Editor

Contributors

§ 1.1. Introduction

The term “business divorce” includes disputes that cause business partners to end their partnership, situations that require owners to separate, or circumstances where a business partner wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2021, to September 30, 2022 from mostly nine 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 To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent.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.

§ 1.2. Access to Books and Records

§ 1.2.1. California

Fowler v. Golden Pac. Bancorp Inc., 80 Cal.App.5th 205, 295 Cal.Rptr.3d 501 (2022). A trial court granted a director plaintiff’s petition for a writ of mandate against a corporation to enforce his statutory and absolute right to inspect corporate books and records as a director under Cal. Corporations Code § 1602. The corporation appealed, then moved to dismiss the appeal as moot due to another company acquiring the corporation and eliminating the plaintiff as a board member during the pendency of the appeal. The court agreed that the primary issue on appeal is moot because plaintiff is no longer a member of the corporation’s board of directors and, therefore, has no director’s inspection rights. But the court exercised its discretion to reach the merits because it presented an issue of substantial and continuing public interest: whether a director’s “absolute” right of inspection under § 1602 may be curtailed because the director and corporation are involved in litigation and there is a possibility the documents could be used to harm the corporation. The court concluded that the mere possibility that information could be used adverse to the corporation is not by itself sufficient to defeat a director’s inspection rights. Rather, any exception to the general rule favoring unfettered access must be limited to extreme cases, where enforcing an “absolute” right of inspection would produce an absurd result, such as when the evidence establishes the director’s clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation.

Grove v. Juul Labs, Inc., 77 Cal.App.5th 1081, 293 Cal.Rptr.3d 202 (2022). This case addresses, among other things, the demand of a former California employee who is a shareholder (through post-employment, exercised options), to inspect the books and records of his former employer, a Delaware company, headquartered in San Francisco, that operated under a corporate charter that required the shareholder to pursue his claims in Delaware. The company responded to the shareholder’s inspection demand letter by filing an action for declaratory and injunctive relief in Delaware, to seek a judgment to establish that the shareholder’s inspection rights are governed by Delaware law and that the shareholder contractually waived his inspection rights, and that he is prohibited from asserting an inspection right under California law. The shareholder then sued the company in California to enforce his shareholder inspection rights, under Cal. Corporations Code § 1601, but that action was stayed due to the Delaware action. The Delaware court first ruled that the shareholder had not surrendered by contract his right to inspect documents under California law because the parties’ agreements addressing inspection rights pertain specifically and exclusively to inspection rights under California law, § 1601. But under the internal affairs doctrine, the Delaware court determined the shareholder’s inspection rights were not dictated by California law, but under Delaware law, because Delaware was the state of incorporation and the corporate charter contains a forum selection clause making the Delaware Chancery Court the sole and exclusive forum for any shareholder to bring an action related to any provision of Delaware corporate law or asserting a claim against the company governed by the internal affairs doctrine. The shareholder then tried to restart the stayed California action in an attempt to have the California court void the forum selection clause. Ultimately, the California trial court determined that the shareholder’s inspection request had been adjudicated in the Delaware Court of Chancery, whose decision is entitled to full faith and credit in California. The appellate court affirmed this decision under the principles of collateral estoppel and full faith and credit. The shareholder was precluded from relitigating a dispute in California that was already adjudicated in the Delaware action.

§ 1.2.2. New York

O’Donnell v. Fleetwood Park Corp., 203 A.D.3d 1048 (NY App. Div. 2022). The court affirmed the trial court’s order compelling a corporation to provide books and records to a petitioning shareholder. A shareholder of a corporative corporation sought to be provided with an unredacted list of the corporation’s current shareholders so that he could communicate with the shareholders as he campaigned for a position on the corporation’s board of directors. The corporation allowed the shareholder to view at its offices an outdated list of shareholders in which the names and addresses of some of the shareholders had been redacted. The shareholder filed a petition to compel the corporation to provide him with an updated, unreacted shareholder list. The trial court granted that petition, finding that the shareholder had established a proper purpose for his request by asserting that he requested the list to campaign for a position on the corporation’s board of directors. The appellate court affirmed, observing that, “Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose”. As the shareholder had established a proper purpose, the corporation was required to provide him with an updated, unredacted list of shareholders.

§ 1.3. Business Judgment Rule

§ 1.3.1. Nevada

In re Newport Corporation Shareholder Litigation, 507 P.3d 182 (Nev. Mar. 30, 2022). Shareholders brought action against the former board members of Newport for breach of fiduciary duties in their approval of a merger. The court affirmed the district court’s summary judgment ruling, finding that Newport’s CEO’s alleged self-interests in the merger were not actionable conflicts: the evidence did not show that he sought the merger out of fear of being fired or to achieve a more lucrative severance package. Moreover, the CEO’s alleged self-interest in the merger, alone, was insufficient to rebut the business judgment rule. Shareholders did not carry their burden to demonstrate that the CEO concealing his alleged self-interests from the Board impacted the Board’s overall independence. The evidence showed that the Board knew of the activist shareholders’ pressure on the CEO’s job performance, and knew of the CEO’s change-of-control severance package. Lastly, the court found that even if the shareholders could defeat the business judgment rule, they did not show an actionable injury; i.e., that the Board breached their fiduciary duties and that those breaches involved intentional misconduct, a knowing violation of law, or fraud.

§ 1.3.2. New York

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director of a corporation brought suit against the other two directors alleging breach of fiduciary duty among other claims. As set forth in the motion court’s decision, the amended complaint alleged that the directors undertook a series of decisions that deviated from the corporation’s previous business model. The trial court held that these decisions were protected by the business judgment rule and dismissed the complaint. The appellate court affirmed, observing that, the complaint merely alleged that a course of action other than that pursued by the board of directors would have been more advantageous.

§ 1.4. Dissolution

§ 1.4.1. Arizona

IMH Special Asset NT 168 LLC v. Beck, 2022 WL 1580864 (Ariz. Ct. App., Div. 1 May 19, 2022). RNMA I was a New Mexico limited partnership that, pursuant to the terms of its Partnership Agreement, was set to dissolve in December 2015. Pursuant to the Partnership Agreement, the dissolution would follow “a liquidation period not to exceed 12 months.” None of its limited partners took any action to extend the dissolution date prior to its passing. A year later, in December 2016, more than 75% of the limited partners gave notice that they were “retroactively” extending the term of the limited partnership. Subsequently, in January 2017 RNMA I made a capital call on the limited partners and, also, in July 2017 took out a loan.

IMH Special Asset NT 161, LLC and IMH Special Asset NT 168, LLC (collectively “IMH”) obtained an interest in RNMA I through a post-foreclosure deficiency action. Although the underlying litigation and arguments are complex, the superior court held that the receiver IMH had appointed did not have authority to manage RNMA I and could not make capital calls and IMH appealed. Initially, the court of appeals concluded that the limited partners’ “retroactive” attempt to extend RNMA I’s term was invalid as it had occurred after the dissolution date and liquidation period and remanded the case so the superior court could determine the effect of RNMA I’s failure to wind up by the date set by the Partnership Agreement. On remand, the superior court held that the January 2017 capital call and the July 2017 loan agreement were ultra vires and not proper winding-down acts. Again, IMH appealed. On the second appeal, the court of appeals confirmed the superior court’s ruling and held that RNMA I was in a wind-up period and, thus, continued to have a legal existence as a limited partnership during that wind-up period but that the capital call and loan were ultra vires as they were not proper winding down acts.

§ 1.4.2. California

Guttman v. Guttman, 72 Cal.App.5th 396, 287 Cal.Rptr.3d 296 (2021). In this case, a plaintiff-partner-plaintiff sued to dissolve a limited partnership. In response, the remining defendant-partners initiated a statutory procedure to buyout plaintiff’s interest in the partnership. Pursuant to this procedure, court-appointed appraisers submitted to the court their valuations of the partnership’s properties. Plaintiff, believing the appraisals undervalued the properties, dismissed his complaint without prejudice. The court then granted defendants’ motion to vacate the dismissal. On appeal, which was treated as a writ of mandate, the court of appeals denied the petition. The court explained that Plaintiff’s dismissal of the dissolution action would frustrate the statutory scheme for permitting buyout of any partner moving to dissolve a limited partnership. Under Cal. Corporations Code § 15908.02, once the buyout procedure has been ordered, a plaintiff’s dissolution action is stayed, and the buyout procedure goes forward in its place. Since the order granting the buyout motion effectively disposed of the dissolution action, such disposition, together with the policy considerations of discouraging tactics of repeatedly filing and dismissing dissolutions until an appraisal acceptable to a plaintiff is issued, deprived the plaintiff in this case of his right to dismiss his dissolution action after the buyout motion was granted.

Friend of Camden, Inc. v. Brandt, 81 Cal.App.5th 1054, 297 Cal.Rptr.3d 732 (2022). Plaintiff, a 1% membership owner of an LLC initiated a judicial dissolution of the LLC under Cal. Corporations Code § 17707.03. Defendants, the other members of the LLC who held 50% of the membership interests, filed a motion to avoid the dissolution by purchasing plaintiff’s 1% interest, under § 17707.03(c). Then, the plaintiff with other members owning 49% membership interest—for a total of 50% of the membership interests in the LLC—voted to voluntarily dissolve the LLC pursuant to § 17707.01(b). The issue on appeal was whether the vote of 50% of the membership to dissolve the LLC extinguished the right defendants otherwise would have had to purchase plaintiff’s 1% interest and avoid dissolution of the LLC. An issue on appeal was whether § 17707.03(c)(6) supports defendants’ contention that plaintiff cannot prevent a buyout, even though plaintiff never dismissed the dissolution action, and the buyout procedure did not commence, before the other 50% of the membership voted to dissolve the LLC. The court ruled that based on the plain language of § 17707.01, the vote of 50% of the LLC membership interests to dissolve the LLC must be given effect and the trial court must dismiss the buyout proceeding as moot and direct the members to wind up the activities of the LLC because the LLC was dissolved in accordance with the vote before a buyout could be implemented, and § 17707.01 says an LLC is dissolved by the “happening of the first to occur,” either “the vote of 50 percent” or “[e]ntry of a decree” of judicial dissolution.

§ 1.4.3. Delaware

In re Doehler Dry Ingredient Solutions, LLC, 2022 WL 4281841 (Del. Ch. Sept. 15, 2022). The Court of Chancery dismissed a petition for dissolution of a limited liability company, finding that the petitioner minority member had failed to plead facts that could reasonably support an inference that the company was deadlocked or could no longer fulfill its defined purposes. The company is owned by two 25% Members, including Russell Davis (“Davis”), and one 50% Member. Following disputes with Davis, the other two Members together executed a written consent removing Davis as a Manager. Davis subsequently accused the other Members of various wrongdoing, including breaches of fiduciary duty and the operating agreement. After a lawsuit was initiated in federal court to force Davis’s compliance with a buyback provision in the operating agreement, Davis petitioned the Court of Chancery for dissolution arguing, among other things, that Davis would “decline to approve ‘nine actions critical to the LLC’ for which unanimous consent is required under the LLC Agreement” thus creating deadlock.

The Court of Chancery dismissed the petition, holding that prospective deadlock was insufficient under the statute to prove actual deadlock. The Court further held that, even if Davis carried out his plan, deadlock could not exist because the operating agreement contained a mechanism by which to resolve potential deadlock in the form of a buyout provision in the operating agreement. The Court additionally noted the existence of a contractual provision for dissolution that could be invoked in the event of deadlock.

§ 1.4.4. New York

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (N.Y. App. Div. 2022). After Stile, a shareholder of the defendant corporation, signed a settlement agreement, the personal representative of Stile’s estate sued the corporation and its other shareholders for withholding distributions and for minority shareholder oppression, among other claims. After holding that the personal representative was bound by the settlement agreement signed by Stile and thus was not entitled to distributions or to seek dissolution of the company per the terms of the agreement, the court agreed with the personal representative that Stile “did not cease being a shareholder by virtue of the settlement.” Rather, the agreement merely required Stile to not “assert any of his rights as a shareholder,” so long as the payments provided for in the settlement are made to him. While the settlement also provided that if Stile transferred any of his shares, the settlement would be terminated, the court determined that “it [was] unclear if ‘transfer’ includes . . . the transfer to Stile’s estate when he died.” Thus, Stile’s estate remained a shareholder of the corporation.

As to the oppression claim, the court dismissed the claim to the extent it was based on the corporation’s refusal to allow the personal representative to examine the corporation’s books and records, as Stile had relinquished that right in the settlement agreement. However, “to the extent the claim is based on the defendants’ refusal to recognize the plaintiff as a shareholder, it was properly permitted to continue.”

Hoffman v. S.T.H.M. Realty Corp., 207 A.D.3d 722 (N.Y. App. Div. 2022). A 25 percent shareholder, who had inherited her shares, filed a petition for dissolution under Business Corporation Law § 1104-a, in which she alleged shareholder oppression. The day-to-day operations of the corporation were managed by the petitioning shareholder’s brother and cousin, each of whom also owned 25 percent of the shares. After a bench trial, the trial court denied the shareholder’s petition for dissolution holding that she had not established shareholder oppression. The appellate court affirmed, noting that, “Oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” As the trial evidence demonstrated that, after inheriting her stock, the petitioning shareholder did not seek employment or responsibilities in the day-to-day management of the corporation, or express an interest in shareholders’ meetings, but, rather, remained, for many years, a passive shareholder, acquiescing in the exercise of control by her brother and cousin, the trial court’s decision that the petitioning shareholder had not established shareholder oppression was supported by the evidence.

Fernandes v. Matrix Model Staffing, Inc., 2022 WL 1172487 (N.Y. Sup. Ct. Apr. 20, 2022). The plaintiff shareholder in a closely held corporation pursued dissolution after discovering that the corporation, through its director, failed to pay the corporation’s tax liabilities and then improperly informed the IRS that the plaintiff was the party responsible for accounting and employee tax withholding, resulting in $200,000 in tax penalties levied on the plaintiff. Reciting the standard under New York law for judicial dissolution of a company, the court stated that “[f]ailing to pay tax liabilities is corporate mismanagement which defeats a petitioner’s reasonable expectations sufficient to constitute oppression.” Further, the court stated that “[i]t is beyond argument that a shareholder, who is not responsible for payroll and accounting, has an objectively reasonable expectation that the corporation will not designate the shareholder as the responsible party for payroll withholdings in IRS filings.” Such conduct on the part of the defendant “is oppressive, if not fraudulent or criminal behavior.” Therefore, “the petition alleg[ed] a demonstrated risk to petitioner’s rights—chiefly continued future tax and other financial liabilities arising from respondent’s oppressive conduct.” However, recognizing dissolution as an extraordinary remedy, and because the defendant “questioned the need for dissolution,” the court referred the matter to a referee to establish the underlying facts and report on the issue of dissolution.

Epstein v. Cantor, No. 506730/19, 2022 WL 3597646 (N.Y. Sup. Ct. Aug. 19, 2022). In a law firm partnership dispute, after the court initially held that the firm was not a partnership and that, even if it were a partnership, the plaintiff was not a partner, the plaintiff moved for re-argument to resolve an apparent conflict between Steinbeck, a 1958 partnership case and Congel, a case decided in 2018. After 14 years in a law partnership with the defendant, Epstein, the plaintiff, sued Cantor, alleging that Cantor formed his own firm without his consent and transferred all the firm’s clients to the new firm. Cantor moved to dismiss, arguing that Cantor was the firm’s sole principal, that the firm was not a partnership, and that the plaintiff was not a partner.

In its first decision, the court applied Steinbeck’s rule that “an indispensable essential of a contract of partnership . . . both under common law and statutory law, is a mutual promise or undertaking of the parties to share in the business and submit to the burden of making good the losses” and dismissed Epstein’s claims. While there was an agreement naming the firm a partnership and naming Epstein as a partner, the agreement allocated profits and losses solely to Cantor. Therefore, the firm could not have been a partnership as a matter of law.

However, citing the 2018 Congel decision holding that partners “as between themselves, may include in the partnership articles any agreement they wish concerning the sharing of profits and losses,” the court granted Epstein’s motion to reargue the case. Ultimately, as to which line of cases controlled, the court sided with the defendants, stating that “it is unclear that Congel controls when the very issue is whether a partnership was formed or whether a partnership agreement can include that no profits and losses would be shared.” (emphasis in original). Nevertheless, applying the indicia of partnership formation outlined in Steinbeck, the court held that “issues of fact abound sufficient to warrant reinstating the claims against the Cantor Defendants.”

Chen v. 697 Dekalb LLC, No. 527902/2021, 2022 WL 2870138 (N.Y. Sup. Ct. Jul. 18, 2022). Alleging multiple violations of the LLC’s operating agreement and that his $300,000 contribution to the LLC was mismanaged by the defendant, the plaintiff sued for dissolution and requested a return of his investment. The defendants argued that the plaintiff was required to provide additional capital contributions to the business and that the standard for judicial dissolution had not been triggered.

Despite the operating agreement provision dealing with capital contributions among members not expressly requiring the consent of all members to make additional contributions to the company, the court interpreted the agreement to require unanimity and held that, contrary to the defendants’ argument, “there can be no reasonable reading of [the operating agreement] that limits the number of members that may impose a capital contribution.”

§ 1.4.5. Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50% membership in the LLC. The court noted that while she would be compensated for her 50% membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50% member of the LLC.

§ 1.5. Jurisdiction, Venue, and Standing

§ 1.5.1. California

Sirott v. Superior Court of Contra Costa County, 78 Cal.App.5th 371, 293 Cal.Rptr.3d 408 (2022). The court of appeals granted a petition for a writ of mandate to instruct a trial court to reverse its refusal to dismiss an LLC member’s derivative action for lack of standing. Defendants, members of the LLC, demurred on the ground that plaintiff-member lacked standing under Cal. Corporations Code § 17709.02 to pursue them, because during the litigation, plaintiff relinquished its interest in and was no longer a member of the LLC. In overruling the demurrer, the trial court determined that it had statutory discretion to allow the plaintiff-member to maintain the derivative claims even though it was no longer a member of the LLC. On appeal, the appellate court based its decision on § 17709.02, which requires both “contemporaneous” membership—meaning the party seeking to bring a derivative claim was a member in the LLC at the time of the challenged transaction (or became a member by gaining an interest from a party who was a member at the time of the transaction)—and “continuous” membership—meaning the party was a member throughout the litigation of a derivative claim. It was uncontested that the plaintiff-member met the contemporaneous membership requirement under § 17709.02, but did not meet the continuous membership requirement because plaintiff relinquished its membership interest in the LLC during litigation. As the appellate court explained, § 17709.02(a)(1) grants a trial court discretion to permit a derivative action by any “member” who does not meet these requirements but does not include such discretion to confer standing on a plaintiff, who is not a member. The plaintiff was no longer a member of the LLC. Thus, it could not satisfy the requirement for continuous membership and the trial court erred in not sustaining the demurrer for lack of standing.

§ 1.5.2. Illinois

Staisz v. Resurrection Physicians Provider Group, Inc., 2022 IL App (1st) 201316, 2022 WL 1446843 (Ill. App. May 9, 2022). In this case, the court held that a former shareholder lacked standing to bring a claim for shareholder oppression under Section 12.56 of the Illinois Business Corporation Act because shareholder status was needed at the commencement of the lawsuit and not, as the plaintiff argued, at the time of the alleged oppressive conduct. The plaintiff also lacked standing to bring a claim for breach of fiduciary duty because the alleged injuries of lost dividends and diversion of corporate funds were common to all shareholders and the claim was derivate, which requires active status as a shareholder.

Smith v. Lucas, 2022 IL App (1st) 210960-U, 2022 WL 4233767 (Ill. App. Sep 14, 2022). In this case , the court held that a plaintiff lacked a membership interest in a limited liability company because she received her rights as a transferee in an inheritance and did not receive the unanimous consent of the non-transferring members to admit a new member as required by the operating agreement. The court reversed the entry of summary judgment on a claim for a forced buy-out under the operating agreement, holding that there was issues of fact whether the accountant had the qualifications to properly value mineral rights and whether he changed portions of his valuation to favor the company.

§ 1.5.3. New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father, his son, and two daughters jointly owned several LLCs, most of which involved the ownership and management of real estate. Over the course of years, the family formed several additional LLCs. The father filed an action against the son alleging breach of fiduciary duty, unjust enrichment, and seeking an accounting for several of the companies. However, with regard to certain of the companies, the operating agreements for those companies established that the father was not actually a member. The son moved to dismiss the father’s derivative claims on behalf of the companies for which the operating agreements established that the father was not a member. The trial court denied the son’s motion; however, the appellate court modified that order and dismissed the claims related to the companies for which the operating agreements established that the father was not a member. The court explained that, in order to maintain a derivative action on behalf of an LLC, one must be a member of the company. Because the operating agreements established that the father was not a member of certain of the companies at issue, his derivative claims relating to those companies should have been dismissed for lack of standing.

Sajust, LLC v. Mendelow, 198 A.D.3d 582, (NY App. Div. 2021). The court affirmed the dismissal of the direct claim of an LLC member, which had alleged that the value of its capital account was reduced through the diversion of a company asset, as the claim was a derivative rather than direct claim. The court explained that the determination of whether a claim is direct or derivative hinges on whether the company or the suing members individually suffered the harm and whether the company or the suing members individually would receive the benefit of a recovery. The court further explained that the lost value of an investment in a company is a quintessential derivative claim. Because the company was allegedly injured by the diversion of the company asset, the claim was derivative rather than direct. Accordingly, the member’s complaint was dismissed for lack of standing.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). The court affirmed the denial of a motion to dismiss the direct claim brought by a shareholder of a closely-held family business against his father, the other shareholder, arising out of the father’s misappropriation from the corporation and having caused the corporation to fail to pay certain state and federal taxes. The son had alleged that the father’s having caused the corporation to fail to pay state and federal taxes subjected the son to potential civil and criminal liability. The court held that the son’s potential civil and criminal liability was an individual harm that was separate and distinct from the loss to the corporation, which was the subject of a separate derivative claim. Additionally, because the father and son were family members, the father owed the son an independent fiduciary duty that was separate from the duty that the father owed to the corporation. Therefore, the trial court properly denied the motion to dismiss the son’s direct claim as it was not duplicative of his derivative claim.

Mohinani v. Charney, 208 A.D.3d 404 (NY App. Div. 2022). Two minority members of an LLC sued the estate of the company’s majority member and manager alleging breach of fiduciary duty. The claims arose out of a special distribution that the majority member received, the majority member’s personal receipt of an acquisition fee that the minority members alleged should have been provided to the LLC, and a management fee paid by two other companies to a management company owned by the majority member that the minority members alleged should have been paid to the company owned jointly by the parties. The minority members brought their claims as direct rather than derivative claims. The case proceeded to a bench trial, after which the court dismissed the minority members’ claims, finding that the claims were derivative rather than direct.

The appellate court affirmed, holding that damages are an essential element of a breach of fiduciary duty claim and that the individual members had failed to establish any personal damages as all of the damages that they had alleged were losses to the company than the individual minority members. The fact that the minority members were the only other members of the company did not change this analysis.

The court rejected the minority members’ argument that the majority member’s personal representative waived this defense by failing to plead lack of standing in his answer or through a motion to dismiss. The court further noted that the minority members had never sought leave to amend their complaint to seek recovery derivatively on behalf of the LLC despite numerous opportunities to do so.

Roche Cyrulnik Freedman LLP v. Cyrulnik, 582 F. Supp. 3d 180 (S.D. N.Y. 2022). A law firm limited liability partnership brought an action for declaratory relief and for breach of fiduciary duty against a former partner in federal court in New York. The defendant partner moved to dismiss the action for lack of subject matter jurisdiction and, in the alternative, called on the court to abstain from hearing the case in favor of a stayed action in Florida state court.

In response to Cyrulnik’s abusive behavior and other misconduct, the firm voted to oust him from the partnership. A fight ensued over the firm’s right to remove Cyrulnik and the amount the firm was obligated to pay him. After the firm filed the suit in federal court, Cyrulnik sued the firm in Florida state court. The firm argued that the court had diversity jurisdiction, as Cyrulnik was no longer a member of the firm. However, the court held that the relevant time for determining diversity of citizenship was the time of the filing of the original complaint, not any amended complaint.

Citing the “intertwining rule,” which provides that “where jurisdiction is so intertwined with the merits that its resolution depends on the resolution of the merits, the court should use the standard applicable to a motion for summary judgment and dismiss only where no triable issues of fact exist,” the court denied the defendant’s motion to dismiss for lack of subject matter jurisdiction. Instead, the court held that “[t]he determination of the firm’s citizenship . . . cannot be separated from [the firm’s] claim that Cyrulnik was properly dissociated from the firm.”

§ 1.5.4. Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50% membership in the LLC. The court noted that while she would be compensated for her 50% membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50% member of the LLC.

§ 1.6. Miscellaneous Claims and Issues in Business Divorce Cases

§ 1.6.1. Accounting

§ 1.6.1.1. New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father was a member of an LLC managed by his son. The father filed a complaint, inter alia, demanding an accounting. The son filed a motion to dismiss, which the trial court denied. However, the appellate court modified that portion of the trial court’s order denying the motion to dismiss the accounting claim as the father’s complaint did not allege that he had made a demand for an accounting that had been refused. The court explained that, to prevail on a cause of action for an accounting, an LLC member must show that a demand for an accounting had been made, which was refused. Additionally, the company’s operating agreement provided that members were entitled to inspect the company’s books and records for the immediately preceding three-year period upon 10 days written notice. Because the complaint did not allege that the father had made a demand to inspect the books and records or that such a demand had been refused, the court held that the accounting claim should have been dismissed.

Grgurev v. Licul, 203 A.D.3d 624 (N.Y. App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered the forced buyout of their shares by the petitioning shareholders. However, the trial court denied the petitioning shareholders’ request for an accounting. The appellate court modified the order to provide that the non-petitioning shareholders were required to provide an accounting. While the non-petitioning shareholders had produced extensive books and records that had been reviewed by a special referee, an accounting was still warranted as the bookkeeping was described as inadequate and sometimes nonexistent, and there was evidence that key financial data had been destroyed during the litigation.

§ 1.6.2. Alternative Entities

§ 1.6.2.1. Delaware

Freeman v. Qualizza, 2022 WL 3330377 (Del. Ch. Aug. 12, 2022). In an action seeking a declaration as to the proper manager of a Delaware limited liability company, the Delaware Court of Chancery determined that the manager of the owner of 99.99% of the membership interest of the subject entity had the power to cause the 99.99% owner to replace the manager of the subject entity because the removal was properly within the manager’s duties as manager under the operating agreement. On a cautionary procedural point, practitioners should take note that the Court initially granted a motion to expedite the action and a status quo order but ultimately vacated both due to a failure to proceed with alacrity on the part of both parties.

The subject entity, UDF, was formed in Delaware. Its membership interests were owned 99.99% by Aries Community Capital, LLC (“ACC”) and .01% by Michael Qualizza (“Qualizza”). Qualizza was designated Manager of UDF. ACC was owned 46% by Aries Capital, LLC, which was, in turn, owned by Neil Freeman (“Freeman”). QSG owned another 46% of ACC and was, in turn, itself owned by Qualiza. The remaining 8% of ACC was owned by Edward Keledjian. Aries Capital was designated Manager of ACC, and its sole duties were to control ACC and manage its sole asset, UDF. After a falling-out among the three business partners, Freeman caused Aries Capital to cause ACC as 99.99% Member of UDF to replace Qualizza with Freeman as Manager of UDF. Qualizza challenged the action as outside the scope of Aries Capital’s duties as Manager of ACC. The Court, however, found that because Aries Capital’s duties as Manager of ACC were solely to cause ACC to manage its sole asset, UDF, the written consent was valid, and Freeman was the proper Manager of UDF.

Avgiris Bros., LLC v. Bouikidis, 2022 WL 4672075 (Del. Ch. Sept. 30, 2022). In an action to determine the proper Managers of an LLC pursuant to 6 Del. C. § 18-110, the Court held that the majority Members of the LLC properly removed the Managers appointed by the minority Members. The Court further held that Plaintiff’s attempts to compel the return of company property were outside the scope of an 18-110 action and declined to enter such relief.

In this case, Plaintiff owned a 65% Membership interest, while defendants owned a 35% Membership interest. The Court declined to entertain any of defendants’ arguments by which they contended that Plaintiff’s Membership interest should be reduced to below a control threshold via reallocation or any other theory. The Court additionally declined to enter an order in favor of plaintiff compelling the defendants to return company property, including passwords and surveillance equipment, because the defendants are no longer Managers. Rather the Court held that “Section 18-110 grants this court jurisdiction ‘to determine who validly holds office as a manager of a Delaware limited liability company.’ It does not address the retention of property by removed managers. … It does not contemplate that the court will bar former managers from the premises of company property. That ancillary relief is beyond the scope of this particular proceeding.”

§ 1.6.2.2. Minnesota

Johnson v. Wright, No. 27-CV-20-2012, 2021 WL 7630246 (Minn. Dist. Ct. Oct. 13, 2021). In an action for employment-based oppression and breach of contract arising out of Johnson’s alleged membership interest in associated corporate entities, the Minnesota district court held that the employment agreement between the parties did not grant Johnson a membership interest but was merely “an agreement to agree.”

Two members of LLCs operating memory care facilities asked Johnson to serve as president of the entities due to her experience in the industry. According to the complaint, the two defendants instructed the attorney drafting the employment contract to include that Johnson would receive a 5% interest in all current and future companies related to the memory care business and real estate holding companies. After Johnson signed the agreement, the defendants then represented to their creditors that the plaintiff had a 5% interest in all related entities. However, two years after executing the employment agreement, Johnson’s employment was terminated. When Johnson requested access to financial records, she was informed that she had no ownership interest in any of the associated LLCs.

Responding to Johnson’s claims arising out of her alleged membership interest, the court held that the employment agreement was an unenforceable “agreement to agree,” and thus did not grant Johnson a membership interest, for two reasons. First, the contested provision “contain[ed] several instances of prospective language that unambiguously contemplate future documentation and memorialization.” Second, the employment agreement, in referencing Johnson’s membership interests, did not specify in which entities Johnson would be a member. Rather, the agreement failed to mention any of the then-existing LLCs and merely anticipated that “Johnson could have membership interests in entities yet to be formed.” Therefore, because Johnson failed to establish that she possessed a membership interest in any of the LLCs, the court awarded the defendants summary judgment on Johnson’s claims for breach of contract and equitable relief.

§ 1.6.3. Breach of Fiduciary Duty

§ 1.6.3.1. Arizona

Zambezi Holdings, LLC v. Proforma Health, PLLC, 2022 WL 3098020 (Ariz. Ct. App. Div. 1, Aug. 2, 2022). Proforma Health, PLLC (“Proforma”) was formed to do business as Munderloh Chiropractic. Munderloh Holdings, LLC and Zambezi Holdings, LLC (“Zambezi”) were simultaneously created with Munderloh Holdings owning 75% of Munderloh Chiropractic and Zambezi owning the remaining 25%. Timothy Munderloh (“Tim”), a chiropractor, and his wife, Siobahn, owned Munderloh Holdings and Mark Love (Siobahn’s brother), an entrepreneur, owned Zambezi. The parties later formed a new holding company, Timark, Inc., to own and operate a Massage Envy franchise in Flagstaff, Arizona. A dispute arose when Mark wanted to open a Massage Envy franchise in Prescott, Arizona. Mark wanted to own the Prescott franchise 75/25 and Tim wanted the ownership split to be 50/50. After much discussion and negotiation, Tim declined the opportunity to participate in the Prescott franchise. Mark obtained the Massage Envy Prescott franchise and opened for business. Tim responded by freezing Mark/Zambezi out of Proforma by cutting off the twice-monthly cash distributions they had been receiving from Proforma. Mark filed suit against Tim, Proforma and Munderloh Holdings alleging breach of contract for failure to pay cash distributions and, also, sought judicial dissolution of Proforma. Tim filed counterclaims against Mark alleging that Mark had breached his duties to Tim by usurping the corporate opportunity of the Prescott franchise.

After a jury trial, the superior court granted judgment as a matter of law in favor of Tim on the corporate opportunity claim and Mark appealed. The jury issued a verdict in favor of Mark on the breach of contract claim. Tim moved for a new trial on Mark’s breach of contract claim. The motion was denied and Tim appealed.

On appeal, the court reversed the judgment as a matter of law in Tim’s favor on the corporate opportunity claim. In doing so, the court of appeals focused on the issue of who had an expectation regarding the corporate opportunity of the Prescott franchise. The court focused on the fact that the Flagstaff franchise was owned by Timark and that Timark (a) was not a party to the litigation; and (b) due to language in the Flagstaff franchise agreement, Timark had no expectation that it would own anything other than the Flagstaff franchise. The court also found that even if Tim, as a 50% owner of Timark, had an individual expectation of the Prescott franchise opportunity, the undisputed facts made clear that judgment as a matter of law should have been granted in Mark’s favor, and not Tim’s, because the Prescott franchise was never a corporate opportunity belonging to Tim. The court based this finding on evidence that Massage Envy was not interested in granting the franchise to Tim without Mark because: (a) Tim’s chiropractic business conflicted in part with Massage Envy’s business; and (b) Tim could not devote full-time efforts to the Prescott Massage Envy. Finally, the court held that even if Tim did have an individual expectation in the opportunity, Tim could have no such expectancy after he had previously rejected the opportunity. Specifically, it was inequitable for Tim to decline the opportunity, let Mark open the franchise and take all the risk, wait for almost three years after declining the offer and almost two years after the Prescott franchise opened, and then claim that Mark had usurped a corporate opportunity.

The court affirmed the jury verdict in Mark’s favor on the breach of contract claim and upheld the denial of Tim’s motion for a new trial. The court of appeals found that the instruction given the jury on the issue of the distributions that had been made to Mark by Proforma mirrored the language of former A.R.S. § 29-703(B) and (C)(1) which provided that in the absence of distribution instructions in the Proforma operating agreement, that Proforma had been making distributions to Tim and Mark in proportion to the value of their capital contributions and Proforma should have continued making such distributions to Mark until “each member has been repaid his capital contribution.”

§ 1.6.3.2. 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’s 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.

§ 1.6.3.3. Delaware

Manti Holdings, LLC v. Carlyle Group Inc., 2022 WL 444272 (Del. Ch. Feb. 14, 2022). The Delaware Court of Chancery held that the terms of a “drag along” provision in a stockholders agreement was not sufficient to cause a waiver of the right of minority stockholders to challenge the sale of the subject company by minority stockholders based on a breach of fiduciary duties. Notably, the Court did not reach the question of the general waiverability of fiduciary duties in this opinion.

The stockholders agreement provided that: “In the event that … a Company Sale is approved by the Board and … the holders of at least fifty percent (50%) of the then-outstanding Shares …, each Other Holder shall consent to and raise no objections against such transaction ….” The Court held that the provision did not rise to the level of a waiver of bringing a claim for breach of fiduciary duties because “a waiver must be clear and unequivocal” while the provision in question never mentioned the waiver of fiduciary duties. The Court noted that the provision did specify certain other actions stockholders agreed not to take when being “dragged along,” including voting against the transaction, asserting appraisal rights, and refusing to execute certain transaction documents.

§ 1.6.3.4. New York

Miami Firefighters’ Relief & Pension Fund v. Icahn, 199 A.D.3d 524 (N.Y. App. Div. 2021). Shareholders of Xerox Holdings Corporation (Xerox) filed a derivative action against Carl Icahn, Xerox’s largest single shareholder, without filing a demand on Xerox’s board of directors to initiate the litigation. The trial court dismissed the action finding that the shareholders had not sufficiently pled that a demand would have been futile. However, the appellate court reversed, holding that the shareholders had sufficiently pled demand futility as four of the seven members of the board of directors lacked sufficient independence from Icahn to impartially decide whether to bring suit against him. Icahn at least tacitly conceded that he controlled two of the board members. Another board member, who served as the corporation’s CEO, received a level of compensation that called into question his independence as he would be putting his employment at risk if he voted to bring suit against Icahn. A fourth board member had served as a managing director of another company owned by Icahn and had served as Icahn’s representative on at least ten other boards.

The case arose out of Icahn and two partnerships that he controlled allegedly using Xerox’s confidential information regarding its planned acquisition of HP, Inc. (“HP”) to purchase HP shares before news of the sale became public. In addition to dismissing the case based on the shareholders’ failure to make a demand, the court trial court also found that the shareholders had not sufficiently pled a cause of action for breach of fiduciary duty as they had not pled that Xerox had been damaged by Icahn’s actions. However, the appellate court reversed this decision as well, holding that damages are not an essential element of a breach of fiduciary duty claim. The court explained that the function of a breach of fiduciary duty action is not just to compensate the plaintiff but to prevent breaches of fiduciary duty by removing any temptation on the part of fiduciaries to breach their duty.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). A shareholder in a closely-held, family corporation sued his father, the other shareholder, alleging breach of fiduciary duty and other claims. The son’s allegations arose out of the father’s alleged misappropriation of corporate assets and causing the company to fail to pay state and federal taxes. The trial court denied the father’s motion to dismiss. The appellate court affirmed, holding that, because the father and son were family members in a closely-held corporation, the father owed a fiduciary duty to the son that was independent of the fiduciary duty that the father owed to the corporation.

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director sued the other two directors for breach of fiduciary duty among other claims. The motion court dismissed the shareholder-director’s breach of fiduciary duty claims finding that they were barred by both the business judgment rule and by an exculpatory provision in the corporation’s certificate of incorporation. As set forth in the trial court’s decision (2021 WL 2416518), the exculpatory provision in the certificate of incorporation tracked the language of New York Business Corporation Law § 402(b) and limited the liability of directors for breach of fiduciary duty subject to certain exceptions. Those exceptions include bad faith and intentional misconduct. The appellate court affirmed the trial court’s holding that the plaintiff shareholder-director’s allegations of bad faith and intentional misconduct were conclusory and, therefore, did not overcome the protections provided to the directors by the exculpation language of the certificate of incorporation.

Salansky v. Empric, 208 A.D.3d 983 (N.Y. App. Div. 2022). Plaintiff minority shareholder sued the corporation’s other two shareholders for breach of fiduciary duty and breach of the shareholder agreement after the defendants made additional capital contributions to the corporation in exchange for shares, diluting the plaintiff’s interest from 45% to less than 3%. The shareholder agreement required the written agreement of all shareholders to amend the certificate of incorporation (“CI”), but the defendants had raised the number of authorized shares by a mere majority vote. The defendants argued that the shareholder agreement violated BCL § 803(a), which states that a CI may be amended by a simple majority vote. However, the court held that § 803 does not prohibit parties from entering into a separate agreement that requires unanimity among the shareholders to amend a CI.

