Editor

§ 7.1. Tribal Litigation & the Third Sovereign

We have been writing this annual update of cases relevant to tribal litigation for many years. Recognizing that the average practitioner consulting this volume may not have much experience with federal Indian law, we have endeavored to provide historical context and citation to most relevant circuit and even district court cases in every volume. To target primarily those cases decided within the last year, this chapter focuses on cases decided between October 1, 2022 – October 1, 2023. The chapter begins with a Supreme Court overview and then is structured around sovereigns—Indian Tribes, the United States, and the fifty sister States.

Retired Supreme Court Justice Sandra Day O’Connor has aptly referred to tribal governments as the “third sovereign” within the United States.^[2] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.^[3] Tribes are typically governed pursuant to a federal treaty, presidential executive order, tribal constitution and bylaws, and/or tribal code of laws, implemented by an executive authority such as a tribal chairperson, governor, chief, or president (similar to the United States’ president or a state’s governor) and a tribal council or senate (the legislative body). Tribal courts adjudicate most matters arising from their reservations or under tribal law.^[4]

Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.^[5] Thus, state laws generally “have no force” in Indian Country.^[6] While in the eyes of federal and state government, tribes no longer possess “the full attributes of sovereignty,” they remain a “separate people, with the power of regulating their internal and social relations.”^[7]

This chapter explores the repose of tribal sovereignty, federal plenary oversight of that sovereignty, and perennial state encroachment upon that sovereignty. Federal trial and appellate courts issue more than 650 written opinions in cases dealing with Indian law each year,^[8] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.

§ 7.2. Indian Law & the Supreme Court

§ 7.2.1. The 2022–2023 Term

The U.S. Supreme Court hears an average of between two and three new Indian law cases every year.^[9] During the 2022–2023 term, the Supreme Court decided three Indian law cases.^[10]

Arizona v. Navajo Nation, 599 U.S. 555 (2023). The U.S. Supreme Court held that the 1868 peace treaty between the United States and the Navajo Tribe (the “Tribe”), which established the Navajo Reservation and reserved necessary water to accomplish the purpose of the Navajo Reservation, did not require the United States to take affirmative steps to secure water for the Tribe.

In Arizona v. Navajo Nation, the Tribe asserted a breach-of-trust claim against the United States, alleging the 1868 treaty imposed a duty on the United States to take affirmative steps to secure water for the Tribe. In rejecting the Tribe’s argument, the Supreme Court explained that to maintain such a claim, the Tribe needed to prove, among other things, that the text of the 1868 treaty imposed such a duty on the United States, as the Federal Government owes judicially enforceable duties to a tribe “‘only to the extent it expressly accepts those responsibilities.’”^[11] The Supreme Court reasoned that while the 1868 treaty did impose a number of specific duties on the United States, it did not contain language imposing a duty on the United States to take affirmative steps to secure water for the Tribe.

The Supreme Court clarified that the United States indeed maintains a general trust relationship with Indian tribes but explained that unless Congress created a conventional trust relationship with a tribe as to a particular trust asset, it would not “‘apply common-law trust principles’” to infer duties not found in the text of the 1868 treaty.^[12] In turn, the Supreme Court further explained that nothing in the 1868 treaty established a conventional trust relationship with respect to water.

Haaland v. Brackeen, 599 U.S. 255, 143 S. Ct. 1609 (2023). The U.S. Supreme Court upheld the constitutionality of the Indian Child Welfare Act (“ICWA” and/or “the Act”), a federal statute that aims to keep Indian children connected to Indian families.

This case arose from three separate child custody proceedings involving ICWA, which governs state court adoption and foster care proceedings when Indian children are involved. ICWA requires, among other things, the placement of Indian children according to the Act’s hierarchical preferences, unless state courts find good cause to depart from such preferences. Under these preferences, Indian families or institutions from any tribe outrank unrelated non-Indians or non-Indian institutions. And with involuntary proceedings, ICWA requires that the Indian child’s parent or custodian and tribe be given notice of any custody proceedings, as well as the right to intervene.

Petitioners here were a birth mother, foster and adoptive parents, and the State of Texas, filing suit in federal court against the United States and other federal parties. Petitioners argued ICWA was unconstitutional on multiple grounds, raising three general issues: (1) that Congress lacked the authority to enact ICWA, (2) anticommandeering, and (3) equal protection.

As to the first and second issues, the Supreme Court held that ICWA did not exceed Congress’ plenary authority to effectuate nor did ICWA violate “commandeering” concerns by requiring states to follow federal law. The majority’s opinion relied on a “long line of cases,” in which the Supreme Court had previously characterized Congress’ power to legislate with respect to the Indian tribes as plenary and exclusive. The majority further stated that the U.S. Constitution’s Indian Commerce and Treaty clauses authorized Congress to deal with matters relating to Indian affairs. The Supreme Court rejected Petitioners’ argument that ICWA violated the Tenth Amendment’s anticommandeering principle, where they asserted ICWA impermissibly mandated states to follow federal requirements as concerned active efforts, notice and expert testimony requirements, hierarchical placement preferences, and recordkeeping requirements. The majority relied on several cases backing its conclusion that because legislation like ICWA applied “evenhandedly” to state and private actors, such legislation did not, generally, implicate the Tenth Amendment. Related to the recordkeeping requirement specifically, the Supreme Court, relying on Printz v. United States, 521 U.S. 898 (1997), concluded that Congress could impose ancillary recordkeeping requirements related to state-court proceedings without violating the Tenth Amendment.

As to the third issue, the Supreme Court did not rule on the merits of Petitioners’ equal protection argument. The Supreme Court found that Petitioners lacked standing to raise such a claim because the lawsuit failed to involve state officials who actually implemented ICWA’s statutory requirements.

Lac du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382, 143 S. Ct. 1689 (2023). The U.S. Supreme Court held that the U.S. Bankruptcy Code (the “Code”) unequivocally abrogated the sovereign immunity of all governments, including federally recognized Indian tribes.

Petitioner Lac du Flambeau Band of Lake Superior Chippewa Indians (the “Band”) is a federally recognized Tribe that wholly owned several business entities. Lendgreen, one of the Band’s businesses, extended respondent Brian Coughlin (“Coughlin”) a payday loan. But shortly after receiving the loan, Coughlin filed for Chapter 13 bankruptcy, which triggered an automatic stay under the Code against further collection efforts by Coughlin’s creditors. Still, Lendgreen allegedly continued to attempt to collect Coughlin’s debt. Coughlin subsequently filed a motion in Bankruptcy Court to enforce the stay and recover damages for emotional distress. The Band moved to dismiss, arguing the Bankruptcy Court lacked subject-matter jurisdiction over Coughlin’s enforcement proceeding because the Band and its subsidiaries enjoyed tribal sovereign immunity from suit.

The Bankruptcy Court dismissed Coughlin’s suit on tribal sovereignty grounds. The First Circuit reversed the judgment, holding that the Bankruptcy Code “stripp[ed] tribes of their immunity.”

The Supreme Court stated that it would not find an abrogation of sovereign immunity unless Congress had conveyed its intent to abrogate in “unequivocal terms.” Two provisions of the “the Code” were relevant to the suit. The first was 11 U.S.C. § 106(a), which stated: “Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section.” The section also set forth a list of Code provisions to which abrogation applied and included a provision governing automatic stays. The second relevant provision, 11 U.S.C. § 101(27), defined “governmental unit” as used in the Code. The provision stated that a “governmental unit” meant, among other things, “a foreign state,” or “other foreign or domestic government[s].” The overarching question was whether the abrogation provision in § 106(a), taken with the definition of “governmental unit” in § 101(27), unambiguously abrogated the sovereign immunity of federally recognized tribes.

The Supreme Court found that several features of the provisions’ text and structure led to the conclusion that the Code “unequivocally” abrogated the sovereign immunity of any and every government that possessed the power to assert such an immunity. The Court stated that the definition of “governmental unit” exuded comprehensiveness by including a long list of governments along with their subdivisions and components. Additionally, the Court considered the inclusion of “foreign or domestic” to be a “catchall phrase.” The Court found that by including these terms, Congress unmistakably intended to cover all governments in § 101(27)’s definition, whatever their location, nature, or type. The Supreme Court also found it significant that the abrogation of sovereign immunity in § 106(a) plainly applied to all “governmental unit[s],” rather than excluding certain governments.

The Supreme Court further added that other aspects of the Code reinforced what § 106(a) and § 101(27) conveyed. For example, the Code called for an “orderly and centralized” debt resolution process, which the Supreme Court found swept broadly and generally applied to all creditors. The Supreme Court also found that courts may enforce the provisions against any kind of noncompliance creditor whether or not the creditor was a “governmental unit.” The Court also noted that the Code provided a number of limited exceptions so as to avoid impeding the functioning of governmental entities when they act as creditors. The Court stated that an exclusive reading of the provisions would cause some government entities to be immune from key enforcement provisions while others would face consequences for noncompliance. Based on the provisions contained in the Code, the Supreme Court found no indication that Congress meant to categorically exclude certain governments from these provisions’ enforcement mechanisms and exceptions, let alone in such an anomalous manner.

Concluding that all government creditors were subject to abrogation under the Code forced the Court to answer the question of whether federally recognized tribes qualified as governments. The Court stated that federally recognized tribes exercised uniquely governmental functions, and Congress, along with the Supreme Court, had repeatedly characterized federally recognized tribes as governments. Overall, the Court concluded that the Code “unequivocally abrogate[d] the sovereign immunity of all governments, categorically.” Anda since tribes “are indisputably governments,” the Supreme Court concluded that § 106(a) unmistakably abrogated their sovereign immunity, too.

The Band attempted to argue that because tribes were not mentioned in the provisions by name, Congress did not intend to abrogate tribal sovereign immunity. The Supreme Court, however, explained that Congress did not have to include a specific reference to federally recognized tribes in order to make its intention clear. The Band further argued that the “catchall phrase” could be read to preserve immunity and noted that Congress had historically treated various types of governments differently for purposes of bankruptcy law. Neither of these arguments persuaded the Supreme Court to reach a different conclusion.

Justice Thomas wrote a concurring opinion, stating that the Band lacked sovereign immunity regardless of the Code because Coughlin’s motion arose from the Band’s off-reservation commercial conduct. Justice Gorsuch wrote a dissenting opinion, stating that Congress did not “unequivocally express” its intent to abrogate sovereign immunity because the Code did not expressly mention federally recognized tribes.

§ 7.2.2. Preview of the 2023–2024 Term

As of January 6, 2024, the Supreme Court granted certiorari in one Indian law case for the 2023–2024 term, with three more petitions for certiorari pending. If any new cases are granted and decided, they will be included in next year’s volume.

§ 7.3. The Tribal Sovereign

§ 7.3.1. Tribal Courts

More than half of the 574 federally recognized tribes have created their own court systems and promulgated extensive court rules and procedures to govern criminal and civil matters involving their members, businesses, and activity conducted on their lands. Notwithstanding federal restrictions on tribal adjudicatory power, tribes have extensive judicial authority. As the complexity of life on reservations has increased, so has Congress’s willingness to enhance and aid tribal courts’ adjudicatory responsibilities.

While tribal courts are similar in structure to other courts in the United States, the approximately 400 Indian courts and justice systems currently functioning throughout the country are unique in many significant ways.^[13] It cannot be overemphasized that every tribal court is different and distinct from the next.^[14] For example, the qualifications of tribal court judges vary widely depending on the court.^[15] Some tribes require tribal judges to be members of the tribe and to possess law degrees, while others do not.^[16] Some tribal courts meet regularly and have a fairly typical court calendar, while others may meet on Saturdays or only a couple days a month in order to meet the more limited needs of a court system serving a smaller population or particularly isolated tribal community.

Tribal courts can have their own admissions rules and counsel should not assume that because they are licensed in the state where the tribal court is located that they can automatically appear in tribal court. While many tribes allow members of the state bar to join the tribal bar, often for a nominal annual fee, the requirements vary from one tribe to another. For example, the Navajo Nation has its own bar exam that tests knowledge of Navajo tribal law as well as other requirements.^[17]

Counsel should keep this uniqueness in mind when addressing a tribal court orally or in writing. If counsel has never appeared before a particular tribal court, it would be wise to solicit common court practices from persons who regularly appear before the court.

Tribal court jurisdiction depends largely on: (1) whether the defendant is a tribal member;^[18] and (2) whether the dispute occurred in Indian Country,^[19] particularly lands held in trust by the United States for the use and benefit of a tribe or tribal member or fee lands within the boundaries of an Indian reservation.^[20] These two highly complex issues should be analyzed first in any tribal business dispute.

In the context of a tribe’s civil authority, the important distinction is between tribal members and non-members (whether or not the non-member is an Indian). Generally, tribal courts have jurisdiction over a civil suit by any party, member, or non-member against a tribal member Indian defendant for a claim arising on the reservation.^[21] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.^[22] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.^[23]

In the “path-making” decision of Montana v. United States,^[24] however, the U.S. Supreme Court held that a tribal court cannot generally assert jurisdiction over a non-tribal member when the subject matter of the dispute occurs on land owned in fee by a non-member, explaining that “exercise of tribal power beyond what is necessary to protect tribal self-government or to control internal relations is inconsistent with the dependent status of tribes, and so cannot survive without express Congressional delegation.”^[25] To help lower courts determine when the assertion of tribal power is necessary, the Court articulated two exceptions: (1) a tribe may have civil authority over the activities of non-tribal persons who enter into consensual relations with the tribe or its members via a commercial dealing, contract, lease, or other arrangement; or (2) the tribe has civil authority over non-Indians when their actions threaten or have a direct effect upon the “political integrity, the economic security, or the health or welfare of the tribe.”^[26]

These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.^[27] The first exception specifically applies to the “activities of non-members,” and the second exception is extremely difficult to prove, as it must “imperil the subsistence of the tribal community.”^[28] These exceptions have become known as the “Montana rule.”

There are new opinions issued every year on the limits of tribal court jurisdiction that are built upon Montana and its exceptions. This section highlights those most relevant.^[29]

Turpen v. Muckleshoot Tribal Ct., No. C22-0496-JCC, 2023 WL 4492250 (W.D. Wash. July 12, 2023). The court in Turpen held that a tribal court has jurisdiction over a marital dissolution between a tribal member and a non-member who consents to numerous tribal contacts. In May 2014, Katherine Arquette Turpen (“Ms. Turpen”), an enrolled member of the Muckleshoot Indian Tribe (the “Tribe”), married David William Turpen (“David William”). The couple was married in King County, which is outside the bounds of the Muckleshoot Indian Reservation (“Reservation”). David William was a non-member of the Tribe, but he did serve as a tribal employee from 2005 to 2018. Prior to the marriage, the couple lived together on the Reservation in a home leased to Ms. Turpen by the Muckleshoot Housing Authority. After marrying, the couple purchased a home outside the Reservation in Auburn, Washington. The couple received substantial financial assistance from the Tribe for the home purchase. On March 16, 2021, Ms. Turpen filed a petition for dissolution of marriage with David William in Muckleshoot Tribal Court (the “Tribal Court”). David William filed a response to the dissolution petition, challenging the Tribal Court’s jurisdiction over the matter.

The court determined that Montana v. United States’^[30] first exception governed the dispute because David William, a non-member of the Tribe, entered into a consensual relationship with the Tribe or its members through commercial dealing, contracts, leases, or other arrangements. The court then examined David William’s contacts with the Tribe to determine whether the Tribal Court could exercise jurisdiction over the couple’s dissolution of marriage. Given that David William worked for the Tribe for over ten years, entered into a consensual relationship with Ms. Turpen, lived in a home on the Reservation that the Tribe leased to Ms. Turpen, and received financial assistance from the Tribe for the purchase of a home, the court found it was reasonable for David William to anticipate being subject to tribal jurisdiction over the dissolution of the marriage. Accordingly, the court concluded that the Tribal Court had subject matter jurisdiction to preside over the marital dissolution.

Lexington Ins. Co. v. Mueller, No. 5:22-CV-00015-JWH-KK, 2023 WL 2056041 (C.D. Cal. Feb. 3, 2023). The court in Lexington held that a tribal court has civil jurisdiction over disputes associated with an activity that it has regulatory jurisdiction over. The Cabazon Band of Cahuilla Indians (the “Tribe”) purchased multiple property insurance policies from Lexington Insurance Company (“Lexington”). The Tribe did not purchase the insurance policies from Lexington directly; instead, the Tribe purchased the policies through an agent of Lexington, Alliant Insurance Services, Inc. (“Alliant”). In the course of purchasing the insurance policies, the Tribe never dealt with Lexington employees, and no Lexington employees ever set foot on the Reservation to conduct Lexington company business. Alliant (and not Lexington) processed the Tribe’s submissions for insurance, collected premiums from the Tribe, maintained the Tribe’s underwriting file, and prepared quotes, cover notes, policy documentation, and evidence of insurance for the Tribe.

In 2020, the Tribe submitted an insurance claim to Alliant; shortly thereafter, Alliant transmitted the claim to Lexington. A Lexington claims adjuster investigated the claim and denied the Tribe coverage. In response, the Tribe sued Lexington in the Cabazon Reservation Court (the “Tribal Court”) for breach of contract and violation of the implied covenant of good faith and fair dealing. Lexington responded by challenging the Tribal Court’s jurisdiction over the dispute.

While addressing the jurisdictional issue, the court first determined that it need not conduct a Montana v. United States^[31] analysis because the Tribe’s “right to exclude” applied to the dispute. The court thereafter found that the Tribe had regulatory jurisdiction over Lexington because the Tribe’s right to exclude included the right to regulate Lexington’s insurance of tribal entities operating on tribal land. The court rooted this conclusion in the fact that Lexington had conducted activity on tribal land by providing insurance to the Tribe through its agent, Alliant. The court then found that because the Tribe had regulatory jurisdiction over Lexington’s insurance activity, it also possessed civil jurisdiction over disputes associated with that activity. Holding otherwise, the court noted, would allow parties to skirt tribal jurisdiction over activity occurring on tribal land through the use of an agent, and “degrade a tribe’s inherent authority to manage its own affairs.” Based upon these considerations, the court determined that the Tribal Court had jurisdiction over Lexington.

Mille Lacs Band of Ojibwe v. Cnty. of Mille Lacs, No. 17-CV-05155 (SRN/LIB), 2023 WL 146834 (D. Minn. Jan. 10, 2023). The court in Mille Lacs held that the Mille Lacs Band of Ojibwe (the “Band”) possessed the authority to investigate violations of state criminal law by non-members throughout the Band’s reservation land. In 2016, Joseph Walsh, the Mille Lacs County Attorney, issued an Opinion and Protocol (the “Opinion”), addressing the Band’s state law enforcement authority. The Opinion stated that the Band’s police officers could not exercise authority on non-tribal lands, investigate violations of state law on the Band’s reservation, or exercise criminal jurisdiction over non-Indians. Furthermore, the Opinion warned that if the Band’s police officers failed to follow the terms of the Opinion, they would be in violation of state law and subject to arrest by state authorities. The Band challenged the enforceability of these restrictions and filed suit against the County of Mille Lacs.

While addressing the geographic scope of the Band’s inherent law enforcement authority, the court noted that Montana v. United States’ second exception “recognize[d] tribes’ civil authority over the conduct of non-Indians on non-Indian fee lands within a reservation.” Based upon this exception, along with its application in Cooley v. United States,^[32] the court found that the Band’s inherent law enforcement authority extended to all lands within its reservation. This authority included the ability to investigate tribal members of suspected violations of federal or state law.

With respect to non-Indians, the court found that Cooley, which was grounded in the second Montana exception, reaffirmed the inherent tribal law enforcement authority to temporarily detain and conduct searches of suspected violators of state and federal law. The court explained that this authority, however, does not allow tribal law enforcement, including the Band’s police officers, to make arrests of such non-Indian suspects. In addition to this limitation, the court noted that the exercise of tribal law enforcement authority is subject to the Indian Civil Rights Act, which protects against unreasonable searches and seizures.^[33] Based upon these findings, the court ordered declaratory relief in favor of the Band, concluding that the Band had the authority to investigate suspected violations of state law by non-members on the Band’s reservation land.

Milne v. Hudson, 519 P.3d 511 (Okla. 2022). The court in Milne held that a state district court may issue a civil order that protects a state citizen from violence where both parties to the order are citizens of an Indian Nation and the violent acts occurred within the boundaries of an Indian Nation. Andrea Sue Milne (“Milne”) applied for a civil protection order against Howard Jeffries Hudson (“Hudson”) in the District Court of McIntosh County (the “District Court”). The District Court thereafter entered a civil protection order against Hudson, which Hudson objected to on jurisdictional grounds. Hudson argued the District Court had no jurisdiction to enter the order against him because McIntosh County resided within the boundaries of the Muscogee Reservation, Milne was a member of the Muscogee Nation, and Hudson was a member of the Cherokee Nation.

The court, considering Lewis v. Sac and Fox Tribe of Oklahoma Housing Authority,^[34] which applied the Montana v. United States^[35] test to the question of state jurisdiction over disputes between Indians, determined that to answer the question of whether state courts had jurisdiction where Indian interests are concerned, the court had to first consider whether Congress had explicitly withdrawn state court jurisdiction, or whether the interest infringed on tribal self-governance. After setting forth this framework, the court concluded that Congress had not vested exclusive jurisdiction in Tribal courts in this context. The court based this conclusion on the fact that 18 U.S.C § 2265(e), which authorizes Tribal courts to issue civil protection orders, does not confer exclusive jurisdiction. In the absence of such a restriction, the court determined that concurrent jurisdiction could be exercised.

After determining that Congress had not clearly provided tribal courts with the exclusive jurisdiction to issue civil protection orders, the court considered whether the State’s interest in civil protection orders infringed on tribal self-governance. While conducting its analysis, the court noted that the second Montana^[36] exception may permit a tribe to have exclusive civil jurisdiction where conduct threatens a tribe’s “political integrity, economic security, or the health and welfare of its citizens.” However, the court concluded that civil protection orders were different because they are individually tailored and narrowly designed with a single goal in mind—the protection of victims from abuse. Based upon the unique nature of civil protection orders, and the Muscogee Nation and State’s concurrent goal of providing each individual citizen with a swift path to safety, the court determined that the State’s interest in issuing a civil protection order did not impermissibly infringe on tribal self-governance. The court accordingly reaffirmed the District Court’s entrance of the civil protection order against Hudson.

§ 7.3.2. Exhaustion of Tribal Court Review

The doctrine of exhaustion of tribal remedies reflects the ongoing tension between tribal and federal courts. If a tribal court claims jurisdiction over a non-Indian party to a civil proceeding, the party usually^[37] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.^[38] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss^[39] or stay^[40] the case.

Ultimately, the question of whether a tribal court has jurisdiction over a nontribal party is one of federal law, giving rise to federal questions of subject matter jurisdiction.^[41] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.^[42] Pursuant to this doctrine, a federal court will not hear a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling.^[43] Ordinarily, a federal court should abstain from hearing the matter “until after the tribal court has had a full opportunity to determine its own jurisdiction.”^[44] And again, notwithstanding a provision that appears to vest jurisdiction with an arbitrator, several federal courts have ruled that a tribal court should be “given the first opportunity to address [its] jurisdiction and explain the basis (or lack thereof) to the parties.”^[45]

After the tribal court has ruled on the merits of the case^[46] and all appellate options have been exhausted,^[47] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.^[48] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.^[49] If the federal court affirms the tribal court ruling, the nontribal party may not relitigate issues already determined on the merits by the tribal court.^[50]

There are several exceptions to the exhaustion doctrine. First, federal courts are not required to defer to tribal courts when an assertion of tribal jurisdiction is “motivated by a desire to harass or is conducted in bad faith . . . or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”^[51] Second, when “it is plain that no federal grant provides for tribal governance of non-members’ conduct on land covered by Montana’s main rule,” exhaustion “would serve no purpose other than delay.”^[52] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.^[53]

Because litigation is expensive, the question of whether the defendant is required to exhaust their tribal court remedies before challenging the jurisdiction of the tribal court is regularly litigated. Several of these cases were decided in the last year.^[54]

Archambault v. United States, 641 F. Supp. 3d 636 (D.S.D. 2022). The court in Archambault held that a tribal member must first exhaust tribal court remedies before bringing a cause of action in federal court against tribal police officers. Jacob Archambault, a member of the Rosebud Sioux Tribe (the “Tribe”), was shot and killed during an encounter with two of the Tribe’s police officers on the Rosebud Indian Reservation (the “Reservation”). Jacob’s mother, Charlee Archambault, individually and as a personal representative of Jacob’s estate, filed a four-count complaint in federal court against the officers, individually and in their official capacities, alleging violations of Jacob’s constitutional rights under 42 U.S.C. § 1983 and Bivens v. Six Unknown Fed. Narcotics Agents^[55] (referred to as a “Bivens action”). The officers moved to dismiss the claims against them under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6).

The court first considered whether the claims against the officers were actually against the Tribe, although not named in the complaint, and therefore barred by sovereign immunity. In addressing this issue, the court explained that a suit against a governmental officer in his official capacity is the same as a suit against the entity of which the officer is an agent. Following this principle, the court concluded that each action alleged against the officers in their official capacities was the same as suing the Tribe and was accordingly barred by the doctrine of sovereign immunity. The court proceeded to discuss whether sovereign immunity also encompassed the claims against the officers in their individual capacities, as they acted on behalf of the Tribe, but determined that it would allow the Rosebud Sioux Tribal Court (the “Tribal Court”) to decide this issue in the first instance.

After determining whether sovereign immunity barred any claims asserted, the court considered whether Charlee, in her complaint, stated a cause of action under § 1983 or Bivens upon which relief could be granted. The court first addressed the various § 1983 claims alleged, explaining that, to state a cause of action under § 1983, one must allege that the defendant(s) acted under the “color of state law.” Because Tribes and their officers are generally not considered state actors, and Charlee did not allege any facts upon which the court could find that the officers acted under the color of state law, the court concluded that the § 1983 claims must be dismissed. The court then considered whether Charlee asserted a viable Bivens claim. The court extensively discussed whether a Bivens claim could be asserted, ultimately concluding that, because the claim so deeply touched the sovereign interests of the Tribe, the court had to conduct an analysis regarding whether the case should be stayed to allow the Tribal Court to first consider the issues.

In addressing the stay question, the court determined that the policy interests in “tribal self-government,” along with the tribal-specific facts of this case, warranted a stay of the current proceedings. The court, citing to Stanko v. Oglala Sioux Tribe,^[56] explained that under Eighth Circuit precedent, plaintiffs must exhaust their tribal court remedies before being able to bring an action in federal court. The court further noted that the Tribal Court should be the first court to consider the underlying facts and legal bases for the Bivens claim because of its potential impact on tribal sovereignty. Finally, the court determined that none of the typical exceptions to the tribal court exhaustion requirement were presented in this case. For these reasons, the court stayed the action pending Charlee’s exhaustion of remedies in the Tribal Court.

Pacino v. Oliver, No. 18-cv-06786-RS, 2023 WL 1928217 (N.D. Cal. Feb. 10, 2023). The court in Pacino held that an untimely appeal will not satisfy the requirement to exhaust tribal remedies, despite the inability to exhaust those same remedies in the future. Frank Pacino owed an interest in land on the Road Valley Indian Tribe’s (the “Tribe’s”) Covelo reservation. In 2017, Pacino discovered that the Oliver family (the “Defendants”) had taken up residence on his land and had installed a fence equipped with a locking gate. Pacino took several measures to remove the Defendants from his land; however, these options were unsuccessful. Eventually, Pacino filed an ejectment action in Tribal court, but the court dismissed the complaint, finding that it lacked subject matter jurisdiction. During the course of the Tribal court proceedings, the Defendants asserted a right to be on the land, which established federal court jurisdiction under the General Allotment Act.^[57] Instead of continuing in the Tribal court of appeals, Pacino filed an action against the Defendants in federal court.

The initial action within federal court was stayed, pending Pacino’s exhaustion of tribal court remedies. Pacino failed to timely appeal the Tribal court action and moved to lift the stay. The court therefore considered whether Pacino’s untimely appeal satisfied the exhaustion requirement. Ultimately, the court concluded that by failing to timely appeal the Tribal Court case, Pacino failed to exhaust his tribal court remedies, and would likely never be able to do so. Because tribal remedies could not be exhausted, the court found that the case against the Defendants must be dismissed. Holding otherwise, the court explained, would eviscerate the tribal court exhaustion requirement.

Phillips v. James, No. CIV-21-256-JFH-GLJ, 2023 WL 1785774 (E.D. Okla. Jan. 18, 2023). The court in Phillips found that comity concerns warranted dismissal of federal claims against tribal police officers. Melissa Phillips brought an action in federal court against several Choctaw Nation police officers and their supervisors (collectively, “Defendants”), each in their individual capacity, alleging various constitutional and state law violations in relation to Defendants’ handling of a protective order Phillips obtained against a neighbor. Defendants moved to dismiss the claims against them, arguing, among other things, that Phillips’ claims were barred by sovereign and qualified immunity.

The court first considered the issue of sovereign immunity. The court explained that in cases where a tribal employee is sued in an individual capacity, courts should look to whether the sovereign is the real party in interest to determine whether sovereign immunity bars the suit. The court further explained that to determine which party is the real party in interest, courts should not look to the characterization of the parties in a complaint but must determine whether the remedy sought is against the individual or the sovereign. The court found that the majority of the relief Phillips requested was equitable in nature and directed at the Choctaw Nation, not the individual Defendants. The court therefore concluded that the Choctaw Nation was the real party at interest and the equitable relief Phillips requested was barred by sovereign immunity.

In addition to equitable relief, Phillips sought monetary damages from Defendants. Unlike the equitable relief claims, the court concluded that the request for monetary damages was asserted in a manner that did not implicate the Choctaw Nation and was therefore not barred by sovereign immunity. Notwithstanding this fact, the court proceeded to explain that the basis for Phillips requested monetary relief was entirely unmoored from the federal claims she asserted. For this reason alone, the federal claims could not survive dismissal. The court also noted that, even if it did find that a valid federal claim existed, there were “comity concerns raised by the tribal exhaustion doctrine” that counseled against exercising federal jurisdiction in the case.

The court proceeded to conduct a tribal exhaustion analysis. As a part of this analysis, the court first considered whether the dispute at issue was a “reservation affair.” The court noted that Phillips was a member of a tribe (other than the Choctaw Nation), that the suit was against Choctaw Nation police officers, and that the dispute was over the Defendants’ handling of an order that originated within the Choctaw Nation’s court system. Having found a strong “tribal nexus,” the court concluded that this case was a “reservation affair,” which required it to abstain from exercising jurisdiction. The court explained that this conclusion was further supported by a brief analysis of the National Farmers Union Ins. v. Crow Tribe of Indians^[58] (“National Farmers”) factors.

Under the National Farmers comity analysis, the court determined that exercise of federal jurisdiction in the case would only serve to contravene the federal policy of supporting tribal self-government. The court further noted that none of the narrow exceptions to the tribal exhaustion rule were present in the case. Accordingly, the court determined that Phillips’ federal claims should be dismissed as a matter of comity.

§ 7.3.3. Tribal Sovereignty & Sovereign Immunity

An axiom in Indian law is that Indian tribes are considered domestic sovereigns.^[59] Like other sovereigns, tribes enjoy sovereign immunity.^[60] As a result, a tribe is subject to suit only where Congress has “unequivocally” authorized the suit or the tribe has “clearly” waived its immunity.^[61] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”^[62] Unlike the immunity of foreign sovereigns, the immunity enjoyed by sovereign tribal governments is limited in scope and “centers on the land held by the tribe and on tribal members within the reservation.”^[63]

Nontribal entities must be aware that, absent a clear and unequivocal tribal immunity waiver, tribes and tribal entities may not be subject to suit should a deal go bad. With regard to contracts, “[t]ribes retain immunity from suits . . . whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”^[64]

Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,^[65] whether in tribal, state, or federal court.^[66] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.^[67]

Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.^[68] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.^[69] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”^[70]

Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.^[71] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma^[72] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.^[73] In C & L Enterprises, the Tribe proposed that the parties use a standard-form contract that contained an arbitration clause and a state choice-of-law clause.^[74] Although the contract did not clearly mention “immunity” or “waiver,” the Supreme Court believed the alternative dispute resolution (ADR) language manifested the tribe’s intent to waive immunity.^[75]

Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”^[76] Attorneys must evaluate a tribe’s structural organization to determine precisely which tribal agents have authority to properly waive tribal sovereign immunity or otherwise bind the tribal entity by contract. If attorneys do not have a working knowledge of pertinent tribal documents, they risk leaving their clients without an enforceable deal. Below are summaries from some of the most relevant sovereign immunity cases of the last year.^[77]

Tsosie v. N.T.U.A. Wireless LLC, CV-23-00105-PHX-DGC, 2023 WL 4205127 (D. Ariz. Jun. 27, 2023). The Arizona District Court held in Tsosie that a tribally co-owned wireless provider was not entitled to sovereign immunity. Plaintiff Velena Tsosie brought suit against her employer, NTUA Wireless (“Wireless”), and her former supervisor, Walter Haase. Wireless provided internet, telephone, and data communication services in and around the Navajo Nation and was jointly owned by Commnet Newco (“Commnet”), a Delaware limited liability company, and the Navajo Tribal Utility Authority (“NTUA”). Tsosie’s claims arose from a work event, where she alleged that Haase had made suggestive comments and initiated unwelcomed physical contact. Tsosie further alleged that Wireless conducted an inadequate investigation, issued a retaliatory press release, and failed to sufficiently discipline Haase. Tsosie asserted claims for violations of Title VII of the Civil Rights Act of 1964, violations of the Arizona Civil Rights Act, discrimination, assault, battery, and intentional infliction of emotional distress. Wireless and Haase moved to dismiss the complaint on tribal immunity grounds, arguing that the company was an arm of the Navajo Nation.

The court explained that a tribe would be immune from a suit absent congressional authorization or clear waiver. The court further added that tribal sovereign immunity not only protects tribes themselves, but also extends to the arms of the tribe acting on behalf of the tribe. To determine whether Wireless was an “arm of the tribe,” the court implemented the Ninth Circuit’s five factor test: (1) the method of creation of the entity; (2) the purpose of the entity; (3) the structure, ownership, ownership, and management, including the tribe’s control over the entity; (4) the tribe’s intent to share sovereign immunity; and (5) the financial relationship between the tribe and the entity.

For the first factor, the court examined the fact that NTUA and Commnet formed Wireless as a corporate entity. NTUA held a 51% interest in the company and Commnet held 49%. While it was undisputed that NTUA enjoyed tribal immunity, the court questioned whether that immunity extended to Wireless. Wireless cited to the fact that the Speaker of the Navajo Nation Council approved of the Wireless operating agreement, and, because of this, argued that the Navajo Nation was involved in Wireless’s creation. However, the court concluded that the method of creation weighed against sovereign immunity because NTUA did not wholly own Wireless, and Wireless was not formed under the laws governing the Navajo Nation. The court also emphasized the fact that Wireless was the defendant in the case, not NTUA.

The court found that Wireless was formed for the purpose of providing data, internet, and phone services in and near the Navajo Nation. The Federal Trade Commission also designated Wireless as an “eligible communications carrier,” which allowed Wireless to provide affordable telecommunications services to low-income consumers and receive subsidies from the federal government. The court added that Wireless’ purpose helped the Navajo Nation become more self-sufficient. The court found that these facts weighed in favor of Wireless having sovereign immunity.

The court reasoned that the structure, ownership, and management of Wireless weighed slightly against immunity. Even though NTUA owned 51% of Wireless, Commnet still held the other 49%. The court stated that neither NTUA nor Commnet had the authority to unilaterally act for or bind Wireless. Additionally, Wireless was managed by a four-person board of directors. All directors had equal voting power and two of the directors had been appointed by NTUA while the other two had been appointed by Commnet. Because Commnet was a designated managing member, the court found that the corporate structure weighed against a finding of immunity.

While the defendants argued that NTUA intended to share its immunity with Wireless, the court found that the company’s operating agreement was silent on that issue. In fact, the Speaker of the Navajo Nation Council allowed NTUA to waive NTUA’s sovereign immunity to enforce the Wireless operating agreement. The court concluded that the Navajo Nation’s express waiver of immunity in the operating agreement and the fact that NTUA only partially owned Wireless implied that the Navajo Nation “did not intend to render Wireless immune.”

Finally, the court found that there was no indication that profits generated by Wireless benefitted the Navajo Nation. While the operating agreement provided that profits would be directly allocated between NTUA and Commnet, the agreement did not indicate that the company’s losses would reach the Navajo Nation. Additionally, the court found that neither the operating agreement nor the management agreement suggested that a judgment against Wireless would reach the Navajo Nation. The court therefore concluded that the financial relationship between the Navajo Nation and Wireless weighed against immunity. In all, the court found that three of the five factors weighed against immunity. The court accordingly held that Wireless was not an “arm” of the Navajo Nation but was acting as a mere business.

Lustre Oil Co. LLC v. Anadarko Minerals, Inc., 527 P.3d 586 (Mont. 2023). The Supreme Court of Montana declined to adopt a bright-line rule that would prevent tribal entities from enjoying sovereign immunity when those entities are incorporated under the laws of the state rather than under tribal law. Lustre Oil Company (“Lustre”) appealed a district court’s decision to grant a motion to dismiss for a suit brought against A&S Mineral Development Company (“A&S”) and an oil and gas well operator, Anadarko Minerals (“Anadarko”). The district court concluded that it did not have jurisdiction over A&S as the entity was an arm of the Assiniboine and Sioux Tribes (the “Tribes”). The Tribes formed A&S after experiencing an influx of private drilling and development of oil and gas wells, which resulted in disastrous environmental impacts to the reservation and compromised the health of the Tribal communities. After authorizing the formation of A&S through their Tribal Executive Board, the Tribes incorporated A&S under the laws of Delaware.

Lustre first asked the Supreme Court of Montana to adopt a bright-line rule preventing tribal entities from enjoying sovereign immunity when those entities are incorporated under the laws of the state rather than under tribal law. The court declined to adopt such a rule, concluding that it is important to “examin[e] the circumstances of each case rather than utilizing a single-inquiry test to analyze tribal sovereign immunity.” The court further explained that the nature of an entity’s activity, rather than whether they were incorporated under state or tribal law, should be the important consideration when determining immunity.

The court proceeded to cited to the Ninth Circuit’s five-factor test to determine whether an entity acted on behalf of a tribe: (1) the method of creation of the entity; (2) the purpose of the entity; (3) the structure, ownership, ownership, and management, including the tribe’s control over the entity; (4) the tribe’s intent to share sovereign immunity; and (5) the financial relationship between the tribe and the entity. Even though the court declined to adopt this test whole cloth, it did mention that these factors provided useful guidance for making its decision. The court thereafter reviewed the district court’s analysis of the factors, which determined that three of the give factors favored a finding of sovereign immunity. Despite that determination, the court found on appeal that incorporating under state law rather than tribal law weighed against a finding of immunity. The court therefore proceeded to consider the entire circumstance of the company’s creation.

Upon consideration of the purpose of A&S, the court concluded that it was clear that the company had been created to develop the Tribes’ oil and gases resources and assume responsibility for environmental cleanup efforts associated with the oil and gas development. The court further found that these were goals that funded the Tribes’ governmental services, while promoting cultural autonomy and self-governance. Lustre argued that the management and control of A&S weighed against immunity because the Tribes delegated most of the control to the general manager, who was not a member of the Tribes. The court found this argument unpersuasive, stating that control factor weighed in favor of immunity because the Tribal Executive Board had a right to assume control over A&S at any time.

Lustre also contended that the financial relationship between the Tribes and A&S did not support a finding of immunity because there was no proof of that there was a proportionate share of the company’s financial contributions to the Tribes’ overall budget. The Montana Supreme Court stated that courts need not probe so deeply into a tribe’s governmental affairs and concluded that the financial relationship factor also weighed in favor of immunity because A&S returned 100% of its profits to the Tribes.

A&S and Anadarko, on the other hand, argued that the district court incorrectly concluded that the Tribes did not intend to share their sovereign immunity with the company. In addressing this argument, the court looked to several company agreements and found that whenever the Tribes had the occasion to address the matter, they documented their intent to treat A&S as a separate entity not immune from suit in state courts.

The Tribes’ choice to incorporate A&S under Delaware law, along with the Tribes’ intent to keep A&S a separate and distinct entity for liability purposes, led the court to conclude that the district court erred in ruling that A&S was immune from suit as an “arm” of the Tribes. Accordingly, the court reversed and remanded the case for further proceedings.

Justice Jim Rice concurred, calling for clearer standards and more bright-line rules for determining tribal corporation immunity, while Justice Laurie McKinnon wrote a concurrence stating that the five-factor test revealed that A&S was an enterprise of the Tribes, but that the Tribes expressly waived A&S’s immunity.

Cayuga Nation ex. rel. Cayuga Nation Council v. Parker, No. 5:22-CV-00128 (BKS/ATB), 2023 WL 130852 (N.D.N.Y. Jan. 9, 2023). The United States District Court for the Northern District of New York declined to find that a tribe waived its sovereign immunity after taking over a premises that was subject to an existing commercial lease. The Cayuga Nation (the “Nation”) brought an action under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act against numerous defendants, alleging that the defendants engaged in an unlawful scheme to “co-opt the Nation’s sovereign rights, erode its business and customer base, and steal its revenues” through the illegal sale of untaxed cigarettes, marijuana, and other merchandise on the reservation. After the defendants asserted several counterclaims, the Nation moved to dismiss the claims on the ground that they were barred by the doctrine of sovereign immunity. The defendants argued that the Nation waived its immunity when it initiated the action and that the counterclaims were permissible under the “immovable property” and “recoupment” exceptions to the sovereign immunity doctrine.

The court first established the rule that without congressional authorization or a waiver of sovereign immunity, it would dismiss any suit against a tribe. The court further added that a plaintiff tribe did not waive sovereign immunity by filing suit and sovereign immunity from suit extended to counterclaims against a plaintiff tribe. It was undisputed that there had been no congressional authorization for the counterclaims the defendants asserted, but a question existed as to whether immunity had been waived. The defendants argued that when the Nation purchased a property from them, the Nation took the land subject to a pre-existing commercial lease, which included a provision in which the Seneca-Cayuga Nation waived sovereign immunity. However, the court found that the provision at issue expressed a waiver of the Seneca-Cayuga Nation’s rights but did not contain anything that would allow a conclusion that the Nation similarly authorized a waiver of its sovereign immunity. Because the lease did not otherwise provide an expression of waiver, the court concluded that the Nation had not waived its sovereign immunity pursuant to the commercial lease.

The defendants attempted to argue that, even if waiver did not exist, the “immovable property” exception to sovereign immunity applied. This exception referred to the common law doctrine that curtailed legal actions contesting a sovereign’s rights or interests in real property located within another sovereign’s territory. However, the court found that the exception did not apply to the case because the property in question was located within the bounds of the Nation’s reservation.

Finally, the defendants argued that their counterclaims fell into the “recoupment” exception to sovereign immunity, which examines whether the claims fall into the same transaction or occurrence as the original suit. Although all the claims asserted occurred during the same time period as the RICO claims, the court found that most of the claims did not all arise out of the same transaction or occurrence as the original RICO claims. The claims that did fall within the same transaction or occurrence—those for conversation and trespass to chattels—remained eligible for recoupment. Besides those two claims, the court found that the Nation was protected by sovereign immunity. Accordingly, the court granted the Nation’s motion to dismiss as to all other claims.

California v. Azuma Corp., No. 2:23-CV-00743-KJM-DB, 2023 WL 5835794 (E.D. Cal. Sept. 8, 2023). The court in Azuma found that the Prevent All Cigarette Trafficking (“PACT”) Act did not prevent Ex parte Young^[78] actions against tribal officials. The State of California brought an action against Defendants Azuma Corporation, Phillip Del Rosa, Darren Rose, and Wendy Del Rosa (collectively, “Defendants”) for declaratory relief, injunctive relief, and civil damages and penalties for Defendants’ years of trafficking contraband cigarettes in the State in violation of the PACT Act. The individually named defendants were tribal officers of the Alturas Indian Rancheria (the “Rancheria”), a federally recognized Indian tribe, and played key roles in Azuma Corporation, a tribal corporation that sold cigarettes in California. Defendants argued that tribal sovereign immunity barred California’s claims. Defendants also argued that California cannot proceed with its claims because the tribal retailers, which were a part of the cigarette sales, must be joined to the action pursuant to the Federal Rules of Civil Procedure 19, but cannot be because of sovereign immunity.

The court first explained that even if sovereign immunity protected the Rancheria from suit, Ex parte Young provided a narrow exception for injunctive relief against individuals, including tribal officers, responsible for unlawful conduct. Defendants argued that the PACT Act prevented application of the Ex parte Young doctrine. The court disagreed, finding that the PACT act confirms, rather than denies, the existence of Ex parte Young actions. The court then explained that, because California sought to enjoin the individually named defendants from violating the PACT Act in their official capacities, the Ex parte Young doctrine applied. The court accordingly found that sovereign immunity did not bar California’s Ex parte Young action.

The court proceeded to consider whether the tribal retailers were necessary parties under Rule 19. The court first explained that the Defendants had the burden of establishing that the tribal retailers were in fact necessary parties. The court noted that Defendants had not shown how the court could not award complete relief without joining the tribal retailers, or how the tribal retailers had an interest in this litigation that would be impaired by California’s requested injunctive relief. The court also mentioned that granting injunctive relief in the absence of the tribal retailers would not lead to inconsistent judgments. Finally, the court determined that, even if the tribal retailers did have a legally protected interest in the litigation, Defendants had not addressed whether their interest would be adequately represented in the present action. For these reasons, the court concluded that Defendants had not satisfied their burden of showing that the tribal retailers were necessary parties under Rule 19.

After finding that Rule 19 did not bar California’s claims, the court conducted a preliminary injunction analysis. At the end of this analysis, the court granted California’s motion for a preliminary injunction as to Rose, but denied the motion as to Phillip and Wendy Del Rose, citing the State’s lack of evidence regarding the latter two defendants.

Victor v. Seminole Gaming, No. 23-61185-CIV, 2023 WL 4763791 (S.D. Fla. July 26, 2023). The United States District Court for the Southern District of Florida struck a complaint after noting that the Equal Employment Opportunity Commission (the “EEOC”) dismissed the same complaint on sovereign immunity grounds. Sekwanna Victor alleged claims of discrimination, harassment, retaliation, and hostile work environment against her former employer, Seminole Gaming. Victor had submitted a claim to the EEOC regarding her grievances, but it was dismissed on the ground that Seminole Gaming was a tribal entity. The court cited to the fact that Victor’s own complaint indicated that Seminole Gaming was federally recognized as an arm of the Seminole Tribe, thus granting it sovereign immunity. The court further added that the EEOC form dismissing Victor’s complaint categorized Seminole Gaming as a tribal entity, which was the basis for the complaint’s dismissal. The court concluded that to “transcend” Seminole Gaming’s sovereign immunity, Victor would have had to show in her complaint that the entity waived its immunity or that there existed a clear indication of abrogation of tribal sovereign immunity from Congress. The court held that Victor had shown neither.

Skull Valley Health Care, LLC v. Norstar Consultants LLC, No. 2:22-CV-00326, 2023 WL 4934292, (D. Utah Aug. 2, 2023). The court in Sky Valley Health Care held that two medical entities created under state law and converted into tribal entities can enjoy tribal sovereign immunity as arms of a tribe. Plaintiffs Skull Valley Health Care, LLC and Skull Valley Health Clinic, LLC (collectively, “Plaintiffs”) were each initially formed under Utah law and then converted into tribal entities of the Skull Valley Band of Goshute Indians (the “Band”). After this conversion, Plaintiffs were considered tribal entities under tribal law and registered as entities of the Band with the Utah Secretary of State. Defendant, Ashanti Moritz, was a former employee of Plaintiffs. Plaintiffs sued Defendant, alleging that Defendant took control of a Facebook page that was the intellectual property of Plaintiffs and used it in connection with Defendant’s own business. Defendant, in response, asserted a cross claim, alleging discrimination and wrongful termination. Plaintiffs moved to dismiss Defendant’s claim, arguing that Plaintiffs were entitled to the Band’s sovereign immunity as an “arm” of the Band.

The district court first explained that the threshold issue for analyzing sovereign immunity for an economic entity is whether the entity is organized under the laws of a tribe or under another sovereign (such as a state). According to Tenth Circuit precedent, if the organization is organized under the laws of another sovereign, then the organization cannot enjoy sovereign immunity. The court explained that this bright-line rule does have limits, such as when an organization is formed under state and tribal laws. The court determined that at the time of Defendant’s termination, Plaintiffs were organized under the laws of the Band and were therefore not precluded from enjoying sovereign immunity on these grounds.

The district court proceeded to explain that the Tenth Circuit has set forth six factors that are helpful in determining whether an entity qualifies as a subordinate economic entity or “arm of a tribe” entitled to share in a tribe’s immunity. These factors included: (1) the method of creation of the economic entity; (2) the entity’s purpose; (3) the entity’s structure, ownership, and management, including the amount of control the tribe has over the entity; (4) the tribe’s intent with respect to sharing its sovereign immunity; (5) the financial relationship between the tribe and the entity; and (6) whether the purposes of tribal sovereign immunity are severed by granting the entity immunity. The court found that all six of these factors weighed in favor of finding that Plaintiffs were an arm of the Band and entitled to share in the Band’s sovereign immunity. The court accordingly dismissed Defendants claim against Plaintiffs without prejudice.

Haney v. Mashpee Wampanoag Indian Tribal Council, Inc., 205 N.E.3d 370 (Mass. App. Ct. 2023). The Massachusetts Court of Appeals held that a business license did not waive tribal sovereign immunity. The Defendants, the Mashpee Wampanoag Indian Tribal Council, Inc. and Mashpee Wampanoag Tribe, operated a commercial shell fishing business off the shore of Cape Cod in Popponesset Bay. Their fishing racks and cages were regularly located on an Island nearby private land owned by the Plaintiff. The Defendants allegedly would leave piles of shells, trash, and other debris on the private land and the Plaintiff consequently filed an action alleging trespass, private nuisance, and public nuisance. The Plaintiff also requested a declaratory judgment defining the parties’ rights related to the defendants’ shellfish propagation license on the private lands. The superior court dismissed the complaint, finding that the Plaintiff’s claims were barred by tribal sovereign immunity.

The Plaintiff argued that the Defendants waived their tribal sovereign immunity by applying for the shellfish propagation license and accepting the grant of rights to use Massachusetts land and waters. However, the court did not find the license showed the Defendants “unequivocally expressed” a waiver of their immunity. The Plaintiff further argued that the Defendants waived their immunity by participating in previous lawsuits with the Plaintiff and other parties. This argument also failed, as the court found that the matters cited by the plaintiff did not arise out of the same transaction or raise the same legal issues as the present case, and therefore did not constitute a waiver of sovereign immunity. The Plaintiff also asserted the “immovable property” exception to sovereign immunity, but the court noted that the dispute at hand did not pertain to rights stemming from an ownership interest or an interest in property but rather involved the Defendants’ use of the property covered by the propagation license. Lastly, the Plaintiff argued that under natural resource laws, the grant of the license bound the Defendants to operate in a manner that did not impact the Plaintiff’s resources. The court rejected this argument, noting that the Plaintiff did not cite to any legal authority for the proposition that a private citizen is permitted to file a lawsuit to enforce compliance. For these reasons, the court of appeals affirmed the superior court’s dismissal of Plaintiff’s complaint.

Maverick Gaming LLC v. United States, 658 F.Supp.3d 966, No. 3:22-CV-05325-DGE, 2023 WL 2138477 (W.D. Wash. Feb. 21, 2023).^[79] The District Court of Washington determined that a federally recognized Indian tribe’s gaming compact created an interest sufficient to make the tribe a required party for purposes of the Federal Rules of Civil Procedure. Maverick Gaming LLC (“Maverick”) brought suit against the United States Department of the Interior and various responsible federal officials, along with various Washington state officials (collectively, “Defendants”), to “challenge Washington state’s tribal gaming monopoly.” Maverick’s suit was predicated on its desire to expand its gaming operations within the State of Washington; however, it was unable to because of Washington’s criminal prohibitions on most forms of Class III gaming.

The court explained, as background information, that the Indian Gaming Regulatory Act (the “IGRA”) established a classification system for different types of gaming. According to the court, Class III gaming included games like slot machines, keno, and blackjack—along with every game not included within Class I or II. The court further explained that the IGRA provided that Class III gaming was permitted on tribal lands if the tribes authorized such activities. To authorize such gaming activities, the court noted that a tribe must enter into a Tribal-State compact, which must be submitted and approved by the Secretary of the Interior.

The court proceeded to explain that Washington State has made most gaming activities a crime. However, in the 1990s, the State slowly agreed to gaming compacts with Washington’s federally recognized Indian tribes. The court further explained that in March 2022, the Washington State Legislature passed a bill permitting sports betting at tribal casinos and gaming facilities. Despite this bill, sports betting otherwise remained illegal throughout the State. Maverick accordingly sued Defendants, alleging that Defendants acted unlawfully when entering into Washington’s compact amendments for sports betting because these amendments violated the IGRA and the Fifth Amendment’s equal protection clause.

Maverick did not name any of Washington’s federally recognized Indian tribes in its suit against Defendants. The Shoalwater Bay Indian Tribe of the Shoalwater Bay Indian Reservation (the “Tribe”), after having its motion for limited intervention granted, moved to dismiss the action, arguing that Maverick failed to join a required party pursuant to Federal Rules of Civil Procedure 12(b)(7) and 19.

The court first concluded that the Tribe was a required party under Rule 19(a). The court reached this conclusion by finding that the Tribe had a legally protected interest in its gaming rights that could be impaired if the Tribe was not included as a party to the suit, and that none of the parties named within the suit would adequately represent the Tribe’s interests. The court proceeded to explain that because the Tribe had not waived its sovereign immunity, it could not be joined as a required party. After reaching this conclusion, the court proceeded to do a necessary party analysis pursuant to Rule 19(b).

Under a necessary party analysis, the court explained that it must consider: (1) the prejudice to any party or absent party; (2) whether relief can be shaped to lessen prejudice; (3) whether an adequate remedy, even if not complete, can be awarded without the absent party; and (4) whether there exists an alternative forum that can join the required party. The court found that the first three factors weighed in favor of dismissal and therefore concluded that the action could not proceed in equity or good conscience. The court accordingly dismissed Maverick’s claims without prejudice.

§ 7.3.4. Tribal Corporations

A majority of non-Alaskan tribes are organized pursuant to the Indian Reorganization Act of 1934 (IRA).^[80] Under Section 16 of the IRA, a tribe may adopt a constitution and bylaws that set forth the tribe’s governmental framework and the authority given to each branch of its governing structure.^[81] A tribe may also incorporate under Section 17 of the IRA, under which the Secretary of the U.S. Department of the Interior issues the tribe a federal commercial charter.^[82]

Through Section 17 incorporation, the tribe creates a separate legal entity to divide its governmental and business activities.^[83] The Section 17 corporation has a federal charter and articles of incorporation, as well as bylaws that identify its purpose, much like a state-chartered corporation.^[84] Section 17 incorporation results in an entity that largely acts like any state-chartered corporation.^[85]

An Indian corporation may also be organized under tribal or state law.^[86] If the entity was formed under tribal law, formation likely occurred pursuant to its corporate code; but it could have also occurred by tribal resolution (i.e., specific legislation chartering the entity).^[87] Under federal common law, the corporation likely enjoys immunity from suit.^[88] However, it is unclear whether a tribal corporation’s sovereign immunity is waived through state incorporation such that the entity may be sued in state court.^[89]

Therefore, when negotiating a tribal business transaction, counsel should consult the tribe’s governmental and corporate information—for example, treaty or constitution, federal or corporate charters, tribal corporate code—which, taken together, identify the entity with which you are dealing, the authority of that entity, and any applicable legal rights and remedies.

There are comparatively few cases decided on the basis of tribal corporate formation, but tribal corporations are often able to claim immunity from suit. In addition to IRA Section 17 entities, Native Alaskan communities are organized as corporations under some unique provisions within the Alaska Native Claims Settlement Act. Below find a discussion of recent cases dealing with tribal corporations.^[90]

Stimson Lumber Co. v. Coeur d’Alene Tribe, 621 F. Supp.3d 1158 (D. Idaho 2022). The court in Stimson Lumber Co. found that a federally recognized Indian tribe’s act of engaging in corporate activities did not render the tribe a corporation or endow it with citizenship for diversity jurisdiction purposes. Plaintiff Stimson Lumber Company (“Stimson”) and Defendant Coeur d’Alene Tribe (the “Tribe”) executed a lease agreement whereby the Tribe allowed Stimson to operate a sawmill on the Tribe’s land. The lease agreement granted Stimson an option to purchase the mill at the end of the lease term for no extra cost and included several dispute resolution clauses, including a forum selection clause in which both parties submitted to the jurisdiction of the United States District Court for the District of Idaho. As the end of the lease neared, Stimson informed the Tribe that it desired to exercise the option to purchase the mill, but the Tribe responded that the option was no longer valid and instead offered to sell the mill to Stimson on terms unfavorable to Stimson. Stimson refused, and the Tribe demanded that Stimson vacate the property, after which Stimson sued the Tribe in district court claiming diversity jurisdiction and alleging breach of contract, unjust enrichment, and conversion. The Tribe then filed a motion to dismiss arguing that the district court did not have jurisdiction over the claim since diversity jurisdiction did not exist and because Stimson did not raise a federal question.

The court reaffirmed the principle that an unincorporated arm of a tribe is not a citizen of any state and that a tribe’s waiver of sovereign immunity does not by itself create state citizenship for diversity jurisdiction purposes. Rather, like a state or federal corporation, a tribal corporation is a citizen of the state where it has its principal place of business. The court emphasized that even though the Tribe may have been acting like a corporation, a tribe does not shed non-citizenship merely by embarking on a commercial enterprise. Therefore, if a tribe is unincorporated and its business operations are likewise unincorporated, then neither the tribe nor its business operations are a citizen for purposes of diversity jurisdiction.

The court therefore proceeded to consider whether the Tribe was incorporated. The Tribe argued that they were not incorporated, but instead were a federally recognized Indian tribe, as was indicated on the lease agreement and other documents included as evidence. Additionally, even though the Tribe filed its constitution and by-laws, the court explained that those were not corporate documents. The court also recognized that “federally recognized Indian tribe” was used in the relevant documents as a legal term of art meaning, which merely meant that the federal government acknowledged, as a matter of law, that a particular Indian group has tribal status. The court noted that tribal status is not equivalent to incorporation. Moreover, the court noted that Stimson had offered no substantive evidence that the Tribe was a corporation, which was required for the suit to continue.

According to the court, the fact that the Tribe was engaging in corporate activities in leasing the mill to Stimson—or even if the Tribe held itself out as a corporation—did not automatically render the Tribe a corporation or endow it citizenship. The court granted the Tribe’s motion to dismiss for lack of jurisdiction, holding that the Tribe was not a corporation and, therefore, not a citizen of any state for purposes of diversity jurisdiction.

LS3 Inc. v. Cherokee Fed. Sols., L.L.C., 20-CV-03555-PAB-MEH, 2023 WL 2390710 (D. Colo. Mar. 7, 2023). The court in LS3 Inc. found that a negative allegation of tribal citizenship was not enough to satisfy the requirements of diversity jurisdiction. Plaintiff, a Maryland corporation, claimed that the Defendants, businesses associated with the Cherokee nation, had solicited several of their employees to work for the Defendants. Plaintiff sued Defendant, asserting claims for breach of contract, intentional interreference with a contract, civil conspiracy, and misappropriation of trade secrets. The district court initially ordered the case be dismissed for lack of jurisdiction. After appealing to the Tenth Circuit, the Plaintiff’s remaining claims were for breach of contract, civil conspiracy, and intentional interference with a contract—none of which warranted subject matter or supplemental jurisdiction. The Plaintiff argued that the court nonetheless had diversity jurisdiction over the suit.

The Plaintiff alleged that diversity jurisdiction existed because the Defendants—Cherokee Federal Solutions, LLC; Cherokee Nation Strategic Programs, LLC; and Cherokee Services Group, LLC—were citizens of Colorado, Oklahoma, and Texas, and that they were all owned by the Cherokee Nation itself or a corporate parent (Cherokee Nation Businesses, LLC), which was not a citizen of Maryland. The Plaintiff raised the principle that a tribal corporate entity may be considered a citizen of the state of its principal place of business for diversity jurisdiction.

However, the court pointed out several flaws in the Plaintiff’s arguments, including that Cherokee Nation Businesses was not a member of two of the LLC defendants, and that the complaint only stated that Cherokee Nation Businesses “is not a citizen of Maryland.” According to the court, a negative allegation of citizenship is not sufficient to prove that diversity jurisdiction exists, and that the Plaintiff had failed to identify what the Cherokee Defendants’ citizenships were.

Unlike a corporation, which is a citizen of the state in which it is incorporated, the citizenship of an LLC is determined by the citizenship of all its members. If the plaintiff had shown that the Cherokee Nation—the sole member of several of the defendant LLCs—was incorporated in a state other than Maryland, diversity jurisdiction would have existed. However, the Plaintiff had not alleged that the Cherokee Nation was incorporated under the IRA or under its own tribal laws. The defendant had also failed to show that any of the corporate members of the other LLC defendants were corporations. Therefore, the court held that the Plaintiff’s complaint had failed to demonstrate that the court had diversity jurisdiction over the claims and ordered that the Plaintiff must show cause as to why the case should not be dismissed for lack of jurisdiction.

HCI Distrib., Inc. v. Hilgers, 8:18-CV-173, 2023 WL 3122201 (D. Neb. Apr. 27, 2023). The court in HCI Distribution Inc. found that a state’s interest in regulating the sale of tobacco products could not justify exercising authority over a tribe’s sale of such products to its own members. Plaintiffs were wholly owned subsidiaries of an economic development company—Ho-Chunk, Inc.—which was entirely controlled by the Winnebago Tribe of Nebraska (the “Tribe”), a federally recognized tribe. The Tribe was incorporated under Section 16 of the IRA, under which it created its own constitution and laws, including a Business Corporation Code. The Tribe founded Ho-Chunk under its Business Corporation Code, which subsequently created several wholly owned subsidiaries, including the Plaintiffs. The Plaintiffs imported and distributed tobacco products to retailers on the Winnebago reservation and on other reservations in Nebraska and elsewhere. Plaintiffs sued Defendants, Nebraska State officials, over the enforceability of Nebraska’s Tobacco regulations.

Pursuant to a 1998 Master Settlement Agreement between 46 states and several tobacco companies, Nebraska had promulgated statutes requiring tobacco manufacturers to either (1) participate in the settlement and make annual settlement payments to the state in perpetuity or (2) agree to make deposits into an escrow account based on the number of tobacco products they sold in the state. In order to sell tobacco products in Nebraska, non-participating manufacturers had to certify their compliance with the escrow statutes and post a bond of at least $100,000 to ensure collection in the event they failed to make proper escrow payments. The statute contemplated releasing escrow deposits for “cigarettes sold on an Indian tribe’s Indian country to its tribal members” if the tribe entered into an agreement with the state. Nebraska and the Tribe were unable to reach such an agreement because each party could not agree on the scope of the Tribe’s waiver of sovereign immunity. Specifically, the parties disagreed about whether Nebraska could enforce the escrow laws against the Plaintiffs because they were subsidiaries of the Tribe.

The court started its analysis with the premise that states may not tax reservation lands or reservation Indians, and only under exceptional circumstances may a state regulate on-reservation activities of tribal members. However, states may impose “minimal burdens” on tribally run, on-reservation businesses to enforce valid state laws. According to the court, Nebraska’s tobacco regulation would be invalid if it constituted a direct tax on the Tribe, if it was preempted by federal law, or if it unlawfully infringed on the Tribe’s right to make and be governed by its own laws.

The Plaintiffs argued that the escrow and bond requirements were a direct tax on the tribal business. The court, however, found that the payment requirements amounted to a penalty rather than a tax. The court distinguished taxes, an involuntary exaction intended to raise revenue, from penalties, which are involuntary exactions intended to control behavior. Under the Nebraska State statute, the escrow payments made by tobacco manufacturers would be remitted to the manufacturer after a certain point unless Nebraska proved that the manufacturer committed some wrong related to the “use, sale, distribution, manufacture, development, advertising, marketing, or health effects of” tobacco products. The court therefore determined that the escrow and bond requirements functioned as a penalty, rather than a tax, because the State received no revenue unless the manufacturer did something wrong.

The court next considered whether the regulation was preempted by federal law or unlawfully infringed on the Tribe’s right to make and be governed by its own laws. To conduct this analysis, the court applied the two-pronged approach from White Mountain Apache Tribe v. Bracker.^[91] On the first prong, the Plaintiffs argued that Nebraska’s tobacco regulations were preempted by the Indian Trader Statutes,^[92] which preempt state regulation of sales made in Indian country but are generally concerned with sales by non-members to tribal members. The court disagreed, finding that the Indian Trader Statutes did not prohibit state regulation of sales by tribal businesses to tribal members. The court further found that the federal government had not enacted a comprehensive and pervasive scheme regulating the sale of tobacco, and that the state regulations were non-discriminatory and applied to all sales of tobacco rather than just those the Plaintiffs made on their own reservation.

The court emphasized that the second prong of the Bracker analysis—whether the regulation unlawfully infringed on the Tribe’s right to make its own laws and be governed by them—required balancing the state, federal, and tribal interests at stake. The court noted that Nebraska has a strong interest in regulating tobacco sales to protect public health, and also an interest in protecting Indians and non-Indians from misconduct by tobacco manufacturers. In contrast, both the federal government and the Tribe had an interest in protecting tribal sovereignty and promoting tribal business and self-sufficiency. Moreover, the Tribe had an economic interest in raising revenue from the Plaintiffs’ business and an interest in selling products free from state regulation.

With respect to the Plaintiffs’ sale of products off the reservation, including on the land of other tribes, the court found that the State’s interest in enforcing the tobacco regulations outweighed the federal and tribal interests at stake, reasoning that the Tribe does not have the same level of interests or protection for activities that take place off its own reservation. However, the court found that the State did not demonstrate the “exceptional circumstances” required to regulate the Plaintiffs’ manufacture and sale of products on the Winnebago reservation. The court further found that the regulation constituted a direct burden on a tribal business operating on its reservation; the Plaintiffs’ were merely providing an exemption to certain state taxes for customers willing to travel to the reservation; the federal government had not authorized state regulation of tribal tobacco businesses; and any “off-reservation” effects of the Plaintiffs’ on-reservation activities were insufficient to justify the infringement. Additionally, the court noted that while the federal government had instituted policies around other areas of Tribal activity to preempt state regulation, such as for gaming and wildlife purposes, the federal government has done nothing to encourage or discourage tribal tobacco manufacturing.

The court granted the Defendant’s motion for summary judgment as it pertained to sales on the Omaha reservation, and granted the Plaintiffs’ motion for summary judgment as it pertained to sales on the Winnebago reservation. The court also permanently enjoined the Defendants from enforcing the escrow and bond requirements for sales on the Winnebago reservation.^[93]

§ 7.4. The Federal Sovereign

§ 7.4.1. Indian Country & Land into Trust

The Indian Reorganization Act (“IRA”) authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.^[94] In 2009, however, the U.S. Supreme Court issued a landmark ruling reversing the Interior’s prior interpretation of the IRA, 25 U.S.C. § 465, now located at 25 U.S.C. § 5108, and limiting the Secretary’s ability to take land into trust on behalf of tribes.^[95] Carcieri held that the Secretary may only acquire land in trust for tribes that (1) were “under federal jurisdiction” in 1934, and (2) currently enjoy federal recognition.^[96] This effectively precludes certain tribes from avoiding state tax and regulatory compliance, or conducting gaming or other economic development activities on newly acquired or reacquired lands.

Despite the Carcieri ruling, the Interior seems willing to issue final decisions on fee-to-trust applications by tribes that were recognized, restored, or reaffirmed after June 1934 on the basis that the tribe may have been under the jurisdiction of the United States in 1934 even if that recognition was not formally documented.^[97] The Interior will continue processing applications for tribes that have enjoyed uninterrupted, formal recognition since June 1934 and for tribes that can point to a non-IRA statute granting the Secretary acquisition authority.^[98] In sum, any non-Indian party looking to enter into a joint venture with a tribe to develop Indian lands not yet in trust status must pause to consider the implications of Carcieri.^[99]

In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”^[100] The Solicitor’s M-37029 Memorandum outlined a two-part test for interpreting the phrase “under federal jurisdiction.” The first part of this inquiry examines whether, before June 18, 1934, the federal government took an action or series of actions through a course of dealings or other relevant acts reflecting its obligation to, responsibility for, or authority over, an Indian tribe, bringing such tribe under federal jurisdiction.^[101] The second prong examines whether this jurisdictional status remained intact in 1934.^[102] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a more recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld the Interior’s application of the two-part test outlined in M-37029.^[103] M-37029 appears to be a non-statutory Carcieri fix.

As if Carcieri were not complicated enough, in 2012, the U.S. Supreme Court issued its opinion in Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak.^[104] In that case, a local landowner by the name of David Patchak launched a legal challenge against the Interior Secretary’s decision to take the tribe’s land into trust for the purpose of gaming. Importantly, Patchak did not allege that he had a legal interest in the land to be taken into trust. Rather, Patchak brought an action under the APA^[105] asserting that the IRA did not authorize the Department of Interior to take land into trust for the tribe. The remedy Patchak sought was for the issuance of an injunction prohibiting the Interior from taking the land into trust. The basis for the injunction, in Patchak’s opinion, was that the requirements of the IRA were to be satisfied per the Supreme Court’s opinion in Carcieri. Both the federal government and the tribe argued that only the Quiet Title Act (QTA)^[106] could grant the waiver of sovereign immunity. Under the theory advanced by the defendants, the APA waiver of sovereign immunity was negated.

The Court determined that the QTA only applies to quiet title actions where a person claims an interest in the property that conflicts with, or is superior to, the government’s claim in the property.^[107] In addition, because the exception causing the APA waiver of sovereign immunity to be negated did not apply, the Court held Patchak had standing under the APA to pursue his challenge.

The result of this decision is that any party claiming harm to property nearby proposed trust land, even damage to an “aesthetic” interest, has legal standing under the APA to bring a lawsuit. This creates considerable risk for casino developers because the statute of limitations under the APA is considerably longer than that of the QTA, creating much more time for a party to challenge Interior’s trust transaction.^[108]

The Interior Department revised its land-into-trust regulations at Part 151 in response to the Patchak decision during the Obama Administration, in late 2013.^[109] This “Patchak Patch” provides that if the Interior Secretary or Assistant Secretary approves a trust acquisition, the decision represents a “final” agency determination subject immediately to judicial review.^[110] If a Bureau of Indian Affairs (“BIA”) official issues the decision, however, the decision is subject to administrative exhaustion requirements^[111] before it becomes a “final agency action.”^[112] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.^[113] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.”

More recently, the BIA, to improve and streamline the tribal land acquisition application process, announced changes to land-into-trust regulations (at Part 151).^[114] Under the new rule, the BIA will now have to meet a 120-day deadline. Prior to the change, the average land acquisition application took an average of 985 days.

A brief discussion of this past year’s cases involving the taking of land into trust follow.^[115]

Chase v. Andeavor Logs., 2023 WL 5920379 (D.N.D. Aug. 8, 2023). After a series of interlocutory appeals, the North Dakota District Court held that individual tribal members (“Allottees”) who hold equitable interests in tribal lands that are held in trust by the United States could not bring a common law trespass claim against an oil pipeline manufacturer whose right of way had expired.

Broadly, dating back to 1953, various companies had operated an oil pipeline in North Dakota that crossed portions of the Fort Berthold Indian Reservation. At various times, these companies held rights of way for use of their pipelines across the reservation. In 2013, however, the right of way expired. Yet, the pipeline continued to operate.

In 2017, the Mandan, Hidatsa, and Arikara Nations negotiated a right of way with Andeavor Logistics (the current pipeline operator), but only as to the tribal trust lands. Several Allottees refused to grant Andeavor a right of way over their individually allotted portions of land.

The Allottees filed suit alleging continuing trespass and constructive trust. Andeavor filed a motion to dismiss. In the intervening procedural chaos, the motion to dismiss came before the court on a single ground—whether the Allotees could assert a federal common law claim for trespass.

In assessing whether the individual Allottees could maintain a federal common law claim, the court reasoned that the “undeniable key” was whether the Allottees could claim aboriginal title to the land—a required prerequisite. Aboriginal title, as opposed to equitable title obtained in trust, requires that the title predate limitations set out by the federal government because it would have preceded the formation of the United States.

By contrast, the court explained that allotted lands, especially allotments to individual Indians, was an attempt by the federal government to weaken tribal power and influence. Moreover, individual allotments are not, by definition, lands that were subject to aboriginal title. For example, the allotted lands may have been granted from the public domain.

Therefore, the court drew a critical distinction between allotted lands, which the Allottees in this case owned, as opposed to those lands with aboriginal title. The court reasoned that if the Allottees were given the same rights as individuals with aboriginal title, it would “cheapen the rich history of aboriginal lands and constitute a rejection of the Supreme Court’s favored treatment of aboriginal title for two centuries.”^[116] Moreover, any attempt by the Allottees to analogize to other federal common law claims were futile because those claims were viable in the context of aboriginal title, not allotments.^[117]

Accordingly, because the Allottees lacked aboriginal title, the court dismissed the Allottees’ trespass action for failure to state a claim. It further denied to affirmatively create a common law claim for trespass.

For the remaining claims (breach of contract, unjust enrichment, and constructive trust), the court also held these claims failed because either the Allottees failed to join the United States as a required party, or the claims depended on the federal trespass action.^[118]

Littlefield v. U.S. Dep’t of the Interior, No. 22-CV-10273-AK, 2023 WL 1878470 (D. Mass. Feb. 10, 2023), aff’d 2023 WL 7146029 (1st Cir. Oct. 31, 2023). Plaintiffs, residents of Taunton, Massachusetts, challenged a decision by the United States Secretary of the Interior (the “Secretary”) to take into trust 321 acres of land for the benefit of the Mashpee Wampanoag Tribe (the “Tribe”). The district court denied Plaintiffs’ challenges and held that the Secretary’s decision to take land into trust for the benefit of the Tribe was legal, and not arbitrary, capricious, or contrary to the law. Plaintiffs appealed. The First Circuit affirmed, albeit for different reasons than the district court.

The First Circuit held that the Supreme Court’s opinion in Carcieri v. Salazar, 555 U.S. 379 (2009), and its analysis of the Narragansett Tribe’s history was not controlling as to whether the Mashpee Tribe was “under Federal jurisdiction” in 1934. It reasoned that the Supreme Court had relied on the parties’ concessions that the Narragansett Tribe was not under federal jurisdiction in 1934, as opposed to any independent investigation. Therefore, that concession (and the subsequent analysis) was inapplicable to the Mashpee Tribe and therefore the Secretary did not err by refusing to adopt the analysis.

The court also rejected Plaintiffs’ argument that the definition of “Tribe” in Montoya v. United States, 180 U.S. 261 (1901), was codified by the IRA. Therefore, it held that the Secretary did not act arbitrarily or capriciously in refusing to apply this definition to the Mashpee Tribe.

On appeal, Plaintiffs conceded that the Solicitor of the Department of the Interior’s memorandum (“M-Opinion”) governed the meaning of “under Federal jurisdiction.” Plaintiffs, however, challenged the Secretary’s application of the factors here. The M-Opinion requires the Secretary first determine whether the federal government took an action, or a series of actions, that conferred jurisdiction on a tribe before 1934. If the answer is “yes,” then the Secretary proceeds to the second step in the analysis and determines whether this jurisdictional status remained intact in 1934.

First, Plaintiffs argued that the federal government took no affirmative actions to remove the Mashpee from western Massachusetts. The First Circuit rejected this argument because the federal government took “specific action” through the issuance of the Morse Report that indicated it considered the Mashpee to be within the jurisdiction of the United States. Moreover, the Morse Report was not the sole piece of evidence relied on by the Secretary in making her decision.

Second, the First Circuit held that the Secretary permissibly analyzed the Mashpee children’s attendance at the Carlisle School as probative evidence of the exercise of federal control. It reasoned that the Secretary could consider different ways in which this attendance might be probative, that parental consent is not a dispositive factor, and the M-Opinion, as well as the Secretary’s third written decision in 2021, instructed the Secretary to consider Bureau of Indian Affairs school attendance.

Third, Plaintiffs identified various reports by federal officials regarding the Mashpee Tribe and argued that because the federal government took no action based on the reports, the Secretary relied on them in error. The court disagreed. Although the reports did not result in any action by the federal government, the act of compiling the reports and making recommendations affected only the weight of the evidence, not its inclusion or exclusion from consideration.

Finally, Plaintiffs argued that the Secretary’s evidence, inter alia census records and various government reports, was not probative on the issue of whether the Tribe was under federal jurisdiction. On this point, the court declined to reweigh the evidence considering that the Plaintiffs offered no authority for their contention.

In sum, the court affirmed the district court’s conclusion that the Secretary did not act arbitrarily, capriciously, or contrary to law by taking the land into trust for the benefit of the Tribe.

State ex rel. Kobach v. U.S. Dep’t of Interior, No. 21-3097, 2023 WL 4307478 (10th Cir. July 3, 2023). In 1992, the Wyandotte Tribe (the “Tribe”) purchased a 10-acre parcel of land (hereinafter the “Park City Parcel”) just outside of Wichita, Kansas using money it received in a settlement from the Indian Claims Commission (“ICC”). In 2008, the Tribe applied for trust status intending to establish gaming operations on the land. In 2020, the Secretary of the Interior (the “Secretary”) approved the Tribe’s application. Kansas, however, opposed the Secretary’s decision to take the land into trust (and therefore the Tribe’s ability to operate a gaming facility) because it claimed that (1) the Tribe did not purchase the land with the appropriate funds and (2) there was no exception to the Indian Gaming Regulatory Act authorizing the Tribe to operate gaming operations on the land. The Tenth Circuit rejected both of the State’s arguments and held that the Secretary’s decision to take the Park City Parcel into trust for the benefit of the Tribe and authorization of gaming operations was not arbitrary or capricious, nor in contravention of the law.

The State first argued that the Tribe did not purchase the Park City Parcel using the appropriate funds, and, as a result, the Secretary’s decision to take the land into trust was arbitrary and capricious. The Secretary had parsed through competing accounting reports that traced the origins of the funds, as well as other Tribal land purchases, and concluded that the Park City Parcel was purchased with Section 105(b)(1) funds. The Tenth Circuit upheld the Secretary’s assessment because the Secretary had reviewed the relevant materials and had rationally explained why she relied on one report over the other.

As a legal matter, the 10th Circuit also rejected the State’s argument that if a Tribe uses Section 105(b)(1) funds as a principal, the investment income from those proceeds can no longer be used for the statutory purposes set out in Section 105(b)(1). In affirming the Secretary’s rationale, the court also rejected the State’s arguments that inter alia the Secretary disregarded department policy and that the decision was unsupported by substantial evidence. Therefore, the court held that the Secretary did not act arbitrarily and capriciously when it approved the Tribe’s application to take the Park City Parcel into trust.

The State also argued that the Secretary acted arbitrarily and capriciously by permitting the Tribe to conduct gaming operations on the Park City Parcel. Broadly, IGRA prohibits gaming on lands acquired and held in trust by the Secretary.^[119] Thus, the State argued that the funds used to purchase the parcel, which originated from an ICC settlement, did not meet IGRA’s settlement-of-a-land-claim exception to the general prohibition.^[120]

To resolve this dispute, the court examined the three requirements to meet IGRA’s settlement-of-a-land-claim exception under 25 U.S.C. § 2719: (1) the Secretary took the land into trust; (2) the land was acquired under a settlement of a land claim; and (3) the land was taken into trust as part of the settlement of the land claim. Here, the court held that all three requirements were met.

First, as discussed, the court concluded that the Secretary took the land into trust.

Second, the court held that the plain meaning of “settlement,” as used in the statute, encompassed the ICC settlement from which the Tribe received the original funds to purchase the Park City Parcel. In particular, the court rejected the State’s argument that the word “settlement” should only include “traditional settlement agreements” when Congress established the ICC to determine all tribal claims and applicable remedies.

Third, the court held that the Secretary took the land into trust “as part of” the settlement of land claims. The court reasoned that Congress, as opposed to the ICC settlement itself, authorized the Secretary to take the Park City Parcel into trust under PL 98-602.^[121] However, the court found that in acting through the authority vested in her by Congress, the Secretary acted “as part of” the ICC settlement because Congress would not have enacted PL 98-602 but for the ICC settlement. Although the Secretary did not undertake this same analysis, the court held that the Secretary’s interpretation (which was based on department regulations) would have produced the same outcome.

As a result, the Secretary did not act arbitrarily or capriciously by permitting the Tribe to conduct gaming operations.

Sault Ste. Marie Tribe of Chippewa Indians v. Haaland, No. 1:18-cv-02035, 2023 WL 2384443 (D.D.C. Mar. 6, 2023). The Sault Ste. Marie Tribe of Chippewa Indians (the “Tribe”) purchased a 71-acre parcel in Michigan’s lower peninsula (hereinafter the “Sibley Parcel”). The Tribe then sought to compel the Secretary of the Interior to take the Sibley Parcel into trust for the purpose of creating a casino. The Secretary denied the Tribe’s application because it reasoned that the Tribe had not adequately satisfied the requirement that the land be for “social welfare” or the “enhancement of tribal lands.” The Tribe appealed the decision to the District Court for the District of Columbia and the court affirmed.

As relevant here, the Tribe purchased the Sibley Parcel solely using investment income. In turn, investment income can only be used to satisfy one of five enumerated purposes under § 108(c) of the Michigan Indian Land Claims Settlement Act (hereinafter the “Michigan Act”).^[122] If the Sibley Parcel qualified under one of the five purposes, the Michigan Act requires the land “be held in trust by the Secretary for the benefit of the tribe.” Here, the Tribe sought to avail itself of reason four (social welfare) and reason five (enhancement of tribal lands).^[123]

The Tribe argued that developing a casino would constitute “social welfare” because it would create jobs as well as generate revenue—five percent of which would be used to finance both services for tribal elders and scholarships. The Secretary argued that the Tribe could not satisfy § 108(c)(4) by merely starting an economic enterprise, which may generate its own profits, which might then be spent on social welfare purposes—that is, the social welfare connection was too attenuated. By contrast, the Secretary suggested that health clinics or schools might qualify.

The court agreed with the Secretary that broad principles of job creation and increased revenue could not satisfy the Michigan Act’s requirements. The court started by defining “social welfare” more narrowly than the Tribe proposed. The court reasoned that both on its own and in context, social welfare could not encompass a for-profit casino. Instead, the court explained that social welfare was linked to direct social welfare contributions, such as providing organized care for the sick, poor, or elderly. The court also rejected the Tribe’s argument that the statute did not require a direct social welfare benefit, as to do so would contradict the statute’s plain meaning. Finally, the court reasoned that § 108(c) had to be read in conjunction with § 108(b), and § 108(b) already provided that the principal (as opposed to investment income) could be used for economic development. By contrast, the court reasoned that the omission of economic development in § 108(c) undermined the Tribe’s argument that the casino would constitute a social welfare endeavor.

Turning to requirement five, the Tribe argued that the development of a casino would enhance tribal lands because tribal housing is in high demand, and gaming revenue is the most viable way of providing housing to members of the Tribe. In addition, the Tribe argued that casino operations would fund necessary facility improvements in the upper peninsula, thus enhancing the Tribe’s land. At bottom, the court upheld the Secretary’s rejection of the Tribe’s proffer because the Tribe’s rationales were conclusory and unsupported. Although the Secretary gave the Tribe multiple opportunities to amend its submissions, the Tribe only offered declarations of its Chief Financial Officer and Director of the Tribal Housing Authority to support its contentions as opposed to definite plans, and the court declined to second-guess how the Secretary weighed that evidence. The court also concluded that the Secretary made rational decisions based on the administrative record.

As an alternative argument, the Tribe argued that the Secretary failed to adequately explain her decision. The court explained that this standard was typically difficult to meet and generally encompassed form language or one sentence decisions. Here, the court found the Secretary’s letter to the Tribe, which included inter alia examples of how the Tribe could satisfy § 108(c)’s provisions, satisfied 5 U.S.C. § 555(e)’s minimum procedural requirements.

Accordingly, the court upheld the Secretary’s rejection of the Tribe’s application as not contrary to law, arbitrary, or capricious.^[124]

§ 7.4.2. Federal Approval for Reservation Activity

Due to the unique trust status of Indian lands, contracts involving those lands are subject to various forms of federal oversight. The Secretary of the Interior must approve any contract or agreement that “encumbers Indian lands for a period of seven or more years,” unless the Secretary determines that approval is not required.^[125] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”^[126] Encumbrances may include leasehold mortgages, easements, and other contracts or agreements that, by their terms, could give to a third party “exclusive or nearly exclusive proprietary control over tribal land.”^[127]

Per revisions to Section 81 in 2000, the Interior Secretary will not approve any contract or agreement if the document does not (1) set forth the parties’ remedies in the event of a breach; (2) disclose that the tribe can assert sovereign immunity as a defense in any action brought against it; and (3) include an express waiver of tribal immunity.^[128] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.^[129] Failure to secure secretarial approval could render the agreement null and void.^[130] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.^[131] Regardless of whether Secretary approval is necessary, all parties should be careful as to how they draft agreements which may encumber the land.^[132] If the contract pertains to a tribal casino, the parties must also consider whether the contract should be submitted to the National Indian Gaming Commission (“NIGC”) for approval pursuant to the Indian Gaming Regulatory Act (“IGRA)”.^[133] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.^[134] The NIGC has recently found that certain consulting, development, lease, and financing documents that confer management authority to the consultant, developer, landlord, or lender thereby constitute a management contract that is void unless approved by the NIGC.

Non-Indian contractors must also consider whether they need to obtain an Indian Traders License from the Bureau of Indian Affairs (“BIA”) and/or a tribal business license to properly do business with a tribe.^[135] Federal regulations do not preclude certain tribes from imposing additional fees on non-Indian contractors. Failure to obtain appropriate licenses could subject the contractor to a fine or forfeiture, if not tribal qui tam litigation.^[136]

With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (“HEARTH”) Act.^[137] As noted above, prior to the passage of this bill, under 25 U.S.C. § 415, every lease of a tribe’s lands must undergo federal review and approval by the Secretary of the Interior under a sprawling, burdensome set of regulations.^[138] The HEARTH Act changes that scheme of Indian land leasing by allowing tribes to lease their own land. The Act gives tribal governments the discretion to lease restricted lands for business, agricultural, public, religious, educational, recreational, or residential purposes without the approval of the Secretary of the Interior. Tribes are able to do so with a primary term of 25 years, and up to two renewal terms of 25 years each (or a primary term of up to 75 years if the lease is for residential, recreational, religious, or educational purposes).

There are some caveats, though. First, before any tribal government can approve a lease, the Secretary must approve the tribal regulations under which those leases are executed (and mining leases will still require the Secretary’s approval). Second, before the Secretary can approve those tribal regulations, the tribe must have implemented an environmental review process—a “tribal,” or “mini” National Environmental Policy Act—that identifies and evaluates any significant effects a proposed lease may have on the environment and allows public comment on those effects. The HEARTH Act authorizes the Interior Secretary to provide a tribe, upon the tribe’s request, with technical assistance in developing this regulatory environmental review process. HEARTH Act implementing regulations went into effect in 2013.^[139] As of January 6, 2024, the BIA lists 92 tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.^[140]

The following highlights several of the more relevant cases decided in the last year.^[141]

W. Flagler Assocs., Ltd. v. Haaland, No. 21-5265, 2023 WL 4279219 (D.C. Cir. June 30, 2023). The District of Columbia Circuit Court of Appeals held that the Secretary of the Interior’s (the “Secretary”) decision not to act (and thus approving a tribal-state compact by default) did not violate the Indian Gaming Regulatory Act (“IGRA”). Further, the court held that as a matter of law the tribal-state compact did not violate the federal Wire Act, or the Unlawful Internet Gambling Enforcement Act (“UIGEA”) and the Secretary’s approval of the compact did not violate the equal protection clause of the Fifth Amendment.

In 2021, the Seminole Tribe of Florida (the “Tribe”) and the State of Florida entered into a tribal-state compact (the “Compact”) under IGRA, which allowed the Tribe to offer online sports betting. The Compact deemed all bets placed through the Tribe’s sports book to occur where the sports book servers are located (the Tribe’s land), regardless of where the person placing the bet is located. When the Secretary failed to affirmatively approve or disapprove the Compact within 45 days of receiving it, the Compact became effective.

West Flagler Associates (“West Flagler”) operated casinos in Florida and filed suit, alleging the compact violated IGRA, the Wire Act, UIGEA, and the Fifth Amendment, specifically because the Compact purported to offer state-wide sports betting that would necessarily occur off-reservation. Because of these alleged violations, West Flagler believed the Secretary was required to disapprove the Compact. The Tribe moved to intervene for the limited purpose of filing a motion to dismiss based on its tribal sovereign immunity. The Tribe’s motion was denied, and the court granted summary judgment for West Flagler, holding that the Compact violated the “Indian lands” requirement of IGRA.

On appeal, the D.C. Circuit reversed, reasoning that an IGRA compact can only authorize a tribe to conduct gaming on its own lands, and as such, does not prohibit such compact from discussing other topics. Therefore, a compact could discuss topics which governed activities outside of Indian lands. The court found that the district court erred in “reading into the Compact a legal effect it does not (and cannot) have,” namely that the Compact cannot provide the authority to regulate any activity that occurs outside the borders of Indian land. The court held that the Compact complied with IGRA by authorizing betting that occurs on the Tribe’s land. As to the provision of the Compact discussing betting activities that would occur outside of Indian land, the court explained that issue was not within the scope of the litigation and instead was reserved for the Florida courts to decide.

The district court did not reach West Flagler’s claims that the Compact violated the Wire Act, UIGEA, and the Fifth Amendment. However, on appeal, the D.C. Circuit held that all three challenges were without merit as a matter of law. Lastly, because the court determined that the Tribe’s Compact would be kept intact regardless of whether the case was decided on the merits or on the Tribe’s motion to dismiss, the court affirmed the district court’s denial of the Tribe’s motion to intervene.

§ 7.4.3. Labor and Employment Law & Indian Tribes

When Indian tribes act as commercial entities and hire employees, they are not subject to the same labor and employment laws as nontribal employers. For example, state labor laws and workers’ compensation statutes are inapplicable to tribal businesses.^[142] Moreover, tribal employers may not be subject to certain federal labor and employment laws.^[143]

Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964^[144] and the Americans with Disabilities Act^[145] expressly exclude Indian tribes,^[146] and state anti-discrimination laws usually do not apply to tribal employers.^[147] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.^[148]

The circuits remain severely split regarding the application of federal regulatory employment laws to tribal employers. The Eighth and Tenth Circuits have refused to apply to tribes such laws as the Occupational Safety and Health Act (OSHA),^[149] the Employee Retirement Income Security Act (ERISA),^[150] the Fair Labor Standards Act (FLSA),^[151] the National Labor Relations Act (NLRA),^[152] and the Age Discrimination in Employment Act (ADEA),^[153] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.^[154]

Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.^[155] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.^[156] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.^[157] Following this reasoning, the Department of Labor has stated that the FMLA^[158] applies to tribal employers.^[159] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.^[160] For example, the Second Circuit has held that, because Congress did not explicitly authorize suits against tribes in the language of the FMLA or the ADEA, tribal employers cannot be sued for money damages in federal court by employees under these statutes.^[161]

Questions remain concerning whether federal statutes of general applicability extend beyond the labor and employment arena where they do not affirmatively contemplate whether Indian tribes govern tribal or reservation-based activities. For example, do federal franchise laws apply in Indian Country? What about the federal Copyright Act or other federal intellectual property statutes? What about Sarbanes-Oxley? While subject to the split in circuits discussed immediately above, it is unclear in which federal jurisdictions a court would hold that such federal laws apply to tribes.^[162]

Federal courts have continued to decide cases involving the application of federal labor and employment rules to tribal employers. More generally, courts have grappled with how to apply statutes of general applicability to tribal sovereigns. Two noteworthy cases from the last year are discussed below:^[163]

Dean S. Seneca v. Great Lakes Inter-Tribal Council, Inc., No. 22-2271, 2023 WL 4340699 (7th Cir. July 5, 2023). The Seventh Circuit Court of Appeals affirmed the dismissal of an employment discrimination claim brought against an employer non-profit consortium of Indian tribes, holding that the employer enjoyed tribal sovereign immunity from suit.

Plaintiff, Dean Seneca (“Seneca”), was employed as a director of epidemiology by the Great Lakes Inter-Tribal Council (the “Council”), a non-profit composite of its member Indian tribes, which are federally recognized and own and control it. Seneca alleged that the Council fired him because of his race, color, national origin, age, sex, gender identity, and sexual orientation in violation of federal law, including Title VII of the Civil Rights Act of 1964. The Council successfully moved to dismiss the suit in district court based on tribal sovereign immunity and its view that the federal statutes that Seneca invoked excluded claims against Indian tribes. The district court accepted the first argument and did not reach the second, reasoning that the Council, as a consortium of its members, enjoyed tribal sovereign immunity. Seneca unsuccessfully appealed.

The Seventh Circuit began its analysis from the premise that suit against Indian tribes are barred “absent a clear waiver by the tribe or congressional abrogation.”

On appeal, Seneca first urged the court to adopt the test in McNally CPA’s & Consultants, S.C. v. DJ Hosts, Inc., 692 N.W.2d 247, 251–52 (Wis. Ct. App. 2004), in which the court held that a for-profit corporation did not enjoy tribal sovereign immunity after a tribe bought all of its shares. Here, the Court rejected this argument because the McNally test was “narrow,” and the for-profit analogy failed to carry water when analogizing to a non-profit.

Second, Seneca argued that the Council waived its sovereign immunity by agreeing to abide by Title VI of the Civil Rights Act of 1964 when it accepted federal funds. The court disagreed. Even if the Tribe had waived immunity under Title VI, the court explained that Seneca brought his claims under Title VII, which was already a comprehensive regulatory scheme.

Third, Seneca argued that the Council’s job postings, which boasted compliance with “federal and state laws” waived sovereign immunity. Again, the Seventh Circuit disagreed, reasoning the job posting made no reference to sovereign immunity or its amenability to suit.

Finally, Seneca argued that unless the Council waived sovereign immunity, he had no recourse for his discrimination claim, in violation of his right to due process under the Fifth and Fourteenth Amendments. But the court reasoned that neither the Fifth Amendment nor the Fourteenth Amendment applied to Indian tribes. Accordingly, the Seventh Circuit affirmed the district court’s dismissal of the suit.

Meglitsch v. Southcentral Found., No. 3:20-CV-0190-HRH, 2022 WL 16949256 (D. Alaska Nov. 15, 2022), appeal dismissed, No. 22-36024, 2023 WL 3940561 (9th Cir. May 31, 2023). Plaintiff, Colin Graham Meglistch, was employed by defendant, Southcentral Foundation, a Tribal organization that provides federal healthcare programs for Alaska Natives and Native Americans. Southcentral Foundation is recognized as a Tribal organization under Title V of the Indian Self-Determination and Education Assistance Act (“ISDEAA”).^[164] Meglistch alleged that the Southcentral Foundation violated the Fair Labor Standards Act (“FLSA”) by failing to properly pay him overtime for the on-call hours he worked. In response, Southcentral Foundation argued that the court lacked subject matter jurisdiction over this dispute because the FLSA requirements did not apply to tribal entities. The court agreed, holding that FLSA does not apply to tribal entities and dismissed the case under Federal Rule of Civil Procedure 12(h)(3).^[165]

In analyzing whether the FLSA applied to Southcentral Foundation, the court noted that “the FLSA is a statute of general applicability” and statutes of general applicability typically apply to Indian tribes. There are, however, three exceptions to this principle.^[166] A federal statute of general applicability that is silent on the issue of applicability to Indian tribes will not apply to them if: (1) the law “touches exclusive rights of self-governance in purely intramural matters”; (2) the application of the law to the tribe would “abrogate rights guaranteed by Indian treaties”; or (3) there is proof “by legislative history or some other means that Congress intended [the law] not to apply to Indians on their reservation . . . .” This case involved the first exception.

The court stated that the self-governance exception applied to Southcentral Foundation for a few reasons. First, the court found it relevant that Southcentral Foundation received funding under the ISDEAA, which recognizes the right of Indian self-determination and tribal self-governance. Second, the court reasoned that Southcentral Foundation’s provision of health care services involved exclusive rights of self-governance because staffing responsibilities and pay rates are purely intramural activities, meaning that they relate exclusively to the Southcentral Foundation’s internal operations. The court also rejected Meglistch’s arguments that pay rates and staffing needs were not purely intramural matters because Southcentral Foundation sometimes provided healthcare services to general, non-Native populations because those populations are both small and generally have a “stake” in tribal self-governance. Meglistch also argued that he was entitled to notice that he was working outside of standard Alaska labor laws. The court rejected this argument, both because there was no federal requirement that he be provided notice and also because he was on notice due to his employee handbook outlining his compensation. Therefore, the court granted Southcentral Foundation’s motion to dismiss for lack of subject matter jurisdiction.

§ 7.4.4. Federal Court Jurisdiction

Federal court jurisdiction is limited to cases that invoke a federal court’s limited subject matter jurisdiction. Such cases may involve a federal question^[167] or claims that are brought involving diversity of citizenship.^[168] Litigation that arises from a deal with a federally recognized tribe, or otherwise has federal overtones, does not necessarily present a federal question that will allow a federal district court to assume jurisdiction,^[169] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.^[170] Moreover, courts have generally held that a tribe is not a citizen of any state for diversity purposes and, therefore, cannot sue or be sued in federal court based on diversity jurisdiction.^[171] However courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.^[172] Because the potential judicial forums for commercial litigation arising out of Indian Country are likely restricted to state or tribal court, choosing federal court as the choice of venue may not make sense.

The following highlights several of the more relevant cases decided in the last year.^[173]

Bessios v. Pueblo of Pojoaque, No. CV 22-266 MV/JFR, 2022 WL 18936057 (D.N.M. Oct. 12, 2022), report and recommendation adopted 2023 WL 2157699 (Feb. 22, 2023). In November 2018, Plaintiff was terminated from a management role at a casino after conducting data assessments of the proprietary software and discovering “errors and unreconcilable discrepancies.” Plaintiff sued Buffalo Thunder Development Authority, Pueblo of Pojoaque, and Pojoaque Gaming Inc. (collectively “Tribal Defendants”), and SG Gaming Inc. and Scientific Games Corporation (collectively “Gaming Defendants”) for inter alia wrongful termination, retaliatory discharge, defamation, spoliation, tortious interference with contractual relations, and negligence.

Tribal Defendants removed the suit from state court to district court, claiming federal question and supplemental jurisdiction under 28 U.S.C. §§ 1331, 1441, and 1446. Gaming Defendants consented to Tribal Defendants’ removal. Plaintiff moved for remand, arguing that her complaint did not raise a federal question, and any reference to the Indian Gaming Regulatory Act (“IGRA”) or the tribal-state compact did not affect the state-law nature of her claims. The magistrate judge reasoned, which the district court adopted, that Plaintiff’s state-law claims incorporated federal questions of law under IGRA and the applicable tribal-state compact and thus had federal question subject matter jurisdiction.

Federal question jurisdiction permits district courts to hear suits “arising under the Constitution, laws or treaties of the United States.” 28 U.S.C. § 1331. Removal, in turn, is permissible when a federal question case has been filed in state court. 28 U.S.C. § 1441. The court explained that federal question jurisdiction does not arise for any question of federal law, but instead the issue must be a substantial issue of federal law. As a general rule, the court explained that state courts are not permitted to hear suits against Indian defendants without federal authorization when those disputes arise out of Indian country.

Here, the court found that federal question jurisdiction existed despite the state-law nature of Plaintiff’s claims. Plaintiff’s termination arose from accounting discrepancies that she uncovered that she claimed were violations of IGRA and the tribal-state compact that governed Class III gaming. Therefore, the court reasoned that when she filed her complaint, every count (15 in total) relied on IGRA and the Tribe’s sovereign immunity waiver under the tribal-state compact. In turn, in order to resolve the merits of Plaintiff’s claims, the court stated it would have to interpret provisions of IGRA and the tribal-state compact. Accordingly, the court adopted the magistrate judge’s recommendation to deny Plaintiff’s motion for remand.

Byrd v. Town of Mount Vernon, No. CV 22-00401-TFM-B, 2022 WL 17400704 (S.D. Ala. Oct. 26, 2022), report and recommendation adopted 2023 WL 361090 (Jan. 23, 2023). Plaintiff, who was pro se, received a municipal speeding violation by a Mount Vernon police officer. In turn, she filed a notice of removal to federal court alleging that the town of Mount Vernon could not charge her with speeding because she was a member of a recognized Indian tribe, and the ticket was issued in Indian territory. The court, by adopting the magistrate judge’s report and recommendation, remanded the case back to state court.

Although Plaintiff invoked federal question jurisdiction, the court reasoned that 28 U.S.C. § 1331 only applies to civil actions, and the speeding ticket at issue was a criminal offense. The court explained that Plaintiff’s criminal violation did not fall within any statute that would permit her criminal proceeding to be removed to federal court nor did she cite any civil rights law that would permit the case to be removed to federal court. Given that the federal could only acquire federal jurisdiction over a very narrow set of criminal cases, the court remanded the case to state court.

Chicken Ranch Rancheria of Me-Wuk Indians v. California, 65 F.4th 1145 (9th Cir. 2023). Plaintiffs, including Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria (the “Tribes”), filed suit against California, alleging that California violated the Indian Gaming Regulatory Act (“IGRA”) by exhibiting bad faith by failing to negotiate a tribal-state compact that would allow the Tribes to operate Class III gaming. On the merits, the Tribes prevailed and filed a motion for attorney’s fees. California opposed the award of attorney’s fees based on sovereign immunity. The Ninth Circuit agreed with California and declined to award attorneys’ fees to the Tribes.

Putting aside the issue of California’s sovereign immunity (which the court concluded that California had waived), the court reasoned that federal law governed attorney’s fees in cases where the court obtained jurisdiction under the federal question doctrine. Here, the court explained that the underlying merits lawsuit was brought under IGRA, a federal law. In turn, in analyzing IGRA’s language, the court noted that IGRA did not contain an attorneys’ fees provision.

The Tribes argued that an exception existed that would permit attorney’s fees in federal question cases, where “substantial and significant issues of state law” were present. To support this argument, the Tribes argued that the underlying lawsuit implicated state law.

The Ninth Circuit rejected this argument, concluding that the Tribes sued California on a federal IGRA claim, which was “purely [a] federal claim.” Therefore, the court held that there were no exceptions that would permit the imposition of an attorneys’ fee award. Accordingly, the Tribes’ motion for attorneys’ fees was denied.

Sauk-Suiattle Indian Tribe v. City of Seattle, 56 F.4th 1179 (9th Cir. 2022). In 1995, the Federal Energy Regulation Committee (“FERC”) issued the city of Seattle a license to operate a hydroelectric dam for thirty-years. In 2021, the Sauk-Suiattle Indian Tribe (the “Tribe”) sued Seattle alleging that the city operated the dam without the appropriate fish passage channel, which in turn violated inter alia the 1853 Act establishing the Washington Territory and the Supremacy Clause of the United States. Seattle removed the suit to federal court and the Tribe filed a motion to remand. The district court denied the Tribe’s motion to remand, holding that the complaint raised substantial federal questions.

Seattle then moved to dismiss the lawsuit for lack of subject matter jurisdiction. The district court granted the motion because the Tribe’s lawsuit essentially challenged an agency decision that was only reviewable by a circuit court under the Federal Power Act (“FPA”). The Ninth Circuit affirmed.

On the removal issue, the Ninth Circuit explained that federal removal is permitted in “any civil action brought in a state court of which the district courts of the United States have original jurisdiction.” To confer federal question jurisdiction under 28 U.S.C. § 1331, a plaintiff must demonstrate that their cause of action has federal issues that are: “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.”^[174]

The court concluded that the first two elements were met because the Tribe’s complaint raised federal issues concerning congressional acts and the Supremacy Clause. For the third element, the court determined that the congressional acts involved nationwide regulation. Therefore, this interest was substantial in nature. Finally, for the fourth element, the court concluded that this action was capable of being resolved on the federal level without interfering with the federal-state balance of power. Accordingly, the district court properly denied the Tribe’s motion to remand.

The court then turned to the district court’s dismissal for lack of subject matter jurisdiction. It held that the Tribe’s complaint was governed by the FPA, and the FPA fell within the exclusive jurisdiction of the federal court of appeals. Therefore, the court held that the district court properly dismissed the suit for lack of subject matter jurisdiction.

Finally, the court reasoned that while the general rule is that a dismissal for lack of subject matter jurisdiction should be remanded to state court, here, remand would be futile because exclusive jurisdiction for this suit lied with the court of appeals.

Queens, LLC v. Seneca-Cayuga Nation, No. 419CV00350WPJCDL, 2022 WL 7074271 (N.D. Okla. Oct. 12, 2022). Plaintiffs operated a series of lake-front businesses that it sold to the Seneca-Cayuga Nation (the “Nation”). Plaintiffs sued the Nation for breach of contract when the Nation failed to meet its payment obligations. The contract had a sovereign immunity waiver, and Defendants argued that a waiver of sovereign immunity had to be authorized by the tribe’s Business Committee before it became effective. The Nation argued that the meeting minutes did not indicate a reference to a waiver of sovereign immunity. Plaintiffs disagreed and provided affidavits from the Business Committee.

This case arose in federal court under a somewhat unconventional procedural posture. Plaintiffs filed in state court and won on summary judgment. However, the Oklahoma Court of Civil Appeals held that before it could render a decision, a federal court must determine that it does not have jurisdiction as a condition precedent to the Nation’s waiver of sovereign immunity. The unusual procedural posture forced Plaintiffs to file a lawsuit in federal court while also arguing that the federal court did not have subject matter jurisdiction.^[175] The district court agreed and dismissed the suit.

In any event, the court reasoned that before proceeding to the merits, it had to determine whether it had subject matter jurisdiction. At bottom, the court stated that this was a breach of contract action which did not invoke federal question jurisdiction because there was no federal or constitutional claim and did not implicate a treaty. Moreover, the court explained that a defense of sovereign immunity is insufficient to invoke federal question jurisdiction because federal question jurisdiction arises from the complaint. Additionally, just because a tribe is in some way involved in a lawsuit, this did not automatically confer federal question jurisdiction.

Turning to diversity jurisdiction, 28 U.S.C. § 1332 confers jurisdiction on the court when the parties are citizens of different states and the amount in controversy exceeds $75,000. Here, the court determined that an Indian tribe is not a citizen of any state. Therefore, diversity jurisdiction could not exist. Accordingly, the court dismissed the lawsuit for lack of subject matter jurisdiction and did not reach the issue of sovereign immunity.

§ 7.5. The State Sovereign

With billions of dollars being exchanged in Indian Country, state government is naturally looking for a piece of the action, giving rise to tax clashes between tribes and their business partners, and states and counties. These conflicts are primarily decided under the “federal preemption doctrine,” which asks whether a state’s attempted regulation or taxation of non-Indian activities in Indian Country is preempted by federal statutes or treaties, taking into account overarching notions of tribal sovereignty.^[176]

Generally, state taxes apply to everyone “outside a tribe’s reservation” and are “federally preempted only where the state law is contrary to express federal law.”^[177] Within Indian Country, on the other hand, “the initial and frequently dispositive question in Indian tax cases is who bears the legal incidence of the tax.”^[178] When the legal incidence falls on tribes, tribal members, or tribal corporations,^[179] “[s]tates are categorically barred” from implementing the tax.^[180]

When the legal incidence falls on non-Indians, however, a more nuanced analysis applies. Although, historically, the U.S. Supreme Court asked whether any assertion of state power on Indian land would impinge on the tribal right to make its own laws and be ruled by them, in recent years, the High Court has moved away from that inherent tribal sovereignty analysis in favor of a federal preemption regime.^[181] Because Congress does not often explicitly preempt state law,^[182] the Supreme Court and the lower federal courts engage in a balancing act to determine whether tribal self-governance rights, bolstered by federal laws, preempt state laws.^[183] This balancing act weighs a state’s interest in policing non-Indian conduct against combined federal and tribal interests in regulating affairs that arise out of tribal lands within the state’s boundaries.^[184]

In New Mexico v. Mescalero Apache Tribe,^[185] the Supreme Court explained that “state jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests embodied in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”^[186] In Mescalero, the Court held that New Mexico could not impose its own fishing and hunting regulations on non-Indians on the reservation because of strong federal interests in “tribal self-sufficiency and economic development” and a lack of state interests.^[187]

When non-Indian parties operate in Indian Country, lawyers must proactively evaluate whether, or to what extent, a state or local government’s interest in policing or taxing conduct that relates to neighboring tribal lands outweighs relevant federal and tribal interests pertaining to that same conduct arising within those lands. The issues of preemption and infringement are regularly litigated in the federal courts.^[188]

Ute Mt. Ute Tribe v. Ariz. Dep’t of Revenue, 524 P.3d 271 (Ariz. Ct. App. 2023). The Ute Mountain Ute Tribe owned the Weeminuche Construction Authority (“WCA”) (collectively “Plaintiffs”) and challenged an Arizona Department of Revenue’s (“Department”) finding that the WCA owed transaction privilege taxes from three construction projects that WCA completed on the Navajo Nation and the Hopi reservation. Plaintiffs argued the WCA was exempt from transaction privilege taxes because they were operating pursuant to a contract with the Bureau of Indian Affairs (within a trust capacity).

The tax court dismissed Plaintiffs’ complaint with prejudice for failure to state a claim and denied their request to amend the complaint as futile and untimely. The Arizona Court of Appeals affirmed.

First, the court held that Arizona’s transaction privilege tax was not preempted by federal law. In particular, under the Supreme Court’s holding in Arizona Department of Revenue v. Blaze Construction Company, 526 U.S. 31 (1999), the tax court applied the proper legal standard to assess whether federal law preempts Arizona’s transaction privilege tax, which “set[] out a bright-line standard upholding state taxing authority over the proceeds derived from all federal contracts.” Here, the Navajo and Hopi tribes did not contract with WCA, and thus the federal government maintained its contractual responsibility. Thus, the bright-line standard applied, and the federal law did not preempt Arizona’s transaction privilege tax.

Similarly, the court rejected the Plaintiffs’ argument that, absent federal preemption, they were exempt from Arizona’s transaction privilege tax under ADOR’s guidance in TPR 95-11 or A.R.S. § 42-5122. Neither TPR 95-11 nor A.R.S. § 42-5122 provided an exemption.

Lastly, the court examined whether the tax court incorrectly denied the Plaintiffs’ request to amend their complaint. The plaintiffs did not submit proposed written amendments in tax court, which constrained the court’s review. Ultimately, the court held that any amendment would be futile because under TPR 95-11, the statute differentiated between contractor transactions with a tribe and contractor transactions with non-members (which included the federal government). Additionally, caselaw interpreting TPR 95-11 had held that the transaction privilege tax applied to proceeds stemming from federal contracts with non-tribal members to construct on-reservation structures for use by tribal members.^[189] Accordingly, the court affirmed the tax court’s dismissal of the complaint.

§ 7.6. Conclusion

Economic growth and development throughout Indian Country have spurred many businesses to engage in business dealings with tribes and tribal entities. Confusion may arise during these transactions because of the unique sovereign and jurisdictional characteristics attendant to business transactions in Indian Country. As a result, these transactions have prompted increased litigation in tribal and nontribal forums. Accordingly, counsel assisting in these transactions, or any subsequent litigation, should conduct certain due diligence with respect to the pertinent tribal organizational documents and governing laws that may collectively dictate and control the business relationship.

To maximize the client’s chances of a successful partnership with tribes and tribal entities, counsel should ensure that the transactional documents contain clear and unambiguous contractual provisions that address all rights, obligations, and remedies of the parties. Therefore, even if the deal fails, careful negotiation and drafting, and, in turn, thoughtful procedural and jurisdictional litigation practice, will allow the parties to more expeditiously litigate the merits of any dispute, without jurisdictional confusion. As business between tribes and nontribal parties continues to grow, ensuring that both sides of the transaction fully understand and respect the deal will lead to a long-lasting and beneficial business relationship for all.

1. Ed J. Hermes is a Partner at Snell & Wilmer L.L.P. and is based in the firm’s Phoenix, Arizona office. Ed is a litigator whose practice is focused on complex commercial, tax, and property disputes, and disputes involving Federal Indian Law. Ed regularly appears on behalf of his clients in state, federal, and tribal courts and administrative tribunals throughout the Southwest. Having previously lived and worked in Indian Country, Ed also advises companies and economic development entities in conducting business and creating job opportunities in Indian Country. Ed is a member of the Native American Bar Association of Arizona, as well as admitted to practice law on the Navajo Nation. Special thanks to Snell & Wilmer L.L.P. Commercial Litigation attorneys Alexa Salari, Reid Edwards, and Megan Carrasco for their assistance in drafting this chapter, as well as Snell & Wilmer L.L.P.’s 2023 summer associate class. ↑

2. The Honorable Sandra Day O’Connor, Lessons from the Third Sovereign: Indian Tribal Courts, 33 Tulsa L.J. 1 (1997). ↑

3. Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 560 (2001). See also Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 11–12 (1997). ↑

4. Frank Pommersheim, What Must Be Done to Achieve the Vision of the Twenty-First Century Tribal Judiciary, 7 Kan. J.L. & Pub. Pol’y 8, 17 (1997). ↑

5. Worcester v. Georgia, 31 U.S. (1 Pet.) 515, 559 (1832). ↑

6. Id. ↑

7. United States v. Kagama, 118 U.S. 375, 381–82 (1886). ↑

8. Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑

9. Grant Christensen, A View from American Courts: The Year in Indian Law 2017, 41 Seattle U.L. Rev. 805 (2018). ↑

10. Oklahoma v. Lauren Sims, 143 S. Ct. 70 (2022), was granted certiorari but judgment was vacated and remanded to the Court of Criminal Appeals of Oklahoma for further consideration in light of Oklahoma v. Castro-Huerta, 597 U.S. —- (2022). ↑

11. See United States v. Jicarilla Apache Nation, 564 U.S. 162, 173–174, 177–178 (2011). ↑

12. See id. at 178. ↑

13. Tribal Court Systems, U.S. Department of Interior, Indian Affairs, https://www.bia.gov/CFRCourts/tribal-justice-support-directorate (last visited Jan. 6, 2024). ↑

14. Justice Systems of Indian Nations, Tribal Court Clearinghouse, http://www.tribal-institute.org/lists/justice.htm (last visited Jan. 6, 2024). ↑

15. B.J. Jones, Role of Indian Tribal Courts in the Justice System, Native American Monograph Series, 7 (Mar. 2000), http://www.nrc4tribes.org/files/Role%20of%20Indian%20Tribal%20Courts-BJ%20Jones.pdf. ↑

16. Id.; Steven J. Gunn, Compacts, Confederacies, and Comity: Intertribal Enforcement of Tribal Court Orders, 34 N.M. L. Rev. 297, 306 (2004). ↑

17. Kristen Carpenter and Eli Wald, Lawyering for Groups: The Case of American Indian Tribal Attorneys, 81 Fordham L. Rev. 3085, 3159 (2013). ↑

18. See Montana v. United States, 450 U.S. 544, 566 (1981) (“Indian tribes retain inherent sovereign power to exercise some forms of civil jurisdiction over non-Indians on their reservations . . . .” (emphasis added)); Means v. Navajo Nation, 432 F.3d 924, 930 (9th Cir. 2005) (holding that the tribe had jurisdiction over defendant because he was an Indian by political affiliation). ↑

19. Indian Country includes: (1) all land within the limits of any Indian reservation; (2) “dependent Indian communities” within the borders of the United States; and (3) all Indian allotments, including rights-of-way. 28 U.S.C. § 1151 (2000). “Although [that] definition by its terms relates only to . . . criminal jurisdiction . . . it also generally applies to questions of civil jurisdiction. . . .” Alaska v. Native Vill. of Venetie Tribal Gov’t, 522 U.S. 520, 527 (1998). ↑

20. “The ownership status of land . . . is only one factor to consider in determining whether [tribal courts have jurisdiction over non-members]. It may sometimes be a dispositive factor.” Nevada v. Hicks, 533 U.S. 353, 360 (2001) (emphasis added). ↑

21. Water Wheel Camp Recreational Area, Inc. v. LaRance, 642 F.3d 802 (9th Cir. 2011); see also Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 14 (1987) (“We have repeatedly recognized the Federal Government’s long-standing policy of encouraging tribal self-government. . . . This policy reflects the fact that Indian tribes retain ‘attributes of sovereignty over both their members and their territory . . . .’”) (quoting United States v. Mazurie, 419 U.S. 544, 557 (1975)). ↑

22. Lesperance v. Sault Ste. Marie Tribe of Chippewa Indians, 259 F. Supp. 3d 713, 716 (W.D. Mich. 2017) (a non-Indian sued the tribe in tribal court but provided notice in a letter to a customer representative and not to the tribal Secretary as required under the tribe’s waiver authority. The tribal trial court and appellate court upheld dismissal and the federal district court affirmed.). ↑

23. Water Wheel, 642 F.3d 802; Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) (power to tax transactions on trust lands). Indian land in this context includes land owned by the tribe or its members as well as land owned in fee by the United States but held in trust for the benefit of the tribe or its members. Notably, the land beneath a navigable waterway is not “Indian land,” Montana v. United States, 450 U.S. 544 (1981); neither is land owned by the United States but with a right-of-way granted to a state for the purposes of the construction and use of a state highway, Strate v. A-1 Contractors, 520 U.S. 438 (1997). ↑

24. 450 U.S. 544 (1981). ↑

25. Id. ↑

26. Plains Commerce, 554 U.S. 316 (2008). Although Montana originally pertained to civil jurisdiction over non-Indians on non-Indian fee lands within reservation boundaries (450 U.S. at 564), the Ninth Circuit Court of Appeals has previously maintained “that the general rule of Montana applies to both Indian and non-Indian lands.” Ford Motor Company v. Todeecheene, 394 F.3d 1170, 1178–79 (9th Cir. 2005), overruled on other grounds, 488 F.3d 1215 (9th Cir. 2007). More recently, however, the Ninth Circuit has indicated a reversion to its original rule. See Water Wheel, 642 F.3d 802. ↑

27. Plains Commerce, 554 U.S. at 340. ↑

28. Id. It appears, however, that courts have become more sympathetic to the second exception as of late. See, e.g., Knighton v. Cedarville Rancheria of N. Paiute Indians, 922 F.3d 892, 905 (9th Cir.), cert. denied, 140 S. Ct. 513 (2019); Norton v. Ute Indian Tribe of the Uintah & Ouray Reservation, 862 F.3d 1236, 1246 (10th Cir. 2017). ↑

29. Michael Feeney helped to research and summarize the cases in this section. Michael is a rising third year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑

30. 450 U.S. 544 (1981). ↑

31. Id. ↑

32. 141 S. Ct. 1638. ↑

33. 25 U.S.C. § 1302(a)(2). ↑

34. 896 P.2d 503 (Okla. 1994). ↑

35. 450 U.S. 544 (1981). ↑

36. Id. ↑

37. Exhaustion is not always required. See Nat’l Farmers Union Ins. Co. v. Crow Tribe of Indians, 471 U.S. 845, 857 n. 21 (1985) (“We do not suggest that exhaustion would be required where an assertion of tribal jurisdiction is motivated by a desire to harass or is conducted in bad faith, or where the action is patently violative of express jurisdictional prohibitions, or where exhaustion would be futile because of the lack of an adequate opportunity to challenge the court’s jurisdiction.”). ↑

38. Id. at 857. (“Until petitioners have exhausted the remedies available to them in the Tribal Court system . . . it would be premature for a federal court to consider any relief.”); Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (“Progressive issued an insurance policy that listed a tribal member as a named insured and covered vehicles that were kept on tribal lands . . . however Progressive never mailed anything to an address on tribal lands. To the extent that factor is dispositive, it may be that the tribal court lacks jurisdiction. But this is a question that must be answered first by the tribal courts of the Navajo Nation.”). ↑

39. Whitetail v. Spirit Lake Tribal Ct., Civ. No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4–5 (N.D. Nov. 28, 2007). The doctrine applies even to federal habeas corpus actions filed under 25 U.S.C. § 1303. See, e.g., Valenzuela v. Silversmith, No. 11-2212, 2012 WL 5507249 (10th Cir. Nov. 14, 2012). ↑

40. See Rincon Mushroom, 490 Fed. Appx. 11, 13 (9th Cir. 2012) (“[H]old[ing] that the district court abused its discretion in dismissing the case rather than staying it.”); but see Progressive Advanced Ins. Co. v. Worker, No. CV-16-08107-PCT-DJH, 2017 U.S. Dist. LEXIS 19283 (D. Ariz. February 8, 2017) (dismissing the case); Window Rock Unified School District v. Reeves, 2017 U.S. App. LEXIS 14254 (9th Cir. August 3, 2017) (same). ↑

41. Nat’l Farmers Union, 471 U.S. at 852. ↑

42. Iowa Mut. Ins. Co. v. LaPlante, 480 U.S. 9, 19 (1987) (“If the Tribal Appeals Court upholds the lower court’s determination that the tribal courts have jurisdiction, petitioner may challenge that ruling in the District Court.”). ↑

43. See Ford Motor Co. v. Todecheene, 474 F.3d 1196, 1197 (9th Cir. 2007), amended and superseded by 488 F.3d 1215, 1216 (9th Cir. 2007); Duncan Energy Co., Inc. v. Three Affiliated Tribes of the Fort Berthold Reservation, 27 F.3d 1294, 1300 (8th Cir. 1993); Plains Commerce Bank, 128 S. Ct. at 2726. It is unclear whether state courts must likewise abstain from hearing a matter arising on tribal lands until the tribal court has determined the scope of its own jurisdiction and entered a final ruling. In Drumm v. Brown, 245 Conn. 657, 716 A.2d 50 (Conn. 1998), the Connecticut Supreme Court held that “[o]ur analysis, which is based primarily on the three United States Supreme Court exhaustion cases, persuades us that the courts of this state must apply the exhaustion of tribal remedies doctrine.” 245 Conn. at 659. However, the Drumm Court found that exhaustion was not required in the absence of a pending action in tribal court. Id. at 684. ↑

44. Nat’l Farmers Union, 471 U.S. at 857; see, e.g., Evans v. Shoshone-Bannock Land Use Policy Comm’n, 4:12-CV-417-BLW, 2012 WL 6651194 (D. Idaho Dec. 20, 2012) (requiring plaintiff to exhaust its tribal court remedies). ↑

45. See, e.g., Bruce H. Lien Co. v. Three Affiliated Tribes, 93 F.3d 1412, 1421 (8th Cir. 1996). ↑

46. Iowa Mutual, 480 U.S. at 16. ↑

47. See id. at 17 (“At a minimum, exhaustion of tribal remedies means that tribal appellate courts must have the opportunity to review the determinations of the lower tribal courts.”); see also Whitetail v. Spirit Lake Tribal Ct., No. 07-0042, 2007 U.S. Dist. LEXIS 87312, at *4 (D.N.D. Nov. 28, 2007) (declining review of the case because the plaintiff had failed to exhaust his tribal court remedies). ↑

48. See Nat’l Farmers Union, 471 U.S. at 853 (reasoning that “a federal court may determine under § 1331 whether a tribal court has exceeded the lawful limits of its jurisdiction”). ↑

49. Iowa Mutual, 480 U.S. at 19. ↑

50. Id. (“Unless a federal court determines that the Tribal Court lacked jurisdiction . . . proper deference to the tribal court system precludes relitigation of issues raised . . . and resolved in the Tribal Courts.”). A thorough analysis of post-judgment proceedings is beyond the scope of this chapter, but there is case law on the issue. See, e.g., AT&T Corp. v. Coeur d’Alene Tribe, 295 F.3d 899, 903–04 (9th Cir. 2002); Burrell v. Armijo, 456 F.3d 1159, 1168 (10th Cir. 2006), cert. denied, 549 U.S. 1167 (2007); Brenner v. Bendigo, No. 13-0005, 2013 WL 5652457 (D.S.D. Oct. 15, 2013); Bank of America, N.A. v. Bills, No. 00-0450, 2008 WL 682399, at *5 (D. Nev. Mar. 6, 2008); First Specialty Ins. Corp. v. Confederated Tribes of Grand Ronde Community of Oregon, No. 07-0005, 2007 WL 3283699, at *4 (D. Or. Nov. 2, 2007); U.S. ex rel. Auginaush v. Medure, No. 12-0256, 2012 WL 5990274 (Minn. Ct. App. Dec. 3, 2012). ↑

51. Nat’l Farmers Union, 471 U.S. at 857 n. 21. ↑

52. Nevada v. Hicks, 533 U.S. 353, 369 (2001); Strate v. A-1 Contractors, 520 U.S. 438, 459 n. 14 (1997). ↑

53. El Paso Natural Gas v. Neztsosie, 526 U.S. 473 (1999). ↑

54. Devyn Arredondo helped to research and summarize the cases in this section. Devyn is a rising third-year law student at the James E. Rogers College of Law, University of Arizona, and expects to graduate in May 2024. ↑

55. 403 U.S. 388 (1971) ↑

56. 916 F.3d 694 (8th Cir. 2019). ↑

57. 25 U.S.C. § 331. ↑

58. 471 U.S. 845 (1985). ↑

59. 25 U.S.C. § 450 (2000). ↑

60. See Santa Clara Pueblo v. Martinez, 436 U.S. 49, 57–58 (1978). ↑

61. Tribal immunity can be abolished via federal statute. Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1015–16 (9th Cir. 2007) (“[The] cornerstone of federal subject matter jurisdiction is statutory authorization.”); E.F.W. v. St. Stephen’s Indian High School, 264 F.3d 1297, 1302 (10th Cir. 2001) (“Tribal sovereign immunity is a matter of subject matter jurisdiction.”); McClendon v. United States, 885 F.2d 627, 629 (9th Cir. 1989) (“The issue of sovereign immunity is jurisdictional in nature.”). Tribal immunity can be voluntarily waived. Kiowa Tribe of Okla. v. Mfg. Techs., 523 U.S. 751, 755–56 (1998); Filer v. Tohono O’odham Nation Gaming Enters., 129 P.3d 78, 83 (Ariz. Ct. App. 2006) (applying for a liquor license did not waive the tribe’s sovereign immunity); Seminole Tribe of Fla. v. McCor, 903 So. 2d 353, 359–60 (Fla. Dist. Ct. App. 2005) (purchasing liability insurance is not a clear waiver of a tribe’s sovereign immunity); Furry v. Miccosukee Tribe of Indians of Fla., 685 F.3d 1224, 1234 (11th Cir. 2012) cert. denied, 133 S. Ct. 663, 184 L. Ed. 2d 462 (U.S. 2012) (tribe did not waive its immunity from private tort actions by applying for a state liquor license). ↑

62. Plains Commerce Bank v. Long Family Land & Cattle, 554 U.S. 316 (2008). ↑

63. Id. ↑

64. Kiowa Tribe, 523 U.S. at 760. The U.S. Constitution provides a basis for suits to enforce state election and campaign finance laws. The U.S. Supreme Court has yet to take a position on this matter. ↑

65. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978). ↑

66. Id.; United States v. Oregon, 657 F.2d 1009, 1013 (9th Cir. 1981); Filer, 129 P.3d at 86; Bellue v. Puyallup Tribe of Indians, No. 94-3045 (Puyallup 1994); Colville Tribal Enter. v. Orr, 5 CCAR 1 (Colville Confed. 1998). ↑

67. Miccosukee Tribe of Indians v. Tein, 2017 Fla. App. LEXIS 11442 (Fla. App. August 9, 2017) (holding that evidence of vexatious and bad faith litigation did not amount to a waiver of immunity “even where the results are deeply troubling, unjust, unfair, and inequitable”). ↑

68. In re Greektown Holdings, LLC, No. 12-12340, 2012 WL 4484933 (E.D. Mich. Sept. 27, 2012), aff’d, 728 F.3d 567 (6th Cir. 2013) (holding that for Congress to waive the tribe’s immunity the waiver must be “express, unequivocal, unmistakable, unambiguous, clearly evident in statutory language, and allow the Court to conclude with perfect confidence that Congress intended to waive sovereign immunity”). See also Demontiney v. United States ex rel. Bureau of Indian Affairs, 255 F.3d 801, 811 (9th Cir. 2001); Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 551 (N.M. Ct. App. 2004) (reasoning that ambiguity within an immunity waiver should be interpreted in favor of the Tribe). ↑

69. Contour Spa at the Hard Rock, Inc. v. Seminole Tribe of Fla., 692 F.3d 1200, 1206 (11th Cir. 2012) cert. denied, 133 S. Ct. 843 (2013) (holding Indian tribe’s removal of action to federal court did not waive its sovereign immunity). But see Guidiville Rancheria of California v. United States, 2017 U.S. App. LEXIS 14394 (9th Cir. August 4, 2017) (holding that raising the issue of attorneys’ fees in the first instance was sufficient to constitute a waiver of the Tribe’s right to claim sovereign immunity when defendant subsequently claimed for fees against the tribe). ↑

70. Santa Clara Pueblo v. Martinez, 436 U.S. 49, 58 (1978) (internal quotation marks and citations omitted); see also Gilbertson v. Quinault Indian Nation, 495 F. App’x 779 (9th Cir. 2012) (holding language in the Quinault Indian Nation’s employee handbook indicating that employees were protected by Title VII was not a sufficiently clear waiver of the Nation’s sovereign immunity). ↑

71. See, e.g., Memphis Biofuels, L.L.C. v. Chickasaw Nation Indus., Inc., 585 F.3d 917 (6th Cir. 2009) (holding that the presence of a sue-and-be-sued clause in the charter of a tribal corporation, alone, was “insufficient” to waive the corporation’s immunity because it made approval by the corporation’s board of directors a prerequisite to legal action by the corporation); accord Ninigret Dev. Corp v. Narragansett Indian Wetuomuck Hous. Auth, 201 F.3d 21, 30 (1st Cir. 2000) (holding that “the enactment of such an ordinance . . . does not waive a tribe’s sovereign immunity [where the ordinance] authorize[d] the [tribal corporation] to shed its immunity ‘by contract’” because “these words would be utter surplusage if the enactment of the ordinance itself served to perfect the waiver”); cf. Rosebud Sioux Tribe v. Val-U Constr. Co., 50 F.3d 560, 562 (8th Cir. 1995) (holding that the mere presence of an arbitration provision in the agreement represented a waiver of immunity from a judgment being enforced in federal court). ↑

72. 532 U.S. 411 (2001). ↑

73. Id. at 418; see Trump Hotels and Casino Resorts Dev. Co. v. Rosow, No. X03CV034000160S, 2005 Conn. Super. LEXIS 1224, at *41 (Conn. Super. Ct. May 2, 2005) (concluding that the tribe “clearly and unequivocally waived sovereign immunity” in its contract). ↑

74. C & L Enterprises, 532 U.S. at 415–16. ↑

75. Id. at 423. ↑

76. Calvello v. Yankton Sioux Tribe, 584 N.W.2d 108, 114 (S.D. 1998) (holding that the chairman of the tribal business committee did not have authority to waive immunity); see also Sandlerin v. Seminole Tribe of Fla., 243 F.3d 1282, 1286–87 (11th Cir. 2001) (reasoning that the tribal chief did not have authority to waive the tribe’s immunity through contract where the tribal code provided procedure for effecting a waiver); Chance v. Coquille Indian Tribe, 963 P.2d 638, 639 (Or. 1998) (reasoning that the tribal corporation president did not have authority to bind the corporation to a contract waiving tribal immunity); Harris v. Lake of the Torches Resort and Casino, 363 Wis. 2d 656 (2015) (holding that a third-party workers compensation administrator lacked the authority to waive the tribe’s immunity). But see Rush Creek Solutions, Inc. v. Ute Mountain Ute Tribe, 107 P.3d 402, 407 (Colo. App. 2004) (holding that the tribal chief financial officer had apparent authority to waive immunity when the tribal law was silent). ↑

77. Sofia Urias helped to research and summarize the cases in this section. Sofia is a rising third year law student at the James E. Rogers College of Law, University of Arizona, and expects to graduate in May 2024. ↑

78. 209 U.S. 123 (1908). ↑

79. Maverick appealed this decision to the Ninth Circuit Court of Appeals. ↑

80. 25 U.S.C. §§ 461–79 (2000). ↑

81. Id. § 476. ↑

82. Id. § 477. ↑

83. Id. ↑

84. Id. ↑

85. See Jack F. Williams, Integrating American Indian Law into the Commercial Law and Bankruptcy Curriculum, 37 Tulsa L. Rev. 557, 562–63 (2001). ↑

86. Id. at 563. ↑

87. Id. ↑

88. Native American Distrib. v. Seneca-Cayuga Tobacco Co., 546 F.3d 1288, 1295 (10th Cir. 2008) (holding that, because the tribal enterprise was not a corporation with a “sue-and-be-sued clause,” the tribal enterprise was immune from suit, as it did not explicitly waive its sovereign immunity). C.f. Grand Canyon Skywalk Dev. LLC v. Cieslak, 2015 U.S. Dist. LEXIS 73186 (D. Nev. June 5, 2015) (holding that, while sovereign immunity may protect the tribal corporation, it does not extend to an employee of the tribal corporation to allow the employee to refuse to comply with a federal subpoena). ↑

89. See Seaport Loan Products v. Lower Brule Community Development Enterprise LLC, 2013 NY slip op. 651492/12 [Sup Ct. NY County 2013] (concluding that an independent, state-incorporated, for-profit tribal enterprise that was principally operating in the financial services markets, with separate assets, liabilities, purposes, and goals could not claim immunity); Arrow Midstream Holdings v. 3 Bears Construction LLC, 873 N.W.2d 16 (N.D. 2015) (holding that a corporation wholly owned by tribal members but incorporated under state law was a non-member entity for the purposes of litigation and therefore subject to state jurisdiction). ↑

90. Danny McDermott helped to research and summarize the cases in this section. Danny is a rising third-year law student at the University of Arizona James E. Rogers College of Law and expects to graduate in May 2024. ↑

91. 448 U.S. 136, 142 (1980). ↑

92. 25 C.F.R. § 140. ↑

93. This case was appealed to the Eighth Circuit. ↑

94. 25 U.S.C. § 463 (2000) (transferred to 25 U.S.C. § 5103); see TOMAC v. Norton, 433 F.3d 852, 866–67 (D.C. Cir. 2006) (upholding Congress’s delegation of power to the Secretary to acquire land in trust for the tribe under § 1300j-5). ↑

95. Carcieri v. Salazar, 555 U.S. 379 (2009). ↑

96. Id. at 386. ↑

97. Record of Decision, Trust Acquisition of, and Reservation Proclamation for the 151.87-acre Cowlitz Parcel in Clark County, Washington, for the Cowlitz Indian Tribe (Dec. 2010), https://www.standupca.org/off-reservation-gaming/Cowlitz%20Record%20of%20Decision%2012-17-2010.pdf/at_download/file. The Cowlitz Indian Tribe was not federally recognized until 2002, but, in 2010, the BIA nonetheless approved a fee-to-trust application, determining that the tribe was “under Federal Jurisdiction” in 1934, even though the federal government did not believe so at that time. Id. The D.C. District Court upheld the BIA’s Record of Decision, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 75 F. Supp. 3d 387 (D.D.C. 2014) and the D.C. Circuit upheld the District Court, Confederated Tribes of Grand Ronde Cmty. of Or. v. Jewell, 830 F.3d 552 (D.C. Cir. 2016); see also Record of Decision, Trust Acquisition and Reservation Proclamation for 151 Acres in the City of Taunton, Massachusetts, and 170 Acres in the Town of Mashpee, Massachusetts, for the Mashpee Wampanoag Tribe (Sept. 2015), https://www.bia.gov/sites/bia.gov/files/assets/public/oig/pdf/idc1-031724.pdf. Although the Interior Department did not federally acknowledge the Mashpee Wampanoag Tribe until 2007, Interior applied M-37029 Memorandum’s two-part test to determine that the Tribe was “under federal jurisdiction” in 1934, which provided the legal basis for the trust acquisition outlined in the 2015 Record of Decision and circumvented the Tribe’s Carcieri issues. However, the District Court of Massachusetts rejected the Secretary’s interpretation and has returned the decision to take land into trust on behalf of the Mashpee to the Secretary of Interior. Littlefield v. U.S. Dept. of Interior, 2016 U.S. Dist. LEXIS 98732 (D. Mass. July 28, 2016). ↑

98. BIA Weighs Land-Into-Trust after Supreme Court Ruling, (Mar. 26, 2009) https://www.indianz.com/News/2009/03/26/bia_weighs_landintotrust_after.asp (last visited Nov. 3, 2022). ↑

99. See, e.g., Stand Up for California! v. U.S. Dep’t of the Interior, 204 F. Supp. 3d 212 (D.D.C. 2016) (challenging the Department’s fee-to-trust decision for the benefit of the North Fork Rancheria of Mono Indians on the basis that the tribe wasn’t a “federally-recognized tribe under jurisdiction” in 1934 as required under Carcieri). ↑

100. Memorandum from Hilary C. Tompkins, U.S. Dep’t of the Interior, Office of the Solicitor, to Sally Jewell, Secretary of the Interior, U.S. Dep’t of the Interior (Mar. 12, 2014) https://www.doi.gov/sites/doi.opengov.ibmcloud.com/files/uploads/M-37029.pdf (hereinafter “M-37029 Memorandum”). ↑

101. Id. ↑

102. Id. ↑

103. 850 F.3d 552 (D.C. Cir. 2016). ↑

104. 132 S.Ct. 2199 (2012). ↑

105. 5 U.S.C. §§ 551–59. ↑

106. 28 U.S.C. § 2409a. ↑

107. The decision thus did not upset the rule that the “QTA provides the exclusive remedy for claims involving adverse title disputes with the government.” McMaster v. United States, 731 F.3d 881, 899 (9th Cir. 2013). ↑

108. The statute of limitations under the APA is six years. See, e.g., Cachil Dehe Band of Wintun Indians of Colusa Indian Cmty. v. Salazar, No. 12-3021, 2013 WL 417813, at *4 (E.D. Cal. Jan. 30, 2013) (holding that under Patchak, “federal district courts do have the power to strip the federal government of title to land taken into trust for an Indian tribe under the APA so long as the claimant does not assert an interest in the land.”). ↑

109. Land Acquisitions: Appeals of Land Acquisitions, 78 Fed. Reg. 67,928, 67,929 (Nov. 13, 2013) (codified at 25 C.F.R. pt. 151). ↑

110. See 25 C.F.R. § 2.6(c). ↑

111. See 25 C.F.R. Part 2. ↑

112. Id. ↑

113. See 25 C.F.R. § 2.9. ↑

114. Department of the Interior Bureau of Indian Affairs, Land Acquisitions, https://www.federalregister.gov/documents/2023/12/12/2023-27077/land-acquisitions (last visited Jan. 6, 2024). ↑

115. Austin Heinisch helped to research and summarize the cases in this section. Austin is a rising third year law student at Texas Tech University School of Law and expects to graduate in May 2024. ↑

116. See, e.g., Oneida Indian Nation of N.Y. State v. Oneida Cnty., 414 U.S. 661 (1974). ↑

117. See, e.g., Oneida Cnty., N.Y. v. Oneida Indian Nation of New York State, 470 U.S. 226 (1985). ↑

118. This case is currently on appeal to the Eighth Circuit. ↑

119. 25 U.S.C. § 2719(a) (“Except as provided in subsection (b), gaming regulated by this chapter shall not be conducted on lands acquired by the Secretary in trust for the benefit of an Indian tribe after October 17, 1988.”). ↑

120. 25 U.S.C. § 2719(b)(1)(B) (“Subsection (a) will not apply when . . . lands are taken into trust as part of . . . a settlement of a land claim.”). See also 25 C.F.R. § 292.2 (explaining the relevant criteria for the settlement of a land claim exception). ↑

121. PL 98-602 § 105(b)(1) provides “A sum of $100,000 of such funds shall be used for the purchase of real property which shall be held in trust by the Secretary for the benefit of such Tribe.” ↑

122. PL 105-143 § 108 (1997). ↑

123. If the land is not taken into trust, the Tribe would be barred from conducting gaming activities. ↑

124. This case is currently pending appeal before the D.C. Circuit. ↑

125. 25 U.S.C. § 81 (2000) (Section 81). For a list of contracts that are exempt from secretarial approval, see 25 C.F.R. § 84.004 (2008). ↑

126. 25 C.F.R. § 84.004. ↑

127. Id. ↑

128. 25 U.S.C. § 81. ↑

129. Id. § 415. ↑

130. Id. § 81. ↑

131. The approval process for alternative energy projects on tribal lands has been particularly burdensome. See Ryan Dreveskracht, The Road to Alternative Energy in Indian Country: Is It a Dead End?, 19 Indian L. Newsl. 3 (2011). For a jurisdictional analysis of the complications created by real property transactions in Indian Country see Grant Christensen, Creating Brightline Rules for Tribal Court Jurisdiction Over Non-Indians: The Case of Trespass to Real Property, 35 Am. Indian L. Rev. 527 (2011). ↑

132. Outsource Servs. Mgmt., LLC. v. Nooksack Bus. Corp., 198 Wash. App. 1032 (2017) (tribal business defaulted on a $15 million loan secured by future profits generated from tribal land on which the tribe intended to build a casino. When the tribe subsequently used the land—not for a casino but for other revenue raising operations—the creditor sought those profits to satisfy the loan obligation. The tribe claimed that the Creditor’s attempt would unlawfully encumber their lands in violation of 25 U.S.C. 81. The court disagreed, holding that “[t]he pledged security is not a legal interest in the land itself. Nor does [creditor]’s right interfere with the tribe’s exclusive proprietary control over the land” and that “[b]ecause the tribe retains complete control over the casino building and property and can use the facilities for any purpose, there is no encumbrance for purposes of Section 81, and thus the agreements did not require preapproval.”). ↑

133. 25 U.S.C. §§ 2701–21 (1988). The jurisdictional and regulatory powers of the NIGC have received criticism in several court decisions. In October 2006, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the IGRA did not confer authority upon the NIGC to promulgate operational control regulations for Class III gaming operations. See Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 466 F.3d 134, 140 (D.C. Cir. 2006); Colo. River Indian Tribes v. Nat’l Indian Gaming Comm’n, 383 F. Supp. 2d 123, 137 (D.D.C. 2005). The Colorado River Indian Tribes cases are significant because some Indian tribes have interpreted the trial court’s decision to mean that the NIGC has no regulatory authority whatsoever over Class III gaming. Indeed, in the wake of the decision, several tribes advised the NIGC that they believe the decision strips the NIGC of all regulatory power over Class III gaming and therefore will not permit any NIGC auditors or other oversight into their casinos. As a result, the NIGC filed a petition for a panel rehearing in late December 2006. This petition was denied per curiam on Dec. 27, 2007. Colo. River Indian Tribes, 466 F.3d 134 (denying the motion for rehearing). ↑

134. 25 U.S.C. § 2711; First Am. Kickapoo Oper. v. Multimedia Games, Inc., 412 F.3d 1166, 1172 (10th Cir. 2005); United States v. President, 451 F.3d 44, 50 n.5 (2d Cir. 2006). ↑

135. 25 U.S.C. § 264 (1882); 25 C.F.R. §§ 140–41 (1996). “Trading” is broadly defined as “buying, selling, bartering, renting, leasing, permitting and any other transaction involving the acquisition of property or services.” 25 C.F.R. § 140.5(a)(6) (1984). For an example of tribal business license requirements, see Navajo Nation Code, 5 N.N.C. § 401, et seq. (2005). ↑

136. See 25 C.F.R. § 140.3. Dahlstrom v. Sauk-Suiattle Indian Tribe, NO. C16-0052JLR, 2017 U.S. Dist. LEXIS 40654 (W.D. Wash. March 21, 2017) (a former employee brought a qui tam action against the tribe and against a medical clinic for filing false claims through the Indian Health Service (IHS)). The court barred the action against the tribe; “Like a state, a Native American tribe ‘is a sovereign that does not fall within the definition of a ‘person’ under the FCA.’” However, the court held that the medical clinic was not “an arm of the tribe” and so it was ineligible to claim sovereign immunity. ↑

137. Pub. L. No. 112-151 (2012). ↑

138. Any failure of a federal agency to complete its obligations in relation to Indian lands can be catastrophic to businesses operating under federal permits. See, e.g., Tribe v. U.S. Forest Serv., No. 13-0348, 2013 WL 5212317 (D. Idaho Sept. 12, 2013). ↑

139. 25 C.F.R. § 162. ↑

140. United States Department of the Interior, Approved Hearth Act Regulation, https://www.bia.gov/service/HEARTH-Act/approved-regulations (last visited Jan. 6, 2024). ↑

141. Kaitlyn Vance helped to research and summarize the cases in this section. Kaitlyn is a rising second-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2025. ↑

142. See, e.g., Middletown Rancheria of Pomo Indians v. Workers’ Comp. Appeals Bd., 71 Cal. Rptr. 2d 105, 114–15 (Cal. Ct. App. 1998) (holding that the Workers’ Compensation Board has no jurisdiction over tribe); Tibbets v. Leech Lake Reservation Bus. Comm’n, 397 N.W.2d 883, 890 (Minn. 1986) (holding Minnesota workers’ compensation law inapplicable to tribal employer); see generally New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 332–33 (1983) (discussing applicability of state laws to tribes). ↑

143. See generally Steven G. Biddle, Indian Law Theme Issue: Labor and Employment Issues for Tribal Employers, 34 Ariz. Att’y 16 (1998) (discussing the applicability of federal labor and employment laws to tribal employers); but see State ex rel. Indus. Comm’n v. Indian Country Enters., Inc., 944 P.2d 117 (Idaho 1997) (applying 40 U.S.C. § 290 to require the application of state workers’ compensation laws to tribal companies incorporated under state law); State i Workforce Safety & Ins. v. J.F.K. Raingutters, 733 N.W.2d 248, 253–54 (N.D. 2007) (same); Martinez v. Cities of Gold Casino, Pojoaque Pueblo, and Food Industries Self-Insurance Fund, No. 28,762, slip op. at ¶ 27 (N.M. Ct. App. filed Apr. 24, 2009) (holding that a tribal corporation waived immunity from claims brought under the Workers’ Compensation Act by voluntarily complying with other provisions of the act and submitting to the jurisdiction of the Workers’ Compensation Administration). ↑

144. 42 U.S.C. §§ 2000e–2000e-17 (1991). Bruguier v. Lac du Flambeau Band of Lake Superior Chippewa Indians, 237 F. Supp. 3d 867 (W.D. Wis. 2017) (“Title VII expressly does not authorize suits against tribes; “the term employer . . . does not include . . . an Indian tribe . . . .”). ↑

145. Id. §§ 12101–17 (1990). ↑

146. Id. §§ 2000e(b)(1), 12111(5). Additionally, discrimination based on tribal affiliation is often not considered unlawful national origin discrimination. See, e.g., E.E.O.C. v. Peabody W. Coal Co., No. 12-17780, 2014 WL 6463162 (9th Cir. Nov. 19, 2014) (discrimination based on tribal affiliation as it relates to lease agreements containing a Navajo reference in hiring provision does not constitute unlawful national origin discrimination but is a political classification and, thus, not within the scope of Title VII of the Civil Rights Act). See also Morton v. Mancari, 417 U.S. 535 (1974) (holding that the United States Department of Interior may affirmatively hire and promote American Indians because the preference is based on a political classification (membership in a federally recognized tribe) and not a racial classification and is, therefore, subject only to rational basis scrutiny to avoid constitutional challenge). ↑

147. See, e.g., Ariz. Rev. Stat. Ann. § 41-1464 (2005) (exempting tribes from Arizona’s discrimination laws). Even if a state’s antidiscrimination laws do not provide an express exemption, the doctrine of sovereign immunity will ordinarily operate to achieve the same effect. See Sanchez v. Santa Ana Golf Club, Inc., 104 P.3d 548, 554 (N.M. Ct. App. 2004) (affirming dismissal of employee’s state law discrimination claim based on tribal employer’s sovereign immunity); see also Aroostook Band of Micmacs v. Ryan, 404 F.3d 48, 67–68 (1st Cir. 2005) (discussing the probable inapplicability of state antidiscrimination laws to a tribal employer). ↑

148. See Hardin v. White Mountain Apache Tribe, 779 F.2d 476, 479 (9th Cir. 1985) (extending the tribe’s sovereign immunity to tribal officials acting in a representative capacity). ↑

149. 29 U.S.C. §§ 651–78 (1998). ↑

150. Id. §§ 1001–61. Congress amended ERISA in 2006 to apply Indian tribal commercial enterprises, but tribal governments remain exempt. 29 U.S.C. §§ 1002(32) (as amended by Pension Protection Act of 2006, 29 U.S.C. § 1002(32)). ↑

151. Id. §§ 201–19. ↑

152. Id. §§ 151–69. ↑

153. Id. §§ 621–34. ↑

154. N.L.R.B. v. Pueblo of San Juan, 276 F.3d 1186, 1200 (10th Cir. 2002) (holding NLRA inapplicable to tribes); E.E.O.C. v. Fond du Lac Heavy Equip. & Const. Co., 986 F.2d 246, 248 (8th Cir. 1993) (refusing to apply the ADEA to an Indian employed by the tribe); Donovan v. Navajo Forest Prods. Indus., 692 F.2d 709, 712 (10th Cir. 1982) (holding OSHA inapplicable to the tribe partly because enforcement “would dilute the principles of tribal sovereignty and self-government recognized in the treaty”). ↑