Troffa v. Troffa, No. 6095102016, 2022 WL 3140457 (N.Y. Sup. Ct. Aug. 02, 2022). Son and 50% shareholder sued his father, also a 50% shareholder, alleging that his father breached his fiduciary duties by usurping corporate opportunities in purchasing land in his own name and then wasting corporate assets in making rent payments to a third-party entity with no ownership interest over the property. The plaintiff claimed that in 1999 his father told him their corporation would be leasing a compost yard but did not tell him that the rent would be applied to pay down the purchase price on the property. The father also allegedly failed to mention that he was the actual party leasing the property and charging rent to the corporation. The father argued his lease to purchase the compost yard was a prudent business decision conferring tax advantages on the corporation and that the son was informed of the arrangement. Further, a third-party entity belonging to the father was receiving the corporation’s rent payments. Ultimately, the court held that the son demonstrated his prima facie entitlement to judgment as a matter of law that his father breached his fiduciary duties to the corporation by wasting corporate assets in the payment of rent to the third-party corporation, which had no ownership interest in the compost yard. However, the father raised “a triable issue of fact” regarding whether his son consented to the arrangement.

§ 1.6.4. Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing

§ 1.6.4.1. Delaware

In re Morrow Park Holding LLC, 2022 WL 3025780 (Del. Ch. Aug. 16, 2022). In a cautionary tale, the Court of Chancery denied both parties’ claims of breach of contract against the other in connection with their attempts to wind up their mutual business affairs. The parties were real estate developers and, after deciding they could no longer work together, “established limited liability companies with operating agreements governing the continued operation and subsequent division of their jointly owned assets.” The process, however, was derailed by impatience coupled with “mutual animus” that resulted in actions that could only be characterized as “spiteful retribution.” Ultimately, after a six day trial, during which the parties submitted 931 joint exhibits and called 12 witnesses, the Court found that, even if there were breaches of contract, no damages had been suffered. Accordingly, the Court “leaves the parties as they are.”

§ 1.6.4.2. Minnesota

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). One of three brothers and shareholders in two closely held corporations sued in 2005 for a fair value buyout from both companies. That action resulted in a 2006 settlement agreement which required the sale of one of the companies and the provision of successive rounds of bonus distributions to the brothers. However, a 2012 IRS audit scrutinizing the tax deductibility of the bonus payments made to the brothers resulted in the two defendants suspending the payments, and the plaintiff sued for breach of the 2006 settlement. The court found that the use of the word “bonus” as opposed to “dividend” in the 2006 settlement agreement left open the question of whether tax deductibility was an essential feature of the payments to be made under the settlement. In answering the question whether the settlement agreement required bonuses to be made regardless of whether they were tax deductible as employee compensation, the jury sided with the plaintiff and awarded him $12,000,000.

§ 1.6.5. Fraud

§ 1.6.5.1. Arizona

AOW Management LLC v. Scythian Solutions LLC, 2022 WL 2813523 (Ariz. Ct. App. Div. 1, July 19, 2022). Demitri Downing (“Demitri”) was a board member of a not-for-profit marijuana dispensary and entered into an oral agreement with Alex Lane (“Lane”) to transfer his board seat to Lane purportedly to hide the board seat (and its resultant income) from Demitri’s wife in a pending divorce. Demitri contended that, despite his official resignation, Lane agreed that Demitri would maintain a 50% interest in the board seat. The superior court granted summary judgment in Lane’s favor on Demitri’s claim for rescission of his transfer of the board seat to Lane. The appellate court reversed that decision and held that if Demitri could establish he surrendered his seat on the board to Alex due to fraud, then rescission or avoidance may be the appropriate remedy.

§ 1.6.6. Equitable/Statutory Relief

§ 1.6.6.1. California

Siry Invest. L.P. v. Farkhondehpour, 13 Cal.5th 333, 513 P.3d 166, 296 Cal.Rptr.3d 1 (2022). In an action involving alleged improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation and breach of fiduciary duty, the California Supreme Court addressed whether Cal. Penal Code § 496(c)’s treble damages and attorney fees were available as civil remedies to address partnership distribution disputes. Under § 496(c), any person who has been injured by the crime of receiving stolen property “may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.” A person commits the crime of receiving stolen property, under § 496(a), when that person “buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained.” The Supreme Court noted that § 496(c) is unambiguous, and when read together with other sections of the Penal Code, § 496(c) must be understood to mean that a plaintiff may recover treble damages and attorney’s fees under § 496(c) when property has been obtained in any manner constituting theft. The fraudulent diversion of partnership funds in the case at issue was deemed to be within criminal definition of theft because the defendants received property (the diverted partnership funds) belonging to plaintiff, having obtained the diverted funds in a manner constituting theft. The court also found that defendants concealed or withheld those funds from plaintiff. Defendant did all of this knowing the diverted funds were so obtained.

§ 1.6.6.2. Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). In a shareholder oppression claim based on alleged wrongful withholding of dividends, the Minnesota court of appeals affirmed the district court’s ruling that the decision to delay payments to the plaintiff was made in good faith and in the best interest of the corporation. The plaintiff, a physician and shareholder in an association of entities operating eye clinics, brought a shareholder oppression claim under Minnesota Statute § 302A.751 based on the clinic’s alleged denying of his governance rights, giving him inadequate meeting notice and accommodations, withholding his distributions, and frustrating his reasonable expectations in valuing his shares. As to the delayed distribution theory, the trial court merged its shareholder oppression analysis under § 302A.751 with the standard for breach of fiduciary duty. On appeal, Steffen argued the court erred in not “separately analyzing the legal requirements of a claim of unfairly prejudicial conduct” under § 302A.751 from that of a breach of fiduciary duty claim.

While the court of appeals agreed with Steffen that the trial court “relied on its breach-of-fiduciary-duty analysis,” the court affirmed the trial court’s analysis and holding, stating that “it identified legitimate reasons that justified the delay, including advice of counsel . . . and the parties’ disagreement regarding the proration date.” The court continued that “the determination that respondents did not breach their fiduciary duty is plainly relevant to the question of whether [Steffen’s] reasonable expectations were frustrated . . . . [H]ere, no breach occurred, and the conduct was reasonable under the circumstances . . . .”

Dualeh v. Abdulle, No. A21-1615, 2022 WL 3581812 (Minn. Ct. App. Aug. 22, 2022), review denied (Nov. 15, 2022). In a dispute over ownership of a business providing non-emergency medical transportation services, the court of appeals affirmed both the district court’s summary judgment ruling that the plaintiff owned a 50% interest in the LLC and the eventual court ordered buyout of the defendant’s 50% interest. In 2017, Abdulle, the defendant, began negotiations to buy Byro Consulting LLC (“Byro”). In March 2018, Abdulle and Dualeh signed an operating agreement identifying them as the two members and stating that each would provide $60,000 for the purchase of the business. Dualeh, a part-owner of a competing business, was to join Abdulle in buying Byro, as she had experience in the industry. However, the purchase agreement with the previous owner was signed only by Abdulle and identified only Abdulle as the purchaser. In December, Dualeh sued Abdulle seeking control of Byro and a buyout of Abdulle’s interest, and Abdulle counterclaimed, arguing that Dualeh did not hold any interest in Byro at all.

On Abdulle’s motion for summary judgment, the district court ruled in Dualeh’s favor on the question of whether she held an interest, determining that she was a 50% owner. Relying on contract principles, the court reasoned that the operating agreement was enforceable, as between Abdulle and Dualeh, after the previous owner transferred his 100% interest to Abdulle, based on their joint payment of the purchase price. Additionally, Abdulle represented to the IRS and a business partner that he and Dualeh were co-owners. In support of this argument, the court also cited to Minnesota Statute § 322C.0401, subd. 4(1)–(3), which provides for the addition of members to an existing LLC “as provided in the operating agreement” or by consent of all members.

§ 1.6.6.3. New York

Grgurev v. Licul, 203 A.D.3d 624 (NY App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered equitable dissolution of the corporation through the forced buyout of their shares by the petitioning shareholders. The court also ordered a money judgment in favor of the petitioning shareholders against the non-petitioning shareholders personally. The value of the shares that the non-petitioning shareholders were forced to sell was offset against the money judgment. The appellate court affirmed this decision based on the closely held nature of the corporation, the non-petitioning shareholders’ exclusive control over its finances, and the breach of fiduciary duty findings.

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (NY App. Div. 2022). The court held that a settlement agreement in which a 33 percent shareholder agreed not to: seek dissolution of the company, seek dividends from the company, commence any derivative actions on behalf of the company, or seek to inspect the company’s books and records was binding on the personal representative of the shareholder’s estate. Although the settlement agreement did not explicitly reference whether or not the agreement would be binding on the shareholder’s personal representative, the presumption is that a contract is binding on the personal representative of the estate of a party to the contract unless the contract involves a personal quality of the testator or explicitly excludes the personal representative of the party’s estate from coverage. Therefore, the appellate court affirmed the dismissal of the personal representative’s claims for relief that the shareholder had agreed not to seek including a books and records inspection, issuance of distributions, recovery of corporate assets that had allegedly been misappropriated, and dissolution of the company.

The corporation had claimed that the estate never became a shareholder. The personal representative also alleged a shareholder oppression claim based on the refusal to recognize the personal representative as a shareholder. The court affirmed the trial court’s refusal to dismiss this claim and allowed this claim for dissolution based on shareholder oppression to proceed.

§ 1.6.7. Tax Estoppel

§ 1.6.7.1. New York

Tradesman Program Managers, LLC v. Doyle, 202 A.D.3d 456, 457 (NY App Div. 2022. An LLC sought judgment declaring that a corporation that claimed to be a member of the LLC was not a member. The corporation claiming to be a member asserted that the LLC was estopped from claiming that it was not a member because the LLC had distributed a Schedule K-1 that identified the corporation as having a profit and loss share and a capital share. The court discussed the doctrine of tax estoppel, which provides that a party may not contradict factual statements as to a company’s ownership contained in its tax returns, proved that the party signed the tax returns and has failed to assert any basis for not crediting the statements contained in them. The court held that that tax estoppel did not apply because the company had not signed the K-1 in question. The court further held that tax estoppel did not apply because the company had offered a reasonable explanation as to why the K-1 contradicted the actual ownership, namely the affidavit of one of its managers stating that it paid distributions to the corporation based on the misrepresentations of one of its members. As tax estoppel did not apply, the appellate court affirmed the trial court’s grant of summary judgment in favor of the company declaring that the corporation was not a member.

§ 1.7. Valuation and Damages

§ 1.7.1. California

Crane v. R.R. Crane Investment Corp., Inc., 82 Cal.App.5th 748, 298 Cal.Rptr.3d 759 (2022). Shareholder brought action for involuntary dissolution of family-owned investment corporation, after which his brother, who was the other 50% shareholder, and corporation invoked statutory appraisal and buy-out provisions, Cal. Corporations Code § 2000. After the appraisal process, the trial court confirmed the fair value of the shares as of the date the shareholder filed for dissolution but refused to award prejudgment interest on the valuation of his shares. On appeal, the shareholder argues he was entitled to interest at a rate of 10 percent per annum from the date he first sought dissolution until the eventual purchase of his shares more than three years later. The shareholder predicated his arguments on Cal. Civil Code § 3287(a) and § 3288. Section 3287(a) governs damages in civil cases. Since the option to exercise a buyback of shares is not considered damages, § 3287(a) was deemed inapplicable. Similarly, since § 3288 grants a jury the discretion to award interest in cases of oppression, fraud, or malice, interest could not be awarded to the shareholder because the shares were bought-out pursuant to a statutory appraisal and buy-out provisions of the Corporations Code. Finally, the court noted that the shareholder should have, but failed to, seek a deferred valuation date under Corporations Code § 2000(f).

§ 1.7.2. Delaware

In re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, 2022 WL 698112 (Del. Ch. March 9, 2022). This case involves a dispute regarding the valuation of minority owners’ interests in freeze-out transactions in several partnerships which held licenses to provide cellular telephone services in specified geographic areas. The court determined that the defendant failed to prove that the freeze-outs were entirely fair to the minority partners, did not employ sufficient procedures that assured fairness to the minority partners, and instead sought to capture the future value for itself. In addition, the court considered that the valuation firm had a long relationship with the defendant and found that improperly influenced the outcome of the valuations.

§ 1.7.3. Louisiana

Shop Rite, Inc. v. Gardiner, 333 So. 3d 506, 2021 La. App. LEXIS 2081, 21-371 (La. App. 3rd Cir. December 29, 2021). This case addresses the fair value of the minority interests of a dissenting shareholder who was withdrawing their shares in two corporations: a 3.8 percent interest in a grocery and convenience store business and a 3.95 percent interest in a tobacco and alcoholic beverage store business. The trial court accepted the adjusted net asset method of valuation which was selected by experts for both parties because the corporations owned large amounts of real estate, and also allowed a discount for “trapped” capital gains taxes that would be owed in the event the underlying real estate was sold. The appellate court rejected the discount for capital gains taxes, stating that there must be a factual basis for a discount to be taken and that a sale of the underlying real estate assets was an unknown future event.

§ 1.7.4. Michigan

Pitsch v. Pitsch Holding Co., 2022 Mich. App. LEXIS 2730, 2022 WL 1508774 (Mich. App. 2022). This case pertains to challenges to the valuation quantification recommended by a special master and accepted by the trial court in a forced stock sale in a shareholder deadlock case. The special master had determined that a sale of shares from one shareholder to the other would yield more value than if the company was dissolved. In this matter, the special master determined a “modified liquidation value” which approximated the middle of the range between liquidation value and fair market value. The appellate court considered that all parties initially expressed a willingness to sell their stock for the amount determined by the special master, that the appellants do not explain why the company would net a higher value, and that the appellants had recommended the particular special master. As a result, the appellate court rejected the appellant’s claims and affirmed the trial court’s decision.

§ 1.7.5. Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). When Steffen was a shareholder-physician with the clinic, four other shareholders were bought out using a valuation method that diverged from the valuation method provided in the shareholder agreements. Strict adherence to the terms of the agreements would provide for a lesser buyout, and, upon discovering that these previous buyouts were not in compliance with the valuation method provided in the agreements, the remaining shareholders agreed that future buyouts would be valued according to the agreements’ actual terms.

Then, Steffen announced his departure from the clinic. When the clinic offered to purchase his shares in accordance with the terms of the agreements—and not the terms of the repurchase of the shares of previous departing doctors—Steffen declined. He commenced a shareholder oppression claim under Minnesota Statute § 302A.751 arguing the clinic frustrated his reasonable expectations in valuing his shares.

The trial court ruled that Steffen’s “expectation upon signing the Agreements was that his buyout would be calculated as set forth in the Agreements.” In reaching this determination, the court relied on the fact that neither Steffen nor the other shareholders were aware that the previous valuations were not in compliance with the agreements and that, after the shareholders discovered the error, Steffen was aware of the decision to bring the buyback program into compliance and had an opportunity to voice his objection but failed to do so. The court of appeals affirmed, citing the fact that Steffen attended board meetings where the issue was discussed and agreed to use the formulas set forth in the agreements to calculate future buyouts. Therefore, Steffen “had no reasonable expectation for his shares to be valued contrary to the Agreements.”

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). In this shareholder dispute among three brothers of two closely held corporations, a battle of valuation experts eventually resulted in the largest reported fair value buyout in Minnesota state history, with the court siding with the plaintiff’s expert “[o]n almost every issue.” The plaintiff brother brought both breach of contract claims and equitable claims for breach of fiduciary duty and unfairly prejudicial conduct under Minnesota Statute § 302A.751 against his two brothers. After a jury verdict for the plaintiff on his breach of contract and breach of the duty of good faith and fair dealing claims (awarding him $12,000,000), the parties stipulated that a buyout should occur but could not agree as to the valuation of the plaintiff’s interest in the two companies, which was tried to the court as a bench trial.

While both experts considered the firms’ income, their respective markets, and their assets in arriving at their valuations, the weight the experts gave to the three approaches differed significantly; therefore, they arrived at wildly divergent estimations of the value of the plaintiff’s interest. Ultimately, the court found that “[the plaintiff’s expert’s] primary reliance on the income and market approaches is more credible than [the defendants’] primary reliance on the asset approach.” Because the two corporations were “strong, solid enterprises” with no expectation of being liquidated or dismantled, the court determined that “a buyer for these companies is more likely to be interested in the income they have the potential to earn than in the liquidation value for their assets.” Therefore, because the plaintiff’s expert’s fair value opinions were “more reasonable, better supported, and closer to a proper valuation” of the plaintiff’s interest in the two firms, the court awarded the plaintiff a total of $58,501,760 based on his expert’s valuation of the two companies. Plaintiff was also awarded his fees and costs incurred in the action.

§ 1.7.6. Nebraska

Bohac v. Benes Serv. Co., 310 Neb. 722, 969 N.W.2d 103 (Neb. 2022). This case encompasses an election to make a purchase in lieu of judicial dissolution of a minority ownership interest in the shares of a corporation which operates an agricultural equipment dealership. The appellate court determined that the trial court did not use the correct definition of “fair value” pursuant to the Nebraska statute and, consequently, it should not have subjected the value of the shares to minority or lack of marketability discounts.

§ 1.7.7. New Jersey

Robertson v. Hyde Park Mall, 2022 N.J. Super. Unpub. LEXIS 848, 2022 WL 1572600 (N.J. Super. Ct. App. Div. May 19, 2022). In this partnership dispute case, the appellants assert that the trial court erred by not applying discounts to the fair value of the dissociated partners’ ownership interests for lack of control and marketability. The partnership owns and operates a major shopping mall. The appellate court determined that the trial court “appropriately considered the equities of the case when it decided not to apply discounts for lack of control and marketability, and its findings and conclusions are supported by the record and applicable law.”

Sipko v. Koger, Inc., 251 N.J. 162, 276 A.3d 160 (N.J. 2022). This case involves a shareholder dispute regarding computer design services businesses and whether a marketability discount should be applied to a shareholder’s interest in the two businesses. On the second appeal, the Supreme Court of New Jersey determined that no marketability discount should be allowed. The appellate court made this determination based upon findings that the comprehensive accounting ordered by the trial court showed that the defendants had attempted to render the corporation worthless to thwart the plaintiff and to create false evidence of the plaintiff giving up one of their ownership interests.

§ 1.7.8. New York

Collins v. Tabs Motors of Valley Stream Corp., 2021 N.Y. Misc. LEXIS 6058, 2021 NY Slip Op 32438(U) (Sup. Ct. N.Y. Cnty. Nov. 23, 2021). This case addresses whether a Shareholder Agreement is determinative in a dissolution to determine the value of a 25 percent ownership interest in a corporation that operates an automotive repair business. In this case, the buy-sell sections of the Shareholder Agreement state, “if any shareholder files a petition to dissolve the Corporation; … the Corporation firstly, and then the other Shareholders shall have the option to purchase all, but not part of the shares owned by such Shareholder,” and an accompanying schedule executed contemporaneously with the Shareholder Agreement stipulates the value per share is a specific dollar amount. The court determined that the Shareholder Agreement and the stipulated value in the accompanying schedule were enforceable.

Ng v. Ng, 2022 N.Y. Misc. LEXIS 3755, 2022 NY Slip Op 31750(U) (Sup. Ct. N.Y. Cnty. May 27, 2022). This case considers a valuation dispute regarding the “separation of a number of businesses previously owned by two brothers and former partners” pursuant to a dissolution agreement which the court considered “a global business divorce between the two brothers.” The valuation dispute arises from the assertion by one brother that “the entire interest” defined in the dissolution agreement only includes the shares of the stock but not the company’s goodwill. The court noted that although the dissolution agreement does not have a restriction on competition, it is well established in case law that there is an “important distinction between the duty to refrain from soliciting former customers which arise from the sale of good will of an established business.” The court determined that the sale terms do include the goodwill and consequently limited preliminary injunctive relief to only apply to the extent of the implied duty to not engage in solicitation impairing the company’s goodwill.

§ 1.7.9. North Dakota

Sproule v. Johnson, 2022 ND 51, 971 N.W.2d 854 (N.D. 2022). This case arises from a valuation dispute in a partnership dissolution of a family farm business. The appellants assert that taxes should have been deducted from the value which the trial court determined for the buyout of the plaintiff’s ownership interest. The appellate court found that there was no intention to currently liquidate, that the proffered tax analysis of what would happen if a liquidation would occur is hypothetical, and that the agreements in principle negotiated by the parties regarding the valuation methods were consistent to valuations without discounts for taxes. Ultimately, it concluded that such a taxes discount would be speculative.

§ 1.7.10. Tennessee

Boesch v. Holeman, 2022 Tenn. App. LEXIS 335, 2022 WL 3695977 (Tenn. Ct. App. Aug. 26, 2022). This is a dispute case regarding the buyout price for a disaffiliated partner in a three-partner business that distilled flavored moonshine. In the initial appeal, the appellate court determined that a “discount for lack of control by the minority partnership is inappropriate because the statute calls for determining value based on a sale of the entire business as a going concern” and remanded the case to the trial court to adjust the valuation accordingly. In this second appeal, the court rejected the appellant’s new challenge to the business valuation, which claims that the income-based method of business valuation was not properly applied. Ultimately, the appellate court determined that under the Tennessee Code, the buyout price after disassociation is measured as “the amount that would have been distributable to the disassociated partner on the day of disassociation if the assets of the business had been sold that day,” that the appellant’s request to include the revenue from stores which opened after the dissociation date should be rejected because it is not consistent with the requirements of the Tennessee Code and that the expert witness for the defendant partner “provided the court with a fully supported and properly calculated method of business valuation in conformity with the court’s previous instructions.”

Buckley v. Carlock, 652 S.W.3d 432 (Tenn. Ct. App. 2022). In this minority shareholder oppression case, the appellate court evaluated the appellant’s challenge to the valuation methodology accepted by the trial court to determine the fair value of the minority owner’s interest in a luxury automobile dealership. The appellate court considered that “The trial court accepted a valuation methodology… that is considered acceptable in the financial community. Authoritative automotive publications endorse the blue-sky approach. And it is used in the ‘great majority’ of ultra-high-end dealership transactions. The [trial] court also found the blue-sky method admissible and reliable.” Furthermore, the appellate court considered that “The method was based on fair value, not fair market value.” Consequently, the appellate court concluded that the valuation method was appropriate.

§ 1.7.11. Utah

Diversified Stripping Systems Inc. v. Kraus, 516 P.3d 306 (Utah Ct. App. Jul. 21, 2022). In an appeal from a complex business dispute involving a joint venture, the court of appeals found that the district court’s damages awards were unsupported. The joint venture, a construction business, was owned by two parties with 80% and 20% equity share. The parties’ agreement to form the joint venture was memorialized in a series of documents, including an asset purchase agreement and a profit advance agreement. In the asset purchase agreement, a third entity, owned the majority owner of the joint venture, purchased all the construction equipment from the minority owner, which would then lease this equipment to the joint venture. In the profit advance agreement, the joint venture agreed to pay the minority owner $70,000 per year for two years as an advance on profits, not a salary. And the minority owner agreed that if his 20% share of the joint venture’s profits fell below $70,000 per year, he would repay the joint venture for any overage. Shortly after the joint ventures’ inception, the parties’ relationship deteriorated, and the majority owner pushed the minority owner out of the joint venture. The majority owner later shut down the joint ventures’ operations and caused his equipment entity to sell all the equipment. The parties brought suit, and the district court found that the majority owner breached its fiduciary and contractual duties.

For damages, the district court awarded the minority owner its lost profits of $227,500 by determining that, based on the profit advance agreement, all parties to the joint venture envisioned that the joint venture’s profits for the first two years would by $350,000. The court extrapolated that estimate over five years, awarding the minority owner 20% of that estimated profit, less certain payments he had already received. The district court also awarded the minority owner 20% of the proceeds of the equipment sale after the joint venture was discontinued.

The majority owner appealed the damages award, arguing that the district court’s lost profit award was unsupported by evidence and that the minority owner was not entitled to the proceeds of the equipment sale. The court of appeals agreed, finding that the district court relied solely on profit advance agreement to calculate the lost profits, making its lost profit calculation speculative and unreliable as it was not based on reasonable assumptions or projections. There was no evidence that the $70,000 figure in the profit advance agreement was based on any projections, profitability analysis, or reasonable expectations of the joint venture’s profitability. The court of appeals also remanded the minority owner’s award of the portion of the equipment sales proceeds because the equipment was owned by an entity wholly owned by the majority owner, not by the joint venture.

Editors

§ 1.1. 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 will focus on cases decided between October 1, 2021 – October 1, 2022. 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.^[1] Much like federal and state governments, tribal governments are elaborate entities often consisting of executive, legislative, and judicial branches.^[2] 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.^[3]

Indian tribes are “distinct, independent political communities, retaining their original natural rights” in matters of local self-government.^[4] Thus, state laws generally “have no force” in Indian Country.^[5] 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.”^[6]

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,^[7] and settle, dismiss, or resolve without opinion countless others. This chapter introduces those cases most relevant to a business litigation focused audience.

§ 1.2. Indian Law & The Supreme Court 

§ 1.2.1. The 2021–2022 Term

The Supreme Court hears an average of between two and three new Indian law cases every year.^[8] During the 2021–2022 term, the Court decided three Indian law cases.

Oklahoma v. Castro-Huerta, 142 S. Ct. 2486 (2022). The U.S. Supreme Court held that the federal government and state governments have concurrent jurisdiction to prosecute crime committed by non-Indians against Indians in Indian country.

Victor Manel Castro-Huerta was convicted in Oklahoma state court for child neglect. Castro-Huerta appealed the conviction, and while the state-court appeal was pending, the U.S. Supreme Court decided McGirt v. Oklahoma.^[9] McGirt held that the Creek Nation’s reservation in eastern Oklahoma had never been properly disestablished and therefore remained “Indian country.” This area of eastern Oklahoma included the city of Tulsa, where Castro-Huerta was accused of committing child neglect. The Oklahoma appellate court vacated Castro-Huerta’s conviction as a result of McGirt and held that the federal government, not the State of Oklahoma, had jurisdiction to prosecute him. The Supreme Court granted certiorari, and in a 5-4 decision, the Court reversed and remanded, holding that both the federal and state government had jurisdiction to prosecute the crime.

Justice Kavanaugh, writing for the majority, began the analysis with the premise that Indian country is a part of a state’s territory and that, unless preempted, states have jurisdiction over crimes committed in Indian Country. For example, the Court has previously held that states have jurisdiction to prosecute crimes committed by non-Indians against non-Indians in Indian country.^[10] A state’s jurisdiction in Indian country may be preempted by federal law under ordinary principles of federal preemption, or when the exercise of state jurisdiction would unlawfully infringe on tribal self-government.

The Court held that the state’s jurisdiction was not preempted in this case. Specifically, the Court rejected Castro-Huerta’s argument that the General Crimes Act and Public Law 280 preempted Oklahoma’s authority to prosecute crimes committed by non-Indians against Indians in Indian country. The General Crimes Act merely extends federal laws that apply on federal enclaves to Indian country, but does not state that Indian country is equivalent to a federal enclave for jurisdictional purposes, that federal jurisdiction is exclusive in Indian country, or that state jurisdiction is preempted in Indian country. Therefore, the General Crimes Act does not preempt state jurisdiction to prosecute crimes committed by non-Indians against Indians in Indian country. Nor does Public Law 280 preempt state jurisdiction under such circumstances. Public Law 280 grants states jurisdiction to prosecute state-law offenses committed by or against Indians in Indian country, but contains no language preempting state jurisdiction.

The Court also held that the test articulated in White Mountain Apache Tribe v. Bracker^[11] does not bar a state from prosecuting crimes committed by non-Indians against Indians in Indian country. In Bracker, the Court held that even when federal law does not preempt state jurisdiction under ordinary preemption analysis, preemption may still occur if the exercise of state jurisdiction would unlawfully infringe upon tribal self-government.

Here, the Court determined the exercise of state jurisdiction does not infringe on tribal self-government. First, state prosecution would not deprive the tribe of any of its prosecutorial authority since Indian tribes lack criminal jurisdiction to prosecute crimes committed by non-Indians. Second, a state prosecution of a non-Indian would not harm the federal interest in protecting Indian victims because state prosecution would supplement federal authority, not supplant federal authority. Third, states have a strong sovereign interest in ensuring public safety and criminal justice within their territory, and in protecting all crime victims.

Justice Gorsuch, writing for the dissent, viewed the majority’s decision as a step back from the foundational rule that Native American Tribes retain their sovereignty unless and until Congress ordains otherwise.

Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929 (2022). This case represents the latest conflict between Texas gaming officials and the Ysleta del Sur Pueblo Indian Tribe. The Attorney General, on behalf of the State of Texas (the “State”), sought to enjoin the Ysleta del Sur Pueblo (the “Tribe”), a federally-recognized Indian tribe, from offering bingo within its entertainment center located on Tribe’s reservation. In 1968, Congress recognized the Ysleta del Sur Pueblo as an Indian tribe and assigned its trust responsibilities for the Tribe to Texas. In 1983, Texas renounced its trust responsibilities because they were inconsistent with the State’s constitution. The State also expressed opposition to any new federal trust legislation that did not permit the State to apply its own gaming laws on tribal lands.

Congress restored the Tribe’s federal trust status in 1987 when it adopted the Ysleta del Sur and Alabama and Coushatta Indian Tribes of Texas Restoration Act (“Restoration Act”). The Restoration act prohibited “[a]ll gaming activities which are prohibited by the laws of the State of Texas.” Shortly thereafter, Congress adopted its own comprehensive Indian gaming legislation: the Indian Gaming Regulatory Act (“IGRA”). IGRA established the rules for separate classes of games. IGRA permitted Tribes to offer Class II games—like bingo—in States that “permi[t] such gaming for any purpose by any person, organization or entity.” 25 U.S.C. § 2710(b)(1)(A). Class III games—like blackjack and baccarat—were only allowed pursuant to negotiated tribal/state compacts.

After losing a legal battle (“Ysleta I”) to offer Class III games,^[12] the Tribe began to offer bingo, including “electronic bingo” machines.^[13] The State sought to shut down the Tribe’s bingo operations. Bound by Ysleta I, the district court enjoined the Tribe’s bingo operations, but stayed the injunction pending appeal. The Fifth Circuit reaffirmed Ysleta I and held that the Tribe’s bingo operations were impermissible because they did not conform to Texas’s bingo regulations.^[14] Certiorari was granted.

Section 107 of the Restoration Act directly addresses gaming on the lands of the Ysleta del Sur Pueblo. It provides that “gaming activities which are prohibited by [Texas law] are hereby prohibited on the reservation and on lands of the tribe” and does not grant Texas “civil or criminal regulatory jurisdiction” with respect to matters covered by § 107 (contained in subsection (b)). The State’s interpretation of the Act subjected the Tribe to the entire body of Texas gaming laws and regulations. The Tribe understood the Act to bar offering State-prohibited gaming activities—State-regulated gaming such as bingo would therefore be subjected only to federal law, not state law, limitations.

The Supreme Court stated that in Texas’s view, laws regulating gaming activities become laws prohibiting gaming activities—an interpretation that violates the rule against “ascribing to one word a meaning so broad” that it assumes the same meaning as another statutory term. Gustafson v. Alloyd Co., 513 U.S. 561, 575 (1995). The Court further explained that indeterminacy aside, the State’s interpretation would leave subsection (b)—denying the State regulatory jurisdiction—with no work to perform. As a result, Texas’s interpretation also defies another canon of statutory construction—the rule that courts must normally seek to construe Congress’s work “so that effect is given to all provisions.” Corley v. United States, 556 U.S. 303, 314 (2009) (internal quotation marks omitted).

Seeking to give subsection (b) real work to perform, Texas submitted that the provision served to deny its state courts and gaming commission “jurisdiction” to punish violations of subsection (a) by sending such disputes to federal court instead. However, that interpretation only serves to render subsection (c), which grants federal courts “exclusive” jurisdiction over subsection (a) violations, a nullity. A full look at the statute’s structure suggests a set of simple and coherent commands; Texas’s competing interpretation renders individual statutory terms duplicative and leaves whole provisions without work to perform.

The Supreme Court also looked at Congress’s intent when they passed the Restoration Act just six months after the Supreme Court handed down its decision in California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987). There, the Court interpreted Public Law 280—a statute Congress had adopted in 1953 to allow a handful of States to enforce some of their criminal laws on certain tribal lands—to mean that only “prohibitory” state gaming laws could be applied on the Indian lands in question, not state “regulatory” gaming laws. The Cabazon Court held that California’s bingo laws—materially identical to Texas’s laws here—fell on the regulatory side of the ledger. In Cabazon’s immediate aftermath, Congress also adopted other laws governing tribal gaming that appeared to reference and employ in different ways Cabazon’s distinction between prohibition and regulation. In doing so, Congress demonstrated that it clearly understood how to grant a State regulatory jurisdiction over a Tribe’s gaming activities when it wished to do so.

Accordingly, the Supreme Court held that the Restoration Act bans, as a matter of federal law on tribal lands, only those gaming activities also banned in Texas.

Denezpi v. United States, 142 S. Ct. 1838 (2022). In a 6-3 decision, the United States Supreme Court held that a Native American defendant previously prosecuted in a special federal administrative tribal court can be charged in a federal court for a separate offense arising from the same act without violating the Double Jeopardy Clause.

The case involved Merle Denezpi, a Navajo Nation member, who was charged by an officer with the Bureau of Indian Affairs for assault and battery, terroristic threats, and false imprisonment. These crimes were alleged to have occurred on the Ute Mountain Reservation. Denezpi was tried in the Court of Indian Offenses—a court established by the United States Department of the Interior in 1883 to administer justice for Indian tribes in certain parts of Indian country where tribal courts have not been established. Here, the Court of Indian Offenses sentenced Denezpi to 140 days in jail. Six months later, a federal grand jury indicted Denezpi on one count of aggravated sexual abuse in Indian country, an offense covered by the federal Major Crimes Act. Denezpi moved to dismiss the indictment, arguing that the Double Jeopardy Clause barred the consecutive prosecution. The District Court denied Denezpi’s motion. Denezpi was convicted and sentenced to 360 months’ imprisonment. The Tenth Circuit affirmed. Certiorari was granted.

Justice Amy Coney Barrett, writing for the majority, held that the Double Jeopardy Clause does not bar successive prosecutions of distinct offenses arising from a single act, even if a single sovereign prosecutes them. The Court reasoned that the Double Jeopardy Clause does not prohibit putting a person twice in jeopardy “for the same conduct or actions,” but rather focuses on whether successive prosecutions are for the same “offense.” Relying on the dual-sovereignty doctrine, the Court stated that because the sovereign source of a law is an inherent and distinctive feature of the law itself, an offense defined by one sovereign is necessarily a different offense from that of another sovereign.

Denezpi’s single act transgressed two laws: the Ute Mountain Ute Code’s assault and battery ordinance and the United States Code’s proscription of aggravated sexual abuse in Indian country. The two laws—defined by separate sovereigns—proscribe separate offenses, so Denezpi’s second prosecution did not place him in jeopardy again “for the same offence.”

Denezpi attempted to argue that this reasoning is only applied when the offenses are enacted and enforced by separate sovereigns. Because prosecutors in the Court of Indian Offenses exercise federal authority, Denezpi argued that he was prosecuted twice by the United States. The Court did not credit this argument, holding instead that the Double Jeopardy Clause does not prohibit successive prosecutions by the same sovereign; rather, it prohibits successive prosecutions “for the same offense.” Thus, even if Denezpi was right that the federal government prosecuted his tribal offense, the Double Jeopardy Clause did not bar the federal government from prosecuting him under the Major Crimes Act as well.

The dissent, led by Justice Neil Gorsuch, and joined by Justices Sonia Sotomayor and Elena Kagan, wholly disagreed with the majority. The dissent argued that this was the “same defendant, same crime, [and] same prosecuting authority” and further argued that the dual-sovereignty “doctrine is at odds with the text and meaning of the Constitution” and “cannot sustain the Court’s conclusion.”

Justice Gorsuch emphasized that the Court of Indian Offenses truly belonged to the United States through the Department of the Interior instead of being a tribal court. On this basis, the majority ruling could allow prosecutors to rehearse their trial in one jurisdiction to prepare for the subsequent trial in another. Furthermore, Gorsuch believed the majority’s ruling undermines tribal sovereign authority.

§ 1.2.2. Preview of the 2022–2023 Term

As of October 1, 2022, the Supreme Court granted certiorari in one Indian law case for the 2022–2023 term, with twelve more petitions for certiorari pending. If any new cases are granted and decided, they will be included in next year’s volume.

§ 1.3. The Tribal Sovereign

§ 1.3.1. 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.^[15] It cannot be overemphasized that every tribal court is different and distinct from the next.^[16] For example, the qualifications of tribal court judges vary widely depending on the court.^[17] Some tribes require tribal judges to be members of the tribe and to possess law degrees, while others do not.^[18] 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.^[19]

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;^[20] and (2) whether the dispute occurred in Indian Country,^[21] 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.^[22] 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.^[23] Even in tribal court, claims against the tribe itself require a waiver of tribal immunity.^[24] Indian tribes also generally have regulatory authority over tribal member and non-member activities on Indian land.^[25]

In the “path-making” decision of Montana v. United States,^[26] 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.”^[27] 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.”^[28]

These exceptions are “limited,” and the burden rests with the tribe to establish the exception’s applicability.^[29] 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.”^[30] 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.^[31]

Ute Indian Tribe of the Uintah & Ouray Rsrv. v. Lawrence, 22 F.4th 892 (10th Cir. 2022), cert denied, 143 S.Ct. 273 (2022). Lynn Becker, a non-native, former employee of the Ute Indian Tribe of the Uintah & Ouray Reservation (the “Tribe”) filed suit in Utah State Court for breach of an employment contract. The Tribe filed a motion to dismiss on the ground that the state court lacked jurisdiction, which the state court denied. The Tribe then filed suit against Becker in federal district court seeking to enjoin the state court action on the ground that the state court lacked subject matter jurisdiction. The district court denied the requested injunction to enjoin the state court action. The district court found that, even though Becker’s claims involve events that occurred on the reservation, a federal statute, 25 U.S.C. § 1322, authorizes state-court jurisdiction of the claims.

The Tenth Circuit reversed the district court’s decision and ruled that the Tribe is entitled to injunctive relief enjoining the state court action. A state court can only exercise jurisdiction over the dispute with “clear congressional authorization.” The Tenth Circuit held that the district court erred when it determined that 25 U.S.C. § 1322 supplied the state court with authorization. 25 U.S.C. § 1322 allows states to acquire jurisdiction over civil causes of action arising within Indian country and involving Indian parties. But state-court jurisdiction under § 1322 requires certain prelitigation action, such as tribal consent. Specifically, 25 U.S.C. § 1326 provides that a state acquires jurisdiction pursuant to § 1322 only when a tribe votes by a special election to accept such jurisdiction. The Tribe argued that it never consented by special election to Utah courts exercising jurisdiction under § 1322. The Tenth Circuit agreed.