155. Menominee Tribal Enter. v. Solis, 601 F.3d 669 (7th Cir. 2010) (applying OSHA); Lumber Indus. Pension Fund v. Warm Springs Forest Prods. Indus., 939 F.2d 683, 683 (9th Cir. 1991) (applying ERISA); U.S. Dep’t of Labor v. OSHA Rev. Comm’n, 935 F.2d 182, 182 (9th Cir. 1991) (applying OSHA); Smart v. State Farm Ins., 868 F.2d 929, 935 (7th Cir. 1989) (stating the “argument that ERISA will interfere with the tribe’s right of self-government is over-broad,” and applying ERISA); Donovan v. Coeur d’Alene Tribal Farm, 751 F.2d 1113, 1116–17 (9th Cir. 1985) (right of self-government is too broad to defeat applicability of OSHA); see also Reich v. Mashantucket Sand & Gravel, 95 F.3d 174 (2d Cir. 1996) (following Ninth and Seventh Circuits to apply OSHA). ↑

156. See, Reich v. Great Lakes Indian Fish and Wildlife Comm’n, 4 F.3d 490, 493–94 (7th Cir. 1993) (holding that the tribe’s law enforcement officers were exempt from FLSA, but noting that not all employees of tribes are exempt); Solis v. Matheson, 563 F.3d 425, 434–35 (9th Cir. 2009) (applying FLSA to retail business on tribal land because business did not involve tribal self-governance and was not protected by treaty rights). ↑

157. Reich, 4 F.3d at 493–94; Lumber Indus. Pension Fund, 939 F.2d at 683; U.S. Dept. of Labor, 935 F.2d at 182; Smart, 868 F.2d at 935; Donovan, 751 F.2d at 1113; see also Mashantucket Sand & Gravel, 95 F.3d at 174. ↑

158. 29 U.S.C. §§ 2601–54 (1993). ↑

159. The Family and Medical Leave Act of 1993, 60 Fed. Reg. 2180 (Jan. 6, 1995). ↑

160. Casino Pauma v. NLRB, 888 F.3d 1066 (9th Cir. 2018). ↑

161. Chayoon v. Chao, 355 F.3d 141, 142–43 (2d Cir. 2004); Garcia v. Akwesasne Hous. Auth., 268 F.3d 76, 84–86 (2d Cir. 2001). ↑

162. Cf. Multimedia Games, Inc. v. WLGC Acquisition Corp., 214 F. Supp. 2d 1131, 1131 (N.D. Okla. 2001) (holding that the federal Copyright Act of 1976 was inapplicable to tribes). ↑

163. Cynthia Murrieta helped to research and summarize the cases in this section. Cynthia is a rising third-year law student at Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑

164. A Tribal organization under the ISDEAA includes “any legally established organization of Indians which is controlled, sanctioned, or chartered by such governing body. . . .” 25 U.S.C. § 5304(l). ↑

165. Southcentral Foundation originally filed a motion for summary judgment for lack of subject matter jurisdiction. The court elected to convert the motion to a Rule 12(h)(3) motion because (1) a summary judgment motion would be considered on the merits, which the court would be barred from ruling on if it had no subject matter jurisdiction and (2) due to the timing of relevant pleadings the court reasoned that a Rule 12(h)(3) would be the best procedural vehicle to address Southcentral Foundation’s arguments. ↑

166. See Donovan v. Coure d’Alene Tribal Farm, 751 F.2d 1113, 1116 (9th Cir. 1985). ↑

167. 28 U.S.C. § 1331 (“Federal Question: The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”). ↑

168. Id. § 1332 (“Diversity of Citizenship: The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—(1) citizens of different states . . . .”). ↑

169. See Peabody Coal Co. v. Navajo Nation, 373 F.3d 945, 945 (9th Cir. 2004) (dismissing a complaint against the Navajo Nation that sought enforcement of an arbitration agreement for lack of federal question jurisdiction); accord, TTEA v. Ysleta Del Sur Pueblo, 181 F.3d 676, 681 (5th Cir. 1999) (“The federal courts do not have jurisdiction to entertain routine contract actions involving Indian tribes.”); Gila River Indian Cmty. v. Henningson, Durham & Richardson, 626 F.2d 708, 714–15 (9th Cir. 1980) (finding “no reason to extend the reach of the federal common law to cover all contracts entered into by Indian tribes”). See also Burlington N. & Santa Fe Ry. Co. v. Vaughn, 509 F.3d 1085, 1089 (9th Cir. 2007) (holding that a federal court may review a denial of sovereign immunity by interlocutory appeal). ↑

170. See Ysleta Del Sur Pueblo, 181 F.3d at 681 (holding that “an anticipatory federal defense is insufficient for federal jurisdiction”). ↑

171. See Payne v. Miss. Band of Choctaw Indians, 159 F. Supp. 3d 724, 726–27 (S.D. Miss. 2015); Am. Vantage Cos. v. Table Mountain Rancheria, 292 F.3d 1091, 1095 (9th Cir. 2002); Akins v. Penobscot Nation, 130 F.3d 482, 485 (1st Cir. 1997); Romanella v. Hayward, 114 F.3d 15, 16 (2d Cir. 1997); Gaines v. Ski Apache, 8 F.3d 726, 728–29 (10th Cir. 1993); Oneida Indian Nation v. Cnty. of Oneida, 464 F.2d 916, 923 (2d Cir. 1972), rev’d and remanded on other grounds, 414 U.S. 661 (1974); Standing Rock Sioux Indian Tribe v. Dorgan, 505 F.2d 1135, 1040–41 (8th Cir. 1974); Tenney v. Iowa Tribe of Kan., 243 F. Supp. 2d 1196, 1198 (D. Kan. 2003); Victor v. Grand Casino-Coushatta, No. 02-2348, 2003 U.S. Dist. LEXIS 24770, at *4 (D. La. Jan. 21, 2003); Worrall v. Mashantucket Pequot Gaming Enter., 131 F. Supp. 2d 328, 329–30 (D. Conn. 2001); Barker-Hatch v. Viejas Group Baron Long Capitan Grande Band of Digueno Mission Indians of the Viejas Group Reservation, 83 F. Supp. 2d 1155, 1157 (D. Cal. 2000); Abdo v. Fort Randall Casino, 957 F. Supp. 1111, 1112 (D.S.D. 1997); Calvello v. Yankton Sioux Tribe, 899 F. Supp. 431, 435 (D.S.D. 1995); Whiteco Metrocom Div. v. Yankton Sioux Tribe, 902 F. Supp. 199, 201 (D.S.D. 1995); Weeder v. Omaha Tribe of Neb., 864 F. Supp. 889, 898–99 (N.D. Iowa 1994); GNS, Inc. v. Winnebago Tribe, 866 F. Supp. 1185, 1191 (D. Iowa 1994). But see Cook, 548 F.3d at 723 (holding that, for diversity purposes, a tribal corporation is “a citizen of the state where it has its principal place of business”). Cf. R.J. Williams Co. v. Fort Belknap Hous. Auth., 719 F.2d 979, 982 (9th Cir. 1983) (stating that the tribal corporation had its principal place of business in Montana); R.C. Hedreen Co. v. Crow Tribal Hous. Auth., 521 F. Supp. 599, 602–03 (D. Mont. 1981) (stating that a tribal corporation had its principal place of business in Montana and “[a]ccordingly, it is a citizen of the state for purposes of diversity jurisdiction”); Parker Drilling Co. v. Metlakatla Indian Cmty., 451 F. Supp. 1127, 1138 (D. Alaska 1978) (“As [the tribal corporation’s] only major business activities, and situs, are located in Alaska, it is an Alaskan corporation for diversity purposes.”). ↑

172. See Inglish Interests LLC v. Seminole Tribe of Florida, 2011 U.S. Dist. LEXIS 6123 (M.D. Fla. January 21, 2011) (describing this split). ↑

173. Courtney Moore helped to research and summarize the cases in this section. Courtney is a rising third-year law student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑

174. Gunn v. Minton, 568 U.S. 251, 258, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013).  ↑

175. The Nation argued that Plaintiffs should be sanctioned for a violation of Federal Rule of Civil Procedure 11 for filing a frivolous lawsuit. The court rejected this argument. It reasoned that because of the Oklahoma court’s ruling, Plaintiffs essentially had to file suit in federal court. Therefore, the court concluded that the lawsuit was not frivolous. ↑

176. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143 (1980). ↑

177. Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148–49 (1973); Cabazon Band of Mission Indians v. Smith, 388 F.3d 691, 694–95 (9th Cir. 2004). ↑

178. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005). ↑

179. There has been some question as to what exactly constitutes a tribally owned corporation. The general rule is that “[a] subdivision of tribal government or a corporation attached to a tribe may be so closely allied with and dependent upon the tribe that it is effectively an arm of the tribe. It is then actually a part of the tribe per se” and is nontaxable. Uniband, Inc. v. C.I.R., 140 T.C. 230, 252 (U.S. Tax Ct. 2013) (quotation omitted). Although preemption of state taxes “is most assured for tribal corporations organized pursuant to federal or tribal law,” Cohen’s Handbook of Federal Indian Law § 8.06 (2012 ed.), “the mere organization of such an entity under state law does not preclude its characterization as a tribal organization as well.” Duke v. Absentee Shawnee Tribe of Okla. Housing Auth., 199 F.3d 1123, 1125 (10th Cir. 1999). ↑

180. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 101 (2005); see also Bercier v. Kiga, 103 P.3d 232, 236 (Wash. Ct. App. 2004) (“[T]he State may not tax Indians or Indian tribes in Indian country . . . .”) (citing Wash. Admin. Code § 458-20-192(5)); Pourier v. S. D. Dept. of Revenue, 658 N.W.2d 395, 403 (S.D. 2003), aff’d in relevant part and rev’d in part on other grounds on reh’g, 674 N.W.2d 314 (S.D. 2004) (“If the legal incidence of a tax falls upon a Tribe or its members . . . the tax is unenforceable.”). See also Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1345–46 (11th Cir. 2015) (reaffirming the legal incidence test but determining that a gross receipts tax more properly fell on utility companies instead of the tribe and, therefore, the tax was not preempted). ↑

181. See McClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 172–73 (1973). ↑

182. Williams v. Lee, 358 U.S. 217, 220 (1959); but see 25 C.F.R. § 162.415(c) (“Any permanent improvements” on business leased Indian land “shall not be subject to any fee, tax, assessment, levy, or other such charge imposed by any State or political subdivision of a State, without regard to ownership of those improvements.”). See also California v. Cabazon Band of Mission Indians, 480 U.S. 202, 216 (1987) (“Decision in this case turns on whether state authority is pre-empted by the operation of federal law; and “[state] jurisdiction is pre-empted . . . if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.”). ↑

183. Bracker, 448 U.S. at 143. ↑

184. Id. at 144; see also Aroostook Band of Micmacs v. Ryan, No. 03-0024, 2007 WL 2816183, at *4, *9–11 (D. Me. Sept. 27, 2007) (discussing whether federal law or state law affects the Aroostook Band, even though the tribe is exempt from state civil and criminal laws). ↑

185. New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983). ↑

186. Id. at 334. ↑

187. Id. at 344. ↑

188. Heather Udowitch helped research and summarize the cases described below. Heather is a rising third-year student at the Sandra Day O’Connor College of Law, Arizona State University, and expects to graduate in May 2024. ↑

189. See Luther Const. Co. v. Arizona Dep’t of Rev., 74 P.3d 276, 283 (Ariz. Ct. App. 2003). ↑

Editors

§ 6.1. Introduction

Trial lawyers eagerly anticipate the day they begin opening statements in the courtroom and get to take their client’s matter to trial. With a trial comes a lot of hard work, preparation, and navigation of the civil rules and local rules of the jurisdiction. This chapter provides a general overview of issues that a lawyer will face in a courtroom, either civil or criminal. The authors have selected cases of note from the present United States Supreme Court docket, the federal Circuit Courts of Appeals, and selected federal District Courts, that provide a general overview, raise unique issues, expand or provide particularly instructive explanations or rationales, or are likely to be of interest to a broad cross section of the bar. It is imperative, however, that prior to starting trial, the rules of the applicable jurisdiction are reviewed.

§ 6.2. Pretrial Matters

§ 6.2.1. Pretrial Conference and Pretrial Order

Virtually all courts require a pretrial conference at least several weeks before the start of trial. A pretrial conference requires careful preparation because it sets the tone for the trial itself. There are no uniform rules across all courts, so practitioners must be fully familiar with those that affect the particular courtroom they are in and the specific judge before whom they will appear.

According to Federal Rule of Civil Procedure 16, the main purpose of a pretrial conference is for the court to establish control over the proceedings such that neither party can achieve significant delay or engage in wasteful pretrial activities.^[1] An additional goal is facilitating settlement before trial commencement.^[2]

Federal Rule of Civil Procedure 16 also contemplates a Final Pretrial Conference to formulate a “trial plan.”^[3] A proposed pretrial conference order should be submitted to the court for review at the conference. Once the judge accepts the pre-trial conference order, the order will supersede all pleadings in the case.^[4] The final pretrial conference order is separate from pretrial disclosures, which include all information and documents required to be disclosed under Federal Rule of Civil Procedure 26.^[5] Many federal courts, pursuant to their local rules, are requiring more detailed pretrial submissions, requiring the parties to outline all legal issues and defenses, and lawyers must pay careful attention to these submissions and some judges do not allow parties to introduce arguments outside the four corners of their pre-trial submission.

§ 6.2.2. Motions in Limine

A motion in limine, which means “at the threshold,”^[6] is a pre-trial motion for a preliminary decision on an objection or offer of proof. Motions in limine are important because they ensure that the jury is not exposed to unfairly prejudicial, confusing, or irrelevant evidence, even if doing so limits a party’s defenses.^[7] Thus, a motion in limine is designed to narrow the evidentiary issues for trial and to eliminate unnecessary trial interruptions by excluding the document before it is entered into evidence.^[8]

In ruling on a motion in limine, the trial judge has discretion to either rule on the motion definitively or postpone a ruling until trial.^[9] Alternatively, the trial judge may make a tentative or qualified ruling.^[10] While definitive rulings do not require a renewed offer of proof at trial,^[11] a tentative or qualified ruling might well require an offer of evidence at trial to preserve the issue on appeal.^[12] A trial court’s discretion in ruling on a motion in limine extends not only to the substantive evidentiary ruling, but also the threshold question of whether a motion in limine presents an evidentiary issue that is appropriate for ruling in advance of trial.^[13] Where the court reserves its ruling on a motion in limine at the outset of trial and later grants the motion, counsel should remember to move to strike any testimony that was provided prior to the ruling.

Motions in limine are not favored and many courts consider it a better practice to deal with questions as to the admissibility of evidence as they arise at trial.^[14]

§ 6.3. Opening Statements

One of the most important components of any trial is the opening statement—it can set the roadmap for the jury of how they can find in favor of your client. The purpose of an opening statement is to:

acquaint the jury with the nature of the case they have been selected to consider, advise them briefly regarding the testimony which it is expected will be introduced to establish the issues involved, and generally give them an understanding of the case from the viewpoint of counsel making a statement, so that they will be better able to comprehend the case as the trial proceeds.^[15]

It is important that any opening statement has a theme or presents the central theory of your case. As a general rule, a lawyer presents facts and evidence, and not argument, during opening statements. Being argumentative and introducing statements that are not evidence can be grounds for a mistrial.^[16] It is also important that counsel keep in mind any rulings on motions in limine prohibiting the use of certain evidence. Failure to raise an objection to matters subject to a motion in limine or other prejudicial arguments can result in the waiver of those rights on appeal.^[17] And the “golden rule” for opening statements is that the jurors should not be asked to place themselves in the position of the party to the case.^[18]

Defense counsel may decide to reserve their opening until their case in chief—this is a strategic decision and is typically disfavored in jury trials.

§ 6.4. Selection of Jury

§ 6.4.1. Right to Fair and Impartial Jury

The right to a fair and impartial jury is an important part of the American legal system. The right originates in the Sixth Amendment, which grants all criminal defendants the right to an impartial jury.^[19] However, today, this foundational right applies in both criminal and civil cases.^[20] This is because the Seventh Amendment preserves “the right of trial by jury” in civil cases, and an inherent part of the right to trial by jury is that the jury must be impartial.^[21] Additionally, Congress cemented this right when it passed legislation requiring “that federal juries in both civil and criminal cases be ‘selected at random from a fair cross section of the community in the district or division where the court convenes.’”^[22]

Examples of ways that jurors may not be impartial include: predispositions about the proper outcome of a case,^[23] financial interests in the outcome of a case,^[24] general biases against the race or gender of a party,^[25] or general biases for or against certain punishments to be imposed.^[26]

Over the years, impartiality has become more and more difficult to achieve. This is due mainly to citizens’ (potential jurors) readily available access to news, and the news media’s increased publicity of defendants and trials.^[27] In Harris, the Ninth Circuit analyzed whether pre‑trial publicity of a murder trial biased prospective jurors and prejudiced the defendant’s ability to receive a fair trial.^[28] The court recognized that “[p]rejudice is presumed when the record demonstrates that the community where the trial was held was saturated with prejudicial and inflammatory media publicity about the crime.”^[29] However, the court found that despite immense publicity prior to trial, because the publicity was not inflammatory but rather factual, there was no evidence of prejudice in the case.^[30]

§ 6.4.2. Right to Trial by Jury

All criminal defendants are entitled to a trial by jury and must waive this right if they elect a bench trial instead.^[31] However, a criminal defendant does not have a constitutional right to a bench trial if he or she decides to waive the right to trial by jury.^[32] In civil cases, the party must expressly demand a jury trial. Failure to make such a demand constitutes a waiver by that party of a trial by jury.^[33] For example, in Hopkins, the Eleventh Circuit explained that a plaintiff waived his right to trial by jury in an employment discrimination case when he made no demand for a jury trial in his Complaint and did not file a separate demand for jury trial within 14 days after filing his complaint.^[34] Some jurisdictions require payment of jury fees to reserve the right to a jury trial.

Additionally, not all civil cases are entitled to a trial by jury. First, the Seventh Amendment expressly requires that the amount in controversy exceed $20.^[35] Additionally, only those civil cases involving legal, rather than equitable, issues are entitled to the right of trial by jury.^[36] Equitable issues often arise in employment discrimination cases where the plaintiff seeks backpay or another sort of compensation under the ADA, ERISA, or FMLA.^[37] Where there are both legal and equitable claims, the parties should address how trial will proceed at the pre-trial conference and whether the equitable claims will be submitted to the jury on an advisory basis, or otherwise.

Another issue that arises in civil cases is contractual jury trial waivers. Most circuits permit parties to waive the right to a jury trial through prior contractual agreement.^[38] Generally, the party seeking enforcement of the waiver “must show that consent to the waiver was both voluntary and informed.”^[39]

§ 6.4.3. Voir Dire

Voir dire is a process of questioning prospective jurors by the judge and/or attorneys who remove jurors who are biased, prejudiced, or otherwise unfit to serve on the jury.^[40] The Supreme Court has explained that “voir dire examination serves the dual purposes of enabling the court to select an impartial jury and assisting counsel in exercising peremptory challenges.”^[41]

Generally, an oath should be administered to prospective jurors before they are asked questions during voir dire.^[42] “While the administration of an oath is not necessary, it is a formality that tends to impress upon the jurors the gravity with which the court views its admonition and is also reassuring to the litigants.”^[43] Moreover, jurors under oath are presumed to have faithfully performed their official duties.^[44]

Federal trial judges have great discretion in deciding what questions are asked to prospective jurors during voir dire.^[45] District judges may permit the parties’ lawyers to conduct voir dire, or the court may conduct the jurors’ examination itself.^[46] Although trial attorneys often prefer to conduct voir dire themselves, many judges believe that counsel’s involvement “results in undue expenditure of time in the jury selection process,” and that “the district court is the most efficient and effective way to assure an impartial jury and evenhanded administration of justice.”^[47]

“[I]f the court conducts the examination it must either permit the parties or their attorneys to supplement the examination by such further inquiry as the court deems proper or itself submit to the prospective jurors such additional questions of the parties or their attorneys as the court deems proper.”^[48] However, a judge still has much leeway in determining what questions an attorney may ask.^[49] For example, in Lawes, a firearm possession case, the Second Circuit found that it was proper for a trial judge to refuse to ask jurors questions about their attitudes towards police.^[50] If, on appeal, a party challenges a judge’s ruling from voir dire, the party must demonstrate that trial judge’s decision constituted an abuse of discretion.^[51] Thus, it is extremely difficult to win an appeal regarding voir dire questioning.^[52] It is also important to keep in mind that cases involving sensitive issues, like sexual abuse type cases, that the lawyer may need to conduct individual voir dire, outside the presence of others, to protect the individuals answering difficult questions on the public record or in front of other potential jurors. This is another issue that should be addressed at the pre-trial conference.

§ 6.4.4. Jury Selection Methods

Each court has its own procedures for jury selection. The two basic methods are the struck jury method and the jury box method (also known as strike-and-replace). At a high level, the methods differ with respect to how many prospective jurors are subject to voir dire and the order in which jurors can be challenged or struck from the jury panel. For example, the jury box method seats the exact number of jurors in the jury box needed to form a viable jury, and allows voir dire and challenges to those jurors.. The stuck method allows voir dire of a larger number of prospective jurors, usually the number of jurors needed to form a viable jury, plus enough prospective jurors to cover all preemptory challenges and potential alternates. Counsel should review local and judge rules to determine which method will be applied. Where there is no set rule or judicial preference, counsel may stipulate with opposing counsel as to the method.

§ 6.4.5. Challenge for Cause

A challenge “for cause” is a request to dismiss a prospective juror because the juror is unqualified to serve, or because of demonstrated bias, an inability to follow the law, or if the juror is unable to perform the duties of a juror. 18 U.S.C. § 1865 sets forth juror qualifications and lists five reasons a judge may strike a juror: (1) if the juror is not a citizen of the United States at least 18 years old, who has resided within the judicial district at least one year; (2) is unable to read, write, or understand English enough to fill out the juror qualification form; (3) is unable to speak English; (4) is incapable, by reason of mental or physical infirmity, to render jury service; or (5) has a criminal charge pending against him, or has been convicted of a state or federal crime punishable by imprisonment for more than one year.^[53]

In addition to striking a juror for these reasons, an attorney may also request to strike a juror “for cause” under 28 U.S.C. § 1866(c)(2) “on the ground that such person may be unable to render impartial jury service or that his service as a juror would be likely to disrupt the proceedings.”^[54]

A challenge “for cause” is proper where the court finds the juror has a bias that is so strong as to interfere with his or her ability to properly consider evidence or follow the law.^[55] Bias can be shown either by the juror’s own admission of bias or by proof of specific facts that show the juror has such a close connection to the parties, or the facts at trial, that bias can be presumed. The following cases illustrate examples of challenges for cause:

• U.S. v. Price: The Fifth Circuit explained that prior jury service during the same term of court is not by itself sufficient to support a challenge for cause. A juror may only be dismissed for cause because of prior service if it can be shown by specific evidence that the juror has been biased by the prior service.^[56]
• Chestnut v. Ford Motor Co.: The Fourth Circuit held that the failure to sustain a challenge to a juror owning 100 shares of stock in defendant Ford Motor Company (worth about $5000) was reversible error.^[57]
• United States v. Chapdelaine: The First Circuit found that it was permissible for trial court not to exclude for cause jurors who had read a newspaper that indicated co‑defendants had pled guilty before trial.^[58]
• Leibstein v. LaFarge N. Am., Inc.: Prospective juror’s alleged failure to disclose during voir dire that he had once been defendant in civil case did not constitute misconduct sufficient to warrant new trial in products liability action.^[59]
• Cravens v. Smith: The Eighth Circuit found that the district court did not abuse its discretion in striking a juror for cause based on that juror’s “strong responses regarding his disfavor of insurance companies.”^[60]

§ 6.4.6. Peremptory Challenge

In addition to challenges for cause, each party also has a right to peremptory challenges.^[61] A peremptory challenge permits parties to strike a prospective juror without stating a reason or cause.^[62] “In civil cases, each party shall be entitled to three peremptory challenges. Several defendants or several plaintiffs may be considered as a single party for the purposes of making challenges, or the court may allow additional peremptory challenges and permit them to be exercised separately or jointly.”^[63]

Parties can move for additional peremptory challenges.^[64] This is common in cases where there are multiple defendants. For example, in Stephens, two civil codefendants moved for additional peremptory challenges so that each defendant could have three challenges (totaling six peremptory challenges for the defense).^[65] In deciding whether to grant the defendants’ motion, the court recognized that trial judges have great discretion in awarding additional peremptory challenges, and that additional challenges may be especially warranted when co-defendants have asserted claims against each other.^[66] The court in Stephens ultimately granted the defendants’ motion for additional challenges.^[67]

Parties may not use peremptory challenges to exclude jurors on the basis of their race, gender, or national origin.^[68] Although “[a]n individual does not have a right to sit on any particular petit jury, . . . he or she does possess the right not to be excluded from one on account of race.”^[69] When one party asserts that another’s peremptory challenges seek to exclude jurors on inappropriate grounds under Batson, the party challenged must demonstrate a legitimate explanation for its strikes, after which the challenging party has the burden to show that the legitimate explanation was pre-textual.^[70] The ultimate determination of the propriety of a challenge is within the discretion of the trial court, and appellate courts review Batson challenges under harmless error analysis.^[71]

Finally, some courts have found that it is reversible error for a trial judge to require an attorney to use peremptory challenges when the juror should have been excused for cause. “The district court is compelled to excuse a potential juror when bias is discovered during voir dire, as the failure to do so may require the litigant to exhaust peremptory challenges on persons who should have been excused for cause. This result, of course, extinguishes the very purpose behind the right to exercise peremptory challenges.”^[72] However, courts also acknowledge that an appeal is not the best way to deal with biased jurors. The Eighth Circuit recognized that “challenges for cause and rulings upon them . . . are fast paced, made on the spot and under pressure. Counsel. as well as the court, in that setting, must be prepared to decide, often between shades of gray, by the minute.”^[73]

§ 6.5. Examination of Witnesses

§ 6.5.1. Direct Examination

Direct examination is the first questioning of a witness in a case by the party on whose behalf the witness has been called to testify.^[74] Pursuant to Fed. R. Evid. 611(c), leading questions, i.e., those suggesting the answer, are not permitted on direct examination unless necessary to develop the witness’s testimony.^[75] Leading questions are permitted as “necessary to develop testimony” in the following circumstances:

• To establish undisputed preliminary or inconsequential matters.^[76]
• If the witness is hostile or unwilling.^[77]
• If the witness is a child, or an adult with communication problems due to a mental or physical disability.^[78]
• If the witness’s recollection is exhausted.^[79]
• If the witness is being impeached by the party calling him or her.^[80]
• If the witness is frightened, nervous, or upset while testifying.^[81]
• If the witness is unresponsive or shows a lack of understanding.^[82]

Additionally, it is improper for a lawyer to bolster the credibility of a witness during direct examination by evidence of specific instances of conduct or otherwise.^[83] Bolstering occurs either when (1) a lawyer suggests that the witness’s testimony is corroborated by evidence known to the lawyer, but not the jury,^[84] or (2) when a lawyer asks a witness a question about specific instances of truthfulness or honesty to establish credibility.^[85] For instance, in Raysor, the Second Circuit found that it was improper for a witness to bolster herself on direct examination by testifying about her religion or faithful marriage.^[86]

When a party calls an adverse party, or someone associated with an adverse party, the attorney has more leeway during direct examination. This is because adverse parties may be predisposed against the party direct-examining him. Because of this, the attorney may ask leading questions, and impeach or contradict the adverse witness.^[87] Courts have broadened who they consider to be “associated with” or “identified with” an adverse party. Employees, significant others, and informants have all constituted adverse parties for purposes of direct examination.^[88] Further, even if the witness is not adverse, an attorney may also ask leading questions to a witness who is hostile. In order to ask such leading questions, the direct examiner must demonstrate that the witness will be resistant to suggestion. This often involves first asking the witness non-leading questions in order to show that the witness is biased against the direct examiner.^[89]

When a witness cannot recall a fact or event, the lawyer is permitted to help refresh that witness’s memory.^[90] The lawyer may do so by providing the witness with an item to help the witness recall the fact or event. Proper foundation before such refreshment requires that:

the witness’s recollection to be exhausted, and that the time, place and person to whom the statement was given be identified. When the court is satisfied that the memorandum on its face reflects the witness’s statement or one the witness acknowledges, and in his discretion the court is further satisfied that it may be of help in refreshing the person’s memory, the witness should be allowed to refer to the document.^[91]

However, the item/memorandum does not come into evidence.^[92] In Rush, the Sixth Circuit found that although the trial judge properly permitted defense counsel to refresh a witness’s memory with the transcript of a previously recorded statement, the trial judge erred in allowing another witness to read that transcript aloud to the jury.^[93]

Further, sometimes the party calling a witness wishes to impeach that witness. Generally, courts are hesitant to permit parties to impeach their own witnesses because the party who calls a witness is vouching for the trustworthiness of that witness, and allowing impeachment may confuse the jury or be unfairly prejudicial.^[94] Prior to adoption of the Federal Rules of Evidence, a party could impeach its own witness only when the witness’s testimony both surprised and affirmatively damaged the calling party.^[95]

However, Federal Rule of Evidence 607 states that “the credibility of a witness may be attacked by any party, including the party calling the witness.”^[96] The Advisory Committee Notes of Rule 607 indicate that this rule repudiates the surprise and injury requirement from common law.^[97] A party can impeach a witness through prior inconsistent statements, cross-examination, or prior evidence from other sources.^[98] However, a party may not use Rule 607 to introduce otherwise inadmissible evidence to the jury.^[99] Additionally, a party may not call a witness with the sole purpose of impeaching him.^[100] Further, even courts that do not permit a party to impeach its own witness still permit parties to contradict their own witnesses through another part of that witness’s testimony.^[101]

§ 6.5.2. Cross-Examination

Cross-examination provides the opposing party an opportunity to challenge what a witness said on direct examination, discredit the witness’s truthfulness, and bring out any other testimony that may be favorable to the opposing party’s case.^[102] Generally under the federal rules, cross-examination is limited to the “subject matter” of the direct examination and any matters affecting the credibility of the witness.^[103] The purpose of limiting the scope of cross-examination is to promote regularity and logic in jury trials, and ensure that each party has the opportunity to present its case in chief. However, courts tend to liberally construe what falls within the “subject matter” of direct examination.^[104] For example, in Perez-Solis, the Fifth Circuit found that a witness’s brief reference to collecting money from a friend permitted opposing counsel to cross-examine him on all of his finances.^[105] Additionally, the language of Fed. R. Evid. 611(b) states that although cross-examination “should not” go beyond the scope of direct examination, the court may exercise its discretion to “allow inquiry into additional matters as if on direct examination.”^[106] However, if the questioning goes beyond the subject matter, it generally should not include leading questions.

One of the main goals of cross-examination is impeachment. The Federal Rules of Evidence explain three different methods of impeachment: (1) impeachment by prior bad acts or character for untruthfulness,^[107] (2) impeachment by prior conviction of a qualifying crime,^[108] and (3) impeachment by prior inconsistent statement.^[109] Additionally, courts still apply common law principles and permit impeachment through three additional methods as well: (1) impeachment by demonstrating the witness’s bias, prejudice, or interest in the litigation or in testifying, (2) impeachment by demonstrating the witness’s incapacity to accurately perceive the facts, and (3) impeachment by showing contradictory evidence to the witness’s testimony in court.^[110] The following present case examples of each of the six methods of impeachment:

1. Prior bad act or dishonesty: In O’Connor v. Venore Transp. Co.,^[111] the First Circuit found that trial judge did not abuse discretion when he allowed defense counsel to cross-examine plaintiff with his prior tax returns with the purpose of demonstrating dishonesty.
2. Conviction of qualifying crime: In Smith v. Tidewater Marine Towing, Inc.,^[112] the Fifth Circuit found that, in Jones Act action arising from injuries plaintiff received while working on a tugboat, defense counsel permissibly crossed the plaintiff about his prior convictions.
3. Prior inconsistent statement: In Wilson v. Bradlees of New England, Inc.,^[113] a product liability case, the First Circuit found that defense counsel appropriately crossed plaintiff with an inconsistent statement made in a complaint filed in a different case against a different defendant.
4. Bias or prejudice: In Udemba v. Nicoli,^[114] the First Circuit found that it was permissible for defense counsel to cross-examine the plaintiff’s wife about domestic abuse to show bias in a case involving excessive force claims against the police.
5. Incapacity to accurately perceive: In Hargrave v. McKee,^[115] the Sixth Circuit found that the trial court should have permitted defense counsel to question a victim about how her ongoing psychiatric problems affected her perception and memory of events.
6. Contradictory evidence: In Barrera v. E. R. DuPont De Nemours and Co., Inc.,^[116] the Fifth Circuit held, in a personal-injury action, that the trial judge erred in denying the use of evidence showing that plaintiff received over $1000 per month in social security benefits because the evidence was admissible to contradict defendant’s volunteered testimony on cross-examination that he did not have a “penny in his pocket.”

Once the right of cross-examination has been fully and fairly exercised, it is within the trial court’s discretion as to whether further cross-examination should be allowed.^[117] In order to recall a witness, the party must show that the new cross-examination will shed additional light on the issues being tried or impeach the witness. Further, it is helpful if the party seeking recall demonstrates that it came into possession of additional evidence or information that it did not have when it previously crossed that witness.^[118] Further, it is difficult to succeed on an appeal of a trial court’s failure to permit recall for further cross‑examination. This is because courts review a trial judge’s decision for abuse of discretion, and often find that the lack of recall was a harmless error.^[119]

§ 6.5.3. Expert Witnesses

Experts are witnesses who offer opinion testimony on an aspect of the case that requires specialized knowledge or experience. Experts also include persons who do not testify, but who advise attorneys on a technical or specialized area to better help them prepare their cases. A few key criteria should be considered at the outset when choosing an expert. First is the level of relevant expertise and the ability to have the expert’s research, assumptions, methodologies, and practices stand up to the scrutiny of cross-examination. Many law firms, nonprofits, commercial services, and government agencies maintain lists of experts categorized by the expertise; those lists are a helpful place to begin. Alternatively, counsel may begin by researching persons who have spoken or written about the subject matter that requires expert testimony. An Internet search is, in many cases, the place to start when developing a list. Counsel also might consider using a legal search engine to identify persons who have provided expert testimony on the subject matter in the past. Westlaw and LexisNexis both maintain expert databases.

Any expert who is on counsel’s list of candidates should produce, in addition to his or her curriculum vitae (CV), a list of prior court and deposition appearances, as well as a list of publications over the last 10 years. In federal court, this information must be disclosed in the expert report, per Federal Rule of Civil Procedure 26(a)(2).^[120]

Another consideration when retaining an expert is whether he or she will be a testifying expert, or whether the expert will only act in a consulting role in preparing the case for trial (non-testifying expert) because this will determine the discoverability of the expert’s opinions. Testifying experts’ opinions are always discoverable, while consulting experts’ opinions are nearly always protected from discovery.

A testifying expert must be qualified, and the proponent of an expert witness bears the burden of establishing the admissibility of the expert’s testimony by a preponderance of the evidence. Federal Rule of Evidence 702 sets forth a standard for admissibility, wherein a witness may be qualified as an expert by knowledge, skill, experience, training, or education and may testify in the form of an opinion if they meet certain criteria. Opposing counsel may challenge the qualifications of the expert before the expert’s opinions are presented; to do so, opposing counsel can ask to voir dire the expert (usually outside of the presence of the jury). It is for the trial court judge to determine whether or not “an expert’s testimony both rests on a reliable foundation and is relevant to the task at hand,” thereby making it admissible.^[121]

§ 6.6. Evidence at Trial

§ 6.6.1. Authentication of Evidence

With the exception of exhibits as to which authenticity is acknowledged by stipulation, admission, judicial notice, or exhibits which are self-authenticating, no exhibit will be received in evidence unless it is first authenticated or identified as being what it purports to be. Under the Federal Rules of Evidence, the authentication requirement is satisfied when “the proponent . . . produce[s] evidence sufficient to support a finding that the item is what the proponent claims it is.”^[122]

When an item is offered into evidence, the court may permit counsel to conduct a limited cross-examination on the foundation offered. In reaching its determination, the court must view all the evidence introduced as to authentication or identification, including issues of credibility, most favorably to the proponent.^[123] Of course, the party who opposed introduction of the evidence may still offer contradictory evidence before the trier of fact or challenge the credibility of the supporting proof in the same way that he can dispute any other testimony.^[124] However, upon consideration of the evidence as a whole, if a sufficient foundation has been laid in support of introduction, contradictory evidence goes to the weight to be assigned by the trier of fact and not to admissibility.^[125] It is important to note that many courts have held that the mere production of a document in discovery waives any argument as to its authenticity.^[126]

While there are many topics to discuss regarding authentication of evidence, this section will focus on electronically stored information. Proper authentication of e-mails and other instant communications, as well as all computerized records, is of critical importance in an ever-increasing number of cases, not only because of the centrality of such data and communications to modern business and society in general, but also due to the ease in which such electronic materials can be created, altered, and manipulated. In the ordinary course of events, a witness who has seen the e-mail in question need only testify that the printout offered as an exhibit is an accurate reproduction.

• Web print out – Printouts of Internet website pages must first be authenticated as accurately reflecting the content of the page and the image of the page on the computer at which the printout was made before they can be introduced into evidence; then, to be relevant and material to the case at hand, the printouts often will need to be further authenticated as having been posted by a particular source.^[127]
• Text message – When there has been an objection to admissibility of a text message, the proponent of the evidence must explain the purpose for which the text message is being offered and provide sufficient direct or circumstantial corroborating evidence of authorship in order to authenticate the text message as a condition precedent to its admission; thus, authenticating a text message or e-mail may be done in much the same way as authenticating a telephone call.^[128]
• Social networking services – Proper inquiry for determining whether a proponent has properly authenticated evidence derived from social networking services was whether the proponent adduced sufficient evidence to support a finding by a reasonable jury that the proffered evidence was what the proponent claimed it to be.^[129]

§ 6.6.2. Objecting to Evidence

Objections must be specific. The party objecting to evidence must make known to the court and the parties the precise ground on which the objecting party is basing the objection.^[130] The objecting party must also be sure to indicate the particular portion of the evidence that is objectionable.^[131] However, a general objection may be permitted if the evidence is clearly inadmissible for any purpose or if the only possible grounds for objection is obvious.^[132]

The purpose of a specific objection to evidence is to preserve the issue on appeal. On appeal, the objecting party will be limited to the specific objections to evidence made at trial. However, an objection raised by a party in writing is sufficiently preserved for appeal, even if that same party subsequently failed to make an oral, on-the-record objection.^[133]

Objections to evidence must be timely so as to not allow a party to wait and see whether an answer is favorable before raising an objection.^[134] Failure to timely object results in the evidence being admitted. Once the evidence is admitted and becomes part of the trial record, it may be considered by the jury in deliberations, the trial court in ruling on motions, and a reviewing court determining the sufficiency of the evidence.^[135] In some instances, the trial judge may prohibit counsel from giving descriptions of the basis for his or her objections. However, the attorney must still attempt to get in the specific grounds for the objection on the record.^[136]

Counsel objecting the evidence should remember to strike the evidence from the record after their objection is sustained.

§ 6.6.3. Offer of Proof

If evidence is excluded by the trial court, the party offering the evidence must make an offer of proof to preserve the issue on appeal.^[137] For an offer of proof to be adequate to preserve an issue on appeal, counsel must state both the theory of admissibility and the content of the excluded evidence.^[138] Although best practice is to make an offer of proof at the time an objection is made, an offer of proof made later in time, even if it is made at a subsequent conference or hearing, may be acceptable.^[139] An offer of proof can take several different forms:

1. A testimonial offer of evidence, whereby counsel summarizes what the proposed evidence is supposed to be. Attorneys using this method should be cautious, however, as the testimony may be considered inadequate.^[140]
2. An examination of a witness, whereby a witness is examined and cross-examined outside of the presence of a jury.^[141]
3. A written statement by the examining counsel, which describes the answers that the proposed witness would give if allowed to testify.^[142]
4. An affidavit, taken under oath, which summarizes a witness’s expected testimony and is signed by the witness.^[143] However, this use of documentary evidence should be marked as an exhibit and introduced into the record for identification on appeal.^[144]

There are exceptions to the offer of proof requirement. First, an offer of proof is unnecessary when the content of the evidence is “apparent from the context.”^[145] Second, a cross-examiner who is conducting a proper cross-examination will be given more leeway by a court, since oftentimes the cross-examiner does not know what a witness will say if permitted to answer a question.^[146]

§ 6.7. Closing Argument

Different than an opening statement, closing argument is the time for advocacy and argument on behalf of your client. It is not an unfettered right, however, and there are certain rules to remember about closing argument. First, present only that which was presented in evidence and do not deviate from the record.^[147] You also do not want to comment on a witness that was unable to testify or suggest that a defendant’s failure to testify results in a guilty verdict.^[148] Further, an attack on the credibility or honesty of opposing counsel is considered unethical.^[149] But that does not mean lawyers cannot comment on the credibility of evidence and suggest reasonable inferences based on the evidence.^[150] In addition, keep in mind, generally, courts are “reluctant to set aside a jury verdict because of an argument made by counsel during closing arguments.”^[151]

§ 6.8. Judgment as a Matter of Law

Federal Rule of Civil Procedure 50 governs the standard for judgment as a matter of law, sometimes referred to as a directed verdict in state court matters.^[152] A motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(a) “may be made at any time before the case is submitted to the jury” and the motion “must specify the judgment sought and the law and facts that entitle the movant to the judgment.”^[153] But, “[a] motion under this Rule need not be stated with ‘technical precision,’” so long as “it clearly requested relief on the basis of insufficient evidence.”^[154] Although it may be “better practice,” there is no requirement that the motion be made in writing.^[155] The Sixth Circuit Court of Appeals has even held that it is “clearly within the court’s power” to raise the motion “sua sponte.”^[156]

Importantly, Rule 50 uses permissive, not mandatory, language, which means, “while a district court is permitted to enter judgment as a matter of law when it concludes that the evidence is legally insufficient, it is not required to do so.” The Supreme Court has gone as far as to say “the district courts are, if anything, encouraged to submit the case to the jury, rather than granting such motions.”^[157] There is a practical reason for this advice: if the motion is granted, then overturned on appeal, a whole new trial must be conveyed. Conversely, if the case is allowed to go to the jury, a post-verdict motion or appellate court can right any wrong with more ease.

In entertaining a motion for judgment as a matter of law, courts should review all of the evidence in the record, but, in doing so, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence.^[158] Credibility determinations, the weighing of the evidence, or the drawing of legitimate inferences from the facts are jury functions, not those of a judge.^[159] The question is not whether there is literally no evidence supporting the party against whom the motion is directed but whether there is evidence upon which the jury might reasonably find a verdict for that party. Since granting judgment as a matter of law deprives the party opposing the motion of a determination of the facts by a jury, it is understandable that it is to be granted cautiously and sparingly by the trial judge. Because a failure to bring a 50(a) motion at the close of evidence will preclude the trial judge from granting judgment as a matter of law after the verdict,^[160] parties should consider bringing a 50(a) motion even if it is unlikely to be granted.^[161]

§ 6.9. Jury Instructions

§ 6.9.1. General

The purpose of jury instructions is to advise the jury on the proper legal standards to be applied in determining issues of fact as to the case before them.^[162] The court may instruct the jury at any time before the jury is discharged.^[163] But the court must first inform the parties of its proposed instructions and give the parties an opportunity to respond.^[164] Although each party is entitled to have the jury charged with his or her theory of the case, the proposed instructions must be supported by the law and the evidence.^[165]

§ 6.9.2. Objections

Federal Rule of Civil Procedure 51 provides counsel the ability to correct errors in jury instructions.^[166] The philosophy underlying the provisions of Rule 51 is to prevent unnecessary appeals of matters concerning jury instructions, which should have been resolved at the trial level. An objection must be made on the record and state distinctly the matter objected to and the grounds for the objection.^[167] Off-the-record objections to jury instructions, regardless of how specific, cannot satisfy requirements of the rule governing preservation of such errors.^[168] A party may object to instructions outside the presence of the jury before the instructions and arguments are delivered or promptly after learning that the instructions or request will be, or has been, given or refused.^[169] Even if the initial request for an instruction is made in detail, the requesting party must object again after the instructions are given but before the jury retires for deliberations, in order to preserve the claimed error.^[170]

Whether a jury instruction is improper is a question of law reviewed de novo.^[171] Instructions are improper if, when viewed as a whole, they are confusing, misleading, and prejudicial.^[172] If an instruction is improper, the judgment will be reversed, unless the error is harmless.^[173] A motion for new trial is not appropriate where the omitted instructions are superfluous and potentially misleading.^[174]

Further, while some courts have been lenient on whether objections are made in accordance with Rule 51, many courts hold that one who does not object in accordance with Rule 51 is deemed to have waived the right to appeal. A patently erroneous instruction can be considered on appeal if the error is “fundamental” and involves a miscarriage of justice, but the movant claiming the error has the burden of demonstrating it is a fundamental error.^[175]

§ 6.10. Conduct of Jury

§ 6.10.1. Conduct During Deliberations

Jury deliberations must remain private in order to protect the jury’s deliberations from improper, outside influence.^[176] Control over the jury during deliberations, including the decision whether to allow the jurors to separate before a verdict is reached, is in the sound discretion of the trial court.^[177] During this time, a judge may consider the fatigue of the jurors in determining whether the time of deliberations could preclude effective and impartial deliberation absent a break.^[178] Although admonition of the jury is not required, one should be given if the jury is to separate at night and could potentially interact with third parties.^[179]

The only individuals permitted in the jury room during deliberations are the jurors. However, in the case of a juror with a hearing or speech impediment, the court will appoint an appropriate professional to assist that individual and the presence of that professional is not grounds for reversal so long as the professional: (1) does not participate in deliberations; and (2) takes an oath to that effect.^[180]

Courts have broad discretion in determining what materials will be permitted in the jury room.^[181] Materials received into evidence are generally permitted,^[182] including real evidence,^[183] documents,^[184] audio recordings,^[185] charts and summaries admitted pursuant to Federal Rule of Evidence 1006,^[186] video recordings,^[187] written stipulations,^[188] depositions,^[189] drugs,^[190] and weapons.^[191] Additionally, jurors are typically permitted to use any notes he or she has taken over the course of trial.^[192] Pleadings, however, are ordinarily not allowed.^[193]

§ 6.10.2. Conduct During Trial

Traditionally, the trial judge has discretion to manage the jury during trial.^[194] To ensure the jurors are properly informed, the court may, at any time after the commencement of trial, instruct the jury regarding a matter related to the case or a principal of law.^[195] If a party wishes to present an exhibit to the jurors for examination over the course of trial, counsel should request that the court admonish the jury not to place undue emphasis on the evidence presented.^[196] Additionally, the trial court may, in its informed discretion, permit a jury view of the premises that is the subject of the litigation.^[197]

During trial, the court may allow the jury to take notes and dictate the procedure for doing so.^[198] The trial court may permit note-taking for all of the trial or restrict the practice to certain parts.^[199] A concern of permitting note-taking during trial is that jurors may place too much significance on their notes and too little significance on their recollection of the trial testimony.^[200] To mitigate this risk, a judge should give a jury instruction informing each juror that he or she should rely on his memory and only use notes to assist that process.^[201]

Allowing a juror to participate in examining a witness is within the discretion of the trial court,^[202] although some courts have strongly opposed the practice.^[203] If allowed, procedural protections should be encouraged to mitigate the risks of questions.^[204] Additionally, the court should permit counsel to re-question the witness after a juror question has been posed.^[205]

While trial is ongoing, jurors should not discuss the case among themselves^[206] or share notes^[207] prior to the case being submitted for deliberations. The same rule applies to communication between jurors and trial counsel^[208] or jurors and the parties,^[209] although accidental or unintentional contact may be excused.^[210]

§ 6.11. Relief from Judgment

§ 6.11.1. Renewed Motion for Judgment as a Matter of Law

Pursuant to Federal Rule of Civil Procedure 50(b) a party may file a “renewed” motion for judgment as a matter of law, previously known as a “motion for directed verdict,” asserting that the jury erred in returning a verdict based on insufficient evidence.^[211] However, as explained above, in order to file a 50(b) motion, a party must have filed a Rule 50(a) pre-verdict motion for judgment as a matter of law before the case was submitted to the jury.^[212] The renewed motion is limited to issues that were raised in a “sufficiently substantial way” in the pre-verdict motion^[213] and failure to comply with this process often results in waiver.^[214] The renewed motion must be filed no later than 28 days after the entry of judgment.^[215]

The standard for granting a renewed motion for judgment as a matter of law mirrors the standard for granting the pre-verdict motion under Rule 50(a).^[216] A party is entitled to judgment only if a reasonable jury lacked a legally sufficient evidentiary basis to return the verdict that it did.^[217] In rendering this analysis, a court may not weigh conflicting evidence and inferences or determine the credibility of the witnesses.^[218] Upon review, the court must:

(1) consider the evidence in the light most favorable to the prevailing party, (2) assume that all conflicts in the evidence were resolved in favor of the prevailing party, (3) assume as proved all facts that the prevailing party’s evidence tended to prove, and (4) give the prevailing party the benefit of all favorable inferences that may reasonably be drawn from the facts proved. That done, the court must then deny the motion if reasonable persons could differ as to the conclusions to be drawn from the evidence.^[219]

The analysis reflects courts’ general reluctance to interfere with a jury verdict.^[220]

§ 6.11.2. Motion for New Trial

Federal Rule of Civil Procedure 59 permits a party to file a motion for new trial, either together with or as an alternative to a 50(b) renewed motion for judgment as a matter of law.^[221] Like a renewed motion for judgment as a matter of law, a motion for new trial must be filed no later than 28 days after an entry of judgment.^[222]

Rule 59 does not specify or limit the grounds on which a new trial may be granted.^[223] A party may move for a new trial on the basis that “the verdict is against the weight of the evidence, that the damages are excessive, or that, for other reasons, the trial was not fair . . . and may raise questions of law arising out of alleged substantial errors in admission or rejection of evidence.”^[224] Other recognized grounds for new trial include newly discovered evidence,^[225] errors involving jury instruction,^[226] and conduct of counsel.^[227] Courts often grant motions for new trial on the issue of damages alone.^[228]

Unlike when reviewing a motion for judgment as a matter of law, courts may independently evaluate and weigh the evidence.^[229] Additionally, the Court, on its own initiative with notice to the parties and an opportunity to be heard, may order a new trial on grounds not stated in a party’s motion.^[230]

When faced with a renewed judgment as a matter of law or a motion for new trial, courts have three options. They may (1) allow judgment on the verdict, if the jury returned a verdict; (2) order a new trial; or (3) direct the entry of judgment as a matter of law.^[231]

§ 6.11.3. Clerical Mistake, Oversights and Omissions

Federal Rule of Civil Procedure 60(a) provides that “the court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice.” This rule applies in very specific and limited circumstances, when the record makes apparent that the court intended one thing but by mere clerical mistake or oversight did another; such mistake must not be one of judgment or even of misidentification, but merely of recitation, of the sort that clerk or amanuensis might commit, mechanical in nature.^[232] It is important to note that this rule can be applied even after a judgment is affirmed on appeal.^[233]

§ 6.11.4. Other Grounds for Relief

Federal Rule of Civil Procedure 60(b) provides for several additional means for relief from a final judgment:

1. mistake, inadvertence, surprise, or excusable neglect;
2. newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
3. fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
4. the judgment is void;
5. the judgment has been satisfied, released or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
6. any other reason that justifies relief.

Courts typically require that the evidence in support of the motion for relief from a final judgement be “highly convincing.”^[234]

1. See Fed. R. Civ. P. 16. ↑

2. Id. ↑

3. Fed. R. Civ. P. 26(e). ↑

4. See Basista v. Weir, 340 F.2d 74, 85 (3d Cir. 1965). ↑

5. See Fed. R. Civ. P. 26. ↑

6. Luce v. United States, 469 U.S. 38, 40 n.2 (1984). ↑

7. United States v. Romano, 849 F.2d 812, 815 (3d Cir. 1988). ↑

8. Frintner v. TruPosition, 892 F. Supp. 2d 699 (E.D. Pa. 2012). ↑

9. United States v. LeMay, 260 F.3d 1018, 1028 (9th Cir. 2001). ↑

10. Wilson v. Williams, 182 F.3d 562, 565–66 (7th Cir. 1999). ↑

11. Id. at 566 (“Definitive rulings, however, do not invite reconsideration.”). ↑

12. Fusco v. General Motors Corp., 11 F.3d 259, 262–63 (1st Cir. 1993). ↑

13. Flythe v. District of Columbia, 4 F. Supp. 3d 222 (D.D.C. 2014). ↑

14. U.S. v. Denton, 547 F. Supp. 16 (E.D. Tenn. 1982). ↑

15. Henwood v. People, 57 Colo 544, 143 P. 373 (1914). An opening statement presents counsel with the opportunity to summarily outline to the trier of fact what counsel expects the evidence presented at trial will show. Lovell v. Sarah Bush Lincoln Health Center, 397 Ill. App. 3d 890, 931 N.E.2d 246 (4th Dist. 2010). ↑

16. Testa v. Mundelein, 89 F.3d 445 (7th Cir. 1996) (“being argumentative in an opening statement does not necessarily warrant a mistrial, but being argumentative and introducing something that should not be allowed into evidence may be a predicate for a mistrial.”). ↑

17. Krengiel v. Lissner Copr., Inc., 250 Ill App. 3d 288, 621 N.E.2d 91 (1st Dist. 1993) (“party whose motion in limine has been denied must object when the challenged evidence is presented at trial in order to preserve the issue for review, and the failure to raise such an objection constitutes a waiver of the issue on appeal.”). ↑

18. Forrestal v. Magendantz, 848 F.2d 303, 308 (1st Cir. 1988) (suggesting to jury to put itself in shoes of plaintiff to determine damages improper because it encourages the jury to depart from neutrality and to decide the case on the basis of personal interest and bias rather than on the evidence.). ↑

19. U.S. Const. amend. VI. ↑

20. See Kiernan v. Van Schaik, 347 F.2d 775, 778 (3d Cir. 1965); McCoy v. Goldston, 652 F.2d 654, 657 (6th Cir. 1981) abrogated on other grounds. ↑

21. U.S. Const. amend. VII; Kiernan, 347 F.2d at 778. ↑

22. Fleming v. Chicago Transit Auth., 397 F. App’x 249, 249–50 (7th Cir. 2010) (quoting Jury Selection & Serv. Act of 1968, 28 U.S.C. §§ 1861–74 (2006)). ↑

23. Irvin v. Dowd, 366 U.S. 717, 727 (1961). ↑

24. Zia Shadows, L.L.C. v. City of Las Cruces, 829 F.3d 1232 (10th Cir. 2016). ↑

25. Turner v. Murray, 476 U.S. 28 (1986). ↑

26. Wainwright v. Witt, 469 U.S. 412, 423 (1985). ↑

27. Harris v. Pulley, 885 F.2d 1354, 1361 (9th Cir. 1988). ↑

28. Id. at 1362. ↑

29. Id. at 1361. ↑

30. Id. ↑

31. People v. Jordan, 2019 IL App (1st Dist.) 161848. ↑

32. Singer v. United States, 380 U.S. 24, 36 (1965) (finding that it is constitutionally permissible to require prosecutor and judge to consent to bench trial, even if the defendant elects one); United States v. Talik, No. CRIM.A. 5:06CR51, 2007 WL 4570704, at *6 (N.D.W. Va. Dec. 26, 2007). ↑

33. Fed. R. Civ. P. 38; Hopkins v. JPMorgan Chase Bank, NA, 618 F. App’x 959, 962 (11th Cir. 2015). ↑

34. Hopkins, 618 F. App’x at 962. ↑

35. U.S. Const. amend. VII. ↑

36. Lorillard v. Pons, 434 U.S. 575, 583 (1978). ↑

37. See Lutz v. Glendale Union High Sch., 403 F.3d 1061, 1069 (9th Cir. 2005) (“[W]e hold that there is no right to have a jury determine the appropriate amount of back pay under Title VII, and thus the ADA, even after the Civil Rights Act of 1991. Instead, back pay remains an equitable remedy to be awarded by the district court in its discretion.”); see also Bledsoe v. Emery Worldwide Airlines, 635 F.3d. 836, 840–41 (6th Cir. 2011) (holding “statutory remedies available to aggrieved employees under the Worker Adjustment and Retraining Notification (WARN) act provide equitable restitutionary relief for which there is no constitutional right to a jury trial.”). ↑

38. K.M.C. Co. v. Irving Tr. Co., 757 F.2d 752, 758 (6th Cir. 1985); Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986); Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988). ↑

39. Zaklit v. Glob. Linguist Sols., LLC, 53 F. Supp. 3d 835, 854 (E.D. Va. 2014); see also Nat’l Equip. Rental, Ltd. v. Hendrix, 565 F.2d 255, 258 (2d Cir. 1977). ↑

40. United States v. Steele, 298 F.3d 906, 912 (9th Cir. 2002) (“The fundamental purpose of voir dire is to ‘ferret out prejudices in the venire’ and ‘to remove partial jurors.’”) (quoting United States v. Howell, 231 F.3d 615, 627–28 (9th Cir. 2000)); Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 189 (4th Cir. 1994) (stating that the purpose of voir dire is to ensure a fair and impartial jury, not to operate as a discovery tool by opposing counsel). ↑

41. Mu’Min v. Virginia, 500 U.S. 415, 431 (1991). ↑

42. United States v. Piancone, 506 F.2d 748, 751 (3d Cir. 1974). ↑

43. Id. ↑

44. United States v. Delgado, 668 F.3d 219, 228 (5th Cir. 2012). ↑

45. Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. February 25, 2000). ↑

46. Fed. R. Civ. P. 47(a). ↑

47. Hicks v. Mickelson, 835 F.2d 721, 726 (8th Cir. 1987). ↑

48. U.S. v. Lewin, 467 F.2d 1132 (7th Cir. 1972) (citing Fed. R. Crim. P. 24(a)). ↑

49. U.S. v. Lawes, 292 F.3d 123, 128 (2d Cir. 2002); Hicks v. Mickelson, 835 F.2d 721, 723–26 (8th Cir. 1987). ↑

50. Lawes, 292 F.3d at 128 (noting that “federal trial judges are not required to ask every question that counsel—even all counsel—believes is appropriate”). ↑

51. Finks v. Longford Equip. Int’l, 208 F.3d 225, at *2 (10th Cir. 2000). ↑

52. Mayes v. Kollman, 560 Fed. Appx. 389, 395 n.13 (5th Cir. 2014); Richardson v. New York City, 370 Fed. Appx. 227 (2d Cir. 2010); c.f. Kiernan v. Van Schaik, 347 F.2d 775, 779 (3d Cir. 1965) (finding that judge’s refusal to ask prospective jurors questions about connection to insurance companies constituted reversible error). ↑

53. See 28 U.S.C. § 1865(b). ↑

54. 28 U.S.C. § 1866. ↑

55. United States v. Bishop, 264 F.3d 535, 554–55 (5th Cir. 2001). ↑

56. United States v. Price, 573 F.2d 356, 389 (5th Cir. 1978). ↑

57. Chestnut v. Ford Motor Co., 445 F.2d 967 (4th Cir. 1971); c.f. United States v. Turner, 389 F.3d 111 (4th Cir. 2004) (finding that district court was within its discretion in failing to disqualify jurors who banked with a different branch of the bank that was robbed). ↑

58. United States v. Chapdelaine, 989 F.2d 28 (1st Cir. 1993). ↑

59. Leibstein v. LaFarge N. Am., Inc., 767 F. Supp. 2d 373 (E.D.N.Y. 2011), as amended (Feb. 15, 2011). ↑

60. Cravens v. Smith, 610 F.3d 1019, 1032 (8th Cir. 2010). ↑

61. See 28 U.S.C. § 1866 (stating that a juror may be “excluded upon peremptory challenge as provided by law”). ↑

62. Davis v. United States, 374 F.2d 1, 5 (1967) (“The essential nature of the peremptory challenge is that it is one exercised without a reason stated, without inquiry and without being subject to the court’s control.”). ↑

63. 28 U.S.C. § 1870; see also Fedorchick v. Massey-Ferguson, Inc., 577 F.2d 856 (3d Cir. 1978). ↑

64. Stephens v. Koch Foods, LLC, No. 2:07-CV-175, 2009 WL 10674890, at *1 (E.D. Tenn. Oct. 20, 2009). ↑

65. Id. ↑

66. Id. ↑

67. Id. ↑

68. See Batson v. Kentucky, 476 U.S. 79 (1986) (race); J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127 (1994) (gender); Rivera v. Nibco, Inc., 372 F. App’x 757, 760 (9th Cir. 2010) (national origin). ↑

69. Powers v. Ohio, 499 U.S. 400, 409 (1991). ↑

70. Robinson v. R.J. Reynolds Tobacco Co., 86 F. App’x 73, 75 (6th Cir. 2004). ↑

71. Rivera v. Illinois, 556 U.S. 148 (2009); see also King v. Peco Foods, Inc., No. 1:14-CV-00088, 2017 WL 2424574 (N.D. Miss. Jun. 5, 2017). ↑

72. Kirk v. Raymark Indus., Inc., 61 F.3d 147, 157 (3d Cir. 1995) (holding, in asbestos litigation, that trial court’s refusal to remove two panelists for cause was error, and the party’s subsequent use of peremptory challenges to remedy the judge’s mistake required per se reversal and a new trial) (citations omitted). ↑

73. Linden v. CNH Am., LLC, 673 F.3d 829, 840 (8th Cir. 2012). ↑

74. Black’s Law Dictionary 460 (6th ed. 1990). ↑

75. Fed. R. Evid. 611(c). ↑

76. McClard v. United States, 386 F.2d 495, 501 (8th Cir. 1967). ↑

77. Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 12–13 (1st Cir. 1993). ↑

78. United States v. Rojas, 520 F.3d 876, 881 (8th Cir. 2008) (citing U.S. v. Butler, 56 F.3d 941, 943 (8th Cir. 1995)). ↑

79. United States v. Carpenter, 819 F.3d 880, 891 (6th Cir. 2016), reversed and remanded on other grounds, 138 S.Ct. 2206, 201 L. Ed. 2d 507 (2018). ↑

80. U.S. v. Hernandez-Albino, 177 F.3d 33, 42 (1st Cir. 1999). ↑

81. United States v. Grassrope, 342 F.3d 866, 869 (8th Cir. 2003) (permitting leading questions when examining a sexual assault victim). ↑

82. U.S. v. Mulinelli-Navas, 111 F.3d 983, 990 (1st Cir. 1997). ↑

83. See United States v. Lin, 101 F.3d 760, 770 (D.C. Cir. 1996). ↑

84. United States v. Jacobs, 215 Fed. Appx. 239, 241 (4th Cir. 2007) (citing United States v. Lewis, 10 F.3d 1086, 1089 (4th Cir. 1993)). ↑

85. Raysor v. Port Authority of New York & New Jersey, 768 F.2d 34, 40 (2d Cir. 1985). ↑

86. Id. ↑

87. Elgabri v. Lekas, 964 F.2d 1255, 1260 (1st Cir. 1992). ↑

88. See Rosa-Rivera v. Dorado Health, Inc., 787 F.3d 614, 617 (1st Cir. 2015) (employees); United States v. Bryant, 461 F.2d 912, 918–19 (6th Cir. 1972) (informants); United States v. Hicks, 748 F.2d 854, 859 (4th Cir. 1984) (girlfriend). ↑

89. See U.S. v. Cisneros-Gutierrez, 517 F.3d 751, 762 (5th Cir. 2008). ↑

90. Fed. R. Evid. 612 authorizes a party to refresh a witness’s memory with a writing so long as the “adverse party is entitled to have the writing produced at the hearing, to inspect it, to cross-examine the witness thereon, and to introduce in evidence those portions which relate to the testimony of the witness.” ↑

91. Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715–22 (6th Cir. 2005). ↑

92. Rush v. Illinois Cent. R. Co., 399 F.3d 705, 715–22 (6th Cir. 2005). ↑

93. Id. at 718–19. ↑

94. United States v. Logan, 121 F.3d 1172, 1175 (8th Cir. 1997). ↑

95. United States v. Lemon, 497 F.2d 854, 857 (10th Cir. 1974). ↑

96. See Fed. R. Evid. 607. ↑

97. Id. ↑

98. Util. Control Corp. v. Prince William Const. Co., 558 F.2d 716, 720 (4th Cir. 1977). ↑

99. United States v. Gilbert, 57 F.3d 709, 711 (9th Cir. 1995). ↑

100. United States v. Finley, 708 F. Supp. 906 (N.D. Ill. 1989). ↑

101. United States v. Finis P. Ernest, Inc., 509 F.2d 1256, 1263 (7th Cir. 1975); United States v. Prince, 491 F.2d 655, 659 (5th Cir. 1974). ↑

102. See Davis v. Alaska, 415 U.S. 308, 316, 94 S. Ct. 1105, 1110, 39 L. Ed. 2d 347 (1974) (“Cross-examination is the principal means by which the believability of a witness and the truth of his testimony are tested.”). ↑

103. See Fed. R. Evid. 611(b) (effective December 1, 2011) (“(b) Scope of Cross-Examination. Cross-examination should not go beyond the subject matter of the direct examination and matters affecting the witness’s credibility. The court may allow inquiry into additional matters as if on direct examination.”). ↑

104. See United States v. Perez-Solis, 709 F.3d 453, 463–64 (5th Cir. 2013); see also United States v. Arias-Villanueva, 998 F.2d 1491, 1508 (9th Cir. 1993) (cross-examination is within the scope of direct where it is “reasonably related” to the issues put in dispute by direct examination), overruled on other grounds; United States v. Moore, 917 F.2d 215 (6th Cir. 1990) (subject matter of direct examination under Rule 611(b) includes all inferences and implications arising from the direct); United States v. Arnott, 704 F.2d 322, 324 (6th Cir. 1983) (“The ‘subject matter of the direct examination,’ within the meaning of Rule 611(b), has been liberally construed to include all inferences and implications arising from such testimony.”). ↑

105. Perez-Solis, 709 F.3d at 464. ↑

106. Id; see also MDU Resources Group v. W.R. Grace and Co., 14 F.3d 1274, 1282 (8th Cir. 1994), cert. denied, 513 U.S. 824, 115 S. Ct. 89, 130 L. Ed. 2d 40 (1994) (“When cross-examination goes beyond the scope of direct, as it did here, and is designed, as here, to establish an affirmative defense (that the statute of limitations had run), the examiner must be required to ask questions of non-hostile witnesses as if on direct.). ↑

107. Under Fed. R. Evid. 608, if the witness concedes the bad act, impeachment is accomplished. If the witness denies the bad act, Rule 608(b) precludes the introduction of extrinsic evidence to prove the act. In short, the cross-examining lawyer must live with the witness’s denial. ↑

108. To qualify, “the crime must have been a felony, or a misdemeanor that has some logical nexus with the character trait of truthfulness, such as when the elements of the offense involve dishonesty or false statement. The conviction must have occurred within ten years of the date of the witness’s testimony at trial, or his or her release from serving the sentence imposed under the conviction, whichever is later, unless the court permits an older conviction to be used, because its probative value substantially outweighs any prejudice, and it should, in the interest of justice, be admitted to impeach the witness. If the prior conviction is used to impeach a witness other than an accused in a criminal case, its admission is subject to exclusion under Rule 403 if the probative value of the evidence is substantially outweighed by the danger of unfair prejudice, delay, confusion or the introduction of unnecessarily cumulative evidence. If offered to impeach an accused in a criminal case, the court still may exclude the evidence, if its probative value is outweighed by its prejudicial effect.” Behler v. Hanlon, 199 F.R.D. 553, 559 (D. Md. 2001). ↑

109. Fed. R. Evid. 608 (bad acts or character of untruthfulness); Fed. R. Evid. 609 (qualifying crime); Fed. R. Evid. 613 (prior inconsistent statement). ↑

110. Behler, 199 F.R.D. at 556. ↑

111. 353 F.2d 324, 325–26 (1st Cir. 1965). ↑

112. 927 F.2d 838, 841 (5th Cir. 1991). ↑

113. 250 F.3d 10, 16–17 (1st Cir. 2001). ↑

114. 237 F.3d 8, 16–17 (1st Cir. 2001). ↑

115. 248 Fed. Appx. 718, 726 (6th Cir. 2007). ↑

116. 653 F.2d 915, 920–21 (5th Cir. 1981). ↑

117. United States v. James, 510 F.2d 546, 551 (5th Cir. 1975). ↑

118. United States v. Blackwood, 456 F.2d 526, 529–30 (2d Cir. 1972). ↑

119. Id. ↑

120. Fed. R. Civ. P. 26(a)(2). ↑

121. Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993). ↑

122. Fed. R. Evid. 901. ↑

123. U.S. v. Goichman, 547 F.2d 778, 784 (3d Cir. 1976) (“[T]here need be only a prima facie showing, to the court, of authenticity, not a full argument on admissibility . . . . [I]t is the jury who will ultimately determine the authenticity of the evidence, not the court.”). ↑

124. Id. ↑

125. Fed. R. Evid. 803(6), 902(11); United States v. Senat, 698 F. App’x 701, 706 (3d. Cir. 2017). ↑

126. See, e.g., Stumpff v. Harris, 31 N.E.3d 164, 173 (Ohio App. 2 Dist. 2015) (“Numerous courts, both state and federal, have held that items produced in discovery are implicitly authenticated by the act of production by the opposing party); Churches of Christ in Christian Union v. Evangelical Ben. Trust, S.D. Ohio No. C2:07CV1186, 2009 WL 2146095, *5 (July 15, 2009) (“Where a document is produced in discovery, ‘there [is] sufficient circumstantial evidence to support its authenticity’ at trial.”). ↑

127. In re L.P., 749 S.E.2d 389, 392–392 (Ga. Ct. App. 2013). ↑

128. Rules of Evid., Rule 901(a). Idaho v. Koch, 334 P.3d 280 (Idaho 2014). ↑

129. State v. Smith, 2015-1359 La. App. 4 Cir. 4/20/16, 2016 WL 3353892, *10–11 (La. Ct. App. 4th Cir. 2016); see also OraLabs, Inc. v. Kind Group LLC, 2015 WL 4538444, *4, Fn 7 (D. Colo. 2015) (in a patent and trade dress infringement action, the court admitted, over hearsay objections, Twitter posts offered to show actual confusion between the plaintiff’s and defendant’s products.). ↑

130. Jones v. U.S., 813 A.2d 220, 226–227 (D.C. 2002). ↑

131. Dente v. Riddell, Inc., 664 F.2d 1, 2 n.1 (1st Cir. 1981). ↑

132. Mills v. Texas Compensation Ins. Co., 220 F.2d 942, 946 (5th Cir. 1955). ↑

133. U.S. v. Gomez-Alvarez, 781 F.3d 787, 792 (5th Cir. 2015). ↑

134. Jerden v. Amstutz, 430 F.3d 1231, 1237 (9th Cir. 2005). ↑

135. See, e.g., Hastings v. Bonner, 578 F.2d 136, 142–143 (5th Cir. 1978); United States v. Johnson, 577 F.2d 1304, 1312 (5th Cir. 1978); United States v. Jamerson, 549 F.2d 1263, 1266–67 (9th Cir. 1977). ↑

136. See United States v. Henderson, 409 F.3d 1293, 1298 (11th Cir. 2005). ↑

137. Inselman v. S & J Operating Co., 44 F.3d 894, 896 (10th Cir. 1995). ↑

138. See United States v. Adams, 271 F.3d 1236, 1241 (10th Cir. 2001) (“In order to qualify as an adequate offer of proof, the proponent must, first, describe the evidence and what it tends to show and, second, identify the grounds for admitting the evidence.”). ↑

139. Murphy v. City of Flagler Beach, 761 F.2d 622 (11th Cir. 1985). ↑

140. See id. at 1241–42 (“On numerous occasions we have held that merely telling the court the content of . . . proposed testimony is not an offer of proof.”). ↑

141. Fed. R. Evid. 103(c) (The trial court “may direct an offer of proof be made in question-and-answer form.”). See, e.g., United States v. Yee, 134 F.R.D. 161, 168 (N.D. Ohio 1991) (stating that “hearings were held for approximately six weeks” on whether DNA evidence was admissible). ↑

142. Adams, 271 F.2d at 1242. ↑

143. Id. ↑

144. Palmer v. Hoffman, 318 U.S. 109, 116 (1943). ↑

145. Fed. R. Evid. 103(a)(2); Beech Aircraft v. Rainy, 488 U.S. 153 (1988). ↑

146. Alford v. United States, 282 U.S. 687, 692 (1931). ↑

147. United States v. Harris, 536 F.3d 798, 812 (7th Cir. Ill. Aug. 6, 2008), overruled on other grounds. ↑

148. See, e.g., United States v. St. Michael’s Credit Union, 880 F.2d 579 (1st Cir. 1989); Griffin v. California, 380 U.S. 609, 615 (Apr. 28, 1965). ↑

149. Model Rule of Professional Conduct Rule 3.4(e). ↑

150. Jones v. Lincoln Elec. Co., 188 F.3d 709, 731 (7th Cir. 1999) (“We find nothing improper in this line of argument. Closing arguments are the time in the trial process when counsel is given the opportunity to discuss more freely the weaknesses in his opponent’s case.”). ↑

151. Vineyard v. County of Murray, Ga., 990 F.2d 1207, 1214 (11th Cir. 1993). ↑

152. See Fed. R. Civ. P. 50(a)(1) (“If a party has been fully heard on an issue during a jury trial and the court finds that a reasonable jury would not have a legally sufficient evidentiary basis to find for the party on that issue, the court may: (A) resolve the issue against the party; and (B) grant a motion for judgment as a matter of law against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue.”). ↑

153. Fed. R. Civ. P. 50(a)(2). ↑

154. Arch Ins. Co. v. Broan-NuTone, LLC, 509 F. App’x 453, fn. 5 (6th Cir. 2012) (quoting Ford v. Cnty. of Grand Traverse, 535 F.3d 483, 492 (6th Cir. 2008). ↑

155. U. S. Indus., Inc. v. Semco Mfg., Inc., 562 F.2d 1061, 1065 (8th Cir. 1977). ↑

156. Am. & Foreign Ins. Co. v. Gen. Elec. Co., 45 F.3d 135, 139 (6th Cir. 1995). ↑

157. Unitherm Food Sys., Inc. v. Swift-Eckrich, Inc., 546 U.S. 394, 405 (2006). ↑

158. Reeves v. Sanderson Plumbing Prod., Inc., 530 U.S. 133, 120 S. Ct. 2097, 147 L. Ed. 2d 105 (2000); citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 554–555, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990); Liberty Lobby, Inc., supra, at 254, 106 S.Ct. 2505; Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696, n.6, 82 S.Ct. 1404, 8 L.Ed.2d 777 (1962). ↑

159. Id. ↑

160. Fed. R. Civ. P. 50(b). ↑

161. Salazar v. AT&T Mobility LLC, 2023 WL 2778774 (Fed. Cir. Apr. 5, 2023) (party that made 50(a) motion but failed to move on the issue of infringement could not raise infringement in 50(b) motion). ↑

162. Daly v. Moore, 491 F.2d 104 (5th Cir. 1974) (explaining that a court should refuse instructions not applicable to the facts). ↑

163. Fed. R. Civ. P. 51(b)(3). ↑

164. Fed. R. Civ. P. 51(b) (1)-(2); see also Vialpando v. Cooper Cameron Corp., 92 F. App’x 612 (10th Cir. 2004) (explaining that “a district court can no longer give mid-trial instructions without first advising the parties of its intent to do so and giving the parties an opportunity to object to the proposed instruction.”). ↑

165. Apple Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2017 WL 3232424 (N.D. Cal. July 28, 2017); see also Daly, 491 F.2d.104 (affirming court’s omission of instructions on the due process requirements of the Fourteenth Amendment since no facts supported a violation). ↑

166. Fed. R. Civ. P. 51. ↑

167. Estate of Keatinge v. Biddle, 316 F.3d 7 (1st Cir. 2002). ↑

168. Positive Black Talk Inc. v. Cash Money Records, Inc., 394 F.3d 357, 65 Fed. R. Evid. Serv. 1366 (5th Cir. 2004), abrogated on other grounds. ↑

169. Fed. R. Civ. P. 51(c)(2); Fed. R. Crim. P. 30(d); see also Abbott v. Babin, No. CV 15-00505-BAJ-EWD, 2017 WL 3138318, at *3 (M.D. La. May 26, 2017) (explaining that upon an untimely objection courts may only consider a plain error in the jury instructions). ↑

170. Fed. Rules Civ. Proc. Rule 51; Foley v. Commonwealth Elec. Co., 312 F.3d 517, 90 Fair Empl. Prac. Cas. (BNA) 895 (1st Cir. 2002). ↑

171. Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996). ↑

172. Benaugh v. Ohio Civil Rights Comm’n, No. 104-CV-306, 2007 WL 1795305 (S.D. Ohio June 19, 2007), aff’d, 278 F. App’x 501 (6th Cir. 2008). ↑

173. Chuman v. Wright, 76 F.3d 292, 294 (9th Cir. 1996) (reversing judgment since the instructions could allow a jury to find the defendant liable based on premise unsupported by law). ↑

174. United States v. Grube, No. CRIM C2-98-28-01, 1999 WL 33283321 (D.N.D. Jan. 16, 1999) (denying motion for new trial since the omitted instructions were superfluous and potentially misleading); see also Cupp v. Naughten, 414 U.S. 141, 94 S. Ct. 396, 397, 38 L. Ed. 2d 368 (1973); Lannon v. Hogan, 555 F. Supp. 999 (D. Mass.), aff’d, 719 F.2d 518 (1st Cir. 1983) (generally cannot seek such relief based on a claim of improper jury instructions, unless the error “so infect[ed] the entire trial that the resulting conviction violated the requirements of Due Process Clause and the Fourteenth Amendment.”). ↑

175. Fashion Boutique of Short Hills, Inc. v. Fendi USA, Inc., 314 F.3d 48 (2d Cir. 2002) (failure to make specific objections to jury instructions before jury retires to deliberate results in waiver, and Court of Appeals may review the instruction for fundamental error only.). ↑

176. United States v. Olano, 507 U.S. 725, 737 (1993). ↑

177. Cleary v. Indiana Beach, Inc., 275 F.2d 543, 545–46 (7th Cir. 1960); Sullivan v. United States, 414 F.2d 714, 715–16 (9th Cir. 1969). ↑

178. Cleary, 275 F.2d at 546; Magnuson v. Fairmont Foods Co., 442 F.2d 95, 98–99 (7th Cir. 1971). ↑

179. See United States v. Williams, 635 F.2d 744, 745–46 (8th Cir. 1980) (“It is essential to a fair trial, civil or criminal, that a jury be cautioned as to permissible conduct in conversations outside the jury room. Such an admonition is particularly needed before a jury separates at night when they will converse with friends and relatives or perhaps encounter newspaper or television coverage of the trial.”); United States v. Hart, 729 F.2d 662, 667 n.10 (10th Cir. 1984) (“[A]n admonition . . . should be given at some point before jurors disperse for recesses or for the day, with reminders about the admonition sufficient to keep the jurors alert to proper conduct on their part.”). ↑

180. United States v. Dempsey, 830 F.2d 1084, 1089–90 (10th Cir. 1987). ↑

181. United States v. Gross, 451 F.2d 1355, 1359 (9th Cir. 1971). ↑

182. United States v. Williams, 87 F.3d 249, 255 (8th Cir. 1996). ↑

183. Taylors v. Reo Motors, Inc., 275 F.2d 699, 705–06 (10th Cir. 1960). ↑

184. United States v. DeCoito, 764 F.2d 690, 695 (9th Cir. 1985). ↑

185. United States. v. Welch, 945 F.2d 1378, 1383 (7th Cir. 1991). ↑

186. Pierce v. Ramsey Winch Co., 753 F.2d 416, 431 (5th Cir. 1985). ↑

187. United States v. Chadwell, 798 F.3d 910, 914–15 (9th Cir. 2015). ↑

188. United States v. Aragon, 983 F.2d 1306, 1309 (4th Cir. 1993). ↑

189. Johnson v. Richardson, 701 F.2d 753, 757 (8th Cir. 1983). ↑

190. United States v. de la Cruz-Paulino, 61 F.3d 986, 997 (1st Cir. 1995). ↑

191. United States v. Gonzales, 121 F.3d 928, 945 (5th Cir. 1997), overruled on other grounds. ↑

192. United States v. Anthony, 565 F.2d 533, 536 (8th Cir. 1977); Unites States v. Johnson, 584 F.2d 148, 157–58 (6th Cir. 1978). ↑

193. McGowan v. Gillenwater, 429 F.2d 586, 587 (4th Cir. 1970). ↑

194. United States v. Wiesner, 789 F.2d 1264, 1268 (7th Cir. 1986). ↑

195. Fed. R. Civ. P. § 51(b)(3). ↑

196. United States. v. Venerable, 807 F.2d 745, 747 (8th Cir. 1986). ↑

197. United States v. Gray, 199 F.3d 547, 550 (1st Cir. 1999). ↑

198. United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011); United States v. Bassler, 651 F.2d 600, 602 n.3 (8th Cir. 1981). ↑

199. See, e.g., United States v. Darden, 70 F.3d 1507, 1537 (8th Cir. 1995) (court permitted note-taking while examining exhibits only); United States v. Porter, 764 F.2d 1, 12 (1st Cir. 1985) (court permitted note-taking only during opening statements, closing statements, and jury charge). ↑

200. United States v. Scott, 642 F.3d 791, 797 (9th Cir. 2011). ↑

201. See United States v. Rhodes, 631 F.2d 43, 45–46 (5th Cir. 1980) (“The court should also explain that the notes taken by each juror are to be used only as a convenience in refreshing that juror’s memory and that each juror should rely on his or her independent recollection of the evidence rather than be influenced by another juror’s notes.”). ↑

202. United States v. Richardson, 233 F.3d 1285, 1288–1289 (11th Cir. 2000). ↑

203. United States v. Rawlings, 522 F.3d 403, 408 (D.C. Cir. 2008); United States v. Bush, 47 F.3d 511, 514–516 (2nd Cir. 1995); DeBenedetto by DeBenedetto v. Goodyear Tire & Rubber Co., 754 F.2d 512, 516 (4th Cir. 1985). ↑

204. Perhaps the most important protection is a screening mechanism where questions are submitted to a judge and reviewed by counsel prior to the question being posed. Rawlings, 522 F.3d at 408; United States v. Collins, 226 F.3d 457, 463 (6th Cir. 2000). ↑

205. Collins, 226 F.3d at 464. ↑

206. Charlotte Cty. Develop. Co. v. Lieber, 415 F.2d 447, 448 (5th Cir. 1969). ↑

207. United States v. Balsam, 203 F.3d 72, 86 (1st Cir. 2000). ↑

208. Budoff v. Holiday Inns, Inc., 732 F.2d 1523, 1527 (6th Cir. 1984). ↑

209. United States v. Barfield Co., 359 F.2d 120, 123–24 (5th Cir. 1966). ↑

210. Dennis v. General Elec. Corp., 762 F.2d 365, 367 (4th Cir. 1985). ↑

211. Fed. R. Civ. P. 50(b). ↑

212. Exxon Shipping Co. v. Baker, 554 U.S. 471, 486, 128 S. Ct. 2605, 2617 n.5, 171 L. Ed. 2d 570 (2008). ↑

213. CFE Racing Prod., Inc. v. BMF Wheels, Inc., 793 F.3d 571, 583 (6th Cir. 2015). ↑

214. Id. (explaining that the waiver rule serves to protect litigants’ right to trial by jury, discourage courts from reweighing evidence simply because they feel the jury could have reached another result, and prevent tactical victories at the expense of substantive interest as the pre-verdict motion enables the defending party to cure defects in proof) (quoting Libbey-Owens-Ford Co. v. Ins. Co. of N. Am., 9 F.3d 422, 426 (6th Cir. 1993)). ↑

215. Bowen v. Roberson, 688 F. App’x 168, 169 (3d Cir. 2017). ↑

216. McGinnis v. Am. Home Mortg. Servicing, Inc., 817 F.3d 1241, 1254 (11th Cir. 2016). ↑

217. Bavlsik v. Gen. Motors, LLC, 870 F.3d 800, 805 (8th Cir. 2017). ↑

218. McGinnis, 817 F.3d at 1254. ↑

219. Id. ↑

220. See, e.g., Stragapede v. City of Evanston, Illinois, 865 F.3d 861, 866 (7th Cir. 2017), as amended (Aug. 8, 2017) (upholding jury verdict in favor of plaintiff for ADA violation when challenged in renewed 50(b) motion on grounds that the jury properly discounted employer’s evidence). ↑

221. Fed. R. Civ. P. 59. ↑

222. Fed. R. Civ. P. 59(b). ↑

223. Molski v. M.J. Cable, Inc., 481 F.3d 724, 729 (9th Cir. 2007) (noting that federal courts are guided by the common law’s established grounds for permitting new trials). ↑

224. Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251, 61 S.Ct. 189, 85 L.Ed. 147 (1940). ↑

225. Kleinschmidt v. United States, 146 F. Supp. 253, 257 (D. Mass. 1956) (explaining that a party seeking new trial on ground of newly discovered evidence has substantial burden to explain why the evidence could not have been found by due diligence before trial). ↑

226. Gross v. FBL Fin. Servs., Inc., 588 F.3d 614, 617 (8th Cir. 2009) (granting new trial in age discrimination case where jury instruction improperly shifted the burden of persuasion on a central issue). ↑

227. Warner v. Rossignol, 538 F.2d 910, 911 (1st Cir. 1976) (counsel’s conduct in going beyond the pleadings and evidence to speculate and exaggerate the plaintiff’s injuries, despite repeated warnings from the trial judge, warranted new trial). ↑

228. See, e.g., Bavlsik v. Gen. Motors LLC, No. 4:13 CV 509 DDN, 2015 WL 4920300, at *1 (E.D. Mo. Aug. 18, 2015) (granting new trial on issue of damages and rejecting defendants’ argument that the record demonstrated a compromised verdict). ↑

229. McGinnis, 817 F.3d at 1254. ↑

230. Fed. R. Civ. P. 59(d). ↑

231. Fed. R. Civ. P. 50(b). ↑

232. In re Transtexas Gas Corp., (5th Cir 2002), 303 F.3d 571. ↑

233. U.S. v. Mansion House Center North Redevelopment Co., (8th Cir. 1988), 855 F.2d 524, certiorari denied 109 S.Ct. 557, 488 U.S. 993, 102 L.Ed.2d 583 (district court had jurisdiction to modify judgment, even after it was affirmed on appeal, in order to clarify its intentions and conform judgment to parties’ pretrial stipulation). ↑

234. See United States v. Cirami, 563 F.2d 26, 33 (2d Cir. 1977). ↑

As chairs of the American Bar Association’s 2024 US Public Target Deal Points Study, we would like to extend a huge thank-you to our attorney, in-house, and technical volunteers (all of whom are listed in the credits pages), who dedicated many hours of their days to bring this Study to you.

What Is the Public Target Deal Points Study?

The US Public Target Deal Points Study is a publication of the Market Trends Subcommittee of the ABA Business Law Section’s M&A Committee. It examines the prevalence of certain provisions in US public target mergers and acquisitions transactions during a specified time period. The US Public Target Deal Points Study is the preeminent study of US public M&A transactions, widely utilized by practitioners, investment bankers, corporate development teams, and other advisors.

The Study analyzes public target merger agreements for transactions that closed during calendar years 2021 (138 transactions) and 2022 (124 transactions), and between January 1, 2023, and June 30, 2023 (50 transactions).

The sample set of transactions included in the Study was created by identifying all of the merger agreements for acquisitions of public company targets filed on the U.S. Securities and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system that the Working Group could ascertain closed between January 1, 2021, and June 30, 2023, and then by refining the sample set to include transactions meeting the following criteria:

• The target company is a public company formed in the United States;
• the publicly available total deal consideration was in excess of $200 million; and
• the target company is not already majority-owned by the buyer.

In addition, for transactions that closed between January 1, 2022, and June 30, 2023, the sample set was confirmed with data from the Practical Law What’s Market Public Acquisition Agreements database. The sample set excluded transactions in which the target or buyer was a real estate investment trust or business development company or was formed in a U.S. territory, and it also excluded de-SPAC transactions.

Where Is My Copy?

• All members of the M&A Committee of the Business Law Section received an email alert from the Study Chair, Charlotte May, with a link when the Study was published. If you are not currently a member of the M&A Committee, you can sign up on the M&A Committee’s homepage—it’s free for Business Law Section members.
• If you are not a member of the Business Law Section, what are you waiting for? You can sign up to join on the Section’s membership webpage.
• The Study is available from the Market Trends Subcommittee’s Deal Points Studies page on the ABA’s website. Also available at that link are the most recently published versions of the other studies published by the Market Trends Subcommittee, including the 2023 Private Target Deal Points Study, the Canadian Public and Private Target M&A Deal Points Studies, the European Private Target M&A Deal Points Study, and the Strategic Buyer/Public Target M&A Deal Points Study.

What Makes the US Public Target Deal Points Study Different?

To suit a large variety of needs, and to facilitate easy and convenient access, we have released the Study in two formats:

• Interactive Version: This is an interactive online version of the Study on Tableau, which you can access here. Volunteers at Salesforce have spent countless hours working with us to create dynamic visualizations of the data. We encourage you to click around—you can sort the data both by using the filters at the top of each page, and by clicking on any viz (or combination of vizzes). This updated Study includes a new filter for the signing year of the agreements so you can see the trends year over year.
• PDF Version Including Supplement: This is a modified PDF version of the online version of the Study, including the new supplement covering deal points related to Con Ed provisions. While many of the exciting features of the interactive Study cannot be accessed through the PDF, the document will nevertheless serve as a handy resource that can be downloaded for offline viewing and even printed. This PDF version includes all the data from public target deals closed in 2021, 2022, and the first half of 2023, and it cannot be filtered. Therefore, we encourage you to use the online version to fully understand the data and trends therein.

How Do I Get Involved?

We will soon embark on our review of the public target deals that closed in the second half of 2023. Is it worth getting involved? Absolutely! Don’t miss out—reach out to any of us if you would like to get involved!

Introduction

A federal court recently ordered a law firm to disclose a judgment preservation insurance (“JPI”) policy it obtained to protect a $185 million fee award pending appeal.^[1] The plaintiffs’ law firm received the fee award in its representation of two classes of health plan insurers, who alleged that the federal government did not compensate the insurers for losses incurred in their participation in the Affordable Care Act’s insurance marketplace. While the case was on appeal, the plaintiffs’ firm accepted a distribution of funds from the claims administrator for the full $185 million fee award.^[2]

On appeal, the U.S. Court of Appeals for the Federal Circuit vacated the $185 million fee award because it found that the district court did not properly conduct a lodestar cross-check against the fee requests.^[3] The appellate court remanded, instructing the district court to conduct a lodestar cross-check, including assessing whether there was sufficient justification for an implicit fee multiplier.^[4] On remand, the plaintiffs’ firm filed a renewed motion for attorneys’ fees, and the government filed motions requesting an accounting and safekeeping of the distributed fee award and authorization to obtain additional discovery into the law firm’s purchase of a JPI policy.^[5]

The Court of Federal Claims denied the government’s request for an accounting and safekeeping of the distributed funds, but it ordered disclosure of the JPI policy.^[6] In compelling disclosure of the policy, the Court said it was erring on the side of requiring transparency, citing its fiduciary duty to protect the interests of the class in assessing reasonable fees. It explained that “[t]he JPI’s terms may be relevant to the Court’s task on remand if the policy provisions are inconsistent with the Court’s objective ‘to ensure an overall fee that is fair for counsel and equitable within the class.’”^[7] Thus, the Court permitted discovery surrounding the “terms and circumstances” of the JPI policy. The Court limited the permitted discovery, however, to only the JPI policy documents.^[8] The Court rejected requests for discovery into the law firm’s communications with the insurer or the insurer’s financial stability.^[9]

This recent ruling may provide one of the first looks into how the terms of a JPI policy can be taken into account by a court when deciding a plaintiff’s recovery. So-called nuclear verdicts are becoming more and more common.^[10] With verdict amounts increasing, insurers have capitalized on the market, finding ways to insure the risks associated with large judgments, and more companies have purchased JPI to secure larger judgment awards. And, as the median verdict continues to increase, JPI policies will likely continue to grow in popularity. Businesses who wish to purchase JPI should evaluate the pros and cons of such policies and consider how JPI may otherwise affect the pending litigation.

Judgment Preservation Insurance

JPI is a type of litigation risk insurance designed to protect the holder of a legal award against the risk of the award being overturned or reduced on appeal. JPI policies typically are customized to address the policyholder’s distinct coverage needs, including the specific risks associated with the litigation. JPI can be used to protect a variety of awards, including summary judgment awards, trial court verdicts, and arbitration awards.

The coverage afforded by JPI allows a plaintiff who wins a significant judgment to secure some—or sometimes, all—of an award pending an appeal or other subsequent proceedings. With any damage award, there is always a risk—even if it is minimal—that the appellate court will reverse or reduce the award entered by the trial court. JPI may help mitigate the risks associated with a reversal or reduction of the award on appeal.

At times, JPI is used in conjunction with litigation funding. For example, a litigation funder may advance the costs of litigating an appeal in exchange for a portion of the plaintiff’s recovery. Securing a JPI policy as part of that negotiation may enable the plaintiff to sell a litigation funder some of the interest in the award amount for a more favorable rate because of the mitigated appellate risk. In some cases, the litigation funder may even procure its own JPI policy after investing in the litigation, which protects the investment against the risk of reversal or a reduction of the award on appeal. A litigation funder may also require the plaintiff to procure JPI coverage to secure funding.

Pros and Cons of JPI

As with most insurance products, there is no one-size-fits-all approach; the viability of JPI as an appropriate risk mitigation tool depends heavily on a variety of factors, including the specifics of the underlying claim and judgment, potential policy wording, and the dynamics of the parties involved. We discuss some of those factors and the benefits and drawbacks of JPI below.

There are a number of benefits to securing a JPI policy. The most obvious benefit is that JPI guarantees that a prevailing party will recover at least an agreed-upon amount of a judgment or award, regardless of the outcome on appeal or in other subsequent proceedings. In other words, JPI protects against the uncertainty of appeals and permits recovery of at least some of the trial court judgment even if that judgment is reversed or subject to a reduction as a result of post-trial motion practice, an appeal, or trial court proceedings after any remand.

JPI also can alleviate the uncertainty of litigation, especially for plaintiffs with lesser financial means than their opposition. After months—and sometimes years—of litigation, plaintiffs may lack the resources to continue to litigate their case through a prolonged appeals process. A plaintiff with JPI, however, has the guarantee of at least a partial recovery from the litigation, which gives the corporation the financial security to continue litigating through an appeal. Such financial security can be created, in part, if the company is able to use the JPI to recognize judgment-related earnings in their financial statements, knowing that an agreed-upon portion of the judgment is secured under their policy. This financial security may help reduce the burdens of litigation, and in turn, allow the plaintiff to continue to fight for a final, enforceable judgment in its favor. It may also increase the plaintiff’s bargaining power in settlement negotiations.

Another benefit of JPI is that the policies often are not riddled with exclusions. In fact, JPI policies often have only one exclusion—the fraud and misrepresentation exclusion. The fraud and misrepresentation exclusion may negate coverage where the policyholder misrepresents facts during the underwriting process. This exclusion is normally quite narrow, requiring proof of actual knowledge of facts that the policyholder deliberately misrepresented. Some policy forms even require the insurer to prove by “clear and convincing evidence” that a misrepresentation was made and prejudiced the insurer, which is a high burden of proof for the insurer. Thus, if an insurer has grounds to exclude coverage at all under a JPI policy, it usually requires the insurer to clear a significant hurdle before the exclusion applies to eliminate coverage for the insured risk.

But JPI does not protect plaintiffs against all risks of litigation. Unlike many types of policies, a JPI policy typically does not cover attorneys’ fees or costs associated with an appeal. Policyholders, however, may be able to bargain for these coverages, as JPI policies are tailored to the policyholder’s unique coverage needs. The policyholder may, for example, advocate for defense cost coverage in exchange for a higher self-insured retention. But JPI generally does not cover shortfalls due to settlement, and thus, it usually does not provide coverage where the plaintiff settles for less than the full value of the trial court’s judgment prior to a final nonappealable judgment, unless the insurer consents to the settlement.

JPI also typically does not insure the collectability of the judgment. In some situations, a judgment may be affirmed on appeal, but the plaintiff is unable to collect the judgment because the defendant is judgment proof. A defendant may be judgment proof if, for example, its assets are exempt from debt collection and a creditor cannot pursue the defendant’s income. JPI normally does not protect against this risk.

Other Considerations for Mitigating Risks in Litigation

Corporations should also contemplate other consequences of using JPI to insure a judgment award. As the recent federal decision discussed above shows, an opposing party may try to use the terms of a JPI policy to reduce their liability. Particularly in the fee context, a defendant might attempt to use the JPI policy as evidence relevant to the court’s determination of a reasonable fee award.

Under a JPI policy, the insurer may also be able to prevent settlement or substitution of counsel without first obtaining the insurer’s consent. In addition to consent obligations, some JPI policies require the plaintiff to vigorously litigate the appeal. Likewise, a JPI insurer may require the plaintiff to maintain the same counsel that successfully litigated the matter before the trial court throughout an appeal and other subsequent proceedings. The terms of the JPI policy may also require the policyholder and its counsel to cooperate with the insurers in the appeal process. Consequently, depending on the policy terms, the policyholder may risk losing total control of the litigation.

Conclusion

Litigation risk insurance, such as JPI, can protect against the uncertainty of the appellate process. But removing that uncertainty comes with certain drawbacks. As shown by the recent decision from the Court of Federal Claims, some courts may compel disclosure of the JPI policy, especially where the case is remanded to the trial court for reevaluation of the damage award. JPI policies may also shift some control of the litigation from the policyholder to the insurer. Companies considering JPI to insure a damage award should consult with coverage counsel to navigate these hurdles and to assist in negotiating and placing customized policies specifically tailored to the unique risks of their case.

1. Health Republic Ins. Co. v. United States, No. 16-259, 2024 WL 339977, at 7–8 (Fed. Cl. Jan. 30, 2024). ↑

2. Id. at 2. ↑

3. Health Republic Ins. Co. v. United States, 58 F.4th 1365, 1373, 1377 (Fed. Cir. 2023). ↑

4. Id. at 1378. ↑

5. Health Republic Ins. Co., 2024 WL 339977, at 2. ↑

6. Id. at 8. ↑

7. Id. at 7 (citing Fed. R. Civ. P. 23(h)). ↑

8. Id. at 7. ↑

9. Id. ↑

10. From 2010 to 2019, so-called nuclear verdicts of greater than $10 million have grown in size (with median verdicts experiencing a 27.5 percent increase during that time period) and frequency. See Cary Silverman & Christopher E. Appel, Nuclear Verdicts Trends, Causes, and Solutions, U.S. Chamber of Com. Inst. for Legal Reform (Sept. 2022). ↑

A Tongue-in-Cheek Revisiting of Value Leakage Protection

Ever since U.S. apparel and accessories retailer J. Crew Group, Inc. (“J. Crew”) controversially utilized provisions in its senior secured credit agreement to move valuable intellectual property (including the J. Crew trademark itself) outside its secured lenders’ collateral pool, the words “J. Crew” are synonymous with value leakage. In what was a novel move to service debt under its affiliate’s existing unsecured payment-in-kind (PIK) notes, J. Crew proverbially robbed Peter to pay Paul. In 2016 and 2017, J. Crew structured a multistep transaction to contribute assets to an unrestricted subsidiary via a foreign restricted subsidiary and consummate an eventual debt exchange and paydown, thereby avoiding bankruptcy for the time being. When faced with distress, whether due to impending maturities in the capital structure, overleveraging, macroeconomic factors like the COVID-19 pandemic, or basic liquidity issues, borrowers, no doubt inspired by J. Crew’s maneuvers, have turned to liability management to achieve value-creating asset-transferring transactions where few unencumbered assets existed, often intended to secure the incurrence of new debt.

Post–J. Crew, lenders were, justifiably, quick to react. Credit agreements incorporated what we in the space colloquially call “J. Crew protections”—that is, language attempting to prevent J. Crew–like arrangements by expressly prohibiting the transfer or exclusive licensing of material intellectual property from loan parties or restricted subsidiaries to unrestricted subsidiaries (and, sometimes, prohibiting the ownership of material intellectual property by, or the exclusive licensing of material intellectual property to, unrestricted subsidiaries). Today, J. Crew protections are so ubiquitous that little effort is spent negotiating whether or not to incorporate them, at least in some form, into credit agreements. Lenders expect such provisions to be de rigueur, as their internal investment committees focus on risk management to ensure what constitutes “collateral” at closing actually remains “collateral” over the life of the loan.

Different iterations of J. Crew protections have evolved, with some credit agreements strictly defining what constitutes material intellectual property, and others prohibiting the ownership of material intellectual property by, and the transfer or exclusive licensing thereof to, non-loan parties. Perhaps because J. Crew protections became a “check-the-box” item for lenders, drafting often covers only material intellectual property. Rarely do such provisions address other material assets, though some (although a minority of) credit agreements tailor their J. Crew protections to deal-specific, material “crown jewel” assets. For instance, taking a page from managed care deals, loan parties with valuable customer contracts particularly important to their businesses may agree to restrictions on transfer and ownership of such customer contracts (those important contracts must always be an asset of a loan party, for example). The “default” J. Crew protection formulation, however, still focuses solely—or primarily—on intellectual property, regardless of whether the relevant loan parties actually own or license any intellectual property at all, let alone material intellectual property.

There is, of course, merit to the attention devoted to material intellectual property—after all, intellectual property is a relatively portable asset. It is easier to transfer a trademark, for instance, than convey real property (which may be subject to third-party financing or liens) or assign a valuable contract with a non-affiliated counterparty (which counterparty may have notice and/or consent rights). Once transferred out of the ring-fenced credit group and collateral pool, such intellectual property—in addition to becoming out of reach of the original secured creditors—may secure new debt incurred at the non-loan party level, or be sold to an unaffiliated buyer. None of the foregoing, though, changes the fact that different assets are material to different companies.

From a creditor perspective, the focus (or refocus, as it were) on collateral stripping and other forms of leakage in the wake of J. Crew and its inspired “offspring” (think Revlon, Neiman Marcus, Travelport, etc.) is undoubtedly a good thing. Lenders should understand the nuances of loan documentation, how deal terms have developed with added market competition, and what actions are often—to the surprise of some—permitted by the “four corners” of the credit agreement. In light of the above and the legacy of J. Crew, lenders and their counsel should consider a “bespoke” take on J. Crew protections.

Take Proper Measurements

At the diligence stage, lenders should drill down on the credit group’s assets, focusing, in particular, on which assets may be material and essential to the business of the corporate enterprise. This exercise might require specific inquiries and extra review, including by specialists and experts.

Tailor to Fit

J. Crew protections included in commitment letters and, ultimately, loan documents should be “tailored” to properly (i) capture the nature of such assets and, (ii) anticipating potential pitfalls, “button up” potential leakage and contribution.

When defining material assets, a good rule of thumb is to capture, at a minimum, material intellectual property, as most borrowers cannot reasonably push back against that limitation at this juncture in the debt capital markets. Then, “fashion” additional defined terms or descriptions for any other material assets, as needed. Pay special attention to ensure the “fit” of such defined terms. Descriptions should be not only sufficiently “slim cut” to ensure that all applicable material assets are captured but also comfortable enough to not unreasonably interfere with the loan parties’ business. A common formulation is to look at the materiality of certain assets in relation to the business of the borrower and its subsidiaries (or the borrower and its restricted subsidiaries, depending on the deal) as a whole.

The suggested sartorial approach to J. Crew protections should not stop at defining material assets. While the typical restrictions on the transfer, exclusive licensing, and ownership of material intellectual property probably work for other material assets, lenders should consider different ways in which other types of material assets may be distributed from collateral pools. This often dictates a holistic review and analysis of covenants and permissions, including, but not limited to, basket capacity and terms around unrestricted subsidiaries (and the designation/redesignation thereof) and non-loan parties, if and as applicable.

Consider Your Retail “Consumers”

An additional reason to adopt a made-to-measure approach to J. Crew protections is that the investment theses of institutional investors, agent banks, and direct lenders differ. In syndicated credits, the makeup of the lender group can dictate terms and outcomes—if there is a significant appetite for a credit in the primary market, J. Crew protections may be nonexistent or watered down, at best, as sponsors and borrowers are able to push for looser and more flexible terms. Deals led by private credit, on the other hand, may take a more conservative and fulsome approach to material intellectual property and assets, sometimes requiring the same to be owned by or exclusively licensed to loan parties. As is the case with any important provision, the final form of a credit agreement’s J. Crew protections should be the product of “threading the needle” through the often-diverse objectives of all applicable lenders and their borrowers.

An additional consideration: While J. Crew and other liability management transactions often carry a negative connotation in the world of leveraged finance, their use is not always nefarious and may even be beneficial. For instance, transferring value away from a credit group might create positive value in other areas—such value, in turn, can be contributed to the original credit group (and, by extension, its creditors) in the form of cash, a debt exchange, or terms tightening, helping to avoid insolvency, bankruptcy, or other negative consequences or to spur a refinancing or consensual reorganization.

The proliferation of J. Crew protections might, at times, relegate them to little more than boilerplate, instead of the useful shield against value leakage they were intended to be. A thoughtful, made-to-measure approach in dealmaking and loan documentation can help ensure that J. Crew protections do not go out of style. In sum, in J. Crew, as in clothing, bespoke is almost always preferable to prêt-à-porter.

This article is adapted from The Legal and Social Ramifications of Pandemics on Civil Rights and Civil Liberties, edited by Claire L. Parins and published by the American Bar Association’s Civil Rights and Social Justice Section.

Prior to the pandemic, employers did not typically collect employee health-related information except through certain work wellness programs or in relation to documenting workplace injury claims. There was an emerging trend in “wellness” programs where individuals would be encouraged to use wearable health devices, such as pedometers or other fitness trackers, through incentives or other benefits, but these programs did not typically involve any data collection by the employer itself. But in response to the pandemic, many employers began to collect and monitor employee health-related data as part of their workplace health protocols.

Workplaces implemented a wide range of systems, including symptom screening surveys, automated exposure notification systems, and temperature checks. In some cases, most notably in professional sports leagues, employers began using mobile apps and wearable devices to track employee health symptoms or to remind employees to maintain social distancing. As with surveillance systems deployed in schools, these new workplace surveillance systems had not been tested or shown to be effective in controlling the spread of disease.

While reliance on these devices and systems was intended to encourage employees that workplaces were safer, these mitigation measures by themselves were not enough to prevent the spread of COVID-19 in workplaces. Many of the systems were also expensive and likely took away from resources that could have been used to improve ventilation and air quality, which appear to be more effective at curbing viral transmission. And meanwhile, these systems pose significant privacy risks and subjected employees to increased surveillance in the workplace.

The nature of the employer–employee relationship and the sensitivity of health information make the collection of biometric data in the workplace especially risky.^[1] The misuse of health data could lead to adverse employment decisions, discrimination, or exclusion. Despite the risks and potential misuse of this data, employees may be unable or unwilling to protest for fear of losing their jobs. This was especially true early in the pandemic when unemployment was widespread and the financial circumstances for many employees were dire. Any claims that employees have given informed consent to participate in these systems are dubious at best.^[2]

The rise of employee health tracking during the pandemic also further entrenched existing power imbalances that impact certain categories of workers. Employers taking an interest in the health of their workers increases scrutiny on workers that have underlying health conditions. These employees could be denied promotion opportunities due to their underlying health condition or could be seen as uncooperative or not devoted to their workplace if they refuse to participate in workplace health monitoring. There are currently no comprehensive data privacy laws that regulate health surveillance in the workplace.

Employers should, however, proactively weigh the risks and benefits of implementing these technologies and be transparent when doing so. Employers should also review their policies and data collection practices to ensure that they do not overextend systems that were specifically adopted in response to the pandemic but may no longer be justified given the current state of public health.

1. Elizabeth A. Brown, A Healthy Mistrust: Curbing Biometric Data Misuse in the Workplace, 23 Stan. Tech. L. Rev. 252, 257–8 (2020). ↑

2. See id. (suggesting that consent to data collection practices cannot be voluntarily given because it is not economically feasible for most individuals to seek out an employer that appropriately collects, uses, and protects the individual’s data); Sharifah Sekalala et al., Analyzing the Human Rights Impact of Increased Digital Public Health Surveillance during the COVID-19 Crisis, 22 Health Hum. Rights J. 7, 11–12 (Dec. 2020) (asserting that where employers made surveillance measures mandatory, consent was rendered “irrelevant”). ↑

Editor

Contributors

§ 4.1. Introduction

This chapter summarizes significant recent legislative and case law developments^[1] concerning the indemnification of directors, officers, employees, and agents by the corporations or other entities they serve, as well as the rights of such persons to the advancement of litigation expenses before final resolution of the litigation.

Although much of this chapter focuses on Delaware case law developments, due to the state’s preeminence in matters of corporate law, the chapter also includes summaries of decisions from both state and federal jurisdictions other than Delaware that either apply Delaware law or otherwise present analysis of significant issues concerning the indemnification and advancement rights of directors and officers. This chapter also refers to legislative developments under Delaware law and the Model Business Corporation Act.

§ 4.2. Indemnification and Advancement: 8 Del. C. § 145

Section 145 of the Delaware General Corporation Law (“DGCL”)^[2] authorizes (and at times requires) a corporation to indemnify its directors, officers, employees, and agents for certain claims brought against them, and it allows a corporation to advance funds to those persons for the expenses they incur while defending such claims. Specifically, Section 145(a) and (b) broadly empower a Delaware corporation to indemnify its current and former corporate officials for expenses incurred in legal proceedings to which a person is a party “by reason of the fact” that the person is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another entity or enterprise.

If a present or former director or officer is successful in defending an action brought “by reason of the fact” that the person is or was a director or officer, Section 145(c) of the DGCL requires the corporation to indemnify that person for expenses (including attorneys’ fees) reasonably incurred in connection with that defense. Section 145(c) allows a corporation to advance to corporate officials the reasonable expenses (including attorneys’ fees) incurred in defending an investigation or lawsuit. The Model Business Corporation Act (“MBCA”) contains similar provisions regarding the indemnification and advancement of expenses to corporate officials and employees, and the alternative entity statutes of Delaware and many other jurisdictions similarly contain enabling provisions concerning indemnification and advancement.

Many corporations have charter or bylaw provisions, or are parties to agreements with directors, officers, or employees, that supplement statutory indemnification and advancement rights. Such provisions often make indemnification and advancement mandatory under specified circumstances.

§ 4.2.1. Legislative Developments

Effective February 7, 2022, the Delaware General Assembly amended 8 Del. C. § 145(g), to expressly authorize a corporation to purchase and maintain director and officer insurance through use of a “captive insurance company”—i.e., an insurer that is directly or indirectly owned, controlled or funded by the corporation—as an alternative to traditional third-party D&O insurance. This allows a corporation to provide insurance for its officers, directors, employees, and agents even if section 145 otherwise prohibits indemnification by the corporation itself for such losses.

Per the 2022 amendment, the captive insurance must exclude from coverage any “loss … arising out of, based upon or attributable to … personal profit or other financial advantage” to which the covered officer or director is “not legally entitled” (i.e., self-dealing), or any “deliberate criminal or deliberate fraudulent act” or “a knowing violation of law[.]” The amendments also include requirements for separate conduct determinations—e.g., regarding excluded conduct—such as by an independent claims administrator, and they impose a disclosure requirement where payment under the captive policy requires notice to shareholders.

Without limitation, section 145(g) was revised, effective February 7, 2022, as follows (amendments in italics):

(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section. For purposes of this subsection, insurance shall include any insurance provided directly or indirectly (including pursuant to any fronting or reinsurance arrangement) by or through a captive insurance company organized and licensed in compliance with the laws of any jurisdiction, including any captive insurance company licensed under Chapter 69 of Title 18, provided that the terms of any such captive insurance shall:

(1) Exclude from coverage thereunder, and provide that the insurer shall not make any payment for, loss in connection with any claim made against any person arising out of, based upon or attributable to any (i) personal profit or other financial advantage to which such person was not legally entitled or (ii) deliberate criminal or deliberate fraudulent act of such person, or a knowing violation of law by such person, if (in the case of the foregoing paragraph (g)(1)(i) or (ii) of this section) established by a final, nonappealable adjudication in the underlying proceeding in respect of such claim (which shall not include an action or proceeding initiated by the insurer or the insured to determine coverage under the policy), unless and only to the extent such person is entitled to be indemnified therefor under this section;

(2) Require that any determination to make a payment under such insurance in respect of a claim against a current director or officer (as defined in paragraph (c)(1) of this section) of the corporation shall be made by a independent claims administrator or in accordance with the provisions of paragraphs (d)(1) through (4) of this section; and

(3) Require that, prior to any payment under such insurance in connection with any dismissal or compromise of any action, suit or proceeding brought by or in the right of a corporation as to which notice is required to be given to stockholders, such corporation shall include in such notice that a payment is proposed to be made under such insurance in connection with such dismissal or compromise.

The American Bar Association did not make any changes to the indemnification and advancement provisions of the MBCA during the 2022 to 2023 period.

§ 4.2.2. Delaware Case Law Developments

1. Gandhi-Kapoor v. Hone Capital LLC^[3]—Contempt Sanction for Failure to Comply with Advancement Order

In a matter of first impression, the Delaware Court of Chancery held that an LLC and its parent company were subject to civil contempt sanctions for failing to comply with an order to advance expenses. The court noted that usually contempt is not available for monetary judgments; however, because this was an advancement issue, which is, at its core, time sensitive, judicially awarding interest would not suffice to remedy the harm. The court explained that the delay caused irreparable harm to the member of the parent company, who was not compensated as the court had ordered.

Gandhi, a member of Hone, was terminated and then sued by the parent company in California Superior Court. In response, Gandhi and another party filed a suit against the parent to enforce their rights in profit interests. Gandhi accumulated almost half a million dollars in expenses defending the claims the LLC brought against her. Gandhi brought an advancement action in Delaware and successfully moved for summary judgment. Every month after advancement was granted, Gandhi submitted advancement demands to the companies, which were never paid.

The court ultimately ruled that, as a sanction, Gandhi was entitled to damages in the amount of $1,000 a day in addition to the advancement, until the companies complied with the Court’s Advancement Order.

2. Hoffman v. First Wave Biopharma, Inc.^[4]—Board “Investigation and Inquiry” Versus “Remedial” Action as Triggering Advancement Right

In Hoffman v. First Wave Biopharma, Inc., the Delaware Court of Chancery considered whether certain board actions amounted to an “investigation or inquiry” (as opposed to only “remedial” actions) sufficient to trigger a director’s mandatory advancement right.

Plaintiff, Hoffman, served on the board of directors of First Wave Biopharma, Inc. (the “Company”). After a leak of confidential information, the Company’s board concluded that Hoffman was responsible for the leak, although it “had no concrete evidence.” Fearing further leaks, the board established a committee consisting of all the directors except Hoffman.

Though neither party disputed that Hoffman enjoyed a mandatory advancement right, only certain covered proceedings triggered that right, particularly at issue: an “investigation” and an “inquiry.” Hoffman contended that because the Company concluded that he leaked the information and therefore breached his fiduciary duty, “the [Company] necessarily must have conducted an ‘investigation’ and/or ‘inquiry’ into [his] actions.” The Company contended “it never undertook an investigation or inquiry into Hoffman’s conduct.”

The court determined that the board took no steps to confirm the belief that Hoffman leaked the information and found that “the Company did not investigate or otherwise conduct an inquiry into Hoffman.” The court ultimately held that because “the Company directors started from the conclusion that Hoffman leaked” the non-public information, the Company’s actions were “corrective actions from that conclusion, not investigative actions undertaken in reaching that conclusion.” Thus, because the Company took only “remedial, not investigatory” actions to assuage their fear of further leaks, the board’s response fell “short of an ‘investigation’ or ‘inquiry’ sufficient to trigger Hoffman’s advancement rights.”

In a footnote, the court, as the Delaware Court of Chancery often does, turned to dictionary definitions in order to ascertain the plain meaning of the words “investigation” and “inquiry” to determine whether advancement was appropriate.

3. Keller v. Steep Hill, Inc.^[5]—Impact of Plaintiff’s Characterization of Claim on Indemnification Rights

This Delaware Court of Chancery opinion addressed whether an officer and director was entitled to indemnification after a company reframed a fiduciary duty claim into a breach of contract claim in an attempt to escape its advancement obligations. Plaintiff, Keller, was a Steep Hill director and officer through a consulting agreement between the company and Delft Blue Horizons, an entity owned and controlled by Keller. Steep Hill asserted conclusory breach of contract claims against Delft Blue Horizons on the theory that Keller’s alleged mismanagement and fiduciary misconduct resulted in regulatory troubles for the company—which in turn constituted a breach of the consulting agreement.

Steep Hill initiated arbitration proceedings against Keller. Keller’s initial defense to arbitration was that he was not a party to the consulting agreement between Steep Hill and Delft Blue, and, so, he could not be forced to arbitrate. The arbitrator found that Keller was a third-party beneficiary to the consulting agreement, bringing him into the arbitration proceedings. Keller then filed a response to the arbitration demand, asserted counterclaims, and made an advancement demand.

This case hinged on the fact that Steep Hill, in an attempt to avoid its advancement obligations, responded that it planned to withdraw the breach of fiduciary duty claim and any other claims involving Keller’s conduct as a director or officer. Despite this, Steep Hill continued to claim that Keller’s actions caused Delft Blue to breach the consulting agreement. Keller sought indemnification for the fees and expenses he and Delft Blue incurred in the arbitration proceedings.

Ultimately, the question was whether Keller was entitled to indemnification for the fees and expenses he and Delft Blue incurred both defending the claims against Delft Blue and asserting counterclaims against Steep Hill. It was clear that Steep Hill merely reframed its fiduciary duty claims for the purpose of avoiding its advancement obligations. Pursuant to Section 145 of the DGCL, Keller was entitled to indemnification for fees and expenses nominally incurred by Delft Blue.

The court in Keller found that since Keller wholly and indirectly owned Delft Blue, he was entitled to recover the fees incurred through that ownership as a practical matter. Keller ultimately was able to recover nearly all the fees and expenses incurred in the arbitration. Although Keller failed to separate his fees from Delft Blue’s fees, that did not preclude a ruling in his favor. The court ordered Keller to submit a good faith estimate of expenses incurred relating to the claims found to be subject to indemnification.

4. Kokorich v. Momentus Inc.^[6]—Release of Indemnification and Advancement Rights

Plaintiff, Kokorich, a Russian national who had a hand in founding and running a “space infrastructure” company, sued for indemnification and advancement, which the Court of Chancery dismissed as released claims. In 2017, the company and Kokorich entered into an indemnification agreement, which provided that the company would indemnify Kokorich to the fullest extent permitted by law, including coverage for claims brought against him while acting as an officer or a director. A 2020 revision of the bylaws of the company extended this provision to all officers and directors. The company merged with another and planned to launch a space vehicle, which sparked concerns with the SEC over foreign ownership of the company. This resulted in Kokorich resigning from all officer and director positions in 2021, pursuant to a separation agreement.

This agreement put Kokorich’s company equity into a trust and released any employment claims, but did not release claims related to his previous indemnification agreement. Subsequent issues led to Kokorich and the company executing a stock repurchase agreement, in which the company repurchased Kokorich’s interest. That agreement, the Court of Chancery found, released all of Kokorich’s claims against the company, including the advancement and indemnification claims, thereby nullifying the 2017 agreement, despite that the stock repurchase agreement excluded any advancement or indemnification releases.

The company unsuccessfully argued that Kokorich’s claims should be dismissed because the court lacked subject matter jurisdiction, despite that the initial indemnification agreement had a binding choice of law clause stating that all claims must be brought in the Delaware Court of Chancery. Kokorich unsuccessfully attempted to sidestep the multiple agreements in order to enforce the initial indemnification agreement and invoke a statutory claim for advancement and indemnification. Not only did the court reject both of Kokorich’s arguments, but it also determined that the bylaws, which applied to all officers and directors, released Kokorich’s claims under his initial agreement. The court also found that Kokorich was not entitled to mandatory arbitration, and his declaratory judgment was not ripe.

5. Krauss v. 180 Life Sciences Corp.^[7]—“By Reason of the Fact” Standard for Advancement

This Delaware Chancery Court decision reinforced the interpretation under Delaware law of the phrase that serves as a prerequisite to the right of advancement, with its origin in section 145 of the DGCL—namely, whether the person seeking advancement was sued “by reason of the fact” that she was an officer or director.

Plaintiff Krauss was the former CEO and director of KBL Merger Corp. IV (“KBL”), until she resigned following KBL’s combination with a group of several entities (the “Company”). Following the combination, the United States Securities and Exchange Commission (SEC) launched an investigation into the combination. In connection with that investigation, Krauss was served a number of subpoenas. Subsequently, the Company filed a complaint against Krauss and others, asserting claims of breach of fiduciary duty, alleging, among other things, “that Krauss intentionally failed to disclose information that rendered certain KBL disclosures materially false and misleading.” After her multiple demands for advancement for legal fees went unanswered, Krauss filed her Complaint for Advancement, seeking advancement pursuant to the Company’s Charter and Bylaws.

Perennially, one of the more common defenses to a claim for advancement is whether the prerequisite to the provision for advancement in a company’s charter or bylaws is triggered to the extent the litigation for which advancement is sought is being prosecuted: “by reason of the fact that … [the plaintiff] is or was a director or officer of the company.” The court in Krauss explained that the “by reason of the fact” standard is satisfied when “a nexus or causal connection” exists between the underlying proceeding and the official’s “corporate capacity.” The court further explained that it “construes such provisions broadly to effectuate Delaware’s policy of providing temporary relief from substantial expenses.”

The Krauss decision is also noteworthy as a reminder that the court will not typically make a determination at the advancement stage regarding the allocation between legal fees that must be advanced and intertwined claims in the same case that may not be subject to advancement. Rather, the court approved the procedure described in Danenberg v. Fitracks,^[8] which directed advancement payments based on the good faith allocation of the parties, with final allocation to be made at the conclusion of the case.

The court in Krauss ultimately entered summary judgment in favor of Krauss, in part, ordering advancement for fees and expenses incurred in connection with the SEC subpoenas and her defenses (including affirmative defenses) and one counterclaim in the Company’s lawsuit. The parties were ordered to confer and submit an “implementing order” consistent with the court’s decision, as well as a “joint letter” setting forth their respective positions regarding allocation consistent with the Fitracks decision.

§ 4.2.3. Other State and Federal Case Law Developments

1. Iarussi v. LobbyTools, Inc.^[9]—“By Reason of the Fact” Versus “Misconduct”

The court in Iarussi confirmed that a former officer was not entitled to attorney fee indemnification, because her former employer-corporation’s lawsuit against her was not “by reason of the fact” that she held an officer position. Rather, the court found that the lawsuit was based on allegations of her misconduct—misappropriation or retention of trade secrets and disclosure of confidential information to the company’s customers.

A husband and wife successfully ran a multi-million-dollar corporation until they divorced. The wife, Sarah Michael (oddly defined as “Michael” in the court’s decision), worked as an officer for the corporation for more than a decade. Michael’s husband, John Iarussi, was the majority shareholder and chair of the corporation. When their marriage deteriorated, the corporation cut Michael’s corporate power and initiated a lawsuit against her, accusing her of violating her confidentiality and noncompete agreements. The corporation moved for injunctive relief to prevent Michael from possessing and/or using any confidential information. The trial court determined that Michael was entitled to the information while divorce proceedings were ongoing, but that once the divorce proceedings were finalized, Michael was not allowed to possess the confidential information. The corporation was satisfied with the trial court’s opinion and voluntarily dismissed its case without prejudice. Michael then sought attorney fee indemnification from the corporation, pursuant to Florida’s applicable statute, Sections 607.0850 and 768.79, Florida Statutes (2018).

This is essentially a statutory interpretation case, relating to whether an officer was entitled to indemnification because she was allegedly sued “by reason of the fact” that she held the officer position.

Concluding that Michael was not eligible for indemnification, the court in Iarussi reasoned that she had not been sued by reason of her position as an officer or former officer of the company. Rather, the court found that the corporation sued her based on allegations of misconduct—specifically, her purported retention of trade secret information and disclosure of confidential information relating to, among other things, the company’s competitors. The court concluded that the statutory language did not extend indemnification rights to Michael’s alleged misconduct under these circumstances.

2. Schorr v. PPA Holdings, Inc.^[10]—Contract Interpretation—Current Versus Former Directors and Officers

In Schorr v. PPA Holdings, Inc., plaintiff Gregory Schorr, a former officer and director of defendants, sued unsuccessfully to obtain a declaratory judgment that he was entitled to indemnification and advancement of expenses he incurred in defending claims asserted against him by a third party, FNA. Schorr contended that defendants were obligated by the plain language of their bylaws and under Indiana law to advance the expenses to him, but the U.S. District Court for the Southern District of Indiana disagreed.

While Schorr was still a director and officer of defendants, third party FNA entered into a Stock Purchase Agreement to purchase all issued and outstanding securities of one of the defendants. As part of FNA’s due diligence investigation, FNA requested documents and information from defendants and Schorr responded to those requests. After Schorr was no longer a director or officer of defendants, FNA alleged that Schorr had intentionally misled it during the due diligence investigation by providing incorrect, misleading information in response to its requests.

Pursuant to an advancement provision in defendants’ bylaws, Schorr made a written demand to defendants for indemnification and advancement of expenses relating to FNA’s allegations. Defendants refused to advance any expenses, and Schorr then filed suit. The defendants answered, and Schorr moved for judgment on the pleadings pursuant to Fed R. Civ. P. 12(c).

The court concluded that Schorr was entitled to judgment as a matter of law only if he could show that the advancement provision in the bylaws unambiguously applied to current and former officers and directors. Applying Indiana law, the court held that the phrase “director or officer” in the bylaws was subject to more than one reasonable interpretation and that the resulting ambiguity precluded judgment on the pleadings. The court also declined to construe the ambiguity against defendants on the ground that they had drafted the bylaws. The court reasoned that under Indiana law, the meaning of the phrase “director or officer” should be decided with the benefit of extrinsic evidence, and, therefore, it ruled that judgment on the pleadings was inappropriate.

Schorr further argued that he had a contractual right to advancement under the bylaws while he was an officer, and under the Indiana Business Corporation Law, Ind. Code § 23-1-36-(4)(b), that right could not be affected by his subsequent removal or resignation. The court concluded, however, that whether section 23-1-36-(4)(b) allowed Schorr to presently enforce a right to advancement also depended on whether the term “officer,” as used in the bylaws, referred to current and former officers (or only to current officers). If the term referred only to current officers, then the obligation to advance expenses did not become enforceable unless a proceeding was initiated against an officer before he or she was removed or resigned. In this case, Schorr was no longer an officer when FNA’s allegations against him arose. Thus, if the term “officer” referred only to current officers, Schorr’s right to advancement was unenforceable.

The court reiterated that the term “officer or director” in the bylaws was ambiguous and extrinsic evidence was necessary to determine its meaning. The court, therefore, denied Schorr’s motion for judgment on the pleadings.

3. Pointe Royale Property Owners’ Ass’n, Inc. v. McBroom^[11]—No Right to Jury Trial on Indemnification Counterclaim

The Pointe Royale case is interesting in its procedural result—whether a jury trial is required on a counterclaim for indemnification under a company’s applicable by-laws.

Plaintiff McBroom appealed a final judgment in favor of Defendant Pointe Royale Property Owners’ Association, Inc. (“Pointe Royale”), which removed McBroom as a Director from Pointe Royale’s Board of Directors. McBroom’s appeal raised three points, including whether the trial court erred in conducting a bench trial and ruling on McBroom’s equitable claims before a jury trial on the legal claims, thus allegedly depriving him of his constitutional right to a jury trial.

More specifically, McBroom argued that the trial court’s rulings on various claims before resolving his counterclaim seeking indemnification violated his constitutional right to a jury trial. The court, however, deemed this question moot to the extent resolving the question on its merits would not practically impact McBroom’s right to a jury trial on his amended counterclaim.

The court explained that, under the circumstances, McBroom did not generally or under the applicable bylaws possess a right to a jury trial on his amended counterclaim for indemnification. The court concluded that the trial court did not abuse its discretion, as McBroom lacked the right to a jury trial on his amended counterclaim, which was “incidental” to the equitable claims affirmatively brought by Pointe Royale.

4. Schnupp v. Annapolis Engineering Servs., Inc.^[12]—De Facto Officer Doctrine

In Schnupp, the Court of Special Appeals of Maryland considered whether an employee, Schnupp, working in a managerial position but alleging to be a de facto officer of the corporation, was entitled to advancement rights for claims arising from his alleged breach of the employment contract and related claims, after he resigned from the corporation. Concluding that Schnupp was not entitled to advancement rights, the court in Schnupp analyzed the de facto officer doctrine and its underlying reasoning and rationale.

Schnupp was employed as the laboratory director for Annapolis Engineering Services (“Annapolis”). Annapolis had a single officer during the term of Schnupp’s employment (its president, Brian Flynn). Schnupp’s employment agreement identified him as an “employee,” clarifying that he had no authority to act in a fashion that would imply he had apparent authority to bind or enter into agreements on Annapolis’s behalf.

Nevertheless, Schnupp argued that he was a de facto officer, because he exercised sole supervision, training, and direction of the subordinate laboratory technicians and employees. He contended he was responsible for maintaining the day-to-day operations of the testing lab, including authorizing the purchase of necessary equipment. Further, he claimed he was responsible for developing Annapolis’s client base and obtaining certifications and accreditations to properly run the testing lab.

In 2017, Schnupp entered into a Stock Agreement that incentivized him with an equity interest, based on his performance as laboratory director. The Stock Agreement provided Schnupp with full and exclusive authority and control in the management of Annapolis, while noting that the powers of Annapolis would be exercised only by, or under the authority of, Annapolis’s president, Mr. Flynn.

After Schnupp resigned from Annapolis in 2019, he entered into a Stock Redemption Agreement by which Annapolis agreed to repurchase Schnupp’s equity interest.

Schnupp was later hired by one of Annapolis’s industry competitors. Shortly thereafter, Annapolis brought suit against Schnupp, alleging breaches of his employment agreement. Schnupp filed a counterclaim, seeking advancement and/or indemnification of his legal fees pursuant to a provision of Annapolis’s Articles of Incorporation, which provided indemnity to a present or former director or officer of the corporation. In support of his counterclaim, Schnupp argued that he was a de facto officer of Annapolis.

Annapolis moved to dismiss the counterclaim, and the trial court found that Schnupp was not entitled to advancement or indemnification, because he was not a de facto officer and the alleged misconduct did not occur while Schnupp was acting in any capacity as an officer or de facto officer of Annapolis.

The court in Schnupp generally described the de facto officer doctrine as follows:

The [de facto officer] doctrine originated as a function of public policy with the primary purpose of binding an individual’s actions when acting pursuant to an unofficial or defective appointment to public office. …The most widely cited touchstone of the doctrine is found in Norton v. Shelby Cnty.[, 118 U.S. 425 (1886)] where the United States Supreme Court held: “an officer de facto is one whose acts, though not those of a lawful officer, the law, upon principles of policy and justice, will hold valid, so far as they involve the interests of the public and third persons …”

The court undertook a comprehensive review, examining rationales traditionally associated with the doctrine within the realm of public office and extrapolating its relevance and application to the “realm of private corporations and association.” Drawing upon insights from Delaware case law, the court identified three distinct scenarios warranting the invocation of the de facto officer doctrine: first, to bind a corporation’s actions concerning third parties; second, to hold the de facto officer accountable for corporate liabilities; and third, to resolve disputes arising from corporate elections.

The court in Schnupp found a conspicuous absence of any of these circumstances in the case. The court held that Schnupp’s claim for advancement failed as a matter of law, emphasizing that the de facto officer doctrine cannot be invoked “for the sole purpose of securing a corporate benefit or protection [such as advancement and indemnification of attorney’s fees].”

5. Miesen v. Hawley Troxel Ennis & Hawley LLP^[13]—Evidence and Apportionment of Advanceable Expenses

The Idaho federal district court in Miesen v. Hawley Troxel Ennis & Hawley LLP recognized that a third-party defendant was entitled to an advance of expenses to defend against claims pertaining to his role as an officer or director, but awarded an amount that was significantly less than the third-party defendant had requested.

In Miesen, defendants/third-party plaintiffs AIA Services Corp. and AIA Insurance, Inc. (collectively, “the AIA entities”) asserted claims against Reed Taylor, a third-party defendant, for actions he took as an officer or director of the AIA entities. Taylor then moved for an expense advance from the AIA entities but did not specify the amount he was seeking. The court concluded that Taylor was entitled to an advance, but only for those expenses related to his defense of claims against him for actions related to his role as officer or director of the AIA entities. The AIA entities were not required to advance money to Taylor for expenses he incurred in opposing the AIA entities or pursuing counterclaims.

The court ordered Taylor to submit itemized invoices of fees associated with his relevant legal defense so that the court could determine the amount of the advance the AIA entities were required to pay him. Taylor complied with the court’s order, but requested a total of $71,945.46 for expenses related to (1) his defense as an officer or director of the AIA entities and his efforts to obtain an advance; (2) his overall defense of the claims, including those related to his actions/inactions as an officer or director of the AIA entities as well as his alleged membership on an advisory board; and (3) his affirmative claims (i.e., counterclaims) as well as his overall defense.

The court rejected Taylor’s request for an advance of expenses that were unrelated to his defense against claims pertaining to his role as an officer or director. The court reasoned that many of the expenses Taylor claimed were incurred relating to his counterclaim and only incidentally related to his defense. The court then determined that Taylor’s request for an advance of $22,412.00 for expenses related to his defense was reasonable.

The AIA entities argued that Taylor’s request was unreasonable in that it included fees for over 27 hours spent on Taylor’s motion for advancement of expenses and that 27 hours was unreasonable. The court disagreed. The court noted that under Idaho Code § 30-29-854(b), if a court determines that a director is entitled to an advance for expenses, it must “order the corporation to pay the director’s expenses incurred in connection with obtaining court-ordered indemnification or advance for expenses.” The court concluded that 27 hours was a reasonable amount of time to spend on the motion, given the complexity of the case, the need for an opening brief and a reply brief, the lengthy period of invoices to review, and the need to categorize and redact time entries. The court, therefore, ordered the AIA entities to pay Taylor $22,412 within thirty days.

6. In re DeMattia^[14]—Statutory Interpretation, Unclean Hands as a Defense, and Mandamus Remedy

This case merits attention due to the court’s recognition that “[t]here is limited Texas case law concerning advancement under the Texas Business Corporation Act or the Texas Business Organizations Code.” The court in DeMattia conducted a thorough analysis of Delaware law on advancement, applying it to interpret the advancement provision at issue and addressing its applicability to former members.

Two brothers, Mark and David DeMattia, acquired Restoration Specialists (“Restoration”) and restructured it as an LLC. Mark served as the managing member, and David was the minority member. In 2018, as the brothers endeavored to sell Restoration, Mark wrongfully copied and deleted Restoration’s project history files a few days before the closing. Restoration filed a lawsuit against Mark for misconduct allegedly occurring while he was the managing member. Mark, then, sought indemnification and advancement of his attorney’s fees from Restoration, pursuant to Restoration’s “corporate regulations” and applicable provisions of the Texas Business Organizations Code.

Restoration’s corporate regulations included an indemnification provision that allowed advancement to members acting as officers. Following amendments in accordance with the Texas Business Organizations Code, the dispute centers on whether the advancement provision applies to former members.

Looking to Delaware case law, the court in DeMattia concluded that current Texas law explicitly allows the advancement of reasonable expenses to both current and former officers/governing persons, and that advancement is mandatory “if a company’s governing documents so state.”

Addressing Restoration’s corporate regulations in particular, the court highlighted the use of the term “Proceeding” in both the advancement and indemnification sections, referring to an action, suit, or proceeding to which a member was made a party “by reason of the fact that he or she is or was a Member.” This commonality, the court explained, creates an obvious linkage between the two regulation sections, which led the court to reject Restoration’s argument that the indemnification and advancement sections must be interpreted separately.

Restoration also raised public policy concerns in support of its arguments against Mark’s alleged indemnification and advancement rights. Restoration argued that Mark was not entitled to indemnification or advancement, because he had “unclean hands.” The court rejected this argument, emphasizing that at the time an advancement dispute ripens, it is often the case that the corporate board has drawn harsh conclusions about the integrity and fidelity of the corporate official seeking advancement. The court found support for this holding in Delaware case law, which the court recognized frequently upholds the indemnification and advancement rights of corporate officials accused of serious misconduct.

The court granted Mark’s petition for a writ of mandamus, reasoning that it was the “appropriate relief to correct an order denying advancement of a claimant’s fees because the act of proceeding to trial without advancement would defeat the substantive right at stake.”

1. This chapter update generally covers legislative and case law developments during 2022 and 2023. The views reflected herein are those of the authors and may not reflect those of their law firms or clients. ↑

2. The DGCL is found in Title 8 of the Delaware Code. ↑

3. C.A. No. 2022-0881-JTL, 2023 WL 4628782 (Del. Ch. July 19, 2023) (Laster, V.C.). ↑

4. C.A. No. 2023-0097-MTZ, 2023 WL 6295345 (Del. Ch. Sep. 27, 2023) (Zurn, V.C.). ↑

5. C.A. No. 2022-0098-MTZ, 2023 WL 5624215 (Del. Ch. Aug. 31, 2023) (Zurn, V.C.). ↑

6. C.A. No. 2022-0722-MTZ, 2023 WL 3454190 (Del. Ch. May 15, 2023) (Zurn, V.C.). ↑

7. C.A. No. 2021-0714-LWW (Del. Ch. Mar. 7, 2022). ↑

8. 58 A.3d 991 (Del. Ch. 2012). ↑

9. No. 1D22-1649, 2023 WL 5734338 (Fla. Ct. App. September 6, 2023). ↑

10. Case No. 1:22-cv-02083-TWP-TAB, 2023 WL 3602760 (S.D. Ind. 2023). ↑

11. 672 S.W.3d 68 (Mo. Ct. App. 2023). ↑

12. 2022 WL 2134690 (Md. Ct. App. June 14, 2022) (unpublished). ↑

13. Case No. 1:10-cv-00404-DCN, 2022 WL 1554833 (D. Idaho May 17, 2022). ↑

14. 644 S.W.3d 225 (Tex. Ct. App. 2022). ↑

Editor

Byeongsook Seo is a member of Snell & Wilmer L.L.P.’s commercial litigation practice. He represents clients in handling complex and, often, heated disputes related to failed business ventures and disputes among business partners, executives, owners, and directors. Byeongsook is a member and Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section Committee on Business and Corporate Litigation. His honors include Colorado Super Lawyers, Litigation Counsel of America Fellow, and The Best Lawyers in America. Byeongsook graduated from the United States Air Force Academy and obtained his law degree from the University of Denver, Sturm College of Law.

Contributors

Melissa Donimirski

Melissa N. Donimirski is counsel with Stevens & Lee in Wilmington, Delaware. She concentrates her practice in the area of corporate and commercial litigation in the Delaware Court of Chancery and has been involved with many of the leading business divorce cases in that Court. Melissa is a Co-Vice-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. She received her undergraduate degree from Bryn Mawr College and her law degree from the Delaware Law School of Widener University. Melissa has also co-edited and co-authored a treatise on business divorce, Litigating the Business Divorce, which is published by Bloomberg BNA.

Janel M. Dressen

Janel Dressen has over twenty-three years of experience as a business trial lawyer and is the CEO of her business litigation boutique law firm in Minneapolis, Minnesota. Ms. Dressen’s clients, co-workers, colleagues and competitors remark that she is a tenacious business litigator who will advocate tirelessly and creatively to resolve her client’s business disputes. She has been named as one of the “Top 50 Women Minnesota Super Lawyers” since 2019. Janel has an impressive list of significant victories for her clients, both plaintiffs and defendants. While she represents business owners and businesses in all types of complex business disputes, her “sweet spot” involves shareholder, ownership, fiduciary duty, owner/executive employment and business valuation disputes, i.e., “business divorces” for closely-held and private businesses, business owners and executives.

Jennifer Hadley Catero

Jennifer Hadley Catero is based in Snell & Wilmer’s Phoenix office where she serves as Co-Chair of the firm’s Corporate Governance Litigation Group. Jennifer handles complex commercial litigation with an emphasis on corporate governance litigation, banking, consumer financial services and securities litigation, shareholder derivative litigation, D&O litigation, class actions and internal investigations. Jennifer also advises clients on compliance issues regarding consumer financial products and services. Jennifer has been named one of the top 100 Lawyers in Arizona and repeatedly named to The Best Lawyers in America for Commercial Litigation.

John Levitske

John Levitske, CPA/ABV/CFF/CGMA, ASA, CFA, MCFLC, CIRA, MBA, JD, is a Partner in the Forensic Accounting and Commercial Damages practice of HKA and he provides business valuation, forensic accounting, and economic damages expert services. He is a Co-Chair of the Investigation, Enforcement & White-Collar Subcommittee of the ABA Business Law Section, a Member at Large of the Membership Board of the Business Law Section; and past Chair of the Dispute Resolution Committee of the Business Law Section. In addition, John served as a Member at Large of the Standing Committee on Audit of the American Bar Association entity.

Tyson Prisbrey

Tyson Prisbrey is based in Snell & Wilmer L.L.P.’s Salt Lake City, Utah office and is a member of the firm’s commercial litigation practice group. He focuses his practice in complex commercial and corporate litigation, including litigation in corporate governance and general contractual disputes. He has experience advising public and private companies in disputes stemming from mergers and acquisitions, corporate financing, corporate control, and alternative entity dissolutions. Prior to joining Snell & Wilmer, Tyson gained significant experience in representing clients in the Delaware Court of Chancery litigating commercial and corporate governance matters.

§ 3.1. Introduction

The term “business divorce” includes disputes that cause business partners/investors to end their partnership, situations that require owners to separate, or circumstances where a business partner/investor wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2022, to September 30, 2023, from mostly eight states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 3.2. Access to Books and Records

§ 3.2.1. California

Farnum v. Iris Biotechnologies Inc., 86 Cal. App.5th 602 (2022). The court affirmed a trial court’s refusal to award plaintiff his reasonable expenses related to his demand for the inspection of defendant company’s records.

The plaintiff was a member of the company’s board of directors and owned approximately 8 percent of the company’s stock. Plaintiff requested an inspection of records related to the company’s acquisition of a subsidiary and financial documents following the acquisition. A month later, plaintiff, in his capacity as a member of the board and shareholder, petitioned for a writ of mandate directing the company to permit him to inspect and copy all corporate records. Before the hearing on the petition, the plaintiff was voted off the company’s board. The trial court denied the petition because plaintiff no longer had standing to inspect records due to his ejection from the board and because the records request was overly board and lacked a statement of purpose reasonably related to his interests as a shareholder. A few weeks later, plaintiff served a set of 31 inspection requests on the company, seeking to inspect a wide range of documents from both that company and its subsidiary. The company responded, indicating that certain documents, such as shareholder and board minutes, were not maintained and could not be produced and that audited financial statements from 2012 to 2014 had already been provided to plaintiff. The company indicated that the remaining requests were not permitted under California law and therefore no responsive documents would be produced. Plaintiff filed another petition for writ of mandate seeking to compel inspection and copying of corporate records in his capacity as a shareholder. The trial court denied both the petition and the associated request for an award of attorney fees. On appeal the court reversed part of the denial related to eight of plaintiff’s 31 document requests. As to those eight categories, plaintiff only had a right to inspect the records for four categories but only for the year 2014. For two categories relating to two separate corporate lawsuits plaintiff’s inspection rights were subject to the company’s right to withhold attorney-client privileged documents. In relation to the final two requests, the court gave plaintiff the right to inspect all “accounting records regarding the costs and professional fees incurred by [company] in creating [its subsidiary].” The court ruled that the trial court may award an amount to reimburse plaintiff on remand for his expenses incurred before the trial court and appeal. On remand, the trail court determined that “in light of all the relevant circumstances of this case, the court cannot say there is a showing that on the whole, [the company] acted without justification in refusing [plaintiff’s] inspection demands,” and denied plaintiff’s request for expenses. Plaintiff timely appealed.

Corporate Code § 1604 allows courts to award reasonable expenses to plaintiffs who successfully enforce shareholder inspection rights if a corporation’s failure to comply was without justification. “Without justification” was not defined in section 1604. The court ruled that if there was “substantial justification” to refuse to produce documents, which means that “a justification … is well grounded in both law and fact,” a court need not award expenses to successful plaintiffs. Because the prior appeal established that a majority of plaintiff’s records requests lacked merit, the court determined the trial court did not abuse its discretion in rejecting plaintiff’s expense request and affirmed the trial court’s decision.

§ 3.3. Business Judgment Rule

§ 3.3.1. Minnesota

Schneider v. Schmidt, No. A22-1305, 2023 WL 4861787 (Minn. Ct. App. July 31, 2023), review denied (Nov. 14, 2023). Appellant, minority owner of an LLC, brought suit in her individual capacity against the LLC and its majority owner following the LLC’s liquidation. The district court determined that all of appellant’s claims, other than a claim for failure to comply with notice requirements, were derivative claims. Appellant subsequently made a demand on the LLC pursuant to the derivative claims, and the LLC appointed a special litigation committee (SLC). The SLC declined to pursue the derivative claims because it determined that doing so was not in the LLC’s best interest. The district court granted summary judgment in appellant’s favor as to the failure to comply with notice requirements, finding that appellant had not been given proper notice regarding dissenter’s rights prior to the sale of the LLC’s assets. Damages were later determined at trial.

On appeal, the LLC argued that the district court should not have awarded damages, but instead deferred to the SLC’s determination of how the LLC should treat its own debts and obligations under the business judgment rule. The Minnesota Court of Appeals affirmed. The Court held that “Courts only defer to an SLC’s decision, under the business judgment rule, on a derivative claim,” and that an SLC must analyze each specific claim to earn deference under the rule. Because appellant’s claim as to failure to comply with notice requirements was a direct claim, and the SLC did not investigate or analyze that claim, there was no deference owed to the SLC under the business judgment rule.

For further discussion of Schneider v. Schmidt, see also sections herein regarding jurisdiction, venue, and standing.

§ 3.3.2. New Jersey

Care One, LLC v. Straus, No. A-1215-20, 2022 WL 17072371 (N.J. Super. Ct. App. Div. Nov. 18, 2022), cert. denied, 255 N.J. 379, 301 A.3d 1281 (2023), and cert. denied, 255 N.J. 387, 301 A.3d 1287 (2023), and cert. denied, 255 N.J. 394, 301 A.3d 1290 (2023). The Court held that proposed third-party claims for aiding and abetting an alleged breach of fiduciary duty could not be brought under New Jersey law. Because the fiduciary duties arose under an LLC Agreement governed by Delaware law, New Jersey law was not proper choice of law to apply in determining whether that claim was time-barred. Civil conspiracy claims were similarly barred because civil conspiracy is not an independent claim and must instead be attached to the underlying wrong. Here, the underlying wrong was associated with the Delaware LLC Agreement. Therefore, both claims were barred as being governed by the Agreement’s choice of Delaware law, rather than New Jersey law.

§ 3.4. Dissolution

§ 3.4.1. Utah

Ellis v. La Val Enterprises Ltd., 523 P.3d 208 (Utah App. Dec. 8, 2022). The court of appeals found that that selling the partnership’s property—a family farm—was not effectively a dissolution because a stated purpose of the partnership was buying and selling real property. The partnership was formed for the management of a family farm with the parents as the general partners and the children as the limited partners. When the father died, and with the mother’s health declining, one of the children, who was a limited partner, entered into an agreement to purchase the partnership’s property. The other siblings sued, claiming that the mother, as general partner, did not have the authority to sell the property without the consent of all limited partners because selling the farm was effectively dissolving the partnership, and the partnership agreement prevents the general partner from undertaking any act which would make it impossible to carry on the ordinary business of the partnership. The court disagreed, finding that the stated purpose of the partnership expressly included buying, holding, and selling real property. If the property was sold, the proceeds would go to the partnership, and it would be no different than buying and selling different assets. Selling the farm was not an act that dissolved or liquidated the partnership because of the express purpose of the partnership.

§ 3.5. Jurisdiction, Venue, and Standing

§ 3.5.1. California

Kandter v. Reed, Cal. App.5^th 191 (2023). Shareholders brought derivative action against board of directors and officers of California corporation, and against corporation as nominal defendant, relating to leak from corporation’s underground natural gas storage facility, and alleging that directors and officers breached their fiduciary duties by acting recklessly or with gross negligence in failing to take steps for adequate inspection, documentation, monitoring, and risk management. Corporations Code § 800(b)(2) requires a shareholder bringing a derivative action to allege “with particularity” the “efforts [made] to secure from the board such action as [the shareholder] desires, or the reasons for not making such effort ….” Plaintiffs did not serve a demand on the board prior to filing suit. Instead, they alleged that it would be futile to do so. The trial court sustained defendants’ demurrer with leave to amend, finding that plaintiffs failed to sufficiently allege that serving a demand on the board would have been futile. Plaintiffs amended the complaint, but the trial court again determined plaintiffs failed to sufficiently allege demand futility. At a subsequent hearing, plaintiffs indicated they would not seek leave to amend. The trial court issued a dismissal from which plaintiffs timely appealed.

In reviewing the allegations to support demand futility, courts must be able to determine on a director-by-director basis whether each possesses independence or disinterest such that he or she may fairly evaluate the challenged transaction. “Where ‘the board that would be considering the demand did not make a business decision which is being challenged in the derivative suit’ (Rales v. Blasband (Del. 1993) 634 A.2d 927, 933–934), the Rales test asks whether ‘the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile’.” (Citation omitted.) As alleged, and contrary to plaintiffs’ allegations that there was no reporting mechanism in place for safety issues regarding gas storage, the board formed a committee that provided regular reports to the board, and whose purpose included, among other things, monitoring storage infrastructure for safety. The board received annual risk management reports. As such, this board did not make a business decision that is challenged by plaintiffs and the Rales test applied. Here, plaintiffs were found not to have alleged particularized facts supporting their theory of liability, and thus have failed to plead demand futility as required under section 800(b)(2). The dismissal was affirmed.