The Tenth Circuit rejected the district court’s interpretation of § 1322, which was that although a tribe must conduct a special election before it can consent to “permanently authorize the state to assume global jurisdiction over [it],” it need not hold a special election before it can “selectively consent”—in a contract like the at issue employment agreement, for example—”to a state’s exercise of . . . jurisdiction” over a specific legal action. The Tenth Circuit disagreed, holding that such an interpretation is inconsistent with the explicit statutory text. Because the Tribe never held a special election granting the state court jurisdiction, § 1322 is inapplicable, the state court lacked jurisdiction, and the state court action should have been enjoined. The United States Supreme Court subsequently denied certiorari in October 2022.

Ute Indian Tribe of Uintah & Ouray Rsrv. v. McKee, 32 F.4th 1003 (10th Cir. 2022). The Tenth Circuit held that a tribal court lacks jurisdiction over a dispute with a non-tribal member arising off Indian lands. In this case, the defendant, a non-tribal member, owned land that was once a part of the Ute Reservation. However, two Uintah Indian Irrigation Project (UIIP) canals still crossed through the defendant’s property. In 2012, UIIP was notified that the defendant was diverting water from the canals to irrigate his property. After an investigation, UIIP determined that the defendant was “unlawfully misappropriating tribal waters in violation of the Cedarview Decree.”

The Ute Tribe sued the defendant in Ute Tribal Court, where the defendant moved to dismiss for lack of subject matter jurisdiction. The Ute Tribe claimed they had subject matter jurisdiction pursuant to the Montana rule, which states that a “tribe can regulate activities of all non-Indians who enter a consensual relationship with the Tribe or whose conduct imperils the Tribe’s political integrity, economic security, or health and welfare.” The defendant chose not to participate in the Ute tribal court action, and the tribal court entered judgment against him. Subsequently, the Ute Tribe petitioned the district court to enforce the tribal court’s judgment. The district court denied the Ute Tribe’s motion, holding that “the tribal-court judgment was unenforceable because the tribal court lacked subject-matter jurisdiction.” The Ute Tribe appealed.

The Tenth Circuit affirmed the district court’s decision. There are only two circumstances when a tribe or tribal entity may regulate non-tribal members and their activities: when a non-tribal member enters a consensual relationship with a tribe or tribal entity or when the non-tribal member’s “activity threatens [the tribe’s] political integrity, economic security, or health and welfare.” The Ute Tribe argued these exceptions did not need to be addressed as the action dealt with the exclusive rights to water from the reservation lands. The Ute Tribe explained that they have the authority to exclude people from their lands and thus have the power to exclude people from using their water.

The Tenth Circuit disagreed. The Ute Tribe did not provide any precedent to support the assertion that a tribe could regulate the usage of “natural resources outside of the tribe’s territory.” The Tenth Circuit held that because the defendant only used the water on non-Indian land, the “tribal court did not have jurisdiction arising from the Tribe’s authority to exclude nonmembers from its territory.”

Furthermore, the Tenth Circuit held that the defendant’s water use is a matter of the Ute Tribe’s external relations, not tribal self-government. The Court explained that because of the external nature of the matter, the parties must have had a contractual relationship where the defendant agreed to tribal court jurisdiction. Additionally, the Court noted that the Ute Tribe did not show how the use of the water would be harmful—the defendant had been using the water for over thirteen years without the Ute Tribe noticing. Ultimately, the Tenth Circuit held that the tribal court lacked jurisdiction over the water dispute.

Big Horn Cnty. Elec. Coop., Inc. v. Big Man, No. 21-35223, 2022 WL 738623 (9th Cir. Mar. 11, 2022). Big Horn County Electric Cooperative (“BHCEC”) provides electrical services to members of the Crow Tribe on the Crow Reservation. BHCEC notified a member of the Crow Tribe, Big Man, who lived on the Reservation, that his account was delinquent and would be terminated if non-payment continued. Big Man failed to pay, and his services were disconnected. Big Man sued BHCEC in Crow Tribal Court alleging that BHCEC’s termination violated Title 20, Chapter 1 of the Crow Law and Order Code, which provides that “no termination of residential service shall occur between November 1 and April 1 without specific prior approval of the Crow Tribal Health Board.” BHCEC filed suit in district court seeking to enjoin the tribal court action for lack of jurisdiction.

The district court granted summary judgment in favor of Big Man. First, the district court held that BHCEC did not show that Congress had intended to divest the Crow Tribe of its tribal jurisdiction over BHCEC’s action on the Tribe’s land. In the alternative, the district court concluded that both Montana v. United States^[32] exceptions apply, which grant a tribal court jurisdiction over a non-tribal member: “1) BHCEC formed a consensual relationship with the Tribe and there is a sufficient nexus between the regulation and that relationship, and 2) BHCEC’s conduct has a direct effect on the health and welfare of a tribal member.” BHCEC appealed the district court’s ruling.

The Ninth Circuit concluded that the first Montana exception was sufficiently met to sustain tribal jurisdiction over the dispute. BHCEC’s voluntary provision of electrical services on the Tribe’s reservation and its contracts with tribal members to provide electrical services created a consensual relationship within the meaning of Montana. Additionally, the Ninth Circuit held that the at-issue tribal regulation had a nexus to the activity that is the subject of the consensual relationship between BHCEC and the Tribe. The Ninth Circuit affirmed the district court’s decision.

§ 1.3.2. 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^[33] is required to exhaust all options in the tribal court prior to challenging tribal jurisdiction in federal district court.^[34] If tribal options are not exhausted prior to bringing suit in federal court, the federal court will likely dismiss^[35] or stay^[36] 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.^[37] Thus, non-Indian parties can challenge the tribal court’s jurisdiction in federal court.^[38] 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.^[39] 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.”^[40] 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.”^[41]

After the tribal court has ruled on the merits of the case^[42] and all appellate options have been exhausted,^[43] the non-tribal party can file suit in federal court, whereby the question of tribal jurisdiction is reviewed under a de novo standard.^[44] The federal court may look to the tribal court’s jurisdictional determination for guidance; however, that determination is not binding.^[45] 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.^[46]

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.”^[47] 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.”^[48] Third, where the primary issue involves an exclusively federal question, exhaustion of tribal remedies may not be mandated.^[49]

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.^[50]

Chegup v. Ute Indian Tribe of Uintah & Ouray Rsrv., 28 F.4th 1051, 1053 (10th Cir. 2022). The Ute Indian Tribe of the Uintah and Ouray Reservation (“Tribe”) temporarily banished four members (“Banished Members). Rather than challenging their banishment in tribal court, the Banished Members sought relief in federal court by filing a petition for habeas corpus. The Banished Members claimed that, as a result of their temporary banishment, they were detained within the meaning of the Indian Civil Rights Act of 1968 (“ICRA”). The district court dismissed the suit, finding that temporary banishment did not constitute detention for the purposes of ICRA. Because the district court first analyzed whether tribal banishment amounted to detention under ICRA, it failed to address the Tribe’s alternative position that the Banished Members failed to exhaust their tribal remedies. The Banished Members appealed.

On appeal, the Tenth Circuit concluded that the district court should have started its analysis by addressing tribal exhaustion. “Only then, assuming that exhaustion was not an obstacle to this suit, should it have considered whether temporary or permanent banishment is cognizable as detention under ICRA’s habeas provision.” The Tenth Circuit declined to address the Banished Members’ argument that tribal exhaustion should be excused. Rather, the Tenth Circuit noted three reasons for finding the district court erred by not first addressing tribal exhaustion: (1) whether banishment constitutes detention under ICRA presented a significant, complex, and contentious issue; (2) tribal exhaustion was not obviously excused; and (3) the strong comity and sovereignty concerns underlying the tribal exhaustion doctrine. Accordingly, the Tenth Circuit reversed with instructions to resolve the exhaustion issue before turning to the substance of the claim.

In a dissenting opinion, Judge Lucero maintained that the district court was “unequivocally correct in dismissing the case.” Judge Lucero explained that “[a]bsent any authority requiring an exhaustion determination before jurisdiction, the complexity of the exhaustion issue in this case is yet another reason to defer to the district court’s discretion to first decide the bounds of its jurisdiction.”

Monster Tech. Grp., LLC v. Eller, No. CIV-21-879-J, 2021 WL 5395788 (W.D. Okla. Oct. 14, 2021). In September 2021, the United States District Court for the Western District of Oklahoma dismissed the Plaintiff’s suit for failure to exhaust tribal court remedies (“Order”). Plaintiff subsequently filed a motion for reconsideration, arguing the Order was erroneous. Plaintiff maintained that although it filed an appeal with the Supreme Court of the Iowa Tribe (“Tribal Supreme Court”) six months prior, it anticipated further delay because the Tribal Supreme Court consisted of only one judge. The court rejected this argument and denied a motion for reconsideration because the Tribal Supreme Court’s review was not complete.

The district court noted that a delay in the pending appeal did not negate the requirement that federal courts should generally abstain from hearing cases until tribal court remedies are fully exhausted. The court further explained that “[a] delay of less than six months coupled with some indefinite amount of anticipated additional delay does not qualify as ‘exceptional circumstances,’” nor does it result in a denial of justice. Accordingly, the district court dismissed Plaintiff’s action without prejudice, permitting the Plaintiff to reassert its claims in the future should the delay of tribal review extend for such a time that it becomes an extraordinary circumstance.

Adams v. Dodge, No. 21-35490, 2022 WL 458394 (9th Cir. Feb. 15, 2022). Adams filed a habeas petition under 25 U.S.C. § 1303 seeking relief from a Nooksack Tribal Court (“Tribal Court”) warrant. The United States District Court for the Western District of Washington denied Adams’ habeas petition for failure to exhaust tribal remedies. Adams appealed the district court’s decision, but the Ninth Circuit affirmed dismissal, explaining that “prior to turning to federal court, habeas petitioners must exhaust the remedies available to them in tribal court.”

The Ninth Circuit rejected Adams’ argument that she was not required to exhaust her tribal court remedies because the Tribal Court acted in bad faith. The Ninth Circuit similarly rejected Adams’ argument that she was not required to exhaust her tribal remedies because she was arrested off-reservation and the Tribal Court therefore lacked criminal jurisdiction to arrest her.

In her final argument, Adams claimed that under Congress’ passage of Public Law 280 in 1953, Washington State assumed exclusive criminal jurisdiction over tribal lands. The Ninth Circuit disagreed with this argument, reasoning that Adams failed to show Washington State’s jurisdiction was exclusive. The court noted that “the Washington Supreme Court has stated in dicta that tribal and state courts generally have concurrent jurisdiction over criminal cases.” Ultimately, because Public Law 280 was designed to supplement tribal institutions rather than supplant them, Adams failed to show the Tribal Court lacked jurisdiction. Because Adams failed to demonstrate that she was not first required to exhaust tribal remedies, the Ninth Circuit affirmed dismissal of her habeas petition.

Allstate Indem. Co. v. Cornelson, No. 21-5831 RJB, 2022 WL 856863 (W.D. Wash. Mar. 23, 2022). This case stems from a complaint filed by Joaquin Ortega Carrillo (“Carrillo”) alleging that Joshua Cornelson (“Cornelson”) assaulted and battered him. The assault and battery allegedly occurred at Cornelson’s home, which is located on the lands of the Lower Elwha Klallam Tribe. Because Cornelson’s home was covered by an Allstate insurance policy, Carrillo sent a letter to Allstate demanding over $500,000 in damages. Accordingly, Allstate sought a declaratory judgment in federal court that it had no obligation to provide coverage or a defense to Cornelson in connection with Carrillo’s claims. Allstate also sought a declaration that it did not owe Carrillo money pursuant to the coverages allowed under Cornelson’s policy.

On February 11, 2022, Cornelson and his wife filed a complaint in the Lower Elwha Klallam Tribal Court (“Tribal Court”) “seeking a declaration that the Tribal Court ha[d] jurisdiction and that Allstate [wa]s under a duty to defend and indemnify them” in the dispute with Carrillo. The Cornelsons then filed a motion to dismiss for lack of tribal court exhaustion, arguing that the United States District Court for the Western District of Washington should dismiss or stay the case to give the Tribal Court an opportunity to rule on whether it had jurisdiction. Allstate opposed the motion, claiming “the Tribal Court plainly lack[ed] jurisdiction over Allstate . . . and exhaustion [wa]s therefore not required.”

The court rejected Allstate’s argument that tribes lack civil authority over the conduct of nonmembers on non-Indian land within a reservation. Because the present case involved activities on Indian trust land, such an argument was inapplicable. The district court therefore concluded that the case should be stayed until the Tribal Court had an opportunity to determine whether it had jurisdiction over the dispute. The district court explained that the “case should be stayed, not dismissed, because exhaustion of tribal court remedies is a matter of comity, not of jurisdiction.” As such, the Tribal Court should first be permitted to consider whether it is the appropriate forum before the district court considers the issue.

Cross v. Fox, 23 F.4th 797, 799 (8th Cir. 2022). Plaintiffs, members of the Three Affiliated Tribes of the Fort Berthold Indian Reservation (“Tribe”), challenged provisions in the tribal constitution requiring nonresidents to return to the reservation to vote in tribal elections and prohibiting nonresidents from holding tribal office. Plaintiffs sued Tribe officials in tribal court. While the case was pending in tribal court, Plaintiffs also filed a lawsuit against the Tribe in federal court. Plaintiffs alleged that the return-to-reservation requirement and the eligibility requirement for holding public office violated the Voting Rights Act (“VRA”) and the Indian Civil Rights Act (“ICRA”). The Tribe moved to dismiss the case for lack of subject-matter jurisdiction, which the district court granted. The district court explained that Plaintiffs “inexcusably failed to exhaust tribal remedies for their ICRA claims and the court lacked federal-question jurisdiction over the VRA claims.”

On appeal, the Eighth Circuit assessed the district court’s dismissal of the ICRA claims as a result of Plaintiffs’ failure to exhaust tribal remedies. The Eighth Circuit affirmed dismissal of Plaintiffs’ ICRA claims on the separate ground that “ICRA does not contain a private right of action to seek injunctive or declaratory relief in federal court, and therefore, the district court lacked subject-matter jurisdiction . . . .” The court pointed out that a writ of habeas corpus is the only federal remedy for ICRA violations authorized by Congress. Because the plaintiffs did not seek a writ of habeas corpus, but rather declaratory and injunctive relief, the action required resolution through tribal forums. In other words, because there was no private right of action to enforce the ICRA in federal court, there could be no jurisdiction.

Stanko v. Ogala Sioux Tribe Pub. Safety Div. of the Ogala Sioux Tribe, No. CIV. 21-5085-JLV, 2022 WL 220088 (D.S.D. Jan. 25, 2022). On November 30, 2021, Stanko, a non-Indian man, filed a pro se complaint against the Ogala Sioux Tribe (“Tribe”) and various tribal officers. The complaint alleged that, while traveling on a federally maintained highway located on reservation land in South Dakota, tribal officers unlawfully arrested and detained him in violation of his constitutional rights. The complaint further alleged that the tribal officers assaulted, battered, and stole from him. Accordingly, Stanko brought claims under the Civil Rights Act, the Indian Civil Rights Act, as well as the common law torts of assault, battery, and theft. With the complaint, Stanko filed an objection and supporting affidavit seeking to avoid dismissal of his claims for failure to exhaust tribal remedies.

The United States District Court for the District of South Dakota rejected this argument, finding Stanko’s allegation that tribal officers violated his civil rights on reservation land squarely within the tribal court’s jurisdiction. Ultimately, the district court noted that “[w]hether Mr. Stanko approves of that jurisdiction or believes he cannot get a fair trial in tribal court is not relevant to the court’s evaluation of the issues before it.” The court further reasoned that federal policy supporting tribal self-government requires federal courts to first give tribal courts an opportunity to determine their own jurisdiction. Accordingly, Stanko’s claims were dismissed without prejudice.

On May 12, 2022, following de novo review, the Eighth Circuit affirmed the district court’s dismissal of Stanko’s claims.^[51]

Rincon Mushroom Corp. of Am. v. Mazzetti, No. 3:09-cv-02330-WQH-JLB, 2022 WL 1043451 (S.D. Cal. Mar. 15, 2022). In 2009, the Rincon Mushroom Corporation of America (“RMCA”) filed a complaint in federal court against Defendants in their personal and official capacities as representatives of the Rincon Band of Luiseño Indians (“Tribe”). RMCA alleged that Defendants and the Tribe conspired to regulate activity on RMCA’s land (“Land”) to lower the value so the Tribe could purchase the Land at a discount. On September 21, 2010, the district court granted Defendants’ motion to dismiss, explaining that RMCA failed to exhaust tribal remedies.

In 2015, RMCA filed a complaint in the Rincon Tribal Court (“Tribal Court”) challenging the Tribe’s regulatory jurisdiction over RMCA’s activities on the Land. Following a bifurcated trial, the Tribal Court held it had adjudicatory jurisdiction over the dispute, and entered judgment in favor of Defendants, granting several forms of relief (“Judgment”). The Judgment included an injunction requiring RMCA to receive Tribe approval prior to any future development or use of the Land, as well as to provide the Tribe with access to the Land to assess contamination. On appeal, the Rincon Appellate Court reversed and remanded the injunction on the grounds that it was overbroad. The Tribal Court subsequently entered an Amended Judgment modifying the scope of the injunction, which was not appealed within the tribal court system.

On April 22, 2020, RMCA filed a motion to reopen case in federal court on the basis that it had exhausted its tribal remedies. The district court granted the motion, and RMCA subsequently filed a motion for summary judgment contending that the Amended Judgment of the Tribal Court should not be recognized or enforced. Following oral argument on the matter, the district court held that RMCA had “not exhausted tribal remedies with respect to the injunctive relief contained in the Amended Judgment because they ha[d] not appealed the injunction to the Rincon Appellate Court.” Accordingly, RMCA’s failure to exhaust tribal remedies with respect to the injunction precluded federal court review of the injunction.

Brown v. Haaland, No. 3:21-cv-00344-MMD-CLB, 2022 WL 1692934 (D. Nev. May 26, 2022). Plaintiffs are ten individuals whose families have resided on the Winnemucca Indian Colony (“Colony”) for many generations. After more than thirty-five years of disputes over Colony leadership, the Rojo Council was recognized as the Colony’s permanent council. In June 2019, the Rojo Council filed trespass actions against the plaintiffs in the Bureau of Indian Affair’s Court of Indian Offenses (“BIA Court”) seeking to evict and remove them from the Colony. Shortly after, the Rojo Council began demolishing homes, and the plaintiffs moved for an emergency mandatory injunction in federal court. This prompted the Colony to request permission to intervene in opposition (“Intervenor”).

After the district court denied the emergency motion, the plaintiffs successfully moved to amend their complaint. Intervenor then filed a countermotion to dismiss, arguing that the plaintiffs “ha[d] not exhausted their tribal court remedies before challenging their evictions in federal court.” The district court rejected this argument, explaining that Intervenor’s arguments related to tribal court exhaustion were predicated on claims in the original complaint. The district court reasoned that “[b]ecause the claims in the [Amended Complaint] arise from different law and challenge different actions, the Court finds that Intervenor’s tribal exhaustion arguments are not responsive to the claims asserted in the [Amended Complaint].”

Cayuga Nation by & through Cayuga Nation Council v. Parker, No. 522-cv-00128 (BKS/ATB), 2022 WL 1813882 (N.D.N.Y. June 2, 2022). The Cayuga Nation (“Nation”) sued numerous parties (“Defendants”) for allegedly conducting an unlawful scheme involving the illegal sale of untaxed and unstamped cigarettes, marijuana, and other merchandise on the reservation. Defendants sold such untaxed goods through a small convenience store (“Pipekeepers”) and aimed to open another Pipekeepers store in Montezuma, New York. Under the Cayuga Nation’s Amended and Restated Business License and Regulation Ordinance (“Ordinance”), business cannot be conducted on Nation land without a business license issued by the Nation. Moreover, licenses may not be issued to businesses that compete with business conducted by the Nation.

On December 2, 2021, the Nation obtained an order from the Cayuga Nation Civil Court (“Tribal Court”) enjoining Pipekeepers from operating and imposing a fine. In February 2022, the Nation filed an amended Tribal Court complaint alleging that Defendants continued to violate the Ordinance. The Tribal Court therefore issued an order temporarily enjoining Defendants from operating Pipekeepers. After Defendants failed to file any opposition, the Tribal Court issued an order permanently enjoining Defendants.

Defendants filed motions to dismiss in the District Court for the Northern District of New York, arguing the court should abstain until all Tribal Court remedies were exhausted. The Nation maintained the position that tribal exhaustion was not applicable because there had been no federal action challenging tribal court jurisdiction and there were no further tribal court proceedings to exhaust. The court rejected this argument, holding there were remedies left to exhaust in the Tribal Court. The court pointed to various circumstances, including the presence of a proceeding in Tribal Court and concern about the Tribal Court’s authority to enforce the injunction as factors favoring application of the tribal exhaustion rule. Accordingly, the district court stayed the action pending exhaustion of Tribal Court proceedings, explaining it would be premature to act until the Tribal Court action was exhausted.

City of Seattle v. Sauk-Suiattle Tribal Ct., No. 2:22-CV-142, 2022 WL 2440076 (W.D. Wash. July 5, 2022). The Sauk-Suiattle Indian Tribe (“Tribe”) filed a complaint against the City of Seattle (“City”) in the Sauk-Suiattle Tribal Court (“Tribal Court”). The Tribe claimed Seattle City Light, which is owned by the City, infringed on the Tribe’s rights by constructing and operating three dams on the Skagit River. These dams blocked the passage of salmon, thereby threatening the Tribe’s livelihood. The dams are not located on Tribal land, but rather upstream.

The City moved to dismiss the action in Tribal Court. Subsequently, the City sought a preliminary injunction in federal court to prevent the Tribal Court from exercising jurisdiction over it. The Tribe then filed a motion to dismiss, arguing the district court should first require the City to exhaust its tribal remedies. In opposition, the City argued that one of the four exceptions to the exhaustion requirement should apply. Specifically, the City argued that tribal court jurisdiction was so plainly lacking that requiring the City to exhaust tribal remedies would serve no purpose other than to delay. While courts have not precisely articulated how plain the issue of tribal court jurisdiction must be before exhaustion can be waived, some courts require that tribal exhaustion only be waived if the assertion of tribal court jurisdiction is frivolous or clearly invalid.

The district court noted that while the powers of an Indian tribe generally do not extend to the activities of nonmembers of the tribe, a “tribe may also retain inherent power to exercise civil authority over the conduct of non-Indians on fee lands within its reservation when that conduct threatens or has some direct effect on the political integrity, economic security, or the health or welfare of the tribe.” To this point, the Tribe argued the City’s upstream activities had a direct impact on the health of the salmon population downstream.

The district court acknowledged that depending on how the facts of the case developed, the argument may be attenuated. But, the court could not definitively find the argument frivolous. In addition, the district court explained that because the lawsuit was based on interpretation of tribal law and Indian treaty rights, the case would benefit from the Tribal Court’s expertise. Accordingly, the district court found the complex legal issues well-suited for review by the Tribal Court. The Defendants’ motion to dismiss was denied and the case stayed until the Tribal Court had a full opportunity to determine its own jurisdiction.

McKinsey & Co., Inc. v. Boyd, No. 22-CV-155-WMC, 2022 WL 1978735 (W.D. Wis. June 6, 2022). McKinsey is a management consulting firm that provided marketing advice to pharmaceutical clients that sold opioids. The Red Cliff Band of Lake Superior Chippewa Indians (“Red Cliff”), a federally recognized tribe in Wisconsin, sued McKinsey in the Red Cliff Tribal Court (“Tribal Court”). Red Cliff sought to hold McKinsey accountable for its consulting work with opioid companies and the resulting devastation to the Red Cliff Reservation caused by the opioid epidemic. McKinsey moved for a preliminary injunction against the tribal action, arguing the Tribal Court lacked jurisdiction given its purported lack of contacts to the Red Cliff Reservation and Wisconsin.

Defendants argued the tribal court exhaustion rule barred McKinsey from raising jurisdictional arguments. While the district court noted the general principle favoring tribal court exhaustion, it recognized that tribal exhaustion is unnecessary when “it is plain that no federal grant provides for governance of nonmembers’ conduct.”^[52] Because the court could find no legal basis for the assertion of tribal court jurisdiction over McKinsey, McKinsey’s likelihood of success on the merits of its claim was a “near certainty.” Accordingly, the district court enjoined Red Cliff from proceeding with its case in Tribal Court.

Clausen v. Eastern Shoshone Tribe Health Care Plan, et al., No. 2:20-cv-00242-NDF (D. Wyo. July 1, 2022). The plaintiff, Clausen, a non-Indian, was a registered nurse and worked as an employee of the Eastern ShoShone Tribe and Eastern Shoshone Tribe Health Care Plan (collectively, the “Tribe”) at the Morning Star Care Center (“Morning Star”)—a nursing home licensed by the State of Wyoming and operated by the Tribe. During her employment, Clausen experienced a series of ailments, and the resulting medical bills were submitted for payment under the tribal health care plan, but ultimately not paid. Clausen filed suit in Wind River Tribal Court against Defendants for failure to provide coverage under the tribal health care plan.

The action in the Tribal Court was stayed by stipulation of the parties, and ultimately was voluntarily dismissed without prejudice. Clausen then filed suit in district court seeking payment of benefits, a declaratory judgment that the tribal health care plan is not a governmental plan as defined in 29 U.S.C. § 1002(32), and damages for breach of fiduciary duties. The Tribe filed a motion to dismiss, arguing, among other things, that the action must be dismissed because Clausen failed to exhaust tribal court remedies. Clausen argued that she was not required to exhaust tribal court remedies given the preemptive nature of ERISA, which she claimed expresses a clear preference for a federal forum.

The district court explained that simply because Clausen alleged that ERISA applies to the tribal health care plan, does not mean that the sovereign immunity issue is somehow less important to tribal self-government and self-determination, or that a tribal court should for some reason lack the opportunity to first evaluate the factual and legal bases for resolution of this issue. In addition, the Tribal Court is particularly well suited to undertake the fact-specific analysis of the tribal health care plan at issue. For these reasons, the district court granted the Tribe’s motion to dismiss.

§ 1.3.3. Tribal Sovereignty & Sovereign Immunity

An axiom in Indian law is that Indian tribes are considered domestic sovereigns.^[53] Like other sovereigns, tribes enjoy sovereign immunity.^[54] 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.^[55] The U.S. Supreme Court, in a 2008 decision, pronounced that tribal sovereign immunity “is of a unique limited character.”^[56] 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.”^[57]

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.”^[58]

Tribal immunity generally shields tribes from suit for damages and requests for injunctive relief,^[59] whether in tribal, state, or federal court.^[60] Sovereign immunity has been held to bar claims against the tribe even when the tribe is acting in bad faith.^[61]

Tribes enjoy the benefit of a “strong presumption” against a waiver of their sovereign immunity.^[62] Moreover, federal courts have made clear that simply participating in litigation does not waive the tribe’s sovereign immunity.^[63] Any waiver of tribal sovereign immunity “cannot be implied but must be unequivocally expressed.”^[64]

Exactly what contract language constitutes a clear tribal immunity waiver is somewhat unclear.^[65] The Supreme Court in C & L Enterprises, Inc. v. Citizen Band Potawatomi Indian Tribe of Oklahoma^[66] ruled that the inclusion of an arbitration clause in a standard-form contract constitutes “clear” manifestation of intent to waive sovereign immunity.^[67] 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.^[68] 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.^[69]

Finally, waivers of immunity must come from a tribe’s governing body and not from “unapproved acts of tribal officials.”^[70] 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.^[71]

**Immunity may be asserted by tribal corporations, as well as tribal governments. Some recent sovereign immunity cases dealing with tribal corporations are collected and discussed in § 1.3.4.

Treasure v. United States, No. CV-20-75-GF-BMM, 2021 WL 4820255 (D. Mont. Oct. 15, 2021). Plaintiffs’ land was destroyed and damaged when a fire spread from the nearby Fort Peck Indian Reservation (FPIR) onto their property. The Assiniboine and Sioux Tribes (“Tribes”) established and cultivated buffalo entirely on land located within the FPIR. The Tribes supplemented the buffalo’s food source through a scheme that involved a crop sharing arrangement with Defendants Dale and Doug Grandchamp. On August 31, 2018, while Defendants and a third crop-sharer were swathing fields for hay, a fire broke out. The fire ignited in Roosevelt County, which had a burn ban in effect due to the high risk of wildland fires.

Authorities, including the Bureau of Indian Affairs (BIA) Fire Services, responded to the blaze, reassuring the concerned Plaintiffs at a later point in time that the blaze was either extinguished or under control. However, on September 1, 2018, the fire spread to Plaintiffs’ land and consumed 3,100 acres, destroying another 700 acres from collateral fire impacts. Plaintiffs filed suit in United States District Court for the District of Montana regarding the damaged or lost property against the BIA, Doug and Dale Grandchamp, and several individuals suspected of involvement in the fire (Defendants). Defendants moved to dismiss for lack of subject matter jurisdiction based on the principle of tribal sovereign immunity. Defendants argued that tribal sovereign immunity shielded both the Tribes and Grandchamp, in his capacity as a tribal employee. Though Plaintiffs agreed that tribal sovereign immunity would shield the Tribes in the absence of a waiver, they argued the Tribes waived their immunity. Plaintiffs asserted that tribal sovereign immunity did not apply to Grandchamp because he was sued in an individual capacity. The court bifurcated its analysis, discussing separately the application of tribal sovereign immunity to the Tribes and to Grandchamp.

The Tribes argued that tribal sovereign immunity shielded them from suit in federal court absent a waiver or abrogation, “neither of which existed in the case.” However, Plaintiffs argued that the Tribes waived tribal sovereign immunity “by virtue of their relationship with the BIA” while they were fighting the fire. The Court cited Alvarado v. Table Mountain Rancheria^[72] for the premise that Indian tribes have sovereign immunity from lawsuits in state and federal court unless immunity is waived by the tribe or abrogated by Congress. The Court also cited Fletcher v. United States^[73] for the principle that a waiver cannot be implied, “but rather must be unequivocally expressed.”

The Tribes argued that they did not waive their tribal sovereign immunity, and that the Federal Torts Claims Act (FTCA), upon which Plaintiffs pursued their claims, did not abrogate their immunity. Plaintiffs requested more time for discovery, but the district court reminded Plaintiffs that (1) “the burden for the party seeking jurisdictional discovery remains particularly high where the party seeks to disprove the applicability of an immunity-derived bar to suit,” and (2) “immunity serves to shield a defendant from the burdens of defending the suit, including the burdens of discovery.”^[74] The district court agreed with Defendants that no evidence existed that the Tribes waived tribal sovereign immunity, and Plaintiffs failed to explain how additional discovery time would have uncovered applicable evidence. In support, the district court reminded Plaintiffs that courts strongly presume that tribal sovereign immunity has not been waived.

Although Plaintiffs argued the Tribes waived tribal sovereign immunity by operating as an instrument of the BIA, the FTCA only applies when “non-government defendants are acting as either an instrumentality or agency of the United States.”^[75] The Federal Government must “supervise day-to-day operations of an instrumentality in order for the FTCA to apply.”^[76] No evidence existed to show that the Tribes were involved in the daily operations supervised by the BIA. Therefore, the district court held the Tribes were not an instrumentality of the BIA and the FTCA had not waived tribal sovereign immunity. Additionally, the court ruled the Tribes were entitled to tribal sovereign immunity and thus immune from suit under the FTCA and related claims. The claims against the Tribes were dismissed pursuant to Rule 12(b)(1).

Next, the district court turned to Doug Grandchamp. As for Dale Grandchamp, he failed to appear, plead, or otherwise defend himself, so default was entered against him on July 9, 2021.

Defendants asserted that Doug Grandchamp was acting in an official capacity during the events alleged in the Complaint. Plaintiffs countered that even if that was true, they sued him in his individual capacity. The Court stated that tribal sovereign immunity does not bar individual capacity suits against tribal employees when the Plaintiffs seek damages from the individual personally. The exception applies even if the plaintiff’s claims involve actions that employees allegedly took in their official capacities and within their employment authority. This exception relies on a “remedy-focused” analysis to determine if tribal employees should have tribal sovereign immunity when sued in their induvial capacity. Sovereign immunity shields a tribal employee when recovery against the individual, in reality, would run against the tribe. Plaintiffs may not circumvent tribal sovereign immunity by identifying individual defendants when the tribe remains the real intended party of interest.

Though Plaintiffs claimed that they sued Grandchamp in an individual capacity, he was never identified individually; all allegations lumped him in with the Tribes. The Court stated that a court assumes that an employee has been sued in their official capacity where plaintiffs articulate only generalized allegations that fail to differentiate the alleged conduct of the individual defendants from a tribe. The Court agreed that Plaintiffs failed to distinguish Grandchamp in an individual capacity and thus sued him in his official capacity. Therefore, Grandchamp was entitled to tribal sovereign immunity, and the complaints against him were dismissed under Rule 12(b)(1).

Acres Bonusing, Inc v. Marston, 17 F.4th 901 (9th Cir. 2021). Blue Lake Rancheria, a federally-recognized Tribal Nation, sued Acres Bonusing, Inc. (ABI) and James Acres, ABI’s owner, in Blue Lake Tribal Court, but lost. Unsatisfied with the Tribal Court win, ABI sued in federal court, and included the tribal court judge, the judge’s law clerks, the clerk of the Tribal Court, tribal officials, and outside law firms and lawyers that represented the Tribe. However, ABI did not sue the Blue Lake Tribe. The district court concluded that tribal sovereign immunity shielded Defendants from suit because they were acting within the scope of their tribal authority, i.e., within the scope of their representation of Blue Lake Casino. The district court held that tribal sovereign immunity applied because adjudicating this dispute would require the court to interfere with the tribe’s internal governance. The main question on appeal was whether tribal sovereign immunity did in fact shield Defendants from suit. The Court held for the following reasons that the district court erred in that respect.

Reversing in part, the Ninth Circuit followed the framework laid out in Lewis v. Clarke^[77] and held tribal sovereign immunity did not apply because ABI sought money damages from Defendants in their individual capacities, and the Tribe therefore was not the real party in interest. The U.S. Supreme Court held in Lewis that “the protection offered by tribal sovereign immunity is no broader than the protection offered by state and federal sovereign immunity.”^[78] In situations where a suit is brought against a governmental official but might actually be brought against a sovereign entity, the courts look to whether the sovereign is the real party in interest to determine whether sovereign immunity bars the suit. Tribal sovereign immunity does not apply where the judgment will not operate against the Tribe. The Court relied on the Lewis framework, with support from additional on point cases in the Ninth Circuit, to conclude that tribal sovereign immunity did not bar ABI’s suit against Defendants. The Ninth Circuit reasoned that Plaintiffs sought money damages against Defendants in an induvial capacity, and any relief ordered by the district court would not require Blue Lake to do or pay anything. Thus, the Blue Lake Tribe is not the real party in interest and tribal sovereign immunity does not apply to bar the suit against applicable Defendants. In addition, the Ninth Circuit rejected the argument that Lewis and other case law were distinguishable in this case because the alleged tortuous conduct occurred in the Tribal Court, which is part of the Tribe’s inherently sovereign authority. The Court of Appeals reasoned that the district court misapplied several cases that did not comport with Lewis and other prior cases.

The Ninth Circuit concluded, among other matters, that tribal sovereign immunity did not bar the suit and the case was remanded back to the district court for further proceedings.

Grondal v. United States, 37 F.4th 610 (9th Cir. 2022). In the culmination of a series of appeals regarding a business lease which Defendant-Appellant Wapato Heritage, LLC once held on waterfront land held in trust for the Colville Indian Reservation and certain allottees, the Ninth Circuit Court of Appeals affirmed the district court’s decision (1) dismissing Wapato Heritage’s cross claims against the Confederated Tribes of the Colville Reservation (the Tribes) and the Bureau of Indian Affairs (BIA). The Court also affirmed the lower court’s decision to deny Wapato Heritage’s motion to intervene in a trespass damages trial between the BIA and other parties.

Regarding a specific piece of land on Lake Chelan, Washington, Wapato Heritage accused the Tribes and the BIA, the beneficial owners of the land, of misconduct related to the land’s lease. The Ninth Circuit Court of Appeals already determined Wapato Heritage’s business lease ended in 2009, and “the land at issue was still Indian land held in trust by the United States.” The lower court dismissed Wapato’s crossclaims against the Tribes and the BIA, in part, because of tribal sovereign immunity.

The Court analyzed five lower court holdings, focusing first on the tribal sovereign immunity issue. Wapato Heritage claimed that the Tribes waived tribal sovereign immunity by generally participating in this case. The Ninth Circuit rejected the argument, reasoning that an instance where participation in litigation will constitute waiver of tribal sovereign immunity must be viewed as a very limited exception to the rule that upholds tribal sovereign immunity. The Court of Appeals stated that a tribe’s participation in litigation does not constitute consent to counterclaims asserted by defendants in those actions. Nor does a tribe’s invocation of tribal sovereign immunity in a motion to dismiss for lack of jurisdiction waive that very defense to the relevant claims. Thus, the Tribes retained their tribal sovereign immunity to the crossclaims, and the lower court did not need to rule on the claims’ merits. The Ninth Circuit also held (1) the district court lacked subject matter jurisdiction over lessee’s claims against BIA; (2) lessee was not entitled to writ of mandamus compelling BIA to recoup overpayments; and (3) lessee was not entitled to intervene as of right in BIA trespass damages trial against members.

Sipp v. Buffalo Thunder, Inc., 505 P.3d 897 (N.M. App. 2021), cert. granted (Feb. 8, 2022) (No. S-1-SC-39169). Jeremiah Sipp, an employee of a casino’s lighting vendor, Dial Electric, and Sipp’s wife sued a casino owned by the Pueblo Tribe in state district court to recover damages for injuries allegedly sustained by hitting his head on one of the casino’s garage doors. Sipp hit his head and was knocked out while acting in his capacity as an employee delivering lights to the casino. The District Court of Santa Fe County granted the casino’s motion to dismiss for lack of subject matter jurisdiction. The state district court held that Plaintiffs’ allegations did not fall within the limited immunity waiver contained in Section 8(A) of the Pueblo Tribe’s Tribal-State Class III Gaming Compact. Plaintiffs appealed.

On appeal, Plaintiffs argued that the state district court erred in granting Defendants’ motion to dismiss because Section 8(A) of the Compact expressly waives sovereign immunity and provides for state court jurisdiction over Plaintiffs’ claims. In contrast, Defendants contended that Section 8(A) does not permit the district court to exercise jurisdiction in this case for two reasons. First, the termination clause at the end of Section 8(A) was triggered by two federal court decisions, Pueblo of Santa Ana v. Nash, 972 F. Supp. 2d 1254 (D.N.M. 2013), and Navajo Nation v. Dalley, 896 F.3d 1196 (10th Cir. 2018), such that Section 8(A) no longer provides for state court jurisdiction. Second, Sipp does not qualify as a visitor to a gaming facility under Section 8(A) because (a) he had a business purpose for visiting Buffalo Thunder and not a gaming purpose, and (b) he was not injured in a “gaming facility.”