§ 3.5.2. Colorado

Electro-Mechanical Products, Inc. v. Alan Lupton Ass’s., Inc., 663 F. Supp.3d 1227 (D. Colo. 2023). Closely held corporation and shareholders filed suit against one minority shareholder and the consulting company for which he was principal shareholder, officer, and director, claiming breach of fiduciary duty and breach of the duty of loyalty by failing to renegotiate a contract, in which consulting company agreed to provide its best efforts to promote closely-held corporation’s sales of its services and products, and by failing to vote in favor of sale of closely held corporation to potential buyer. The potential buyer conditioned the sale on the termination of the consulting agreement. Minority shareholder moved to dismiss for failure to state claim and for lack of standing.

Minority shareholder argued that plaintiffs’ claims against him should be dismissed because he did not owe fiduciary duties to the closely held corporation or its other shareholders because he was only an 8.9 percent shareholder of a closely held corporation. No Colorado case has directly addressed whether minority shareholders in a closely held corporation owe fiduciary duties. The court predicted that the Colorado Supreme Court would not find that a minority shareholder who did not exercise control over the corporation and who is alleged to have acted in his own contractual interests to the detriment of other shareholders owed fiduciary duties to other shareholders. Here, the complaint did not allege that the minority shareholder had the ability to control the closely held corporation. It only alleged that the minority shareholder was able to prevent the sale to potential buyer because of a condition imposed by the potential buyer, not due to any control the minority shareholder may have had. Moreover, the fact that minority shareholder was the principal stockholder, officer, and director of the consulting company did not create a fiduciary duty, or a conflict of interest, requiring him to renegotiate the terms of the consulting contract or vote in favor of the sale. The minority shareholder had no fiduciary duty to act against his economic self-interest given that there are no allegations that he controlled the board of directors or controlled the other shareholders such that he could direct the business of the corporation. The Court granted the motion to dismiss.

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB-5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, were alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted: breach of operating agreement (against Kramer and Bornhoft); intentional interference with existing and prospective business relations (against the Management Company); breach of fiduciary duties (against Kramer and Bornhoft); aiding and abetting breach of fiduciary duties (against Bornhoft and the Management Company); civil theft (against Kramer and Bornhoft); and a claim for access to books and records. Kramer, Bornhoft, and Management Company moved to dismiss all but the records claim. Among other arguments, defendants argue that plaintiffs had no standing to pursue damages because the alleged harms were suffered by Company and must be brought as a derivative action.

The court rejected this dismissal argument. Colorado precedent (Tisch v. Tisch, 439 P.3d 89 (Colo. App. 2019)) addressing a similar standing issue with a corporation was applied here. Tisch concluded that the minority shareholders had “a distinct, proprietary interest in their share of … undeclared distributions that allowed them to bring an individual claim against [a majority shareholder] for civil theft.” In this case, by alleging that defendants have diverted profits that should have been distributions, plaintiffs have standing to proceed on their direct claims for damages.

§ 3.5.3. Delaware

Central Am. Mezzanine Infrastructure Fund L.P. v. Lopez, C.A. No. 2022-0408-KSJM (Del. Ch. Dec. 14, 2022) (ORDER). The Court of Chancery refused to dismiss or stay an action brought to determine the proper managing members of a LLC based on forum non conveniens grounds, even where two other first-filed lawsuits were being litigated over substantially similar issues in both Belgium and Mexico. The Court held that, although the other lawsuits unquestionably were first-filed and related to the same subject matter as the subject lawsuit, a stay or dismissal was inappropriate because the Belgian court was looking to the Delaware court to decide the question of the proper management of the company and the Court of Chancery is the proper arbiter of the fate of Delaware entities.

In re P3 Health Group Holdings, LLC, 285 A.3d 143 (Del. Ch. 2022). The Court of Chancery held that it could properly exercise personal jurisdiction over a defendant as a de facto manager of the subject company, even though defendant was not a formal manager and held no official role with the company. The Court, however, held that it could properly exercise jurisdiction over defendant where he made decisions on behalf of the company, directed management to take certain actions, instructed the company’s advisors to perform work without authorization from management, berated the company’s outside counsel for not running documents by him before sending them out, and enjoyed access to information that even formal managers of the company did not have.

§ 3.5.4. Minnesota

Schneider v. Schmidt, No. A22-1305, 2023 WL 4861787 (Minn. Ct. App. July 31, 2023), review denied (Nov. 14, 2023). Appellant, the minority owner of an LLC, brought suit in her individual capacity against the LLC and its majority owner after the LLC’s liquidation. The appellant alleged unfairly prejudicial conduct, breach of fiduciary duty, failure to comply with notice requirements, and breach of both the operating agreement and the member-control agreement. The district court found that the claims for unfairly prejudicial conduct, breach of fiduciary duty, and breach of the member-control agreement were derivative claims and granted summary judgment in favor of the majority owner-respondent.

On appeal, the Minnesota Court of Appeals found that the claims for unfairly prejudicial conduct and breach of fiduciary duty were direct claims because appellant alleged direct and personal harm because the majority owner-respondent made unauthorized payments with the proceeds of the LLC’s asset sale, using those proceeds to pay a promissory note and loan agreement that the respondent was personally liable for. As to the breach of the member-control agreement, the Court of Appeals found that this was also a direct claim because the member-control agreement was an agreement between the LLC’s members. Because the LLC was not a party to the member-control agreement, it was not harmed by the breaches of the agreement. Appellant was personally harmed because the member-control agreement specified the rights and obligations of members thereunder, including provisions as to liquidation of the LLC and the distribution of proceeds from that liquidation. The harm under these three claims accrued directly to the appellant, rather than the LLC, thus making them appropriate direct claims.

For further discussion of Schneider v. Schmidt, see also sections herein regarding the business judgment rule.

§ 3.5.5. Texas

Bay Area RV Parks, L.L.C. v. WGB RV Parks, LLC, 2023 WL 2248738 (Tex. Ct. App. Feb. 28, 2023). In a dispute between business partners, the Court of Appeals drew a distinction between allocations and distributions in interpreting an LLC’s operating agreement, finding that that a member was not entitled to preferential distributions upon the sale of the company’s assets. The business, which operated three RV parks, brought in plaintiff as a new member, who purchased 25 percent of the membership interest for $500,000. The membership then executed a new operating agreement, which included a provision whereby upon the sale of the business’s property, the profits of the sale “shall be allocated first to return the unreturned capital contribution of a member.” The company sold its real property, and the 25 percent interest holder demanded preferential distribution to repay its $500,000 capital contribution. The court of appeals disagreed with the trial court, finding that the provision at issue was concerning allocation, not distribution. Allocation refers to how profits and losses are divided among the company’s members, typically for tax purposes, while distributions refer to a member’s receipt of money from the company. The court found that the 25 percent interest holder was not entitled to the first $500,000 of the profits from the sale; rather, it was entitled to 25 percent of whatever distributions were made by the company during the winding up.

§ 3.6. Claims and Issues in Business Divorce Cases

§ 3.6.1. Alternative Entities

§ 3.6.1.1. Delaware

Central Am. Mezzanine Infrastructure Fund L.P. v. Lopez, C.A. No. 2022-0408-KSJM (Del. Ch. Dec. 14, 2022) (ORDER). The Court of Chancery determined that an LLC Agreement that provided for the removal of the LLC’s managing member at any time for any reason by Plaintiff was unambiguous. The Court accordingly determined that Plaintiff’s removal of Defendant under the LLC Agreement was effective. The members of the LLC, an investment fund and an operator of port terminals, began to do business together whereby the investment fund provided financing to port terminals that were in severe financial distress in exchange for a membership interest and provisions in the LLC Agreement permitting the investment fund to remove defendant as managing member at any time for any reason, as well as a call option providing the right to purchase 90–95 percent of the subject company’s equity for $10,000.

Defendant understood those rights to be extant only to the extent that Plaintiff’s loans were outstanding. Once the payment of the loans was complete, however, Plaintiff removed Defendant as managing member and invoked the call option. The Court of Chancery determined that, because the LLC Agreement did not make the removal right or the call option contingent on any occurrence, including the payment of the loans, such rights were absolute.

§ 3.6.1.2. Texas

Bay Area RV Parks, L.L.C. v. WGB RV Parks, LLC, 2023 WL 2248738 (Tex. Ct. App. Feb. 28, 2023). In a dispute between business partners, the Court of Appeals drew a distinction between allocations and distributions in interpreting an LLC’s operating agreement, finding that that a member was not entitled to preferential distributions upon the sale of the company’s assets. The business, which operated three RV parks, brought in plaintiff as a new member, who purchased 25 percent of the membership interest for $500,000. The membership then executed a new operating agreement, which included a provision whereby upon the sale of the business’s property, the profits of the sale “shall be allocated first to return the unreturned capital contribution of a member.” The company sold its real property, and the 25 percent interest holder demanded preferential distribution to repay its $500,000 capital contribution. The court of appeals disagreed with the trial court, finding that the provision at issue was concerning allocation, not distribution. Allocation refers to how profits and losses are divided among the company’s members, typically for tax purposes, while distributions refer to a member’s receipt of money from the company. The court found that the 25 percent interest holder was not entitled to the first $500,000 of the profits from the sale; rather, it was entitled to 25 percent of whatever distributions were made by the company during the winding up.

§ 3.6.2. Breach of Fiduciary Duty

§ 3.6.2.1. Colorado

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB-5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, was alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted several claims including breach of fiduciary duties (against Kramer and Bornhoft) and aiding and abetting breach of fiduciary duties (against Bornhoft and the Management Company). Defendants moved to dismiss several asserted claims, including breach of fiduciary duty and aiding and abetting breach of fiduciary duty. Among other arguments, defendants argued that plaintiffs’ breach of fiduciary duties and aiding and abetting claims fail because all duties not expressly set forth in the Company operating agreement have been disclaimed, so no fiduciary duties are owed.

The operating agreement explicitly described the duties and obligations of Company managers to include: conducting the Company’s business and operations, and taking actions “necessary or appropriate (i) for the continuation of the Company’s valid existence as a limited liability company … and (ii) for the accomplishment of the Company’s purposes, including the acquisition, development, maintenance, preservation, and operation of Property in accordance with the provisions of this Agreement and applicable laws and regulations.” The operating agreement stated that such duties were to be discharged “in good faith,” and that managers “shall be under no other duty (fiduciary or otherwise) to the Company or the Members to conduct the affairs of the Company in a particular manner.” Since Colorado law allows for the express disclaimer of duties in an operating agreement, including fiduciary duties, the Court agreed with defendants that any fiduciary duties were disclaims. Without a fiduciary duty, the breach of fiduciary duty and aiding and abetting claims could not survive and were dismissed.

§ 3.6.2.2. Texas

Peek v. Mayfield, 2023 WL 5967886, at *1 (Tex. App. Sept. 14, 2023). In a trust dispute, the trial court found that the trustee breached his fiduciary duties to the trust due to self-dealing and undue influence and appointed a receiver to replace the trustee. Specifically, the trial court found that the trustee unduly influenced his mother to assign certain assets away from the trust. On appeal, the trustee argued that there was insufficient evidence for the trial court to find that he breached his fiduciary duties to the trust. The court pointed to the evidence presented at trial that the trustee transferred interest in certain trust assets to the trustee’s own trust. This self-dealing transaction gave rise to an unfairness presumption, and the trustee had the burden to prove otherwise. The record did not reflect any evidence addressing this presumption or showing that the trustee transferred assets to his own trust in the best interest of the trust’s beneficiaries.

§ 3.6.3. Civil Theft

§ 3.6.3.1. Colorado

Weinreis Ethanol, LLC v. Kramer, 2022 WL 17986754 (D. Colo. Dec. 29, 2022). Plaintiffs, certain members and investors of an LLC that produced ethanol and distilled wet grain (Company), sued two of the four managers of the Company’s board of managers (Kramer and Bornhoft) and who also founded and owned a separate LLC that managed the Company (Management Company) pursuant a management agreement with the Company along with the general manager of the Company along with the Management Company. The crux of this suit is that Kramer and Bornhoft, individually and through the Management Company, improperly diverted Company profits that otherwise would have been distributed to plaintiffs. Kramer, in collaboration with Bornhoft, was alleged to have taken Company funds for Kramer’s “own use and/or used such funds to pay for or reimburse dues, fees, marketing and advertising, and sponsorship expenses for … personal race car teams.” Defendants allegedly caused the Company to pay “inflated, over-market prices” for enzymes and other products to produce ethanol from various suppliers who sponsored one of Kramer’s personal racing teams. Plaintiffs asserted several claims, including civil theft under C.R.S. § 18-4-405 (against Kramer and Bornhoft). Defendants moved to dismiss several asserted claims, including civil theft. Among other arguments, defendants argue that the civil theft claim fails because plaintiffs do not have a proprietary interest in undeclared distributions, and because plaintiffs have failed to plead that Kramer or Bornhoft took property by theft, robbery, or burglary.

The court rejected these dismissal arguments. In Tisch v. Tisch, 439 P.3d 89 (Colo. App. 2019), a Colorado appellate court ruled that the minority shareholders had “a distinct, proprietary interest in their share of … undeclared distributions that allowed them to bring an individual claim against [a majority shareholder] for civil theft.” And, since the civil theft statute does not define theft, robbery, or burglary, these terms are understood within the broader criminal statutory framework. So “[a] person commits theft when he or she knowingly obtains, retains, or exercises control over anything of value of another without authorization or by threat or deception.” C.R.S. § 18-4-401(1). By alleging that defendants have diverted profits that should have been distributions, plaintiffs have alleged a civil theft claim.

§ 3.6.4. Fraud

§ 3.6.4.1. Arizona

Ferneau v. Wilder, 256 Ariz. 68, 535 P.3d 554 (Ariz. Ct. App. 2023). This action involved a contentious dispute between co-directors of a corporation called Total Accountability Systems I, Inc. (“TAS”), an Arizona non-profit corporation that held a certificate to operate a medical marijuana dispensary. Johnny Ferneau unsuccessfully appealed from the trial court’s order removing him as a director of TAS and sanctioning him, for discovery violations, by dismissing his complaint against his co-director Kristine Wilder. The court of appeals concluded that the trial court did not err in removing Mr. Ferneau as a director of TAS because he engaged in “fraudulent conduct” under A.R.S. § 10–3810(A), which, despite Mr. Ferneau’s assertion, includes both actual and constructive fraud. In pertinent part, Mr. Ferneau alleged that Ms. Wilder denied him access to TAS’s books and records, including access to TAS’s email account (“Account”). Ms. Wilder countered that she did not have access to the Account, rather she requested access from Mr. Ferneau, which he refused to provide, and she informed the trial court of her concern that Mr. Ferneau would destroy the emails in TAS’s Account. At a pretrial conference, the trial court reminded the parties of their duty to preserve relevant evidence. Litigation ensued for years, and the trial court later found that Mr. Ferneau had “intentionally deleted the contents of the Account,” with TAS losing four years’ worth of business emails. The trial court found, and the appellate court affirmed, that this constituted fraudulent activity against TAS, a corporation toward which Mr. Ferneau owed a fiduciary duty. Accordingly, the court found, and the appellate court affirmed, that the removal of Mr. Ferneau as a director of TAS, pursuant to A.R.S. § 10–3810(A), was in TAS’s bests interests because he had engaged in “solely self-serving” conduct.

§ 3.6.5. Equitable/Statutory Relief

§ 3.6.5.1. Colorado

Air Solutions, Inc. v. Spivey, 2023 COA 14. A newly formed corporation and its sole shareholder brought a declaratory judgment action against its CFO to declare that the CFO was not an owner of the corporation. CFO countersued for breach of contract and fraud against the corporation and shareholder for refusing to make the CFO a 50 percent owner of the corporation and sought specific performance of the agreement to sell shares to the CFO along with other equitable types of relief, including a declaration that CFO was an owner of the corporation. A jury trial was conducted on only the CFO’s fraud and contract claims before the court addressed all other equitable claims and remedies. The jury found in favor of the CFO’s breach of contract counterclaim. After trial, the CFO asked the court for a decree of specific performance on the breach of contract counterclaim and for declaratory relief, arguing, among other things, that the nature of the contract rendered an award of damages inadequate to compensate him for the benefit of his bargain. The court denied the request for specific performance and the remaining declaratory judgment and equitable counterclaims.

On appeal, the appellate court concluded that the trial court was wrong in denying the CFO’s request for a decree of specific performance and that the CFO is entitled to a decree of specific performance against sole shareholder on the contract and that the trial court erred by denying the CFO’s counterclaims for declaratory judgment against both the sole shareholder and the corporation, though on remand the trial court will need to determine the precise terms of any such declaration.

§ 3.6.5.2. Delaware

Bighorn Ventures Nevada, LLC v. Solis, 2022 WL 17948659 (Del. Ch. Dec. 23, 2022). The Court of Chancery declined to enter an order appointing a receiver or custodian, holding that the subject nominal defendant corporation was not deadlocked, was not clearly insolvent—and even if it was, no special circumstances existed—and no equitable considerations required the appointment of a receiver or custodian. Plaintiff, nominal defendant’s largest shareholder, brought an action seeking appointment of a receiver or custodian on the grounds that it believed that nominal defendant was on “precarious financial footing” requiring an infusion of cash that Plaintiff believed only it could provide. The Board, however, was split 2:2 on accepting the cash infusion on the terms offered by Plaintiff in lieu of some other form of financing. The Court held that appointment of a receiver or custodian was not appropriate under 8 Del. C. § 226 because a tie-breaking director could be appointed to the board via stockholder vote under the company’s charter. The Court further held that appointment of a receiver or custodian under 8 Del. C. § 291 was not appropriate because the company was not clearly insolvent and, in any event, no special circumstances existed to warrant such extraordinary relief. Finally, the Court held that no equitable considerations required such an appointment either.

§ 3.7. Valuation and Damages

§ 3.7.1. Colorado

Snyder v. Montgomery, 2022 Colo. Dist. LEXIS 1071 (Larimer County, Colo. Oct. 4, 2022) (Order). This case involves a dispute regarding whether a minority discount should be applied in determining the buyout value for the decedent’s minority ownership interest subject to a shareholders’ agreement which required the shares to be sold to the remaining shareholder at “fair market value.” The decedent’s estate filed a motion seeking a determination of law that a minority discount is not applicable. The Court distinguished this case from others in which courts decided the appropriateness of a minority discount. Rather, the Court found that in this case the issue is whether fair market valuation does not include a minority discount. The Court reviewed the shareholders’ agreement, concluded that the term “fair market valuation” written into the shareholders’ agreement is not an ambiguous term, and declined to read into the definition “requiring or forbidding any valuation approaches like the minority discount.”

§ 3.7.2. Connecticut

Buccieri v. New Hope Realty, Inc., 2022 Conn. Super. LEXIS 2230 (Oct. 20, 2022). This case involves a corporate dissolution that was initiated after the parties could not agree on the management and operation of a realty company. The defendants elected to purchase the plaintiff’s fifty percent ownership interest but agreement regarding the value of plaintiff’s shares could not be reached. The Court heard expert witness testimony from real estate appraisers and business appraisers. The Court determined that the moving party who applied for Court to “evaluate” the shares has the burden of proof. Furthermore, the Court considered what is the standard of value and whether discounts of lack of marketability and lack of control apply. In this case, the Court found that the shareholders’ agreement specified standard of “fair market value” was not determinative because the shares had not been offered for sale. In addition, the Court found that the applicable Connecticut buyout statute required the application of the fair value standard and that because “purchase of plaintiff’s fifty percent shares by the defendants confers complete control of the … company…any minority discount is inappropriate here.” Also, the Court found that a discount for lack of control is not applicable in a statutory buyout in which no third party is entailed.

§ 3.7.3. Florida

WL Alliance LLC, Plaintiff-Appellee, v. Precision Testing Group Inc., Glenn Stuckey, Defendants Appellants, 2022 U.S. App. LEXIS 35298; 2022 WL 17830257 (11^th Cir. Dec. 21, 2022). This case involves a partnership termination dispute between two companies who had formed a partnership to provide technician serves to an energy utility company. The partners had agreed to split profits equally (50–50) each quarter. However, a dispute arose regarding accounting and payments of the profit split, and the partnership was terminated. One of the partner companies—the defendant company—attempted to replace the partnership with a new entity to enter into a new agreement with the energy utility company which would in effect cut out the original other partner—the plaintiff. The plaintiff filed claims of wrongful disassociation, breach of partnership agreement and lost profits damages against the defendant. A jury trial found the defendant liable for damages and made an award. Defendant appealed asserting that the damage award “included damages for lost future profits that were not ‘reasonably certain, and that the damage awards were not supported by the evidence because there was no accounting.”

On appeal, the Court reviewed whether there was sufficient evidence to support the award of future damages. It found that although Florida law requires that causation of lost profits damages must be proven with “reasonable certainty,” that once causation has been proven, the quantification of damages needs only to be judged by a reasonable “yardstick.” Defendant claimed that the contract the partnership had with the energy utility company was terminable at will and therefore damages are speculative. The Court rejected that argument and found that “the evidence was sufficient to support the award of future of damages,” and that the “jury did not need to speculate based on the testimony of the fact witnesses.” According to the Court, “there was specific evidence from fact witnesses that [the energy utility company customer’s] need for the [services] provided by the partnership did not change before the disassociation, had not changed since then, and was unlikely to change in the future.”

§ 3.7.4. Kansas

Hefner v. Deutscher, 2023 Kan. App. Unpub. LEXIS 136 (Mar. 24, 2023). This case involves a plaintiff professional medical practitioner who was terminated from his employment and ownership in a closely held corporation of medical professionals. His Employment and Redemption Agreement would have entitled him to a large payout for his stock ownership interest in the corporation at exit. However, the defendant corporation claimed that the plaintiff was threatening to breach the non-complete clause in his employment agreement which would mean that only a nominal payout was appropriate for the plaintiff’s stock. At trial, the plaintiff prevailed, and the trial court found that the corporation wrongly terminated the plaintiff in breach of his employment agreement, violated fiduciary duties and awarded plaintiff over $1 million in damages. The defendant appealed.

On appeal, the Court found that the trial court’s decision to be legally and factually sound and affirmed it. Furthermore, the Court noted that the trial court did not err in calculating damages. The Court noted that because the trial court found that the plaintiff did not violate the noncompete provisions this means that the plaintiff was terminated without cause. Therefore, under the Employment and Redemption Agreement, the purchase price of the stock is to be negotiated on the “existing practice value.” Because of the acrimonious situation between the parties, the Court concluded that “the task fell to the” trial court to quantify “existing practice value” and the trial court heard testimony from each party’s expert witness. Furthermore, the Court noted that the trial court weighed the evidence and gave greater weight to the expert’s appraisal which “relied on reasonable data provided by the Corporation and well-accepted appraisal principals.” In addition, the Court agreed with the trial court that in a wrongful termination, the plaintiff is additionally entitled to receive the regular salary and benefits he would have received in the meantime.

§ 3.7.5. Kentucky

Kenneth Raymond Schomp & Quality Logistics v. Holton, 2022 Ky. App. Unpub. LEXIS 584 (Oct. 14, 2022). This case involves a dispute regarding the value of the plaintiff’s ownership interest in a transportation logistics brokerage company which was organized as a limited liability company. The plaintiff was an employee with whom the company had entered into an incentive agreement which enabled him to purchase a 30.8 percent member’s interest. The founder owned the other member’s interest. Eventually, the founder and the plaintiff no longer got along, and the founder fired the plaintiff. A dispute arose regarding valuation of the plaintiff’s membership interest pursuant to the operating agreement. The trial court determined value and that decision was appealed.

The appellate court affirmed the trial court’s decision regarding value. The court noted that the trial court evaluated whether the appraisal by the company “comported with the obligations of good faith and fair dealing,” independent judgment and reasonable accuracy. At trial, issues were asserted about the accuracy of the company’s appraisal which the trial court reviewed. The appellate court found no error in the trial court’s analysis which concluded that while the appraisal “may not have been perfect, there is insufficient evidence to suggest that it was so lacking in good faith as to the make the financial data… unreliable” and that the valuation is reliable.

Also, the Court affirmed the award of pre-judgment interest because it is consistent with giving the plaintiff the benefit of his bargain as of 60 days after the company provided written notice of its intention to purchase the plaintiff’s member interest.

§ 3.7.6. Maryland

Furrer v. Siegel & Rouhana, LLC, 2022 Md. App. LEXIS 745; 2022 WL 9834101 (Oct. 17, 2022). This case involves a plaintiff attorney who was terminated and sued for the value of his unredeemed 26.5 percent member ownership interest in a five-member law practice which was organized as a limited liability company. The plaintiff member had his license to practice law indefinitely suspended and the parties could not agree regarding the value of his interest. The firm countersued for damages alleging that the withdrawing member mistreated clients.

On appeal, the Court affirmed the damages award but determined “that the trial court erred in determining the value of [plaintiff’s] unredeemed economic interest. Based on its erroneous interpretation of the applicable statutory framework under the LLC Act… the [trial] court awarded [plaintiff] his pro rata shares of the LLC’s profits and distributions for the one year after his withdrawal as a member” and still licensed to practice law. The Court noted that there was no operating agreement governing valuation, but each member had been receiving $10,000 per month in guaranteed payments, that quarterly profits were split equally without regard to who generated the revenues, and that plaintiff had been a member for over 20 years. Because of the absence of an operating agreement, the Court looked to the LLC Act to fill in the gaps. The Court determined that under the LLC Act, “withdrawing from the LLC changed [plaintiff[ from a member with an economic interest, i.e., a current right to share in the LLC’s profits, losses, and distributions, into an assignee of that economic interest, with the right to share only in the LLC’s assets, liabilities, profits, losses, and distributions, as they existed at the time of his withdrawal.” The Court concluded that the plaintiff was not “entitled, as a non-member of the LLC, to a perpetual ‘economic interest’ in the LLC,” and that “the unredeemed economic interest… as an assignee is limited to his 26% percent share of the fair value of assets, profits, losses and distributions to which he was entitled to” on the date of his withdrawal. Consequently, the Court vacated the trial court’s judgment and remanded for reconsideration of fair value.

§ 3.7.7. Michigan

In re Herremans, 653 B.R. 386 (Bankr. W.D. Mich. 2023). This case involves a dispute between two shareholders in a bankrupt restaurant business and the issue of the fair value of a 50 percent interest in the buyout of one shareholder by the other. The two owners had started the business 27 years earlier on a handshake and had no operating agreement. Five years of silence with the parties not speaking to each other, several years of litigation between the parties, and eight years in Chapter 12 bankruptcy proceedings ensued when the plaintiff filed a bankruptcy petition.

The Bankruptcy Court concluded that willful oppression on the rights of the plaintiff shareholder occurred and evaluated appropriate damages. The Court applied the Michigan shareholder oppression act as the remedy for oppressive conduct and ordered the oppressive shareholder to buyout the plaintiff’s interest at statutory “fair value.” Furthermore, the Court noted that “fair value” is not synonymous with “fair market value” and that “application of discounts in the valuation analysis is neither precluded nor required.” The Court found that the assessments by the parties of value “were mostly polar opposites.” The Court considered that the president of the franchisor testified that the brand is “a ‘lot’ less popular that it used to be, with only fifteen [restaurants] remaining in the country… and that the bulk of the value of the business is in the real estate itself,” and that the company’s financial statements showed that the company had positive but not very significant income.

Furthermore, the Court found issues with neither party choosing meaningful or consistent valuation dates. The Court determined that that most appropriate date at which to value the real estate is the date of the appraisal report itself, which was about eight months after the adversarial proceeding was filed. In addition, the Court determined that the values of the non-real estate assets listed in the corporate balance sheet should be adjusted to estimate the value as of the date of the real estate appraisal. The Court also considered that “the evidence at trial included very little credible evidence about … cash flow or earning capacity,” and found “that an asset approach is the most appropriate method for valuing.” The plaintiff argued that the appraisal’s value should be increased five percent for each year since the date of the report through the date of the Court’s decision; the Court rejected that argument. Also, the Court rejected the application of valuation discounts, stating that application of discounts would enable the oppressive 50 percent shareholder to force the plaintiff to sell at an unfair price to the benefit of the oppressor.

§ 3.7.8. Minnesota

Novak v. Miller, No. A22-1164, 2023 WL 2847207 (Minn. Ct. App. Apr. 10, 2023). Appellant-defendant was not entitled to have her interest in the LLC used to offset damages imposed by the district court’s judgment. When a member applies for and the district court orders dissolution of the company on the grounds that a member has acted in an illegal manner that is harmful to the applicant, the district court “may order a remedy other than dissolution.” Minn. Stat. § 322C.0701, subd. 2 (2022). This may be ordered “in any case where that remedy would be appropriate under all the facts and circumstances of the case.” Id. Here, the district court determined that defendant stole $494,590.94 and imposed a civil penalty of $100,000. The district court entered a judgment in favor of plaintiff against defendant for the entire amount stolen for the civil penalty. “Minnesota law permits the district court to order a remedy other than dissolution for the illegal acts of another member. Moreover, it is common sense that a party should not be able to offset the amount they converted by claiming an equal share of an LLC when it is dissolved.”

§ 3.7.9. New York

Matter of Galasso v. Cobleskill Stone Prods., Inc., 197 N.Y.S.3d 860 (2023). This case involved a petition by a decedent’s estate which owns 39 percent of the shares of a mining and construction company for judicial dissolution of the corporation and establishment of a judicial receivership. The corporate filed a written election to purchase the estate’s shares for its “fair value.” A dispute arose regarding the value which culminated in a valuation trial over two and half years later.

At the valuation trial, the Court heard testimony from expert witnesses, determined fair value and awarded pre-award interest. The Court found the income approach to value the company’s operating assets and the cost approach for valuing its non-operating assets appropriate, and applied certain adjustments for: reclamation costs on formerly-mined properties, costs to complete closure of a business line for which the decision to shut it down was previously made, excess inventory, and applied a discount for lack of marketability. The Court rejected adjustments for deferred income tax liabilities which it deemed “unlikely to ever come due,” excess cash as unwarranted given the large seasonal fluctuations and need for a working capital reserve.

Laurilliard v. McNamee Lochner, P.C., 2023 N.Y. Misc. LEXIS 3286 (Civ. Court of Richmond County, N.Y. Jun. 20, 2023) (Order). This case involves a dispute regarding the redemption buyout of a shareholder-employee in a law firm which shut down after merging into another law firm. Numerous partners refused to join the merged law firm and the firm demanded that they surrender their shares at book value, which was nominal, under the mandatory redemption provision of their employment agreements. These partners sued the firm and alleged breach of the employment agreements and breach of fiduciary duties.

The Court held that mandatory buy-sell agreements, “should not be undone simply upon an allegation of unfairness. This would destroy their very purpose, which is provide a certain formula by which to value stock in the future,” and that each plaintiff “accepted the offer to become a minority stockholder, but only for the period during which he remained an employee. The buy-back price formula was designed for the benefit of both parties precisely so that they could know their respective rights on certain dates and avoid costly and lengthy litigation on the ‘fair value’ issue.” Ultimately, the Court concluded that it would not “open the door to litigation on both the value of the stock and the date of termination and hinder the employer from fulfilling its contractual rights under the agreement.” Consequently, the Court granted defendants’ motion to dismiss the plaintiff’s complaint.

Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035 (New York Cnty., N.Y. Aug. 8, 2023) (Order). This case involves a dispute regarding the buyout of a passive 50 percent investor in a corporation which operated an optical business. The other 50 percent shareholder operated the business, and elected to purchase the passive investor’s interest at fair value.

The Court conducted a “fair value” hearing, during which it heard expert testimony. The court agreed with much of the plaintiff’s expert’s approach and “found him to be a credible witness.” The Court adjusted for some of the criticisms asserted by the defense side, such as overly optimistic growth rate and some non-comparable guideline companies and concluded, “The court finds and across the board 20 percent reduction to the valuations should fairly account for these aggressive assumptions.” The Court was unpersuaded by the defendant’s expert witness who “concluded based on the record evidence that the Company was worth $0.” “The notion that the Company is worthless is belied by the significant value [the defendant] derives from it.” Furthermore, the Court noted that the defendant “failed to provide all of the financial records to this expert.”

§ 3.7.10. North Carolina

Jayawardena v. Daka, 287 N.C. App. 393, 881 S.E.2d 759 (2022). This case involves a dispute among four shareholders who own shares in a physician group practice and members’ interests in two real estate limited liability companies, in which the entities have buy-sell agreements. The trial court entered partial summary judgment in favor of the defendants.

The Court of Appeals affirmed the trial court’s decision. The Court considered that the “[u]ndisputed record evidence demonstrates that the corporations’ regular accountants valued the business in good faith according to the parties’ agreement; that Plaintiff breached the operating agreements of two related LLCs by failing to identify an appraiser within the required time frame; and that the Defendants, who are minority shareholders like Plaintiff, did not act as a unified group sufficient to warrant treating them collectively as a controlling majority shareholder for purposes of fiduciary duties.”

Mauck v. Cherry Oil Co., Inc., 2023 NCBC LEXIS 144 (Supr. Court Lenoir County, N.C. Nov. 14, 2023). This case involves a dispute among family members regarding the management of their oil business, the remaining steps to buyout plaintiff’s shares in the corporation once the defendants voted to exercise the call provision in the shareholders’ agreement, and the company’s alleged refusal to permit the plaintiff to inspect certain company records.

The Court facilitated an agreement between the parties to have each party designate an appraiser, and for the two selected appraisers to select an independent third appraiser. Furthermore, the Court considered that the shareholder has statutory rights to inspect certain records until bought out and allowed certain inspection and copying of company records.

§ 3.7.11. Ohio

Miller v. Mission Essential [Grp.], LLC, 2023-Ohio-3077 (2023). This case involves an appeal from a judgement granting the fair value of a membership interest in a limited liability company, and whether the latest in a series of several operating agreements provided a sufficient basis to determine and pay the fair cash value of the dissenting member’s interest.

On appeal, the Court determined: 1) the trial court’s decision not to exclude the expert witness who relied on certain budgeted financial information was appropriate given that the trial court weighed the facts and circumstances and assessed the credibility of the witness and the relevance and reliability of the information at issue; 2) the trial court’s award of interest was appropriate because it has wide discretion to select a rate, but the trial court does not have discretion to not award interest; and 3) the trial court erred in applying discounts for minority position and lack of control, because that would result in a windfall to the buyer who would as a result become the 100 percent owner.

§ 3.7.12. Oregon

Ybarra v. Dominguez Fam. Enters., 322 Ore. App. 798 (2022). This case involves alleged shareholder deadlock and a dispute regarding the trial court’s decision that discounts for minority position and lack of marketability apply to plaintiff’s eight percent interest in a company that makes tacos. The trial court based its decision upon the reasoning that since it did not find that oppression had occurred then the “fair market value,” not “fair value,” standard of value applies.

On appeal, the Court concluded that the trial court erred, and vacated and remanded to the trial court to determine value under the “fair value” standard. However, the Court noted that it is not the case that such discounts never apply, “Rather, … the court must determine, based on all of the relevant facts and circumstances, whether to apply marketability and/or minority discounts in calculating the fair value of plaintiff’s shares under [the statute]. Because the trial court mistakenly understood that its determination of fair value required the absence of those discounts based on the absence of oppression alone, the court had no reason to consider whether these discounts were otherwise warranted in this case.”

Editor Emeritus and Editors

Contributors

§ 2.1. Introduction

The 2024 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.^[1] There are currently functioning business courts of some type in cities, counties, regions, or statewide in twenty-five states: (1) Arizona; (2) Delaware; (3) Florida; (4) Georgia; (5) Illinois; (6) Indiana; (7) Iowa; (8) Kentucky; (9) Maine; (10) Maryland; (11) Massachusetts; (12) Michigan; (13) Nevada; (14) New Hampshire; (15) New Jersey; (16) New York; (17) North Carolina; (18) Ohio; (19) Pennsylvania; (20) Rhode Island; (21) South Carolina; (22) Tennessee; (23) West Virginia; (24) Wisconsin; and (25) Wyoming.^[2] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.^[3] The California and Connecticut programs are expressly not business court programs as such.^[4] Utah and Texas will begin operating business courts in 2024.^[5]

§ 2.2. Recent Developments

§ 2.2.1. Business Court Resources

American College of Business Court Judges. The American College of Business Court Judges (ACBCJ) provides judicial education and resources, in terms of information and the availability of its member judges, to those jurisdictions interested in the development of business courts.^[6] The ACBCJ’s Eighteenth Annual Meeting will take place in Reno, Nevada, from April 24, 2024, to April 26, 2024.^[7]

Section, Committee, and Subcommittee Resources. The ABA Business Law Section provides a Diversity Clerkship Program that sponsors second-year law students of diverse backgrounds in summer clerkships with business and complex court judges.^[8] The ABA Business Law Section has created a pamphlet, Establishing Business Courts in Your State, which is available among other resources in the online library for the Business and Corporate Litigation Committee’s community web page.^[9] The Business and Corporate Litigation Committee’s Subcommittee on Business Courts provides documents and/or hyperlinks to business court resources.^[10] This includes links to public sources and legal publications, as well as business court related materials and panel discussions presented at ABA Business Law Section meetings. The Section also has established a Business Courts Representatives (BCR) program,^[11] where a number of specialized business, commercial, or complex litigation judges are selected to participate in and support Section activities, committees, and subcommittees. These BCRs attend Section meetings, and many have become leaders within the Section. Judge Elizabeth Hazlitt Emerson of the Supreme Court of the State of New York Commercial Division and Judge John E. Jordan of Florida’s Ninth Judicial Circuit served as BCRs for the 2021-2023 term, and Judge Julianna Theall Earp of the North Carolina Business Court and Judge Anne C. Martin of the Chancery Court of Davidson County, Tennessee, serve as BCRs for the 2022-2024 term.^[12] Finally, this publication has included a chapter on updates and developments in business courts every year since 2004.

Other Resources. “The National Center for State Courts (NCSC) and the Tennessee Administrative Office of the Courts (AOC) developed an innovative training curriculum^[13] and faculty guide^[14] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”^[15] The Business Courts Blog^[16] aims to serve as a national library to those interested in business courts, with posts on past, present, and future developments. This includes posts on reports and studies going back twenty years,^[17] as well as recent developments in business courts. In 2023, there were articles and reports addressing aspects of business courts.^[18] There are also various legal blogs with content relating to business courts in particular states.^[19]

§ 2.2.2. Developments in Existing Business Courts

§ 2.2.2.1. Arizona Commercial Court

The Arizona Rule of Civil Procedure governing Arizona’s commercial court, Rule 8.1, was amended slightly in March 2023 to fix an incorrect cross-reference. The previous version of Rule 8.1(d)(4), which governed assignment of cases to the commercial court, was amended to correctly cross-reference another subsection of the Rule. The previous version of Rule 8.1(d)(4) provided as follows:

Assignment. Upon the filing of a complaint by a plaintiff requesting assignment to the commercial court under (e)(2), or the filing by another party of a Notice Requesting Assignment to the Commercial Court under (e)(3), the case will be assigned to the commercial court.

However, subsections (e)(2) and (e)(3), referenced in the previous version of Rule 8.1(d)(4), concerned requirements surrounding the early meeting of the parties and the preparation of a joint report and proposed scheduling order, not the assignment of a case to the Arizona commercial court. The current version of the Rule 8.1(d)(4) provides as follows:

Assignment. Upon the filing of a complaint by a plaintiff requesting assignment to the commercial court under (d)(2), or the filing by another party of a Notice Requesting Assignment to the Commercial Court under (d)(3), the case will be assigned to the commercial court.

The updated cross-references to subsections (d)(2) and (d)(3) in the current version of Rule 8.1(d)(4) now correctly reference the subsections detailing what a plaintiff or another party must do to request assignment of a case to the commercial court.

Beyond this technical revision, there are no other changes that were made to Rule 8.1 concerning Arizona’s Commercial Court.

§ 2.2.2.2. Florida’s Complex Business Litigation Courts

Florida’s business courts saw a number of changes this year. Most notable, however, was the state’s expansion from six business court divisions to seven. Indeed, early this year, the Ninth Judicial Circuit completed its planned expansion and opening of a new business court division in Osceola County (Division 23).^[20] Presiding over the new division is Judge John E. Jordan, who was also re-appointed to continue presiding over the Ninth Judicial Circuit’s business court division in Orange County (Division 43).^[21]

In addition to the physical growth of its business courts, 2023 also included significant changes to Florida’s roster of business court judges. In the Eleventh Judicial Circuit, Judges Thomas Rebúll (Division 43) and Lisa Walsh (Division 44) were appointed to succeed Judges Michael Hanzman and Alan Fine, each of whom resigned from the bench to pursue new opportunities.^[22] In the Seventeenth Judicial Circuit, Judge Patti Englander Henning retired in March after 43 years of judicial service,^[23] and was succeeded in Division 26 by Judge Carol-Lisa Phillips,^[24] who now serves alongside Chief Judge Jack B. Tuter (Division 07). The business court for the Thirteenth Judicial Circuit was the only court without any significant changes this year, and Judge Darren Farfante (Division L) continues in his role there.^[25]

§ 2.2.2.3. Iowa Business Specialty Court

Iowa Supreme Court Assigns Three Iowa Business Specialty Court Judges. District Judge Rustin Davenport (Mason City), District Judge David Odekirk (Waterloo), and Senior Judge Michael Schilling (Burlington) were assigned by the Iowa Supreme Court to the Business Specialty Court on November 13, 2023.^[26] The Iowa Supreme Court based its selection on educational background, judicial and trial practice experience in business and complex commercial cases, and personal interest in the business court.^[27]

Judge Davenport earned his undergraduate degree from Drake University in 1982 and his law degree, with distinction, from the University of Iowa College of Law in 1985.^[28] Judge Davenport clerked for the Second Judicial District from 1985–1986 and for the Honorable David R. Hansen, United States District Court Judge, Northern District of Iowa from 1986–1988.^[29] Judge Davenport was in private practice from 1988–2010 and was appointed to the bench in October 2010.^[30] He has previously served as President of the Iowa Judge’s Association and is a member of the American Bar Association, Iowa State Bar Association, Judicial District 2A Bar Association, and the Cerro Gordo County Bar Association.^[31]

Judge Odekirk earned his bachelor’s degree, with honors, from the University of Iowa in 1989 and his law degree from the University of Iowa College of Law in 1993.^[32] Following his graduation, Judge Odekirk moved back to his hometown in Waterloo, Iowa, where he practiced civil litigation and trial work for over 20 years.^[33] Judge Odekirk was appointed to the bench in 2014.^[34] He is currently the immediate past president and member of the Iowa Judges Association and is a member of the Black Hawk County Bar Association, Iowa State Bar Association, and the American Bar Association.^[35]

Judge Schilling earned his undergraduate degree, with honors, from the University of Iowa in 1973 and his law degree, with distinction, from the University of Iowa College of Law in 1976.^[36] Following his law school graduation, Judge Schilling served as a VISTA volunteer lawyer on three Native American reservations in Nebraska and as an Assistant Public Defender.^[37] Judge Schilling practiced criminal and civil trial work for almost 30 years, was appointed to the bench in 2006, and took senior status in 2023.^[38] Judge Schilling has served on several committees including the Iowa Supreme Court’s Civil Justice Reform Task Force and the Eighth Judicial District’s Mediation Committee.^[39] Judge Schilling served as a drug court judge for several counties for nine years and is a member of the Des Moines County Bar Association, Iowa State Bar Association, American Bar Association, American Judicature Society, and the Iowa Judges Association.^[40]

Iowa Business Specialty Court will be Evaluated by State Court Administration Every Two Years. Starting in 2023, the Iowa Business Specialty Court will be evaluated by state court administration every two years.^[41] The evaluation is expected to ensure the court continues to accomplish its mission and to identify opportunities to improve its operations.^[42] The first report, prepared in December 2023, will evaluate the court for calendar years 2021 and 2022.^[43] Subsequent reports will be prepared by state court administration every two years.^[44]

§ 2.2.2.4. Indiana Commercial Court

The Indiana Office of Court Services continues to maintain a beta search engine for substantive Indiana Commercial Court Orders.^[45] The database allows users to narrow their search by date and the specific commercial court. Users are encouraged to provide feedback, as the Commercial Court staff works to identify and build historical content.

Additionally, the Indiana Commercial Courts Handbook, which is updated regularly, continues to be an aid for both judges and attorneys, covering procedural topics such as case management conferences, discovery, class actions, and trial preparation, and including sample case documents and forms.^[46] The Indiana Commercial Court Treatise also covers substantive topics such as non-compete covenants, fiduciary duties, piercing the corporate veil, preliminary injunctions, and receiverships.^[47]

On October 20, 2023, it was announced that Marion County Commercial Court Judge Heather A. Welch would retire effective February 2, 2024.^[48] She is one of 10 commercial court judges in Indiana and serves as the co-chair of the Commercial Courts Committee.^[49] Additionally, on November 15, 2023, President Biden nominated St. Joseph County Commercial Court Judge Cristal C. Brisco to fill a vacancy on the U.S. District Court for the Northern District of Indiana.^[50] Pursuant to Rule 7 of the Indiana Commercial Court Rules, the Commercial Courts Committee will review applications to fill the expected vacancies from current judges in each respective county, and will then provide the Indiana Supreme Court with a list of up to three recommended nominees for each vacancy.^[51] Three judges have applied for the Marion County vacancy: Judge Kurt M. Eisgruber, Judge James Joven, and Judge Christina Klineman. It is unclear whether any applications have been received for the St. Joseph County vacancy.

§ 2.2.2.5. Massachusetts Business Litigation Session (BLS)

Business Litigation Session (“BLS”) Judge Michael D. Ricciuti has been appointed Chief Justice of the Superior Court. He will begin his five-year term on December 22, 2023. The Court will announce Judge Ricciuti’s replacement in the next few weeks.

There were no new procedural orders for the BLS in 2023.

§ 2.2.2.6. Michigan Business Courts

Michigan’s Adoption of Continuing Judicial Education Rules. On November 1, 2023, the Michigan Supreme Court announced its adoption of the Michigan Continuing Judicial Education Rules, effective January 1, 2024.^[52] These rules require every judicial officer in the state to complete at least 24 hours^[53] of continuing judicial education every two years. A judicial officer’s credited hours must consist of 6 hours of education related to integrity and demeanor and 18 hours of education within the subject area of “judicial practice and related areas.” The CJE program will be overseen by a 12-member board, which will comprise two appellate court judges, two circuit court judges, two district court judges, two probate court judges, three quasi-judicial officers, and one retired judge.

Although these new rules apply to all Michigan state judges, Michigan’s business court statute has always required training for business court judges.^[54] Judge Thomas P. Boyd, Administrator of Michigan’s State Court Administrative Office, recently announced that judicial training sessions, which were suspended during the COVID-19 pandemic, are expected to return in 2024.^[55]

2023 Business Court Appointments. The business court bench remained largely the same in 2023, with only two new appointments: Curtis J. Bell (Kalamazoo County)^[56] and B. Chris Christenson (Genesee County). Both new appointees will serve for a term expiring April 1, 2025.

§ 2.2.2.7. New York Commercial Division

Commercial Division Updates Rules on Motion Papers. On December 16, 2022, Acting Chief Administrative Judge Amaker announced amendments to Commercial Division Rule 16, Motions in General, effective January 3, 2023.^[57] The amendments provide for the following:

1. Counsel submitting exhibits to motion papers should clearly separate them with divider pages with the exhibit numbers, instead of tabs.
2. Counsel shall follow the hyperlinking guidance under Commercial Division Rule 6 for motion papers.
3. The Court may direct counsel to submit hard copies of decisions or other authorities not readily available, instead of such hard copy submissions being mandatory.

These amendments to Rule 16 are identical to the language proposed by the Commercial Division Advisory Council in February of 2022.^[58] In the request for public comment on the proposed amendments, the Advisory Council explained that these revisions were aimed at modernizing the language of Rule 16 “to reflect the widespread use of electronic filing”—with the use of divider pages instead of tabs and the inclusion of hyperlinking.

Commercial Division Updates Rules on Motions in Limine. Effective June 5, 2023, Commercial Division Rule 27 regarding motions in limine was amended. The amended rule now provides a deadline for oppositions to any such motions, which must be filed no later than two days before the return date of the motion unless otherwise directed by the court.^[59] The amended rule further clarifies which issues are appropriately addressed via motion in limine, rather than via objections to pre-trial disclosures. Specifically, the rule states that basic threshold issues such as lack of foundation or hearsay should be made via objections to pre-trial disclosures, whereas “[m]otions in limine should be used to address broader issues [including] (1) the receipt or exclusion of evidence, testimony or arguments of a particular kind or concerning a particular subject matter, (2) challenges to the competence of a particular witness, or (3) challenges to qualifications of experts or to the receipt of expert testimony on a particular subject matter.”^[60] The amended rule similarly cautions that “[m]otions in limine should not be used as vehicles for summary judgment motions.”^[61]

§ 2.2.2.8. South Carolina Business Court Program

Business Court Program Amended for First Time in Four Years. On July 14, 2023, the South Carolina Supreme Court entered an administrative order narrowing the Business Court Program’s jurisdiction and replacing retired judges.^[62]

This order supersedes the previous one from January 30, 2019, which provided the program with jurisdiction over the following matters:

• Title 33—South Carolina Business Corporation Act of 1988;
• Title 35—South Carolina Uniform Securities Act of 2005;
• Title 36, Chapter 8—South Carolina Uniform Commercial Code: Investment Securities;
• Title 39, Chapter 3—Trade and Commerce: Trusts, Monopolies, and Restraints of Trade;
• Title 39, Chapter 8—Trade and Commerce: The South Carolina Trade Secrets Act; and
• Title 39, Chapter 15—Trade and Commerce: Labels and Trademarks.^[63]

In addition to these specified case types, the 2019 order allowed the program to hear “such other cases as the Chief Business Court Judge may determine.”^[64] But the 2023 order eliminates the Chief Business Court Judge’s discretion, narrowing the jurisdictional parameters to only the specified case types.^[65]

The 2019 Order also replaced Judges R. Markley Dennis, Jr. and Alison R. Lee, who retired from the bench, with Judges Jocelyn Newman and Walton J. McLeod, IV.^[66] 

§ 2.2.2.9. West Virginia Business Court Division

Proposed Rule Amendments. On October 19, 2023, the Supreme Court of Appeals of West Virginia requested comments on proposed amendments to the provisions of the Business Court Division as set out in Rules 29.07, 29.08, 29.09, and 29.10 of the West Virginia Trial Court Rules. In summary, the proposed amendments would permit business court judges to hold hearings and trials in any county in the state, if agreed to by all parties and the presiding judge. The proposed amendments would also allow for arbitration to be used as a form of alternative dispute resolution in business court cases. Comments were due on or before December 22, 2023.

Currently, Rule 29.07 sets out the procedure for assigning the presiding and resolution judges in Business Court Division cases. In addition, Rule 29.07 permits the presiding judge to preside over the case in any county within the Business Litigation Assignment Region, as defined in Rule 29.04, in which the case was filed. Proposed amendments to Rule 29.07 would be an addition, also permitting business court judges to preside over an action in any county within West Virginia if the parties and the presiding judge approve.

Rule 29.08, which prescribes the powers and duties of presiding and resolution judges, currently permits the presiding judge in a business court case to schedule conferences, motions, mediation, pretrial hearings, and trials in any circuit court courtroom within the Assignment Region, as defined by Rule 29.04. However, the proposed amendments to Rule 29.08 would permit presiding judges in business court cases to also schedule conferences, motions, mediation, pretrial hearings, and trials in (1) the filing county, (2) in any county within the Business Litigation Assignment Region, or (3) any other county within West Virginia if the parties and presiding judge approve. In addition, the proposed amendments would create an order of preference for jury trials in business court cases: (1) the filing county; (2) in any county within the Business Litigation Assignment Region; or (3) in any county within West Virginia upon the agreement of the parties and the presiding judge.

Another proposed amendment to the business court rules would create a method and procedure for arbitration in business court cases in Rule 29.09 of the West Virginia Trial Court Rules. Under the amendment, upon the agreement of the parties, any case referred to the Business Court Division is available for either binding or non-binding arbitration. The parties may have their case arbitrated by either one Business Court Division Judge or by a panel of three Business Court Division Judges. If the parties agree to have their case arbitrated by a three-judge panel, then the plaintiff will choose one judge, the defendant will choose one judge and, the Chair of the Business Court Division will choose the third judge. Usually, the arbitration will take place in the courtroom in the county where the action is pending, however, it may also be conducted in any courtroom in the Business Litigation Assignment Region, or any other place which the parties and the Chief Arbitrating Judge agree to.

Within thirty days of the conclusion of the arbitration hearing, or within thirty days after the receipt of the final memorandum of the parties, the arbitration decision is to be submitted to the Presiding Judge for entry of the judgment. However, if the arbitration was binding and carried out by a three-judge panel, then the decision must be unanimous to be binding and final.

§ 2.2.2.10. Wisconsin Commercial Docket Pilot Project

There have been no updates to Wisconsin’s Commercial Docket Pilot Project, which was extended in 2022 for two years, with an end date of July 30, 2024. The Court originally approved the Project to create specialized commercial dockets in 2017. Under the current rule, the Chief Justice of the Wisconsin Supreme Court assigns judges to the Project after considering the recommendation of the chief judge in the relevant Judicial Administrative District. Currently, twenty-six counties in Wisconsin participate in the program: Waukesha, Dane, Racine, Kenosha, Walworth, Brown, Door, Kewaunee, Marinette, Oconto, Outagamie, Waupaca, Ashland, Barron, Bayfield, Burnett, Chippewa, Douglas, Dunn, Eau Claire, Iron, Polk, Rusk, St. Croix, Sawyer, and Washburn. The state’s largest county—Milwaukee—has yet to participate in the Project.

§ 2.2.2.11. Wyoming Chancery Court

The Wyoming Chancery Court celebrated its two-year anniversary on December 1, 2023, with good reason. New case filings nearly doubled from 15 in the first year to 29 in the second year. During its first two years, the court handled 44 cases involving 152 different parties and 61 unique attorneys. For the least populated state in the nation, these numbers represent a promising trajectory.

In addition to the increase in case filings, the Chancery Court’s second year marked other notable developments. Specifically, the court seized its first two opportunities to define and clarify its jurisdictional contours through the cases of Clark v. Romo, 2023 WYCH 4 (Wy. Ch. C. June 16, 2023), and Lincolnway v. Villalpando, 2023 WYCH 6 (Wy. Ch. C. Oct. 6, 2023). Both are summarized below.

§ 2.2.3. Other Developments

§ 2.2.3.1. Texas Business Court

When Governor Abbott signed House Bill 19 and Senate Bill 1045 in June 2023, Texas became the latest state to join the modern business court movement and the first to establish an appellate business court.^[67] Both the appellate and trial courts open this fall, hearing cases filed on or after September 1, 2024.^[68]

Here are key details about Texas’s business courts.

• HB 19 created 11 business court divisions aligned with the existing administrative judicial regions in Texas.^[69] Five of the eleven divisions serve urban centers and go live September 2024. The remaining six divisions, which serve more rural areas, will be abolished if not authorized and funded by September 1, 2026.^[70]
• Unlike elected district court judges, the governor will appoint business court judges with the advice and consent of the Senate.^[71] The governor will appoint two business court judges to each of the five urban divisions and one judge for each of the six rural divisions (if funded).^[72] Appointed judges will serve two-year terms but may be reappointed.^[73]
• Parties can either file cases directly in business court or remove cases from district or county court to the business court.^[74]
• Business courts have limited jurisdiction, concurrent with district courts, over two lists of action types—one list where the amount in controversy exceeds $10 million, and another where the controversy exceeds $5 million.^[75] The $10 million minimum case list includes commercial and contract disputes, as well as certain violations of the finance or business code, while the $5 million minimum list includes governance and security disputes.^[76] The $5 million threshold does not apply if the party is a publicly traded corporation.^[77] These minimum amounts also exclude interest, statutory damages, exemplary damages, penalties, attorneys’ fees, and court costs.^[78]
• Business courts also enjoy civil jurisdiction (again, concurrent with district courts) in actions seeking injunctive or declaratory relief in the case types outlined above.^[79]
• Business courts further enjoy supplemental jurisdiction over any other related claim if all parties and the judge agree.^[80]
• Business courts must use juries when required by Texas Constitution.^[81] A jury trial in a case initially filed in business court will be held in any county in which the case could have been filed.^[82] In a case removed to district court, the jury trial must be held in the county where the action was originally filed.^[83] If a contractual provision specifies a venue, the jury trial must be held in that venue.^[84]
• Business court orders or judgments are appealable to the newly created Fifteenth Court of Appeals, a specialized appellate business court located in Austin.^[85] The procedures for an appeal from business court are the same as those for appeals from district court.^[86]

§ 2.2.3.2. Utah Business and Chancery Court

Like Texas, Utah enacted legislation in 2023 to establish its own business court.^[87] Utah named its new court the business and chancery court. It launches fall 2024 with a single judge.^[88]

Key features of Utah’s new court follow.

• The business and chancery court will conduct bench trials only, transferring cases to district court when a party requests a jury trial.^[89]
• The court will have limited, statewide, jurisdiction, concurrent with Utah’s district courts. It will handle disputes seeking monetary damages of at least $300,000, or seeking solely equitable relief, and with claims arising from specific causes of action related to business and commercial activities.^[90] These include: breach of contracts and fiduciary duties; internal business governance; sale, merger, dissolution, receivership, or liquidation of a business; liability or indemnity disputes among owners; indemnification of officers or owners; tortious interference or other unlawful act against a business; commercial insurance coverage disputes; the UCC; the Uniform Trade Secrets Act; misappropriation of intellectual property; non-compete, non-solicitations, and nondisclosure or confidentiality agreements; franchise disputes; securities; blockchain and DAO disputes; antitrust; certain malpractice claims; forum selection clauses that identify Utah or other states’ business courts; and shareholder derivative claims.^[91]
• Notably, at least 48 hours before an oral argument, the court must provide parties with tentative rulings on the motion.^[92] Final decisions and orders will be published and available on the Utah Court’s website.^[93]

§ 2.3. 2023 Cases

§ 2.3.1. Delaware Superior Court Complex Commercial Litigation Division

In re CVS Opioid Litigation^[94] (Claims seeking generalized economic damages to redress the opioid crises are not covered under liability insurance policies). Liability insurers filed suit against retail pharmacy giant, CVS Health Corporation (“CVS”), for a declaratory judgment that they owed no duty to defend or indemnify CVS in suits brought by nine governments to recover costs associated with the opioid epidemic. The insurers argued that they had no duty to defend or indemnify CVS because the policies required allegations of physical injuries for coverage and that the governments did not claim that they suffered bodily injury and did not seek damages on behalf of opioid users.

The court held that the liability policies cover only “damages because of bodily injury,” and not the negligence and public-nuisance claims brought by the state and local governments. Specifically, it held that the claims “must directly relate to and be predicated upon a particular bodily injury” to be covered, but “none of the complaints seek to recover for damages because of the individual injuries sustained by a person.” Rather, the governments’ complaints sought redress for the communal economic losses suffered. Therefore, the court granted the insurers’ motion for partial summary judgment and declared that the insurers were not required to defend CVS against lawsuits seeking only economic damages.

BCORE Timber EC Owner, LP v. Qorvo US, Inc.^[95] (Granting motion to dismiss on the basis of forum non conveniens). The court held that this is “one of those rare cases” in which the defendant met its high burden of showing that the forum non conveniens factors weighed so heavily in its favor that it would face “overwhelming hardship” were the case to proceed in Delaware. This dispute involved a commercial property in Greensboro, North Carolina, which was leased to Qorvo US, Inc. (“Qorvo”). The lease provided that, subject to certain restrictions, tenants could make alterations to the property, but, at the option of the landlord, they may be required to remove any or all alterations or improvements at their expense. When Qorvo refused to remove alterations it made to the property, BCORE Timber EC Owner, LP (“BCORE”) brought suit for waste, breach of contract, and a declaration that Qorvo is obligated to indemnify BCORE. Qorvo filed a motion to dismiss for improper venue, arguing that the subject matter of BCORE’s claims had no connection to Delaware and that it would suffer overwhelming hardship if it were forced to litigate in Delaware.

Because the Delaware action was the only action filed in this dispute, the court applied the “overwhelming hardship” standard to determine whether dismissal was warranted. The court found that this standard was met because the forum non conveniens factors weighed so overwhelmingly in Qorvo’s favor that dismissal of the Delaware litigation was required to avoid undue hardship and inconvenience to Qorvo. Those factors are: (i) the relative ease of access to proof; (ii) the availability of compulsory process for witnesses; (iii) the possibility of a view of the premises; (iv) the applicability of Delaware law; (v) the pendency or nonpendency of a similar action or actions in another jurisdiction; and (vi) “all other practical problems that would make the trial of the case easy, expeditious and inexpensive.” Here, the only salient connection between this action and Delaware was the named entities’ incorporation or registration. Considering that, along with the totality of the other factors, the court determined that dismissal was warranted.

§ 2.3.2. Florida’s Complex Business Litigation Courts

The Plurinational State of Bolivia v. Arturo Carlos Murillo-Prijic et al.^[96] (To successfully plead conspiracy jurisdiction under Florida’s long-arm statute, a plaintiff must make clear, positive and specific allegations of a defendant’s participation in the conspiracy). Following a successful appeal, the Plurinational State of Bolivia (“Bolivia”) was given leave to file a third amended complaint for the purpose of amending its allegations supporting personal jurisdiction over Condor S.A. (“Condor”). The claim against Condor arose from a conspiracy involving former senior Bolivian government officials and a national defense contractor (“Bravo”). The complaint alleged that Bolivian officials conspired with Bravo and Condor in a bribery and money laundering scheme to award Bravo a contract at an inflated rate, and for Bravo to pay bribes to the officials. In her decision on Condor’s motion to dismiss for lack of personal jurisdiction, Judge Walsh determined that Bolivia’s allegations as to Condor asserted no more than that it was an intermediary that “should have inferred” the existence of the scheme. Because those allegations fell short of making the required “specific allegations of [Condor’s] knowledge or participation in a scheme to commit bribery or money laundering,” and Bolivia failed to prove a basis for long-arm jurisdiction in light of Condor’s affidavit refuting Bolivia’s jurisdictional allegations, Judge Walsh dismissed Bolivia’s claims against Condor with prejudice.

Miami-Dade Expressway Authority et al. v. Greater Miami Expressway Agency et al.^[97] (The public official standing doctrine bars a state agency from bringing a constitutional challenge to a statute affecting them). In a long-running legal battle by state officials to establish control over the five main expressways and toll roads in Miami-Dade County, Judge Walsh recently denied Miami-Dade Expressway Authority’s (“MDX”) emergency motion for a “status quo” temporary injunction while a related appeal is pending. MDX’s emergency motion followed a final declaratory judgment in Leon County, wherein the Second Judicial Circuit held that MDX was a state agency that was dissolved by an amendment of the Florida Legislature, and ordered that its assets and obligations be transferred to a newly created state agency, the Greater Miami Expressway Agency (“GMX”). Noting that it was MDX’s ultimate goal in the litigation before her to obtain a declaratory judgment finding the amendment unconstitutional, Judge Walsh denied MDX’s motion on the ground that, as a state agency, it lacked standing to challenge a statute affecting it under the public official standing doctrine. But the battle for control over Miami-Dade’s highways continues, as GMX’s appeal of the Second Judicial Circuit’s ruling in favor of MDX is currently pending in the First District Court of Appeal.

§ 2.3.3. State-wide Business Court in Georgia

Dufour v. Dufour^[98] (Judicial dissolution of a law firm and appointment of a receiver). This partnership dispute arose between two brothers who operated a law firm in Carrollton, Georgia. For over a decade, the brothers split profits from the practice equally between them under the terms of a handwritten agreement. In 2018, Defendant suggested they shift to a pro-rata compensation structure to reflect the parties’ workloads and productivity. Defendant insisted that proposal became binding on the parties via a series of emails. Plaintiff disagreed. He sued, alleging his brother breached the original, handwritten agreement by effectively seizing control over the partnership, its accounts, and its other assets. The action was filed first in Carroll County superior court. There, Plaintiff asked that a receiver be appointed over the law firm, but the superior court denied that request. The parties later agreed to remove the case to the State-Wide Business Court, however, where Plaintiff renewed his motion to appoint a receiver.

This time, the court granted the motion. The court noted at the start that Georgia’s State-wide Business Court has authority to exercise the powers of any equity court, including to appoint a receiver to oversee a partnership’s dissolution. While the parties disagreed over whether their partnership was in fact already dissolved under Georgia’s Uniform Partnership Act because of Defendant withdrawing from it in July 2022, they both, at a minimum, acknowledged the partnership should be dissolved. The court therefore ordered the partnership dissolved, remaining intact only as needed to wind up its affairs. The court then concluded that a neutral receiver was warranted to take possession of, and protect, the partnership’s assets during that dissolution process. Support for that conclusion included dueling allegations about breaches of duty and partnership obligations; misappropriation of files; interference with each other’s legal practice; and other acrimonious dealings between the brothers. Accordingly, the court appointed a receiver agreed to by the parties.

OZ Media, LLC v. Greenberg Film and TV Studio Holdings^[99] (Criminal contempt proceedings). This action involved ownership and management rights to a television and movie production company. Ozie Areu and Steven Greenberg formed Greenberg Georgia Film and TV Studio Holdings (“Greenberg Georgia” or “the company”), a Delaware LLC, as part of a bankruptcy reorganization plan in 2021. The following year, Areu sued Greenberg alleging, among other things, that Greenberg used his authority as majority member to shut out Areu from the company’s operations. Areu also asserted that Greenberg and others were obstructing his use of an office space at a studio that Greenberg Georgia runs, in violation of the company’s operating agreement. By consent of the parties, the court entered a TRO that secured Areu’s access to the office space. But less than a month later, Defendants moved for criminal contempt. The motion contended that Plaintiffs violated the TRO by using their access to the studio to take control of its website and email system, causing Greenberg to be arrested at the studio and jailed in connection with purported threats and stalking charges, and publicizing that arrest, all of which disrupted the studio’s business.

The court denied the motion after an evidentiary hearing. First, the court emphasized the high bar for holding a party in criminal contempt, including that evidence admitted must establish guilt beyond a reasonable doubt. Second and relatedly, the court noted that, in support of their request, Defendants did not present any live witness testimony at the hearing but relied only on affidavits filed with the motion, preventing Plaintiffs an opportunity to cross examine the affiants, which a party facing criminal contempt is constitutionally entitled to do. The court therefore denied the motion. But the court observed that it would also be an abuse of discretion for the court to graft onto the TRO a restriction against Areu pursuing separate criminal proceedings for threats allegedly made against him, where the TRO was limited, by its terms, to Areu’s right to use the studio office space.

§ 2.3.4. Indiana Commercial Court

Arrow Container, LLC v. Clare Allison^[100] (Denying the plaintiff’s motion for temporary restraining order). In Arrow, Arrow Container, LLC (a manufacturer, marketer, and seller of packaging materials and related products and services) filed a complaint and motion for a TRO to enforce non-compete and non-solicit provisions against a former employee. Among other things, the Indianapolis-based plaintiff sought to restrain the defendant-employee from working for a competitor within a 100-mile radius of the plaintiff’s Indianapolis office. The defendant had accepted employment for a competitor in Green Bay, Wisconsin, supporting the competitor’s Cincinnati division in Lebanon, Ohio (i.e., more than 100 miles from the plaintiff’s office), while working remotely from her home in Greenwood, Indiana (i.e., within a 100 miles of the plaintiff’s office). The plaintiff also sought to restrain the defendant-employee from contacting or soliciting any customer of the plaintiff to whom the plaintiff had provided services within the 12 months preceding the defendant’s employment with the plaintiff. Particularly at issue was a post the defendant made on her LinkedIn page which stated:

Big things coming for this girl in 2023! Excited for a new year, new inspiration, and so thankful for new opportunities to thrive! How are you making a big impact in 2023?

#inspiration #opportunities #packaging #boxes #manufacturing #thriving #happinessmatters #operational excellence #new year #growthmindset

The post included a photograph of the defendant tossing the box into the air with the words: “Same Clare / New Company!” and “New resources & more options coming to your area!” Neither the post nor the defendant’s bio referenced her new employment at the competitor or tagged any customers or prospective customers.

The court held that the plaintiff failed to demonstrate a likelihood of success on the merits for its claim for breach of the non-compete provision. “Merely performing remote work within the geographic scope of a non-competition covenant on behalf of customers or business operations located outside the scope of the ‘restricted territory,’ without more, is insufficient to state a claim for the breach of a non-compete.” The court failed to see how the defendant received some “unique competitive advantage or ability to harm” the plaintiff by working remotely from her home and sending emails and making phone calls to customers located outside of the restricted area of her non-compete that she would otherwise not receive if she moved to a location 100+ miles from the plaintiff’s office. “Without evidence that [the defendant] is servicing or soliciting customers within the geographic scope of the Non-Compete, or otherwise directing competitive activities within the geographic scope of the Non-Compete, the Court finds that [the defendant] is not in violation of the Non-Compete.”

The court also held that the defendant’s LinkedIn post did not violate the non-solicit provision, and was instead a “generic, non-targeted job announcement” that was publicly available to anyone on LinkedIn. The court noted that the defendant did not receive any inquiries in response to her post, and that there was nothing in the record to indicate that she had any intention of soliciting or selling to any customers falling within the scope of her non-solicit agreement. Thus, the court found that the substance, apparent intent, and effect of the post did not support the conclusion that it was a customer solicitation and that it was not made for the purpose of selling packaging materials and/or related services to the plaintiff’s existing customers in violation of the non-solicit agreement.

HCW Evansville Hotel, LLC et al. v. Butler, Rosenbury & Partners, Inc. et al.^[101] (Granting in part and denying in part the defendant’s motion to dismiss and for a more definite statement). In HCW, the defendant BRP sought dismissal of claims for breach of contract, restitution, and promissory estoppel, arguing (among other things) that none of the individual plaintiffs alleged the requisite elements of breach of contract against the BRP and instead impermissibly attempted to consolidate their individual elements by alleging the breach of contract claim collectively. Specifically, BRP asserted that (1) HCW Development was not the real party in interest because it was not damaged, (2) HCW was not the real party in interest because it was neither a party to nor an intended beneficiary of the BRP contract; and (3) HCW, LLC was not the real party in interest because it had nothing to do with anything that happened and did not contract with BRP.

The court agreed that the plaintiffs’ use of the collective term “HCW” was vague and that each allegation that included the term was not “simple, concise, and direct” because it did not indicate which plaintiff(s) entered the contract with BRP (or alternatively, conferred a benefit upon BRP or relied on a promise by BRP). The court held that the plaintiffs cannot “lump together” their allegations using vague terms and definitions to create a valid claim against BRP. Rather, BRP is entitled to know which entity is asserting a claim against it. However, the court declined to dismiss the claims against BRP because, once specified, the allegations might state claims for breach of contract, restitution, and promissory estoppel. Instead, the court granted BRP’s request for a more definite statement, holding that if the plaintiffs still could not assert that the party to the contract was the party that suffered damages, then BRP could seek dismissal.

BNAB, LLC et al. v. Franklin St Lofts LLC et al.^[102] (Granting the defendants’ motion to compel). In BNAB, the defendants sought to compel the production of handwritten notes taken by the plaintiffs’ (30)(b)(6) designee and which he had discussed during his deposition. In support of their motion, the defendants cited Indiana Rule of Evidence 612, which provides that an adverse party is entitled to receive copies of the writings used to refresh a witnesses’ recollection before testifying. The defendants argued that the witness stated during his deposition that he used the notes to refresh his memory, and therefore waived any attorney-client privilege regarding the notes. They further argued that the notes were not protected because they documented conversations and meetings that occurred outside the presence of counsel and prior to the initiation of the lawsuit. In response, the plaintiffs argued that the witness took the notes at the request of the plaintiffs’ attorney for the purpose of communicating with its attorney in anticipation of litigation and therefore the notes were protected. The plaintiffs also argued that the defendants failed to satisfy the Sporck Test which provides that (1) the witness must use the object or writing to refresh his memory; (2) the witness used the document for the purpose of testifying; and (3) allowing the questioning party to inspect the writing is necessary in the interest of justice. See Ind. R. Evid. 612(a)(2); Sporck v. Peil, 759 F.2d 312, 317-318 (3d Cir. 1985).

The court found that, taking the Plaintiffs’ contentions as true, the notes were prepared by the witness to provide information to his attorney and as such were protected by the attorney-client privilege. The court also found that the notes were protected by the work-product doctrine because they contained “information gathered with an eye toward litigation by the client himself.” However, in looking at the Sporck Test, the court found that the attorney-client privilege and work-product doctrine were waived when the witness used the notes to refresh his recollection. Specifically, the witness stated that he read his notes the day prior to his deposition, and he answered affirmatively that the notes refreshed his recollection as to what the parties talked about at those meetings. The court also noted that his statements showed that his testimony was affected by his review of the notes the day before. The court further found that it was in the interests of justice for the defendants to have the opportunity to inspect the notes to determine if there are discrepancies between the notes and the witness’s testimony. Finally, the court determined that the notes did not contain pure mental impressions or conclusions, so redaction was not required prior to inspection by the defendants.

Core Bore, LLC et al. v. Martell Electric, LLC^[103] (Granting the defendant’s motion to stay). In 2019, the U.S. Government awarded a contract to BFBC, LLC (“BFBC”) to construct portions of a border wall along the United States/Mexico border. BFBC then entered into two general contracts in 2019 and 2020 with the defendant to perform border wall construction in portions of California and Arizona. The defendant subsequently entered into two subcontracts with the plaintiff to perform some of the work under the general contracts. In May 2021, following a change in administration from President Trump to President Biden, the U.S. Government ordered work on the border wall to cease, and the work under the general contracts and subcontracts was terminated. The plaintiff submitted its “close out” claims (i.e., claims for materials or other things that were provided after notice of termination was provided), along with other invoices, to the defendant which in turn submitted them to the U.S. Government for payment.

After the defendant failed to pay, the plaintiff filed suit, alleging that it had completed the work pursuant to the subcontracts, that the U.S. Government fully paid the defendant for the work performed by the plaintiff, and that the defendant was owed an outstanding principal balance of $2.3 million. The defendant then filed a motion to stay based on the terms of the subcontracts. The subcontracts provided the following:

If [the plaintiff] has damages or a claim against [the defendant] which is only partially covered by the “Pass Through” disputes clause, then any lawsuit or arbitration brought by [the plaintiff] shall, in [the defendant’s] discretion, be stayed until the “Pass Through” portion of the claim is finally determined.

The subcontracts defined a “Pass Through” claim as

any damages or claims which arise from or relate to any directive, interference, rejections of work, breach of express or implied warranty, failure of payment, termination, or other act, failure to act, or conduct by [BFBC], [BFBC’s] separate contractors, or another third party[.]

The defendant asserted that it had presented the plaintiff’s claims to the U.S. Government for payment but had not yet received payment in full for the “close out” claims or for other work performed by the plaintiff. In response to the defendant’s motion to stay, the plaintiff noted that they would amend their complaint to withdraw their claim for the “close out” expenses.