The Court of Appeals of New Mexico held that the termination clause had not been triggered and applied New Mexico case law interpreting Section 8(A) to find that Plaintiffs’ complaint sufficiently pleaded claims that fall within the Compact’s waiver of sovereign immunity for visitors to a gaming facility. The key question regarding tribal sovereign immunity being whether the employee sufficiently alleged claims that fall within the Compact’s immunity-waiver for visitors to a gaming facility. Defendants argued that Sipp’s visit to Buffalo Thunder was for business, and that the immunity-waiver only applied to casino patrons and not persons on the premises for other purposes. Also, Defendants asserted that the waiver was inapplicable because Sipp was not injured in a gaming facility. The Court of Appeals concluded that Sipp’s status as a visitor was sufficiently pleaded.

The Court of Appeals also rejected Defendants’ argument that cited the policy rationale that businesses like Dial Electric can negotiate the terms under which they enter the gaming facility and suggest that employees of the business should be treated in the same manner as the business itself for purposes of the waiver of tribal sovereign immunity. The Court of Appeals agreed that a person capable of suffering a physical injury is simply not analogous to that of a business entity for purposes of the waiver. The court also concluded that Plaintiffs’ amended complaint sufficiently alleged that he was on the premises with the permission of Defendants, and that his status as a visitor should have withheld the motion for dismissal.

The Court of Appeals also determined that Defendants failed to provide any authority for the interpretation that there is no waiver of sovereign immunity for injuries that occur outside of the gaming facility, and both the plain language of the Compact and New Mexico precedent are to the contrary. For these reasons, and several other unrelated to sovereign immunity, the Court of Appeals held that Plaintiffs plausibly alleged that Sipp was a visitor to the facility for purposes of the limited waiver of sovereign immunity in tribal-state gaming compact. The state district court’s dismissal of Plaintiffs’ lawsuit was reversed and remanded for further proceedings consistent with the opinion.

In re Coughlin, 33 F.4th 600 (1st Cir. 2022). A Chapter 13 debtor, Coughlin, filed a motion to recover for alleged violations of an automatic stay during his bankruptcy proceedings, and the creditors, an Indian Tribe, moved to dismiss the order based on the principle of tribal sovereign immunity. The United State Bankruptcy Court for the District of Massachusetts granted the motion, Coughlin appealed, and the First Circuit Court of Appeals permitted the direct appeal. The First Circuit ultimately held that the Bankruptcy Code unequivocally abrogates tribal sovereign immunity, even though it never expressly mentions Indian tribes.

In this case, Coughlin took out a loan from Lendgreen, a subsidiary of the Niiwan Tribe. Soon after, Coughlin filed for bankruptcy and per the Bankruptcy Code (BC), an automatic stay was issued enjoining debt-collection efforts outside the umbrella of the bankruptcy case. However, Lendgreen allegedly continued to contact Coughlin via phone and email seeking repayment of the loan despite reminders of the automatic stay prohibiting such conduct. At a later point, Coughlin attempted suicide. He claimed the decision was in part driven by the belief that his mental and financial agony would never end, and much of that agony was due to Lendgreen’s regular and incessant telephone calls, emails, and voicemails. To stop the alleged harassment, Coughlin brought an action to enforce the automatic stay and sought an order prohibiting Lendgreen from further attempts to recover their money, along with damages, attorney’s fees, and expenses. Lendgreen, wholly owned by an Indian Tribe successfully asserted tribal sovereign immunity by the lower court in those proceedings.

The First Circuit ruled that Section 106(a) of the Bankruptcy Code abrogated sovereign immunity for Indian Tribes. The Court believed that Native American tribes are not exempt from federal law barring suits against debtors once they file for bankruptcy, holding the Bankruptcy Code unequivocally strips tribes of their [tribal sovereign] immunity. The Court provided that Section 106(a) states that sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to dozens of provisions in the Bankruptcy Code, including Section 362. A “governmental unit” is defined in Section 101(27) to mean:

United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States, (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.^[79]

The question then shifted to whether “domestic government” included Indian tribes. The Court concluded that there is no real disagreement that a tribe is a government, and it is also clear that tribes are domestic, rather than foreign, thus, a tribe is a domestic government and therefore a government unit. The First Circuit took note that Section 106 was amended in the late 1990s because the prior version was ambiguous regarding the abrogation of tribal sovereign immunity. The Court explained that when Congress enacted Section 101(27) and 106, it understood tribes to be domestic governments, and when it abrogated the sovereign immunity of domestic governments in § 106, it unmistakably abrogated the sovereign immunity of tribes. The First Circuit rejected the argument that the BC does not abrogate tribal sovereign immunity because it never uses the word “tribe,” and because the Supreme Court previously ruled that “magic words” are not required to waive immunity. Finally, the Court rejected the Tribe’s argument that the legislative history led to ambiguity, because legislative history cannot introduce ambiguity into an unambiguous statute. The First Court reversed the lower court’s decision dismissing Coughlin’s motion to enforce the automatic stay and remanded the case for further proceedings.

Unite Here Loc. 30 v. Sycuan Band of the Kumeyaay Nation, 35 F.4th 695 (9th Cir. 2022). A labor union brought an action against Sycuan Band of the Kumeyaay Nation, a federally-recognized Indian Tribe, alleging the tribe violated the labor provisions of a contract between the two parties with respect to operation of a casino on Tribe’s reservation, and seeking to compel arbitration of that dispute pursuant to an arbitration clause contained in the contract. The Tribe counterclaimed and the lower court granted the labor union’s motion for judgment to compel arbitration and dismissed the Tribe’s counterclaim for declaratory relief. The Tribe appealed, and during those proceedings the issue of tribal sovereign immunity arose.

The Tribe entered a compact with the State of California that included the requirement that the Tribe adopt and maintain a Tribal Labor Relations Ordinance (TLRO). Section 13 of the TLRO “provides for arbitration as the dispute resolution procedure for all issues arising under the TLRO,” and section 13(e) required the Tribe to waive its tribal sovereign immunity “against suits brought in state or federal court seeking to compel arbitration.” The Tribe contended that they did not waive tribal sovereign immunity. The Tribe argued that tribal sovereign immunity cannot be implied but must be unequivocally expressed. The Tribe admitted to waiving tribal sovereign immunity under the TLRO but denied waving it under the National Labor Relation Act (NLRA) because such a waiver was not clear and unequivocal. Essentially, the Tribe asserted that the NLRA preemption is a threshold issue that the district court should consider before sending the underlying claims to arbitration because if the NLRA preempts the TLRO, then the waiver of tribal sovereign immunity may also be preempted and arbitrating sovereign immunity is contrary to the principles of sovereign immunity. The Court rejected that argument, concluding instead that the Tribe expressly waived tribal sovereign immunity in section 13(e) of the TLRO, and when a tribe agrees to judicial enforcement of an arbitration agreement it waives its immunity concerning that agreement. The Court commented that the Tribe cited no law in support of its argument that the arbitration agreement must expressly list all issues to which the Tribe waives sovereign immunity. Thus, there was no tribal sovereign immunity to arbitration because a party is only obligated to arbitrate when that party agreed to arbitrate, as the Tribe did.

Seneca v. Great Lakes Inter-Tribal Council, Inc., No. 21-CV-304-WMC, 2022 WL 1618758 (W.D. Wis. May 23, 2022). This case arose after Plaintiff, Dean Seneca, claimed that Defendant, Great Lake Inter-Tribal Council, Inc. (GLITC) fired him as Director of Epidemiology because of his race, color, national origin, age, and sex. Plaintiff also alleged Defendant retaliated against him for engaging in protected activity, in violation of Title VII of the Civil Rights Act of 1964 (Title VII), the Americans with Disabilities Act of 1990 (“ADA”), the Age Discrimination in Employment Act of 1967 (ADEA), and the Genetic Information Nondiscrimination Act of 2008 (GINA). The lawsuit was Plaintiff’s third action challenging his termination. He filed two earlier cases in state court where GLITC asserted, as they did here, that the action should be dismissed based on tribal sovereign immunity. The district court agreed that tribal sovereign immunity as it was applied in state court applied in federal court too. Accordingly, Defendant’s motion to dismiss was granted.

The district court stated that federally-recognized Indian tribes are immune from suit in both state and federal courts unless Congress abrogates a tribe’s sovereign immunity, or the tribe waives its right to invoke sovereign immunity. More importantly, because the GLITC is an arm of the Great Lake Tribe, business entities owned and operated as arms of a federally-recognized Indian tribe may assert the same immunity as the tribe itself. The district court concluded that because of GLITC’s composition, the fact that it was operated solely by a recognized tribe, and that its purpose is to support its member tribes through service and assistance, it was entitled to tribal sovereign immunity as an arm of the Great Lakes Tribe. The district court granted Defendant’s motion to dismiss.

§ 1.3.4. 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]

** Some cases dealing with Tribal Corporations are discussed in § 1.3.3 because they deal with whether a Tribal Corporation may assert their tribe’s sovereign immunity.

A+ Gov’t Sols., LLC v. Comptroller of Md., 272 A.3d 882 (Md. Ct. Spec. App. 2022). The Oklahoma Indian Welfare Act (“OIWA”), 25 U.S.C. §§ 5201–10, is a parallel provision to section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. §§ 5101–44. Chickasaw Nation Industries, Inc. (“CNI”) was a federally chartered corporation created and incorporated in 1996 under the OIWA. CNI owned CNI Government, LLC (“CNI Government”), which wholly owned CNI Subsidiaries, a collection of six limited liability companies—the appellants in this case. CNI Subsidiaries derived all, or substantially all, of their income from the performance of service contracts with the federal government.

In 2014, after concluding that CNI Subsidiaries were required to pay pass-through entity income tax (“PTE income tax”), the Comptroller of the Treasury issued notices of tax assessment for tax year 2012 against each of the CNI Subsidiaries. CNI Subsidiaries challenged these tax assessments, but two lower courts affirmed the Comptroller’s assessment.

The Court in this case, as relevant here, considered whether the Tax Court erred in assessing PTE income tax against CNI Subsidiaries even though CNI Government is owned by CNI, a federally chartered tribal corporation. The Court explained that PTE income tax is not imposed on a pass-through entity like CNI Subsidiaries and CNI Government. Rather, it is treated as a tax imposed on the nonresident owner of the pass-through entity, here, CNI. As such, central to determining whether the Comptroller could collect PTE income tax from CNI Subsidiaries turned on whether CNI’s income was taxable under Maryland law.

The Court held that the Tax Court erred in concluding that CNI Subsidiaries was subject to PTE income tax. The court explained that Section 17 corporations like CNI “are not recognized as separate entities for federal tax purposes,” and the corporations therefore receive the same federal tax treatment as the tribes that own them.^[91] Because Native American tribes are not subject to federal income tax, neither are federally chartered tribal corporations like CNI. Given CNI’s income was not taxable under federal law, and Maryland had elected to rely on the federal calculation of taxable income, the Court held that none of CNI’s income was taxable under Maryland law—and thus, it was error to require CNI subsidiaries to pay PTE income tax.

Cully Corp. v. United States, 160 Fed. Cl. 360 (Fed. Cl. 2022). In 2005, the defendant, the United States acting through the Air Force, purportedly transferred by donation three buildings to the plaintiff, Cully Corporation (“Cully”), an Alaska Native village corporation (“ANC”). Several years later, the Air Force attempted to reclaim the property by arguing that the buildings were never effectively transferred to Cully because the transaction violated federal regulations. An Alaskan state court found that Cully did not hold a present possessory interest in the buildings, a finding binding this United States Court of Federal Claims. Thus, the following claims remained: Cully sued the United States, asserting a Fifth Amendment takings claim and a quantum meruit claim. In this Court, Cully moved for summary judgment on its takings claim and the United States cross-moved for summary judgment on both of Cully’s claims.

According to the Code of Federal Regulations (“C.F.R.”) § 102-75.990, federal agencies may “[d]onate to public bodies any Government-owned real property (land and/or improvements and related personal property), or interests therein.”^[92] Thus, for the takings claim, the issue was whether Cully was a “public body for purposes of the Federal Regulations governing the transfer or donation of real property” such that the building transfer was valid—to the extent a revisionary interest was transferred.^[93]

A “public body” as it relates to the transfer of real property is “any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, or any political subdivision, agency, or instrumentality of the foregoing.”^[94] Cully, as an ANC, was distinct from Indian tribes throughout the rest of the United States; ANCs operate as corporations in form but appear as local governments on their face. For this reason, the Court determined that Cully, as an ANC, qualified as a “political subdivision” for purposes of 41 C.F.R. § 102-71.20, and thus was a public body as contemplated under 41 C.F.R. § 102-75.990.

The Court granted in part Cully’s motion for summary judgment on the takings claim, concluding that Cully held a reversionary property interest in the buildings which was temporarily taken by the United States, and reserved the issue of whether the taking was compensable for trial. The Court, however, denied summary judgment on the quantum meruit claim, reasoning that Cully’s recoverability in quantum meruit was “limited to the extent Cully believed it was performing remediation to receive a possessory interest and what interest the parties believed were being transferred,” such questions of fact further necessitating trial on these issues.^[95]

Evans Energy Partners, LLC v. Seminole Tribe of Fla., Inc., No. 21-13493, 2022 WL 2784604 (11th Cir. July 15, 2022). This case concerned whether the agreement between Seminole Tribe of Florida (the “Tribe”) and Evans Energy Partners (“Evans”) contained a clear waiver of tribal immunity. The Eleventh Circuit held that the agreement did not contain a waiver of the Tribe’s sovereign immunity.

The agreement included two relevant provisions: a limited arbitration clause and a waiver of tribal immunity. The arbitration clause explained that, though disputes arising out of the agreement would normally be settled in the Tribe’s courts, Evans retained the right “to initiate a binding arbitration proceeding . . . for the sole and exclusive purpose of terminating the Management Agreement and compelling the payment of the Termination Fee . . . .” But this right did not extend to a proceeding against the Tribe, as the parties agreed that “in no event shall the Seminole Tribe of Florida, Inc., or any of its other affiliated entities be named a party in any arbitration . . . .” Instead, Evans’s rights were “restricted to compelling Seminole Energy to participate in an arbitration proceeding for the express purpose set forth herein.” Seminole Energy is a third entity that is mentioned several times throughout the agreement, but whose identity is never clearly defined. The agreement also included a clause waiving tribal immunity. That clause stated that “[T]he Company through its parent company the Seminole Tribe of Florida, Inc., agrees to a limited waiver of sovereign immunity in order to allow Evans Energy” to exercise its rights under the arbitration clause.

After the agreement was terminated, the Tribe filed an action in tribal court against Evans, which resulted in a default judgment of $2.5 million. Before the final judgment was issued in the tribal court, Evans served the Tribe with a demand for arbitration for breach of contract. The arbitration panel found that they lacked jurisdiction to decide the gateway question of who decides the arbitrability of the dispute. Evans then sued in federal court seeking to enforce the agreement’s arbitration clause under the Federal Arbitration Act. The district court held that the agreement did not clearly waive the Tribe’s immunity and dismissed the complaint for lack of jurisdiction.

The Eleventh Circuit stated that the issue of tribal immunity depends on whether the agreement clearly waived the Tribe’s immunity from suit. Although a tribe may waive its immunity by contract, such waivers must be clear to be enforceable. Here, the agreement did not expressly waive sovereign immunity. Although the agreement typically refers to the Tribe as “the Company” and the purported waiver expressly states that “the Company” waives its sovereign immunity, the Eleventh Circuit could not read “the Company” as “the Tribe” in the waiver without creating an absurdity. If “the Company” was read as “the Tribe” in the waiver clause, the new waiver and arbitration provision would read: “[The Seminole Tribe of Florida, Inc.], through its parent company the Seminole Tribe of Florida, Inc., agrees to a limited waiver of sovereign immunity in order to allow Evans Energy to initiate a binding arbitration proceeding . . . for the sole and exclusive purpose of terminating the Management Agreement and compelling the payment of the Termination Fee . . . .” Because the Tribe cannot be its own parent company, Evans’s proposed construction is facially absurd. Instead, in the context of the waiver provision, “the Company” is best read to refer to Seminole Energy. 

Regardless, this ambiguity prevents the waiver language from containing the requisite clarity that is needed for the Tribe to waive its immunity.

§ 1.4. The Federal Sovereign

§ 1.4.1. Indian Country & Land Into Trust

The IRA authorizes the Secretary of the Interior to take land into trust for the benefit of an Indian tribe’s reservation.^[96] 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.^[97] 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.^[98] 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, 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.^[99] 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.^[100] 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.^[101]

In response to the Carcieri decision, in 2014, the Interior Department issued a Memorandum that provided guidance on the meaning of “under federal jurisdiction.”^[102] 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.^[103] The second prong examines whether this jurisdictional status remained intact in 1934.^[104] Satisfying either prong will suffice to establish that the tribe was “under federal jurisdiction.” In a recent decision, Confederated Tribes of Grand Ronde Community of Oregon v. Jewell, the D.C. Circuit Court of Appeals upheld Interior’s application of the two-part test outlined in M-37029.^[105] 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.^[106] 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^[107] 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)^[108] 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.^[109] 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.^[110]

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.^[111] 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.^[112] If a BIA official issues the decision, however, the decision is subject to administrative exhaustion requirements^[113] before it becomes a “final agency action.”^[114] In this instance, parties must file an appeal of the BIA official’s decision within 30 days of its issue.^[115] If no appeal is filed within the 30-day administrative appeal period, the BIA official’s decision becomes a “final agency action.” In October 2017, the Trump Administration’s Interior Department announced a consultation regarding a rulemaking that would reverse the “Patchak Patch,” and impose a much newer criteria for off-reservation land-into-trust applications. Assuming that rulemaking results in new Part 151 regulations, litigation will certainly follow.

A brief discussion of several of the year’s most prominent cases involving the diminishment of an Indian reservation and/or the taking of land into trust follow.^[116]

No Casino in Plymouth v. Nat’l Indian Gaming Comm’n, No. 2:18-cv-01398-TLN-CKD, 2022 U.S. Dist. LEXIS 87000 (E.D. Cal. May 11, 2022). In 2018, Plaintiffs filed a complaint for declaratory and injunctive relief against the Defendants following the Department of Interior’s (the “DOI”) Record of Decision (the “ROD”), announcing (1) its taking of nearly 230 acres of land in Amador County into trust for the Ione Band of Miwok Indians (the “Tribe”) and (2) approval of the Tribe’s gaming ordinance—wherein the ROD permitted the Tribe to construct a casino complex and conduct gaming once the land was taken into trust.

More specifically, the Plaintiffs challenged: (1) the Tribe’s gaming ordinance; (2) the then-Acting Assistant Secretary of Indian Affairs’ authority to approve the ROD under the Appointment Clause of the U.S. Constitution; (3) the Tribe’s federally recognized status under the Indian Reorganization Act (“IRA”); and (4) the Tribe’s federal recognition under 25 C.F.R. Part 83. Plaintiffs also claimed (5) Defendants violated Plaintiffs’ Equal Protection rights by favoring the Tribe, a race-based group, through approval of the ROD and (6) Defendants’ actions ran afoul of federalism protections. In June 2020, the Defendants filed a motion on the pleadings, which Plaintiffs opposed. And the Tribe successfully moved to intervene in this action.

Relying on Cnty. of Amador v. United States DOI, 872 F.3d 1012 (9th Cir. 2017), the Court granted the Defendants’ motion for judgment on the pleadings as to claims one through four. In Cnty. of Amador, the Ninth Circuit Court confirmed the Tribe’s status as a federally-recognized tribe and its under-federal-jurisdiction status in 1934 under the IRA.^[117] The Ninth Circuit Court further determined that the Tribe was qualified to have land taken into trust under the IRA, the Tribe could conduct gaming operations on the at-issue parcels under the Indian Gaming Regulatory Act (“IGRA”), and the then-Acting Assistant Secretary of Indian Affairs had the authority to take parcels into trust.^[118] As such, the Court found that the Ninth Circuit Court’s prior determinations in Cnty. of Amador disposed of Defendants’ claims one through four.

The Court also granted the Defendants’ motion for judgment on the pleadings as to claims five and six. As to claim five, the Court rejected Plaintiffs’ Equal Protection claim because approval of the ROD did not rest on the racial status of the Tribe but rather consideration of their status as members of a quasi-sovereign tribal entity. As to claim six, the Court rejected Plaintiffs’ argument concerning the Defendants’ alleged violation of federalism protections. The Court relied on Congress’ authority to grant IRA and IGRA benefits to tribes that have been federally recognized.

Berry v. United States, 159 Fed. Cl. 844 (Fed. Cl. 2022). Plaintiff, a landowner in Oklahoma, unsuccessfully brought a Fifth Amendment takings claim related to a gaming facility built by the Cherokee Nation (the “Nation”) on land held in trust by Defendant, the United States. The trust land was located next to Plaintiff’s property and Plaintiff alleged that development the gaming facility caused repeated flooding, erosion, and impoundment of water on her property. Plaintiff also asserted that the Nation removed vegetation and soil and dug a drainage ditch without her permission. Plaintiff alleged this activity constituted a taking pursuant to the Fifth Amendment because the United States, holder of the land in trust, failed to act in halting damage caused by the Nation.

The Court, in dismissing the Plaintiff’s action for failure to state a claim, explained that a taking necessarily involves governmental action. And here, Plaintiff failed to allege any governmental action that caused the alleged injuries in her takings claim. Beyond conclusory assertions of liability, her amended complaint only alleged, without more, that Defendant acquired and held the land in trust, not that Defendant itself developed the land and therefore caused flooding on her property. Rather, it was the Nation who developed and operated the gaming facility on the trust land, not Defendant. To be sure, the Court noted that Plaintiff’s claim still failed even under Plaintiff’s assertion that the government acted, for purposes of a takings claim, by approving the Nation’s application for Defendant to acquire the land in trust and thereafter acquiring the trust land. In other words, development of the gaming facility would not have occurred—and thus no damages to her property would have ensued—if Defendant had not initially approved of the Nation’s application and acquired the land in trust. The Court clarified that what Plaintiff asserted was not direct governmental action effecting a taking but rather agency-decision making that permitted the Nation’s action, which may have given rise to a claim in federal district court under the Administrative Procedure Act but not in the Ninth Circuit as a taking under the Fifth Amendment.

In further support of her takings claim, the Court also rejected Plaintiff’s argument that Defendant owed her an actionable fiduciary duty. The Court explained that the Indian Gaming Regulatory Act does not create an enhanced duty of trust with respect to the land held in trust by Defendant, and, Plaintiff, who was not a beneficiary of the trust land, could not enforce such a duty.

Birdbear v. United States, No. 16-75L, 2022 WL 4295326 (Fed. Cl. Sep. 9, 2022). Plaintiffs, members of the Three Affiliated Tribes of the Fort Berthold Indian Reservation (the “Reservation”), were beneficial owners of allotted land on the Reservation held in trust by Defendant, the United States. Portions of the Plaintiffs’ allotted lands were subject to oil and gas leases the Secretary of Interior (the “Secretary”) approved and managed pursuant to federal statutes and regulations. Plaintiffs claimed that these statutes and regulations imposed fiduciary obligations on the Defendant concerning the approval and management of mineral leases on their allotted lands and that Defendant breached those obligations. Plaintiffs sought an award of compensatory damages for the millions of dollars in losses they allegedly suffered because of those breaches.

Plaintiffs’ complaint contained various counts, and various motions for partial summary judgment were before the Court in this matter. In pertinent part, however, as to counts three and eight, Defendant asserted it was entitled to summary judgment because the Court lacked jurisdiction as to these counts—that is, they did not fall within the waiver of sovereign immunity contained in the Indian Tucker Act (“ITA”), 28 U.S.C. § 1505. The Court explained that to establish the Court’s jurisdiction under the ITA, “a tribal plaintiff must invoke a rights-creating source of substantive law that can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained.”^[119] To determine whether a claim by a tribal plaintiff alleging a breach of trust has met these requirements, the Supreme Court has established a two-prong test.^[120] For prong one, “the plaintiff must persuade the Court that the source of law on which the claim is based imposes ‘specific fiduciary or other duties’ on the government.”^[121] For prong two, “if a statute or regulation imposes a specific fiduciary or other duties on the United States, the Court must determine whether the statute or regulation also ‘can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained.’”^[122]

The Court here found that Plaintiffs’ counts three and eight, as relevant, satisfied the aforementioned prongs. For context, in count three, Plaintiffs claimed the government breached its fiduciary duty “to properly manage, administer and supervise Plaintiffs’ lands to prevent the avoidable loss of oil and gas through drainage.”^[123] The Court concluded “that the government ha[d] a specific fiduciary obligation to protect Plaintiffs against the uncompensated drainage of oil and gas held in trust for them”—satisfying prong one of the test for determining jurisdiction under the ITA.^[124] In count eight, Plaintiffs claimed the Secretary breached its duty “to ensure the timely drilling of oil and gas wells on Plaintiffs’ leased land.”^[125] The Court ultimately concluded “that the United States ha[d] a specific fiduciary obligation to ensure that lessees exhibit reasonable diligence in their development of mineral resources”—also satisfying prong one of the test for determining jurisdiction under the ITA.^[126] Concerning the second prong for both counts, the Court concluded that “the money-mandating nature of the [specific fiduciary] obligations [could] be inferred from the government’s comprehensive control over the development of oil and gas on Plaintiffs’ land”—satisfying the requirement that the these specific fiduciary obligations set out in the at-issue statutes and regulations relied upon by Plaintiffs for its claims could be fairly interpreted as mandating compensation by the Federal government for the damages allegedly sustained by Plaintiffs.

§ 1.4.2. 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.^[127] Federal regulations explain that “[e]ncumber means to attach a claim, lien, charge, right of entry, or liability to real property.”^[128] 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.”^[129]

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.^[130] Leaseholds for Indian lands, which typically run 25 years, also require secretarial approval.^[131] Failure to secure secretarial approval could render the agreement null and void.^[132] Therefore, if the transaction implicates tribal lands, counsel should analyze whether the Secretary must approve the underlying contract or lease.^[133] Regardless of whether Secretary approval is necessary, all parties should be careful as to how they draft agreements which may encumber the land.^[134] 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).^[135] Any “management agreement” for a tribal casino or “contract collateral to such agreement” requires NIGC approval to be valid and enforceable.^[136] 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 BIA and/or a tribal business license to properly do business with a tribe.^[137] 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.^[138]

With much tribal and media fanfare, in 2012, President Obama signed into law the Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.^[139] 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.^[140] 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.^[141] As of November 3, 2022, the BIA lists 79 tribes whose regulations have been approved to exercise the enhanced rights of sovereignty associated with taking control over the leasing of tribal land.^[142]

The following highlights several of the more relevant cases decided in the last year.^[143]

Kiowa Tribe v. United States Dep’t of the Interior, No. CIV-22-425-G, 2022 WL1913436 (W.D. Okla. June 3, 2022). The Kiowa tribe and Comanche Nation (“Plaintiffs”) filed an action on May 25, 2022, raising three claims “to prevent an illegal casino from conducting unlawful gaming within Plaintiff’s reservation:” (1) a declaration under the Administrative Procedure Act (“APA”) that the Tsalote Allotment (“Apache Wye”) is not owned by FSAT;^[144] (2) “a declaration that [Fort Sill Apache Tribe (“FSAT”)] may not conduct gaming on the Tsalote Allotment” because such gaming would violate the Indian Gaming Regulatory Act (“IGRA”);^[145] and (3) a declaration that gaming on the Tsalote Allotment by FSAT will violate the Racketeer Influenced and Corrupt Organization Act (“RICO”).^[146]

Plaintiffs contended that the FSA Defendants’ opening of the Casino would violate IGRA in several ways. IGRA prescribes that a tribe may engage in Class III gaming “on Indian lands of the Indian tribe” only if such activities are “authorized by an ordinance or resolution that” is adopted by a tribe “having jurisdiction over such lands.”^[147] This matter was before this Court on the Motion for Temporary Restraining Order.

At the hearing, the Federal Defendants argued Plaintiffs’ IGRA claim was improperly pled because any claim of an IGRA violation must be raised as a request for judicial review pursuant to the APA. Relatedly, the FSA Defendants argued that IGRA does not give Plaintiffs the right or authority to sue them based upon violation of that statute, emphasizing that Congress in passing the IGRA set out the NIGC as the agency tasked to regulate gaming pursuant to that statutory scheme.

The Court found that Plaintiffs did not present a claim that is reviewable by this Court pursuant to 25 U.S.C. § 2714. Plaintiffs also alleged in passing that FSAT’s Class III gaming operations on the Tsalote Allotment will violate FSAT’s gaming compact with Oklahoma, which recites that the tribe may conduct Class III gaming only on its own Indian lands.

While 25 U.S.C. § 2710(d)(7)(A) does provide a “[cause] of action in favor of tribes” to enjoin Class III gaming “located on Indian lands and conducted in violation of any Tribal-State compact,” Plaintiffs’ nominal argument, unsupported by any discussion of the statutory provision or citation to relevant authority, was insufficient to show a substantial likelihood of success on such a claim at this stage of proceedings. Because Plaintiffs did not satisfy their burden to show that they are substantially likely to succeed on the merits of any of their legal claims, the Court did not discuss the other three elements necessary for a Temporary Restraining Order. The Motion for Temporary Restraining Order filed by Plaintiffs was Denied. Id.

No Casino In Plymouth v. Nat’l Indian Gaming Comm’n, No. 218CV01398TLNCKD, 2022 WL 1489498 (E.D. Cal. May 11, 2022). On May 22, 2018, Plaintiffs filed a Complaint for declaratory and injunctive relief asserting seven causes of action against Defendants, National Indian Gaming Commission (“NIGC”) and others (collectively, “Defendants”). This lawsuit primarily presented a challenge to the Record of Decision (“ROD”) issued by the Department of the Interior’s (“DOI”) then-Acting Assistant Secretary of Indian Affairs, Donald Laverdure (“Laverdure”). The ROD announced the DOI’s taking of 228.04 acres of land in Amador County into trust for the Ione Band of Miwok Indians (“Tribe” or “Band”). It also allowed the Band to construct a casino complex and conduct gaming once the land was taken into trust. Pursuant to IGRA, 25 U.S.C. § 2702(1), NIGC Chairman Jonodev Chaudhuri approved the Tribe’s gaming ordinance on March 6, 2018.

Plaintiffs’ claims challenged various determinations as follows: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to approve the ROD under the Appointment Clause of the U.S. Constitution; (3) the Tribe’s federally-recognized status under the Indian Reorganization Act (“IRA”); (4) the Tribe’s federal recognition under 25 C.F.R. Part 83; (5) Defendants’ violation of Plaintiffs’ Equal Protection rights by favoring the Tribe, a race-based group, through approval of the ROD and gaming ordinance; and (6) Defendants’ violation of federalism protection. Defendants moved for judgment on the pleadings, arguing Plaintiffs cannot challenge the federal agency action because: (1) the Ninth Circuit has affirmed both the Tribe’s status as federally recognized and Laverdure’s authority to issue the 2012 ROD as Acting Assistant Secretary of Indian Affairs; and (2) the Complaint fails to state claims for which relief can be granted.

Defendants argued the Ninth Circuit in County of Amador^[148] issued dispositive rulings on Claims One through Four in the instant matter, including: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to issue the ROD; (3) the Tribe’s federally recognized status. In opposition, Plaintiffs argued the 2018 gaming ordinance was not at issue in County of Amador, and that the court did not conclusively decide Laverdure had authority to take land into trust for the Tribe. Plaintiffs also contended the Tribe lacked Part 83 recognition to be eligible for IRA and IGRA benefits. Plaintiffs argued the Tribe’s inclusion on the administrative list of “Indian Entities” eligible to receive service for the Bureau of Indian Affairs did not mean that the Tribe is federally recognized.

The “law of the circuit doctrine” mandates that a published decision of a Ninth Circuit court constitutes finding authority which must be followed unless and until overruled by a body competent to do so. Thus, the Ninth Circuit’s decision on the Tribe’s federally recognized status and the Tribe’s status in 1934 under the IRA are binding on this Court.^[149] Further, the Ninth Circuit clearly found Laverdure’s actions within his powers.

The Court found County of Amador disposed of Plaintiffs’ Claims One through Four on the following issues: (1) the Tribe’s gaming ordinance; (2) Laverdure’s authority to issue the ROD; and (3) the Tribe’s federally recognized status under the IRA and Part 83. Accordingly, the Court granted Defendants’ motion for judgment on the pleadings on Claims One through Four. Plaintiffs’ remaining claims were Claims Five (equal protection) and Six (federalism protection). Defendants argued Plaintiffs’ equal protection claim fails because provision of benefits to federally recognized tribes on the basis of their status as tribes does not offend equal protection principles. Further, Defendants argued Plaintiffs’ federalism claim, which alleges that the Tribe receives exemptions from state and local law, is inaccurate. Plaintiffs did not respond to these arguments in any meaningful way. Thus, Plaintiffs’ failure to respond to Defendants’ arguments was a concession of those arguments. Accordingly, the Court did not consider the arguments and granted Defendants’ motion for judgment on the pleadings on Claims Five and Six.

W. Flagler Assocs. Ltd. v. DeSantis, No. 4:21-CV-270-AW-MJF, 2021 WL 5768481 (N.D. Fla. Oct. 18, 2021), appeal dismissed sub nom. W. Flagler Assocs., Ltd. v. Governor of Fla., No. 21-14141-AA, 2021 WL 7209340 (11th Cir. Dec. 20, 2021). The Seminole Tribe of Florida (“Tribe”) has offered casino gambling on its tribal lands and recently entered a Compact that allows a new form of sports betting on (or through) the Tribe’s reservation. Parimutuel Operators (the “Plaintiffs”), also in the gaming business, sued Florida’s Governor and the Secretary of Florida’s Department of Business and Professional Regulation (the “State Officials”) seeking a declaration that the Compact’s sports betting provision violates federal law, and seeking an injunction precluding its enforcement. State Officials moved to dismiss for lack of standing, the Tribe moved to intervene, and Plaintiffs moved to expedite, and for summary judgment or a preliminary injunction.

The Plaintiffs alleged that the Compact violated several federal gambling laws, plus the Fourteenth Amendment. They sought a declaratory judgment that the Compact violated the Indian Gaming Regulatory Act, 25 U.S.C. § 2710(d) (permitting certain gambling activities “on Indian lands”); the Wire Act, 18 U.S.C. § 1084(a) (prohibiting certain interstate wire communications related to sports gambling); and the Unlawful Internet Gambling Enforcement Act, 31 U.S.C. § 5362(10) (defining internet betting on tribal lands as “unlawful internet gambling” if it is illegal under applicable state or federal law). They also sought a declaratory judgment that permitting Floridians to engage in online sports betting with the Tribe when not physically present on tribal land, while still prohibiting all other forms of sports betting in the state,^[150] violates Equal Protection.

The Court reviewed whether the Plaintiffs had standing, and held that: (1) Plaintiffs failed to state a claim that their alleged injury-in-in fact of lost business from Compact was traceable to Florida’s governor; (2) Plaintiffs failed to state a claim that their alleged injury-in fact of lost business from Compact was traceable to the Secretary of Florida’s Department of Business and Professional Regulation; (3) a declaration that would be entered against Florida officials and that would declare that Compact violated federal law would not address Plaintiffs’ alleged injury of lost business due to the compact; (4) an injunction precluding Florida’s governor from implementing the Compact would not redress Florida Plaintiffs’ alleged injury of lost business; and (5) an injunction precluding Secretary of Florida’s Department of Business and Professional Regulation from implementing sports-betting statute relevant to Compact would not redress Plaintiffs’ alleged injury of lost business. Accordingly, the Court granted the State Officials motion to dismiss because Plaintiffs lacked standing since the State Officials actions were not fairly traceable to any alleged harm and the requested declaratory and injunctive relief would provide no legal or practical redress for the Plaintiffs’ injuries.

Cal-Pac Rancho Cordova, LLC v. United States Dep’t of the Interior, No. 2:16-CV-02982-TLN-AC, 2021 WL 5826776 (E.D. Cal. Dec. 8, 2021). Cal-Pac Rancho Cordova LLC, Capital Casino, Inc., Lodi Cardroom, Inc., and Rogelio’s Inc.’s (collectively, “Plaintiffs”) filed this action seeking injunctive relief and declaratory relief based on: (1) violation of the Indian Gaming Regulatory Act’s (“IGRA”) jurisdiction requirement; (2) the unconstitutionality of the Indian Reorganization Act (“IRA”); (3) violation of IGRA due to inconsistency of Secretarial Procedures with state law; (4) and erroneous interpretation of IGRA. Plaintiffs are four state-licensed card clubs located within the same area as the proposed casino site.

Plaintiffs argued they would be at a competitive disadvantage if the Tribe opened a Nevada-style casino and operated casino-style games in the area because Plaintiffs are more limited in the gaming they can offer. Plaintiffs made two main arguments: (1) the Secretarial Procedures were issued in violation of IGRA, as the Tribe purportedly never acquired jurisdiction or exercised governmental power over the Yuba Parcel;^[151] and (2) assuming the Tribe acquired jurisdiction and exercised governmental power, IRA violates the Tenth Amendment by reducing the State’s jurisdiction over land within its territory without its agreement.

The Defendants notified the Court that the Ninth Circuit had already made a decision on a similar case, Club One Casino, Inc. v. Bernhardt^[152] (“Club One II”), where it held that “because Congress has plenary authority to regulate Indians affairs, . . . IRA does not offend the Tenth Amendment.” Because Club One II was binding on this Court, the Court did not address the arguments and granted summary judgment to Defendants as to Plaintiffs’ first two arguments.

Plaintiffs raised two alternative arguments. First, the Governor’s concurrence in the Secretary’s two-part determination as to gaming eligibility on the Yuba Parcel was negated by the California legislature’s refusal to ratify the Class III gaming compact. The Court agreed with Defendants that the IGRA does not require the Governor’s concurrence in Secretarial Procedures, nor does it require the Secretary to determine the validity of the Governor’s concurrence in the Secretary’s two-part determination. Second, Plaintiffs argued the Secretarial Procedures were inconsistent with California law requiring a Compact for Class III gaming. However, the Club One I court rejected this exact argument. That court further explained, “The issuance of Secretarial Procedures is the part of the remedial process that gives it teeth. If gaming pursuant to Secretarial Procedures was not contemplated, the purpose of the remedial process—restoring leverage to tribes to sue recalcitrant states and thereby force them into a compact—would be wholly eroded.”^[153] This Court agreed to decline to read the IGRA to have created (or the State of California to have waived immunity as to) an empty remedial process.

Accordingly, the Court held that the Secretary’s issuance of Secretarial Procedures was not arbitrary, capricious, or otherwise not in accordance with law for any of the reasons identified by Plaintiffs. Based on the foregoing reasons, the Court denied Plaintiffs’ motion for summary judgment and granted the Defendants’ motion for summary judgment.

W. Flagler Assocs. v. Haaland, No. 21-CV-2192 (DLF), 2021 WL 5492996 (D.D.C. Nov. 22, 2021). In August 2021, the Secretary of Interior approved a gaming Compact between the State of Florida and the Seminole Tribe of Florida (the “Tribe”). The Compact authorized the Tribe to offer online sports betting throughout the State, including the bettors located off tribal lands. Plaintiffs, West Flagler Associates and Bonita-Fort Myer’s Corporation (collectively, the “West Flagler Plaintiffs”) brought a civil action and argued that the Compact violated the Indian Gaming Regulatory Act, the Unlawful Internal Gambling Enforcement Act, the Wire Act, and the Equal Protection Clause. Accordingly, they asked the Court to “set aside” the Secretary’s approval of the Compact pursuant to the Administrative Procedure Act (“ACA”).

Before the Compact took effect, Florida law prohibited wagering on “any trial or contest of skill, speed[,] power or endurance.”^[154] Although that prohibition contained a narrow exception for horse racing, dog racing, and jai alai, it barred betting on all major sports, including football, baseball, and basketball. The Florida Constitution also limited the conditions in which the State could expand sports betting going forward. Specifically, it provided that the State could only expand such betting through a “citizens’ initiative,” with the caveat that this did not limit the ability of the state or Native American tribes to negotiate gaming compacts under IGRA.

The Compact in this case expanded the Tribe’s ability to host sports betting throughout the State. In relevant part, the Compact defines “sports betting” to mean “wagering on any past or future professional sport or athletic event, competition or contest;” classifies “sports betting” as a “covered game;” authorizes the Tribe “to operate Covered Games on its Indian lands, as defined in [IGRA].” The Compact also provides that all in-state wagers on sporting events “shall be deemed . . . to be exclusively conducted by the Tribe at its Facilities where the sports book(s) . . . are located,” even those that are made “using an electronic device” “by a Patron physically located in the State but not on Indian lands.” In this manner, the Compact authorizes online sports betting throughout the State. Because the State has not entered a similar agreement with any other entity, the Compact grants the Tribe a monopoly over both all online betting and all wagers on major sporting events.

On June 21, 2021, the Secretary of the Interior received a copy of the Compact. Because the Secretary took no action on it within forty-five days, the Compact was “deemed approved” on August 5. The next day, the Secretary explained her no-action decision in a letter to the Tribe. The letter reasoned that IGRA allows the Tribe to offer online sports betting to persons who are not physically located on its tribal lands. To support that conclusion, the letter noted that IGRA allows states and tribes to negotiate the “allocation of criminal and civil jurisdiction,” emphasized that Florida consented to the Compact, and argued that “IGRA should not be an impediment to tribes that seek to modernize their gaming offerings.” At the same time, the letter insisted that Florida residents could not place sports bets while “physically located on another Tribe’s Indian lands.” To do so would violate IGRA’s instruction that gaming is “lawful on Indian lands” only if such gaming is authorized by the “Indian tribe having jurisdiction over such lands.” On August 11, the Secretary published notice of the Compact in the Federal Register. At that point, the Compact took effect and acquired the force of law.

The West Flagler Plaintiffs’ civil action challenged the Secretary’s approval of the Compact. Both entities own brick-and-mortar casinos in Florida. To establish Article III standing, they alleged that the Compact’s allowance for online betting will divert business from their facilities. On the merits, they argued that the Compact’s authorization of online betting violated IGRA, the Unlawful Internet Gambling Enforcement Act (“UIGEA”), the Wire Act, and the Equal Protection Clause. Their leading argument was that the Compact violated IGRA because it authorizes Class III gambling outside of “Indian lands.” The Tribe moved to intervene for the limited purpose of filing a motion to dismiss. The Tribe argues that it may intervene as of right because it has an economic interest in the Compact and because the Secretary will not adequately protect that interest.

On September 27, 2021, other Plaintiffs, Monterra MF, LLC and its co-plaintiffs (collectively, the “Monterra Plaintiffs”) filed a separate challenge to the Secretary’s approval. All but one of these co-plaintiffs lived, worked, or owned property near Florida casinos. The remaining Plaintiff, No Casinos, is a nonprofit organization that opposed the expansion of gambling in Florida. To establish Article III standing, the Monterra Plaintiffs alleged that the expansion of gambling in Florida will increase neighborhood traffic, increase criminal activity, and reduce their property values. On the merits, they joined the West Flagler Plaintiffs in arguing that the Compact’s online gambling rules violated IGRA, UIGEA, and the Wire Act. They also argued that the Compact’s expansion of in-person gambling violates both the Florida Constitution and a separate provision of IGRA, which conditions the lawfulness of Class III gaming on whether the state “permits such gaming for any purpose by any person, organization, or entity.”

The West Flagler Plaintiffs moved for summary judgment on September 21, 2021. The Monterra Plaintiffs followed suit on October 15, 2021. The Secretary then moved to dismiss both cases for lack of standing. The Secretary also argued that the Plaintiffs failed to state a claim under IGRA, that IGRA does not require her to consider questions of state law, and that West Flagler’s constitutional argument fails. The Secretary did not, however, address whether the online gaming contemplated by the Compact occurs on or off “Indian lands.”

The Court found that West Flagler Plaintiffs had adequately established a competitive injury that was both caused by the conduct challenged in this action and redressable by a favorable decision on the merits. On that first point, the Court stated there is a “causal connection” between West Flagler’s Plaintiffs injury and the Secretary’s approval of the gaming Compact, without which the Tribe could not offer online sports betting. Setting aside the Secretary’s approval would prevent the Tribe from offering such betting, at least under the current Compact because that result would fully redress West Flagler’s Plaintiff’s injury, West Flagler has Article III standing. The Court did not address whether the other Plaintiffs in these actions had standing because as a general matter, “the presence of one party with standing is sufficient to satisfy Article III’s case-or controversy requirement.”

The Court found that “equity and good conscience” permitted this action to continue in the Tribe’s absence. The Court stated that because the Tribe moved to intervene solely to move for dismissal, because the Tribe seeks dismissal on the sole ground that it is indispensable and the Tribe is not indispensable, the Tribe’s motion for limited intervention was denied as moot.

On the merits, it is well-settled that IGRA authorizes sports betting only on Indian lands. Altogether, over a dozen provisions in IGRA regulate gaming on “Indian lands,” and none regulate gaming in another location. The Supreme Court has emphasized that “[e]verything—literally everything—in IGRA affords tools . . . to regulate gaming on Indian lands, and nowhere else.”^[155] The instant Compact attempts to authorize sports betting both on and off Indian lands. Accordingly, because the Compact allows patrons to wager throughout Florida, including at locations that are not Indian lands, the Compact violates IGRA’s “Indian lands” requirement. Therefore, the Secretary had an affirmative duty to reject it. The Court granted West Flagler Plaintiffs’ motion for summary judgment as to this claim.

The last issue in this case was the Plaintiffs’ remedy. The issue is governed by § 706 of the APA, which directs courts to “hold unlawful and set aside agency action” that is “not in accordance with law.”^[156] The “agency action” under review is the Secretary’s default approval of the Compact. Vacating the Secretary’s approval was appropriate because it would fully redress the West Flagler Plaintiffs’ injury. For those reasons, the Court concluded that the appropriate remedy was to set aside the Secretary’s default approval of the Compact. The remedy also resolved the Monterra Plaintiffs’ action.

It was the Court’s understanding that the practical effect of this remedy is to reinstate the Tribe’s prior gaming compact, and restore the legal status of Class III gaming in Florida to where it was on August 4, 2021—one day before the Secretary approved the new compact by inaction. Because the more recent Compact is no longer in effect, continuing to offer online sports betting would violate federal law.^[157] The Court clarified that this decision does not foreclose other avenues for authorizing online sports betting in Florida. The State and the Tribe may agree to a new Compact, with the Secretary’s approval, that allows online gaming solely on Indian lands. Alternatively, Florida citizens may authorize such betting across their State through a citizens’ initiative. What the Secretary may not do, however, is approve future Compacts that authorize conduct outside IGRA’s scope.

The West Flagler Plaintiffs’ motion for summary judgment was granted, the Monterra Plaintiffs’ motion for summary judgment was denied as moot, the Tribes’ motions to intervene was denied, and the Secretary’s motions to dismiss was denied. The matter is being appealed to the D.C. Court of Appeals.

Chicken Ranch Rancheria of Me-Wuk Indians v. California, 42 F.4th 1024 (9th Cir. 2022). California (“Defendant”) engaged in negotiations with the Chicken Ranch Rancheria of Me-Wuk Indians, Blue Lake Rancheria, Chemehuevi Indian Tribe, Hopland Band of Pomo Indians, and Robinson Rancheria (collectively, “Plaintiffs”) to enter into a compact.^[158] Under the Indian Gaming Regulatory Act (“IGRA”), topics of negotiation are limited to those directly related to the operation of gaming activities. These protections are in place to prevent states from using their compact approval authority to force regulations on tribes that the states would otherwise be powerless to enact.

During several years of negotiations, California demanded that the Tribes agree to compact provisions relating to family law, environmental regulation, and tort law that were unrelated to the operation of gaming activities and far outside the bounds of permissible negotiation under IGRA.

The Court held that in doing so, California did not act in good faith. To reach this conclusion, the Court held that the list^[159] enumerated in the IGRA is exhaustive. The Court noted the connection between gaming and topic of negotiation must be direct; this is a meaningful limitation on negotiations. None were.

The family support ordinances only tangentially touched gaming as they were applicable to gaming facility employees. The environmental provisions were far afield of the actual operation of gaming activities and the mitigation of organized crime and unfair gaming practices that were at the heart of IGRA’s limited extension of regulatory authority to the states. The tort provisions were similarly indirect and would require tribes to commit to adopting and applying an entire body of state law as tribal law, waive sovereign immunity, and create claims commissions for injuries that are merely “connected with” or “relating to” a casino gaming facility.

Having found that these were outside the IGRA’s permissible topics, the Court then considered whether a state could negotiate well outside the enumerated topics while simultaneously acting in good faith. The Court looked to the plain meaning and structure of the statute to conclude that a state could not. The good faith requirement exists because Congress anticipated that states might abuse their authority over compact negotiations to force tribes to accept burdens on their sovereignty in order to obtain gaming opportunities.

§ 1.4.3. 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.^[160] Moreover, tribal employers may not be subject to certain federal labor and employment laws.^[161]

Tribal employers are ordinarily exempt from antidiscrimination laws. Both Title VII of the Civil Rights Act of 1964^[162] and the Americans with Disabilities Act^[163] expressly exclude Indian tribes,^[164] and state anti-discrimination laws usually do not apply to tribal employers.^[165] In addition, tribal officials are generally immune from suits arising from alleged discriminatory behavior.^[166]

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),^[167] the Employee Retirement Income Security Act (ERISA),^[168] the Fair Labor Standards Act (FLSA),^[169] the National Labor Relations Act (NLRA),^[170] and the Age Discrimination in Employment Act (ADEA),^[171] because doing so would encroach upon well-established principles of tribal sovereignty and tribal self-governance.^[172]

Conversely, the Second, Seventh, and Ninth Circuits have applied OSHA and ERISA to tribes.^[173] Moreover, the Seventh and Ninth Circuits lean toward application of FLSA to tribes.^[174] These circuits reason that, because Indian tribes are not explicitly exempted from these statutes of general applicability, the laws accordingly govern tribal employment activity.^[175] Following this reasoning, the Department of Labor has stated that the FMLA^[176] applies to tribal employers.^[177] However, aggrieved employees may experience difficulty enforcing federal employment rights due to the doctrine of sovereign immunity.^[178] 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.^[179]

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.^[180]

In the last year, 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. A noteworthy case from the last year is discussed below:^[181]

Mashantucket Pequot Tribal Nation v. Davis, MPTC-CV-AA-2019-126, 2021 WL 5013894 (Mash. Pequot Tribal Ct. Oct. 7, 2021). Carrie-Ann Davis (“Ms. Davis”), was employed as a surveillance officer in the Surveillance Department of the Mashantucket Pequot Tribe (the “Tribe”). Ms. Davis was responsible for monitoring security cameras. Ms. Davis began having health problems and was observed asleep at her workstation on three different occasions. After the first two instances she was given a performance improvement notice dated September 5, 2017. This notice constituted a final warning. Ms. Davis provided a written statement regarding these two incidents explaining that her “condition is not falling asleep,” but instead is “due to some medical issue” where she would slur her speech, lose consciousness, and then become coherent again as if nothing had occurred. Ms. Davis noted that she had informed management about her medical issue and that she was seeing two doctors to address her medical issue. Ms. Davis’s medical issue continued and on May 26, 2018, the surveillance shift manager observed her asleep at her workstation in the surveillance monitor room for eight minutes. As a result, Ms. Davis was suspended on June 12, 2018, pending further investigation. On July 2, 2018, the Tribe terminated her employment. The charging document further stated that the Tribe terminated Ms. Davis’s employment because she violated the Tribe’s Standards of Conduct Section IV Subsection 4, which prohibits sleeping on the job. After her termination, Ms. Davis received a correct diagnosis of severe sleep apnea.

Ms. Davis appealed her termination. On March 13, 2019, the Board of Review (the “Board”) issued a decision returning Ms. Davis to work on a final warning with three months’ back pay because Ms. Davis had an “undiagnosed medical condition” at the time of her termination which was a mitigating circumstance that influenced the Board’s decision since she was actively seeking treatment and under doctors’ care. The Tribe appealed the Board’s decision arguing that there was no reasonable basis for the Board to have reversed Ms. Davis’s termination and ordered back pay.

The central issue in this case is the Board’s finding and application of mitigating circumstances. Title 8 of the Employee Review Code (the “Code”) is comprised of five factors to be considered when determining whether the Board’s decision was appropriate. Those factors ask whether: (1) There was a reasonable basis for the Board’s consideration that the employee did or did not violate the policies and/or procedures established by the employer for the position held by the employee; (2) There was a reasonable basis to find that the employer did or did not substantially comply with the policies and/or procedures regarding discipline; (3) The employee was given a description of the offense or conduct that was the basis for the disciplinary action and both parties were afforded a reasonable opportunity to present and refute evidence regarding the offense or conduct and/or evidence of aggravating or mitigating circumstances relating thereto; (4) There was a reasonable basis for the Board’s decision as to whether the form of discipline was or was not appropriate for the offense or conduct; and (5) The Board’s decision is in violation of tribal laws or exceeds the Board’s authority under tribal law.

Focusing on the issue at hand, the Code states that “mitigating circumstances are those that ‘do not constitute a justification or excuse of the offense in question, but which, in fairness and mercy, may be considered as extenuating or reducing the degree of moral culpability.’”^[182] The Board found that Ms. Davis’s undiagnosed medical condition at the time of termination was a mitigating circumstance which influenced their final decision since she was receiving treatment.

In accordance with the Code, the Tribal Court found that Ms. Davis’s medical condition, severe sleep apnea, was a mitigating circumstance which caused and was directly related to her violation of the Tribe’s prohibition against sleeping on the job. Therefore, the Board properly relied upon Ms. Davis’s medical condition, severe sleep apnea, as a mitigating circumstance.

§ 1.4.4. 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^[183] or claims that are brought involving diversity of citizenship.^[184] 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,^[185] nor does the possibility that a tribe may invoke a federal statute in its defense confer federal court jurisdiction.^[186] 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.^[187] However courts are split on whether a business incorporated under federal statute, state law, or tribal law can qualify for diversity jurisdiction.^[188] 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.^[189]

Big Sandy Rancheria Enterprises v. Bonta, 1 F.4th 710 (9th Cir. 2021), cert. denied, 142 S. Ct. 1110, 212 L. Ed. 2d 8 (2022). Big Sandy Rancheria of Western Mono Indians (the “Corporation”) is a federally chartered tribal corporation engaged in tobacco distribution and was wholly owned by a federally recognized Native American tribe. The Corporation brought an action against the Attorney General for the state of California and the director of the California Department of Tax and Fee Administration seeking a declaration that California’s Complementary Statute, Licensing Act, and Cigarette Tax Law are preempted by federal law and tribal sovereignty under the Indian Reorganization Act (“IRA”). The United States District Court for the Eastern District of California granted California’s motion to dismiss for lack of subject matter jurisdiction.^[190] In the motion, California argued that the Corporation is a company and not a “tribe” within the meaning of 28 U.S.C. § 1362.

28 U.S.C. § 1362 confers federal jurisdiction over claims “brought by any Indian tribe or band with a governing body duly recognized by the Secretary of the Interior.” Congress enacted the IRA to enable tribes “to revitalize their self-government through the adoption of constitutions and bylaws . . . through the creation of chartered corporations, with the power to conduct the business and economic affairs of the tribe.” 25 U.S.C. § 5126.

The court ruled that based on the relevant statutory language, legislative history, and circuit precedent narrowly construing § 1362, the Corporation was not an “Indian tribe or band,” and that the Corporation may not invoke § 1362 to avoid the Tax Injunction Act’s jurisdictional bar. The court further noted that its conclusions align with Congress’s purpose in enacting 25 U.S.C. § 5126: “giving tribes the power to incorporate . . . enabl[ing] tribes to waive sovereign immunity, thereby facilitating business transactions.” The court further reasoned that in light of this purpose, it would be odd to allow a 25 U.S.C. § 5126 corporation to selectively claim the benefits of sovereignty in order to challenge a tax.

The U.S. Supreme Court denied the Plaintiff’s petition for writ of certiorari on February 22, 2022.

Brown v. Haaland, No. 321CV00344MMDCLB, 2022 WL 1692934 (D. Nev. May 26, 2022). This case arises in the context of a longer dispute about the living conditions on and rightful governance of the Winnemucca Indian Colony. The ten individual Plaintiffs resided on the Winnemucca Indian Colony and alleged civil rights abuses by the Bureau of Indian Affairs (“BIA”) and the Department of Interior (“DOI”) arising out of their self-determination contract with the BIA. The Plaintiffs brought this action in the U.S. District Court for the District of Nevada under the Indian Self-Determination and Education Assistance Act (“ISDEAA”). 25 U.S.C.A. § 5331(a). The BIA filed a motion to dismiss for lack of subject matter jurisdiction alleging that ISDEAA only confers federal court jurisdiction over claims involving federally-recognized tribes or tribal organizations.

ISDEAA directs the Secretary of the Interior to enter into contracts with willing tribes to provide services such as education and law enforcement that otherwise would have been provided by the federal government. Section 1330 of ISDEAA provides that:

Each contract . . . shall provide that in any case where the appropriate Secretary determines that the tribal organization’s performance under such contract … involves (1) the violation of the rights or endangerment of the health, safety, or welfare of any persons; or (2) gross negligence or mismanagement in the handling use of funds provided to the tribal organization pursuant to such contract … Such Secretary may, under regulations prescribed by [them] and after providing notice and a hearing on the record to such tribal organization, rescind such contract in whole or in part, and assume or resume control or operation of the program, activity or service involved if [they] determine that the tribal organization has not taken corrective action as prescribed by the Secretary to remedy the contract deficiency, except that the appropriate Secretary may, upon written notice to a tribal organization, and the tribe served by the tribal organization, immediately rescind a contract if the Secretary finds that (i) there is an immediate threat of imminent harm to the safety of any person, or imminent substantial and irreparable harm to trust funds, trust lands, or interests in such lands, and (ii) such threat arises from the failure of the contractor to fulfill the requirements of the contract.

The court held that ISDEAA does confer jurisdiction on federal district courts to hear disputes regarding self-determination contracts through § 5331(a). The court further ruled that § 5331(a) applies only to suits by Indian tribes or tribal organizations against the United States. This means that only tribes or tribal organizations can be parties to a self-determination contract. Because § 5331(a) does not waive sovereign immunity for claims brought by nonparties to the self-determination contract, the statute does not create jurisdiction for claims arising under ISDEAA except in the limited context of a tribe suing the federal government. The Court therefore found that it lacks jurisdiction over plaintiffs’ ISDEAA statutory claims given that the plaintiffs are individuals rather than a federally recognized tribe.

Newtok Village v. Patrick, 21 F.4th 608 (2021). Members of a village council for a federally recognized Alaskan Native tribe asserted state-law claims and sought injunctive and mandamus relief to prohibit former members from representing themselves as the tribe’s governing body to federal and state entities. The action was brought in the U.S. District Court for the District of Alaska under the Indian Self-Determination and Education Assistance Act (“ISDEAA”). 25 U.S.C.A. § 5331(a).

The court ruled that ISDEAA only authorized suits against United States, which was not a defendant in this case. Additionally, the claims did not assert any wrongful receipt of federal funds but rather rested on contractual obligations within the meaning of the ISDEAA. Accordingly, the claim did not present a substantial question of federal law that could support exercise of federal jurisdiction over the action despite the complaint’s reference to the tribe’s contracting with the Bureau of Indian Affairs. The court further noted that “[i]ntratribal disputes are generally nonjusticiable in federal courts . . . . While Congress has broad authority over Indian matters, the role of courts in adjusting relations between and among tribes and their members is correspondingly restrained.”

Kewadin Casinos Gaming Authority v. Draganchuk, 2022 WL 1715207 (W.D. Mich. Feb. 8, 2022). In 2011, the gaming and casino operation department of the Sault St. Marie Tribe of Chippewa Indians, a federally recognized Indian tribe (“Plaintiffs”), entered into separate contracts with developers (“Defendants”) for the purpose of developing two tribal casinos on two parcels of land in Michigan’s Lower Peninsula. In March of 2020, Plaintiffs brought state law claims against Defendants in the U.S. District Court for the Western District of Michigan. Defendants moved to dismiss based on tribal sovereign immunity. The court dismissed the case for lack of subject matter jurisdiction without deciding the issue of sovereign immunity. Defendants refiled the case in state court the next day. Plaintiffs then brought an action in the district court against the state court and Defendants seeking a temporary restraining order and preliminary injunction to enjoin state court proceedings until the district court ruled on whether there was a waiver of sovereign immunity such that the state court could hear Defendants’ claims against Plaintiffs.

The Rooker-Feldman Doctrine, as discussed in Rooker v. Fidelity Trust Co., 263 U.S. 413, 415–16 (1923), addresses a party’s ability to challenge a state court judgment in federal court. In Rooker, the Supreme Court held that no matter how wrongful a state court decision concerning compliance with the Constitution may have been, a federal district court has no jurisdiction to reverse or modify the decision and must dismiss such claims for lack of subject matter jurisdiction. The Anti-Injunction Act (“AIA”) provides that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”^[191] The Non-Intercourse Act (“NIA”) provides that “[n]o purchase, grant, lease, or other conveyance of lands, or of any title or claim thereto, from any Indian nation or tribe of Indians, shall be of any validity in law or equity, unless the same be made by treaty or convention entered into pursuant to the Constitution.”^[192]

Applying the Rooker-Feldman Doctrine, the district court ruled that it lacked subject matter jurisdiction to decide question of whether there was a waiver of sovereign immunity in the contract between the developers and the gaming and casino operation. The court further ruled that neither the specific grant of jurisdiction to district courts over civil actions brought by an Indian tribe nor NIA contained statutory language permitting federal courts to issue injunctions in state court proceedings. Accordingly, absent some other explanation, the injunction requested by Plaintiffs to enjoin state court proceedings did not fall within the “expressly authorized” exception to the AIA. However, the temporary restraining order was granted because there was a potential for irreparable harm if the sovereign immunity of Plaintiffs was violated.

§ 1.5. 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.^[193]

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.”^[194] 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.”^[195] When the legal incidence falls on tribes, tribal members, or tribal corporations,^[196] “[s]tates are categorically barred” from implementing the tax.^[197]

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.^[198] Because Congress does not often explicitly preempt state law,^[199] 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.^[200] 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.^[201]

In New Mexico v. Mescalero Apache Tribe,^[202] 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.”^[203] 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.^[204]

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. The following highlights several of the more relevant cases decided in the last year.

S. Point Energy Ctr. LLC v. Arizona Dep’t of Revenue, 253 Ariz. 30 (2022). The Arizona Supreme Court examined whether the Indian Reorganization Act of 1934 (the “Act”) preempts a county ad valorem property tax on a power plant where the power plant is owned by non-Indian lessees of land, and the land is held in trust for the benefit of an Indian tribe. The Court held that the tax is not preempted.

South Point Energy Center LLC (“South Point”), a non-Indian entity, leases land from the Fort Mojave Indian Tribe (the “Tribe”), upon which South Point owns and operates a power plant. The power plant does not supply any energy to the Tribe or persons located on the reservation. Since the power plant was put into operation, Mohave County assessed ad valorem property taxes against the power plant. South Point initiated a lawsuit seeking a refund of payments for property taxes imposed from 2010 to 2018 and argued that Section 5 of the Act expressly preempts states from imposing property taxes on any real property improvements located on land held in trust by the federal government for the benefit of Indian tribes or individual Indians.

A federal law, such as the Act, may preempt application of state law by express terms, which is known as “express preemption.” The relevant part of the Act states that land held in trust for an Indian tribe “shall be exempt from State and local taxation.”^[205] Interpreting this statute, the Court reasoned that to fall under this tax exemption, the power plant must be an “interest in lands, water rights, or surface rights to lands.”^[206] The Court ruled that the power plant does not satisfy this definition because the land held in trust for the Tribe does not include the actual power plant. In addition, the Tribe has no ownership interest in the power plant and derives no benefit from the power plant. Therefore, taxation of the power plant does not infringe upon or burden the Tribe’s use of the land. In sum, the Court held that while Section 5 of the Act preempts state and local taxes imposed on land held in trust for Indian tribes, such preemption does not extend to permanent improvements affixed to that land when the lessee is non-Indian and the Indian tribe and lessee agree that the lessee owns the improvements.

The Court remanded the case to the court of appeals to determine whether the power plant is impliedly exempt from taxation under the balancing test stated in White Mountain Apache Tribe v. Bracker which requires a review of the “nature of the state, federal, and tribal interests at stake . . . to determine whether, in the specific context, the exercise of state authority would violate federal law.”^[207]

Lac Courte Oreilles Band of Lake Superior Chippewa Indians of Wisconsin v. Evers, 46 F.4th 552 (7th Cir. 2022). The Seventh Circuit held that tribal land owned by tribe members is exempt from state property tax even though the land was previously sold to non-Indians before coming back into tribal ownership.

Tribal members living within four Ojibwe Indian reservations brought an action challenging whether the State of Wisconsin could assess property taxes on land within the reservation. Unlike the traditional makeup of such a lawsuit, the parcels of land in question are fully alienable, meaning that the current owners of the at-issue land can sell the land at will. Furthermore, although the at-issue land is currently owned by Ojibwe tribal members, the land had previously been sold by tribal members to non-Indians before being sold back to tribal members. The State argues that the sale of the land to non-Indians before being sold back to tribal members eliminates the land’s tax immunity for all time.

The Court rejected this argument. Rather than performing the traditional analysis under the Bracker balancing test, which involves weighing “tribal interests, federal interests, and state interests,”^[208] the Court analyzed the issue of state taxation of Indians living in Indian country under a categorical approach. Under this categorical approach, “absent cession of jurisdiction or other federal statutes permitting it, . . . a State is without power to tax reservation lands and reservation Indians.”^[209] The categorical approach begins with the threshold question of “who bears the legal incidence of the tax.”^[210] If the tax falls on non-Indians, the tax will be upheld so long as “the balance of federal, state, and tribal interests favors the State, and federal law is not to the contrary.”^[211] If the tax falls on Indians on Indian land, it is presumptively invalid unless Congress has authorized it in “unmistakably clear” terms. Here, the parties agreed that no act of Congress authorized the taxation of these lands.

Nonetheless, the State argued that the fact of non-Indian ownership in the chain of title supports its authority to tax reservation lands held by Ojibwe tribal members. However, the Court again highlighted the fact that the at-issue land did not become alienable because of a Congressional act, but rather as a result of a treaty. The at-issue land became freely alienable under the 1854 Treaty, which is not a legislative act. Rather, a treaty is in its nature a contract between nations. Therefore, the at-issue land became freely alienable under the 1854 Treaty by mutual assent of the contracting parties—the Ojibwe tribes and the President of the United States—without Congress’ input.^[212] Because the land did not become alienable by an act of Congress, the categorical rule that a tax falling on Indians on Indian land is presumptively invalid applies.

Oklahoma v. United States Dep’t of the Interior, 577 F. Supp. 3d 1266, 1269 (W.D. Okla. 2021). In this case, the Court indicates that the U.S. Supreme Court’s decision in McGirt v. Oklahoma^[213] may have far-reaching implications. In McGirt, the Supreme Court held that the Muscogee (Creek) Nation’s reservation in eastern Oklahoma had not been disestablished and continued to be reservation land. The McGirt decision led to the Department of the Interior and the Office of Surface Mining and Enforcement stripping Oklahoma of its ability to regulate surface mining on the Creek Nation’s Reservation. Contending that McGirt’s impact is limited to federal criminal jurisdiction under the Major Crimes Act, Oklahoma filed this action challenging defendants’ actions. Pending before the Court in this action is Oklahoma’s motion for preliminary injunction to enjoin the Department of Interior from enforcing their decision to strip Oklahoma of its regulatory authority over surface mining on the Creek Reservation.

The Court held that Oklahoma did not show a likelihood of success on the merits of its claims. The Court emphasized that this case turns on the narrow issue of the interpretation and application of federal statute, not whether inhabitants of the newly-confirmed Creek Reservation should enjoy immunity from local regulation or whether McGirt’s holding should apply generally in the civil context.

The relevant statute in this matter is the Surface Mining Control and Reclamation Act (the “Act”). The Court stated that the language of the Act is clear in that a State does not have authority to regulate Indian land. Because the land at issue qualifies as reservation land for the purposes of the Major Crime Act, as decided in McGirt, it also qualifies as “Federal Indian reservation” for the purposes of the Act. Therefore, Oklahoma failed to show a likelihood of success on the merits. This case is one which the McGirt court suggested could be triggered by the finding that the Creek Reservation persists today, and demonstrates how a state’s ability to regulate is diminished on Indian land.

State v. On-Auk-Mor Trade Ctr., LLC, No. 1 CA-TX 21-0005, 2022 WL 1256617 (Ariz. Ct. App. Apr. 28, 2022). This case examines whether a limited liability company duly organized under Arizona law, but owned and operated by a tribal member solely on tribal land, is subject to Arizona’s unemployment insurance tax. The Court held that such a company is subject to Arizona’s unemployment insurance tax.

On-Auk-Mor Trade Center, LLC (“OAM”) is an LLC organized under Arizona law. OAM’s sole member is a trust whose sole trustee and manager, David Montiel, is a member of the Salt River Pima-Maricopa Indian Community (the “Community”). OAM argues that it is not subject to Arizona’s unemployment insurance tax because it is an excise tax on a member of the Community doing business entirely on Tribal land.

The dispositive question is who bears the legal incidence of the tax. Where the “legal incidence of an excise tax rests on a tribe or on tribal members for sales made inside Indian country, the tax cannot be enforced absent clear congressional authorization.”^[214] When the legal incidence of the tax rests on non-Indians, “no categorical bar prevents enforcement of the tax; if the balance of federal, state, and tribal interests favors the State, and federal law is not to the contrary, the State may impose its levy.”^[215]

Here, the parties agree that the legal incidence of the tax falls on employers. The question is whether the tax rests on OAM as an LLC or on Montiel as the sole manager of OAM. The Court reasoned that LLCs exist by virtue of state law, and, under Arizona law, an LLC is an entity distinct from its owners. Furthermore, the Community’s constitution provides that only natural persons are considered enrolled members of the Community. As an LLC, OAM is not a member of the Community, and the State is not categorically barred from enforcing the tax. Therefore, the legal incidence of the tax falls upon OAM and not Montiel. OAM also waived any arguments as to whether the balancing of federal, state, and tribal interests favor barring the tax because OAM did not raise this issue with the lower court. In conclusion, because OAM is an LLC organized under Arizona law, is taxed as a corporation for unemployment insurance tax purposes, and is not an enrolled member of the Community, it is subject to Arizona’s unemployment insurance tax.

§ 1.6. 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.

* Ryan D. Dreveskracht is an attorney with Galanda Broadman, PLLC. Ryan practices out of the firm’s Seattle office, focusing on representing businesses and tribal governments in complex litigation. He is also devoted to defending individuals’ constitutional rights and handles civil rights and intentional tort cases.

† Heidi McNeil Staudenmaier is the Partner Coordinator of Native American Law & Gaming Law Services for Snell & Wilmer, L.L.P., where she is based in the firm’s Phoenix, Arizona office. Heidi is the past Chair of the State Bar of Arizona Indian Law Section, past President of the Maricopa County Bar Association, a member of the Executive Council for the ABA Business Law Section, past Chair of the Business and Corporate Litigation Committee, and has held numerous other leadership positions within the Section. She is also a Lifetime Honorary Director for the Iowa College of Law Foundation Board.

‡ Paloma Diaz is an attorney in the Commercial Litigation Group at Snell & Wilmer, L.L.P. Paloma has assisted in the representation of a variety of clients across multiple industries, including matters involving breach of contract, intellectual property disputes, gaming, and financial services litigation. Special thanks to Snell & Wilmer, L.L.P. Commercial Litigation attorney Christian Fernandez for his assistance in drafting this chapter.

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

2. 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). ↑

3. 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). ↑

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

5. Id. ↑

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

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

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

9. 140 S. Ct. 2452 (2020). ↑

10. United States v. McBratney, 104 U.S. 621, 623–624 (1882). ↑

11. 448 U.S. 136 (1980). ↑

12. See Ysleta Del Sur Pueblo v. State of Tex., 852 F. Supp. 587 (W.D. Tex. 1993), rev’d, 36 F.3d 1325 (5th Cir. 1994). ↑

13. The Tribe’s view was that state permission was not necessary, pursuant to IGRA’s classification of bingo as a Class II game, so long as the State permitted the game to be played on some terms by some persons. ↑

14. Ysleta del Sur Pueblo, 36 F.3d 1325 (holding that the Restoration Act’s gaming provision, rather than IGRA, governed whether the Tribe’s proposed gaming activities were allowed under Texas law and thus Texas’s law would apply to the Tribe’s gaming operations), abrogated by Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929 (2022). ↑

15. Tribal Court Systems, U.S. Department of Interior, Indian Affairs, https://www.bia.gov/CFRCourts/tribal-justice-support-directorate (last visited Nov. 3, 2022). ↑

16. Justice Systems of Indian Nations, Tribal Court Clearinghouse, http://www.tribal-institute.org/lists/justice.htm (last visited Nov. 3, 2022). ↑

17. 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. ↑

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

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

20. 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). ↑

21. 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). ↑

22. “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). ↑

23. 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)). ↑

24. 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.). ↑

25. 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). ↑

26. 450 U.S. 544 (1981). ↑

27. Id. ↑

28. 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. ↑

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

30. 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). ↑

31. Kelsey Haake helped research and summarize the cases in this section. Kelsey is a rising third-year law student at the University of Pennsylvania Carey Law School and expects to graduate in May 2023. ↑

32. 450 U.S. 544 (1981). ↑

33. 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.”). ↑

34. 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.”). ↑

35. 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). ↑

36. 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). ↑

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

38. 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.”). ↑

39. 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. ↑

40. 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). ↑

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

42. Iowa Mutual, 480 U.S. at 16. ↑

43. 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). ↑

44. 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”). ↑

45. Iowa Mutual, 480 U.S. at 19. ↑

46. 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). ↑

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

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

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

50. Miranda Martinez helped to research and summarize the cases in this section. Miranda 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 2023. ↑

51. Stanko v. Ogala Sioux Tribe, No. 22-1266, 2022 WL 1499817, at *1 (8th Cir. May 12, 2022). ↑

52. Id. (quoting Strate v. A-1 Contractors, 520 U.S. 438, 459 (1997)). ↑

53. 25 U.S.C. § 450 (2000). ↑

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

55. 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). ↑

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

57. Id. ↑

58. 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. ↑

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

60. 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). ↑

61. 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”). ↑

62. 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). ↑

63. 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). ↑

64. 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). ↑

65. 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). ↑

66. 532 U.S. 411 (2001). ↑

67. 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). ↑

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

69. Id. at 423. ↑

70. 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). ↑

71. Maxwell Herath helped to research and summarize the cases in this section. Maxwell is a

    rising third-year law student at Moritz College of Law, The Ohio State University, and expects to graduate in May 2023. ↑

72. 509 F.3d 1008, 1015–16 (9th Cir. 2007). ↑

73. 116 F.3d 1315, 1324 (10th Cir. 1997). ↑

74. Davila v. United States, 713 F.3d 248, 264 (5th Cir. 2013). ↑

75. See 28 U.S.C. § 2671. ↑

76. Id. ↑

77. Lewis v. Clarke, 137 S. Ct. 1285, 1292 (2017). ↑

78. Id. ↑

79. 11 U.S.C. § 101(27) (emphasis added). ↑

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. Savannah Wix helped to research and summarize the cases in this section. Savannah 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 2023. ↑

91. Uniband, Inc. v. Comm’r of Internal Revenue, 140 T.C. 230, 262–63 (T.C. 2013). ↑

92. Cully Corp. v. United States, 160 Fed. Cl. 360, 376 (Fed. Cl. 2022) (quoting 41 C.F.R. § 102-75.990). ↑

93. Id. at 375 (internal quotation marks omitted). ↑

94. Id. at 376–77 (quoting 41 C.F.R. § 102-71.20) (internal quotation marks omitted). ↑

95. Id. at 383. ↑

96. 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). ↑

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

98. Id. at 386. ↑

99. 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). ↑

100. 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). ↑

101. 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). ↑

102. 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”). ↑

103. Id. ↑

104. Id. ↑

105. 850 F.3d 552 (D.C. Cir. 2016). ↑

106. \132 S.Ct. 2199 (2012). ↑

107. 5 U.S.C. §§ 551–59. ↑

108. 28 U.S.C. § 2409a. ↑

109. 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). ↑

110. 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.”). ↑

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

112. See 25 C.F.R. § 2.6(c). ↑

113. See 25 C.F.R. Part 2. ↑

114. Id. ↑

115. See 25 C.F.R. § 2.9. ↑

116. Courtney Moore helped to research and summarize the cases in this section. Courtney 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 2024. ↑

117. Cnty. of Amador, 872 F.3d at 1020–31. ↑

118. Id. at n.5. ↑

119. Birdbear, No. 16-75L at *4 (quoting United States v. Navajo Nation (“Navajo I”), 537 U.S. 488, 506 (2003)) (internal quotation marks omitted). ↑

120. Id. (citing United States v. Navajo Nation (“Navajo II”), 556 U.S. 287, 290–91 (2009)). ↑

121. Id. (quoting Navajo I, 537 U.S. at 506). ↑

122. Id. (quoting U.S. v. Mitchell, 463 U.S. 206, 218 (1983)). ↑

123. Id. at *8 (internal quotation marks omitted). ↑

124. Id. at *3–9. ↑

125. Id. at *9. ↑

126. Id. at *3–6, *9–10. ↑

127. 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). ↑

128. 25 C.F.R. § 84.004. ↑

129. Id. ↑

130. 25 U.S.C. § 81. ↑

131. Id. § 415. ↑

132. Id. § 81. ↑

133. 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). ↑

134. 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.”). ↑

135. 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). ↑

136. 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). ↑

137. 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). ↑

138. 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. ↑

139. Pub. L. No. 112-151 (2012). ↑

140. 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). ↑

141. 25 C.F.R. § 162. ↑

142. United States Department of Interior, Approved Hearth Act Regulation, https://www.bia.gov/service/HEARTH-Act/approved-regulations (last visited Nov. 3, 2022). ↑

143. Cynthia Murrieta helped to research and summarize the cases in this section. Cynthia is a rising second year law student at the William S. Boyd School of Law, University of Nevada – Las Vegas, and expects to graduate in May 2024. ↑

144. Against the Federal Defendants: United States Department of the Interior (“DOI”); Bryan Newland, in his official capacity as Assistant Secretary—Indian Affairs; and Darryl LaCounte, in his official capacity as Director of the Bureau of Indian Affairs (“BIA”). Kiowa Tribe v. United States Dep’t of the Interior, No. CIV-22-425-G, 2022 WL 1913436, at *1 (W.D. Okla. June 3, 2022). ↑

145. Against the FSA Defendants who are each sued in both their individual and official capacities: Lori Gooday Ware, Fort Sill Apache Tribe (“FSAT”) Chairwoman; Pamela Eagleshield, FSAT Vice-Chairman; James Dempsey, FSAT Secretary-Treasurer; FSAT Committee Members Jeanette Mann, Jennifer Heminokeky, and Dolly Loretta Buckner; Philip Koszarek, FSAGC (“Fort Sill Apache Gaming Commission”) Chairman; Naomi Harford, FSAGC Vice-Chairman; and FSAGC Commissioners Michael Crump, Lauren Pinola, and Debbie Baker. Kiowa, 2022 WL 1913436, at *1. ↑

146. Against FSA Defendants. ↑

147. 25 U.S.C. § 2710(d)(1)(A)(i), (d)(2)(A); see also id. §§ 2710(b)(2), (d)(1)(A)(ii). ↑

148. Cnty. of Amador v. United States Dep’t of the Interior, 872 F.3d 1012 (9th Cir. 2017). ↑

149. In County of Amador, the Ninth Circuit considered two challenges to the same 2012 ROD at issue in the present case, based on whether: (1) the Tribe qualified to have land taken into trust for its benefit under the IRA; and (2) the Tribe may conduct gaming on the parcels pursuant to IGRA. Id. As a preliminary matter, the court affirmed Laverdure “was empowered to take the Plymouth Parcels into trust” and therefore had the authority to approve the ROD. Id. Then, the Ninth Circuit held “the Band is a recognized Indian tribe that was ‘under Federal jurisdiction’ in 1934, and [DOI] did not err in concluding that the Band is eligible to have land taken into trust on its behalf under 25 U.S.C. § 5108.” Id. With respect to recognition under 25 C.F.R. Part 83, the court stated, “the Band was effectively recognized without having to go through the Part 83 process” because “a tribe could be ‘restored’ to Federal recognition outside the Part 83 process.” Id. Thus, as a federally recognized Tribe, the court held DOI “did not err in allowing the Band to conduct gaming operations on the Plymouth Parcels” in accordance with IGRA. Id. ↑

150. Fla. Stat. § 849.14. ↑

151. In August 2002, the Estom Yumeka Tribe of the Enterprise Rancheria (“Tribe”) applied to the Department of Interior (the “Department”) to have the Yuba Parcel taken into trust for the purposes of constructing a casino, hotel, and related infrastructure pursuant to the IRA. They were successful in their application and the Yuba Parcel was taken into federal trust for the Tribe on May 14, 2013. The California legislature took no action toward ratifying the gaming compact during 2013 or early 2014, and the compact became ineligible for legislative ratification by its own terms on July 1, 2014. The Tribe then filed suit under 25 U.S.C. § 2710(d)(7)(A)(i) of the IGRA’s remedial scheme.