The court noted that even if the plaintiff amended their complaint, it would not change the fact that there were unresolved pending claims given that the defendant’s receipt of payment from BFBC was an express condition precedent to the defendant’s obligation to pay the plaintiff. Because the defendant had not received final payment from BFBC for the plaintiff’s work, a portion of the claims were still covered by the “Pass Through” provision. Thus, the court held that the subcontracts gave the defendant the contractual right in the defendant’s discretion to stay the case. Under Indiana law, a trial court’s decision to stay civil proceedings is discretionary and may occur when the “interest of justice” requires such action. However, the court found that a stay in perpetuity would not be in the “interest of justice.” The court therefore granted a six-month stay and set a mediation deadline prior to the expiration of the stay.

McLaughlin Real Estate Indiana, LLC v. LCI Construction, Inc. d/b/a Leatherman Construction^[104] (Transferring venue) and Seaside Ice, LLC d/b/a Ice America v. Town of Zionsville, et al.^[105] (Denying the defendant’s motion to transfer venue). These two decisions are addressed together because they examine the extent to which Indiana statutes, Trial Rules, and Commercial Court Rules identify when a county with a Commercial Court may be considered a “preferred venue.” This is particularly relevant given that Commercial Courts exist in only 10 of Indiana’s 92 counties. To identify when a county may be considered a preferred venue county, Trial Rule 75(A) lists ten categories of preferred venue. The most relevant category here is “the county where a claim in the plaintiff’s complaint may be commenced under any statute recognizing or creating a special or general remedy or proceeding.” See Trial Rule 75(A)(8). Ind. Code § 23-0.5-8-3 (“the Commercial Court venue statute”) provides that “[n]otwithstanding any law that requires that a case must be filed in a specific court, a case, if otherwise eligible, may also be filed in or transferred to a business or commercial court or docket established or designated by law or supreme court rule.”

In McLaughlin, the Allen County Commercial Court held that the mere fact that Allen County had a Commercial Court did not provide for preferred venue in Allen County for a case that was previously assigned to the Commercial Court docket. There, the plaintiff filed its complaint in Allen County, along with a Notice Identifying Commercial Court Docket Case. The defendant subsequently filed its motion to dismiss, along with a Notice of Refusal to Consent to Commercial Court Docket. The court then issued an order removing the case from its Commercial Court Docket, pursuant to Ind. Comm. Court Rule 4(D) which provides that “if a Refusal Notice is timely filed, the clerk shall transfer and assign the case to the non-Commercial Court Docket of the Commercial Court Judge.” A dispute then arose as to whether there was preferred venue in Allen County. The defendant asserted that preferred venue was in Noble County, not Allen County, based on the allegations of the complaint. The plaintiff argued that reading Commercial Court Rule 4(D) in conjunction with Trial Rule 75(A)(8) and Ind. Code § 23-0.5-8-3 required the case to remain on the non-Commercial Court Docket of the Commercial Court judge. The court noted that this appeared to be an issue of first impression, and noted that, taken together, the rules and statute might appear to create preferred venue in any county in Indiana that has a Commercial Court. However, the court rejected such an interpretation of the interplay between the rules and statute, finding that the statute’s phrase “any law that requires a case must be filed in a specific court” did not encompass the trial rule’s preferred venue scheme because the rule did not “require” a case to be filed anywhere. The trial rule merely provided venue options, not requirements. Further, the court noted that the statute was enacted so that commercial court cases that were previously filed in a county’s circuit court, could be filed in that county’s superior court, and vice-versa. There was no indication of legislative intent to create preferred venue for Commercial Court cases in any of the ten counties that had a Commercial Court. Thus, the court concluded that Allen County was not a county of preferred venue, and transferred the case to Noble County, which had preferred venue.

In contrast, the Marion County Superior Court in Seaside held that there was preferred venue in Marion County for a case that was permanently assigned to the Commercial Court docket. In Seaside, the plaintiff filed its complaint in Marion County, along with a Notice Identifying Commercial Court Docket Case. The defendant subsequently filed its motion to dismiss or transfer to Boone County but did not file a Notice of Refusal to Consent to Commercial Court Docket. The plaintiff thereafter filed an objection to the defendant’s motion, along with a motion for permanent assignment to the Commercial Court docket. The defendant asserted that proper preferred venue was in Boone County, not Marion County, because the defendant’s principal office was in Boone County, and the complaint failed to include any operative facts that would establish preferred venue in Marion County under the categories set forth in Trial Rule 75(A). In response, the plaintiff argued that Marion County was a preferred venue because the case was filed in Commercial Court and was “commenced under [a] statute recognizing … a special or general … proceeding.” See Trial Rule 75(A)(8); Ind. Code § 23-0.5-8-3. As a threshold matter, the court found that the case should be permanently assigned to the Commercial Court docket under Ind. Comm. Ct. Rule 4(D)(2) because the defendant did not file a Notice of Refusal. The court then determined that Marion County was indeed a preferred venue under Trial Rule 75(A)(8) because the case had been permanently assigned to the Commercial Court docket and Indiana statutes provided that the Commercial Court in Marion could oversee such a proceeding. Because Marion County was a preferred venue, the court could not transfer the case to Boone County, even if it was also a preferred venue. Further, the court noted that the case could not remain on a Commercial Court docket and be transferred to Boone County because a Commercial Court does not exist in Boone County.

Thus, the differing outcome between the two decisions appears based on a key factual distinction, i.e., that McLaughlin was no longer assigned to the Commercial Court docket after the defendant filed a Notice of Refusal to Consent to the Commercial Court Docket while Seaside remained permanently assigned to the Commercial Court docket after the defendant failed to file a Notice of Refusal. However, it is possible that a future decision could differ from these decisions and find that preferred venue does exist in a county with a Commercial Court, even if the case has been re-assigned from a Commercial Court judge’s Commercial Court docket to his non-Commercial Court docket, because the case was initially filed on the Commercial Court docket. See Ind. Comm. Ct. Rule 4(D)(3); Ind. Trial Rule 75(A)(8); Ind. Code § 23-0.5-8-3. Hopefully, this lack of ambiguity will be resolved by Indiana’s appellate courts, or by a clarification of Indiana’s Trial and Commercial Court rules.

§ 2.3.5. Iowa Business Specialty Court

Southern Disaster Recovery, LLC v. City of Marion, Iowa^[106] (Public improvement contract, attorneys’ fees, interest). After Iowa’s 2020 derecho, Plaintiff Southern Disaster Recovery, LLC (“SDR”) contracted with Defendant City of Marion (“City”) to remove debris from waterways. SDR conducted the work, but the City withheld payment of SDR’s later invoices in the amount of $4,928,993.28. SDR filed suit against the City for failure to pay the outstanding invoices pursuant to its contract. SDR also asserted a claim for attorneys’ fees and expenses under Chapter 573 of the Iowa Code, which governs public improvements, and later added a claim for alleged false reporting by the City to law enforcement under Iowa Code § 708.7(7). Shortly before trial, the City paid SDR’s outstanding invoices in full. The parties submitted SDR’s false reporting claim to the jury, and after seven trial days, the jury returned a verdict for the City. The parties then submitted SDR’s claim for attorneys’ fees to the court. SDR also argued it was entitled to interest in the amount of $377,502.70 under Iowa Code Chapter 535 because the City refused to pay the invoices for more than a year and a half.

The court rejected SDR’s attorneys’ fees claim under Chapter 573 but granted SDR’s interest claim under Chapter 535. The court concluded that Chapter 573 was inapplicable to the case because the contract between the parties was not a public improvement contract. The court explained that under Chapter 573, “public improvement” required work related to construction, and SDR did not build, or claim to demolish, anything in connection with the services it provided to the City. However, the court granted SDR’s claim for interest on the invoices pursuant to Iowa Code § 535.2 because the contract provided that the City and its debris monitoring agent would exercise their discretion in determining what debris SDR removed. Although the court recognized the City’s concerns with possible ineligible debris removal, the City’s debris monitor oversaw all the work of SDR and approved every invoice. The court thus concluded that the City did not have a good faith basis for disputing the amount of SDR’s invoices and awarded interest on the unpaid invoices.

§ 2.3.6. Maine Business and Consumer Docket

Desjardin v. Wirchak^[107] (Order denying individual defendants’ motion to dismiss). This BCD case centered around claims against individual hospital employees (the “Individual Defendants”) and the hospital itself (the “Hospital Defendants”) for inappropriate and unlawful access to patient medical records. The question presented by the Individual Defendants’ motion to dismiss was whether a hospital patient whose electronic medical record was repeatedly accessed, viewed, and misappropriated for illegitimate reasons by prying unauthorized hospital employees during the nine months of her pregnancy and beyond could bring a claim against the employees without first going through the medical malpractice pre-litigation screening panel.

Plaintiff had been in a contentious relationship with one of the Individual Defendants from 2020 through 2021, and learned that she was pregnant with his child, which he denied. That Individual Defendant was employed by the Hospital Defendants, as was his mother, both as non-clinical, administrative employees. During Plaintiff’s prenatal, labor and delivery, and postpartum care through the Hospital Defendants, the Individual Defendants either accessed directly or directed other Hospital employees to access Plaintiff’s health care information and protected health information via Plaintiff’s electronic medical records, without her knowledge or consent. Eventually, in late 2021, Plaintiff received an anonymous message notifying her that the Individual Defendants had accessed her medical record. After Plaintiff’s report, the Hospital Defendants commenced an investigation and found that Plaintiff’s records had been inappropriately accessed, but did not take any action against the Individual Defendants, and did not take any effective steps to protect Plaintiff’s private healthcare information. The unauthorized access continued, and Plaintiff was anonymously alerted a second time.

In May of 2023, Plaintiff filed a seven-count complaint, including claims for Invasion of Privacy, Unlawful Disclosure of Health Care Information under 22 M.R.S. § 1711-C(13)(B), and Intentional Infliction of Emotional Distress. The Individual Defendants filed a Motion to Dismiss all claims against them for lack of subject matter jurisdiction, on the grounds that Plaintiff did not comply with the Maine Health Security Act (“MHSA”), 24 M.R.S. §§ 2501-2988 (2023), because Plaintiff’s allegations arose from professional negligence and therefore should have been brought pursuant to the MHSA.

The court denied the Individual Defendants’ Motion to Dismiss in the grounds that the “MHSA was enacted to regulate the medical malpractice insurance industry in response to the rising insurance costs against health care providers – not to create procedural hurdles for every claim against or involving the medical field.” As a result, despite the breadth of the MHSA, health care services under the MHSA are defined as “acts of diagnosis, treatment, medical evaluation or advice or such other acts as may be permissible under the health care licensing, certification or registration laws of this State.” In this case, the Individual Defendants did not have a work-related reason for accessing Plaintiff’s medical records and personal health information, were not providing health care services, and were not performing related activities such as billing, scheduling, or other legitimate activities. The court stated: “The conduct of a hospital employee accessing a patient’s confidential information for illegitimate purposes like snooping or spying is no more providing a health care service subject to the MHSA than if a health care practitioner ran over her own patient in the hospital parking lot.” Thus, since Plaintiff’s claims against the Individual Defendants did not arise out of the provision or failure to provide health care services, she was not first required to submit her claims to a prelitigation screening panel pursuant to the MHSA.

§ 2.3.7. Maryland Business and Technology Courts

Wilber v. Feldman^[108] (The nature of the action brought by plaintiffs in breach of fiduciary claims determines whether it is a derivative or direct claim, not the label given to the claim by the plaintiffs). In September 2020, the Board of Directors (“Board”) of Resource Real Estate Opportunity REIT Inc. (“REIT I”), a Maryland real estate investment trust, approved an internalization transaction to internalize its management functions (“Self-Management Transaction”) and then later merged with and into Resource Real Estate Opportunity REIT II Inc. (“REIT II”), another Maryland real estate investment trust (“Merger Transaction”). The newly merged company (the “Company”) also later acquired Resource Apartment REIT III, Inc. (“REIT III”), another Maryland real estate investment trust. In June 2021, Plaintiffs delivered a stockholder demand letter to the Board in which they alleged breaches of fiduciary duties by the Board in the Self-Management Transaction and the Merger Transaction. After receiving the demand letter, the Board formed a Special Litigation Committee (“SLC”) and delegated to the SLC the ability to investigate and make a determination regarding how the Company should respond to the demand letter. The SLC engaged separate independent counsel, investigated Plaintiffs’ claims in the demand letter and determined on January 23, 2022, that the claims had no merit. During the pendency of the SLC investigation, the Company’s management met with several financial advisors in September 2021 to discuss potentially listing the Company’s common stock or sale of the Company. Ultimately, after running its process, Blackstone Real Estate Income Trust Inc. became the successful bidder to acquire the Company through the use of a cash-out merger at the price of $14.75 per share and closed on the transaction in May 2022 (the “BREIT Transaction”). Plaintiffs filed a class action complaint against the Board in February 2022 alleging that the directors of the Board breached their fiduciary duties and were unjustly enriched to the detriment of stockholders when the Company completed the Self-Management Transaction, the Merger Transaction, and BREIT Transaction. The defendant directors moved to dismiss Plaintiffs’ complaint.

The court held that Plaintiffs’ claims for breach of fiduciary duty and unjust enrichment as to the Self-Management Transaction and the Merger Transaction were derivative claims that could not be maintained because Plaintiffs were no longer stockholders. In reaching this conclusion, the court looked to the language of the Plaintiffs’ complaint and the demand letter, which both asserted damages to the Company rather than articulated how the Plaintiffs were distinctly and separately harmed. The court rejected Plaintiffs’ contention that share dilution caused individual harm that would render their claims direct claims instead of derivative claims. In concluding that the Plaintiffs’ derivative claims failed, the court noted that a plaintiff must continuously own shares in the company to maintain a derivative action. However, a plaintiff may be able to bring a derivative action if its ownership of shares is terminated by a merger and it shows that the board pursued the merger fraudulently and merely to preclude a derivative action. Because Plaintiffs had not alleged that the Board pursued the Merger Transaction fraudulently and with the purpose of avoiding a derivative action, the court held that Plaintiffs were unable to maintain the derivative claims. Noting that the SLC was composed of independent and disinterest directors that were newly added to create the SLC, the SLC’s use of independent counsel and extensive investigation that was not restrained by the Board in making its determinations, the court found Plaintiffs’ claims to also fail because the business judgment rule applied to the SLC’s rejection of Plaintiffs’ demand letter. Furthermore, the court held that Plaintiffs’ breach of duty claim as to the BREIT Transaction was not actionable because defendant directors were fully transparent in the proxy material pertaining to the sale and the sale was ratified by informed stockholders of the Company and found the inclusion of immunity for the Board through broad indemnification rights in the BREIT Transaction failed to establish that the directors engaged in self-dealing.

Whitlow v. Bowser^[109] (Claims for breach of fiduciary duty in connection with a transaction are foreclosed when the transaction is approved by the requisite vote of informed and disinterested stockholders). In a class action, Plaintiffs alleged that the directors of the board of directors (the “Directors”) of Columbia Property Trust Inc. (“Columbia”) breached their fiduciary duties of good faith and loyalty by allegedly choosing to merge with Pacific Investment Management Company LLC (the “Merger”) to appease an activist investor to the detriment of Columbia’s stockholders and through the Directors’ receipt of an improper benefit resulting from the Directors’ receipt of “easy liquidity” and reputation protection. Plaintiffs further alleged the Directors breached their duty of disclosure by withholding information about the proposed Merger to the stockholders, thus preventing stockholders from evaluating the necessary information to make an informed decision regarding the Merger. Defendant Directors moved to dismiss. The court granted Defendants’ motion to dismiss.

The court held that the business judgment rule applied to the Board’s decision to enter into and consummate the Merger, found that Plaintiffs’ allegations that an activist stockholder threatening a proxy fight bullied Defendants into a merger to protect their reputation and avoid a proxy contest were speculative and were insufficient to overcome the presumption that the actions of the Directors were in the best interest of Columbia—especially considering the extensive efforts Columbia and the Directors took in the review process and its consultation with independent legal counsel as well as financial advisors. The court further held that Plaintiffs’ claims also failed because the stockholders voted in favor of the Merger and therefore, even if Plaintiffs presented a sufficient claim for breach of fiduciary duty arising from the Merger, those claims became foreclosed when a majority of informed and disinterested stockholders voted to ratify the Merger. In considering a violation of the duty of disclosure, the court noted that a materiality standard is applied when determining the scope of information that must be disclosed to stockholders prior to a merger, such that an omitted fact is only considered material if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding how to vote. Thus, a plaintiff must explain how omitted information would have altered a stockholder’s vote. In dismissing Plaintiffs’ disclosure allegations, the court considered the extent of information that was given to the stockholders and ultimately found Plaintiffs’ disclosure claims to be speculative and insufficient and to not state how or why the allegedly undisclosed information was in fact material. Finally, the court held that Plaintiffs’ claims were also barred by the exculpatory provision in Columbia’s charter, which provided that no director or officer of Columbia would be liable to stockholders for money damages. Under Maryland law, for claims to survive such an exculpatory provision, a plaintiff must show that the officer or director received an improper benefit or engaged in active or deliberate dishonesty. In dismissing this claim, the court found that Plaintiffs’ claims that the Merger provided Defendants with “easy liquidity” and protected their reputations were not sufficient to demonstrate the receipt of an improper benefit and Plaintiff provided no facts showing that Defendants engaged in active and deliberate dishonesty.

Shareholder Representative Services, LLC v. Columbia Care Inc.^[110] (Motion to Dismiss Granted due to Failure to establish personal jurisdiction, standing, and to plead facts sufficient to establish fraud). Shareholder Representative Services, LLC, on behalf of former securityholders of Green Leaf Medical LLC (“Green Leaf”), sued Columbia Care Inc. (“Columbia Care”), Kroll Inc. (“Kroll”), and Columbia Care’s Chief Financial Officer, Chief Executive Officer, and Executive Chairman of Board of Directors (collectively the “Individual Defendants”) alleging that Defendants fraudulently deprived the former securityholders of milestone payments totaling more than $72 million that they would be entitled to receive as a result of Green Leaf achieving certain performance metrics after being acquired by, and becoming a subsidiary of Columbia Care pursuant to a merger entered into in December 2020. Plaintiff alleged that the Individual Defendants were instrumental in an effort to defraud them and that the Individual Defendants retained Defendant Kroll, who provided accounting services that improperly deflated the performance results of Green Leaf. Plaintiff further alleged that Columbia Care and its Chief Executive Officer made fraudulent or negligent misrepresentations regarding a litigation matter that was pending against Columbia Care prior to the merger. Defendants moved to dismiss the Plaintiff’s claims. The court ultimately granted the Defendants’ motions to dismiss.

First, the court explained that despite the lengthy nature of the Plaintiff’s complaint, the Plaintiff failed to establish that the court had personal jurisdiction over any of the Defendants due to none of the Defendants having enough contacts and/or soliciting business in the State of Maryland sufficient to establish personal jurisdiction. Next, the court explained that Plaintiff failed to establish standing to bring claims alleging breach of fiduciary duties due to those claims only being claims that can be brought by the securityholders themselves and not the Plaintiff. Additionally, the court noted that the assignment document that required the Plaintiff to distribute any proceeds received from the litigation was insufficient to actually assign the right of the former securityholders of Green Leaf to bring derivative or direct claims resulting from the merger transaction. The court also dismissed Plaintiff’s fraud and intentional misrepresentation claims against Columbia Care and its Chief Executive Officer. Despite Plaintiff’s allegations that Columbia Care failed to identify pending litigation and the Chief Executive Officer’s characterization of the pending litigation as immaterial, the court found that the allegations on their own were insufficient to maintain a claim for fraudulent misrepresentation. The Plaintiff failed to allege facts to indicate that the Individual Defendants knew of the falsity of their statements, made such statements with the intent to deceive, or that the former securityholders relied on those statements to enter into the Merger Agreement with Columbia Care. The court further held that Plaintiff’s claim against Columbia Care and its Chief Executive Officer for negligent misrepresentation were contractually waived by the exclusive remedy clause in the Merger Agreement, leaving indemnification as the sole remedy available. The court also dismissed the claim of breach of fiduciary duty against the Defendants on the basis that officers and directors owe no duty directly to shareholders. Finally, the court dismissed claims for tortious interference against the Individual Defendants and Kroll. In reaching this decision, the court noted that officers and directors cannot be held liable for intentional interference with contractual relations and, therefore, the Individual Defendants cannot interfere with a contract concerning their own company. As to Kroll, the court held that a conclusory allegation that a party was aware of the existence of a contract was insufficient to support a claim for tortious interference.

§ 2.3.8. Massachusetts Business Litigation Session

Adelman v. Proskauer Rose LLP^[111] (legal malpractice, superseding causation). Dr. Robert Adelman retained Proskauer Rose LLP (“Proskauer”) to prepare contract documents that would effectuate a hedge fund spin-off from the life sciences investment firm he had helped found. The contract documents Proskauer prepared included a provision that allowed the new hedge fund’s manager to redeem Dr. Adelman’s interests in the fund and its profits if the hedge fund manager carried out certain permitted transactions. The hedge fund manager took advantage of the provision and engaged in certain strategic transactions that stripped Dr. Adelman of his economic interests. Dr. Adelman brought a legal malpractice claim against Proskauer, alleging that the firm had negligently copied and pasted the referenced provision from a prior contract it had worked on. He sought $636 million in damages.

At summary judgment, Proskauer conceded a triable issue as to whether it breached the standard of care by including the provision at issue. It contended, however, that the hedge fund manager had himself breached other contractual provisions and his fiduciary duty to Dr. Adelman, and that each of those breaches severed the chain of causation between its conduct and Dr. Adelman’s injury. The court disagreed, denying Proskauer’s motion for summary judgment and finding that the contractual breaches invoked by Proskauer were irrelevant; the contracting parties had agreed that the hedge fund manager did not owe Dr. Adelman any fiduciary duty; Proskauer had failed to show the hedge fund manager’s conduct was an unforeseeable superseding cause of the harm; the record supported a finding that Proskauer’s negligence caused the loss of Dr. Adelman’s share of future hedge fund profits; and Dr. Adelman had standing to sue for the loss of his right to share in those profits.

On the superseding causation issue, the court explained that, in a legal malpractice case, intervening events or conduct by a third party may relieve a defendant of liability only where the intervening events or conduct (i) occurred after the original negligence; (ii) were not the consequence of the attorney’s negligence; (3) created a result that would not otherwise have followed from the original negligence; and (4) were not reasonably foreseeable. Where the intervening cause was reasonably foreseeable and the attorney could have taken reasonable steps to mitigate the harm, the intervening cause is simply a “concurring cause.” Accordingly, even if the hedge fund manager had breached material portions of the agreement (which he did not), that would still not be a superseding cause that absolved Proskauer of liability. The record suggested that the hedge fund manager would not have been able to redeem Dr. Adelman’s interest but for Proskauer’s alleged negligence. It was foreseeable that, once Proskauer drafted the agreement to let the hedge fund manager engage in the underlying transaction without Dr. Adelman’s consent, then Dr. Adelman would have trouble collecting his share of the consideration from the hedge fund manager. A jury could reasonably find that Proskauer could have protected Dr. Adelman from this risk by, for example, not including the strategic transaction provision in the agreement.

Alves v. BJ’s Wholesale Club, Inc.^[112] (electronic data collection, wiretapping). Alves is one of a number of decisions issued by the Business Litigation Session in 2023 related to whether certain internet tracking technologies violate the Massachusetts Wiretap Statute, G.L. c. 272, § 99 (“Wiretap Statute”). Here, the court considered, and ultimately denied, a motion to dismiss a class action complaint challenging BJ’s Wholesale Club, Inc.’s (“BJ’s”) use of “Session Replay Code” (“SRC”) to record visitors’ activities on its website. SRC is computer code that enables website operators to record, save, and replay visitors’ interactions with a website—including mouse clicks, scrolls, zooms, keystrokes, and text entries. SRC recordings are not necessarily anonymized, and personally identifiable information typed by a website visitor may be captured. The Alves plaintiff alleged that BJ’s use of SRC violated both the Wiretap Statute and the Massachusetts statute governing invasion of privacy, G.L c. 214, § 1B. BJ’s moved to dismiss all claims, arguing with respect to the Wiretap Statute that the plaintiff (i) failed to plausibly allege that BJ’s conduct concerned wire communications and (ii) failed to plausibly allege that the conduct amounted to an interception within the meaning of the statute. The court rejected each argument in turn.

A “wire communication” is defined in the Wiretap Statute as “any communication made in whole or in part through the use of facilities for the transmission of communications by the aid of wire, cable, or other like connection between the point of origin and the point of reception.” G.L. c. 272, § 99(B)(1). BJ’s asserted that the plaintiff’s claims did not implicate “wire communications” because the activities tracked by its SRC (i) were not “communications” and (ii) did not involve the use of a wire, cable, or other like connection. The court disagreed. Citing to the dictionary definition of “communication,” the court found that the mouse movements, clicks, and keystrokes recorded by BJ’s SRC may properly be considered an exchange of information between the website owner and the website user. The court further rejected BJ’s contention that an Internet-based communication does not occur by wire, reasoning that internet technology is rooted in telephone infrastructure.

BJ’s arguments as to the absence of an “interception” likewise failed. As defined in the statute, “interception” means to “secretly hear, secretly record, or aid another to secretly hear or secretly record the contents of any wire or oral communication through the use of any intercepting device by any person other than a person given prior authority by all parties to such communication.” G.L. c. 272, § 99(B)(4). BJ’s argued that, even if these were wire communications, the plaintiff’s claims still failed because he did not allege that the contents of any wire communication were recorded. BJ’s further argued that the plaintiff failed to plausibly allege that SRC is an intercepting device. Citing the breadth of the statutory language, the court found that keystrokes, clicks, mouse movements, and other data constitute recorded “contents” within the meaning of the statute. The court further rejected BJ’s claims that SRC is not a “device” or “apparatus,” and declined to find that SRC falls within the so-called “telephone equipment exception.” The court found the case law cited by BJ’s to be distinguishable based on the degree of invasion involved, and concluded that SRC’s characteristics are “quite different” from telephone equipment. Finally, the court refused to dismiss the plaintiff’s invasion of privacy claim on the grounds that (i) whether an intrusion transgresses the privacy statute is a fact question not resolvable on a motion to dismiss; (ii) the standards for acceptable data collection on the internet are evolving; and (iii) the scope of discovery would not change if the invasion of privacy claim remained.

JFF Cecilia LLC v. Weiner Ventures LLC^[113] (spoliation, sanctions). Read together, these decisions (i) clarify the legal standard in Massachusetts for when the duty to preserve evidence begins and (ii) explain when sanctions may be imposed for spoliation of evidence. The plaintiffs in JFF Cecilia LLC moved for sanctions based on the defendants’ deletion of various emails and texts after they had been provided with formal written notice of a contract dispute between the parties. The notice was provided on August 20, 2019. In the days that followed, however, multiple attorneys communicated that the notice was not meant to serve as a precursor to litigation. Then, on October 1, 2019, counsel for the plaintiffs sent a settlement offer that threatened recovery through “other mechanisms” if the offer was not accepted. Shortly thereafter, one of the defendants performed a factory reset of his cell phone, permanently destroying any electronic evidence that might otherwise have been recoverable. The defendants also continued their practice of deleting old texts and emails until October 23, 2019.

In its initial decision, the court denied the plaintiffs’ motion for sanctions on the grounds that the defendants would not reasonably have expected to be sued until October 1, 2019, and that the plaintiffs failed to show they suffered any prejudice from spoliation that occurred between October 1 and October 23, 2019. The court reasoned that the duty to preserve evidence arises once litigation becomes “probable” and “not merely possible.” Here, litigation became “probable” upon the defendants’ receipt of the October 1 settlement offer, at which point any reasonable person would have understood there to be a clear threat of litigation.

On appeal, a single justice held that the lower court had applied the wrong legal standard and remanded with an order that the court “determine if the defendants knew or reasonably should have known that evidence might have been relevant to a possible action.” On remand, the lower court stated that it understood the phrase “possible action” to mean something materially different than “likely” litigation. It concluded that a future lawsuit is “possible” if it is within the limits of ability, capacity, or realization but “likely” only if it has a high probability of occurring. Under this standard, sanctions were warranted based on the defendants’ spoliation of evidence after their receipt of the August 20, 2019, notice. Because the plaintiffs were prejudiced by the destruction of evidence during this time period, the court held that the plaintiffs would be permitted to offer evidence of the spoliation at trial and found that the jury should be instructed as to an unfavorable inference against the defendants regarding the contents of the deleted messages.

§ 2.3.9. Michigan Business Courts

Thomas A. Robinson and The Mack Shop, LLC v. Gretchen C. Valade Revocable Living Trust^[114] (Arbitration, deadlock, dissolution, operating agreements). In 2012, Plaintiff Thomas Robinson established Plaintiff The Mack Shop, LLC with Gretchen Valade. Robinson and Valade were 50/50 owners and co-managers of the company. The company owned a commercial building, of which Valade occupied 20% and Robinson occupied 80%. Each paid below-market rent of $1,000 per month and shared the building’s operating expenses. Nearly a decade later, Valade transferred her interest in the company to the Defendant Trust and granted authorization to her son and to her business representative to manage the company on behalf of the trust. At that time, Valade also relinquished her tenancy and leased her 20% of the building to a third party, who continued to pay the $1,000 rental rate.

Then, in December 2021, the trust’s representatives called a member/manager meeting and submitted two resolutions, one that would require the company to increase its rental rates for both tenants and another that would require the company to sell the building before March 2022. Robinson voted against both resolutions, prompting the trust to submit a third resolution to dissolve the company. Robinson voted against this resolution as well. Consequently, the trust filed a demand for arbitration claiming that the members were at an impasse and seeking dissolution pursuant to Michigan’s LLC Act. Robinson countered that the company had operated the same way for a decade, and that so long as it maintained its historical operations, there was no deadlock. The arbitrator agreed with the trust and ordered a dissolution.

Robinson and the company filed a complaint in the Wayne County Business Court seeking to vacate the arbitrator’s ruling. The trust moved to dismiss and to confirm the award. Robinson argued that the arbitrator erred by applying the LLC Act’s dissolution provision instead of a provision in the company’s operating agreement that prohibited the company’s members from seeking to “compel dissolution of the company, even if such power is otherwise conferred by law.” Given the conflict between the provision and the statute, the court considered the question of which should prevail. After reviewing the caselaw and the particulars of the case, the court agreed with the arbitrator’s harmonization of the statute and the operating agreement and found that the statute permits dissolution where, as here, an operating agreement has no mechanism for resolving an impasse. Thus, the court upheld the arbitration award.

Graczyk Holdings, LLC, Offshore Spars Co., and Eric Graczyk v. Steven King^[115] (Breach of contract; fraud; economic loss doctrine). In September 2021, Plaintiff Eric Graczyk and Defendant Steven King executed a letter of intent (“LOI”) for Graczyk’s company, Graczyk Holdings (“GH”), to purchase King’s company, Offshore Spars (“Offshore”) The LOI provided for due diligence review by Graczyk and required King to make disclosures concerning Offshore’s finances and operations. In December 2021, Graczyk and King executed a stock purchase agreement (“SPA”) by which GH purchased all of Offshore’s shares for $3,000,000. The SPA required King and Offshore to make further disclosures to GH. The sale closed in January 2022, and was financed by a bank loan, two promissory notes, and a personal guaranty from Graczyk.

Plaintiffs alleged that just months after closing, they discovered that King made multiple misrepresentations and omissions during the LOI’s due diligence and disclosure period and breached the representations and warranties he made during that period. Plaintiffs further alleged that King made multiple misrepresentations and omissions in the SPA’s required disclosures. Plaintiffs sued in the Macomb County Business Court, raising claims for breach of contract and unjust enrichment as well as multiple fraud claims, including misrepresentation, silent fraud, and fraudulent inducement. King moved to dismiss all of Plaintiffs’ claims, which the court granted for the fraud claims only.

The court first considered King’s arguments based on the economic loss doctrine, which precludes tort claims based on a breach of a duty arising out of a contractual obligation. The court found that Plaintiffs’ misrepresentation and silent fraud allegations (such as the claim that King “falsely represented that all disclosures required under the [SPA] were fully, accurately, and completely made”) related directly to King’s disclosure obligations under the SPA, and in fact were the same allegations underlying Plaintiffs’ breach of contract claims. The court rejected Plaintiffs’ argument that the SPA’s indemnification provision excepted fraud and thus created a carve-out for the doctrine. The court stated that allowing parties to contract around the doctrine would undermine its purpose to keep contract and tort law distinct. Furthermore, the court rejected Plaintiffs’ assertion that their fraudulent inducement claim is exempt from the economic loss doctrine. The court stated that while there is an exemption for inducement claims relating to fraud extraneous to the contract, Plaintiffs’ inducement claims all concerned King’s performance of the contract. Accordingly, the court held that Plaintiffs’ fraud claims were barred by the economic loss doctrine.

Pinnacle North, LLC v Keith A. White^[116] (Voidable transactions, capital contributions, distributions). Non-party Marketplace Home Mortgage, LLC (“MHM”) leased office space from Plaintiff. In October 2019, Plaintiff obtained a default judgment against MHM of approximately $53,000, plus interest, costs, and attorneys’ fees. Plaintiff was unable to collect on the judgment, and brought a subsequent suit in the Oakland County Business Court against Defendant’s former owner, seeking to pierce the corporate veil and recover the default judgment. The matter went to a bench trial, where the central dispute was the characterization of a $50,000 payment Defendant made from MHM to himself in December 2019. If the payment was a distribution to Defendant, then it would be a voidable transfer under the Voidable Transactions Act that Plaintiff could collect to satisfy the judgment; but if it was a loan repayment as Defendant contended, then it would not be a transfer under the Act and therefore would not be collectible.

The court first considered whether Defendant had made any loan to MHM at all. Defendant claimed to have deposited $275,000 in order to use a line of credit for the company and claimed that this deposit was a loan to the company. However, the deposit was characterized differently on different documents: MHM’s books and records showed it as a capital contribution made on November 30, 2018; a separate loan document and security agreement showed it as a loan made on December 3, 2018; tax documents did not show it as a liability; and MHM’s balance sheet did not show it as a loan. Defendant, for his part, testified that the deposit was both a loan and a capital contribution. The court did not find Defendant credible and found that the books and records unambiguously proved the $275,000 deposit to be a capital contribution.

Turning to the $50,000 payment, the court found that it was a distribution from MHM to Defendant, and not a repayment of the alleged loan, because the check: (1) was made to MHM’s sole owner; (2) was made at the end of the year; (3) did not identify any consideration; (4) did not correspond to any loan schedule; (5) did not correspond to any loans on MHM’s books; (6) had no description of the payment; and (7) was shown on MHM’s books as a return of a capital contribution. Additionally, Defendant had sworn to the IRS that there were no outstanding loans from MHM officers. Accordingly, the payment was a distribution, and because it was made after Plaintiff’s claim against MHM and while MHM was insolvent, it was voidable under the Voidable Transactions Act. The court found Defendant responsible for the entirety of Plaintiff’s default judgment against MHM, including nearly $70,000 in attorneys’ fees pursuant to the underlying contract.

Fastenal Company v. Kurt Patrick Gross and Hi-Tech Fasteners, LLC^[117] (Noncompete, trade secrets, preliminary injunctions). Defendant Kurt Gross was an employee of Plaintiff Fastenal Company. Gross had a confidentiality and noncompetition agreement that prohibited Gross from soliciting Fastenal’s customers for a year after leaving Fastenel’s employ. On June 3, 2022, Gross resigned from Fastenal. On that same day, Gross began employment with Defendant Hi-Tech Fasteners, LLC, a competitor of Fastenol. Upon exiting Fastenal, Gross emailed to himself a “rolodex” spreadsheet listing Fastenal customers and confidential customer information. Fastenal alleged that while at Hi-Tech, Gross used his connections with Fastenal’s customers and Fastenal’s confidential customer information to solicit numerous Fastenal customers to buy parts from Hi-Tech, and that Hi-Tech could not have secured those customers without Fastenal’s proprietary and confidential information. Believing Gross breached his agreement, Fastenal filed suit in the Ottawa County Business Court, alleging breach of the confidentiality and noncompetition agreement, misappropriation of trade secrets, and tortious interference. Fastenal sought a preliminary injunction prohibiting Gross from failing to maintain the confidentiality of Fastenal’s customer information and from soliciting Fastenal’s customers and prohibiting Hi-Tech from causing Gross to violate the confidentiality and noncompetition agreement.

The court held an evidentiary hearing, after which it considered the traditional injunction factors. First, the court found that Fastenal showed a substantial likelihood of success on its breach of contract claim because Gross took employment with a direct competitor, emailed himself a customer list with proprietary information, and an email exchange proved at least one incident of impermissible solicitation. However, the court found that there was not a likelihood that Fastenal would succeed on its misappropriation of trade secrets claim, as Fastenal provided only speculative and circumstantial allegations of improper disclosure, which Gross denied.

Next the court stated that a breach of a noncompetition agreement can establish irreparable injury in the form of the “loss of consumer goodwill and the weakened ability to fairly compete that would result from disclosure of trade secrets and breach of a non-compete.” Gross argued that his agreement with Fastenal was not actually a noncompetition agreement because it did not totally prohibit him from working for a direct competitor, but instead prohibited him from soliciting customers and sharing information. The court disagreed, noting that the agreement’s narrow employment restrictions merely complied with Michigan’s statutory requirement that a noncompete agreement be reasonable.

The court then looked to the balance of hardships and found that while Fastenal had established it would suffer some irreparable harm, the proposed injunction would not subject Gross or Hi-Tech to comparable harm. Under the proposed injunction, Gross could still continue working at Hi-Tech, and Hi-Tech had other salespeople that are not subject to Gross’s agreement and thus could do business with Fastenal’s customers.

Finally, the court considered the public interest, and found that the public has a general interest in the courts’ enforcement of contracts, which support the legitimate business interests of all contracting parties. The court further found that the proposed injunction was a limited and reasonable restriction on Gross, who would still be able to utilize his years of experience.

Having found all of the preliminary injunction factors in Fastenal’s favor, the court issued the requested preliminary injunction pending final judgment on Fastenal’s claims.

Franks v. Franks^[118] (Shareholder oppression, business judgment rule, dividends; buyout).^[119] Plaintiffs owned 50% of the non-voting shares of Defendant Burr Oak Tool, Inc. The individual Defendants were officers and directors who made a low offer to redeem Plaintiffs’ shares, which they followed up by refusing to pay dividends despite the company having ample funds to do so. Plaintiffs brought a claim for, among other things, shareholder oppression.

A Kent County Business Court judge, sitting by designation, conducted a Zoom trial over 11 days. After trial, the court found that Defendants had committed intentional shareholder oppression and had acted in bad faith by withholding dividends, and that because of that bad faith, Defendants could not avail themselves of the protection of the business judgment rule.^[120] The court ordered four of the individual Defendants and the company to pay damages to the Plaintiffs in the form of a dividend totaling $2,100,000, including interest. However, the court declined to order a buyout, finding that because of Plaintiffs’ substantial holdings, such a remedy would have an adverse effect on the company and third parties who rely on the company. Instead, the court ordered damages and the appointment of an independent outside director, which the court believed would improve the corporate culture.

§2.3.10. New Hampshire Commercial Dispute Docket

Under the following case headings, you will find direct excerpts from the respective opinions of the New Hampshire Commercial Dispute Docket, featuring key language from the court’s decision.

Scott Komaridis v. Kevin D’Amelio, et al.^[121] (Minority shareholder freezeout claims). “The New Hampshire Supreme Court has not explicitly adopted the tort of corporate freezeout but has assumed its existence arguendo. See Thorndike v. Thorndike, 154 N.H. 443, 446 (2006). Another superior court, as part of the Business and Commercial Dispute Docket, ‘has previously held that if the question were squarely presented, the New Hampshire Supreme Court would find that majority shareholders owe an actionable fiduciary obligation to minority shareholders.’ Ronzio v. Tannariello, No. 226-2019-CV-00671, 2019 WL 678358, at *7 (N.H. Super. Ct. Dec. 19, 2019) (McNamara, J.); see also Meehan v. Gould, No. 218-2017-CV-1322, 2019 WL 3519455, at *5 (N.H. Super. Ct. July 31, 2019) (McNamara, J.). ‘[T]he assumed existence of the freeze-out claim under New Hampshire law is based on the existence of a fiduciary duty between shareholders in a closely held corporation.’ Ronzio v. Tannariello, No. 226-2019-CV-671, 2020 WL 13663046, at *5 (N.H. Super. Ct. Dec. 11, 2020).

“The Court finds that the nature of a member-managed LLC, perhaps the most common form of a closely held corporation, supports Plaintiff’s position. See Pointer v. Castellani, 918 N.E.2d 805, 808 (Mass. 2009) (describing an LLC as ‘a closely held corporate entity.’). ‘Only in the close corporation does the power to manage carry with it the de facto power to allocate the benefits of ownership arbitrarily among the shareholders and to discriminate against a minority whose investment is imprisoned in the enterprise.’ Meiselman v. Meiselman, 307 S.E.2d 551, 559 (N.C. 1983) (quotation omitted). The unequal power inherent in a closely held corporation leaves minority shareholders in an especially vulnerable situation because they cannot readily sell off their shares to recoup their investment. See Donahue v. Rodd Electrotype Co. of New England, Inc., 328 N.E.2d 505, 514–15 (Mass. 1975) (explaining that compared to a large public corporation where a dissatisfied shareholder could sell off shares, the minority shareholder in a closely held corporation does not have a ready market to reclaim capital). Additionally, courts’ general reluctance to become involved with business decisions of a corporation have also left minority shareholders susceptible to majority shareholders’ oppressive conduct. See id. at 513–14.”

Atlantic Anesthesia, P.A. v. Ira Lehrer, et al.^[122] (Common interest doctrine). “It is well settled that ‘[w]here legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications related to that purpose, made in confidence by the client, are at his instance permanently protected from disclosure by himself or by the legal adviser unless the protection is waived by the client or his legal representatives.’ Riddle Spring Realty Co. v. State, 107 N.H. 271, 273 (1966). The burden to prove the existence of the attorney-client relationship lies with the party asserting the privilege. McCabe v. Arcidy, 138 N.H. 20, 25 (1993).

“‘Although occasionally termed a privilege itself, the common interest doctrine is really an exception to the rule that no privilege attaches to communications between a client and an attorney in the presence of a third person.’ United States v. BDO Seidman, LLP, 492 F.3d 806, 815 (7th Cir. 2007). The common interest doctrine applies when two or more clients consult or retain the same attorney to represent them on a matter of common interest. Cavallaro v. United States, 284 F.3d 236, 249 (1st Cir. 2002). ‘In such a situation, the communications between each of them and the attorney are privileged against third parties.’ Id. ‘[T]he privilege [also] applies to communications made by the client or the client’s lawyer to a lawyer representing another in a matter of common interest.’ Id. at 249–50; see also N.H. R. Evid. 502(b) (codifying the common interest doctrine and providing that it applies to ‘confidential communications made for the purpose of facilitating the rendition of professional legal services,’ when between, inter alia, the client’s lawyer and a lawyer ‘representing another party in a pending action and concerning a matter of common interest therein.’). The doctrine ‘is not an independent basis for privilege, but an exception to the general rule that the attorney-client privilege is waived when privileged information is disclosed to a third party.’ Cavallaro, 284 F.3d at 250. It generally does not protect communications that did not include an attorney or another privileged person. See United States v. Krug, 868 F.3d 82, 87 (2d Cir. 2017) (noting that, while the doctrine ‘somewhat relaxes the requirement of confidentiality by defining a widened circle of persons to whom clients may disclose privileged communications,’ a communication only among the clients is only privileged if it was ‘made for the purpose of communicating with a privileged person, i.e., the lawyer,’ or the lawyer’s agent or client’s agent). ‘The application of properly formulated doctrine to the facts remains a matter of discretion for the district court.’ Massachusetts Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 412 F.3d 215, 225 (1st Cir. 2005).”

Vermont Telephone Company, Inc. v. FirstLight Fiber, Inc.^[123] (Material breaches of contract). “Plaintiff next argues that even if it did breach the Lease, said breach was not material as a matter of law. ‘For a breach of contract to be material, it must go to the root or essence of the agreement between the parties, or be one which touches the fundamental purpose of the contract.’ Found. for Seacoast Health v. Hosp. Corp. of Am., 165 N.H. 168, 181–82 (2013). ‘A breach is material if: (1) a party fails to perform a substantial part of the contract or one or more of its essential terms of conditions; (2) the breach substantially defeats the contract’s purpose; or (3) the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract.’ Id. at 182. ‘Whether a breach of contract is material is a question of fact.’ Id. at 181.”

§ 2.3.11. New Jersey’s Complex Business Litigation Program

Twp. Of Parsippany-Troy Hills v. Thomas Controls, Inc. v. Keystone Engineering Group, et al.^[124] (Breach of contract and negligence). In this breach of contract and negligence action arising from a dispute in connection with construction improvements to be made to plaintiff’s wastewater treatment plan, the New Jersey Superior Court confirmed that New Jersey’s Affidavit of Merit statute indeed has teeth. The court dismissed with prejudice the third-party complaint of defendant/third-party plaintiff, Thomas Controls, Inc. (TCI) for TCI’s failure to timely serve an Affidavit of Merit (AOM) in connection with TCI’s third-party complaint alleging, inter alia, professional malpractice against Keystone, the engineer for the construction project at issue.

New Jersey’s AOM Statute (N.J.S.A. 2A:53-27, et seq.) requires a plaintiff seeking damages for personal injuries, wrongful death or property damage resulting from an alleged act of negligence or malpractice by a licensed person in his or her profession or occupation to provide the defendant with an affidavit of an appropriate licensed person that such claims have merit (i.e., an AOM). Under the statute, the AOM must be provided within 120 days following the filing of the answer to the complaint. TCI acknowledged that it failed to timely serve the AOM, but argued that it had nonetheless substantially complied with the AOM Statute by filing the AOM shortly after receiving Keystone’s motion to dismiss.

In granting Keystone’s motion to dismiss with prejudice, the court (at least tacitly) agreed with Keystone’s arguments that the AOM Statute applies to malpractice actions against engineers, as well as to third-party complaints. The court also ruled that TCI failed to substantially comply with the AOM Statute and granted Keystone’s motion to dismiss the third-party complaint with prejudice for failure to comply with the AOM Statute.

Weston Landing Condominium Assoc., Inc. v. Centex et al.^[125] (Construction defect). In this construction defect case concerning roofing work performed by certain defendants, the New Jersey Superior Court reaffirmed New Jersey’s “strong public policy favoring non-disclosure of confidential settlements.” In this multi-party action, a non-settling defendant filed a motion to compel the terms of a settlement between plaintiff and other settling defendants. The non-settling defendant argued that, because the other roofing defendants had already settled and the cost to repair the roof was a fixed amount given that the roof repairs had already been made, the non-settling defendant was entitled to information about the settlement so that plaintiff would not receive an unfair windfall if the non-settling defendant was not provided with a post-trial credit.

In denying the non-settling defendant’s motion to compel, the court noted that while New Jersey’s strong public policy favoring settlements does not override the presumption of access to court records, the terms of the settlement in the instant case, as opposed to other cases cited by the non-settling defendant, were not placed on the record in court and were not a matter of public record. Therefore, the court denied the non-settling defendant’s motion as “[defendant] fail[ed] to cite to any case that allows a court in New Jersey to compel the disclosure of confidential settlement terms if those terms were not a matter of public record.”

§ 2.3.12. New York Supreme Court Commercial Division

Chen v Fox Rehab. Servs., P.C.^[126] (Pre-answer motion to dismiss). This case is an example of a pre-answer motion to dismiss based on documentary evidence—a form of motion practice that is relatively unique to New York. There, the Bronx County Commercial Division dismissed nine of ten claims brought by the plaintiffs for failure to state a claim, but did not dismiss the plaintiffs’ breach of contract claim, despite the defendants’ introduction of documentary evidence aimed at defeating that claim.

In Chen, a group of five physical and occupational therapists brought suit against their former/current employer (Fox Rehabilitation Services, P.C. or “Fox”), its founder, CEO, chief of staff, and a related company (Fox Rehabilitation Physical, Occupational and Speech Therapy Services, L.L.C. or “FTS”). In their amended complaint, the plaintiffs alleged that the defendants represented to them “explicitly and in writing—that they would be paid out of a deferred compensation plan upon a 50% change in control of the company (i.e. an acquisition) . . . .” When the acquisition occurred and the plaintiffs requested their deferred compensation, they claimed that the defendants improperly denied their compensation on the grounds that the transaction did not satisfy the definition for change of control and that the compensation plan had been abolished five years earlier. Critically, the plaintiffs pleaded that they were never shown copies of what the defendants claimed to have been the actual compensation plan or copies of the notice that the plan was abolished, just copies of a Summary Plan Description (or “SPD”). The plaintiffs asserted a variety of claims, including for breach of contract, which the defendants moved to dismiss in full on the basis of documentary evidence under CPLR § 3211(a)(1) and for failure to state a cause of action under CPLR § 3211(a)(7).

The defendants introduced four sets of documents to support their motion to dismiss, including copies of the Plan, the SPD, a document terminating the Plan, and documents reflecting the denial of plaintiffs’ requests for compensation under claims procedure provisions in the Plan. The introduction of these documents placed the case into a unique procedural posture. As the court noted, the New York Court of Appeals has previously stated that “‘when evidentiary material [in support of dismissal] is considered the criterion is whether the proponent of the pleading has a cause of action not whether he has stated one.’” In light of this binding precedent, the court explained “that if the evidence submitted controverts the allegations in the complaint, they are not deemed true and dismissal for failure to state a cause of action is warranted.” The court further explained that, at the motion to dismiss stage, documentary evidence can be considered, but only “judicial records, judgments, orders, contracts, deeds, wills, mortgages and ‘a paper whose content is essentially undeniable and which, assuming the verity of its contents and the validity of its execution, will itself support the ground upon which the motion is based’. . . .”

With those principles in mind, the court determined that the documents submitted by the defendants constituted documentary evidence under CPLR § 3211(a)(1) and stated that it “must view the allegations in the complaint against the backdrop of these documents and resolve any conflict in favor of the documents. This is no less true despite plaintiffs’ assertion that they question the authenticity and validity of the Plan and termination document.” The court held that the SPD was not the agreement between the parties; instead, the Plan governed between the parties. Then, pursuant to a New Jersey choice-of-law provision in the Plan, the court applied New Jersey substantive law to interpret the contract, concluding that the termination provision in the Plan “proscribed cancellation of the Plan if any participant had earned equity appreciation under the terms of the Plan on the date of cancellation.” While the defendants submitted documents claiming that there was no value at termination, the court noted that “they submitted documents which only conclusorily alleged that when the Plan was terminated, as relevant here, that the company’s value was less than plaintiffs’ base value in the Plan”; the “[d]efendants could and should have submitted documents detailing the [specific values] . . . when the Plan was terminated thereby establishing that the Plan was terminated in accordance with its terms.” The court stated that “the record is bereft of specific and detailed information establishing that Fox terminated the Plan in accordance with section 8.2 of the same,” and it denied dismissal of the breach of contract claim. At the end of the decision, the court also denied the defendants’ motion to dismiss the breach of contract claim under CPLR § 3211(a)(1) on the same grounds.

Magnetic Parts Trading Ltd. v. National Air Cargo Group, Inc.^[127] (Motion to amend the pleadings). The Commercial Division’s decision in Magnetic Parts Trading Limited v. National Air Cargo Group, Inc., demonstrates the flexibility and leniency courts embody when adjudicating motions to amend pleadings. In Magnetic Parts, the New York County Commercial Division granted National Airlines Cargo Group’s (National Airlines) motion for leave to amend its answer to assert counterclaims against Magnetic Parts Trading Limited (Magnetic Parts).

In December 2002 Magnetic Parts, as lessor, and National Airlines, as lessee, entered into a written lease (the Lease) for a Rolls Royce aircraft engine. National Airlines agreed to pay Magnetic Parts a $150,000 deposit and $60,000 fee each month. The Lease provided that if National Airlines failed to redeliver the engine, the lease term would automatically extend. In January 2020, National Airlines informed Magnetic Parts that it did not intend to re-lease the engine but failed to redeliver the engine. Magnetic Parts took the position that the lease term had been automatically extended and continued to charge National Airlines a monthly fee. A later inspection of the engine revealed several defects including corrosion on the fan case. Magnetic Parts claimed that the defects were caused by National Airlines and rendered the engine unserviceable. As a result, Magnetic Parts filed a complaint in September 2020 pleading causes of actions for breach of the Lease, unjust enrichment, and an account stated. National Airlines interposed seven affirmative defenses in its answer, and two years later moved to amend its answer to assert two counterclaims for breach of contract and for breach of the covenant of good faith and fair dealing on the ground that Magnetic Parts had prior knowledge of pre-existing corrosion problems with Rolls-Royce engines. Magnetic Parts opposed the motion on the ground that National Airlines had waited for more than two years to assert its counterclaims.

The court first explained the standard for granting leave to amend pleadings, holding that it is well settled that “leave to amend a pleading should be freely granted in the absence of prejudice to the nonmoving party where the amendment is not patently lacking in merit,” and that a “party opposing leave to amend ‘must overcome a heavy presumption of validity in favor of permitting amendment’” by demonstrating prejudice or surprise or that the proposed amendment is palpably insufficient or patently devoid of merit.

The court found Magnetic Parts’ undue delay argument unpersuasive, explaining that a “showing of lateness must be coupled with significant prejudice to the other side to warrant relief,” and such prejudice exists only where a party “has been hindered in the preparation of its case or has been prevented from taking some measure in support of its position.” Because Magnetic Parts had not demonstrated any such prejudice, the court ultimately concluded that the two-year delay was not so significant as to warrant denial of the motion.

This did not end the inquiry, however. Turning to the substance of the proposed counterclaims, the court explained that the “party moving for the amendment need not establish the merit of the claim, only that the proposed amendment is not palpably insufficient or clearly devoid of merit.” The court held that National Airlines had met its burden on the proposed counterclaim for a breach of contract. To support its claim National Airlines alleged that corrosion of the fan case was a known issue falling outside of “routine-scheduled, condition monitored or on-condition line maintenance” as provided by the Lease and that it was therefore under no obligation to correct the condition, as doing so would violate the clause of the Lease prohibiting modification, alteration, overhaul, or repair of the engine. National Airlines also alleged that Magnetic Parts refused to cover the cost of replacing the fan case despite having collected $150,000 in fees for that purpose and failed to designate a redelivery location when National Airline offered to redeliver the engine. Magnetic Parts argued that these allegations were insufficient to state a claim because National Airlines could not establish willful misconduct or gross negligence based on the fact that it had been in possession of the engine for several years, was responsible for its care and maintenance, and had superior knowledge about its condition. The court rejected these arguments, found that National Airlines assertions were sufficient to state a cause of action for breach of contract, and granted leave to amend. Because National Airlines’ breach of good faith and fair dealing counterclaim rested on the same facts as its breach of contract claim, the court held it was duplicative and denied the motion with respect to this counterclaim.

Five Star Elec. Corp. v. Silverite Constr. Co. Inc.^[128] (No-damages for delay contract provision). The New York County Commercial Division’s decision in Five Star Elec. Corp. v. Silverite Constr. Co. Inc. demonstrates the narrow scope, and strict interpretation, of no-damages for delay provisions in a contract. The decision reaffirmed the proposition that no-damages for delay clauses are enforceable and a party challenging such clauses bears a heavy burden to demonstrate that an exception to enforcement applies or that enforcement has been waived based on the parties’ conduct or prior business dealings.

In June 2012, Silverite entered a contract with New York City School Construction Authority (SCA) to construct P.S. 315, a school in Queens (the “Project”). Later that year, in September 2012, Plaintiff Five Star and Defendant Silverite entered a subcontract under which Five Star was to furnish and install electrical and fire alarm equipment for the Project. Both the contract between Silverite and the SCA and the subcontract between Silverite and Five Star contained “no-damages for delay” clauses, which provided that the parties waived their claims for damages based on delay in performance and that the sole remedy for any such delay would be an extension of the time to perform and completion of the required work. These clauses notwithstanding, when work on the project was ultimately delayed, Five Start filed suit against Silverite, asserting that due to “Silverite’s bad faith, gross negligence and fundamental breach of its obligations under the… [s]ubcontract,” Five Star sustained damages. Specifically, Five Star claimed that Silverite unreasonably delayed “the review/resolution of [] requests for information, change orders, field work orders and related… project issues” and generally acted in “bad faith and with willful, malicious and grossly negligent conduct.” Silverite moved to dismiss the action, arguing that Five Star’s claims were clearly barred by the relevant no-damages clauses.

The court was not persuaded by Five Star’s argument that SCA and Silverite waived enforcement of the no-damages for delay provisions in the underlying agreements “because Silverite submitted at least some of Five Star and Silverite’s claims for delay damages to SCA.” In support Five Star relied on Pizzarotti, LLC v. FPG Maiden Lane LLC, 187 A.D.3d 420, 420 (1st Dept 2020), where “the First Department found, in a Lien Law case, that the waivers in the defendant’s payment applications ‘raised an issue of fact as to whether the waivers released plaintiff’s payment claims.’” The court in Five Star was not convinced and held that the “no-damages for delay provision b[ound] the parties.” Relying on the Court of Appeal’s decision in Corinno Civetta Constr. Corp. v. City of New York, 67 N.Y.2d 297, 309 (1986) (Corinno Civetta)—which held that “‘[a] clause which exculpates a contractee from liability to a contractor for damages resulting from delays in the performance of the latter’s work is valid and enforceable’ when the underlying contract and the provision satisfy the general requirements for contractual validity”—the court found that because Five Star did not assert that the relevant contract or subcontract themselves were invalid, the no damages for delay provisions in those agreements were generally enforceable.

Moreover, the court held that none of the recognized exceptions to the enforcement of a no-damages for delay provision were applicable here. Pursuant to Corinno Civetta, “damages may be recovered for: (1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract.” Specifically, the court held that Five Star failed to allege any facts in support of its conclusory allegations that “(1) Silverite unreasonably delayed, disrupted, and interfered with Five Star’s performance, (2) these disruptions were not contemplated by the subcontract, (3) Silverite did not properly coordinate Five Star’s work, (4) Silverite did not ‘promptly review/resolve . . . requests for information, change orders, field work orders and related . . . Project issues,’ (5) Silverite acted in bad faith, willfully, maliciously, and in a grossly negligent manner, and (6) Silverite did not perform ‘numerous fundamental obligations of the . . . Subcontract,’” and it therefore had failed to meet its pleading burden to establish that one of the recognized exceptions applied to its claims. Ultimately, the court concluded that that the “no-damages provision [was] clear on its face, and courts habitually enforce[d] such clauses.”

SPG Cap. Partners LLC v. Cascade 553 LLC^[129] (Preliminary agreement in advance of a term sheet). In SPG Cap. Partners LLC v. Cascade 553 LLC, the New York County Commercial Division considered the enforceability of certain types of preliminary agreements in connection with a term sheet signed by the parties in anticipation of a real estate investment that later fell through. The court’s decision in this case highlights the risks of using these types of agreements to obtain promises from a counterparty, and it underscores the importance of drafting clear expressions of intent to ensure that such contracts are enforceable.

In this case, the plaintiff, SPG Capital Partners LLC (“SPG”), reached an agreement in principle with the defendant, Cascade 553 LLC (“Cascade”), whereby SPG would provide a mortgage loan to Cascade in connection with a planned real estate development in Brooklyn. Pursuant to the term sheet signed by the parties, SPG would provide a first mortgage loan to Cascade of $110,000,000, and Cascade would pay SPG $200,000 as a good-faith deposit. The term sheet stated that the document was “for discussion purposes only and [] subject to the Lender’s satisfactory completion of its due diligence, internal credit approvals and satisfactory legal review.” It further included an exclusivity clause and a liquidated damages clause obligating Cascade to pay SPG a breakup fee in the event the borrower elected not to proceed with the loan. The loan process did not go as planned and Cascade ultimately decided to obtain financing from another company. SPG then sued Cascade, seeking, inter alia, to enforce the term sheet’s liquidated damages and exclusivity clauses. SPG argued that even if the term sheet were otherwise unenforceable, the relevant clause was “independently enforceable” because the document expressly stated that those provisions would “survive the termination of this Term Sheet.” Cascade ultimately moved for summary judgment on SPG’s claims.

In its decision, the court agreed with Cascade that the parties’ term sheet was unenforceable. It found that “the document repeatedly emphasize[d] its nonbinding nature,” insofar as the term sheet was “expressly conditioned on the completion of the lender’s due diligence, further satisfactory negotiation by the parties, and the acceptance of the loan documents.” The court noted that “in those cases where courts have found letters of intent or term sheets to be binding, courts have relied not only on the specificity of the details in the documents but a similar manifestation of intent,” which was nowhere to be found in the term sheet at issue. Further, “virtually all the obligations in the term sheet fell upon” Cascade, whereas the agreement gave SPG “sole discretion” to “terminate the term sheet” and “determine the terms upon which it would extend credit.” And although SPG agreed to perform due diligence in connection with the transaction, the term sheet “bound Cascade to refrain from seeking other financing without regard to whether [SPG] moved forward with its due diligence in a timely fashion or adhered to the other provisions in the term sheet.” The court thus found that the lack of “mutuality of obligation” in the agreement, coupled with its nonbinding and conditional language, suggested that the parties did not intend to be bound by its terms.

Moreover, the court rejected SPG’s alternative argument that the exclusivity provisions in the agreement—which forbade Cascade from obtaining a first mortgage loan from a different lender—were independently enforceable, even if the term sheet were otherwise an unenforceable agreement to agree. The court noted that courts have enforced similar terms only where the “exclusivity provision [states that it] shall survive the term sheet and is binding regardless of the binding nature of the term sheet.” Here, although the document stated that the exclusivity provisions would “survive the termination of this Term Sheet,” there was “no statement that render[ed] the provision enforceable notwithstanding the nonbinding nature of the term sheet.” The court thus found that the exclusivity provisions could not be severed from the rest of the document.

CDx Diagnostics, Inc. v. Rutenberg^[130] (Motion to compel arbitration, Noerr-Pennington doctrine, tortious interference). In CDx Diagnostics, Inc. v. Rutenberg, the Commercial Division for New York County, clarified a range of legal issues involving motions to compel arbitration, the scope of the Noerr-Pennington doctrine, and tortious interference with contractual rights.

This case arose out of the transfer of control of the plaintiff CDx Diagnostics, Inc. from its founder, the defendant Dr. Mark Rutenberg, to private equity firm Galen. In connection with this transaction, Rutenberg entered into an Executive Employment Agreement (“EEA”) and an IP Agreement with CDx. Under the IP Agreement, Rutenberg assigned all proprietary rights to his inventions developed during the course of his employment to CDx. The EEA contained an arbitration clause that provided, in relevant part, that, “any dispute between the parties arising out of or relating to the negotiation, execution, performance or termination of this Agreement or Executive’s employment, including, but not limited to, any claim arising out of this Agreement … shall be settled by binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association.” Several years after this transaction, the parties fell into a dispute regarding a patent application for cancer detection technology filed by Rutenberg, which ultimately led to the termination of his employment. Shortly thereafter, CDx commenced an action against Rutenberg, seeking, among other things, (1) a declaration that the IP Agreement was enforceable; (2) an order invalidating Rutenberg’s assignment of the cancer detection technology; (3) a declaration that CDx was the rightful owner of the relevant patent; and (4) an order compelling Rutenberg to assign the intellectual property to CDx. In response, Rutenberg raised a host of affirmative defenses and counter-claims, including claims of wrongful termination, abuse of process, conversion, civil conspiracy, and misappropriation of commercial advantage. Specifically, Rutenberg claimed that by filing a “fraudulent lawsuit,” CDx had “usurped” and “misappropriate[d] economic opportunity” from the defendants. CDx moved to compel Rutenberg to arbitrate his counter-claims.

Ultimately, the court granted CDx’s motion to compel arbitration. The court began with the proposition that agreements to arbitrate disputes are both favored as a matter of policy and binding as a matter of law, as per the terms of the Federal Arbitration Act. Under New York law, the court emphasized that the court’s role in deciding motions to arbitrate is narrow: it must determine only whether there is a reasonable relationship between the subject-matter of the dispute and the general subject-matter of the underlying contract. Once such a reasonable relationship is established, the court must grant the motion. Any ambiguity in the scope of the arbitration clause must be resolved in favor of arbitration. The court held that the scope of the arbitration clause in the EEA was sufficiently broad to capture within its ambit most of Rutenberg’s counter-claims against CDx, including the wrongful termination claim.

The court also rejected both arguments Rutenberg raised in opposition to the motion. First, Rutenberg argued that the arbitration clause in the EEA terminated when Rutenberg’s role in CDx changed from CEO to Chief Scientific Officer a year before his termination from the company. As a result, Rutenberg argued, the EEA’s arbitration clause did not extend to his wrongful termination claim. The court held that the question of whether an arbitration clause survived the change in Rutenberg’s employment at CDx was a matter for the arbitrator to decide. Second, Rutenberg argued that the arbitration clause did not apply to the dispute over the intellectual property between Rutenberg and CDx, which was the crux of the litigation between the parties. Rutenberg claimed that granting the motion to arbitrate would lead to multiple and overlapping claims before multiple fora. The court ruled, relying on binding appellate precedent in PNE Media, LLC v. Cistrone, 294 A.D.2d 143 (1st Dep’t 2002), that “arbitration clauses are binding contracts which must be strictly enforced, even if enforcement will lead to bifurcated and overlapping litigation.” The court ultimately concluded that even if the employment dispute had to be arbitrated before an arbitrator and the intellectual property claim had to be litigated before a court, the possibility of bifurcated litigation was not sufficient grounds to deny CDx’s motion to compel arbitration.

Turning to the counter-claims, the court held that commencing a legal action in court was a protected activity under the First Amendment, and that the Noerr-Pennington thus doctrine barred the counter-claims. Under the Noerr-Pennington doctrine, “parties may not be subjected to liability for petitioning the government.” The court held that the act of filing a complaint and summons in court fell within the scope of “petitioning activity” under the Noerr-Pennington doctrine. The court concluded that “the Noerr-Pennington doctrine precludes precisely what [defendants] attempt to do here: interfere with the act of filing a lawsuit, which is protected First Amendment activity, by bringing civil claims against the plaintiff, CDx, based on that act.” The court then rejected Rutenberg’s argument that the instant action fell within the “sham lawsuit” exception to the doctrine, holding that the exception was a narrow one and that the burden of proving the exception fell on the party invoking it. In order to successfully invoke the “sham lawsuit” exception, Rutenberg and the other defendants had to show that “no reasonable litigant could realistically expect success on the merits of CDx’s declaratory judgment claim.” The court concluded that so long as CDx had “probable cause” to bring the lawsuit, which the court found existed in this case, the company was protected under the Noerr-Pennington doctrine. Accordingly, the court dismissed most of the defendants’ counter-claims.

The court also dismissed the claim against Galen for tortious interference with Rutenberg’s contract. A party asserting tortious interference must a plead the following facts: “(1) that a valid contract exists; (2) that a third party had knowledge of the contract; (3) that the third party intentionally and improperly procured the breach of the contract; and (4) that the breach resulted in damage to the plaintiff.” However, the third party is not liable for tortious interference if such conduct was justified under the economic interest doctrine, which provides that a third party is immune from liability for interfering with someone else’s contract, when such third party is “acting to protect its own legal or financial stake in the breaching party’s business.” The court noted that “a corporation that acquires another corporation and then causes one of the acquired corporation’s contracts to be terminated, is not liable for interference with that contract, because it had an economic justification for its actions.” The court held that Galen pleaded sufficient facts to establish the economic justification defense. Once the economic interest defense is established, the party asserting tortious interference must plead that the contractual interference was affected “through illegal or fraudulent means, or were otherwise motivated by malice.” Since the court found that Rutenberg’s allegations of illegality and malice against Galen were merely conclusory in nature, the court dismissed the tortious interference claim.

Haart v. Scaglia^[131] (Res judicata and collateral estoppel). In Haart v. Scaglia, the New York County Commercial Division partially granted the defendant’s motion to dismiss based on the doctrines of res judicata and collateral estoppel. The court found that the plaintiff was attempting to relitigate issues and facts that were previously decided in a Delaware case.

This case was at least the fourth of five lawsuits filed by Julia Haart (“Haart”) and Silvio Scaglia (“Scaglia”) in Delaware and New York in recent years related to their personal and business divorce. Scaglia is an Italian entrepreneur and investor, and Haart is a designer who became CEO of Elite World Group (EWG), one of Scaglia’s companies. After marrying Haart, Scaglia formed a holding company called Freedom and transferred his interests in EWG to it. Scaglia then transferred ownership of half of Freedom’s common stock to Haart, retaining 100% ownership of Freedom’s preferred stock. Haart alleged that Scaglia fraudulently concealed the existence of these preferred shares from her in connection with this transaction and that she entered into the deal with the understanding that the transfer of the common stock would make her an equal partner with Scaglia. Haart alleged that she only learned about the preferred shares during negotiations for a possible SPAC transaction for EWG, at which point Scaglia allegedly transferred her half of the preferred stock in the company. Haart also alleged that Scaglia unilaterally transferred $1.5 million from Freedom’s bank account and transferred other company property without informing her, in a manner inconsistent with their purported 50-50 partnership. Eventually, the personal and business relationship between the parties soured, leading to the instant action.

Prior to the instant action, Haart filed suit against Scaglia in Delaware, Haart v. Scaglia and Freedom Holding, Inc. & Elite World Group, LLC, C.A. No. 2022-0145-MTZ (the “Delaware Action”) seeking a declaratory judgment acknowledging her equal ownership of Freedom with Scaglia, invalidating her removal as a director and CEO of Freedom, affecting a judicial dissolution of Freedom, and asserting claims for breach of fiduciary duty. After a multi-day trial, the Delaware Court concluded (based on the language of the written agreements between the parties and Haart’s testimony about promises made by Scaglia to make her a 50% partner) that Haart was not in fact a 50% owner of Freedom.

In the instant action, Haart filed a lawsuit, inter alia, seeking a declaratory judgment and asserting claims for fraudulent inducement, fraudulent concealment, breach of contract, breach of fiduciary duty, unjust enrichment, promissory estoppel, and conversion. Haart alleged that Scaglia promised her that she would be a 50% partner in Freedom as compensation for her work as EWG’s CEO, but he intentionally concealed the existence of a preferred class of shares when he transferred 50% of the company’s common stock to her. Haart further alleged that Scaglia breached his promises, converted her property, and benefited from her work without compensating her. Scaglia sought dismissal of these claims on res judicata and collateral estoppel grounds in light of the earlier decision in the Delaware Action. In her opposition papers, Haart argued that the issues in the New York case were not identical to those in the Delaware Action because she explicitly conceded here that she was not a 50% owner of Freedom.

The New York County Commercial Division held that most of Haart’s claims were barred by the doctrines of res judicata and collateral estoppel. Citing controlling law from the New York Court of Appeals, the court explained that “[u]nder the doctrine of res judicata, when a claim is brought to a final conclusion, all other claims arising from the same transaction or series of transactions are barred, even if based on different theories or if seeking a different remedy.” As the court further explained, the “doctrine of collateral estoppel precludes a party from litigating an issue which has previously been decided against them in a proceeding in which they had a fair opportunity to fully litigate the point.” Here, the court found that the claims at issue in the Delaware Action involved the same documents, testimony, and evidence, and involved many of the same questions that would be at issue in the instant action, namely, whether Scaglia had promised to make Haart a 50-50 owner of Freedom (a question that the Delaware court ultimately answered in the negative). Thus, even though Haart may have been advancing a slightly different theory to seek recovery in the instant action, the court concluded that her claims for fraudulent inducement, fraudulent concealment, breach of contract, and promissory estoppel all arose from the same transaction or occurrence or involved the same questions at issue in the Delaware Action, and dismissed these claims from the case on res judicata and collateral estoppel grounds.

With respect to Haart’s remaining claims for breach of fiduciary duty, conversion, and the declaratory judgement that she owned a 49.9% share of Freedom—all of which were unrelated to Haart’s claim she had been promised a 50% stake in the company—the court found that res judicata and collateral estoppel did not apply and denied the motion to dismiss, finding that Haart had pled sufficient facts to state a claim for these causes of action.

Worbes Corp. v. Sebrow^[132] (Arbitration). In Worbes Corp. v. Sebrow, the Bronx County Commercial Division addressed the question of how long and to what extent can a party litigate in court before claiming that the dispute needs to be arbitrated. Ultimately, the court dismissed the plaintiffs’ motion seeking to compel arbitration against the defendants, reaffirming that despite favoring arbitration (where the parties have agreed to arbitrate their claims), courts may not compel arbitration if a party has litigated a matter extensively in court.

The complaint in Worbes alleged that plaintiff ZVI Sebrow (“ZS”) owned 50% of the stocks in Worbes Corp. (“Worbes”), a corporation, whose sole asset was real property located in the Bronx and whose exclusive business was to own, hold, and operate the property. Worbes Corp. was governed by a Stockholder’s Agreement (“Agreement”), which included an arbitration clause and whereby the shares in the corporation were equally owned by Abraham Sebrow (“AS”), Joseph Sebrow (“JS”), ZS, and David Sebrow (“DS”). When AS died in 2000, ZS became the owner of 50% of the shares in Worbes, and upon JS’s death, DS became the owner of 50% of the shares in the corporation. When DS died in 2017, his shares were reverted to Worbes. In 2019, DS’s wife Betty Sebrow (“BS”) filed an action seeking a declaration that, upon DS’s death, she and DS’s estate became owners of 50% of the shares in Worbes. She was unsuccessful, moved to reargue the court’s decision, and also filed an appeal. The motion to reargue and the appeal were pending when the instant decision was issued.

On January 5, 2022, ZS entered into a contract on behalf of Worbes to sell the property for $5,500,000, and sought a declaratory judgement from the court that BS did not own any of the shares in Worbes. ZS also argued that BS’s initiation of the prior action prevented ZS from selling the property and amounted to tortious interference with prospective business relations, abuse of process, and malicious prosecution. Additionally, ZS asserted that if it was found that BS owned any share in Worbes, “the refusal to consent to the sale of the [property] unless their demands [were] met constitute[d] a breach of duty of loyalty to Worbes.” ZS also moved for an order pursuant to CPLR §7503(a), compelling defendants to participate in arbitration, pursuant to the arbitration clause in the Stockholders Agreement.

In ruling on the motion, the court explained that under CPLR §7503(a), a party can seek leave to compel arbitration, and similarly, under CPLR §7503(b), an opposing party may seek an injunction to stay arbitration. It further noted that the right to arbitrate was not “unfettered and irrevocable,” and a party, “by his conduct, can waive the right” even if it was granted by an agreement between the parties. The court went on to consider five factors to determine whether the right to arbitrate had been waived, including: (1) whether the party seeking arbitration had “elected to proceed and/or resolve the otherwise arbitral dispute between the parties in a ‘judicial arena,’” which usually depends on “the amount of litigation that has occurred, the length of time between the start of the litigation and the arbitration request, and whether prejudice has been established”; (2) whether the party seeking to compel arbitration availed itself of the remedies available in court; (3) “whether the claims before the court are the same as those sought to be arbitrated”; (4) whether the party seeking to compel arbitration delayed seeking arbitration of its claims; and (5) whether arbitration would result in prejudice to the party opposing arbitration.