     In that action, this Court ordered the State and the Tribe to proceed under 25 U.S.C. § 2710(d)(7)(B)(iii) to conclude a gaming Compact within 60 days. The parties failed to do so, which triggered IGRA’s requirement that the parties submit to a court-appointed mediator. The mediator found the Tribes’ proposed Compact best comported with IGRA and forwarded it to the State for its consent. The State failed to consent within the IGRA-mandated 60 days, and the Tribe’s Compact was then submitted to the Secretary. On August 12, 2016, the Secretary issued Secretarial Procedures prescribing the parameters under which the Tribe may conduct Class III gaming activities on the Yuba Parcel. ↑

152. 959 F.3d 1142, 1145 (9th Cir. 2020), cert. denied, sub nom. Club One Casino, Inc. v. Haaland, 141 S. Ct. 2792 (2021). ↑

153. Id. ↑

154. Fl. Stat. § 849.14 (2020). ↑

155. Michigan v. Bay Mills Indian Cmty., 572 U.S. 782, 795 (2014). ↑

156. 5 U.S.C. § 706(2)(A). ↑

157. See 25 U.S.C. § 2710(d)(1)(C) (providing that “[c]lass III gaming activities shall be lawful on Indian lands only if . . . [they are] conducted in conformance with a Tribal-State compact . . . that is in effect”). ↑

158. Under the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. § 2701 et seq., Indian tribes must enter a compact with the state in order to conduct high-stakes Las Vegas-style casino gambling, known as Class III gaming. ↑

159. The list includes: “(i) the application of the criminal and civil laws and regulations of the Indian tribe or the State that are directly related to, and necessary for, the licensing and regulation of such activity; (ii) the allocation of criminal and civil jurisdiction between the State and the Indian tribe necessary for the enforcement of such laws and regulations; (iii) the assessment by the State of such activities in such amounts as are necessary to defray the costs of regulating such activity; (iv) taxation by the Indian tribe of such activity in amounts comparable to amounts assessed by the State for comparable activities; (v) remedies for breach of contract; (vi) standards for the operation of such activity and maintenance of the gaming facility, including licensing; and (vii) any other subjects that are directly related to the operation of gaming activities.” 25 U.S.C. § 2710(d)(3)(C). ↑

160. 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). ↑

161. 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). ↑

162. 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 . . . .”). ↑

163. Id. §§ 12101–17 (1990). ↑

164. 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). ↑

165. 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). ↑

166. 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). ↑

167. 29 U.S.C. §§ 651–78 (1998). ↑

168. 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)). ↑

169. Id. §§ 201–19. ↑

170. Id. §§ 151–69. ↑

171. Id. §§ 621–34. ↑

172. 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”). ↑

173. 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). ↑

174. 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). ↑

175. 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. ↑

176. 29 U.S.C. §§ 2601–54 (1993). ↑

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

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

179. 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). ↑

180. 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). ↑

181. Lucinda Iheaso helped to research and summarize the cases in this section. Lucinda is a rising third-year law student at Southern University Law Center in Baton Rouge, Louisiana, and expects to graduate in May 2023. ↑

182. Mashantucket Pequot Gaming Enter. v. Scheller, CV-AA-2013-109, 2014 WL 465814, at *3 (Mash. Pequot Tribal Ct. Jan. 28, 2014) (quoting Mashantucket Pequot Gaming Enterprise v. Christison, 6 Mash.Rep. 41, 46 (2013). ↑

183. 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.”). ↑

184. 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 . . . .”). ↑

185. 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). ↑

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

187. 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.”). ↑

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

189. Sean Howard helped to research and summarize the cases in Section 8.4.4. Sean is a rising third-year law student at the University of Illinois Chicago School of Law and expects to graduate in May 2023. ↑

190. Pursuant to 28 U.S.C. § 1362. ↑

191. 28 U.S.C. § 2283. ↑

192. 25 U.S.C.A. § 177. ↑

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

194. 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). ↑

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

196. 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). ↑

197. 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). ↑

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

199. 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.”). ↑

200. Bracker, 448 U.S. at 143. ↑

201. 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). ↑

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

203. Id. at 334. ↑

204. Id. at 344. ↑

205. 25 U.S.C. § 5108. ↑

206. Id. ↑

207. 448 U.S. 136, 144–45 (1980). ↑

208. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 145 (1980). ↑

209. Cnty. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation, 502 U.S. 251, 257 (1992). ↑

210. Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 458 (1995). ↑

211. Id. at 459. ↑

212. Keweenaw Bay Indian Cmty. v. Naftaly, 452 F.3d 514, 530 (6th Cir. 2006) (concluding that “[a] treaty is not a federal statute or an act of Congress” for purposes of the Cnty. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation analysis). ↑

213. 140 S.Ct. 2452 (2020). ↑

214. Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 457 (1995). ↑

215. Id. ↑

Editor Emeritus and Editor

Contributors

§ 1.1. Introduction

The 2023 Recent Developments describes developments in business courts and summarizes significant cases from a number of business courts with publicly available opinions.^[2] 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.^[3] States with dedicated complex litigation programs encompassing business and commercial cases, among other types of complex cases, include California, Connecticut, Minnesota, and Oregon.^[4] The California and Connecticut programs are expressly not business court programs as such.^[5]

§ 1.2. Recent Developments

§ 1.2.1. 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 Seventeenth Annual Meeting took place in Glen Cove, New York from October 26, 2021, to October 28, 2022.^[7] Among other topics, the meeting addressed economic analysis for lawyers, discovery proportionality and cost allocation issues, bankruptcy law and mass tort litigation, the American Law Institute’s Restatement of the Law, Corporate Governance, scientific methodology and the admissibility of expert testimony, public nuisance litigation, and the management of ADR, expert witnesses and special masters in complex litigation.

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 Section of 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 Section of Business Law meetings. The Section’s Judges Initiative Committee also provides links to business court resources, such as annual meeting materials, articles relating to business court initiatives in various states, and other selected resources.^[11] The Section also has established a Business Courts Representatives (BCR) program,^[12] 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 will serve 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 will serve as BCRs for the 2022-2024 term.^[13] 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 have developed an innovative training curriculum^[14] and faculty guide^[15] – along with practical tools – to help state courts establish and manage business court dockets more efficiently and effectively.”^[16] The Business Courts Blog^[17] 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,^[18] as well as recent developments in business courts. In 2022, there were articles and reports addressing some aspects of business courts.^[19] There are also various legal blogs with content relating to business courts in particular states.^[20]

§ 1.2.2. Developments in Existing Business Courts

§ 1.2.2.1. Cook County, Illinois Circuit Court Law Division Commercial Calendar

The Chicago business court, the Commercial Calendar Section of the Circuit Court of Cook County, issued an updated Uniform Standing Order, effective August 29, 2022.^[21] Among other items, the Uniform Standing Order covers scheduling, zoom appearances, motion procedures, requirements for briefs and citations, and a list of materials required to be exchanged before trial and then submitted to the court.

§ 1.2.2.2. Florida’s Complex Business Litigation Courts

As it was last year, Florida is lucky enough to have six circuit court divisions dedicated to resolving complex business litigation (“CBL”). Florida’s six CBL judges are spread across Orange County (Ninth Judicial Circuit), Miami-Dade County (Eleventh Judicial Circuit), Hillsborough County (Thirteenth Judicial Circuit), and Broward County (Seventeenth Judicial Circuit). The judges currently assigned to hear CBL cases are: Judge John E. Jordan (Division 2-43) in Orlando,^[22] Judges Michael A. Hanzman (Division 43) and Alan Fine (Division 44) in Miami,^[23] Chief Judge Jack Tuter (Division 07) and Judge Patti Englander Henning (Division 26) in Fort Lauderdale,^[24] and Judge Darren D. Farfante (Division L) in Tampa.^[25] Judge Fine was newly-assigned to a CBL division in 2022.

There are two upcoming changes to the Ninth Circuit’s CBL court, which it refers to as the “Business Court.” First, the Business Court is expanding to include an additional division in Osceola County, Florida, to complement the existing division in Orange County, Florida. This will bring Florida up to a total of seven circuit court divisions dedicated to CBL matters. Judge Jordan will preside over the new division initially. Second, the Business Court will likely see a new face next year upon the anticipated completion of Judge Jordan’s CBL term in 2023.^[26]

Cases may be directly filed or reassigned/transferred to a complex business division based on a number of factors, including: the nature of the case, complexity of the issues; complexity of discovery; number of parties in the case; and specific criteria enumerated by each circuit.

§ 1.2.2.3. State-wide Business Court in Georgia

Georgia’s inaugural judge for the State-wide Business Court, Judge Walter W. Davis, returns to private practice. After nearly three years of service, Judge Walter W. Davis, the first judge to serve on Georgia’s State-wide Business Court, resigned in June 2022.^[27] Nominated by Governor Brian P. Kemp in July 2019, Judge Davis was unanimously confirmed by the Judiciary Committees of both houses of the General Assembly.^[28] His initial term was set to last for five years.^[29]

The Georgia State-wide Business Court began accepting cases in August 2020, and at the time of Judge Davis’s resignation, 72 cases had been directly filed in, or transferred to, the Court. ^[30] Judge Davis explained that “[t]he vast majority (87%) of those cases involve[d] disputes between and among small businesses from 22 different counties across the State[.]”^[31] Judge Davis authored more than 130 substantive opinions during his time on the Bench.^[32] Judge Davis has now returned to private practice as a partner at the Atlanta office of Jones Day.^[33]

In August 2022, Governor Kemp appointed Judge William “Bill” Hamrick III to succeed Judge Davis at the Georgia State-wide Business Court.^[34] Judge Hamrick, who previously served on the Superior Court for the Coweta Judicial Circuit since 2012, was sworn into office on September 26, 2022.^[35]

§ 1.2.2.4. Iowa Business Specialty Court

Iowa Business Specialty Court will soon 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.^[36] The evaluation is expected to ensure the court continues to accomplish its mission and to identify opportunities to improve its operations.^[37] The first report, which will be prepared in July 2023, will evaluate the court for calendar years 2021 and 2022.^[38] Subsequent reports will be prepared by the state court administration every two years.^[39]

§ 1.2.2.5. Maryland Business and Technology Court

Maryland revises General Corporation Law to codify method of ratification for defective corporate acts. On October 1, 2022, a new subtitle to the Maryland General Corporation Law (“MGCL”) became effective that sets forth a procedure by which corporations can retroactively ratify corporate acts that were defective at the time such acts were enacted. See Md. Code Ann., Corps. & Ass’ns §§ 2-701–707. This ratification subtitle applies to corporate acts that would have been in the corporation’s power to execute had there not been a defective aspect of the act’s adoption. Id. at § 701(d). These defective acts include, but are not limited to, the unauthorized issuance of stock, failure to adopt board resolutions approving a corporate action, and failure to file a required charter document with the State Department of Assessments and Taxation (“SDAT”). In order to ratify the defective act, the corporation’s board of directors must adopt a resolution that states: (1) what the defective corporate act is and whether it involved the issuance of putative stock; (2) the date of the defective act, as best determined under Section 2-701(c); (3) the nature of the failure to authorize the defective act; and (4) whether the act would have required authorization of just the board of directors or of the stockholders, and that the board of directors and/or the stockholders will be ratifying the action, as applicable. Id. at § 2-702(a).

In order to ratify the defective corporate act, the MGCL requires the affirmative vote under either the requirements for approval of the corporate act at the time of the ratification or the requirements for approval of the corporate act on the date of the defective act, whichever portion of votes is greater. Id. at § 2.702(c). Holders of putative stock on the record date that determines which stockholders are entitled to vote on ratification are not entitled to cast a vote in consideration of ratification. Id. If the defective corporate act that requires ratification involves filing a charter document with SDAT, the corporation must file articles of validation in place of the charter document that should have been filed. Id. at § 2-705. These articles of validation must include: (1) the title and date of filing of the charter document to be corrected; (2) a description of the defective corporate act; (3) the date of the defective act; (4) a statement that the defective act was properly ratified; (5) the time the ratification became or becomes effective; and (6) a statement that either (i) a charter document was previously filed regarding the defective corporate act that requires no change, (ii) a charter document was previously filed regarding the defective corporate act and does require changes, or (iii) no charter document was previously filed regarding the defective corporate act. Id. While this new MGCL subtitle outlines a procedure to ensure valid ratification of a defective corporate act, it specifies that this is a nonexclusive remedy, and a defective corporate act can be otherwise lawfully ratified by a corporation. Id. at § 2-707.

Maryland simplifies limited liability company and partnership ownership transfers upon death. Also effective as of October 1, 2022, the Maryland legislature made a series of amendments to existing code provisions that declare that transfers of an equity interest in either a limited liability company or a partnership upon death of the equity holder that are made pursuant to the business’s governing documents are not testamentary transfers. See Md. Code Ann., Est. & Trusts § 1-401(c). These amendments were a direct response to a 2021 Maryland appellate court opinion holding that such equity transfers upon death were subject to estate and probate laws. See Potter v. Potter, 250 Md. App. 569 (2021). Under these modifications, an holder of an interest in a limited liability company or partnership may transfer a membership interest, an economic interest, a noneconomic interest, or a partnership interest, as applicable, to another person upon the interest holder’s death, even if the transferee does not have their own interest in the business at the time of the interest holder’s death. Md. Code Ann., Corps. & Ass’ns §§ 4A-402(a)(9), 9A-503(g). Such transfers will not be treated as testamentary transfers so long as these transfers are consistent with the business’s governing documents and/or agreements. Id. at §§ 4A-402(a), 10-702(d).

§ 1.2.2.6. Massachusetts Business Litigation Session (BLS)

On March 2, 2022, the Massachusetts Business Litigation Session (“BLS”) issued Formal Guidance of BLS Regarding Hearings, Trials, and Electronic Filings (“Guidance”). In the Guidance, the BLS explained that it will continue to hold remote hearings when appropriate, noting that counsel can request that a hearing be conducted remotely. At the same time, the BLS explained that it has a “strong preference” for conducting trials and evidentiary hearings in person. Regarding electronic filings, the BLS explained that an attorney electronically filing an item that needs immediate court attention should alert the session clerk of the filing. If the filing exceeds 20 pages, a courtesy hard copy should be provided to the court. More generally, the BLS also encouraged counsel to provide digital courtesy copies of “complex filings” by a thumb drive or disc, with each document or exhibit included as a separate PDF. Finally, the BLS affirmed its commitment to encouraging the participation of less senior attorneys in all court proceedings. To this end, the BLS explained that it will allow two or more attorneys to handle different parts of a hearing. When a less senior attorney is arguing a motion, the BLS will also allow the less senior attorney to confer with a senior attorney during the hearing and the senior attorney can make additional points when the less senior attorney finishes arguing the motion.

In April 2022, the BLS also published BLS Bench Notes, MBA Complex Commercial Litigation Section, Business Litigation Session Practice Guide (“Bench Notes”). The Bench Notes describe each BLS judges’ practices and preferences regarding case management, discovery, motion practice, and trial.

§ 1.2.2.7. Michigan Business Courts

Michigan Business Courts’ 10-Year Anniversary. October 16, 2022, marked the 10th anniversary of then-Governor Rick Snyder’s signing of Michigan’s business court legislation, which took effect on January 1, 2013. Since their inception, Michigan’s business courts have held an important place in the state’s jurisprudence and have established numerous protocols that circuit courts throughout Michigan have adopted (e.g., early case management conferences and early mediation). Attorneys throughout the state hold the business courts in high regard, finding that the business courts are responsive, efficient, and fulfill their legislatively prescribed purpose of enhancing “the accuracy, consistency, and predictability of decisions in business and commercial cases.”^[40] 

2022 Business Court Appointments. The makeup of Michigan’s business court bench changed significantly in 2022 as Judge Christopher P. Yates (formerly a business court judge in Kent County) was appointed to the Michigan Court of Appeals and several judges were newly appointed to the business courts. The new appointees are Judges Annette J. Berry (Wayne County), Curt A. Benson (Kent County), Timothy P. Connors (Washtenaw County), Kenneth S. Hoopes (Muskegon County), and Victoria A. Valentine (Oakland County). These new appointees will all serve for a term expiring April 1, 2025. 

Michigan’s New Videoconferencing Court Rules. In July 2021, the Michigan Supreme Court responded to the lingering impacts of the COVID–19 pandemic by adopting interim court rules relating to remote proceedings that, inter alia, required trial courts to employ videoconferencing or telephone conferencing “to the greatest extent possible.” Mich. Ct. R. 2.407(G). The court invited public comment on the efficacy of the interim rules and ultimately received 41 written comments and heard feedback from 49 individuals at a public hearing on March 16, 2022. Thereafter, on September 9, 2022, the court issued a new order making the interim rules permanent, thereby solidifying videoconferencing as an important tool available to Michigan courts to increase efficiency, lower costs, and promote access to the judicial system. The most pertinent modification in the 2022 order affecting business court litigants is the court’s adoption of a new rule: Mich. Ct. R. 2.408.^[41]

Under Mich. Ct. R. 2.408, “the use of videoconferencing technology shall be presumed” for virtually all civil proceedings besides evidentiary hearings and trials. Nevertheless, courts have discretion to determine the manner and extent to which videoconferencing technology is used. Indeed, even where the presumption applies, the court may require the proceeding to be conducted in person if it determines that the “case is not suited for videoconferencing.”^[42] In making this determination, the court must consider twelve factors, including the technological capabilities of the court and the parties, whether “specific articulable prejudice” would occur, and the potential to increase access to courts through the use of videoconferencing.^[43] On the other hand, the court generally can also require participants to attend proceedings remotely.^[44] An exception to this grant of authority lies in Mich. Ct. R. 2.407(B)(4), which provides that a participant can request to appear in person for any proceeding. If the participant so requests, the participant’s attorney and the presiding judge must appear in person with the participant; however, the court must allow the other participants to participate remotely using videoconferencing technology if they so choose, assuming the court determines that the case is well-suited for videoconferencing.^[45]

Beyond the new presumption in favor of videoconferencing for most civil proceedings, the Michigan Supreme Court’s 2022 order instituted numerous additional procedural rules related to remote participation. Among these new rules are the requirements that courts must provide participants with reasonable notice of the time and mode of proceedings, permit parties and their counsel to engage in confidential communications during a videoconferencing proceeding (including, for example, through the use of a virtual “break-out room”), and generally make videoconferencing proceedings accessible to the public.^[46] Counsel litigating in Michigan’s business courts should familiarize themselves with the changes made in the 2022 order, which is available on the Michigan One Court of Justice website.^[47]

§ 1.2.2.8. New York Commercial Division

Commercial Division promulgates new rule regarding mandatory settlement conferences. On January 7, 2022, the Commercial Division amended Rule 30 of section 202.70(g) of the Rules of the Commercial Division of the Supreme Court. Rule 30 is titled “Settlement and Pretrial Conferences,” and the amendment, effective as of February 1, 2022, adds a new provision to the rule that provides for mandatory settlement conferences in Commercial Division cases following the filing of a Note of Issue. The new provision, which will become Rule 30(b), greatly expands the scope of Commercial Division cases for which settlement conferences will be held. The amendment is aimed at recognizing: “a) the need to respect the authority and discretion of the justice assigned to each case; (b) the benefit of allowing the parties and counsel to provide input to the assigned justice as to which settlement conference procedure they think will be best suited to their particular matter; and (c) [Office of Court Administration] budget constraints that preclude the hiring of additional settlement neutrals.” See Memorandum from Subcommittee on Procedural Rules, entitled “Proposal to amend Commercial Division Rule 30 to provide for a mandatory settlement conference,” dated September 25, 2020.

New York State Unified Court System adopts new rules and guidelines for e-discovery. On April 11, 2022, the New York State Unified Court System adopted additional rules and guidelines for Electronically Stored Information (“ESI”). Under the amended Rule 11-c, parties are required to confer regarding electronic discovery prior to the initial conference. The rule further provides that any topics upon which the parties cannot reach agreement are to be addressed with the Court at the preliminary conference.

The amended Rule 11-c also adopts a cost-benefit analysis similar to the standard in federal court and requires that “[t]he costs and burdens of ESI shall not be disproportionate to its benefits.” To that end, the parties are required to consider “the nature of the dispute, the amount in controversy, and the importance of the materials requested to resolve the dispute.” The amended rule also encourages the parties to use technology-assisted review when appropriate, and the parties are required to confer regarding “technology-assisted review mechanisms” throughout the discovery period. Lastly, the amended rule adds a claw-back provision for inadvertently produced ESI that is subject to either attorney-client privilege or the work product doctrine.

§ 1.2.2.9. West Virginia Business Court Division

In the past year, eighteen motions to refer cases to the West Virginia Business Court Division were filed, and there were three pending motions to refer from 2020. Of these, eleven were granted, nine were denied, and one was pending as of year’s end. Since the Court’s inception in 2012, there have been 219 motions to refer filed, with a total of 127 of those motions granted. The Business Court Division has resolved 101 of these. At the end of 2021, there were twenty-six cases pending before the Business Court Division with an average age of 397 days. The average age of the ten cases disposed of in 2020 was 675 days.

The past year has also been a period of transition for the West Virginia Business Court Division. New judges have been appointed to the Division and the method of assigning judges has been tweaked to reflect the focus of much of the Division’s work. Judge Michael Lorensen of the 23^rd Judicial Circuit was reappointed as Chair of the Business Court Division by Chief Justice John Hutchison of the Supreme Court of Appeals. The Administrative Offices of the Division continues to be in Martinsburg, Berkeley County, West Virginia, with law clerk support for each of the Division’s judges located in Martinsburg as well. The current judges assigned to the Business Court Division are:

1. Judge Michael D. Lorensen (Chair), 23^rd Judicial Circuit
2. Senior Status Judge Christopher C. Wilkes (former Chair)
3. Judge Paul T. Farrell, 6^th Judicial Circuit
4. Judge Joseph K. Reeder, 29^th Judicial Circuit
5. Judge Shawn D. Nines, 19^th Judicial Circuit
6. Judge Maryclaire Akers, 13^th Judicial Circuit
7. Judge David M. Hammer, 23^rd Judicial Circuit

When originally formed, the Business Court Division divided the judge’s assignments up geographically, with each judge representing a region of a certain number of counties. Experience has shown that the cases assigned to the Business Court Division are not necessarily spread across the state. The north-central part of West Virginia, with a burgeoning energy industry, has been the focus of a number of Business Court Division cases. As a result, the Division is less focused on geographic assignments and more on matching the case with the best judge who can handle the matter.

It is also important for practitioners who might be handling a matter before the Business Court Division to understand that the judges appointed to the Division by the Supreme Court of Appeals are not only trained in handling these complex, commercial disputes, but also that they have a full docket in their home circuits of criminal, civil, and abuse and neglect cases. Unlike in some states, assignment to the West Virginia Business Court Division is an additional part of the judge’s workload, which they voluntarily take on to better serve the judicial needs of parties in complex commercial matters.

§ 1.2.2.10. Wisconsin Commercial Docket Pilot Project

In 2022, the Wisconsin Supreme Court extended Wisconsin’s Commercial Docket Pilot Project for another two years, with a new end date of July 30, 2024. The Court originally approved the Project in 2017. The Court also ordered that, on or before July 1, 2023, the Business Court Advisory Committee must file a formal rule petition asking the Court to adopt a permanent business court or advise the Court that it recommends the Court permit the Project to expire. The Court also amended the Interim Commercial Court Rule related to the mechanism for selecting judges to participate in the Project to reflect existing practice. Under the amended 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 not yet been added to the Project.

§ 1.2.2.11. Wyoming Chancery Court

December 1, 2022, marked the Wyoming Chancery Court’s first anniversary. Born of legislation enacted in 2019, the Wyoming Chancery Court resolves commercial, business, and trust cases on an accelerated schedule using active case management practices, expedited discovery, and bench trials.^[48] The Court has jurisdiction over actions seeking equitable or declaratory relief and actions seeking monetary relief over $50,000 exclusive of punitive or exemplary damages, interest, and costs and attorney fees.^[49] The underlying cause of action must fall within a list of 20 case types involving business and trust subjects.^[50] And the court must seek to resolve the cases as expeditiously as possible, within 150 days in most cases.^[51]

During its first year, the Chancery Court saw 15 new cases filed. These 15 cases involved 36 different parties, 29 unique attorneys, and six primary case types—breach of contract, internal business affairs, trust code, business agreements, breach of fiduciary duty, and business transactions involving financial institutions.^[52] Two Wyoming district court judges experienced in business litigation—Judges Richard Lavery and Steven Sharpe—handled these cases and will continue to handle cases until a full-time Chancery Court judge is appointed.^[53] Wyoming statute requires a full-time judge to be appointed by January 2024.^[54] On two occasions, however, the Wyoming Legislature has extended this deadline.^[55] It may do so again.

§ 1.2.3. Other Developments

§ 1.2.3.1. Texas Judicial Council’s Civil Justice Committee

The Texas Judicial Council’s Civil Justice Committee issued its 2022 Report and Recommendations,^[56] which included a recommendation that the Supreme Court create a pilot business court program. The recommendation included the following subparts:

• The Supreme Court should establish a pilot business court program to permit consideration of implementation details prior to statewide implementation.
• This pilot business court should be a part of or parallel to the existing court structure, and the Supreme Court should establish qualifications to determine who can be designated as a business court judge.
• The business court should hold proceedings regionally to ensure that parties throughout the state with complex litigation have access to the court.
• Parties to complex litigation should be given the opportunity to opt-in to the business court.
• The business court should be provided sufficient resources to handle the complex litigation, including technology and staff attorneys.

§ 1.3. 2022 Cases

§ 1.3.1. Arizona Commercial Court

State v. Google L.L.C.^[57] (Examining the scope of the Arizona Consumer Fraud Act). The State of Arizona filed suit against Google alleging that Google misled consumers about how and when Google collects location information from the devices it sells. Specifically, the State of Arizona alleged that the Android devices marketed and sold by Google are sold pre-loaded with functions and applications that collect and store a user’s location information. The State of Arizona argued that Google violated the Arizona Consumer Fraud Act (“ACFA”) because, for example, before selling its devices Google programed them with the ability to track a user’s location and did not disclose to the user at the time of sale that the tracking settings could not be completely disabled. Google moved for summary judgment, arguing that any alleged fraud or deceit was not made in connection with the sale or advertisement of merchandise, a requirement under the ACFA. For example, Google argued that the subsequent act of setting up an account and/or using an app, which would be when location tracking begins, cannot be characterized as being “in connection” with the sale of a previously purchased device.

The ACFA specifically addresses deceptive or unfair practices employed “in connection with” the sale or advertisement of merchandise. The commercial court acknowledged that the scope of “in connection with” under the ACFA is unclear, but after examining authority from varying sources the commercial court concluded that “in connection with” is not limited solely to specific actions taken at or before the purchase or sale of merchandise. Rather, a deceptive or unfair practice occurring after a sale may still be considered “in connection with” the sale. Whether an alleged deception is in connection with the sale of merchandise is ultimately a question of fact to be decided at trial. Here, there were issues of fact to be determined by the trier of fact, such as whether the alleged post-sale deceit involving location information had some connection with the sale of the devices such that Google violated the ACFA.

World Egg Bank Inc v. Weiss^[58] (Examining whether the sale of a company is consummated merely by the execution of a sales contract). In this case, the majority shareholder of a company sought to sell the company over the minority shareholder’s objection. In addition to objecting, the minority shareholder subsequently disputed the fair market value of the company. The issue before the commercial court was the determination of the fair market value of the company, which required the commercial court to determine when, if ever, the sale of the company actually occurred.

The commercial court explained that the consummation or effectuation of the sale of a company is triggered by the occurrence of the sale, not by the entry of a contract for sale. Here, the majority shareholder argued that the sale was consummated on April 17, 2015, which was the effective date identified in the contract for the sale of the company. The commercial court rejected this argument, finding that there was no evidence that the sale of the company was actually consummated at that time, or at any time thereafter, because the majority shareholder did not provide evidence that the transaction ever closed or was completed. For example, the commercial court determined that the company’s share price for purposes of the sale was not even finalized until November 2015. Therefore, the sale could not have been consummated as of April 17, 2015. The court granted the minority shareholder’s motion for summary judgment holding the majority shareholder failed to carry its burden of establishing the consummation of the transaction.

Beazer Homes Holdings LLC v. DCOH Development LLC^[59] (Examining whether a condition under a contract occurred such that duty to perform was triggered). In this case, Defendant filed a motion for partial summary judgment on the issue of whether a condition under a purchase agreement occurred such that the Defendant’s obligation to sell real property to Plaintiffs arose. Defendant entered into a written purchase agreement with Plaintiffs to sell real property to Plaintiffs. The purchase agreement contained a provision titled “Determination of Buyer’s Estimated Improvement Costs and Schedule,” under which the parties were required to agree in writing upon the final amount of Estimated Improvement Costs (“EICs”) prior to closing. Defendant argued that this provision was an express condition that never occurred because any EICs Defendant provided to Plaintiffs were not based on “fixed/guaranteed prices and actual bids,” and, therefore, were not final. As a result, Defendant argued that its obligation to sell the property to Plaintiffs never arose.

In response, Plaintiffs raised several arguments. First, Plaintiffs argued that Defendant sent Plaintiffs proposed EICs that Plaintiffs accepted, thereby satisfying requirement in the purchase agreement. Second, Plaintiffs argued that if the proposed EICs did not satisfy the requirement in the purchase agreement, the failure to satisfy the requirement was caused by Defendant’s failure to provide “final” EICs acceptable to defendant that Plaintiffs could then accept. Third, Plaintiffs argued that Defendant anticipatorily repudiated the purchase agreement because by failing to provide EICs that Defendant deemed acceptable, Defendant clearly indicated that it would not perform under the purchase agreement. Finally, Plaintiffs argued that Defendant breached the implied covenant of good faith and fair dealing because Defendant’s purported terminations of the purchase agreement were shams intended to secure a higher price for the property.

The commercial court started off by acknowledging that the purchase agreement contained ambiguities. While the EIC provision did refer to “actual bids” and “fixed/guaranteed” amounts, the very item at issue— EIC —contains the word “estimated.” Therefore, the nature of the EICs themselves are estimates and not fixed or guaranteed prices. The commercial court doubted that the parties intended to enter into a purchase agreement defining EICs in such a manner that they could never complete. Next, the commercial court indicated that questions of fact remained as to whether the EICs that Defendant proposed to Plaintiffs were accepted such that Plaintiffs could accept them. In addition, the commercial court noted that Defendant’s argument ignored the fact that it was its obligation to provide proposed EICs to Plaintiffs. Therefore, questions of fact remained as to whether Defendant itself prevented the fulfillment of the condition or if Defendant intended to never perform. The commercial court denied the partial motion for summary judgment.

§ 1.3.2. Delaware Superior Court Complex Commercial Litigation Division

Diamond Fortress Techs., Inc. v. Everid, Inc.^[60] (Cryptocurrency assets are treated as a security when evaluating contract damages). Pursuant to a licensing agreement and an advisor agreement, Plaintiffs contracted to provide Defendant with patented identification software and as-needed assistance with the integration of the software. Defendant developed a block-chain based identity and financial platform which needed Plaintiffs’ identification software to verify and confirm its users’ identities. The agreements provided that the Plaintiffs would be paid in cryptocurrency token distributions when Defendant eventually held its Initial Coin Offering (“ICO”) (the cryptocurrency equivalent of an initial public offering) and at subsequent Token Distribution Events (“TDEs”). The ICO and several TDEs occurred but Defendant never paid Plaintiffs as agreed. Plaintiffs sued Defendant for breach of the agreements and moved for default judgment based on Defendant’s failure to defend itself in the lawsuit.

In deciding the damages to award Plaintiffs for the Defendant’s breach, the court recognized that the classification and valuation of cryptocurrency, along with the calculation of damages resulting from the breach of a cryptocurrency-paid contract, are novel matters to Delaware. First, the court held that it would rely on CoinMarketCap as a reliable cryptocurrency valuation tool for determining the USD value of cryptocurrency tokens. Then, the court ascertained the proper method for calculating damages such that it would place Plaintiffs in the same position they would have been had the agreements been fully performed. The court held that, because cryptocurrency constitutes a security, it would follow the “New York Rule” previously adopted by Delaware courts to calculate damages in wrongful stock conversion litigation. Accordingly, the court calculated the damages by multiplying the total tokens awarded under the agreements by the tokens’ highest intermediate value within three months of the discovery of Defendant’s breach.

Greentech Consultancy Co., WLL v. Hilco IP Servs., LLC^[61] (Preliminary agreements to agree are binding and enforceable contracts). In Greentech Consultancy Company, WLL, the parties agreed to enter into a joint venture to develop and commercialize intellectual property owned by Plaintiff. Their agreement was set forth in a term sheet which indicated that there would be a subsequent agreement “setting forth the specific terms and conditions of the proposed transaction in more detail.” Defendant ultimately backed out of the joint venture before closing and Plaintiff sought to recover damages for Defendant’s failure to meet its obligations pursuant to the term sheet.

Although the term sheet did not expressly state that the parties would exercise “good faith” in negotiating the open issues, the court held that the term sheet nevertheless contained an implied obligation to negotiate in good faith. The court further clarified that preliminary agreements in which the parties agree on certain major terms, but leave other terms open for further negotiation are in fact binding and enforceable contracts. The difference between such preliminary agreements and normal contracts is simply which obligations bind the parties. The court held that Defendant was obligated to negotiate with Plaintiff in good faith in an effort to reach final agreement within the scope that had been settled in the term sheet. Ultimately, the court denied the parties’ motions for summary judgment on the issue of whether Defendant satisfied its obligation to negotiate the open issues under the term sheet in good faith because reasonable minds could differ as to whether Defendant’s conduct amounted to bad faith.

Simon Prop. Grp., L.P. v. Regal Ent. Grp.^[62] (Enforcing a broad force majeure provision between sophisticated parties). In Simon Property Group, L.P., the parties entered into several leasing agreements for commercial properties. The leasing agreements contained clauses in which Defendants guaranteed performance by the tenants of all agreements, covenants, and obligations, including guaranteeing the full and prompt payment of rent. Each of the leasing agreements also contained a force majeure provision, obligating the tenants to pay rent in full despite the occurrence of a force majeure event. Due to COVID-19, the tenants were required to adhere to their respective state’s restrictions and began to default on their rent obligations in April 2020. Plaintiff sought more than $5.5 million in unpaid rent and other charges, and moved for partial summary judgment on the counts for breach of the guaranties.

The court rejected Defendants’ argument that they were excused by the COVID-19 pandemic and related governmental restrictions. Specifically, it held that the leasing agreements contained broad force majeure provisions which allocated the risk of impossibility and impracticability to the tenants. Based on the great weight of authority in Delaware and other jurisdictions, the court held that Plaintiff was entitled to partial summary judgment on liability. Acknowledging that the ruling may be considered harsh, the court noted that the leasing agreements involved sophisticated parties which freely contracted and allocated risk to the tenants. Moreover, it recognized that the COVID-19 pandemic was neither unprecedented nor unforeseeable noting the Spanish Flu pandemic and the 1988 film industry strike.

§ 1.3.3. State-wide Business Court in Georgia

Insight Global, LLC v. Marriott Intern., Inc.^[63] (Contract termination under force majeure provisions). This contract dispute arose from an event cancellation due to the COVID-19 pandemic. Under a 2019 contract, Defendant Marriott International, Inc. agreed to host an annual sales conference in January 2021 for Plaintiff Insight Global, LLC at one of Marriott’s Florida hotels. Insight paid Marriott a $40,000 deposit. In June 2020, as the COVID-19 pandemic unfolded, Florida state and county officials issued short-term executive orders limiting, among others, restaurant capacity and encouraging the public to avoid large gatherings. In July 2020, Insight sent Marriott a “termination notice” and requested the return of its deposit, stating that it was ending the agreement under the contract’s “Impossibility Provision.” Insight argued that the executive orders under the pandemic rendered the agreement impossible. Marriott disputed this contention, however, and demanded $695,000 under the contract’s liquidated damages, which provided damages at varying percentages based on the date of termination. Soon after Insight sent the termination email, new executive orders were issued that allowed business to reopen and only required face coverings. Insight’s counsel then asked Marriott to provide a plan for performance, but Marriott did not respond. After the performance dates passed, Insight sued seeking (1) a declaration that it properly terminated the agreement because of the pandemic; (2) a declaration that Marriott failed to provide reasonable assurances; (3) a declaration that the liquidated damages provision was unenforceable; and (4) relief under two Florida statutes. Marriott counterclaimed for breach of contract and failure to pay liquidated damages. Insight moved for summary judgment on the counterclaim, and Marriott cross-moved for summary judgment on all claims, including its own counterclaim.

The court granted Marriott’s motion. First, because the contract contained no choice of law provision, the court conducted a choice of law analysis, holding that Georgia’s “traditional rule” for contracts involving out-of-state performance requires application of Georgia law to common law claims and state-of-performance law to statutory claims. Second, the court held that, although the Impossibility Provision contemplated situations like the COVID-19 pandemic and pandemic-related government regulations, Insight did not prove that the pandemic ultimately made its performance impossible or illegal. The court rejected Insights’ argument that impossibility should be measured at the time of termination; impossibility must be determined instead at the time of performance. Third, the court held that, although case law is unclear on the availability of demands for “adequate assurances” under service contracts, Insight’s communications did not even constitute demands because its requests for a “plan of performance” merely sought information and came after repudiation of the contract. As a result, Insight breached the agreement. Fourth, the court rejected Insight’s argument that even if it breached the agreement, its breach was excused because Marriott could not perform. The court concluded that, unlike Florida law, Georgia does not require non-repudiating parties to prove they were “ready, willing and able” to perform after an anticipatory repudiation. Finally, the court held that as the non-breaching party Marriott is entitled to liquidated damages because (a) Marriott’s lost profits are difficult to predict, (b) the contract contained language stating that liquidated damages (which are common in the industry) are not intended to be a penalty, and (c) the sums provided are reasonable and not arbitrarily set.

Elavon, Inc. v. People’s United Bank, Nat. Ass’n^[64] (Personal jurisdiction of out-of-state defendants). This action involves an out-of-state successor in interest’s attempted termination of a referral agreement. Plaintiff Elavon, Inc. is a Georgia corporation that provides global processing services for merchants in credit card and other transactions. In 2018, Elavon entered into a five-year referral agreement with United Bank, N.A. (“United”), a Connecticut corporation. Defendant People’s United Bank (“People’s United”) became United’s successor in interest after a stock-purchase merger in 2019. Upon completion of the merger, People’s United transmitted a letter to Elavon purporting to terminate the referral agreement. Elavon sued, claiming People United’s letter amounted to a wrongful anticipatory repudiation and failure to perform under the contract. People’s United then moved to transfer the case from the State-wide Business Court. While that petition was pending, People’s United filed its answer and moved to dismiss for lack of personal jurisdiction. Although the parties’ agreement included a jurisdictional provision that required disputes to be pursued “exclusively in the state courts located in Fulton County, State of Georgia,” People’s United insisted that because the jurisdiction provision also contained an impermissible jury-waiver clause, the entire provision was unenforceable. Elavon responded that the inclusion of a severability provision in the contract made the jurisdictional clause enforceable despite its jury-waiver language.

The court held that, under Georgia precedent, the entire jurisdiction provision was unenforceable. While the severability provision allowed an unenforceable provision to be severed from the agreement, the jury waiver and forum selection language, though separate clauses, were part of a single provision. Next, the court determined that an independent basis of personal jurisdiction over People’s United was just as unavailable. Under Georgia law, a court has jurisdiction over nonresident defendants if the defendants purposefully act or transact business in the state, the cause of action arises out of those transactions, and the exercise of jurisdiction is reasonable. By itself, signing a contract cannot support the court’s exercise of personal jurisdiction. The court noted that preliminary negotiations did not take place in Georgia, and the record did not reveal that People’s United performed any services in Georgia. Thus, under Georgia law, it was clear that unilateral acts by Elavon did not confer jurisdiction, and the mere transmittal of the termination letter did not subject People’s United to personal jurisdiction.

§ 1.3.4. Indiana Commercial Court

deGorter v. Devlin II et al.^[65] (Approving the Commercial Court Master’s Recommendations regarding Plaintiff’s Motion to Compel). Indiana’s Commercial Court Rules outline the process for appointment of a commercial court master in a specific case, as well as the requirements that a commercial court master must follow.^[66] DeGorter is a prime example of the use of masters in Indiana’s commercial courts. On November 1, 2021, Plaintiff filed a motion to compel production of documents, which Defendants opposed. Following additional briefing and a hearing, the Court issued an order on June 23, 2022, finding that there was insufficient information to determine whether any privilege applied to the documents at issue without conducting a full review of the documents, and recommending that the matter be resolved by a commercial court master. After both parties consented, the Court issued an order on July 18, 2022, appointing a commercial court master to review the withheld/redacted documents, determine when the parties became adverse, and prepare a written report and recommendation on the motion to compel for the Court’s review. On August 15, 2022, the Court issued a subsequent order clarifying the scope of its prior order to note that certain categories of documents were not covered by the master’s review.

Shortly thereafter, the commercial court master submitted an initial report, providing his recommendations on seven different categories of documents based on their varying characteristics. On September 23, 2022, the Court accepted all the master’s recommendations, granting in part and denying in part Plaintiff’s motion to compel. Three of the determinations adopted by the Court are particularly noteworthy:

• First, the commercial court master determined that Plaintiff was entitled to privileged documents that were created during his tenure on Defendant’s board, as former directors or board members of corporations are entitled to privileged documents created during their tenure as they are individuals within the mantel of privilege. As such disclosure of those documents to the former directors does not eliminate the privilege.
• Second, the commercial court master determined that Plaintiff was entitled to documents that were part of his application before a government entity, as the common interest principle applied due to the same attorney acting as counsel for both Plaintiff and Defendants during the application process. The master also determined that the lack of clear boundaries explaining the scope of the attorney’s representation of the parties further supported the application of the common interest exception to privilege.
• Third, the commercial court master noted that non-privileged attachments to privileged communications should generally be treated as privileged, but only when they are attached to communications with counsel. Other copies of the same non-privilege attachment do not share that privilege and are discoverable.

Parkview Health Sys. Inc. v. Am. Guar. And Liab. Ins. Co.^[67] (Denying Defendant’s motion to dismiss). In Parkview Health, Plaintiff, a health care system, purchased an insurance policy from Defendant which contained an Interruption by Communicable Disease Coverage (ICD Coverage). The ICD Coverage provided that Defendant would pay for losses sustained by Plaintiff resulting from suspension of business activities at covered locations due to any government orders regulating communicable diseases. Plaintiff alleged that a series of executive orders issued by Indiana’s Governor during the COVID-19 pandemic, impacted Plaintiff’s ability to provide access at its locations, thus requiring payment under the policy. Defendant argued that the complaint should be dismissed because it failed to sufficiently plead facts that satisfied the requirements to establish coverage, in that the executive orders did not prevent access to Plaintiff’s locations, and that admissions of coverage in other cases was irrelevant. In response, Plaintiff argued that discovery was necessary to under the effect of the executive orders.

While the Indiana Trial Rules (specifically Rules 8(A) and 12(B)(6)) generally mirror their federal counterparts, Indiana’s motion-to-dismiss procedure is different than federal practice. Rather than adopting the “plausibility standard” as found in federal case law, Indiana is a notice-pleading state. As such, a complaint filed in Indiana state court is not required to state all the elements of a cause of action but it must inform a defendant of the claim’s operative facts so the defendant can prepare to meet it. The intention of this practice is to “discourage battles over mere form of statement.”

The Court found that there was no clear Indiana appellate case law that provided specific guidance on this rare type of policy. The Court also noted that any ambiguities in the policy must be read in a light most favorable to the non-moving party, Plaintiff. The Court held that the motion to dismiss was premature and that the case should proceed as (1) Plaintiff had met the notice pleading requirements regarding the issue of whether the executive orders impacted the policy, and (2) discovery should be conducted on the issue of whether Defendant had admitted coverage in other cases. The Court noted that it might consider those issues upon summary judgment motions at an appropriate time.

Indianapolis Power & Light Co. (d/b/a AES Indiana) v. American States Insurance Co., et al.^[68] (Granting Defendant’s motion to dismiss). In Indianapolis Power & Light Co., AES Indiana brought an action against the Home Insurance Company (“Home”) related to insurance coverage for AES Indiana’s alleged actual and potential liability for claims arising from coal combustion residuals or ash. AES Indiana asserted that Home has a duty to defend and/or reimburse AES Indiana for ongoing costs related to these claims. AES Indiana brought claims for (1) breach of contract; (2) declaratory judgment; and (3) unfair claims practices and breach of the duty of good faith. Home moved to dismiss under Indiana Trial Rules 12(b)(1), (2), and (6). Home also moved to transfer venue under Indiana T.R. 12(B)(3). AES Indiana did not contest Home’s motion to dismiss the breach of contract or unfair claims practices claim, and thus the claims were dismissed. The Court addressed the motion to dismiss as to the declaratory judgment claim.

Here, Home contended that AES Indiana’s claims should be dismissed because Home was declared insolvent and ordered liquidated by a New Hampshire Superior Court in 2003. The New Hampshire Order also directed that all actions and proceedings against Home, whether in New Hampshire or elsewhere, should be abated. Home argued that the New Hampshire Court’s Order must be honored under fundamental principles of full faith and credit and comity. Indiana Code § 27-9-3-12(b) requires Indiana courts to “give full faith and credit to injunctions against the liquidator or the company or the continuation of existing actions against the liquidator or the company, when those injunctions are included in an order to liquidate an insurer issued under similar provisions in other states.” Indiana has also codified the concept of full faith and credit at Ind. Code § 34-39-4-3(b). The Court found that the concept of full faith and credit is central to the system of jurisprudence. Similarly, Indiana courts have described comity, while not a constitutional requirement, as representing a willingness to grant a privilege out of deference and goodwill. Under principles of comity, as the Court notes, Indiana courts may respect final decisions of sister courts as well as proceedings pending in those courts. Factors considered in addressing comity questions include (1) whether the first filed suit has been proceeding normally, without delay, and (2) whether there is a danger the parties may be subjected to multiple or inconsistent judgments. Where an action concerning the same parties and the same subject has been commenced in another jurisdiction capable of granting prompt and complete justice, comity ordinarily should require staying or dismissal of a subsequent action filed in a different jurisdiction, in the absence of special circumstances. Here, the Court found that denying Home’s Motion to Dismiss would cause inconsistency throughout the lawsuits. Because this principle of preventing inconsistency is the reason that comity exists, the Court granted Home’s Motion to Dismiss in its entirety.

New Era Constr., LLC v. Brendonshire Cts. Ass’n, Inc.^[69] (Denying Plaintiff’s motion for award of expenses). On April 19, 2021, Plaintiff served discovery requests on Defendant, simultaneously with its Complaint and summons. On September 17, 2021, Plaintiff filed a Motion to Compel due to Defendant’s failure to respond to the discovery requests, despite Defendant’s attorney having filed an appearance and an Answer. After Defendant’s attorney withdrew from the case and Defendant failed to respond to Plaintiff’s motion, the Court granted the Motion to Compel on October 12, 2021. On October 27, 2021, Defendant filed a letter, which the Court construed as a Motion to Reconsider and Motion for Protective Order. Plaintiff filed a response, and the Court denied Defendant’s motion to reconsider and for protective order.

Plaintiff then filed a Motion for Award of Expenses seeking $1,140.00 in attorneys’ fees for its response to Defendant’s Motion to Reconsider and Motion for Protective order, which Plaintiff argued was not substantially justified and was meritless. Defendant argued that he filed the motion in good faith on limited issues and that the motion was not meritless. Trial courts have wide discretion in resolving discovery disputes between parties, and any decision by trial court will only be overturned on appeal if the appealing party can show that the trial court abused its discretion. Such an abuse of discretion is only found where the result reached by the trial court is clearly against the logic and effect of the facts and circumstances before the court. Ind. T.R. 37(A)(4) states:

(A) Motion for order compelling discovery. A party, upon reasonable notice to other parties and all persons affected thereby, may apply for an order compelling discovery as follows:

***

(4) Award of expenses of motion…If the motion is denied, the court shall, after opportunity for hearing, require the moving party or the attorney advising the motion or both of them to pay to the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorneys’ fees’, unless the court finds that making of the motion was substantially justified or that other circumstances make an award of expenses unjust.

Here, the Court found that there was at least one question over whether Defendant had the documents sought in discovery or if he was obligated to turn them over. Thus, the Motion to Reconsider and Motion for Protective Order was substantially justified, and the Motion for Award of Expenses was denied, accordingly.

Midwest Service & Supply, Inc., et al. v. Auto-Owners Insurance Co.^[70] (Granting in part and denying in part Defendant’s motions to strike and the parties’ cross-motions for partial summary judgment). In Midwest Service, the parties filed partial cross-motions for partial summary judgment to determine whether Plaintiffs had demonstrated their entitlement to additional insurance coverage within the policy issued by Defendant after a fire occurred at a commercial warehouse building. Defendant also filed motions to strike portions of testimony for two of Plaintiffs’ witnesses, including an expert.

In determining that the declaration of Plaintiff’s expert was admissible, the Court explained the intersection between Indiana Rule of Evidence 702 and the federal Daubert factors. “In Indiana, there is no specific test or set of prongs which must be considered [to] satisfy Indiana Evidence Rule 702.” While Indiana courts consider the federal Daubert factors to be helpful, they are not considered controlling. “Rather, a witness qualifies as expert under Rule 702 if two elements are met: (1) the subject matter is distinctly related to some scientific field, business or profession beyond the knowledge of the average lay person; and (2) the witness is shown to have sufficient skill, knowledge, or experience in that area so that the opinion will aid the trier of fact.”

In determining the parties’ cross-motions for summary judgment regarding Plaintiff’s declaratory judgment claim, the Court explained Indiana’s standard for the interpretation of insurance policies. An insurance policy should be construed to further the policy’s basic purpose of indemnity. If there is an ambiguity, an insurance contract is construed strictly against the insurer, and the language of the policy is viewed from the insured’s perspective. While a division between courts as to the meaning of the language in an insurance contract is evidence of ambiguity, it does not establish that a particular clause is ambiguous and Indiana courts are not obliged to agree that other courts have construed the policy correctly. A policyholder need not prove that its interpretation of a policy term is the only reasonable interpretation—only that it is a reasonable interpretation. For those reasons, the Court found that the policy at issue should be construed in favor of providing coverage, as “an ordinary policyholder of average intelligence-the standard for interpreting policy terms in Indiana-… would reasonably expect coverage for any lost income or extra expense suffered because of the fire.”

§ 1.3.5. Iowa Business Specialty Court

RSS COMM2015-CCRE27-DE WMC, LLC v. WC MRP Des Moines Center, LLC, et al.^[71] (Discharge of receivership). Plaintiff filed a lawsuit to foreclose on two mortgages it held over rental properties owned by mortgagors WC MRP Des Moines Center, LLC and WC MRP Waterloo Plaza, LLC (together “the WC MRP Defendants”). In addition to the petition, Plaintiff also filed an emergency application for the appointment of a receiver over properties located in Des Moines, Iowa (“Des Moines property”) and Waterloo, Iowa (“Waterloo property”), claiming that one of the properties needed a receiver to avoid imminent harm. Plaintiff specifically argued the WC MRP Defendants were instructed by a fire department to immediately repair a broken fire suppression system, which constituted a fire hazard, or cease all business operations. Plaintiff also asserted that a lack of adequate lighting resulted in increased vandalism on the Des Moines property and conditions on the property were so inadequate that a tenant sued the WC MRP Defendants over said conditions. The Court ultimately granted the application for receiver.

The WC MRP Defendants filed a motion to discharge the receiver and argued, among other things: (1) they were working diligently to repair the fire suppression system, (2) the receiver caused delays and extra expenses, (3) repair of the fire suppression issue was complex and the receiver made no greater progress than the WC MRP Defendants had before the receiver was appointed, and (4) the receivership over the Waterloo property was unnecessary because all of Plaintiff’s management complaints related to the Des Moines property.

The Court found there was lack of evidence showing a continuing need for the receivership and the costs of the receiver significantly outweighed the benefit of continued appointment. The establishment of the receivership was no longer supported because either the issues were resolved by the receiver or the receiver was no better positioned to resolve the issue than the WC MRP Defendants. Accordingly, the Court granted Defendants’ motion to discharge the receiver.

Rupert v. Elplast America, Inc.^[72] (Breach of fiduciary duties for corporate officers). Plaintiff, the former president of Defendant Elplast America, Inc., filed a lawsuit alleging breach of contract and a claim for unpaid wages relating to Plaintiff’s separation from the company after he was asked to step down as president. Defendant asserted a breach of fiduciary duty counterclaim alleging Plaintiff breached his duty to shareholders in various ways, including failing to properly account for the transfer of funds, failing to repay company debt, and failing to report accurate company data to the board of directors. Plaintiff filed a motion for summary judgment asserting (1) Defendants failed to support a breach or damages, (2) expert testimony is necessary establish a breach of fiduciary duty claim, and (3) Plaintiff was immune to liability pursuant to Iowa statutory law.

The Court denied Plaintiff’s motion for summary judgment on all arguments. First, the Court determined that there was sufficient evidence, if believed by a jury, to demonstrate that Plaintiff breached his fiduciary duty to the company, which resulted in damages. Second, the Court rejected that Iowa Code § 490.842(3), a statutory provision that may immunize officers for delegated responsibilities if there is no knowledge of the incompetent or improper conduct related to the delated task, provides an absolute defense. The Court further noted that the defense was not available to Plaintiff because evidence suggested that there were no delegated tasks related to the purported breach. Third, the Court rejected that expert witness testimony was necessary to establish a breach of a fiduciary duty as the claims concerned the failure to take action, which, unlike legal and medical malpractice cases, are within the common understanding of a layperson.

§ 1.3.6. Kentucky Business Court Docket

Wen-Parker Logistics, Inc. and WPL Brokerage Inc. vs. Two Canoes, LLC and Mesh Gelman^[73] (Contract dispute involving forum selection clause, personal guaranty and unjust enrichment claim). Plaintiffs, a parent that is a New York corporation and its wholly owned subsidiary that is a Kentucky corporation, provide end-to-end cargo transportation with the subsidiary handling custom clearances for importers. Gelman executed Terms of Service with the Kentucky subsidiary on behalf of Two Canoes to handle shipments of personal protective equipment. Plaintiffs brought the action to recover more than $2,000,000 in unpaid invoices, and Defendant made a motion to dismiss. Defendants argued that the Web Site Terms applied, requiring a New York forum rather than the Terms of Service signed by it, which chose a forum in Kentucky. The court found that the appropriate forum was in Kentucky. The court dismissed the claims against Gelman for breach of a personal guaranty finding that Gelman signed the documents on behalf of the company, and not individually, among other things. The court did not dismiss the Plaintiffs’ unjust enrichment claim finding that discovery would be needed determine if the contract were controlling or an unjust enrichment claim may be made.

§ 1.3.7. Maine Business and Consumer Docket

Morgan v. Townsend^[74] (Restrictive Covenants). Short-term rentals are a source of much controversy in Maine, and have been the focus of several ballot measures, ordinances, and referendums across the state. A recent BCD case highlights one neighborhood’s attempt to regulate short-term rentals using its restrictive deed covenant. In Morgan v. Townsend, two neighbors (“Plaintiffs”) moved for summary judgment against a third neighbor (“Defendant”) for violating the neighborhood’s restrictive covenant and for nuisance because he operated a short-term rental on his property. The parties all own real property in a neighborhood in Cushing, Maine, a popular summer vacation destination. Cushing has no noise ordinances or zoning restrictions on rental properties, but the neighborhood properties were subject to identical restrictive covenants, stating that properties could “not be used or occupied for any purpose other than for private residential purposes and no trade or business shall be conducted therefrom,” and allowed no structure other than “for use and occupancy by one family.” Defendant’s property contained two separate residences that he rented out on short-term vacation rental websites. He advertised the structures as jointly sleeping up to 32 people and described the property as the “[b]est oceanfront property for large groups on the coast of Maine!” He had not lived on the property since the late 1970s and had not visited it since early 2019. He employed a property manager who was responsible for renting it out. Between May 2019 and September 2021, the property was rented to 59 groups who, according to Plaintiffs, played loud music; trespassed; left trash on neighboring properties; set off fireworks; left flood lights on all night; and generally disrupted the neighborhood.

The Plaintiffs claimed that Defendant’s operation violated the restrictive covenant because: 1) he was not using the property for solely residential purposes; 2) he was conducting business on the property; and 3) he used the structures on the property in a manner inconsistent with its intended use as a private residence by a single family. Plaintiffs also asserted a private nuisance claim. The BCD first assessed whether Defendant’s rentals violated the restrictive covenant. It observed that, in Maine, renting out a property is not necessarily a commercial use that is inconsistent with a restrictive covenant limiting a property to use for residential purposes. A party may, however, violate a residential use restriction where the party’s use is inconsistent with the purpose of the restriction. While a residential use restriction, on its own, encompasses a wide range of property uses beyond use as a long-term or primary home, qualifying language in the covenant can tighten the restriction. Finally, the BCD noted that Maine case law does not limit one-family properties to hold a single structure where multiple structures are intended for use by one family. The Court found that although the neighborhood covenant did not entirely prohibit rentals—or even short-term rentals—its use of “private” to modify the term “residential purposes,” along with its limitation to “occupancy by a single family,” narrowed the rental pool to familial units only. Further, the BCD found that the circumstances of Defendant’s rental operation, including his arms-length relationship with the property and employment of a property manager, rose to the level of a full-scale commercial enterprise. As such, his conduct violated the restrictive covenant. The Plaintiffs’ motion for summary judgment was granted on the first count.

§ 1.3.8. Massachusetts Business Litigation Session

Healey v. Uber Technologies, Inc.^[75] (Privilege dispute). In 2020, the Attorney General (“AG”) of Massachusetts, Maura Healy, filed a lawsuit against the ride-share companies Uber Technologies, Inc. (“Uber”) and Lyft, Inc. (“Lyft”), alleging that Uber and Lyft have violated Massachusetts wage and hour laws by incorrectly classifying drivers who use these ride-share apps as independent contractors. Uber moved to compel the AG’s response to various discovery requests, arguing that the AG could not rely on the investigatory privilege to withhold documents or redact information identifying individual Uber and Lyft drivers who shared information with the AG during its investigation. Some of these drivers were interviewed by the AG. Others supplied information through a website the AG created to gather drivers’ stories. The AG argued that disclosure of the drivers’ identities would chill the willingness of individuals to “come forward and speak freely” with law enforcement in future investigations.

The Court disagreed. The Court concluded that the investigatory privilege did not bar discovery of the drivers’ identities. As the Court explained, the drivers’ testimony was plainly relevant. Drivers who provided information to the AG were more likely to be called as witnesses at trial. Uber and Lyft were entitled to know the identities of these drivers to help prepare for their testimony or to consider calling some of these drivers as defense witnesses. Moreover, according to the AG, more than 600 drivers provided information. Given the large number of drivers that provided information, the Court concluded that the drivers could not have reasonably expected their identities to remain confidential. In fact, the AG had warned the drivers that their identities might eventually be disclosed. The Court also reasoned that, given the number of drivers that came forward, it was unlikely these individuals would face retaliation from Uber or Lyft. In any event, these drivers would have a “considerable remedy” if any such retaliation were to follow. Finally, the Court noted that this information would be produced subject to a protective order. Thus, based on the “unique circumstances” of the case, the Court overruled the AG’s objections based on investigatory privilege.

In its decision, the Court also addressed several other discovery disputes. Among other things, the Court sustained the AG’s objections that Uber’s requests for production purportedly seeking information relevant to its “constitutional” defenses were overbroad. In essence, these “constitutional” defenses sought to show that the AG had been selective or inconsistent in deciding to bring litigation against Uber and Lyft as opposed to the many other companies involved in the “gig-economy.” At the same time, the Court noted that the AG enjoys broad prosecutorial discretion and a presumption that she has properly discharged her duties. Uber had failed to present the “clear evidence” of selective prosecution needed to rebut this presumption.

FTI, LLC v. Duffy^[76] (Non-solicitation; unfair and deceptive trade practices). FTI, LLC (“FTI”), a consulting company, brought a lawsuit against three of its former employees—Robert Duffy (“Duffy”), Stephen Coulombe (“Coulombe”), and Elliot Fuhr (“Fuhr”) (collectively, the “Former Employees”), alleging that they violated their employment agreements and fiduciary duties by going to work for a competitor, Berkley Research Group, LLC (“BRG”). BRG was also named as a defendant. In 2022, the Court presided over a two-and-a-half-week trial where, among other things, the Former Employees were found to have breached their employment agreements, and BRG was found to have engaged in unfair and deceptive trade practices in violation of M.G.L. c. 93A. The jury awarded FTI over $21 million in damages, and the Court, deciding certain claims against BRG, awarded FTI $18 million in punitive damages.

Defendants moved for a new trial and to amend the judgment. The Court denied these motions. The Court concluded that it properly granted a directed verdict for FTI on Defendants’ defense that the Former Employees were constructively discharged by FTI. Defendants did not provide any evidence to show that Duffy had been improperly demoted or that working conditions at FTI had become so intolerable as to constitute constructive discharge. The Court reaffirmed that the non-competition and non-solicitation clauses in the subject employment agreements were reasonable in scope. And the Court rejected Defendants’ argument that “solicit” should have been defined to the jury to require the initiation of a client contact.

As to the c. 93A claim, the Court rejected BRG’s argument that the disputed events did not occur “primarily and substantially” in Massachusetts, as the statute requires. At trial, BRG had the burden of proof on this issue. As the Court explained, although Fuhr worked out of FTI’s New York office, he supervised FTI employees in Boston, and Duffy and Coulombe both worked in FTI’s Boston office. Half of the other FTI employees that left for BRG with Duffy, Coulombe, and Fuhr were also located in the Boston office. Moreover, over half of the client revenues that left FTI with the departure of Duffy had originated in the Boston office. All told, Massachusetts provided the requisite “center of gravity” for the culpable conduct. The Court rejected BRG’s argument that the dormant Commerce Clause prohibited regulation of conduct occurring outside Massachusetts. Because c. 93A does not discriminate against interstate commerce, any incidental effects on interstate commerce would not violate the constitution unless they were “clearly excessive” in relation to the putative local benefits of the law. Here, the c. 93A verdict was based on culpable conduct squarely aimed at and caused in Massachusetts, and the interstate effects of the verdict were not excessive. The Court also rejected the argument that a Maryland choice-of-law provision in the Former Employees’ FTI employment agreements in any way barred the c. 93A claim against BRG.

Katopodis v. Plainville Gaming and Redevelopment, LLC^[77] (Consumer protection). In a putative class action, Plaintiffs alleged that Plainville Gaming and Redevelopment, LLC d/b/a Plainridge Park Casino (“PPC”) violated the Massachusetts Gaming Act, M.G.L. c. 23K, § 29, and its related regulations, by failing to send its rewards cardholders statements notifying them of their bets, wins, and losses (“win/loss statements”). Based on these allegations, Plaintiffs asserted a single claim for violation of Massachusetts’ consumer protection statute, M.G.L. c. 93A. PPC moved to dismiss the case under Rule 12(b)(6).

The Court denied PPC’s motion, concluding that Plaintiffs had alleged a plausible claim under c. 93A. The Gaming Act and its regulations require casino operators, like PPC, to provide a monthly win/loss statement to patrons with rewards cards. The statement can be sent to a patron’s physical address, or it can be sent by email unless the patron opts out of electronic notifications. As alleged, PPC failed to provide any win/loss statement to its rewards cardholders for several years and then only provided electronic statements, regardless of whether a patron had provided an email address or had opted out of electronic notifications. Because of this, Plaintiffs claimed they had not received the monthly win/loss statements required by law.

PPC relied on a line of cases holding that a claim under c. 93A requires a plaintiff to show “injury” “separate” and “distinct” from the statutory or regulatory violation itself. Based on this authority, PPC argued the case should be dismissed because its alleged failure to provide the win/loss statement did not, by itself, constitute “injury” to Plaintiffs under c. 93A. The Court disagreed. According to Plaintiffs, without the win/loss statements, they were deprived of the opportunity to make an “informed decision” about their gambling habits. A demand letter sent to PPC – which the Court considered on the motion to dismiss – further claimed that Plaintiffs had gambled less at other casinos when these casinos provided the required win/loss statements. And some of Plaintiffs further claimed that they had suffered financial hardships as a result of their gambling habits. All told, the Court concluded that Plaintiffs had adequately alleged an “injury,” i.e., “gambling in the absence of a required consumer protection,” that was “separate” and “distinct” from the alleged violation itself.

§ 1.3.9. Michigan Business Courts

Main St. Real Est., LLC v. Conifer Holdings, Inc.^[78] (Insurance; contract interpretation). This case involved an insurance coverage dispute in which Defendant Conifer Holdings, Inc. refused to defend Plaintiff Main Street Real Estate, LLC in a lawsuit concerning Main Street’s alleged involvement in a fraudulent real estate transaction. In that underlying suit, the adverse party brought numerous claims against Main Street, including breach of contract, breach of fiduciary duty, and vicarious liability for an independent contractor’s criminal misconduct. Main Street sought indemnity from Conifer, its insurer. Conifer, however, denied coverage for all the claims against Main Street, asserting that: (1) only claims pertaining to “real estate services” were covered under Main Street’s insurance policy, and none of the allegations against Main Street fell within the scope of this term; and (2) all the claims fell under the policy’s list of coverage exclusions. 

The court rejected Conifer’s arguments and granted Main Street’s motion for summary disposition (i.e., summary judgment) as to Conifer’s duty to defend and indemnify Main Street against all the claims. In addressing Conifer’s first argument, the court applied the rules of contract interpretation and read the contract to provide that Conifer was required to defend Main Street against claims relating to “real estate services.” The court found that while the term “real estate services” was defined in the policy as services rendered by a “real estate agent” or “real estate broker,” the policy did not define “real estate broker” or “real estate agent.” As such, the court turned to Black’s Law Dictionary for guidance and used the dictionary’s definitions of “real estate broker” and “real estate agent” to find that several of the claims brought against Main Street related to “real estate services.” This included the claim in the underlying suit that Main Street did not draft accurate purchase agreements or properly advise its client regarding escrow funds. Therefore, these claims fell within the scope of the insurance policy such that Conifer had a duty to defend Main Street.

Since at least some of the claims were covered, Conifer’s duty to defend extended to all the claims: “Michigan case law is clear that when theories of liability which are not covered are raised with theories of liability that are covered under the policy, the insurer has a duty to defend.” The court also relied on this principle to dispose of Conifer’s second argument––that the claims against Main Street fell within the policy’s list of coverage exclusions. Because the court had already found that some of the claims were covered under the policy, Conifer had a duty to defend Main Street on all claims regardless of whether some of the claims were on the exclusion list. 

LiftForward, Inc. v. SimonXpress Pizza, LLC, et al.^[79] (Breach of Credit Agreement, COVID–19). Plaintiff LiftForward, Inc. extended a secured loan to Defendant SimonXpress Pizza, LLC for business purposes pursuant to a credit agreement and an accompanying promissory note. After several months of nonpayment, LiftForward sent a letter of default to SimonXpress, accelerating the unpaid principal balance due, together with accumulated interest and other fees and charges. LiftForward sued SimonXpress and moved for summary disposition, asserting that SimonXpress breached the parties’ credit agreement by failing to make required payments. SimonXpress also moved for summary disposition, alleging, inter alia: (1) that LiftForward had first breached the parties’ agreement by charging an unlawful interest rate; and (2) frustration of purpose due to the COVID–19 pandemic.  

The court first found that there was no genuine issue of material fact that SimonXpress was in default and that LiftForward was therefore entitled to the unpaid principal, accrued interest, and any other charges or fees payable pursuant to the parties’ credit agreement and promissory note. The court then rejected SimonXpress’s affirmative defenses. First, LiftForward had not materially breached the contract first by charging an unlawful interest rate; the promissory note, which SimonXpress had signed, agreed to fix the interest rate such that it would not exceed the “maximum interest rate permitted by applicable law.” Additionally, the loan qualified under a statutory exception (Mich. Comp. L. 438.31c(11)) to the criminal usury interest rate provisions, which permits “the parties to a note, bond, or other indebtedness of $100,000.00 or more, the bona fide primary security for which is a lien against real property other than a single family residence…[to]…agree in writing for the payment of any rate of interest.”

As to the other affirmative defense—COVID–19 frustration of purpose—SimonXpress failed to demonstrate that it was unable to perform its obligations under the agreement or even that its business was closed during the time period at issue. Moreover, the pandemic did not render LiftForward’s performance “virtually worthless” to SimonXpress, as is required under the frustration of purpose doctrine. The funds were intended for business-related purposes, and SimonXpress did not allege that it had stopped operating its business during the pandemic. Finally, SimonXpress’s frustration of purpose argument was undermined by the fact that it had allegedly stopped making the required payments more than two months before the COVID–19 shutdown commenced.  

Pioneer Gen. Contractors, Inc. v. 20 Fulton St. E. Ltd. Dividend Hous. Ass’n Ltd P’ship, et al.^[80] (Construction liens). Plaintiff Pioneer General Contractors, Inc. served as general contractor for the construction of a building in downtown Grand Rapids, Michigan. Pursuant to its contractual relationship with Defendants, the property owners, Pioneer began work on the project in 2015 and provided various services for Defendants, including supervising the work of various subcontractors. In 2017, a certificate of use and occupancy was issued, and tenants began to occupy the building. Defendants, however, failed to pay the $3.6 million outstanding balance that they owed to Pioneer and the subcontractors. Pioneer and some of the subcontractors then executed a “liquidating agreement,” in which they agreed to file construction liens on the property. The contractors ultimately carried out their agreement; each filed separate liens that totaled, in aggregate, approximately $6 million. In 2018, the parties entered a settlement agreement wherein Pioneer agreed to discharge all outstanding construction liens in exchange for Defendants’ payment of $1 million. Defendants failed to pay this amount, however, so Pioneer sued, seeking to foreclose on its construction liens.  

Defendants contended that the construction liens were invalid, raising three arguments to support this assertion. First, Defendants argued that Pioneer and the subcontractors had filed their liens for an amount (about $6 million total) that far exceeded the amount owed under the contract ($3.6 million total), which violated Michigan law (Mich. Comp. L. 570.1107(6)) and should therefore be void ab initio. The court disagreed and found that the statutory amount restriction applies to each lien claimant individually, rather than to lien claimants in the aggregate. Thus, while the aggregate lien amount did exceed the total amount Defendants owed to all the lien claimants, this did not invalidate the liens because, on an individual basis, each contractor’s construction liens did not exceed the amount that Defendants owed to that contractor. A discrepancy (here of about $2.3 million) between the aggregate lien and individual debt amounts may occur when, as here, a general contractor (Pioneer) and the subcontractors all have valid claims against Defendants for “the same unpaid obligations arising from work on the same construction project.” This discrepancy did not render the liens void ab initio.

Defendants next argued that the construction liens were invalid because Pioneer had filed them in bad faith. Specifically, Defendants alleged that Pioneer’s and the subcontractors’ execution of the “liquidating agreement” shortly before they filed their construction liens evinced a bad-faith scheme. The court rejected this claim, finding “nothing untoward” about the agreement or its timing. Indeed, the court noted that such agreements are commonplace within the construction industry as a mechanism to provide some security to subcontractors who lack privity of contract with the property owner. Defendants lastly argued that the parties’ master contract obligated Pioneer to refrain from encumbering the property with construction liens. The court flatly rejected this argument, noting that the plain terms of the contract authorized the filing of construction liens and required Pioneer to discharge the liens only if Defendants had paid for the completed work or payment was not yet due. This discharge requirement did not apply since the liens arose from Defendants’ failure to pay. The court also noted that a contractual lien forbearance obligation would be functionally equivalent to a contractual waiver of the right to a construction lien, which is expressly prohibited under Michigan law (Mich. Comp. L. 570.1115(1)). Having rejected all three of Defendants’ arguments, the court granted partial summary disposition in Pioneer’s favor.

Crown Enter., Inc. v. Bounce House KRT, LLC^[81] (Commercial lease; COVID–19). Beginning in 2019, Plaintiff Crown Enterprises, Inc. leased a 26,000 square-foot commercial property to Defendant Bounce House KRT, LLC. Shortly after the parties’ contractual relationship began, the COVID–19 pandemic’s emergence prompted federal and state governments to order business closings. On March 23, 2020, the Michigan government ordered a statewide shutdown of non-essential businesses like Bounce House. Beginning in October 2020, the government allowed businesses to reopen at limited capacity. The permissible level of capacity percentage gradually increased (besides a period of complete closure between November and December) until the restrictions were fully lifted on June 17, 2021. Throughout the shutdown, Bounce House paid rent to Crown pro rata based upon the capacity percentage allowed by the government. Crown accepted these partial rent payments. Eventually, however, Crown sued Bounce House for breach of the parties’ lease, seeking, inter alia, unpaid rent, utilities, and late fees. Bounce House raised the following defenses: (1) the COVID–19 shutdown order triggered the lease’s force majeure clause; (2) impossibility; and (3) frustration of purpose.  