Applying the first and second factor to the matter before it, the court held that the plaintiffs, ZS and Worbes, had “so significantly availed themselves of the litigation process in th[e] action, so as to constitute waiver of the right to arbitration.” The court explained that the plaintiffs initiated the action by filing a complaint containing causes of actions sounding in declaratory judgement, tortious interference with prospective business relations, abuse of process, malicious prosecution, and breach of fiduciary duty. Moreover, the plaintiffs had filed five motions seeking various relief and remedies before they filed the instant motion to compel arbitration. The court noted that it agreed with the plaintiff that “under the circumstances then existing—the existence of a tax lien …—judicial intervention authorizing the sale of the [property] was necessary.” Thus, the court’s decision was “not premised on the plaintiffs’ initiation of the instant action”; “[h]ad the plaintiffs sought arbitration at that point, it is likely that the instant motion would have been granted.” However, the plaintiffs “decided to avail themselves of this court’s ability to decide this action on papers and made a motion, their third, seeking summary judgement.” The court held that this was clearly inconsistent with the plaintiffs’ claim that the parties were obligated to settle their differences by arbitration.

Moving to the third factor, the court noted that although the plaintiffs’ motion papers were “bereft of any indication of what issues” they seek to arbitrate, the court “will assume that they are the very issues asserted in the complaint.” The court denied the motion to compel arbitration because the claims that the plaintiffs seek to arbitrate had already been asserted before the court.

Addressing the fourth and fifth factors, the court held that the plaintiffs had “for months charted a course of litigation,” causing a significant delay in the resolution of the claims. The “plaintiffs waited almost a year from the time they were granted the exigent relief that they could not get via arbitration to seek arbitration.” The court opined that this delay “when viewed against the procedural history is egregious and militates in favor of the conclusion urged by defendants, namely that when it became apparent that the litigation in this action would be protracted, plaintiffs’ moved to abandon it and avail themselves of arbitration.” The court found this unacceptable as it would enable the plaintiffs to create their own unique structure combining litigation and arbitration. Lastly, the court noted that the defendant had incurred unnecessary delay and expense; hence, it would be prejudiced if compelled to arbitrate.

Trump v. Trump^[133] (Anti-SLAPP, breach of contract). The New York County Commercial Division’s decision in Trump v. Trump, 192 N.Y.S.3d 891 (Sup. Ct. N.Y. Cnty. June 9, 2023), provides an example of how courts can approach the interactions between New York’s recently amended anti-SLAPP law and traditional breach of contract claims. This decision largely denied Mary Trump’s motion to dismiss the claims brought by former president Donald Trump alleging that she breached a settlement agreement by disclosing documents to The New York Times and publishing a book that discussed the finances of the Trump family.

This decision arose out of a long-running dispute over the publication of financial information from the Trump family in the pages of the Times—specifically, in a 2018 article titled “Trump Engaged in Suspect Tax Schemes as He Reaped Riches from His Father”—as well as Mary Trump’s 2020 book, Too Much and Never Enough: How My Family Created the World’s Most Dangerous Man. As the court explained, Mary Trump had access to this information as a result of her participation as an objectant in litigation over the estate of Frederick C. Trump. The case was ultimately resolved with a 2001 settlement agreement, which included a confidentiality clause.

In 2021, Donald Trump brought claims against Mary Trump for the publication of her book, as well as claims against Mary Trump, the Times, and several Times journalists related to the Times article. While the suit was pending, New York expanded the scope of its anti-SLAPP law—which is aimed at frivolous strategic lawsuits against public participation (SLAPP) that seek to deter free speech. Mechanically, New York’s anti-SLAPP law operates by, inter alia, requiring a showing either that (a) the “cause of action has a substantial basis in law” or (b) the cause of action “is supported by a substantial argument for an extension, modification or reversal of existing law” under CPLR § 3211(g). However, this heightened standard only applies to actions “involving public petition and participation.” Prior to the 2020 expansion, actions involving public petition and participation were limited “to instances where speech was aimed toward a public applicant or permittee.” In 2020, New York expanded the scope of those actions to include “any communication in a place open to the public or a public forum in connection with an issue of public interest.”

The Times, its employees, and Mary Trump all filed motions to dismiss under the revised anti-SLAPP law. On May 3, 2023, the court found that the anti-SLAPP law applied to claims asserted against the Times and its employees and dismissed those claims. This left three claims—for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) unjust enrichment, against Mary Trump—to be decided in her motion to dismiss.

As a threshold matter, the court first addressed whether or not the claims against Mary Trump were covered by New York’s anti-SLAPP law. As the court noted, “Mary Trump argues that each claim asserted against her predicated liability on protected speech—the publication of the book and the provision of documents to a journalist reporting on issues of public interest and concern.” In contrast, Donald Trump argued that “his claims against Mary Trump are not subject to the anti-SLAPP law because the claims . . . are based upon on Mary Trump’s alleged violation of a binding settlement agreement that explicitly prohibited such publication.”

Weighing California law interpreting California’s similar anti-SLAPP law, the court ultimately found the decision in City of Alhambra v. D’Ausilio, 193 Cal. App. 4th 1301 (Ct. App. 2011) to be persuasive. In City of Alhambra, the City sued the defendant for breaching a settlement agreement that prohibited him from certain speech-related conduct. As the court summarized, “the court of appeal held that the ‘City did not sue [D’Ausilio] because he engaged in protected speech,’ but rather because ‘it believed he breached a contract which prevented him from engaging in certain speech-related conduct and a dispute exists as to the scope and validity of the contract,’ and that the suit, therefore, did not ‘arise from’ the protected activities.” Applying the same logic to this case, the court found that “New York’s amended anti-SLAPP law does not apply to prohibit plaintiff’s claims as asserted against Mary Trump.”

As a part of this discussion, the court also distinguished its determination in this motion sequence from the Times’ motion by noting first that the claims against the Times sounded in tort, not contract, and that “a wealth of case law supports the notion that the press is constitutionally protected to engage in the activity of newsgathering.” “In contrast,” the court noted, “Mary Trump has not cited any case law in which a court has held that breaching one’s own confidentiality obligations, by virtue of engaging in commercial speech and publishing a book that specifically addresses matters that are deemed confidential, constitutes, as a matter of law, a protected activity under the anti-SLAPP statute.”

§ 2.3.13. North Carolina Business Court

Cutter v. Vojnovic^[134] (Derivate action by a general partner on behalf of the general partnership against another general partner). The plaintiff alleged that he and the individual defendant were equal general partners in a common law partnership formed to purchase three family-owned hot dog restaurants in Ohio and that the individual defendant later misappropriated this partnership opportunity. The plaintiff asserted various claims, both individually and derivatively on behalf of the general partnership. The court dismissed the derivative claims for lack of standing.

Absent contract or consent, North Carolina law does not permit a general partner to bring a claim derivatively on behalf of the general partnership against another general partner. The North Carolina Uniform Partnership Act (“NCUPA”) does not authorize one general partner to assert a derivative action against another general partner (unlike other corporate statutes that permit derivative actions). And because general partners all have the ability to act on behalf of the partnership, all have management rights, and owe one another fiduciary duties, there is no need for derivative action in the general partnership context. Further, the NCUPA creates an adequate remedy for general partners, a claim for an accounting, through which one general partner may pursue claims directly against another general partner to obtain both equitable and monetary relief.

Notably, no reported North Carolina decision has held that a general partner may sue another general partner derivatively. A prior decision permitted a derivative claim by a general partner against a non-partner who allegedly colluded with another general partner to injure the partnership, but that claim was permitted because the partnership had no recourse against the non-partner, since it was impractical to expect the unfaithful general partner to consent to a direct action by the partnership. That decision thus did not hold that general partners may sue each other derivatively.

Visionary Ed. Tech. Holdings Grp., Inc. v. Issuer Direct Corp.^[135] (Standing of a corporation and its majority shareholder to demand that the corporation’s transfer agent not register transfer of shares of stock to the registered owner of the shares). The issuer (a Canadian corporation) of certain shares of stock and the issuer’s majority shareholder sued the issuer’s transfer agent under Section 25-8-403 of North Carolina’s Uniform Commercial Code. The majority shareholder (who previously owned the shares) had transferred the shares to two former directors of the issuer. The issuer later claimed that the former directors had no right to retain the shares because they had not met certain performance goals that they had agreed to in connection with the share transfer. The issuer and the majority shareholder thus requested an order that barred the transfer agent from removing restrictions on the shares and registering a transfer of the shares, as well as a declaration that the transfer agent could not be liable to the former directors for refusing a request to register transfer.

The court concluded that the issuer and the majority shareholder lacked standing to seek relief under section 25-8-403. The purpose of section 25-8-403 is to help the registered owner of a security prevent a sham registration request. To that end, the statute allows an “appropriate person” to demand that an issuer’s transfer agent not register transfer of a security. A related statute (section 25-8-107) defines “appropriate person” to mean the security’s registered owner. Accordingly, no one other than the registered owner is allowed to make a demand under section 25-8-403, and the issuer or past owner of shares may not interfere with the registered owner’s right to request registration of a share transfer. As a result, because it was undisputed that the shares at issue here were registered in the name of the former directors, the issuer and majority shareholder did not have standing under section 25-8-403 to make a demand on the transfer agent, obtain an injunction against the transfer agent, or seek a declaration concerning the transfer agent’s potential liability to the former directors.

Harris Teeter Supermarkets, Inc. v. Ace Am. Ins. Co.^[136] (Personal jurisdiction over insurance companies based on application of recent Mallory Supreme Court decision). This case involved an insurance coverage dispute between two supermarket chains and their insurers concerning whether the insurers owe coverage to the supermarket chains as to nearly 800 underlying lawsuits seeking damages related to injuries allegedly caused by the supermarket chains’ distribution and dispensing of opioid drugs. Some of the insurers moved to dismiss on personal jurisdiction grounds.

The court concluded that it had personal jurisdiction over the insurers based on the U.S. Supreme Court’s decisions in Mallory v. Norfolk Southern Railway Co.^[137] (a case decided while the court was considering the insurers’ motion to dismiss) and Pennsylvania Fire Insurance. Co. of Philadelphia v. Gold Issue Mining & Milling Co.^[138] (a 1917 case). Mallory held that a Pennsylvania law requiring registered foreign corporations to consent to suit in Pennsylvania courts in order to do business in Pennsylvania did not violate the Due Process Clause. In doing so, the Supreme Court reaffirmed its prior holding in Pennsylvania Fire, which had rejected a Due Process challenge to a Missouri law requiring out-of-state insurance companies to file “with the Superintendent of the Insurance Department a power of attorney consenting that service of process upon the superintendent should be deemed personal service upon the company so long as it should have any liabilities outstanding in the State.”

Here, the court reasoned that North Carolina has a statutory scheme similar to the Missouri law at issue in Pennsylvania Fire. In particular, the court determined that N.C.G.S. § 58-16-5, a statute that sets forth requirements for foreign insurance companies to be admitted and authorized to do business in North Carolina, makes it “mandatory” for foreign insurance companies to file an “instrument appointing the Commissioner of Insurance as agent for purposes of service of process” under N.C.G.S. § 58-16-30. And because it was undisputed that all the insurers (except one) were licensed to conduct insurance business in North Carolina, all the insurers (except one) had filed an instrument appointing the Commissioner as their agent on whom any legal process may be served under Section 58-16-30, and all the insurers had accepted service of process through the Commissioner, the court ruled that all the insurers (except one) “consented to suit in this State by completing the statutorily required registration procedures for foreign corporations.” As for the one insurer that was a surplus lines insurance company and subject to different licensing requirements under the North Carolina Surplus Lines Act, the court interpreted this statute to “mean that a surplus lines insurer may be sued in this State upon a cause of action arising here under any surplus lines insurance contract made by that insurer, so long as service of process is made upon the Commissioner pursuant to N.C.G.S. § 58-16-30.” Accordingly, personal jurisdiction over that insurer was also proper because it had accepted service of process through the Commissioner under 58-16-30.

Murphy Brown, LLC v. Ace Insurance Company^[139] (Allocation of liability among insurers). This insurance coverage dispute arose from several nuisance lawsuits brought against Smithfield Foods and its wholly owned subsidiary, Murphy Brown, in 2013 and 2014. Nearby property owners complained of excessive odor, dust, and noise in connection with Smithfield’s hog farming operations. Following several “bellwether” trials in the Eastern District of North Carolina that resulted in verdicts for the neighboring property owners, all of which were upheld on appeal, Smithfield and Murphy Brown entered into a global settlement with the remaining property owners. Smithfield and Murphy Brown then sued their various insurers who provided primary and excess coverage between 2010 and 2015, seeking a declaratory judgment that the insurers should be liable for the settlement amounts and costs in defending the lawsuits. Previously in this case, the court determined that the insurers owed a duty to defend. The court also granted in part and denied in part motions for partial summary judgment based on the “Pollution Exclusions” contained in Defendants’ various insurance policies.

In the instant summary judgment motion, the court considered the proper method to allocate indemnity liability among the various insurers. The insurers argued that the allocation should be “pro rata” based on the amount of time each insurer provided coverage to Plaintiffs. They relied on a provision in the policies stating that the policies only covered injuries for accidents occurring during the stated policy periods. Plaintiffs, however, pointed to different language in the policies stating that coverage would be provided for “any continuation, change, or resumption” of that injury after the policy period has ended. Based on that language, Plaintiffs claimed they were entitled to recover the entirety of their loss under an “all sums” theory.

The court relied on recent precedent from the North Carolina Supreme Court in Radiator Specialty Co. v. Arrowood Indem. Co., 383 N.C. 387, 881 S.E.2d 597 (2022), which had analyzed similar coverage requirements for damages allegedly caused by repeated exposure to benzene over time. Although noting that state courts were split on the issue, the North Carolina Supreme Court recognized the “modern trend” to give greater weight to the limiting effect of the phrase “during the policy period,” and apply pro rata allocation, even in the presence of other policy language suggesting the insurer would pay all sums arising out of certain injuries. Id. at 414, S.E.2d at 615 and n. 12. Based on the controlling language and reasoning of Radiator Specialty Co., the Business Court concluded that Defendants’ similarly worded policies should also be applied pro rata.

Chi v. Northern Riverfront Marina and Hotel, LLLP^[140] (Statute of limitations, equitable estoppel, fiduciary duties). Plaintiffs were a group of Chinese nationals who invested and became limited partners in Northern Riverfront Marina and Hotel, LLLP, a development project in downtown Wilmington, at various times between 2011 and 2013, as part of an EB-5 Visa program. Northern Riverfront’s general partner was Wilmington Riverfront Development, LLC, managed by Charles Schoninger, the project’s lead developer. The investment offers to Plaintiffs were for five-year terms, making the last term’s expiration date February 18, 2018. Plaintiffs filed suit on December 13, 2021, claiming that their investments failed to provide the promised return and asserting, inter alia, claims for fraud, negligent misrepresentation, breach of fiduciary duties, breach of contract, and violations of the North Carolina Securities Act against a host of defendants, including Wilmington Riverfront and Schoninger. Defendants moved to dismiss the complaint in its entirety.

The court dismissed most of the claims with prejudice, largely on statute of limitations grounds. The fraud and securities violation claims were largely barred by the three-year statute of limitations because Plaintiffs were on notice of their claims long before 2021. For instance, despite the development plan to have a hotel operating by 2014, no hotel was ever built. With respect to Wilmington Riverfront and Schoninger, however, the court noted that Schoninger had written letters to investors in his role as managing member of Wilmington Development, updating them on the project’s status. These contained potential misrepresentations causing Plaintiffs to delay bringing their lawsuit. Therefore, those two defendants were equitably estopped from asserting a statute of limitations defense. Nevertheless, Plaintiffs failed to plead fraud with the particularity required under Rule 9, even after being given multiple opportunities to amend the complaint. Notably though, because Wilmington Development was estopped from invoking the statute of limitations, Plaintiffs’ breach of contract claims against it for an alleged transfer of property and failure to repurchase Plaintiffs’ partnership interests survived—the only significant claim to do so.

As to the breach of fiduciary duty claims, the court refused to find a de facto fiduciary duty owed by Northern Riverfront Marina and Schoninger. The court concluded that those Defendants did not “hold all the cards” with respect to the financial and technical knowledge of the project. Plaintiffs were sophisticated parties who all warranted that they were accredited investors, had access to information about the project, and understood English or had the offering circulars translated for them. Accordingly, those Defendants owed no fiduciary duties. Finally, the court concluded that Plaintiffs’ fiduciary claims against Wilmington Development as general partner should also be dismissed. The allegations that Wilmington Development breached its fiduciary duties to the limited partners were harms to the partnership as a whole, not individualized direct harms giving rise to a private cause of action under North Carolina law. Because no derivative claims were brought, all fiduciary duty claims were dismissed.

§ 2.3.14. Philadelphia Commerce Case Management Program

Antonio v. Wilmington Sav. Fund Soc’y, FSB^[141] (Grant of summary judgment in favor of lender dismissing class action alleging violation of Uniform Commercial Code). This is one of an increasing number of class actions in Philadelphia’s Commerce Court claiming that post-repossession automobile loan deficiency notices violate the UCC. When Antonio fell behind on her car payments, the Bank repossessed her vehicle, and sent her a “Notice of Repossession, Redemption Rights and Sale.” The Notice included a list of “Charges as of Date of Mailing” and directed Antonio to call the Bank for the exact redemption amount. Antonio did not redeem her vehicle, and the Bank sold it. Thereafter, the Bank informed Antonio that she still owed a deficiency.

Antonio filed a class action alleging that the Notice of Repossession, Redemption Rights and Sale violated the UCC and was misleading because it allegedly misstated the amount owed by Antonio. However, Judge Paula Patrick held that the Notice was not defective because the Notice directed Antonio to contact the Bank for the exact amount she needed to pay for the Bank to return her car. The UCC did not require the Bank to list every item owed by Antonio, and the Notice did not purport to be exhaustive. The UCC also did not mandate that the Notice be in a particular format. It was not misleading for the Notice to reference the possibility of additional costs, including the daily storage fee, which the Bank could easily determine, or repair costs, when there were none. Antonio could have called to learn the deficiency amount and its components.

Ambox Operations Co., LLC v. Pocklington^[142] (Grant of preliminary objections [motion to dismiss] in favor of defendant on the ground of judicial privilege). Philadelphia’s Commerce Court continues to frown upon “litigation about litigation.” Pocklington sued Randazzo, the principal of Ambox, for fraud over an investment. Ambox filed a retaliatory lawsuit using facts and language Pockington had averred against Randazzo. Ambox alleged that Pockington’s statements in his complaint were themselves false and tortious.

Judge Ramy I. Djerassi dismissed Ambox’s complaint on judicial privilege grounds, but also allowed Ambox to amend its claim for tortious interference with prospective economic advantage. Ambox declined, contending that there was no judicial privilege because the alleged false statements and tortious conduct by Pocklington predated his complaint against Randazzo. Judge Djerassi noted that traditionally judicial privilege applied to libel and slander claims. Emphasizing the broad scope of judicial privilege—and its grant of absolute immunity even to false or malicious communications made in the regular course of litigation—Judge Djerassi proceeded to extend judicial privilege protection to the alleged tortious interference by Pocklington in his pleading. Because Pocklington’s allegations in his pleading against Randazzo were privileged, Ambox could not use them as the basis for a tort claim against Pocklington. Absent those allegations, Ambox did not state a cause of action, and Judge Djerassi dismissed. In sum, judicial privilege bars a claim that allegations in a pleading are tortious and actionable.

LL Cap. Partners I, LP v. Tambur^[143] (Denial of stay of civil case pending resolution of alleged federal criminal investigation). Philadelphia’s Commerce Court remains skeptical of stay requests, even if occasioned by a possible related criminal action against a party. Tambur and other defendants sought a stay after learning that the U.S. Attorney’s Office and FBI served a subpoena on one of the plaintiffs and interviewed its CEO. Tambur was concerned about the government indicting him because of the fraud and other wrongdoing alleged by the plaintiffs, and about discovery in the civil case possible provoking the government. However, the government had not subpoenaed or interviewed Tambur. Tambur also proffered no evidence about the specific subject matter of any alleged investigation, how long the alleged investigation might take, or whether indictments might result. Nevertheless, Tambur sought an indefinite stay.

Judge Nina W. Padilla balanced (1) the overlap between the civil and criminal cases; (2) the status of any criminal case, including the indictment of Tambur; (3) the plaintiff’s interests in expeditious civil proceedings versus any prejudice caused to the plaintiff by the requested delay; (4) the burden on Tambur; (5) the interests of the court; and (6) the public interest. Judge Padilla concluded a stay was not warranted because (1) there was no actual criminal case; (2) any alleged criminal case was not advanced, and it was possible that no indictments would result; (3) discovery disputes had already prejudiced the plaintiff by significantly delaying the case; (4) the minimal burden on Tambur, who had already invoked his right not to incriminate himself, and the lack of any showing that Tambur could not defend himself in the civil case; and (5) the court and (6) the public’s interest in prompt adjudication of the civil case unless it interfered with any criminal case. At this point, Tambur’s concerns were speculative and entitled to little weight. However, Judge Padilla was open to re-visiting the situation should the circumstances change.

Skw-B Acquisitions v. Stobba Residential Assocs., L.P.^[144] (Grant of petition to appoint receiver). This is the rare case where Philadelphia’s Commerce Court imposed a receiver with broad powers to manage property. Loan documents required the defendant commercial borrowers to deposit rent payments into a bank account for the benefit of the lender. However, the borrowers defaulted by failing to make monthly payments, and then their loan matured. Thereafter, the borrowers instructed their tenants to direct their rent payments to the borrower’s operating account. The lender sued and filed an emergency petition for the appointment of a receiver because of the loss of two tenants and the declining condition of the property that was the collateral for the loan. The court refused, but the Superior Court [Pennsylvania’s intermediate appellate court] vacated. On remand, the lender renewed its petition and also alleged that the borrowers had misappropriated rent and mismanaged the property. This time, the court granted the petition.

Judge Paula Patrick observed that in Pennsylvania there is a stringent, cautious standard for the appointment of a receiver of a solvent business. The test is similar to that for injunctive relief. The court must be “absolutely certain” that a receiver is necessary to protect creditors. The appointment of a receiver cannot cause more harm than good, and there cannot be another less drastic remedy, such as damages. Judge Patrick emphasized that the borrowers were diverting funds to themselves, in violation of the loan documents. Furthermore, commercial vacancies at the property were increasing, much of the first floor of the property was empty, and several remaining commercial tenants had ceased to pay rent. Conditions at the property were deteriorating. The borrowers were not making meaningful efforts to find replacement tenants and they were behind on their taxes. A receiver was necessary to prevent the circumstances from further deteriorating, and in particular, to stop the misappropriation of funds. Judge Patrick included with her decision a comprehensive order that is a model for the scope of the authority and duties of a receiver for distressed property.

§ 2.3.15. Rhode Island Superior Court Business Calendar

MKG Beauty & Business, LLC et al. v. Independence Bank^[145] (commercially reasonable sales). Defendant Independence Bank moved for summary judgment on the remaining counts in the Verified Complaint filed by Plaintiffs MKG Beauty & Business, LLC, et al. Defendant also moved for summary judgment on its Counterclaim against Plaintiffs for the unpaid balance of a promissory note, plus reasonable attorneys’ fees and costs. Plaintiffs objected to both motions.

The primary issue addressed was “whether there exists a genuine issue of material fact that Defendant did not sell 395 Atwood in a commercially reasonable manner. Defendant argues that Plaintiffs have failed to provide any evidence that supports a finding that the sale price of $450,000 for 395 Atwood” was not commercially reasonable. “Conversely, Plaintiffs argue that ‘the sale price’ of $450,000 for 395 Atwood alone establishes that it was not sold in a commercially reasonable manner or, at the very least, creates a genuine issue of material fact as to the commercial reasonableness of the sale.”

“Under Rhode Island law, a mere discrepancy between a market value appraisal and a foreclosure sale price, without more, is not sufficient to establish that a transaction is commercially unreasonable.” “The primary focus of whether a sale is commercially reasonable ‘is not the proceeds received from the sale but rather the procedures employed for the sale.’”

“Defendant has presented substantial evidence to support a finding that … it sold 395 Atwood in a commercially reasonable manner. Notably, Defendant has provided competent evidence indicating that it was both ready and willing to accept private offers and that, by no fault of Defendant, both prospects failed.”

“[T]he only evidence that Plaintiffs have set forth in support of their position is the fact that 395 Atwood sold for less than its assessed value for property taxes. (Citation omitted). However, … selling a property at a value less than what it is appraised or assessed at is not enough” to make a case for commercial unreasonableness. “Plaintiffs have failed to present any evidence indicating collusion or impropriety on the part of Defendant with respect to accepting a sale price of $450,000.” “Plaintiffs have neither advanced expert appraisal regarding the value of 395 Atwood at the time of the public auction nor have Plaintiffs provided any other substantive grounds as to why $450,000 was insufficient. Moreover, Plaintiffs have provided no evidence that the procedures employed by Defendant were commercially unreasonable.”

“Furthermore, this Court finds that the unambiguous language of Section 9G of the Note supports a finding that no dispute exists as to Defendant’s liability to Plaintiffs for its failure to secure the FMV of 395 Atwood at the time of sale. Section 9G of the Note provides in part, ‘Borrower also waives any defenses based upon any claim that Lender did not…obtain the fair market value of Collateral at a sale.’ Plaintiffs, in their written or oral objections to the motion, have failed to provide any reason as to why this section should be ignored. Thus, viewing the evidence in the light most favorable to Plaintiffs, Plaintiffs have failed to show by competent evidence that a genuine issue of material fact exists as to the commercial reasonableness of the 395 Atwood sale.”

The Court also rejected the Plaintiffs’ claim that the workout deal amounted to a usurious loan. That deal called for the Plaintiffs to repay the original principal plus interest, surrender the properties without deduction on the loan balance, and enter the lease on one of the properties.

Beretta v. DeQuattro^[146] (breach of contract, breach of fiduciary duty). Plaintiff brought an action against the company (the “Company”) he was a shareholder of and the individual to whom Plaintiff transferred his shares in that entity for claims of breach of contract, breach of covenant of good faith and fair dealing, breach of fiduciary duty, indemnification, and seeking the appointment of a special master. The parties executed two separate agreements in 2009 and 2016 and under both agreements the Plaintiff agreed to transfer his shares in the company. A bench trial was conducted to determine which agreement controls. Providence Country Superior Court, Justice Brian P. Stern held: (1) “the 2016 Operating Agreement constitutes the entire agreement between the parties with respect to transitioning ownership of” the Company; (2) the Company “was intimately and closely managed by a small group of shareholders … like a partnership.” The Plaintiff and the Defendant “owed fiduciary duties toward one another and to [the Company] as shareholders of a close corporation”; (3) the Plaintiff “did not breach a fiduciary duty to disclose”; (4) “[h]aving found that [the Plaintiff] did not breach a fiduciary duty to disclose, there is no legally sufficient reason to unwind the 2016 Operating Agreement” and the Defendants’ counterclaims are without merit; (5) Defendant’s “actions in connection with the contractual dispute at bar did not constitute a breach of the duties of good faith or loyalty”; (6) Defendant “is in breach [of the 2016 Operating Agreement] by failing to adhere to its terms”; (7) Defendant did not breach the implied covenant of good faith and fair dealing; (8) the Plaintiff’s request for indemnification is denied; (9) the Plaintiff is awarded $404,797.50 in damages, “representing a 50 percent share of [the Company]’s accrued net income for calendar year 2018”; and (9) Plaintiff failed to prove damages with reasonable certainty regarding additional compensation for calendar year 2019, a 401(k) contribution for calendar year 2019, profit-sharing distributions for calendar year 2019 and his 50-percent share of the Company’s profits in calendar year 2018, and therefore “the Court does not award any damages for additional compensation.”

Wilson v. 2 Tower, LLC^[147] (breach of contract, fraud, breach of fiduciary duty). An individual brought claims against her two business partners and two entities she had an interest in for alleged breach of contract, fraud, and breach of fiduciary duty. Washington County Superior Court Judge Sarah Taft-Carter held that (1) Plaintiff’s claim for rescission of the Operating Agreement of 2 Tower, LLC on a theory of fraud and negligent misrepresentation failed due to the plaintiff’s failure to demonstrate reasonable or justifiable reliance on the alleged misrepresentation because the “weight of the credible evidence prove[d] otherwise”; (2) found Plaintiff suffered no damage for breach of the operating agreement’s notice requirement; (3) found for Plaintiff as to the claim of breach of promissory note in the amount $13,949.71; and (4) Plaintiff’s claim for breach of fiduciary duty fails (the operating agreement of 2 Tower, LLC permitted the sale of its assets with an affirmative vote of its members).

Jutonus, LLC v. Fiano^[148] (tax sale in violation of automatic stay). Jutonus, LLC, having won a property through a tax sale, petitioned the Superior Court to foreclose all rights of redemption. Prior to the tax sale the owner filed for Chapter 13 Bankruptcy and an automatic stay issued. Premier Capital, a creditor, held a writ of attachment that had issued and been recorded on the property prior to the initiation of the Chapter 13 bankruptcy and tax sale. Premier challenged the petition to foreclose all rights of redemption on the grounds that the tax sale violated the automatic stay. The Court held that a creditor had standing because the creditor’s imminent risk of divestment of its interest in the property is fairly traceable to the violation of the automatic stay. The Court further denied the request to foreclose the right of redemption due to the underlying tax sale violating the automatic stay and that the tax sale was invalid.

§ 2.3.16. West Virginia Business Court Division

The Thrasher Group v. Bear Contracting, LLC and Great American Insurance Company^[149] (Order Granting Defendant’s Motion for Summary Judgment Regarding Certain Diana Deck and Pike Fork Damage Counterclaims; Order Granting Defendant’s Motion for Summary Judgment Regarding Certain Diana Deck and Pike Fork Counterclaims). This case was referred to the Business Court Division on October 30, 2020, and involves three construction projects in which Bear Contracting, LLC and The Thrasher Group contracted together, wherein Bear Contracting, LLC was to provide construction services and the Thrasher Group was to provide engineering services for the two projects.

After hearing oral argument regarding Defendant Bear Contracting, LLC’s Motion for Summary Judgment Regarding Certain Diana Deck and Pike Fork Damage Counterclaims, on March 8, 2023, the Business Court Division granted Bear Contracting, LLC’s motion for summary judgment. Bear Contracting, LLC argued that it was entitled to certain damages that it incurred in completing the project, after The Thrasher Group’s termination, including inspection costs, survey layout costs, and right of way acquisition costs. The Thrasher Group argued that it had provided an itemized list of services in its pricing proposal, Bear Contracting, LLC agreed to the scope of the pricing proposals, and therefore, the disputed damages were outside of the scope of services which The Thrasher Group was to provide. Ruling in favor of Bear Contracting, LLC, the Business Court Division held that (1) The Thrasher Group could not bill for inspection services in addition to the lump sum payment owed under the contract, as inspection services were included in the lump sum payment; (2) Bear Contracting, LLC was entitled to $161,172.53 in replacement damages for inspection services; (3) Bear Contracting, LLC was entitled to $14,405.81 in damages for survey and layout work costs; and (4) Bear Contracting, LLC was entitled to either performance of right of way work or the costs of a subcontractor to complete right of way work. This case remains pending before the Business Court Division.

American Bituminous Power Partners v. Horizon Ventures of West Virginia^[150] (Order – Findings of Fact and Conclusions of Law from Bench Trial). This case was referred to the Business Court Division on January 10, 2019, and involves disputes arising from an amended lease agreement between American Bituminous Power Partners, L.P. (“AMBIT”) and Horizon Ventures of West Virginia, Inc. The original lease agreement allowed AMBIT to rent property from Horizon Ventures for the purposes of building a power plant, which would primarily use waste coal from the site to produce electricity. The original lease agreement required AMBIT to pay Horizon Ventures a certain amount of their gross revenues, depending on whether the fuel used at the power plant was “Foreign Fuel” or “Local Fuel” and whether it was used for “Operating” or “Non-Operating” reasons. The parties largely disagreed over the interpretation of a particular clause in the amended lease agreement, in which the parties defined all “Foreign Fuel” as “Non-Operating,” and in exchange, Horizon Ventures agreed that AMBIT would pay Horizon Ventures 2.5% of all gross revenues for the use of “Foreign Fuel” for “Non-Operating” reasons.

After being remanded to the Business Court Division from the West Virginia Supreme Court of Appeals, on October 10-12 of 2023, the Business Court Division held a three-day bench trial. The Business Court Division found that in the amended lease agreement the parties defined “Foreign Fuel” as “Non-Operating,” and in exchange the amended lease agreement did not contain a requirement that the “Local Fuel” be of any particular quality. Therefore, the amended lease agreement dispensed with any issue regarding the quality of “Local Fuel” used at the power plant. Resolving the disputes between the parties and interpreting the terms according to the amended lease agreement, the Business Court Division held that AMBIT owed Horizon Ventures of West Virginia 2.5% of gross revenues until all “Local Fuel” is used and no longer present on the site. This case remains pending in the Business Court Division.

Dallas Runyon, Sr. v. Citizens Telecommunications Company of West Virginia, Frontier West Virginia, Inc., and Appalachian Power Company^[151] (Order Denying Frontier’s Motion for Summary Judgment – Entered June 28, 2023) (Order Denying Plaintiff’s Motion for Partial Summary Judgment on Their Trespass and Unjust Enrichment Claims – Entered June 27, 2023). This case was referred to the Business Court Division on September 9, 2019, and involves a dispute regarding telecommunications utility poles placed on the plaintiff’s property.

On June 27, 2023, the Business Court Division entered an order denying Plaintiff’s Motion for Partial Summary Judgment on Their Trespass and Unjust Enrichment Claims. Then, on June 28, 2023, the Business Court Division entered another order denying Frontier’s Motion for Summary Judgment. In denying both motions, the court noted that the two easements were central to the litigation. While the plaintiffs alleged that the 2014 easement superseded the 1939 easement on the property, Frontier contended that the 2014 easement did not cancel the 1939 easement. Further, Frontier claimed that the plaintiff refused to sign a new easement, while the plaintiff claimed that a new easement was proffered to Frontier, but Frontier refused to agree to the proffered easement. The Business Court Division noted that due to the factual disputes, summary judgment was not appropriate.

§ 2.3.17. Wisconsin Commercial Docket Pilot Project

Nestlé USA, Inc. v. Advanced Boiler Control Services, et al.^[152] (Summary judgment related to insurance coverage). In Nestlé, the circuit court considered opposing motions for summary judgment related to insurance coverage filed by Plaintiff Nestlé and Defendants Cincinnati Specialty Underwriters Insurance Company (“Cincinnati”) and Evanston Insurance Company (“Evanston”). The underlying lawsuit arose out of an explosion at Nestlé’s factory that occurred during the performance of services by Advanced Boiler Control Services, Inc. (“ABC”). Nestlé sought a summary judgment ruling that there was coverage through Cincinnati’s Commercial General Liability (“CGL”) policy issued to ABC, and by extension coverage under Evanston’s excess policy. Cincinnati and Evanston sought a summary judgment ruling that coverage does not exist and that neither had a duty to defend or indemnify ABC. Ultimately, the court granted summary judgment to Nestlé. The court noted that insurance policies are contracts governed by the same rules of construction as any other, and that insurance coverage determinations are made using a three-step analysis. First, the court examines the claim to determine whether the policy makes an initial grant of coverage. If so, the court then determines whether any of the policy’s exclusions preclude coverage. Exclusions are narrowly and strictly construed against the insurer if their effect is uncertain. Last, if an exclusion applies, the court determines whether an exception to that exclusion reinstates coverage. The court emphasized that ambiguities as to coverage must be resolved in favor of the insured. Applying this analysis, the court determined that Nestlé had demonstrated initial coverage under the CGL, and that Cincinnati and Evanston did not prove that any of the asserted exclusions applied. The court was therefore not required to look at the exclusions’ exceptions. The court refrained from ruling on the merits as to one other defense: that any alleged misrepresentation made by ABC regarding the events leading up to the explosion and claimed investigation costs incurred by Nestlé were not covered. The court determined that any alleged misrepresentation would not relieve Cincinnati from its legal responsibility for such costs, but that Cincinnati could challenge the reasonableness of them if a jury found that ABC had made a misrepresentation which resulted in additional costs. The court instructed that that jury should be provided specific verdict forms to that effect.

§ 2.3.18. Wyoming Chancery Court

Clark v. Romo^[153] and Lincolnway v. Villalpando^[154] (Chancery Court’s limited jurisdiction). Both orders focused on statutory language granting the court limited jurisdiction over “disputes involving commercial [and] business . . . issues.” Wyo. Stat. § 5-13-115(a).

In Clark, the Chancery Court interpreted this statutory phrase to encompass “disputes among businesses, disputes between businesses and financial institutions, and disputes about business governance” while excluding disputes between business and consumers. Consequently, the court dismissed a complaint involving a consumer-business dispute.

In keeping with this definition, in Lincolnway, the court determined disputes involving private sellers—individuals not engaged in regular trade or business—fall beyond the court’s limited jurisdiction. Accordingly, the court dismissed a complaint filed by a corporation against private sellers.

These orders underscore the Chancery Court’s awareness of its unique yet limited role within Wyoming’s judicial system. They also signal the court’s commitment to strictly delineating its jurisdictional boundaries, maintaining a focus on business-to-business and trust cases.

1. For a more detailed discussion on what may be defined as a business court, see generally A.B.A. Bus. Law Section, The Business Courts Bench Book: Procedures and Best Practices in Business and Commercial Cases (Vanessa R. Tiradentes, et al., eds., 2019) [hereinafter Business Courts Bench Book]; Mitchell L. Bach & Lee Applebaum, A History of the Creation and Jurisdiction of Business Courts in the Last Decade, 60 Bus. Law. 147 (2004) [hereinafter Business Courts History]. ↑

2. For an overview of business courts in the United States, see, e.g., Business Courts Bench Book, supra note 1, Business Courts History, supra note 1, Lee Applebaum & Mitchell L. Bach, Business Courts in the United States: 20 Years of Innovation, in The Improvement of the Administration of Justice (Peter M. Koelling ed., 8th ed. 2016); Joseph R. Slights, III & Elizabeth A. Powers, Delaware Courts Continue to Excel in Business Litigation with the Success of the Complex Commercial Litigation Division of the Superior Court, 70 Bus. Law. 1039 (Fall 2015); John Coyle, Business Courts and Inter-State Competition, 53 Wm. & Mary L. Rev. 1915 (2012); The Honorable Ben F. Tennille, Lee Applebaum, & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 Pepp. Disp. Resol. L. J. 35 (2010); Ann Tucker Nees, Making a Case for Business Courts: A Survey of and Proposed Framework to Evaluate Business Courts, 24 Ga. St. U. L. Rev. 477 (2007); Tim Dibble & Geoff Gallas, Best Practices in U.S. Business Courts, 19 Court Manager, no. 2, 2004, at 25. Further, the Business Courts chapter of this publication has provided details on developments in business courts every year since 2004. Finally, the Business Courts Blog went online in 2019, and serves as a library for past, present and future business court developments, www.businesscourtsblog.com (last visited Jan. 17, 2024). ↑

3. Business Courts Bench Book, supra note 1, at xx. ↑

4. Business Courts History, supra note 1, at 207, 211. ↑

5. Benjamin D. Perkins & Julianne P. Blanch, Utah businesses get their own court, Utah Business (April 3, 2023), https://www.utahbusiness.com/utah-businesses-get-their-own-court/; Stephen E. Fox, Bill Mateja, Amanda L. Cottrell & Jonathan E. Clark, Texas Revolution: State Legislature Creates New Business Court System to Handle Significant Commercial Disputes, Nat’l L. Rev. (July 28, 2023), https://www.natlawreview.com/article/texas-revolution-state-legislature-creates-new-business-court-system-to-handle. ↑

6. American College of Business Court Judges, https://masonlec.org/divisions/mason-judicial-education-program/american-college-business-court-judges/ (last visited Jan. 17, 2024). ↑

7. See Meeting Agenda, Law & Econ. Ctr, https://web.cvent.com/event/f195b17a-4af1-449d-b956-8ff7f6315767/websitePage:8deb4542-d9c4-4193-9354-d3f8f3426f81 (last visited Jan. 17, 2024). ↑

8. Diversity Clerkship Program, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/diversity/ (last visited Jan. 17, 2024). ↑

9. Establishing Business Courts in Your State, https://communities.americanbar.org/topics/13510/media_center/file/0040887f-858d-41e9-a1a3-b1c1aa1c7440 (ABA login required) (last visited Jan. 17, 2024). ↑

10. These materials are located on the Business Court Subcommittee’s Library web page, https://communities.americanbar.org/topics/13503/media_center/folder/8c312eb8-3c18-4feb-acba-bbce37a8ff97 (ABA login required) (last visited Jan. 17, 2024). ↑

11. Business Court Representatives, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/about/awards-initiatives/business-court-representatives/ (ABA login required) (last visited Jan. 17, 2024). ↑

12. Id. ↑

13. Business and Commercial Courts Training Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/92/rec/9 (last visited Jan. 17, 2024). ↑

14. Faculty Guide, Business and Commercial Litigation Courts Course Curriculum, Nat’l Ctr. for State Courts, https://ncsc.contentdm.oclc.org/digital/collection/traffic/id/91/rec/4 (last visited Jan. 17, 2024). ↑

15. New business court docket curriculum developed for courts nationwide, State justice institute, https://www.sji.gov/new-business-court-docket-curriculum-developed-for-courts-nationwide/ (last visited Jan. 17, 2024). ↑

16. www.businesscourtsblog.com. ↑

17. See, e.g., Business Court Studies and Reports 2000–2009, Bus. Courts Blog (May 30, 2023), https://www.businesscourtsblog.com/business-court-studies-and-reports-2000-2009; Business Court Studies and Reports 2010–2018, Bus. Courts Blog (May 30, 2023), https://www.businesscourtsblog.com/business-court-studies-and-reports-2010-2018; Business Court Studies and Reports 2019–2023, Bus. Courts Blog (May 30, 2023), https://www.businesscourtsblog.com/business-court-reports-and-studies-from-2019-to-present/; New York Commercial Division Advisory Council Report on Business Court Benefits, Bus. Courts Blog (July 10, 2019), https://www.businesscourtsblog.com/category/reports-and-studies. ↑

18. See, e.g., ABA Section of Business Law’s Business and Corporate Litigation Committee, Business Courts (chapter), in Recent Developments in Business and Corporate Litigation (2023), https://businesslawtoday.org/2023/04/recent-developments-in-business-courts-2023/ (ABA login required); Douglas L. Toering and Michael Butterfield, Touring the Business Courts – A National Perspective, Mich. Bus. L.J. (Spring 2023), https://manteselaw.com/wp-content/uploads/2023/04/Touring-the-Business-Courts-Spring-2023-3.pdf ; Benjamin D. Perkins & Julianne P. Blanch, Utah businesses get their own court, Utah Business (April 3, 2023), https://www.utahbusiness.com/utah-businesses-get-their-own-court/; Hayley Fowler, How A Real-Life ‘Lincoln Lawyer’ Hatched NC’s Business Court, Law360 (June 5, 2023), https://www.law360.com/articles/1681851/how-a-real-life-lincoln-lawyer-hatched-nc-s-business-court; Stephen E. Fox, Bill Mateja, Amanda L. Cottrell & Jonathan E. Clark, Texas Revolution: State Legislature Creates New Business Court System to Handle Significant Commercial Disputes, Nat’l L. Rev. (July 28, 2023), https://www.natlawreview.com/article/texas-revolution-state-legislature-creates-new-business-court-system-to-handle; Douglas L. Toering, Ian Williamson, Michigan’s business courts: A decade of success, Mich. Bar J. (Oct. 2023), https://www.michbar.org/journal/Details/Michigans-business-courts-A-decade-of-success?ArticleID=4722; Jonathan Hugg, Sarah Boutros, The 4 Top Philadelphia Commerce Court Opinions of 2023, Law360 (Dec. 18, 2023), https://www.law360.com/pennsylvania/articles/1777178/the-4-top-philadelphia-commerce-court-opinions-of-2023. ↑

19. See, e.g., Delaware Corporate & Commercial Litigation Blog, http://www.delawarelitigation.com (last visited Jan. 19, 2024); Mass Law Blog, http://www.masslawblog.com (last visited Jan. 19, 2024); New York Business Divorce Blog, http://www.nybusinessdivorce.com (last visited Jan. 19, 2024); NY Commercial Division Blog, https://www.pbwt.com/ny-commercial-division-blog/ (last visited Jan. 19, 2024); New York Commercial Division Practice, https://www.nycomdiv.com/ (last visited Jan. 19, 2024); Duane Morris Delaware Business Law Blog, http://blogs.duanemorris.com/delawarebusinesslaw/ (last visited Jan. 19, 2024); Commercial Division Blog: Current Developments in the Commercial Division of the New York State Courts, http://schlamstone.com/commercial/ (last visited Jan. 19, 2024); The North Carolina Business Litigation Report, http://www.ncbusinesslitigationreport.com (last visited Jan. 19, 2024); The Nevada Business Court Report, https://www.sierracrestlaw.com/news-blog/ (last visited Jan. 19, 2024); It’s Just Business (North Carolina), https://itsjustbusiness.foxrothschild.com/ (last visited Jan. 19, 2024); and the New York Commercial Division Roundup, https://www.newyorkcommercialdivroundup.com/ (last visited Jan. 19, 2024). ↑

20. Ninth Judicial Circuit of Florida, Divisions of Court, Business Court, https://ninthcircuit.org/divisions/business-court (last visited Dec. 4, 2023). ↑

21. Ninth Judicial Circuit of Florida, Judicial Directory, Judge John E. Jordan, https://ninthcircuit.org/judges/circuit/john-e-jordan (last visited Dec. 4, 2023). ↑

22. Michael Mora, This Miami Judge is Retiring to Open an ADR Firm, Daily Business Review (January 18, 2023), https://www.law.com/dailybusinessreview/2023/01/18/this-miami-judge-is-retiring-to-open-an-adr-firm/ (last visited Dec. 4, 2023). ↑

23. Notice of Retirement, Judge Patti Englander Henning, available at https://www.flgov.com/wp-content/uploads/2023/04/17th-Cir.-Henning.pdf (last visited Dec. 4, 2023). ↑

24. Seventeenth Judicial Circuit of Florida, Circuit Civil Division (26) Procedures (December 4, 2023), https://www.17th.flcourts.org/division-26/ (last visited Dec. 4, 2023). ↑

25. Thirteenth Judicial Circuit of Florida, Judicial Directory, Judge Darren D. Farfante, https://www.fljud13.org/JudicialDirectory/DarrenDFarfante.aspx (last visited Dec. 4, 2023). ↑

26. Iowa Judicial Branch, https://www.iowacourts.gov/newsroom/news-releases/iowa-supreme-court-assigns-three-iowa-business-specialty-court-judges/. ↑

27. Id. ↑

28. Id. ↑

29. Id. ↑

30. Id. ↑

31. Id. ↑

32. Id. ↑

33. Id. ↑

34. Id. ↑

35. Id. ↑

36. Id. ↑

37. Id. ↑

38. Id. ↑

39. Id. ↑

40. Id. ↑

41. Iowa Judicial Branch, https://www.iowacourts.gov/iowa-courts/district-court/iowa-business-specialty-court#:~:text=Starting%20in%202023%2C%20the%20business,calendar%20years%202021%20and%202022. ↑

42. Id. ↑

43. Id. ↑

44. Id. ↑

45. Commercial Court Document Search, https://public.courts.in.gov/CCDocSearch. ↑

46. Indiana Commercial Courts Handbook, https://www.in.gov/courts/iocs/publications/commercial-handbook/. ↑

47. Indiana Commercial Court Treatise, https://www.in.gov/courts/iocs/files/commercial-court-treatise.pdf. ↑

48. The Indiana Lawyer, Marion Superior Judge Welch to retire in February; applications open to fill vacancy, Oct. 20, 2023 https://www.theindianalawyer.com/articles/marion-superior-judge-welch-to-retire-in-february-applications-open-to-fill-vacancy. ↑

49. Indiana Judicial Branch, https://www.in.gov/courts/iocs/committees/commercial-courts/#members. ↑

50. The Indiana Lawyer, Brisco, Lund nominated to IN Northern District Court, Nov. 15, 2023 https://www.theindianalawyer.com/articles/brisco-lund-nominated-to-in-northern-district-court. ↑

51. See Indiana Commercial Court Rule 7, https://www.in.gov/courts/rules/commercial/index.html#_Toc62198784. ↑

52. The full text of the Order adopting these rules can be found at https://www.courts.michigan.gov/siteassets/rules-instructions-administrative-orders/proposed-and-recently-adopted-orders-on-admin-matters/adopted-orders/2019-33_2023-11-01_formor_mcjerules.pdf. ↑

53. Retired judges taking assignment are also required to complete CJE, albeit they need only complete 8 hours. ↑

54. MCL 600.8043 (“The Michigan judicial institute shall provide appropriate training for all circuit judges serving

    as business court judges.”). ↑

55. Toering & Lockhart, Touring the Business Courts, 43-3 Mich. Bus. L.J. 10 (Fall 2023). ↑

56. Judge Bell’s appointment came in December 2022. ↑

57. See Administrative Order 286/22, N.Y.S. Unified Court Sys. (Dec. 16, 2022). ↑

58. See Request for Public Comment on Proposal to Amend Commercial Division Rules 2, 5, 15, 16, and 19, N.Y.S. Unified Court Sys. (Feb. 18, 2022). ↑

59. See Administrative Order 147/23, N.Y.S. Unified Court Sys. (May 15, 2023). ↑

60. Id. ↑

61. Id. ↑

62. Administrative Order, In Re Amended Business Court Program (S.C. July 14, 2023) (C.J. Beatty). ↑

63. Administrative Order, In Re Amended Business Court Program (S.C. Jan. 30, 2019) (C.J. Beatty). ↑

64. Id. ↑

65. Administrative Order, In Re Amended Business Court Program (S.C. July 14, 2023) (C.J. Beatty). ↑

66. Id. ↑

67. H.B. 19, 88th Leg., R.S. (2023); S.B. 1045, 88th Leg., R.S (2023). ↑

68. H.B. 19, §§ 5, 8; S.B. 1045, §§ 1.14, 1.15. ↑

69. H.B. 19, § 1; Tex. Gov’t Code § 25A.003. ↑

70. H.B. 19, § 1; Tex. Gov’t Code § 25A.003(c)-(m). ↑

71. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.009(a). ↑

72. H.B. 19, § 6; Tex. Gov’t Code Ann. § 25A.009(a). ↑

73. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.009(b) and (c). ↑

74. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.006. ↑

75. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004. ↑

76. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(b)–(d). ↑

77. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(c). ↑

78. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(b) and (d). ↑

79. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(e). ↑

80. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.004(f). ↑

81. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(a). ↑

82. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(b). ↑

83. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(c). ↑

84. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.015(d). ↑

85. H.B. 19, § 1; S.B. 1045, §§ 1.02; Tex. Gov’t Code Ann. § 25A.007. ↑

86. H.B. 19, § 1; Tex. Gov’t Code Ann. § 25A.007(c). ↑

87. Utah H.B. 216, 65th Leg., Gen. Sess. (2023). ↑

88. Wyoming Judicial Council, Meeting Minutes, 4 (Mar. 16, 2023), available at https://legacy.utcourts.gov/utc/judicial-council/wp-content/uploads/sites/48/2023/03/2023-03-Council-Approved-minutes.pdf. ↑

89. Utah Code Ann. § 78A-5a-104. ↑

90. Utah Code. Ann. § 78A-5a-103. ↑

91. Id. ↑

92. Utah Code Ann. § 78A-5a-302. ↑

93. Utah Code Ann. § 78A-5a-301. ↑

94. C.A. No. N22C-02-045 PRW CCLD, 301 A.3d 1194 (Del. Super. Ct. 2023). ↑

95. N22C-07-139 PRW CCLD (Del. Super. Ct. Apr. 18, 2023). ↑

96. Order Granting Condor S.A.’s Motion to Dismiss Third Amended Complaint for Lack of Personal Jurisdiction DE 363, The Plurinational State of Bolivia v. Arturo Carlos Murillo-Prijjic, et al., No. 2021-0184420CA-01 (Fla. 11th Jud. Cir. Aug. 28, 2023) (Walsh, J.). ↑

97. Order Denying Plaintiffs’ Emergency Motion for Preliminary Injunction, Miami-Dade Expressway Authority, et al. v. Greater Miami Expressway Agency, et al., No. 2023-018598-CA-01 (Fla. 11th Jud. Cir. Aug. 16, 2023) (Walsh, J.). ↑

98. Dufour v. Dufour, No. 22-GSBC-0014, 2023 WL 3016876 (Ga. Bus. Ct. April 10, 2023). ↑

99. OZ Media, LLC v. Greenberg Film and TV Studio Holdings, LLC, No. 22-GSBC-0006, 2023 WL 2466118 (Ga. Bus. Ct. Feb. 27, 2023). ↑

100. No. 49D01-2212-PL-044296, (Ind. Comm. Ct., Marion Cnty., Jan. 9, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

101. No. 82D07-2207-PL-003441, (Ind. Comm. Ct., Vanderburgh Cnty., Mar. 16, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

102. No. 82D07-2212-PL-005678, (Ind. Comm. Ct., Vanderburgh Cnty., Nov. 10, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

103. No. 71D04-2209-PL-000161, (Ind. Comm. Ct., St. Joseph Cnty., Jan. 19, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

104. No. 02D02-2301-PL-000026, (Ind. Comm. Ct., Allen Cnty., Apr. 11, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

105. No. 49D01-2302-PL-008564, (Ind. Comm. Ct., Marion Cnty., Jun. 2, 2023), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

106. No. LACV098830 (Iowa Dist. Ct. Linn Cnty. May 1, 2023). ↑

107. No. BCD-CIV-2023-00028, 2023 WL 6309681 (Me. B.C.D. August 31, 2023). ↑

108. No. 24-C-22-000531, 2023 WL 8582354 (Md. Cir. Ct. Mar. 30, 2023). ↑

109. No. 24-C-21-004813, 2023 WL 8582355 (Md. Cir. Ct. Jan. 4, 2023). ↑

110. No. 24-C-23-001344, 2023 WL 8582356 (Md. Cir. Ct. Aug. 29, 2023) ↑

111. Case No. 2084CV00735-BLS2, 2023 WL 3792880 (May 16, 2023) (Salinger, J.). ↑

112. No. 22-2509-BLS1, 2023 WL 4456956 (June 21, 2023) (Krupp, J.). The authors of this section note that members of their Firm represent BJ’s Wholesale Club, Inc. in connection with this matter. The authors are not personally involved in the litigation. ↑

113. No. 1984CV03317-BLS2, 2023 WL 1804376 (Jan. 6, 2023) and 2023 WL 1804375 (Jan. 30, 2023) (Salinger, J.) ↑

114. Wayne County, Case No. 23-001951-CB, Hon. Annette J. Berry, Sept. 21, 2023. ↑

115. Macomb County, 22-004565-CB, Hon. Kathryn A. Viviano, May 10, 2023. ↑

116. Oakland County, 20-183261-CB, Hon. Victoria A. Valentine, Mar. 27, 2023. ↑

117. Ottawa County, 22-007065-CB, Hon. Jon A. Van Allsburg, May 8, 2023. ↑

118. St. Joseph County, 13-809-CBB, Hon. T.J. Ackert (Kent County Business Court Judge sitting by assignment), June 12, 2023. ↑

119. The authors’ firm, Mantese Honigman, P.C., was counsel for Plaintiffs in this matter. ↑

120. Prior to trial, the case generated the appellate decision of Franks v. Franks, 330 Mich. App. 69, 944 N.W.2d 388 (2019), where the Michigan Court of Appeals held that the business judgment rule defense is inapplicable where oppression is shown. ↑

121. No. 216-2023-cv-00094, 2023 N.H. Super. LEXIS 8, at *5-6 (Super. Ct. Hillsborough Cnty. Aug. 23, 2023). ↑

122. Nos. 218-2019-cv-933, 218-2019-cv-1683, 219-2019-cv-424 (April 19, 2023), at 19-20, available at
     https://www.courts.nh.gov/sites/g/files/ehbemt471/files/documents/2023-08/april-19-2023-order-redacted.pdf.

     ↑

123. No. 216-2020-cv-00312, 2023 N.H. Super. LEXIS 1, at *10-11 (Super. Ct. Hillsborough Cnty. Jan 3. 2023). ↑

124. No. MRS-L-1530-22 (N.J. Super. Law Div., Complex Business Litigation Program, Oct. 23, 2023 (unpublished)). ↑

125. No. MON-L-1518-20 (N.J. Super. Law Div., Complex Business Litigation Program, Nov. 16, 2023 (unpublished)). ↑

126. 175 N.Y.S.3d 713, 2022 NY Slip Op. 50986(U) (Sup. Ct. Bronx Cnty. Oct. 11, 2022). ↑

127. 77 Misc. 3d 1220(A) (Sup. Ct. N.Y. Cnty., Jan. 5, 2023). ↑

128. 174 N.Y.S.3d 825, 76 Misc. 3d 1213(A) (Sup. Ct. N.Y. Cnty. Sept. 26, 2022). ↑

129. 180 N.Y.S.3d 524, 77 Misc. 3d 1222(A) (Sup. Ct. N.Y. Cnty. Jan. 6, 2023). ↑

130. 2022 BL 479595, 76 Misc. 3d 1220(A), 175 N.Y.S.3d 714 (Sup. Ct. N.Y. Cnty., Oct. 12, 2022). ↑

131. 183 N.Y.S.3d 727, 78 Misc. 3d 1202 (Sup. Ct. N.Y. Cnty. Feb. 27, 2023). ↑

132. 184 N.Y.S.3d 591, 78 Misc. 3d 1212(A) (Sup. Ct. Bronx Cnty. March 17, 2023). ↑

133. 192 N.Y.S.3d 891 (Sup. Ct. N.Y. Cnty. June 9, 2023). ↑

134. No. 21-CVS-10487, 2023 NCBC 7 (Mecklenburg Cnty. Super. Ct. Jan. 24, 2023) (Bledsoe, C.J.), https://www.nccourts.gov/documents/business-court-opinions/cutter-v-vojnovic-2023-ncbc-7. ↑

135. No. 23-CVS-20101, 2023 NCBC 65 (Wake Cnty. Super. Ct. Sept. 22, 2023) (Conrad, J.), https://www.nccourts.gov/documents/business-court-opinions/visionary-ed-tech-holdings-grp-inc-v-issuer-direct-corp-2023-ncbc-65. ↑

136. No. 22-CVS-5279, 2023 NCBC 68 (Forsyth Cnty. Super. Ct. Oct. 10, 2023) (Robinson, J.), https://www.nccourts.gov/assets/documents/opinions/2023%20NCBC%2068.pdf?VersionId=XXYCaBlaI6hK0U_fYcrd5Y40xUFIBOAe. ↑

137. 600 U.S. 122 (2023). ↑

138. 243 U.S. 93 (1917). ↑

139. No. 19-CVS-2793, 2023 NCBC 52 (N.C. Super. August. 7, 2023) (Davis, J.), https://www.nccourts.gov/documents/business-court-opinions. ↑

140. No. 121-CVS-4611, 2023 NCBC 47 (N.C. Super. July 27, 2023) (Earp, J.), https://www.nccourts.gov/documents/business-court-opinions. ↑

141. 2023 Phila. Ct. Com. Pl. LEXIS 3 (Jan. 9, 2023). ↑

142. 2023 Phila. Ct. Com. Pl. LEXIS 10 (Apr. 25, 2023). ↑

143. 2023 Phila. Ct. Com. Pl. LEXIS 17 (July 7, 2023). ↑

144. 2023 Phila. Ct. Com. Pl. LEXIS 23 (Aug. 30, 2023). ↑

145. C.A. No. KC-2019-1354, 2022 R.I. Super. LEXIS 78 (R.I. Super. Ct. Kent Cnty. Oct. 24, 2022) (Licht, J.). ↑

146. No. PC-2020-03404, 2023 WL 2716424 (R.I. Super. Ct. Providence Cnty. Mar. 23, 2023). ↑

147. No. WC-2017-0018, 2022 WL 4541155 (R.I. Super. Ct. Washington Cnty. Sept. 20, 2022). ↑

148. No. WM-2022-0091, 2022 WL 17225090 (R.I. Super. Ct. Washington Cnty. Nov. 18, 2022) ↑

149. No. 20-C-772 (W. Va. Cir. Ct. Kanawha Cnty. Mar. 8, 2023). ↑

150. No. CC-24-2018-C-130 (W. Va. Cir. Ct. Marion Cnty. Oct. 31, 2023). ↑

151. No. CC-30-2017-C-108 (W. Va. Cir. Ct. Mingo Cnty. June 27-28, 2023). ↑

152. No. 2020CV1292 (Wis. Cir. Ct. Racine Cnty. Apr. 11, 2023). ↑

153. 2023 WYCH 4 (Wy. Ch. Ct. June 16, 2023). ↑

154. 2023 WYCH 6 (Wy. Ch. Ct. Oct. 6, 2023). ↑

Editors

§ 1.1.1. Supreme Court

Bartenwerfer v. Buckley, 598 U.S. 69, 143665 (2023). In this case the Court was confronted with the Bankruptcy Code’s exception to discharge for any debt obtained by fraud (contained in Section 523(a)(2)(A)). While this provision clearly applies to the active fraudster, the Court noted that sometimes a debtor may be liable for fraud that she did not personally commit. “For example, deceit practiced by a partner or an agent.” The question for the Court was whether the bar extends to this latter situation.

In 2005, Kate and David jointly purchased a house in San Francisco. Acting as business partners, they decided to remodel the house and sell it at a profit. David took charge of the project. Kate was largely uninvolved. Kate and David ultimately married and sold the house to Kieran Buckley. In connection with the sale, Kate and David attested that they had disclosed all material facts relating to the property. After closing, Buckley discovered several undisclosed defects. Buckley sued Kate and David and obtained a judgment in his favor. Kate and David were unable to pay Buckley and sought Chapter 7 bankruptcy protection. Buckley filed an adversary complaint alleging that the money owed on the state-court judgment fell within Section 523(a)(2)(A)’s exception to discharge for any debt for money obtained by fraud. The bankruptcy court ruled in Buckley’s favor holding that David’s fraudulent intent would be imputed to Kate because they had formed a legal partnership to execute the renovation and resale project. The Ninth Circuit bankruptcy appellate panel agreed as to David’s fraudulent intent but did not agree as to Kate. The panel concluded that the Code only barred her from receiving a discharge if she knew or had reason to know of David’s fraud. The Ninth Circuit reversed, holding that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability. The Supreme Court granted certiorari to resolve confusion in the lower courts.

The Court began its analysis with the text of the Code. Justice Barrett wrote that “this text precludes Kate Bartenwerfer from discharging her liability for the state-court judgment.” There was no dispute that Kate was an individual debtor nor that the judgment was a debt. The focus of the Court’s analysis, and the arguments of the parties, revolved around whether the debt arose from money obtained by false pretenses, a false representation, or actual fraud. Kate disputed this last premise. She admitted that the statute was written in the passive voice, which does not specify a fraudulent actor. But she argued that the statute should be most naturally read to bar discharge of debts for money obtained by the debtor’s fraud. In other words, she argued that the passive voice hides the relevant actor in plain sight. The Court disagreed finding that the passive voice simply removes the actor from the equation.

By framing the statute to focus on an event without reference to the specific actor, the statute does not depend on the actor’s intent or culpability. The Court noted that this was consistent with the common law of fraud, which “has long maintained that fraud liability is not limited to the wrongdoer.” Both precedent and Congress’s response eliminated any doubt as to the propriety of the Court’s textual analysis. The Court had long ago held that the discharge exception was not limited to fraud by the debtor herself. Justice Barrett wrote that the Court must assume that Congress meant to incorporate the interpretations adopted by precedent when it reenacted the bankruptcy laws (without addressing the issue). In this case, the Congress went even further. Thirteen years after the Court’s decision Congress overhauled bankruptcy law and deleted “the strongest textual hook counseling against the outcome” reached by the Court. The Court concluded by noting that “innocent people are sometimes held liable for fraud they did not personally commit and, if they declare a bankruptcy, §523(a)(2)(A) bars discharge of that debt.” Justices Sotomayor and Jackson concurred noting that the Court did “not confront a situation involving fraud by a person bearing no agency or partnership relationship to the debtor.”

Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, 599 U.S. 382, 143 S. Ct. 1689 (2023). This case concerned whether the express abrogation of sovereign immunity found in Section 106(a) of the Bankruptcy Code extended to federally recognized Indian tribes. The Lac Du Flambeau Band of Lake Superior Chippewa Indians is a federally recognized Indian tribe, with several wholly owned businesses. One of those businesses loaned money to Brian Coughlin. Coughlin sought Chapter 13 bankruptcy protection before repaying the loan. Notwithstanding the automatic stay imposed by Section 362(a) of the Bankruptcy Code, the tribe’s lending entity, Lendgreen, continued its collection efforts notwithstanding. Ultimately, Coughlin filed a motion with the Bankruptcy court to enforce the automatic stay and sought damages for emotional distress along with costs and attorney’s fees. Lendgreen moved to dismiss arguing that the bankruptcy court lacked subject-matter jurisdiction as both the Tribe and its subsidiaries enjoyed tribal sovereign immunity. The bankruptcy court agreed with the Tribe and dismissed the case on sovereign immunity grounds. The First Circuit reversed, holding that the Bankruptcy Code “unequivocally strips tribes of their immunity.” The Supreme Court granted certiorari to resolve a circuit split (the Ninth Circuit had held that the Bankruptcy Code abrogates Tribal sovereign immunity, while the Sixth Circuit reached the opposite conclusion).

In her opinion for the Court, Justice Jackson began by noting that two provisions of the Bankruptcy Code apply. First, Section 106(a) abrogates the sovereign immunity of “governmental unit[s].” And Section 101(27) defines “governmental units” to mean a number of specified governmental entities and then concludes with a catchall: “or other foreign or domestic government.” In order to abrogate sovereign immunity, the Court had previously held that Congress must make its intent “unmistakably clear.” Because Indian tribes possess the “common-law immunity from suit traditionally enjoyed by sovereign powers,” this well-settled rule applies with equal force to federally recognized Tribes. Thus, if there is a plausible interpretation of the statute that preserves sovereign immunity, the Court will conclude that Congress has not unambiguously made its intent to abrogate clear. But the rule does not require magic words.

Given this rule, the majority concluded “that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possess the power to assert such immunity.” And this includes federally recognized tribes. The Court’s analysis began with the proposition that the term “governmental unit” was defined in such a way to exude comprehensiveness from beginning to end. Furthermore, the catchall phrase quoted above was notable. “Few phrases in the English language express all-inclusiveness more than the pairing of two extremes.” The pairing of foreign with domestic was such a construction. Thus, by coupling foreign and domestic together and placing that pair at the end of an extensive list, “Congress unmistakably intended to cover all governments in §101(27)’s definition, whatever their location, nature or type.” Carving out any government from the definition of “governmental unit” would have required the Court to upend the policy choice embodied in the Code. Because the Code unequivocally abrogates sovereign immunity of all governments and Tribes are undisputedly governments, §106(a) unmistakably abrogates Tribal sovereign immunity.

Justice Thomas concurred in the judgment but reiterated his longstanding position that “to the extent that Tribes possess sovereign immunity at all, that immunity does not extend to “suits arising out of a Tribe’s commercial activities conducted beyond its territory.” Justice Gorsuch dissented. He began by noting that there had not been a single example in all of history where the Court had found that Congress intended to abrogate Tribal sovereign immunity without an express mention that Indian Tribes in the statute. Moreover, Justice Gorsuch found that the phrase “other foreign or domestic governments” could mean what the Court concluded, but there was a plausible other meaning. That is, it could mean every other foreign government and every other domestic government, but Indian Tribes are neither. In his view, the Tribes enjoy unique status that requires specific mention.

MOAC Mall Holdings LLC v. Transform Holdco LLC, 598 U.S. 288, 143 S. Ct. 927 (2023). “[T]he Bankruptcy Code permits a debtor (or a trustee) to sell or lease the bankruptcy estate’s property outside of the ordinary course of the bankruptcy entity’s business … Interested parties may file an objection to such a sale or lease, and may appeal if the Court authorizes the sale or lease of the estate’s property over their objection. But §363(m) restricts the effect of such an appeal if successful.” Namely, it provides that “[t]he reversal or modification on appeal of an authorization … of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization of such sale or lease was stayed pending appeal.” Thus, “sometimes, a successful appeal of a judicial authorization to sell or lease estate property will not impugn the validity of a sale or lease made under that authorization.” In this case, the Supreme Court was asked to decide whether the statutory mootness of Section 363(m) was jurisdictional.

In 2018, Sears filed for Chapter 11 bankruptcy protection. In 2019, Sears sought to sell most of its assets to the respondent subject to bankruptcy court approval. As part of the sale, the respondent was given the right to designate to whom a lease between Sears and certain landlords would be assigned. The agreement did not designate an assignee; it simply meant that if the respondent designated one, Sears would be compelled to assign the lease to the designee. One of the leases in question was a lease with the petitioner MOAC, the owner of the Minnesota Mall of America.

Section 365 of the Code prohibits assignment of an unexpired lease absent adequate assurance of future performance by the assignee, generally. And it contains specific rules regarding adequate assurance applicable to shopping centers. Respondent designated the Mall of America lease for assignment to a wholly owned subsidiary. MOAC objected on the grounds that the respondents had not provided the requisite adequate assurance of future performance. The bankruptcy court disagreed and approved the assignment. MOAC sought a stay of that order. The bankruptcy court denied the request, reasoning that an appeal of the assignment order did not fall within the scope of Section 363(m). Thus, a stay was not necessary. The bankruptcy court further noted that the respondent had explicitly represented that it would not invoke Section 363(m) against MOAC. No stay was granted, the order became effective, and Sears assigned the lease. MOAC successfully appealed the order to the district court, which concluded that the respondent did not satisfy the requirements of adequate assurance. The district court, therefore, vacated the order. The respondent then sought rehearing and, for the first time, backed away from its previous commitments and argued that Section 363(m) deprived the district court of jurisdiction. While the district court was appalled by the gambit, it was bound by Second Circuit precedent holding that Section 363(m) is jurisdictional and not subject to waiver or judicial estoppel. The Second Circuit affirmed. The Supreme Court granted the Mall’s petition for certiorari to resolve a circuit split.

Before turning to the jurisdictional arguments, the Court first addressed the respondent’s argument that the case was moot because the lease had been transferred out of the estate via the assignment. The Court noted that “a case is only moot when it is impossible for the court to grant any effective relief.” The respondent argued that the only way for the Court to grant relief would be to avoid the transfer pursuant to Section 549 of the Code. As Section 549 could only be asserted by the debtor and the debtor had expressly waived any right to bring such an action, the transfer of the lease could not be undone.

The Court noted that its precedents disfavor these kinds of mootness arguments. MOAC simply sought typical appellate relief: the reversal of the lower courts’ decisions. In that regard, the Court would not conclude that the parties did not have a concrete interest in the relief sought. And the Supreme Court declined to act as the court of “first view” with regard to the respondent’s contention that no actual relief remains legally available.

The Court then turned to the question of jurisdiction. Whether Section 363(m) is jurisdictional is “significant because it carries with it unique and sometimes severe consequences.” Not only does a jurisdictional condition deprive the Court of the power to hear a case, but it is also impervious to excuses like waiver or forfeiture. If the statute is jurisdictional even the egregious conduct of the respondent would not permit application of judicial estoppel. Given these extreme consequences, the Court has previously held “that jurisdictional rules pertain to ‘“‘the power of the court rather than to the rights or obligations of the parties.’”’ And a provision will only be held to be jurisdictional if Congress clearly states its intent that it be applied in that fashion. But magic words are not required.

The Court found nothing in Section 363(m) that purported to govern the Court’s ability to adjudicate a dispute. To the contrary, Section 363(m) clearly anticipates that courts will exercise jurisdiction over a covered authorization, and it is, thus, permissible to read the text as merely cloaking certain good-faith purchasers with protection, even when jurisdiction exists. Moreover, Congress separated Section 363(m) from other provisions that actually limit a court’s jurisdiction, and Section 363(m) does not contain any clear connection to those plainly jurisdictional provisions. The Court further rejected the respondent’s argument that the transfer of a res to a good-faith purchaser removes it from the bankruptcy estate and from the court’s in rem jurisdiction. It found this argument to be a red herring. The important issue is the text of the statute where Congress did not clearly limit judicial power as opposed to merely restricting the effects of a valid exercise of that power. The Supreme Court vacated the Second Circuit’s judgment and remanded the case for further proceedings.

§ 1.1.2. First Circuit

Botelho v. Buscone (In re Buscone), 61 F.4th 10 (1st Cir. 2023). Although the Fifth, Sixth, Tenth, and Eleventh Circuits have all found an exception to judicial estoppel in circumstances where the failure to disclose a legal claim in bankruptcy was inadvertent, the First Circuit Court of Appeals seemingly indicated, in dicta, that it would not permit such an exception.

Neighbors Mary and Ann went into business together. When their business failed in 2014, Ann commenced chapter 7 proceedings that same year. In her bankruptcy schedules, Ann neglected to include any claims against Mary. Ann subsequently received a discharge. Approximately three years later, in 2018, Ann sued Mary in Massachusetts state court and secured a default judgment of $91,673.45 when Mary failed to respond to the suit. Shortly thereafter, Mary commenced her own chapter 7 proceeding in which she listed in her schedules Ann’s claim against her in the default judgment amount. Ann commenced an adversary proceeding in Mary’s bankruptcy, seeking a determination that her default judgment against Mary was non-dischargeable under sections 523(a)(2)(A) and 523(a)(4) of the Bankruptcy Code. Section 523(a) provides that:

A discharge under section 727 . . . does not discharge an individual debtor from any debt—

. . .

(2) for money, property, [or] services . . . to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud . . . ; [or]

. . .

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . .

11 U.S.C. § 523(a). Mary sought to dismiss Ann’s adversary complaint on the basis that Ann was foreclosed from asserting that her claim was non-dischargeable by reason of judicial estoppel because Ann failed to list in her bankruptcy schedules. After the bankruptcy court converted Mary’s motion to one for summary judgment, the parties proceeded to discovery. However, after Mary failed to comply with multiple discovery orders, the bankruptcy court ultimately granted Ann’s motion for sanctions, including an order finding default judgment in Ann’s favor. On Mary’s motion to reconsider both the sanctions order and Mary’s motion for summary judgment, the bankruptcy court re-affirmed its decisions. After the Bankruptcy Appellate Panel largely reiterated the bankruptcy court’s findings, Mary appealed (i) the bankruptcy court’s denial of her motion for summary judgment, (ii) the default judgment entered against her as a discovery sanction, and (iii) the bankruptcy court’s denial of her motion to reconsider to the First Circuit.

Turning to the question of Mary’s motion for summary judgment, the First Circuit took under consideration whether Ann should have been judicially estopped from pursuing the state court judgment. The court began with an overview of the judicially-created doctrine, noting its purpose “‘to protect the integrity of the judicial process,’ by ‘prohibiting parties from deliberately changing positions according to the exigencies of the moment.’” Id. at 21 (quoting New Hampshire v. Maine, 532 U.S. 742, 749–50 (2001)). The court highlighted “two baseline factors,” which—when met—afford a court the discretion to estop a party from asserting a legal position: (1) a party’s position must be “clearly inconsistent” with an earlier position; and (2) the party must have “succeeded in persuading a court to accept [their] earlier position.” Id. (quoting New Hampshire v. Maine, 532 U.S. 742, 750 (2001)) (emphasis original). But in the bankruptcy context, where judicial estoppel is often applied to prevent a debtor, who previously obtained a discharge on the representation that no claims exist, from resurrecting those claims, the First Circuit acknowledged that certain of its sister circuits had found an exception to judicial estoppel where the failure to disclose a legal claim in bankruptcy was inadvertent. Although the question before it was whether the bankruptcy court abused its discretion in denying Mary’s motion for summary judgment, the First Circuit seemingly indicated it would split from its sister circuits, reiterating from prior precedent that “a party is not automatically excused from judicial estoppel if the earlier statement was made in good faith.” Id. at 28 (quoting Thore v. Howe, 466 F.3d 173, 184 n.5 (1st Cir. 2006)); see also id. at 23 (“[w]e have never recognized such an exception and have noted that deliberate dishonesty is not a prerequisite to application of judicial estoppel.”) (quoting Guay v. Burack, 677 F.3d 10, 20 n.7 (1st Cir. 2012)). The court then affirmed the bankruptcy court’s denial of summary judgment, finding no error in its conclusion that a further factual record was required to determine if judicial estoppel foreclosed Ann’s non-dischargeability action.

The First Circuit went on to affirm the bankruptcy court on the latter two issues as well, finding that it was squarely within the bankruptcy court’s discretion to award default judgment as a discovery sanction in the face of Mary’s repeated failures to comply with the court’s prior orders and to deny Mary’s motion for reconsideration when she had primarily regurgitated her prior arguments.

Rodgers, Powers & Schwartz, LLP v. Minkina (In re Minkina), 79 F.4th 142 (1st Cir. 2023). In this case, the First Circuit examined whether the Butner principle created a conflict with the Bankruptcy Code in the context of a valuation dispute under section 522(f) of the Bankruptcy Code. Overturning the Bankruptcy Appellate Panel’s (the “BAP”) longstanding Snyder v. Rockland Tr. Co. (In re Snyder), 249 B.R. 40 (1st Cir. B.A.P. 2000) decision, the First Circuit concluded that a debtor’s interest in property held as a tenant by the entirety must be determined by the fair market value of such interest, notwithstanding that Massachusetts law defines a tenancy by the entirety as a “unitary title.”

At the time of Nataly Minkina’s chapter 13 bankruptcy filing in 2018, Minkina and her husband owned their Brookline, Massachusetts home as tenants by the entirety. The property was subject to (1) two mortgages totaling $177, 741, and (2) a judicial lien, solely on Minkina’s interest in the property, in favor of law firm Rodgers, Powers & Schwartz, LLP (“RPS”) for $250,094, resulting from a state court judgment ordering Minkina to reimburse RPS for the expenses incurred in defending against Minkina’s frivolous malpractice suit. Minkina was also entitled to a $500,000 homestead exemption. In 2019, Minkina moved to avoid the RPS judicial lien on the grounds that the lien impaired her homestead exemption pursuant to section 522(f). For the purposes of the lien avoidance, the parties agreed to value the property as a whole at $1.05 million. But the question then arose as to how the parties should value Minkina’s interest in the property as a tenant by the entirety. While RPS argued that the bankruptcy court was bound to follow the Snyder decision, in which the BAP ruled that a Massachusetts debtor’s interest in a tenancy by the entirety is equal to 100% of the value of the property for purposes of the section 522(f) formula, Minkina argued that her interest in the property should be appraised based on either an actuarial approach or a simple 50% interest in the value of the property. Following a preliminary ruling, in which the bankruptcy court indicated that it would not follow Snyder, the parties stipulated to a valuation of Minkina’s interest in the property, subject to her husband’s right of survivorship, of $525,000, while also preserving RPS’s right to pursue a valuation of Minkina’s interest at 100% of the property value. As previewed, the bankruptcy court granted Minkina’s motion to avoid RPS’s lien, rejecting Snyder. RPS petitioned for, and was granted, direct appeal to the First Circuit.

On appeal, RPS argued primarily that the Massachusetts Supreme Judicial Court’s decision in Coraccio v. Lowell Five Cents Sav. Bank, 415 Mass. 145 (1993), which determined that a tenancy by the entirety constitutes a “unitary title” under Massachusetts law, compels the conclusion that Minkina’s interest in the property should be valued at the full market value of the property. The First Circuit dispatched this argument easily, finding that Coraccio did not concern valuation, and therefore had no bearing on the requirement established under Snyder to value Minkina’s interest in the property as the full property value.

The First Circuit then examined whether the bankruptcy court erred in declining to follow Snyder’s approach to valuing a tenancy by the entirety at the full property value. Holding that the bankruptcy court had not erred when it accepted the stipulated 50% valuation, the First Circuit instead found that Snyder impermissibly deviated from the plain text of the Bankruptcy Code. The Bankruptcy Code defines the term “value,” as used in section 522(f), as “fair market value as of the date of the filing of the petition.” 11 U.S.C. § 522(a)(2). Snyder’s valuation of a tenancy by the entirety at 100% of the property value assumes that an interest in a tenancy by the entirety is equally as marketable as an interest in the property in fee simple, without accounting for the limitations of a tenancy by the entirety (i.e., the right of survivorship). By failing to establish a fair market value for an interest in a tenancy by the entirety, the First Circuit held, the BAP in Snyder failed to abide by the plain text of section 522.

§ 1.1.3. Second Circuit

ESL Invs., Inc. v. Sears Holdings Corp. (In re Sears Holdings Corp.), 51 F.4th 53 (2d Cir. 2022). In the context of a section 507(b) super-priority claim litigation, the Second Circuit was asked to determine how to value the assets of Sears Holding Corporation and its debtor-affiliates (collectively, “Sears”). Although the Second Circuit relied on the reasoning underlying the Supreme Court’s decision in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), it nonetheless found that the net orderly liquidation value (“NOLV”) was the appropriate measure for Sears’ assets, rather replacement value, as used by the Supreme Court.

Before the bankruptcy court, certain holders of Sears’ second-lien debt (the “second-lien claimholders”) asserted that they were entitled super-priority claims pursuant to section 507(b) of the Bankruptcy Code, for the diminution in value of their collateral during the course of Sears bankruptcy proceeding. The bankruptcy court was therefore required to determine whether the second-lien claimholders’ collateral had decreased in value after the October 15, 2018, commencement of the Sears bankruptcy proceeding (the “Petition Date”). The second-lien claimholders would only be able to assert their section 507(b) claim to the extent that the value of the collateral as of the Petition Date, less the obligations owed to the first-lien lenders, exceeded the $433.5 million credit bid that the second-lien claimholders had used to purchase Sears’ assets during the bankruptcy.

After hearing the evidence, including expert testimony, the bankruptcy court determined that the value of the second-lien claimholders’ collateral as of the Petition Date was $2.147 billion, based on the NOLV approach. Included in that determination was a zero-dollar valuation for a subset of inventory (the “NBB Inventory”) and a face-value valuation for $395 million in letters of credit Sears purchased, since—as the bankruptcy court held—the second-lien claimholders had not offered a reasonable valuation method for either category of asset. Because the bankruptcy court found that the first-lien lenders were owed $1.96 billion, the second-lien claimholders were therefore only secured to the extent of $187 million, which was less than the value they received via their $433.5 million credit bid. Accordingly, the bankruptcy court determined that the second-lien claimholders were not entitled to a super-priority claim under section 507(b). The district court affirmed.

On appeal to the Second Circuit, the second-lien claimholders argued that the bankruptcy court had erred in (1) valuing the inventory at its NOLV, rather than replacement value or retail value, (2) assigning zero value to the NBB Inventory, and (3) valuing the letters of credit at their full face value. First addressing the inventory valuation methodology argument, the Second Circuit began by examining the Supreme Court’s decision in Rash. The Rash Court was asked to determine the present value of collateral in accordance with section 506(a)(1) of the Bankruptcy Code, which provides that the value of collateral “shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” 11 U.S.C. § 506(a)(1). There, because the collateral was being used to continue the debtor’s business, the Supreme Court held that the proper value of the collateral was its replacement value. Although the second-lien claimholders argued that Rash required the bankruptcy court to apply the replacement value, the Second Circuit rejected this argument, instead interpreting Rash to stand for the proposition that, “when valuing collateral pursuant to section 506(a), the value of the property should be calculated ‘in light of the disposition or use in fact proposed, not the various dispositions or uses that might have been proposed.’” Id. at 63 (quoting Rash, 520 U.S. at 964). Because the only realistic outcomes contemplated—a going-concern sale or a forced liquidation—the Second Circuit concluded that the bankruptcy court had reasonably decided to assess the collateral according to the NOLV.

Turning next to the second-lien claimholders’ argument that the bankruptcy court should not have valued the NBB inventory at zero, the Second Circuit found that the second-lien claimholders had waived their argument that they did not have the burden of proving the value of the collateral. Accordingly, the bankruptcy court was entitled, in the absence of an acceptable valuation methodology establishing any other value, to value the NBB Inventory at zero. Similarly, because the second-lien claimholders failed to propose a valuation methodology that adequately addressed the contingent nature of the letters of credit, the bankruptcy court was entitled to apply face value.

TLA Claimholders Grp. v. LATAM Airlines Grp. S.A. (In re LATAM Airlines Grp. S.A.), 55 F.4th 377 (2d Cir. 2022). The Second Circuit joined the Third, Fifth, and Ninth Circuits in holding that an unsecured claim may be treated as unimpaired under a plan of reorganization even if the plan does not provide for the payment of postpetition interest, despite the debtor’s solvency.

Certain unsecured creditors of Tam Linhas Aéreas S.A. (“TLA”), an affiliate of LATAM Airlines Group S.A. (collectively, “LATAM”), opposed confirmation of the LATAM chapter 11 plan. The TLA creditors objected to the plan’s classification of their claims as “unimpaired” when, although the claims were being paid in full, the plan did not provide for payment of postpetition interest on their claims. The TLA creditors further argued that because TLA was solvent, based on both a waterfall analysis and a discounted cash flow analysis, they were entitled to interest payments on their claims during the pendency of the bankruptcy pursuant to the “solvent-debtor” exception to the general rule of bankruptcy that interest stops accruing upon a bankruptcy filing. However, the bankruptcy court disagreed with both arguments, confirming the plan over the TLA creditors’ objection. The bankruptcy court found that the definition of impairment contained in section 1124(1) did not supersede the limitation in section 502(b)(2) of the Bankruptcy Code prohibiting allowance of claims for unmatured interest. The bankruptcy court further found that TLA was insolvent, relying on the liquidation analysis and the balance sheet test put forward by LATAM, such that the solvent-debtor exception was inapplicable. After the district court confirmed the bankruptcy court’s findings, the TLA creditors appealed to the Second Circuit.

On appeal, the Second Circuit first addressed whether the TLA creditors’ claims were impaired under section 1124(1) of the Bankruptcy Code. Relying heavily on the precedents established in the Third, Fifth, and Ninth Circuits, the Second Circuit looked to the statutory language of section 1124(1), which provides that a class of claims or interests is impaired under a plan, unless the plan does not alter the legal, equitable, and contractual rights to which the claim holder is entitled. See 11 U.S.C. § 1124(1). Although the TLA creditors had a contractual right to collect interest on their claims outside of bankruptcy, section 502(b)(2) of the Bankruptcy Code cut off the TLA creditors’ claim to interest. And because the creditors’ rights were altered by operation of the Bankruptcy Code, rather than the chapter 11 plan itself, the Second Circuit held that the TLA creditors’ claims were unimpaired.

The Second Circuit then considered whether the bankruptcy court erred in determining that TLA was insolvent. The TLA creditors argued first that the solvent-debtor exception is derived from the absolute priority rule, and thus the solvent-debtor exception is triggered if a chapter 11 plan proposes to pay equity holders. The Second Circuit dismissed this argument, reasoning that, because the plan proposed to pay the TLA creditors the allowed amount of their claims, see 11 U.S.C. § 1129(b)(2)(B)(i), the TLA creditors could not invoke the absolutely priority rule as a measure of TLA’s solvency. Turning to the TLA creditors’ argument that the bankruptcy court should have applied the discounted cash flow analysis based on the precedent established in Consolidated Rock Products Company v. DuBois, 312 U.S. 510 (1941), the Second Circuit found that the Supreme Court’s holding in that case was limited to the common-law absolute priority rule such that it could not be “imported” to the absolute priority rule as codified in the current Bankruptcy Code. Accordingly, the Second Circuit found no error in the bankruptcy court’s ruling that TLA was insolvent and that the solvent-debtor exception was inapplicable.

Tutor Perini Building Corp. v. NYC Regional Cntr. George Washington Bridge Bus Station & Infrastructure Dev. Fund, LLC (In re George Washington Bridge Bus Station Dev. Venture, LLC, 65 F.4th 43 (2d Cir. 2023). The Second Circuit Court of Appeals narrowly construed who may assert a cure claim under section 365(b)(1)(A) of the Bankruptcy Code, holding that a party “must have some right to pursue a breach of contract claim under the executory contract or unexpired lease a debtor assumes under § 365(a)” to receive a right to payment to payment in full. Id. at 51.

In 2011, the debtor, a redevelopment company, entered into a lease agreement (the “Lease”) with the Port Authority of New York and New Jersey (“Port Authority”). The Lease provided that the debtor would renovate the George Washington Bridge Bus Station in Manhattan and receive a 99-year lease to operate a retail mall to be built on the property. The Lease further required the debtor to pay all claims against it by its contractors, subcontractors, material-men, and workmen in full. The debtor subsequently entered into a contract (the “Construction Contract”) to engage Tutor Perini Building Corp. (“Tutor Perini”) as the general contractor for the project. In 2015, the relationship between the debtor and Tutor Perini soured when Tutor Perini commenced arbitration proceedings against the debtor, claiming that it was owed approximately $113 million in damages for the debtor’s failure to pay amounts due under the Construction Contract.

When the debtor filed chapter 11 proceedings in 2019, it sought to sell substantially all of its assets, including its rights under the Lease. Tutor Perini opposed the sale, arguing that the debtor was obligated to pay Tutor Perini’s $113 million claim under the Construction Contract in full to cure the default of the Lease provision requiring the debtor to pay its contractors and subcontractors. Both the bankruptcy court and the district court rejected Tutor Perini’s two main arguments in support of its cure claim: (1) that section 365(b)(1)(A) does not limit who may assert a cure claim; and (2) that, if section 365(b)(1)(A) did limit who may assert a cure claim, Tutor Perini was entitled to assert a cure claim as a third-party beneficiary to the Lease.

The Second Circuit affirmed on both arguments. First, the court held that administrative priority under section 365(b)(1)(A) should be limited to those whose claims arise from the contract to be assumed under section 365(a). The purpose of section 365, the court reasoned, is to preserve the benefit of the bargain struck between the parties to fairly compensate the non-debtor contracting party who is obligated, under the Bankruptcy Code, to continue performing under the contract to be assumed. Where no bargain had been struck as between the debtor and Tutor Perini, the court was unwilling to alter the narrowly-construed statutory priorities established under the Bankruptcy Code. Furthermore, the court found unpersuasive Tutor Perini’s argument that the text of section 365(b)(1)(A) did not explicitly limit cure claims to those with rights under the subject contract. Looking to both sections 365(b)(1)(B) and 365(g), the Second Circuit concluded that “Congress clearly contemplated the rules of priority for creditors with claims actually arising under contracts, and not just for any party who claims some tangential interest in a contract short of a legal right to sue under it.” Id. at 53. In addition, the court posited that section 365(g), which entitles parties to rejected executory contracts to treatment as general unsecured creditors, would be rendered meaningless if Tutor Perini’s $113 million claim, arising under the rejected Construction Contract, somehow became entitled to payment in full on the basis of a tenuous relationship to the assumed Lease.

The Second Circuit then easily dispatched Tutor Perini’s second argument by holding that Tutor Perini was not a third-party beneficiary of the Lease. Accordingly, the court was not required to address whether a third-party beneficiary is entitled to seek administrative priority pursuant to section 365(b). However, in dicta, the court noted that, because “a third-party beneficiary is one who has a ‘right to performance’ under a contract because ‘the intention of the parties’ to that contract was to afford the third party such right, … protecting the non-debtor contracting party’s bargain reasonably includes allowing the intended third-party beneficiary to be made whole as well.” Id. at 54 n.6 (quoting Restatement (Second) of Contracts § 302 (1981)).

§ 1.1.4. Third Circuit

In re Delloso, 72 F.4th 532 (3d Cir. 2022). In a precedential opinion, the Third Circuit affirmed the ruling of the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) denying a motion of Strategic Funding Source, Inc. d/b/a Kapitus (“Kapitus”), a creditor of Louis N. Delloso (the “Debtor”), to reopen the bankruptcy case because (i) Kapitus’s request for relief was time-barred, and (ii) Kapitus had an alternative forum in which to seek relief.

In 2011, several years prior to the Debtor’s bankruptcy filing, Kapitus and Greenville Concrete, a company partially owned by the Debtor, entered into an agreement whereby Kapitus would purchase receivables from Greenville Concrete, and Greenville Concrete would deposit the receivables into an account on behalf of Kapitus. On March 6, 2013, Greenville Concrete failed to deposit certain receivables, and Kapitus issued a notice of default.

After out-of-court resolution efforts stalled, Kapitus sued Greenville Concrete in New York state court alleging breach of contract. This suit ended in a settlement under which Greenville Concrete was to make weekly payments until it had reached an agreed-upon amount. The settlement agreement provided that if Greenville Concrete failed to make such payments, Kapitus could enter a default judgment against Greenville Concrete. Greenville Concrete later defaulted, and Kapitus received a judgment against the Debtor and Greenville Concrete in the amount of $776,600.25.

On March 31, 2016 (the “Petition Date”), the Debtor filed a case under chapter 7 of title 11 of the U.S. Code (the “Bankruptcy Code”). The Debtor listed the debt owed to Kapitus in his schedules and disclosed that his sole employer for the three years prior to the Petition Date was “Bari Concrete Construction” (“Bari Concrete”). Following the filing of the bankruptcy case, the Bankruptcy Court notified creditors that the final day to oppose the Debtor’s discharge or the dischargeability of certain debts was July 5, 2016. Having received no responses, on July 6, 2016, the Bankruptcy Court granted a discharge of the Debtor’s debts and on August 5, 2016, the case was closed.

On November 15, 2021, over five years after the case was closed, Kapitus moved to reopen the case, asserting that Bari Concrete appeared to operate as a mere continuation of Greenville Concrete. Kapitus separately sued Bari Concrete in state court seeking satisfaction of its debt against Greenville Concrete, among other causes of action. In the Bankruptcy Court, Kapitus requested that the case be reopened (i) so that it could seek a determination of non-dischargeability of its scheduled claim of $776,600.25; or (ii) so that a chapter 7 trustee could administer a purported ownership interest of the Debtor in Bari Concrete, an asset which was not disclosed at the time of the bankruptcy filing. In the alternative, Kapitus asked that the Court revoke the Debtor’s discharge because the discharge was obtained through fraud, and Kapitus did not know of the fraud until after the discharge.

Following oral argument, the Bankruptcy Court declined to reopen the case. The Bankruptcy Court based its decision on two of the factors listed in the case of In re New Century TRS Holdings, Inc., No. 07-10416 (BLS), 2021 WL 4767924, at *6–7 (Bankr. D. Del. Oct. 12, 2021): (i) Kapitus would not be able to obtain the relief it sought even if the case were reopened, as Kapitus’s claims were time-barred, and the Bankruptcy Court was precluded from modifying the applicable time period by, among other things, Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) 4007(c) and 9006(b) and Supreme Court precedent in Nutraceutical Corp. v. Lambert, 139 S. Ct. 710 (2019) (providing guidance on the application of rules regarding time limitations); and (ii) Kapitus could obtain the relief it sought in the state court action it had previously commenced against Bari Concrete. Following the Bankruptcy Court’s decision, Kapitus requested an immediate appeal to the Third Circuit, which the Third Circuit granted.

On appeal, Kapitus argued that (i) the case should be reopened to allow for pursuit of “potentially viable theories of relief,” Delloso, 72 F.4th at 536, and that (ii) the presence of its state court action against Bari Concrete should not preclude reopening the bankruptcy case for purposes of administering a previously undisclosed asset.

Kapitus argued that Bankruptcy Rules 4007(c) and 9006(b), which set the time periods during which Kapitus was required to file its claims, are each subject to doctrines such as equitable tolling, as well as Bankruptcy Code section 105(a). Kapitus further argued that the Bankruptcy Court’s application of Supreme Court precedent was in error. The application of these doctrines, according to Kapitus, would allow it to pursue its claims in the reopened bankruptcy case.

The Third Circuit disagreed, noting that the cited Supreme Court precedent applied to the Bankruptcy Court’s analysis, and adopting the reasoning of the Bankruptcy Court that Bankruptcy Rule 4007(c) precludes equitable tolling, explaining that, among other reasons, Bankruptcy Rule 9006 “singles out Rule 4007(c) for inflexible treatment.” Delloso, 72 F.4th at 540 (internal quotations omitted). Therefore, the Third Circuit concluded, the Bankruptcy Court properly reasoned that Kapitus’s claims were time-barred.

Kapitus also argued that the existence of its state court action against Bari Concrete should not preclude reopening of the bankruptcy case. The Third Circuit was unconvinced by this argument, explaining that the Bankruptcy Court had considered this fact and weighed reopening the case to administer the previously undisclosed asset against the cost of reopening a case that had been closed for over five years. The Bankruptcy Court concluded that state court remedies would provide adequate value if any remedy was warranted. The Third Circuit decided that this was not an abuse of the Bankruptcy Court’s discretion.

Because Kapitus’s claims were time-barred, Kapitus had an adequate remedy in the form of its state court action against Bari Concrete, and the Bankruptcy Court did not abuse its discretion in deciding so, the Third Circuit affirmed the order of the Bankruptcy Court denying Kapitus’s motion to reopen the bankruptcy case.

In re National Medical Imaging, LLC, No. 22-1727 (3rd Cir. 2023). In this non-precedential opinion, the Third Circuit vacated and remanded the Bankruptcy Court for the Eastern District of Pennsylvania’s decision to disallow U.S. Bank’s right to setoff under 11 U.S.C. § 553(a).

This case arises from years of litigation between National Medical Imaging (“NMI”) and U.S. Bank. In 2008, U.S. Bank and others filed an involuntary bankruptcy petition against NMI. The bankruptcy court later dismissed the involuntary petition. The dismissals caused NMI to sue U.S. Bank for costs and attorneys’ fees under 11 U.S.C. § 303(i)(1) as well as proximate and punitive damages under section 303(i)(2) for an alleged bad-faith involuntary petition. The bankruptcy court stayed that case, on and off, until 2021.

In the interim, U.S. Bank obtained a judgment against NMI for $12 million plus post-judgment interest. U.S. Bank sought to execute on those judgments by moving a Florida state court to force NMI to sell its section 303(i)(2) causes of action. Presumably, U.S. Bank would then credit bid and acquire the claims against itself to nix them. The Florida court granted U.S. Bank’s motion.

Shortly thereafter, NMI voluntarily filed for bankruptcy, declaring its section 303(i) claims to be its only significant assets. NMI then sought two declaratory judgments in an adversary proceeding against U.S. Bank. First, it requested a declaration that U.S. Bank may not set off its money judgment against NMI’s section 303(i) award. Second, NMI asked the bankruptcy court to declare that “U.S. Bank is prohibited from taking any action to interfere with the Debtors’ prosecution of their claims under Section 303(i)” other than defending against those claims.

The bankruptcy court entered judgment in favor of NMI as to the setoff request, reasoning that, “as a matter of public policy,” section 303(i)(1) remedies are not subject to setoff. As to NMI’s second request, the bankruptcy court initially dismissed the claim as unripe because the automatic stay “precludes any action U.S. Bank might wish to take…that might impair or extinguish [NMI’s] § 303(i) claims,” but later sua sponte reversed and entered judgment for NMI. U.S. Bank timely appealed.

The Third Circuit rejected the bankruptcy court’s ruling that U.S. Bank may not set off its judgments against its section 303(i)(1) liability “as a matter of public policy.” The Third Circuit held that public policy cannot displace a statute that is directly on point, as is the case with section 553(a), which governs a creditor’s ability to set off debt owing to reorganizing debtors. Section 553(a) provides:

[T]his title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.

Section 553 does not create a right of setoff; rather, it preserves whatever setoff rights that may exist outside of bankruptcy. Accordingly, for a creditor to assert a right to setoff under section 553(a), the creditor must demonstrate (i) a right to setoff exists under applicable state law, (ii) the debts are “mutual,” and (iii) that the debts “arose before the commencement of the case.”

In the case at hand, under governing Pennsylvania law, setoff “is an inherent power of the courts, regulated by equitable principles.” The Third Circuit found that the bankruptcy court did not assume the posture of a court sitting in equity, nor did it reference Pennsylvania law in analyzing the circumstances of NMI’s case. The Third Circuit held that the bankruptcy court should have considered whether a right to setoff existed under Pennsylvania law (the threshold question in a section 553 analysis) instead of prematurely barring setoff on public policy grounds. The Court then found that the debts at issue were mutual and arose prior to the petition date, satisfying the statutory requirements of section 553(a). The Court concluded that U.S. Bank is not barred from setting off its section 303(i)(1) liability as a matter of law and remanded to the bankruptcy court to decide whether setoff was available under Pennsylvania law.

In re TE Holdcorp, LLC, No. 22-1807 (3d Cir. 2023). In this opinion, the Third Circuit held that the Bankruptcy Court had jurisdiction to interpret its own orders and properly held that its orders did not preserve any claims by a disgruntled contract counter-party, Spitfire Energy Group, LLC (“Spitfire”) of the debtor TE Holdcorp LLC (“Templar”) against the successful purchaser, Presidio Petroleum LLC (“Presidio”).

Templar filed for Chapter 11 in June of 2020 and also sought to sell substantially all of its assets under section 363 of the Bankruptcy Code and pursue a plan of liquidation. Spitfire raised several objections to Templar’s proposed plan, which Templar resolved by entering into a stipulation that preserved Spitfire’s claims resulting from any rejection of its contract with Templar. As part of the stipulation, Spitfire opted out of the plan’s third-party releases, of which included releases of the successful purchaser.

Presidio was the successful purchaser of Templar’s assets, and the Bankruptcy Court entered an order approving the sale free and clear of all liens, claims, and encumbrances, including contracts not designated for assumption. Spitfire’s contract was not assumed through the sale and Spitfire did not object to the sale. The sale also provided for the deemed consent of any interest-holder who did not object to the Sale.

The Bankruptcy Court entered the confirmation order, which included Spitfire’s opt-out as well as a representation that Spitfire would not file any additional documents or appeal the Chapter 11 cases beyond filing general unsecured claims. Thereafter, Spitfire sued Presidio in state court over the contract Presidio decided not to assume. Believing that the Sale Order and Confirmation Order foreclosed Spitfire’s suit, Presidio moved the Bankruptcy Court to enforce both, which the Bankruptcy Court did, and the District Court affirmed.

On appeal, Spitfire contested two issues: (1) the Bankruptcy Court’s jurisdiction over the enforcement proceedings, and (2) the Bankruptcy Court’s interpretation of its Sale and Confirmation Orders.

The Court noted that the Bankruptcy Court had core jurisdiction over the enforcement motion because it had jurisdiction to interpret and enforce those prior orders, notwithstanding that the Bankruptcy Court’s jurisdiction wanes post-confirmation. In particular, sale and confirmation orders are core bankruptcy proceedings.

With respect to the interpretation of the provisions themselves, the sale order unambiguously provided that any interest holder who fails to object to the “free and clear” sale is deemed to consent. Spitfire participated in the sale hearing, but did not object, so it was deemed to consent to Templar’s asset sale free and clear of any Spitfire’s contractual obligations to Presidio. Likewise, the opt-out provision in the confirmation order did not represent a separate agreement between Spitfire and Presidio, and the stipulation Spitfire entered into with Templar could not be enforced against Presidio. Accordingly, the Third Circuit agreed with the lower courts in enforcing the sale order and confirmation order against Spitfire.

§ 1.1.5. Fourth Circuit

Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023). The Fourth Circuit Court of Appeals sent a strongly worded reminder to bankruptcy litigants that a final bankruptcy order cannot be manufactured for purposes of an appeal. In so doing, the Fourth Circuit differentiated bankruptcy courts’ jurisdiction from that of Article III courts, finding that bankruptcy courts can adjudicate matters that would be found “moot” if put before an Article III court.

A husband and wife (the “Kivitis”) hired a contractor to renovate their Washington, D.C. home. However, the contractor was not properly licensed. D.C. law therefore entitled the Kivitis to recover what they had paid the contractor. However, the Kivitis could prevail in their suit to recover their money, the contractor commenced chapter 7 proceedings. To continue pursuing their claims, the Kivitis filed a proof of claim for their damages, but also commenced an adversary proceeding seeking both a determination that they were entitled to repayment (“Count I”) as well as a determination that their right to repayment was non-dischargeable (“Count II”). When the bankruptcy court dismissed Count II without resolving Count I, finding that the claim—if it existed—was dischargeable, both parties agreed to voluntarily dismiss Count I (without prejudice) so that the bankruptcy court’s dismissal order resolved all of the Kivitis’ claims against the contractor. The Kivitis then appealed the bankruptcy court’s dismissal to the district court, which affirmed without addressing the “finality” of the bankruptcy court’s order.

On appeal, the Fourth Circuit refused to address the underlying substance of the dismissal, instead finding that the district court lacked jurisdiction over the appeal under 28 U.S.C. § 158(a). 28 U.S.C. § 158(a)(1) grants district courts jurisdiction to hear appeals “from final judgments, orders, and decrees” of bankruptcy courts. Focusing on the fact that the parties had voluntarily dismissed Count I to engineer their desired outcome, the Fourth Circuit held that the bankruptcy court’s dismissal of Count II was not a final order when it was entered, because it did not dispose of all claims against the contractor. See Fed. R. Bankr. P. 7054(a) (incorporating Fed. R. Civ. P. 54(a)-(c) into adversary proceeding); Fed. R. Civ. P. 54(b) (“any order or other decision, however designated, that adjudicates fewer than all the claims . . . does not end the action”). Accordingly, the district court did not have jurisdiction to hear the appeal.

In response, the Kivitis argued that Affinity Living Group, LLC v. StarStone Specialty Insurance Co.,959 F.3d 634 (4th Cir. 2020) establishes an exception wherein a partial dismissal may be considered final and appealable after the parties dismiss the remaining claims. They argued that, because the surviving Count I was essentially the same as their proof of claim, the bankruptcy court’s dismissal order had mooted the adversary proceeding. The Fourth Circuit rejected this argument, finding that mootness, which arises from Article III’s “case-or-controversy” requirement, does not constrain bankruptcy courts’ authority to act. Accordingly, because the bankruptcy court was capable of adjudicating a constitutionally moot matter, such as the remaining Count I, the dismissal of Count II did not give rise to a final order.

§ 1.1.6. Fifth Circuit

RDNJ Trowbridge v. Chesapeake Energy Corp. (In re Chesapeake Energy Corp.), 70 F.4th 273 (5th Cir. 2023). After it emerged from Chapter 11, Chesapeake Energy Corporation tested the limits of post-confirmation jurisdiction by asking the bankruptcy court to approve settlements of certain purported class actions that had been filed before the bankruptcy case. The problem was that no proof of claim was filed by most of the class members. And certain features of the settlement conflicted with the plan and disclosure statement. The Fifth Circuit concluded that attempting to handle these cases within the bankruptcy court exceeded post-confirmation jurisdiction and remanded with instructions to dismiss.

The underlying lawsuits were two federal class actions filed in Pennsylvania and a third state-court proceeding brought by the Pennsylvania Attorney General. All three lawsuits involved the underpayment of royalties. In the case of one class action, the district court preliminarily approved a settlement, but a large number of putative class members opted out. In the other class action, a preliminary settlement was reached but preliminary approval had not been granted. The state-court litigation was pending before the Supreme Court of Pennsylvania at the time Chesapeake filed for bankruptcy. The bankruptcy filing stayed all three of these aforementioned non-bankruptcy cases.

Following the filing of the bankruptcy case, the Bankruptcy court set a claims bar date of October 30, 2020. None of the named plaintiffs in federal the class actions filed proofs of claim nor did the vast majority of landowners within the putative classes. The Attorney General did file a timely proof of claim as did the individual lease holders within the two putative classes. Ultimately, the bankruptcy court confirmed Chesapeake’s plan of reorganization and approved its disclosure statement. The disclosure statement provided that the landowners’ claims for nonpayment of royalties would be included in the class of general unsecured claims. And holders of allowed claims within this class were estimated to receive 0.1% of the amount owed. The plan, and the disclosure statement, assured Chesapeake’s creditors that the mineral leases in question would remain in full force and effect and that no royalty interest would be compromised or discharged by the plaintiff. But prepetition rights to royalty payments would be treated as a claim under the plan and subject to discharge. The plan further stated that late-filed proofs of claim would be deemed disallowed and expunged, absent an order of the court deeming the claim timely filed. The plan further rejected the pending, pre-petition class settlement agreements. While the plan did authorize certain late filing of proofs of claim, none were filed by any of the class plaintiffs. Thus, only the Attorney General and the 161 individual leaseholders were eligible to vote or receive any distribution of account of their damage plans. The leases rode through the bankruptcy unimpaired.

On the effective date, the Attorney General’s claims were settled. But a month after the effective date, Chesapeake reached new settlement agreements with the two class action plaintiffs, which purportedly resolved all of Chesapeake’s remaining Pennsylvania royalty-related litigation disputes. The two settlements called for Chesapeake to pay a combined $6.25 million dollars and resolved the claims of approximately 23,000 Pennsylvania landowners. Chesapeake sought preliminary approval of the settlements from the bankruptcy court. The lessors who had filed proofs of claim opposed the motion. The bankruptcy court concluded that it had “core” jurisdiction over the settlements pursuant to 28 U.S.C. §1334(a). Ultimately, the Court overruled the objections and preliminarily approved the settlements, preliminarily certified the settlement classes, and approved the form and manner of notice. The Bankruptcy court further concluded that an Article III court would need to make the final determination regarding class certification and settlement approval. On appeal, the district court affirmed the bankruptcy court’s preliminary approval. The district court disagreed with the bankruptcy court’s determination of core jurisdiction. While core jurisdiction was lacking, the district court nonetheless found jurisdiction existed to adjudicate the settlements because they related to the confirmed Chapter 11 plan.

These decisions were ultimately appealed to the Fifth Circuit. Finding that the jurisdictional issue was determinative, the appellate court limited its review to that issue. The court initially rejected the contention that there was core bankruptcy jurisdiction. The settlements were not within the ordinary claims adjudication process. Thousands of leaseholders who were potential class members never filed proofs of claim, nor did Chesapeake file a proof of claim of any sort referencing Pennsylvania royalty claims. The plan emphatically provides that late filed proofs of claim would be deemed disallowed and expunged. And because no proofs of claim were ever filed, they cannot now be deemed timely filed. Moreover, neither court below had held that the claims were timely filed.

Treating the class actions as if they had been the subject of timely filed proofs of claim would simply disregard the reorganization process. The requirement of filing a proof of claim is more than a technicality. “Proofs of claim are the touchstone for plan approval and proper distribution of the debtor’s assets allotted to each creditor class.” Notwithstanding the fact that these claims were classified as general unsecured claims to be paid only 0.1% of their pre-petition amount, the settlements would result in the leaseholders obtaining well over 20% of the amount they negotiated in their pre-petition settlement agreements. The Court found this to be an enormous windfall when compared with the treatment of other general unsecured creditors. This approach “thwarted the transparency of the reorganization process.” And the 161 leaseholders who did file timely proofs of claim could not be the basis for class settlements to fall within core jurisdiction. The Fifth Circuit found this to be an “audacious attempt to bootstrap a few objectors’ preserved rights into a basis for ‘fundamental reset’ between the debtor and nearly 23,000 other Pennsylvania lessors who did not preserve their rights.”

The court then turned to the question of “related-to jurisdiction.” The Court acknowledged that this sort of jurisdiction presented a closer question. In the post-confirmation context, the question is whether the dispute concerns the effectuation of the plan.” In that context, the Court has identified three factors that constitute a “useful heuristic”:

• First, do the claims at issue principally deal with post-confirmation relations between the parties?
• Second, was there an antagonism or a claim pending between the parties as of the date of the reorganization?
• Third, are there any facts or laws deriving from the reorganization of the plan necessary to the claim?

The Court addressed each of these factors in turn.

Because the settlements in question predated the bankruptcy, they do not principally deal with post-confirmation business. The vast majority of the class action claimants would have no recourse in bankruptcy court for their pre-petition monetary claims as the debts owed to them were discharged and expunged. The class action plaintiffs cannot resurrect those claims, use them to invoke bankruptcy jurisdiction, and then lay them to rest via class settlements. Moreover, the settlement agreements purported to modify the terms of the lease going forward for all the class members, even those who originally opted out of the settlements. This is contrary to the plan which stated that the leases would ride through unaffected. Accordingly, the Fifth Circuit found that this first factor weighed against jurisdiction.

In regard to whether there was antagonism pending at the date of reorganization, the Court agreed that that antagonism predated confirmation. But the class action against Chesapeake did not survive confirmation. Post-confirmation, the class members could not pursue their discharged claims and the plan did not adversely affect or modify their pre-petition royalty provisions. Thus, this factor did not warrant the exercise of related-to jurisdiction.

The third factor also worked against the class plaintiffs. Nothing in the plan is necessary to the disposition of the claims or the settlement agreements. Those agreements have nothing to do with any obligation created by the plan nor did Chesapeake contend that modifying the leases going forward would affect its distribution to creditors under the plan. To the contrary, the settlements contradict the plan. Thus, far from merely enforcing the plan, the settlement effects a fundamental reset of the relationship. The effect of this reset concerns the future, not the consummated reorganization. Thus, the approval of the settlements did not pertain to the implementation or execution of the plan. Because these were voluntary arrangements paying off claims that were already discharged, it would make little sense to hold that post-confirmation jurisdiction extended to them. Thus, the bankruptcy and district courts lacked jurisdiction, the judgments were vacated, and the proceedings were remanded with instructions to dismiss for lack of jurisdiction.

§ 1.1.7. Sixth Circuit

Hall v. Meisner, 51 F.4th 185 (6th Cir. 2022). The Sixth Circuit Court of Appeals held that a Michigan law permitting the county to take absolute title to real property for failure to pay certain property taxes violated the Takings Clause of the Fifth Amendment, overturning the district court’s dismissal of the claim. In so holding, the Sixth Circuit conducted a deep historical analysis of longstanding principles affording property owners equitable title in their property and disfavoring strict foreclosure.

The Michigan General Property Tax Act afforded either the county or the state to foreclose on real property in the event that property taxes remained unpaid for more than twelve months. Under the law, upon foreclosure, “absolute title” would vest in the governmental unit exercising its foreclosure right. The statute then afforded first the state, and then the city or town the right to buy the property from the foreclosing governmental unit for the amount of the tax delinquency. At that point, the property could then be sold at public auction. However, the statute did not afford the former property owner the right to receive any surplus from the auction.

Plaintiffs in the case at hand owed tax liabilities of $22,642, $30,547, and $43,350, respectively. Oakland County foreclosed under the General Property Tax Act and subsequently transferred the properties to the City of Southfield for the amount of the tax deficiencies. Southfield, in turn, sold the properties to the Southfield Neighborhood Revitalization Initiative, a for-profit entity, for $1. The Initiative then sold the first two properties for $308,000 and $155,000, respectively; the third property had not yet been sold at the time of the Sixth Circuit’s decision. The plaintiffs brought suit against the County, Southfield, the Initiative, and certain officers of each under 42 U.S.C. § 1983, alleging, among other things, that the County impermissibly deprived them of the equity in their homes without just compensation, in violation of the Takings Clause of the Fifth Amendment. The district court, however, dismissed the claim, finding that there was no surplus from the County’s disposition of the properties. The plaintiffs appealed the dismissal to the Sixth Circuit.

The Sixth Circuit disagreed with the district court’s approach, finding that the district court’s scope of review—which focused only on the question of whether there was a surplus, and therefore equity available to the property owners—was too limited. Looking instead to the mechanics of the Michigan General Property Tax Act, the Sixth Circuit considered whether Michigan had, ipse dixit, effected a taking “merely by defining [the property owners’ equity in their homes] away,” contravening longstanding principles of traditional property interests. Id. at 190. After a lengthy survey of a mortgagor’s equitable interests in property, covering 12^th century English case law through 19^th century American case law, the Sixth Circuit established that both English and American courts have consistently held strict foreclosure—whereby a property owner’s equitable interest in their property is entirely extinguished and given to the foreclosing in fee simple—to be an “unconscionable” and impermissible abrogation of debtor-property-owner’s rights. Both the English and American legal systems recognized that, although a creditor has a right to his security, that right only exists to the extent of the debts he is owed. The debtor has an equitable right to any value realized above the value of the debt. Because the Michigan General Property Tax Act did not contain a mechanism to afford property owners of their equitable right to any amounts above the tax deficiency amount, the Sixth Circuit held that the law effected an unconstitutional taking, reversing the district court.

§1.1.8. Seventh Circuit

Mann v. LSQ Funding Group, LLC, 71 F.4th 640 (7th Cir. 2023). The Seventh Circuit Court of Appeals had occasion to evaluate the Bankruptcy Code’s requirement for there to be a transfer of “an interest of the debtor in property” in connection with a voidable preferential or fraudulent transfer. See 11 U.S.C. §§ 547(b), 548(a)(1). The Seventh Circuit’s decision—that a transfer sought to be avoided under either sections 547 or 548 of the Bankruptcy Code must, at least, have had some diminutive effect on the debtor’s estate—aligns with decisions from other circuits that have held or suggested that the presence of a fraud is not sufficient to render a transaction voidable under the Bankruptcy Code. See id. at 648 (collecting cases).

Prior to its bankruptcy filing, Engstrom, Inc. engaged in a factoring agreement with LSQ Funding Group, L.C. (“LSQ”), pursuant to which LSQ agreed to provide upfront payments to Engstrom on the basis of its future receivables. Pursuant to the arrangement, LSQ took a security interest in Engstrom’s receivables. However, when LSQ discovered that the receivables were fictitious, it terminated the arrangement, creating a $10.3 million payable for Engstrom. Engstrom’s CEO then allegedly hatched a plan whereby she arranged for a new lender, Millennium Funding (“Millennium”), to buy Engstrom’s $10.3 million payable from LSQ, replacing LSQ as creditor. In connection with the transfer, LSQ transferred its interest in the Engstrom’s receivables to Millennium. After Engstrom commenced chapter 7 proceedings, however, the trustee sought to avoid the transfer between LSQ and Millennium as a payoff of Engstrom’s debt. The bankruptcy court disagreed and awarded summary judgment to LSQ based on the doctrine of “earmarking,” pursuant to which one creditor may provide a debtor “earmarked” funds to pay off a specific debt in full, thereby assuming the original creditor’s position, without being subject to a preference action. Accordingly, the bankruptcy court found that Millennium’s payment to LSQ was not a transfer of an “interest of the debtor in property.” The district court affirmed.

On appeal, the Seventh Circuit disposed of any analysis of the earmarking doctrine, instead relying only on an analysis of whether the transfer between LSQ and Millennium constituted a transfer of “an interest of the debtor in property.” In so doing, the Seventh Circuit considered both “(1) whether the debtor c[ould] exercise control over the funds transferred; and (2) whether the transfer diminishe[d] the property of the estate.” Id. at 645 (citing Matter of Smith, 966 F.2d 1527, 1535 (7th Cir. 1992)). Looking first to the question of Engstrom’s control, the Seventh Circuit found insufficient evidence to conclude that Engstrom had, in fact, controlled the payoff between LSQ and Millennium. But regardless of the infirmities in the factual record in connection with the first question, the panel found that, because there was no diminution to the estate resulting from the transaction, there was definitively no transfer of “an interest of the debtor in property” for both purposes of section 547 and section 548. As such, the issue of fraud remained solely between LSQ and Millennium.

Warsco v. Creditmax Collection Agency, Inc. (In re Harris), 56 F.4th 1134 (7th Cir. 2023). The Seventh Circuit heard and decided a direct appeal in a preference action in order to overturn its own precedent established in In re Coppie, 728 F.2d 951 (7th Cir. 1984). The Seventh Circuit panel determined that Coppie was in direct conflict with the Supreme Court’s decision in Barnhill v. Johnson, 503 U.S. 393 (1992).

A chapter 7 trustee commenced an adversary seeking to avoid approximately $3,700 in payments made by the debtor to creditor Creditmax in the ninety days prior to the debtor’s bankruptcy proceeding. The payments were made pursuant to a garnishment order that Creditmax had obtained from an Indiana state court more than ninety days before the bankruptcy proceeding commenced. In defense of the payments, Creditmax argued that Coppie, which held that (1) the definition of a “transfer” for purposes of section 547 of the Bankruptcy Code depended on state law, and (2) that, under Indiana law, the date of a transfer with respect to a garnishment occurs when the garnishment order is entered, required dismissal of the trustee’s claims. The bankruptcy court agreed, nevertheless noting that it thought Coppie was wrongly decided, but stating that only the Seventh Circuit could overrule its decision.

After accepting the case on direct appeal, the Seventh Circuit reversed the bankruptcy court to find that the garnished payments were voidable preferential transfers. In so holding, the panel acknowledged that the Supreme Court’s decision in Barnhill abrogated Coppie. Barnhill held that the meaning of “transfer,” for the purpose of section 547, was defined by federal—rather than state—law. Furthermore, the Court in Barnhill determined that, for purposes of a preference claim, the transfer is made as of the date money passes to the creditor. Although the instrument at issue in Barnhill was a check, rather than a garnishment, the Seventh Circuit applied the same reasoning in its holding that the garnished payments arose within the ninety-day preference window, and therefore remanded the case back to the bankruptcy court for further proceedings on the merits of the trustee’s claim.

§1.1.9. Eighth Circuit

Pitman Farms v. ARKK Food Co., LLC (In re Simply Essentials, LLC), 78 F.4th 1006 (8th Cir. 2023). The Eighth Circuit definitively held that avoidance actions can be sold as property of the estate under section 541(a).

The debtor operated a chicken production and processing facility in Iowa. It was forced into an involuntary chapter 7 proceeding by disgruntled creditors. Upon his appointment, the chapter 7 trustee determined that the estate did not have sufficient funds to pursue certain avoidance actions it had against creditor Pitman Farms (“Pitman”). After soliciting bids, the trustee selected another creditor, AARK Food Company (“AARK”), as the winning bidder, over Pitman’s competing bid. The bankruptcy court then approved the trustee’s sale to AARK over Pitman’s objection. Pitman appealed.

On appeal, Pitman argued that avoidance actions are not property of the estate and instead belong to the trustee or other creditors. Looking first to the plain language of section 541(a) of the Bankruptcy Code, the Eighth Circuit disagreed, finding that avoidance actions fit within the broad ambit of “property of the estate.” Not only does a debtor have an interest in avoidance actions that becomes property of the estate pursuant to section 541(a)(7), but the Eighth Circuit also found that, prior to the commencement of a bankruptcy proceeding, a debtor has an inchoate interest in avoidance actions that becomes property of the estate under section 541(a)(1). The Eighth Circuit was also not convinced by Pitman’s argument that including avoidance actions as property of the estate would render language in section 541(a)(3) and (4) redundant to section 541(a)(6). Noting that the “canon against surplusage is not an absolute rule,” the panel determined that the “the possibility of our interpretation creating surplusage does not alter our conclusion that avoidance actions are part of the estate under the plain language of § 541(a).” Id. at 1009–10. Finally, the Eighth Circuit found persuasive the consensus among other circuits—namely, the First, Fifth, and Seventh Circuits—that avoidance actions constitute property of the estate. Although the Third Circuit had held that avoidance actions were not “assets” of the estate, In re Cybergenics Corp., 226 F.3d 227 (3d Cir. 2000), the opinion distinguished “property of the estate” from “assets,” and so would not deter the Eighth Circuit from its holding. Accordingly, the Eighth Circuit affirmed the bankruptcy court’s ruling that the avoidance actions were property of the estate that the trustee could sell.

§ 1.1.10. Ninth Circuit

A&D Prop. Consultants, LLC v. A&S Lending, LLC (In re Groves), 652 B.R. 104 (9th Cir. BAP 2023). In affirming the bankruptcy court’s ruling, the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that section 363(f) of the Bankruptcy Code does not allow for the sale of property free and clear of a lien that encumbers a non-debtor co-owner’s interest in the property. This provides much needed clarity on the interplay between sections 363(f) and 363(h), which is an area where there is little caselaw.

As tenants in common, a debtor and her wholly owned limited liability company (the “LLC”) jointly owned two parcels of real property: one was the debtor’s residence (the “Residence”), while the other was an investment property (the “Investment Property”). The debtor and the LLC subsequently took out a loan secured by a deed of trust covering both properties. However, due to a clerical error, the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property (such that the debtor’s interest in the Investment Property and the LLC’s interest in the residence were unencumbered). After filing a chapter 13 petition, the debtor initiated an adversary proceeding against the current holder of the promissory note and deed of trust (the “Secured Creditor”), seeking a declaratory judgment that the deed of trust only encumbered the debtor’s interest in the Residence and the LLC’s interest in the Investment Property. In its amended answer, the Secured Creditor asserted a counterclaim against the debtor and the LLC for reformation of the deed of trust to reflect that it encumbered the interests of the debtor and the LLC in both properties. After a two-day trial, the bankruptcy court ruled in favor of the debtor and the LLC, dismissing the Secured Creditor’s reformation claim.

After the conclusion of the adversary proceeding, the debtor moved to sell the Investment Property under section 363(h) of the Bankruptcy Code, which allows the sale of property that is co-owned by a debtor. The debtor also sought to sell the Investment Property free and clear of all liens, including the Secured Creditor’s lien on the non-debtor LLC’s interest in the Investment Property, under section 363(f)(4). The Secured Creditor objected to the sale, arguing that it still maintained a lien on the LLC’s interest in the Investment Property. The debtor argued that the Secured Creditor had waived its lien by failing to assert the lien as a compulsory counterclaim in the adversary proceeding. The bankruptcy court ultimately approved the sale free and clear of any liens on the debtor’s interest in the Investment Property, but upheld the Secured Creditor’s lien on the LLC’s interest in the property, and required that any net proceeds from the LLC’s interest in the property to be paid to the Secured Creditor in partial satisfaction of its lien. The LLC appealed as to the bankruptcy court’s ruling that the Secured Creditor maintained its lien on the LLC’s interest in the Investment Property.

In its decision, the BAP addressed the following question, among others: did the bankruptcy court err when it determined that the debtor and the LLC could not sell the Investment Property free and clear of the Secured Creditor’s lien on the LLC’s interest in the property? To answer this question, the BAP examined two cases addressing the intersection of sections 363(f) and 363(h): the first, Hull v. Bishop (In re Bishop), 554 B.R. 558 (Bankr. D. Me. 2016), permitted a sale free and clear of a lien on the non-debtor’s interest in the property, while the second, in re Marko, No. 11-31287, 2014 WL 948492 (Bankr. W.D.N.C. Mar. 11, 2014), held that it would risk overextending the Bankruptcy Code to enable a non-debtor to obtain relief from its liens under section 363(f). The BAP found the reasoning in Marko more persuasive, noting in addition that sections 363(b) and 363(f) are limited to sales of estate property. Because the LLC’s interest in the Investment Property was not part of the bankruptcy estate, it could not be sold free and clear.

Clifton Capital Group, LLC v. Sharp (In re East Coast Foods, Inc.), 66 F.4th 1214 (9th Cir. 2023). Unlike the Fourth Circuit in Kiviti v. Bhatt, 80 F.4th 520 (4th Cir. 2023), above, the Ninth Circuit “returned emphasis” to the requirement that a party must have Article III standing, in addition to “person aggrieved” standing, to appeal a bankruptcy court order. See id. at 906.

In 2016, East Coast Foods, Inc. (“ECF”), manager of four locations of Roscoe’s House of Chicken & Waffles, filed for chapter 11 bankruptcy. An official committee of unsecured creditors (the “Committee”) was appointed. In addition, the bankruptcy court determined it was necessary to appoint a chapter 11 trustee to make business decisions for ECF. Later, the Committee and ECF’s founder, Herb Hudson, put forward a plan that guaranteed creditors payment in full, plus interest. Payments under the plan were secured by a “collateral package,” which included up to a $10 million contribution from Hudson. The plan also provided a set hourly rate of $450, plus expenses, for the chapter 11 trustee.

After the plan was confirmed and became effective, the chapter 11 trustee sought final compensation in the amount of $1,155,844.71, representing the maximum allowable under the fee cap in 11 U.S.C. § 326(a). The amount represented the lodestar (i.e., 1,692.2 hours at a rate of $450 per hour) plus a roughly 65% enhancement for “exceptional services.” A creditor, Clifton Capital Group, LLC (“Clifton”), objected to the fee application, arguing that the case did not merit an enhancement beyond the lodestar. When the bankruptcy court approved the fees, Clifton appealed to the district court. On appeal to the district court, the trustee argued that Clifton lacked standing to appeal because it was not a “party aggrieved.” Finding that Clifton was adversely affected by the fee order because it further subordinated its claim, and therefore “aggrieved,” the district court then agreed with Clifton on the merits, remanding the matter to the bankruptcy court with instructions either to reduce the fees to the lodestar or make detailed findings justifying the enhancement. On remand, the bankruptcy court again approved the trustee’s full fees, including the enhancement. This time, when Clifton appealed, the district court affirmed the bankruptcy court’s order approving the fees.

On appeal before the Ninth Circuit, the panel reconsidered whether Clifton had sufficiently established an actual and imminent injury for purposes of Article III standing. Reviewing the district court’s decision, the Ninth Circuit found that the district court had relied on precedent wherein the existence of a finite pool of assets to pay claims had previously conferred appellate standing on a party whose share of the asset pool was under threat. In this particular case, however, the Ninth Circuit found that ECF’s plan did not establish such a limited fund, but rather provided for the payment in full from the reorganized debtor’s future income, guaranteed by the “collateral package” and Hudson’s $10 million contribution. In light of these circumstances, the Ninth Circuit determined that the district court had erroneously concluded that payment of the chapter 11 trustee’s fees put Clifton at risk for non-payment. The Ninth Circuit also rejected Clifton’s argument that it was harmed because payment of the trustee’s fees would prolong payment of its subordinated claim. The Ninth Circuit found that delayed payment was too conjectural to sustain an injury for the purpose of Article III standing because the plan explicitly stated that the timing of creditor distributions was uncertain. In addition, Clifton was not harmed by any delay in distribution because the plan entitled it to postpetition interest. Accordingly, Clifton had failed to establish an actual injury, and thus did not have standing under Article III to appeal the bankruptcy court’s fee order.

Sony Music Publishing (US) LLC v. Priddis (In re Priddis), No. 22-15457, 2023 WL 2203562 (9th Cir. Feb. 24, 2023). In a split decision, the Ninth Circuit held that an involuntary filing by fourteen creditors, who each had a right to a portion of a $3 million judgment, satisfied the numerosity requirement under section 303(b)(1) of the Bankruptcy Code. Reversing the bankruptcy court’s dismissal and the district court’s affirmation, the majority held that each creditor had an individual claim, notwithstanding that the debt arose from a single judgment.

In 2016, twenty-one publishers sued the debtor for copyright infringement. The debtor entered into a settlement agreement with the publishers, under which the debtor was obligated to make payments to the publishers, who could seek a judgment of $3 million if the debtor failed to make any payments. After the debtor stopped making the settlement payments, fourteen of those publishers sued the debtor and ultimately obtained a stipulated judgment in their favor in the amount of $3 million. These publishers then filed an involuntary bankruptcy against the debtor. The debtor contested the involuntary filing, and the bankruptcy court dismissed it on summary judgement holding that the petitioning creditors failed to satisfy section 303(b)(1)’s numerosity requirement as the stipulated judgment constituted a single, joint claim. On appeal, the district court affirmed, and the debtor appealed to the Ninth Circuit.

On appeal, the Ninth Circuit held that the petitioning creditors did in fact satisfy section 303(b)(1)’s numerosity requirement. The court reasoned that the judgement was easily divisible because the petitioning creditors had stipulated to statutory damages in the underlying suit and, under the Copyright Act, the petitioning creditors would receive damages strictly according to their ownership interests. The court concluded that because each petitioning creditor had an enforceable right to payment in the judgment, they also necessarily each held an individual claim.

The dissent rejected the majority’s finding that the numerosity requirement of section 303(b)(1) had been met for two primary reasons. First, the dissent agreed with the district court that the stipulated judgment merged the petitioning creditors’ claims together. Second, the dissent was troubled by the judgment’s lack of specificity as to how the $3 million figure should be allocated among the publishers. Because the publishers could have reserved their individual rights to payment, but failed to do so, it found that the numerosity requirement of section 303(b)(1) had not been met.

§ 1.1.11. Tenth Circuit

Byrnes v. Byrnes (In re Byrnes), No. 22-2049, 2022 WL 19693003 (10th Cir. Dec. 21, 2022). In an unpublished decision, the Tenth Circuit held that it lacked appellate jurisdiction over the denial of a motion to withdraw the refence of an adversary proceeding to the bankruptcy court. The Tenth Circuit panel held that such a denial is interlocutory, and accordingly that the court did not have appellate jurisdiction.

Shortly after the debtor commenced her chapter 7 proceedings, the debtor’s former spouse, Mr. Byrnes, filed two adversary proceedings against her, which were eventually consolidated. Mr. Byrnes demanded a jury trial and did not consent to the bankruptcy court’s entry of a final order on his claims. While the adversary proceeding was pending, Mr. Byrnes moved to withdraw the reference to the bankruptcy court. The district court then referred the motion to a magistrate, who recommended denial of Mr. Byrnes’ motion to withdraw the reference. Over Mr. Byrnes’ objections, the district court adopted the magistrate’s recommendation. While Mr. Byrnes sought reconsideration of the denial of the motion to withdraw the reference, the bankruptcy court entered a final order dismissing the adversary proceeding. The district court then denied Mr. Byrnes’ motion for reconsideration as moot.

The district court referred the Motion to a magistrate judge, who subsequently issued proposed findings and a recommended disposition denying the Motion (the “PFRD”). In overruling Mr. Byrnes’ objection to the PFRD, the district court denied the Motion and “dismissed the case without prejudice, and entered judgment by separate order.” Id. Mr. Byrnes then moved for reconsideration of the district court’s decision, but the bankruptcy court dismissed the underlying adversary proceeding before the district court reached a decision on the motion for reconsideration, which Mr. Byrnes appealed. The district court then denied the motion for reconsideration “as moot and, alternatively, as lacking a basis in fact or law.” Id.

Because an order to withdraw the reference is an interlocutory matter, which does not dispose of the matter, but merely determines which forum shall hear the matter, the Tenth Circuit dismissed the appeal for lack of appellate jurisdiction.

Miller v. United States, 71 F.4th 1247 (10th Cir. 2023). The Tenth Circuit joins the majority in a circuit split, holding that the waiver of sovereign immunity in section 106(a) of the Bankruptcy Code permits a bankruptcy trustee to pursue avoidance actions against the government under section 544(b)(1), notwithstanding the fact that an actual creditor could not have maintained a suit against the government outside of bankruptcy. In so holding, the Tenth Circuit sided with Ninth and Fourth Circuits against the Seventh Circuit as to how to address the interplay between sections 106(a) and 544(b)(1) of the Code. Compare In re Equip. Acquisition Res., Inc., 742 F.3d 743 (7th Cir. 2014) (holding that section 106(a)’s waiver did not extend to an Illinois state law cause of action under section 544(b)(1)), with In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) (holding that section 106(a)’s waiver extended to an Idaho state law cause of action under section 544(b)(1)), and In re Yahweh Ctr., Inc., 27 F.4th 960 (4th Cir. 2022) (holding in the alterative that section 106(a)’s waiver extended to a North Carolina state law cause of action under section 544(b)(1)).

In 2014, All Resorts Group, Inc. (“All Resorts”) paid the Internal Revenue Service (the “IRS”) $145,138.78 to satisfy the personal tax debts of two of its principals. When All Resorts filed for bankruptcy in 2017, the chapter 7 trustee who was ultimately appointed commenced an adversary proceeding, pursuant to Utah’s Uniform Voidable Transactions Act and section 544(b)(1) of the Bankruptcy Code, against the IRS to recover the payments. In opposition, the government argued not that the transfers did not occur, but instead that the trustee could not meet the requirement, under section 544(b)(1), for there to be an “actual creditor” who could bring suit under state law. In response, the trustee pointed to section 106(a) of the Bankruptcy Code, which abrogates sovereign immunity as to a governmental unit for several purposes, including with respect to section 544 of the Bankruptcy Code. Although no creditor could bring an avoidance action under Utah law in the absence of bankruptcy, the trustee argued that the bankruptcy filing made section 106(a)’s abrogation of sovereign immunity applicable to the underlying Utah state law. The bankruptcy court agreed with the trustee, holding that section 106(a) “unequivocally waives the federal government’s sovereign immunity with respect to the underlying state law cause of action incorporated through [section] 544(b).” Id. at 1251 (quoting In re All Resorts Grp., Inc., 617 B.R. 375, 394 (Bankr. D. Utah 2020)). The district court adopted the bankruptcy court’s decision and affirmed its judgment, and an appeal to the Tenth Circuit followed.

The Tenth Circuit affirmed, finding that section 106(a)’s abrogation of sovereign immunity reached the underlying state law cause of action through section 544(b)(1)’s authority. First looking to the language of section 106(a), the Tenth Circuit held that, in accordance with Supreme Court precedent, the phrase “with respect to” must be construed broadly and “clearly expresses Congress’s intent to abolish the [IRS’s] sovereign immunity in an avoidance proceeding arising under § 544(b)(1), regardless of the context in which the defense arises.” Id. at 1253. The Tenth Circuit then noted that the broad language of section 106(a)(2), authorizing bankruptcy courts “to hear and determine any issue with respect to the application” of section 544, among others, presumes that bankruptcy courts have subject matter jurisdiction, which would not be the case if the government were immune from suit.

§ 1.1.12. Eleventh Circuit

Braun v. America-CV Station Grp., Inc. (In re America-CV Station Grp. Inc.), 56 F.4th 1302 (11th Cir. 2023). The Eleventh Circuit required that a debtor provide a new disclosure statement and opportunity to vote whenever a Chapter 11 plan’s amendment causes a class of creditors to be materially and adversely affected.

The case arose out of an amendment to chapter 11 reorganization plans for Caribevision Holdings, Inc. and Caribevision TV Network, LLC. The initial plans provided that equity in the reorganized debtor would be split among those creditors providing new equity in the reorganized company in proportion to the amount of capital each shareholder contributed. Effectively, equity in the reorganized debtor would be split up among four shareholders. The same day as the deadline for voting on the plan, the debtor informed three out of the four shareholders (the “Pegaso Equity Holders”) that any financing that they would be providing was needed in the next ten days. The Pegaso Equity Holders missed the new deadline, at which point the remaining of shareholder (“Vasallo”) seized the opportunity to fund the entire equity contribution, resulting in Vasallo receiving all equity in the reorganized holding companies. The other creditors disputed the transaction, arguing that they were entitled to additional disclosure and voting.

The Eleventh Circuit explained that modifying a chapter 11 plan of reorganization is permissible under section 1127(a), provided that the plan remains in compliance with all ordinary substantive requirements necessary for any other chapter 11 plan. The Eleventh Circuit highlighted the requirement of section 1123(a)(4) of the Bankruptcy Code that a modified plan must “‘provide the same treatment for each claim or interest of a particular class,’” absent that class’s consent. 56 F.4th at 1308 (quoting 11 U.S.C. § 1123(a)(4)). The court stated that a modification requires the debtor to “provide a new disclosure statement and call for another round of voting” where the amended plan materially and adversely affects that class. Id. at 1309 (citing In re New Power Co., 438 F.3d 1113, 1117–18 (11th Cir. 2006)).

The Eleventh Circuit first found that the bankruptcy court improperly narrowed Bankruptcy Rule 3019(a) when it required new disclosure and voting only where a materially affected claimholder had previously voted to accept the plan. Bankruptcy Rule 3019(a) provides that if the court finds that “‘the proposed modification does not adversely change the treatment of the claim of any creditor. . . who has not accepted . . . the modification, it shall be deemed accepted by all . . . who have previously accepted the plan.’” Id. at 1311 (quoting Bankr. Rule 3019(a)). The circuit court read Bankruptcy Rule 3019(a) expansively, explaining that the use of the word “any” indicated the requirement that a class of creditors receive additional disclosure and voting, even if the class previously voted to reject the plan. Id.

The Eleventh Circuit then explained why the failure to provide additional disclosure was harmful to the Pegaso Equity Holders. The court explained that, because the only notice the appellants actually received was one day’s notice of a contemplated modification, they were denied the opportunity to vote and reject the modified plans and present their objections to the court. The court emphasized the actual notice arrived too close to the confirmation hearing and provided insufficient detail surrounding the terms of the modification.

Esteva v. UBS Fin. Servs. Inc. (In re Esteva), 60 F.4th 664 (11th Cir. 2023). In this case, the Eleventh Circuit further shed light on the ability of parties to convert an interlocutory order into a final order by holding that a stipulation of dismissal under rule 41(a)(1)(A) of the Federal Rules of Civil Procedure (“Rule 41(a)(1)(A)”) with respect to the last remaining claim of an action cannot transform an order granting partial summary judgment into an appealable final order.

A debtor in a converted chapter 11 individual bankruptcy case and his spouse (the “Plaintiffs”) commenced an adversary proceeding against UBS Financial Services and UBS Credit Corp. (together, “UBS”) to recover funds from a frozen account at UBS jointly held by the Plaintiffs (the “Account”). Prior to the bankruptcy, the debtor provided financial services to UBS and, in connection with his recruitment, entered into several agreements with UBS that provided for a $2 million loan to the debtor (the “Promissory Notes”). UBS eventually terminated the debtor on suspicions of fraudulent activity, thereby triggering a provision under the Promissory Notes making any outstanding principal immediately due and payable with interest. To secure repayment of the Promissory Notes, UBS restricted and froze the Account pursuant to a client relationship agreement that governed the Account. Subsequently, the debtor filed for chapter 7 bankruptcy and later converted his case to a proceeding under chapter 11 of the Bankruptcy Code.

During the bankruptcy case, the Plaintiffs filed a complaint against UBS seeking (1) a determination that the debtor’s tenancy-by-the-entirety renders the account exempt, (2) a determination that UBS does not have an enforceable security interest in the Account, (3) the turnover of funds in the account, and (4) restitution based on UBS’ unjust enrichment from the retention of the debtor’s book of business following his termination. UBS then filed counterclaims and the Plaintiffs moved for summary judgment on all claims except for their unjust enrichment claim. After the bankruptcy court entered an order for partial summary judgment but before trial on the remaining claim, UBS appealed the bankruptcy court’s decision without a grant of certification for immediate appeal under Bankruptcy Rule 7054, which incorporates rule 54 of the Federal Rules of Civil Procedure. The district court affirmed the bankruptcy court’s ruling and dismissed the appeal with prejudice.

UBS then appealed to the Eleventh Circuit, which directed the parties to brief the issue of whether the court had jurisdiction as the unjust enrichment claim was still pending. Before oral argument, the parties entered into a stipulation of dismissal under Rule 41(a)(1)(A) with respect to the remaining claim. In its analysis, the court first addressed whether the parties’ argument that the partial summary judgment ruling can be considered a final order because it resolved the discrete dispute over the validity of UBS’ lien against the Account. The court rejected this argument as the court had previously held in Dzikowski v. Boomer’s Sports & Recreation Center, Inc. (In re Boca), 184 F.3d 1285 (11th Cir. 1999) that an order entered in an adversary proceeding must dismiss all claims against all parties to be considered final.

The court also examined whether there were any applicable exceptions to the finality of orders that would grant jurisdiction over the appeal. The court found that the collateral order doctrine, which allows an appeal of an interlocutory order of a separable claim that is collateral to the merits and too important to delay review, did not apply because the bankruptcy court’s partial summary judgement was not separate from the underlying adversary proceeding. Next, the court held that the marginal finality doctrine did not apply because this doctrine only applies to issues of national significance and the bankruptcy suit did not rise to such a level of importance. The court also considered the applicability of the practical finality doctrine, which permits review of an interlocutory order deciding the transfer of property if delaying the appeal would cause irreparable harm. As any harm suffered by UBS here could be remedied with money damages and the debtor did not lack an ability to repay, the court found that UBS would not be subjected to irreparable harm and therefore held this exception did not apply.

Finally, the court addressed whether the stipulation of dismissal cured the court’s lack of jurisdiction under the doctrine of cumulative finality. Under this doctrine, appellate review of an interlocutory order is permitted if the appeal is filed from an order dismissing a claim and followed by a subsequent final judgment without the filing of a new notice of appeal. In analyzing voluntary dismissal pursuant to Rule 41(a)(1)(A), the court found that, pursuant to its previous holding in Perry v. Schumacher Group of Louisiana (In re Perry), 891 F.3d 954 (11th Cir. 2018), voluntary dismissal must be with respect to the entire action and not to individual claims. The stipulation of dismissal between the parties was therefore invalid because it applied to a single claim, and thus the bankruptcy court still had jurisdiction over the action. The court also briefly noted that there were alternative paths available that the parties could have taken to establish appellate jurisdiction, such as certification under Bankruptcy Rule 54(b) or moving to amend under Bankruptcy Rule 15(a), which incorporates rule 15(a) of the Federal Rules of Civil Procedure.

§ 1.1.13. D.C. Circuit

FTC v. Endo Pharms. Inc., 82 F.4th 1196 (D.C. Cir. 2023). The D.C. Circuit ultimately affirmed the district court’s decision dismissing the Federal Trade Commission’s (“FTC”) lawsuit for injunctive and other equitable relief under the Sherman Act and the Federal Trade Commission Act. In doing so, the D.C. Circuit ruled that the lawsuit fell under an exception to the automatic stay as a governmental unit’s regulatory power.

The appellee (“Endo”), a pharmaceutical company, began selling an extended-release oxymorphone, which it held several patents to, under the brand name Opana ER. A third-party (“Impax”) later began to market its own generic version of the drug. In response, Endo filed a patent infringement action in 2008, and the parties settled their dispute in 2010 (the “2010 Agreement”). Under the 2010 Agreement: (1) Impax would not sell its generic version of Opana ER until 2013; (2) Endo would convey a license to Impax to cover all of Endo’s patents regarding Opana ER; and (3) the parties would “negotiate in good faith an amendment to the terms of the License to any patents which issue[d] from any Pending Applications.” Id. at 1201 (internal citations omitted).

In 2012, acquired additional patents related to Opana ER. Pursuant to the 2010 Agreement, Impax began selling its generic version of Opana ER in 2013. Two years later in 2015, Endo asked Impax to pay an eighty-five percent royalty on the license for the additional Opana ER patents, which Impax refused, leading to Endo suing Impax for breach of the 2010 Agreement. The parties reached another settlement (the “2017 Agreement”), through which: (1) Impax was granted a license to all of Endo’s Opana ER patents for payment and royalties from Impax’s Opana ER profits; and (2) Impax’s obligation to pay royalties would terminate if Endo used its own patents to enter the market. As a result of the 2017 Agreement, Endo exited the oxymorphone market, which led to an increase in price of the drug.

The Federal Trade Commission determined that the 2017 Agreement was anticompetitive and filed a complaint for injunctive and other equitable relief against Endo. The FTC alleged that: “(1) [Endo’s] 2017 Agreement violated § 1 of the Sherman Act and it constituted an unfair method of competition in violation of § 5(a) of the FTC Act; and that (2) Amneal [the parent company of Impax] exercised monopoly power in violation of § 2 of the Sherman Act and § 5(a) of the FTC Act.” Id. at 1201–02 (internal citations omitted). Endo moved to dismiss the FTC’s complaint for failure to state a claim and lack of personal jurisdiction. The district court dismissed the action and the FTC appealed. While the appeal was pending, Endo filed for bankruptcy in 2022.

The D.C. Circuit first had to determine whether it had jurisdiction over the FTC’s action against Endo because a “party’s filing for bankruptcy generally triggers an automatic stay of any commencement or continuation of a judicial proceeding against the debtor.” Id. at 1202 (quoting 11 U.S.C. § 362(a)(1)) (internal quotation marks and alterations omitted). If the automatic stay applied, it would “strip[] [the D.C. Circuit] of jurisdiction.” Id. (citing In re Kupperstein, 994 F.3d 673, 677 (1st Cir. 2021)). The D.C. Circuit would have jurisdiction only if the case fell under one of the exceptions to the automatic stay.

One exception includes “actions by a governmental unit intended to enforce such governmental unit’s police and regulatory power.” Id. (quoting Wallaesa v. FAA, 824 F.3d 1071, 1076 n.3 (D.C. Cir. 2016)) (internal quotation marks and alterations omitted). The governmental action will be excepted from the automatic stay if it is “designed primarily to protect the public safety and welfare [and not] for a pecuniary purpose, that is, [recovering] property from the estate.” Id. (quoting In re Kupperstein, 994 F.3d at 677) (internal quotation marks omitted). Here, the FTC commenced the action “to prevent unfair methods of competition, which it is authorized to do if the competition is against public policy.” Id. (internal citations omitted). Thus the D.C. Circuit ruled that the regulatory power exception to the automatic stay applied, and the case could be adjudicated.

As to whether the district court erred in dismissing the FTC’s claims, the D.C. Circuit ruled that it did not, citing to cases that established that “a single patentee may set conditions in granting a single licensee the right to use its valid patents,” which is what the 2017 Agreement did. Id. at 1204 (citing FTC v. Actavis, Inc., 570 U.S. 136, 150 (2013)). Additionally, the “Patent Act expressly authorizes behavior that closely resembles the 2017 Agreement.” Id. The FTC argued that the 2017 Agreement was actually an agreement not to compete because the “2010 Agreement had already given Impax a license to Endo’s present and future patents.” Id. at 1205. However, the D.C. Circuit stated that the FTC “fail[ed] to explain how the 2017 Agreement . . . meaningfully differ[ed] from a standard exclusive license [and that the FTC] admitted that its challenge to the 2017 Agreement would remain the same even if the . . . 2010 Agreement never existed.” Id. The D.C. Circuit also found that there was no basis for Sherman Act liability, and so the district court’s decision to dismiss the case was affirmed.