As to the force-majeure-clause argument, the court noted that the lease contained a provision stating that Bounce House was required to pay rent “without any deduction or set off whatsoever.” The court found that this language, rather than the force majeure clause, governed Bounce House’s obligation to pay rent. Further, the clause did not authorize rent abatement in consequence of a triggering event. Next, the court summarily rejected the frustration of purpose and impossibility arguments. It noted that frustration of purpose applies only where the purpose of the “entire lease” is frustrated, which was not the case here since Bounce House had partial or complete access to the premises for much of the lease’s term. Likewise, the impossibility doctrine was inapposite because the premises were not destroyed; performance was not literally impossible.  

The court did, however, find that Bounce House could obtain rent abatement under the doctrine of “temporary frustration of purpose” (also known as impracticability). Under this doctrine, a party to a contract is excused from performance where: (1) the contract is executory; (2) the party’s purpose was known at the time it entered into the contract; and (3) the purpose was temporarily frustrated by an event that was not reasonably foreseeable when the contract was created and which was not the party’s fault. The court noted that while jurisdictions are split on whether COVID–19 shutdown orders can excuse a party’s contractual performance, the Michigan federal district court in Bay City Realty, LLC v. Mattress Firm, Inc. applied temporary frustration of purpose to a similar set of facts.^[82] The court found the Bay City court’s approach persuasive and adopted it. Specifically, the court emphasized that both parties suffered a loss—Bounce House, in the form of “temporarily worthless” premises; Crown, in the form of lost income––caused by an unforeseeable governmental shutdown that was neither party’s fault. Moreover, the parties’ lease failed to allocate the risk of such a loss to either party. As such, the court determined that the best solution was to allocate some of the loss to each party by only requiring Bounce House to pay Crown “the applicable pro rata percentage of the allowable occupancy” levels under the state’s COVID–19 orders. Since Bounce House had already made rental payments on this pro rata basis, the court dismissed Crown’s claim for breach of contract.

§ 1.3.10. New Hampshire Commercial Dispute Docket

Fisher Cat Development, LLC. v. Stephen Johnson^[83] (Breach of contract; contractual ambiguity; extrinsic evidence). Seller argued that, while the Parties’ Purchase and Sales Agreement contained two inconsistent closing date provisions, an executed addendum resolved such ambiguity. The addendum extended the closing date “to no later than 4/28/21,” but also stated “[a]ll other aspects of the aforementioned Purchase and Sales Agreement shall remain in full force and effect.”

The Court was not persuaded by Seller’s argument that this addendum resolved the ambiguity, due to it incorporating all other provisions of the Agreement. The Court thus found that, because the provisions were ambiguous, the Court could reference extrinsic evidence to interpret the Agreement. The Court determined the extrinsic evidence created a material dispute as to: (1) whether the Parties ever agreed to a closing date; (2) whether the Seller breached the Agreement; and (3) whether the Seller breached the implied covenant of good faith. As a result, summary judgment was denied.

N.H. Elec. Coop., Inc. v. Consol. Communs. of N. New Eng., LLC.^[84] (Impracticability and frustration of purpose defenses). After Defendant moved to amend its answer and counterclaims to include the doctrine of impracticability as an affirmative defense, Plaintiff argued an affirmative defense of impracticability is futile and that New Hampshire does not recognize impracticability as a breach of contract defense. Plaintiff asserted that New Hampshire law recognizes frustration of purpose, which Defendant had already pled. Defendant argued that impracticability is synonymous with impossibility, which New Hampshire courts recognize.

The Court agreed with Defendant. Further, the Court found that frustration of purpose is distinguishable from impossibility, and is thus also distinguishable from impracticability.

Finally, the Court determined that, even though impracticability was substantively different from Defendant’s original affirmative defenses, Defendant’s impracticability argument restates its longstanding position. Thus, the Court allowed Defendant’s amended defense of impracticability.

Vt. Tel. Co., Inc. v. FirstLight Fiber, Inc.^[85] (Consequential damages limitations and alleged bad faith). Plaintiff brought a number of claims due to Defendant’s termination of a lease between the Parties, and Defendant moved for summary judgment. The enforceability of the Limitation Clause of the lease was of particular issue, which barred recovery of consequential damages entirely, and limited monetary recovery to the charges payable to Plaintiff during the term of the lease. Plaintiff argued that the Limitation Clause was unenforceable because Defendant acted in bad faith.

Although the New Hampshire Supreme Court has not definitively ruled on this issue, the Court found that New Hampshire law would adopt the rule that a limitation clause may not be enforceable if the party seeking to enforce it has acted in bad faith, and therefore denied summary judgment due to the factual dispute that bad faith exists.

§ 1.3.11. New Jersey’s Complex Business Litigation Program

Jenkinson’s Nik Lamas-Richie and Relic Agency, Inc. v. Matthew Richards and Mars Media, LLC^[86] (Jurisdiction). In this case involving a dispute concerning the parties’ agreement relating to unpaid loan amounts and consulting fees, the New Jersey Superior Court clarified that New Jersey’s “first-filed rule” extends not only to actions brought in New Jersey and a neighboring state, but also to actions brought in New Jersey state and Federal court. Following a dispute regarding Lamas-Richie and Relic’s alleged failure to compensate Richards and Mars for Richards’ consulting work, the parties entered into an Agreement where Lamas-Richie would serve as a consultant to Mars and Lamas-Richie, and Relic would satisfy outstanding financial obligations for unpaid compensation and outstanding loan amounts, in addition to agreeing to certain restrictive covenants. In March 2022, Richards and Mars filed an action in the U.S. District Court for the District of New Jersey alleging breach of the Agreement and tortious conduct committed by Lamas-Richie and Relic (the “Federal Action”).

A month later, Lamas-Richie and Relic commenced an action in New Jersey state court alleging tortious conduct by Richards and Mars relating to the Agreement (the “State Court Action”). Despite requests by Richards and Mars that Lamas-Richie and Relic pursue their claims in the first-filed Federal Action and voluntarily dismiss the State Court Action, Lamas-Richie and Relic did not respond. Richards and Mars then moved to dismiss Lamas-Richie and Relic’s complaint in the State Court Action, citing New Jersey’s “first-filed rule” which states that the court which first acquires jurisdiction over an action has precedence in the absence of special equities.

The Court granted Richards and Mars’ motion to dismiss Lamas-Richie and Relic’s complaint in the State Court Action and ordered the parties to litigate their disputes in the Federal Action. In so doing, the Court rejected Lamas-Richie and Relic’s argument that New Jersey’s first-filed rule applies only to lawsuits filed in New Jersey and a neighboring state, and held that the first-filed rule warrants dismissal in instances where a defendant in a federal action asserted what would be a compulsory counterclaim under F.R.C.P. 13(a) in a subsequent state court action. The court also rejected Lamas-Richie and Relic’s argument that the first-filed rule was inapplicable because “special equities” existed as a result of the “extreme delays plaguing” the Federal court in New Jersey, and ruled that even if the parties would experience a near-six-year delay due to the backlog of cases in the New Jersey Federal courts as Lamas-Richie and Relic claimed, any prejudice to the parties stemming from such a delay would be outweighed by the prejudice that resulted from the parties being forced to litigate in two forums and the risk of receiving inconsistent judgments in either action. Thus, the Court concluded that: (i) New Jersey’s first-filed rule obligated the parties to litigate their disputes in the Federal Action, which first acquired jurisdiction; and (ii) the delays present in the New Jersey Federal courts were insufficient to render the first–filed rule inapplicable.

NVL, Inc. and Hooman Nissani d/b/a Hooman Automotive Group v. Volvo Car USA LLC^[87] (Contract; liability waiver). In this case involving a dispute over the enforceability of a covenant not to sue provision contained in a Letter of Intent, the Court found that the covenant not to sue was enforceable and granted Defendants’ motion for summary judgment. The parties in the case entered into a series of letters of intent (LOIs) which contained the steps that Plaintiff was required to take in order to be approved as an authorized Volvo dealer. The final version of the LOI, which was drafted by Defendant’s legal counsel, contained a waiver of liability wherein Plaintiff covenanted not to sue Defendant Volvo. Following multiple extensions of the construction deadlines contained within the LOI, Defendant elected to terminate the LOI, citing a pattern of failed deadlines by Plaintiff. Plaintiff filed suit and Defendant moved for summary judgment, citing the waiver of liability provision in the LOI.

In its decision, the Court reiterated New Jersey’s two-pronged approach to determine whether a waiver of liability is unconscionable: (1) determining the relative bargaining power of the parties, i.e., whether the parties could actually negotiate regarding the waiver of liability provision; and (2) whether the challenged provision is substantively unreasonable, i.e., whether the exchange of obligations was so one-sided that it shocks the court’s conscience. The court concluded that, although Defendant is a major automobile manufacturer, which “certainly gave it some leverage over Plaintiffs,” there was not a procedurally unconscionable disparity in the bargaining power of the parties as Mr. Nissani was a sophisticated businessman with significant experience negotiating with automobile manufacturers in the course of opening dealerships, and Plaintiffs had an attorney review the LOI before it was executed. Furthermore, the Court concluded that the LOI did not contain substantive terms that were so one-sided as to shock the Court’s conscience as liability waivers are commonly included in contracts between sophisticated commercial parties, and the parties engaged in negotiation and mutually assented to all terms included in the LOI. Thus, the court concluded that the liability waiver was valid and enforceable, and granted Defendants’ motion for summary judgment.

§ 1.3.12. New York Supreme Court Commercial Division

Walk v. Kasowitz Benson Torres LLP^[88] (Malpractice). In Walk v. Kasowitz Benson Torres LLP, the New York County Commercial Division, relying on “documentary evidence” under CPLR 3211(a)(1), concluded that a legal malpractice claim brought by former president of Universal Music Group’s (“UMG’s”) Republic Records, Charlie Walk, was based on a “false narrative” and consequently dismissed the complaint pursuant to CPLR 3211(a)(1) and (a)(7).

On March 25, 2021, Walk initiated an action against the Defendants for legal malpractice. The complaint alleged that Walk had entered into the settlement agreement with UMG without being fully informed by counsel as to the agreement’s meaning and his alternatives to settlement. Specifically, Walk contended that he was never advised that: (i) he was entitled to receive certain bonuses for fiscal year 2017, regardless of whether he was terminated for cause; (ii) UMG breached Walk’s employment agreement by threatening to fire him for “cause” for alleged conduct occurring outside the scope of his employment and by failing to conduct an adequate investigation of the allegations against him; (iii) he could have terminated his employment for “good reason” when UMG put him on leave, which would have entitled him to more compensation than a “cause” termination; and (iv) the confidentiality provisions in his agreement with UMG prevented him from discussing the terms of the settlement and disputing the facts of his departure.

Defendants moved to dismiss pursuant to CPLR 3211(a)(1) (defense founded on documentary evidence) and (a)(7) (failure to state a cause of action). In support of their 3211(a)(1) argument, Defendants submitted certain letters and emails, along with Walk’s settlement agreement, employment agreement, and certain press coverage of his alleged misdeeds.

CPLR 3211(a)(1) allows a defendant to “move for judgment dismissing one or more causes of action asserted against him on the ground that . . . a defense is founded upon documentary evidence.”  The statute itself does not define “documentary evidence” and the First and Second Departments have taken conflicting approaches to this issue—whereas the Second Department has repeatedly held that letters and emails “fail to meet the requirements for documentary evidence,” the First Department will consider such correspondence under CPLR 3211(a)(1), but only if their factual content is “essentially undeniable.” Compare Gawrych v. Astoria Fed. Sav. & Loan, 148 A.D.3d 681, 682 (2d Dep’t 2017) with Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assoc., Inc., 120 A.D.3d 431, 432 (1st Dep’t 2014); WFB Telecomms., Inc. v. NYNEX Corp., 188 A.D.2d 257, 259 (1st Dep’t 1992).

The Court found that the documentary evidence in the record, including the letters and emails submitted by Defendants, “unequivocally establish[ed] that the Defendants did in fact make the very arguments that Mr. Walk assert[ed] were not made to UMG,” and demonstrated that “the entire premise of [Walk’s] lawsuit [was] based on a false narrative.” The Court held that the emails and letters in the record established that Walk was “well aware of the very issues that he now feigns a lack of knowledge of and that these very issues were discussed with the Defendants and his other lawyers.” Furthermore, Walk failed to allege facts that would suggest that he could prove his “case within a case” and show he would have achieved a better result than the settlement agreement absent his counsel’s alleged negligence—a requirement for prevailing on a claim of legal malpractice under New York law. See Katz v. Essner, 136 A.D.3d 575, 576 (1st Dep’t 2016) (“Plaintiff failed to . . . meet the ‘case within a case’ requirement, demonstrating that ‘but for’ defendants’ conduct he would have obtained a better settlement.”). As a result, the Court dismissed the action pursuant to both CPLR 3211(a)(1) and CPLR 3211(a)(7).

Real Estate Webmasters Inc. v. Rodeo Realty, Inc.^[89] (Jury waiver). In Real Estate Webmasters Inc. v. Rodeo Realty, Inc., the Albany County Commercial Division granted a motion to strike a jury demand on the basis that the counterclaim-plaintiff waived its right to a jury trial by interposing an equitable defense of rescission and a related counterclaim for fraudulent inducement arising from the same transaction underlying Plaintiff’s complaint.

Real Estate Webmasters Inc. (“REW”) filed a single-count complaint to recover damages for Rodeo’s alleged anticipatory repudiation of the parties’ contract, which set forth the terms of Rodeo’s engagement of REW to develop Rodeo’s website. As an affirmative defense in its answer, Rodeo alleged that it was entitled to rescission of the contract “due to [REW’s] own fraud and/or misrepresentations,” and Rodeo also asserted a counterclaim for fraudulent inducement, among other affirmative defenses and counterclaims. Following discovery, REW moved for partial summary judgment seeking to dismiss Rodeo’s affirmative defenses and counterclaims. After dismissing most of the defenses and counterclaims at issue, the Court held that Rodeo had raised triable issues of fact as to its affirmative defense seeking rescission and as to its counterclaim for fraudulent inducement. When REW filed a note of issue requesting a bench trial, Rodeo responded by serving a jury demand. REW then moved to strike Rodeo’s jury demand.

The Court began its analysis of REW’s motion to strike by explaining that CPLR 4101 provides that “issues of fact shall be tried by a jury unless a jury trial is waived…, except that equitable defenses and equitable counterclaims shall be tried by the court.” Under New York law, a defendant waives the right to a jury trial when it asserts “equitable counterclaims which relate to and emanate from the same set of facts as does the main claim.” The Court noted that claims for rescission are equitable in nature. Applying that legal standard, the Court held that Rodeo waived its right to a jury trial by asserting an affirmative defense of rescission to unwind the same transaction underlying REW’s complaint. The Court reasoned that Rodeo did not deny repudiating the parties’ agreement. Rather, Rodeo contended that the repudiation was not wrongful because it possessed “a valid rescission defense based on fraud.”

The Court also found that because Rodeo chose to defend against REW’s claim of anticipatory breach by asserting the equitable defense of rescission, Rodeo’s counterclaim for money damages for fraudulent inducement of the same contract was also “equitable in nature.” It explained that while claims for money damages ordinarily constitute “legal” relief, restitution damages awarded incidental to equitable relief are not legal in nature. Here, the Court concluded that the only damage identified in Rodeo’s counterclaim—the return of money paid under the parties’ contract—was “restitutionary in nature and incidental to the equitable remedy of rescission.” Having asserted the equitable defense of rescission and a counterclaim for fraudulent inducement incidental to that equitable defense, the Court held that Rodeo was not entitled to maintain a claim at law for fraud damages and waived its right to a jury trial.

Castle Restoration LLC v. Castle Restoration & Construction, Inc.^[90] (Contract modification). In Castle Restoration LLC v. Castle Restoration & Construction, Inc., the Suffolk County Commercial Division determined after a bench trial that New York’s statute of frauds rendered an oral modification of a contract unenforceable and, ultimately, left the enforcing party with no remedy in its commercial dispute.

In March 2012, Castle Inc. and Castle LLC entered into an asset-sale agreement pursuant to which Castle Inc. transferred its equipment and client list to Castle LLC, in exchange for $1.2 million. Castle LLC paid $100,000 at the closing and gave Castle Inc. a promissory note for the balance of $1.1 million. The note was payable in consecutive monthly installments commencing on April 15, 2012. Castle LLC immediately defaulted on the note by failing to make the first payment, and litigation ensued.

At issue in the litigation was an oral modification claimed by Castle LLC. Castle LLC argued that under the asset-sale agreement, Castle Inc. was obligated to complete all work-in-progress that remained unfinished as of the closing date, and that the parties entered into a subsequent oral agreement in which Castle LLC agreed to provide Castle Inc. with labor and materials for the completion of that work-in-progress, the value of which would offset Castle LLC’s obligation under the promissory note.

After a prior action had been commenced by Castle Inc., Castle LLC brought a separate action asserting claims for breach of the asset-sale agreement and breach of the subsequent oral agreement, among others. After all other claims were dismissed on summary judgment, the parties proceeded to a bench trial on those two claims.

On the cause of action for breach of the oral agreement—under which Castle LLC allegedly would be compensated for providing labor and materials for the completion of Castle Inc.’s work-in-progress—the Court determined the statute of frauds rendered that oral agreement unenforceable. The Court observed that the parties’ asset-sale agreement contained a no-oral-modification provision, which meant that the parties were “protected by the statute of frauds.” The Court explained that “[a]ny contract containing such a clause cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement is sought.” Accordingly, the default presumption was that the parties’ written agreement controlled.

On the cause of action for breach of the asset-sale agreement—under which Castle Inc. had an obligation to complete all work-in-progress that remained unfinished as of the closing date—the Court determined that Castle LLC was entitled to no recovery due to its failure to perform its own material obligations under the agreement. Here, the Court observed that “a party is relieved of its duty to perform under a contract when the other party has committed a material breach,” such as “[f]ailure to tender payment.” As applied here, the Court observed that Castle LLC’s failure to make any payments on the promissory note for the $1.1 million balance due on the purchase price excused Castle Inc.’s obligation to further perform its obligations.

Amherst II UE LLC v. Fitness Int’l, LLC^[91] (Commercial lease; COVID 19). In Amherst II UE LLC v. Fitness Int’l, LLC, the Erie County Commercial Division granted summary judgment in favor of the plaintiff-landlord in a case involving a commercial lease for a gym that was closed due to COVID-19 restrictions.

The Defendant operated an LA Fitness facility and health club in a shopping center owned by Plaintiff. On March 18, 2021, the Plaintiff brought a breach of contract claim against the Defendant for unpaid rent and common area charges for those months, as well as late charges. The Defendant answered—with affirmative defenses including impossibility, impracticability, frustration of purposes and failure of consideration— and counterclaimed for, inter alia, the Plaintiff’s failure to abate rent for the closure periods and in light of the restrictions.

In its decision, the Court determined that Defendant was bound by the lease and that Plaintiff had demonstrated prima facie entitlement to the relief requested. The Court rejected Defendant’s argument that it was not bound by a lease provision stating that rent “shall be paid without notice, demand, counterclaim, offset, deduction, defense, or abatement,” because the lease did not also include language stating that payment of rent is “absolute and unconditional.” It also rejected the argument that the COVID closures constituted a “force majeure” that excused the Defendant’s obligation to pay rent. Although the lease defined force majeure to include “any causes beyond the reasonable control of a party . . . [,]” it also explicitly stated “[n]otwithstanding anything herein contained, the provisions of this Section shall not be applicable to . . . Tenant’s obligations to pay Rent . . . or any other sums or charges payable by Tenant hereunder after the Rent Commencement Date.” Therefore, the Court held that even if the closures and restrictions constituted force majeure events, they did not eliminate the Defendant’s obligation to pay under the lease. The Court also cited two recent Commercial Division decisions involving similar provisions—with respect to leases for Valentino and Victoria’s Secret stores—where the courts reached the same conclusion.

With respect to the Defendant’s affirmative defense of frustration of purpose, the Court explained that this doctrine “has been ‘limited to instances where a virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party.’” The Court held that Defendant couldn’t meet this standard “because the Pandemic did not render the Lease ‘valueless;’” instead, the closures and restrictions were only temporary. Indeed, the Defendant was operating at full capacity by the time the decision was rendered.

The Court also quickly dispatched Defendant’s affirmative defenses with respect to impossibility and impracticability. It observed that the defenses are one in the same under New York law, and only applicable when the means of performance are destroyed by an act of God, vis major, or by law. As the Court previously noted, performance had “not been rendered completely impossible or impracticable” by the pandemic; therefore, those affirmative defenses did not apply.

Finally, the Court found meritless Defendant’s counterclaims for failing to provide credit on rent for closures and restrictions, breaches of the lease stemming from the Defendant’s inability to use the premises, and unjust enrichment as a result of the closures and restrictions. The Court reasoned that they were “based on the same legal theories as the Affirmative Defenses, such as, inter alia, frustration of purpose, impossibility of performance, and commercial impracticability.”

In re New York State Dept. of Health (Rusi Tech. Co., Ltd.)^[92] (International law; choice of law). In In re New York State Dept. of Health (Rusi Tech. Co., Ltd.), the Albany County Commercial Division permanently stayed an arbitration before the China International Economic and Trade Arbitration Commission (“CIETAC”) brought by a Chinese company (“Rusi”) against the New York State Department of Health (“DOH”) regarding a purchase contract for KN-95 masks.

The underlying purchase contract consisted of three written instruments: (1) the contract that was drafted, in both English and Chinese, by Rusi (the “Contract”), (2) the subsequent purchase order that was drafted by DOH (the “Purchase Order”), and (3) the written amendment to the contract (the “Amendment”).

The English version of the Contract provides that it “shall prevail” if there are “any discrepancies between the two versions [English and Chinese]”, and that disputes “shall be settled through friendly consultation.” If a dispute cannot be resolved through friendly consultation, the Purchase Order provides that the dispute shall be resolved through binding arbitration in New York administered by the International Chamber of Commerce. Further, the Purchase Order states that the Contract “shall be governed by and construed in accordance with the law of the State of New York[.]”

Conversely, the Chinese version of the Contract provides that if there is a discrepancy between the versions, the Chinese version shall prevail, and disputes not resolved through friendly consultation shall be resolved by binding arbitration administered by CIETAC. Additionally, the Chinese version further provides that the Contract shall be governed by Chinese law and the United Nations Convention on Contracts for the International Sale of Goods (Vienna 1980) (“CISG”) shall not apply.

After DOH rejected the delivery of the masks for not complying with the standards specified in the Contract, Rusi commenced an arbitration before CIETAC. DOH commenced a special proceeding under CPLR 7503 (b) to permanently stay the CIETAC arbitration.

First, the Court addressed which substantive laws would govern the dispute. It noted that both the United States and China have adopted the CISG, which establishes provisions that govern international sales contracts. While parties can choose to exclude the CISG, the Court explained that such an election must be “clearly and unequivocally” expressed in the contract to establish mutual agreement. Rusi argued that the dispute is governed by Chinese law and that the parties elected not to be governed by the CISG because the Chinese version of the Contract expressly states where there is a conflict between the versions, the Chinese version shall prevail. The Court rejected this argument, finding that there was not “clear mutual intent” to exclude the CISG because there was not even a mutual agreement as to which version of the Contract would be controlling. Therefore, the Court ruled that the CISG principles would apply because any reasonable purchaser under the same circumstances would intend for the English version of the Contract to control.

Next, the Court turned to the question of whether the parties agreed to binding arbitration before CIETAC. Similar to its reasoning regarding the choice of law, the Court concluded that there was no meeting of the minds between the parties that the Chinese text was controlling. The Court explained that by proposing to draft parallel versions of the Contract, Rusi knew (or should have known) that DOH’s intentions would be formed based on the English version. Furthermore, DOH’s actions were consistent with the parties’ prior course of dealing. Therefore, having determined that the English version of the Contract controlled, and consequently, that New York law applied, the Court ruled to permanently stay the arbitration in the absence of an agreement on the part of DOH to submit to binding arbitration before the CIETAC.

Salesmark Ventures, LLC v. Jay Singh, JJHM Trading Corp.^[93] (Piercing the corporate veil). In Salesmark Ventures, LLC v. Jay Singh, JJHM Trading Corp., the New York County Commercial Division dismissed, inter alia, the Plaintiff’s claim to pierce the corporate veil of the Defendant and impose personal liability on the Defendant’s sole principal. Underlying the dispute was a contract to purchase millions of synthetic nitrile gloves during the outbreak of COVID-19.

In this case, Plaintiff paid the Defendant the contracted purchase price, but the gloves were never delivered. Afterwards, Defendant only refunded a portion of the purchase price. To recover the remainder of the purchase price, Plaintiff sought to pierce the corporate veil of Defendant. Additionally, Plaintiff asserted claims against both Defendant and its sole principal for breach of contract, unjust enrichment, and fraud.

As to the veil-piercing claim, the Court explained that “New York law disfavors disregard of the corporate form” and the party seeking to pierce the corporate veil “bear[s] a heavy burden.” To meet that burden, a party must demonstrate that the individual dominated the corporate form for personal use and that a wrongful or unjust act was conducted toward the plaintiff. Here, the Court found that Plaintiff’s allegations—that the company has no assets and its website has minimal information about the company—did not meet the heavy burden or provide “specific factual assertion[s] to substantiate” piercing the corporate veil and dismissed the claim. Likewise, the Court dismissed the breach of contract claim against the principal because, without veil-piercing, the principal cannot be held liable for liabilities incurred by the corporate Defendant.

The Court also dismissed the unjust enrichment and fraud claims, reasoning that because there was a valid contract, the Plaintiff could not recover from Defendant’s sole principal without a showing that the services were performed for the principal and that those services resulted in the alleged unjust enrichment. Moreover, the Plaintiff could not recover from Defendant for a quasi-contract claim—i.e., unjust enrichment—where a valid contract for the same subject matter existed between the parties. Finally, the Court dismissed the fraud claim because it essentially restated the breach of contract claim. As the Court explained, a fraud claim does not lie under New York law where the only alleged misrepresentation is of “intent or ability to perform under the contract.”

Cascade Funding LP – Series 6 v. Bancorp Bank^[94] (Contract; “market disruption” clauses). In Cascade Funding LP – Series 6 v. Bancorp Bank, the New York County Commercial Division found that where contractual clauses are included to permit termination in instances of market disruption, to the extent such a clause contains an objective benchmark by which to determine disruption, the counterparty cannot defeat the clause’s operation through actions deemed to be “off-market.”

Plaintiff Cascade Funding LP (“Cascade”) is an investment fund formed for the purpose of purchasing and securitizing mortgage loans. Defendant The Bancorp Bank (“Bancorp”) is a commercial bank that, among other things, originates commercial mortgage loans and sponsors commercial real estate collateralized loan obligations (“CLOs”). On the eve of the COVID-19 pandemic, on February 24, 2020, Cascade agreed to purchase from Bancorp a pool of more than $825 million in commercial mortgage loan assets, with the intention of packaging and securitizing those assets into commercial real estate CLOs that would be marketed and sold to investors no later than April 15, 2020. As part of the deal, Cascade paid Bancorp an initial $12.5 million deposit in advance of the target April 15 closing date.

At the center of the dispute was a “Market Disruption” clause in the parties’ agreement that, as the Court explained, effectively gave Cascade a “securitization out” based on an objective change in market conditions between contract execution and the securitization closing date. In addition to termination of the transaction, the “Market Disruption” clause also provided for return of Cascade’s initial $12.5 million deposit.

On March 31, 2020, fifteen days before the closing date, Cascade exercised the “Market Disruption” clause, provided Bancorp with notice of termination, and demanded return of the $12.5 million deposit. Cascade included with its notice a written determination of market conditions prepared by the underwriter. For reasons discussed below, however, Bancorp rejected the notice. Cascade ultimately filed suit, seeking among other things recovery of the initial deposit.

In opposing Cascade’s motion for summary judgment, Bancorp argued that (1) before concluding that the bonds could not be priced at or below LIBOR+200bp and invoking the “Market Disruption” clause, Cascade should have gone through the process of soliciting actual bids; and (2) had it done so, it would have learned that Bancorp itself was willing to buy the bonds (if offered) at LIBOR+199bp.

The Court rejected Bancorp’s arguments and granted Cascade summary judgment. With respect to Bancorp’s argument that Cascade was required to solicit actual bids, the Court reasoned that the clause—as written—provided an objective metric by which to determine disruption and did not expressly state that “actual bids” were the “only acceptable evidence of market disruption.” The Court concluded that the clause therefore did not require Cascade to “proceed with objectively futile marketing efforts to prove the market potential of the bonds in an admittedly frozen market.”

With respect to Bancorp’s argument about its own willingness to bid on the offering, the Court noted “some logic” to the theory but concluded that the “problem” was that it “clashe[d] with the language and clear purpose of the contract, which focuses on whether there has been a market disruption measured against an objective standard.” As the Court explained, Bancorp’s interpretation—if accepted—would give counterparties with an “off-market” financial incentive the “unilateral option to extinguish [a] termination right regardless of market conditions.” The Court noted that the consequence of such an interpretation—i.e., “locking Cascade into a 99-bp adverse change in LIBOR spreads,” with untold spillover effects to lower tranches of the bond—was not what the parties intended or agreed to.

§ 1.3.13. North Carolina Business Court

Lee v. McDowell^[95] (Director liability for lack of executive oversight). Investors brought derivative and individual claims against several members of the board of directors of the defunct corporation rFactr, alleging that Defendants failed to monitor the corporation’s finances and operations properly, which allowed the company’s President and Vice President to engage in mismanagement and malfeasance. Plaintiffs brought derivative claims against board members Chris McDowell, Chris Lau, and Robert Dunn for breach of fiduciary duty and individual claims against McDowell for breach of fiduciary duty, constructive fraud, and securities fraud under North Carolina law, Section 10(b) of the Exchange Act, and Rule 10(b)(5). Defendants moved for summary judgment on all claims.

The court granted summary judgment with respect to the derivative claims based on failure to monitor and oversee rFactr. Applying Delaware law, the court determined that although they could have done more, McDowell and Dunn had, among other things, requested financial information about the company and obtained a cash flow statement, thereby meeting the minimum burden established by In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996). In contrast, the court denied the motion based on claims against McDowell and Dunn for failing to prevent excessive compensation payments. The court refused to conclude their actions fit within the Business Judgment Rule as a matter of law because McDowell and Dunn, despite acknowledging they were shocked and horrified at the outrageous executive compensation, pursued no formal board action to lower compensation levels and had even rejected an offer by President Richard Brasser to reduce his own salary. Therefore, questions of fact existed as to whether their actions amounted to corporate waste. The court also concluded there were triable issues of fact on whether Defendants Lau and Dunn violated their duty of loyalty when they cancelled a potential deal to sell rFactr while simultaneously contemplating a purchase of the company themselves. However, summary judgment was still appropriate on that claim, as Plaintiffs failed to offer any evidence that the deal would have been completed but for Defendants’ self-dealing.

On the individual claims against McDowell, the court granted summary judgment on the fiduciary duty and constructive fraud claims, concluding that even if McDowell owed a special duty to Plaintiffs, that duty was not a fiduciary one. McDowell did not control all the financial power or technical information in his relationship with Plaintiffs amounting to a de facto fiduciary relationship. Instead, Plaintiffs were highly sophisticated investors themselves. Additionally, the court granted summary judgment based on Plaintiffs’ claims that McDowell failed to correct the alleged misrepresentations about the health and status of the company made by Brasser. The Court concluded that McDowell had no duty to Plaintiffs to correct Brasser’s statements, nor did the evidence show McDowell was aware those statements were false. In contrast, however, the court denied the motion as it related to McDowell’s failure to disclose to Plaintiffs that he would be compensated if they invested in the company.

Davis v. HCA Healthcare, Inc.^[96] (Antitrust). Plaintiffs are several citizens of Western North Carolina with commercial insurance plans who brought antitrust claims arising out of the activities of Defendant Mission Hospital in Asheville. Mission operated for years under state Certificate of Public Advantage (COPA) laws, protecting it from antitrust claims in exchange for state oversight. During this time, Mission acquired numerous competitors in the area. After the repeal of the COPA laws, Florida-based HCA Healthcare, Inc. acquired Mission. Plaintiffs alleged that because of Mission’s “must have” status as the premier hospital in Western North Carolina, coupled with its recent freedom from government oversight, Defendants were able to force insurers to include Defendants’ other facilities in their network in order to include Mission, an unlawful practice known as “tying.” Plaintiffs also alleged Defendants used other anticompetitive tactics, such as including “antisteering” clauses in their contracts to prevent insurers from sending patients to lower cost options, and including “gag” clauses that forbid insurers to release the terms of their contracts with Defendants to regulators or the public. Plaintiffs alleged these practices allowed Defendants to offer lower quality service at monopolistic prices, forced patients into unnecessary services, prevented the introduction of insurance products to lower prices for consumers, and deprived consumers of a competitive marketplace for inpatient hospital services. Plaintiffs brought monopolization, attempted monopolization, and restraint of trade claims under Chapter 75 of the North Carolina general statutes and the anti-monopoly provision of the North Carolina Constitution.

Defendants initially moved to dismiss for lack of standing, which the court rejected, citing North Carolina law recognizing indirect purchaser standing. Additionally, the court rejected Defendants’ motion to dismiss Plaintiffs’ restraint of trade claim under Rule 12(b)(6). Analyzing the claim under the “rule of reason” test, the court determined that Plaintiffs had adequately alleged “an unreasonable restraint of trade . . . by alleging the existence of sufficient market power held by Defendants in the Asheville Inpatient Services market, coupled with the potential for anticompetitive effects stemming from unwanted contractual provisions unilaterally imposed by Defendants on insurers.” However, the court dismissed all of Plaintiffs’ monopolization claims. With respect to the constitutional claim, well-settled North Carolina law requires that such claims be against a state actor, not private companies. Additionally, Plaintiffs’ Chapter 75 claims failed because (1) HCA did not own any other hospitals in North Carolina to support a monopoly acquisition claim; (2) Plaintiffs failed to allege any conduct “specifically designed to prevent competitors from entering the Asheville Region” to support a monopoly maintenance claim; and (3) Plaintiffs “failed to allege a sufficient market share held by Defendants” to support a monopoly leveraging claim. Plaintiffs’ market share allegations were based solely on Medicare data, which the court found irrelevant in the private insurance market. Finally, for the same reasons, the court dismissed Plaintiffs’ attempted monopolization claims for failure to show a “dangerous likelihood” that Defendants would establish a monopoly in the region.

Aspen Specialty Ins. Co. v. Nucor Corp.^[97] (Discoverability of insurance reserve amounts). This case involved a declaratory judgment action brought by twelve insurance companies to construe the relevant policies covering property damage and loss to Defendant Nucor Corporation. Nucor is a manufacturer who produces iron ore into “sponge iron” for use in steel production. Following an accident at Nucor’s Convent, Louisiana facility, where iron ore leaked into a cement lined reactor and solidified, Nucor suffered losses of the ruined iron ore, damage to the reactor, and business interruption losses. In the ensuing discovery, Plaintiffs all objected to Nucor’s interrogatories and requests for production of documents seeking information related to each Plaintiff’s insurance reserve amount. After exhausting the Business Court discovery resolution procedures, Nucor filed a motion to compel.

The court first considered the variety of ways in which insurers determine their reserve amounts. Given the multitude of methods and philosophies insurers have in calculating reserves, the court noted that “it is folly to generalize about the meaning of a particular reserve.” Instead, courts must make an individualized determination based on each case, which largely depends on the type of claims involved. Surveying a wide body of federal law, the court concluded that although “the weight of authority is that reserve information is generally not discoverable in coverage cases, which turn largely on an interpretation of the language of the policy,” discovery of reserve amounts can be appropriate in cases where claims of bad faith and misrepresentation are present. The court then examined and distinguished the only relevant North Carolina authority on insurance reserves, Wachovia Bank, N.A. v. Clean River Corp., 178 N.C. App. 528, 631 S.E.2d 879 (2006), determining that it established “only that reserves are not categorically off limits in discovery as long as they are not shielded by privilege or qualified immunity.” Unlike Wachovia, the present case did not deal with claims of misrepresentation or bad faith, but instead, was limited to breach of contract and declaratory judgment claims. Therefore, discovery into the insurance reserves was inappropriate. The court also rejected Nucor’s argument that discovery of the reserve amounts may lead to a bad faith claim, considering that possibility too “hypothetical.” Accordingly, the court denied Nucor’s motion to compel.

Emrich Enters., LLC v. Hornwood, Inc.^[98] (Fiduciary duty owed by an LLC majority member and application of the business judgment rule in the LLC context). This case involved a dispute between the two sole members of a North Carolina LLC. Among other claims, the minority member asserted breach of fiduciary duty claims, individually and derivatively on behalf of the LLC, against the majority member. The majority member and the LLC moved for summary judgment on these claims, arguing that the majority member did not owe a fiduciary duty directly to the minority member and that the business judgment rule shielded the majority member (also a manager of the LLC) from liability.

The general rule in North Carolina is that LLC members do not owe a fiduciary duty to each other. An exception to this rule is that “a holder of a majority interest who exercises control over the LLC owes a fiduciary duty to minority interest members.” Here, the majority member was a manager of the LLC, and the operating agreement (which was silent on fiduciary duties) provided that all decisions regarding the management and affairs of the LLC would be made by the majority interest of the members. There was also evidence that the majority member owned all of the manufacturing facilities where the LLC’s products were manufactured, that the minority member could not manufacture the LLC’s products without the majority member, and that the majority member unilaterally took action on certain financial matters concerning the business and controlled the LLC’s bank account. Thus, there was sufficient evidence of the majority member exercising the type of control that could give rise to a fiduciary relationship between the majority member and the minority member.

As for the business judgment rule, the court explained that this rule’s protection extends to certain “business decisions” by LLC managers. The court determined that the majority member’s challenged conduct fell within the business judgment rule’s protection, except for the member’s alleged failure to correctly provide a contractor of the LLC with the product specifications needed to pass quality testing by a customer of the LLC. The majority member’s conduct concerning the specifications was not a business decision, but rather a “ministerial act that did not involve either judgment as to whether to enter into a course of conduct, or a weighing of the risks and rewards of future.”

North Carolina ex rel. Stein v. Bowen^[99] (Personal jurisdiction over corporate officers and directors). The State of North Carolina sued five nonresident officers and directors of JUUL Labs, Inc., an e-cigarette company based in California. The State alleged that Defendants had engaged in unfair or deceptive trade practices in North Carolina while supervising and directing the marketing of JUUL’s products. Defendants moved to dismiss the lawsuit for lack of personal jurisdiction and failure to state a claim. The court concluded that it lacked personal jurisdiction over Defendants.

In its analysis, the court disregarded many of the allegations in the State’s unverified complaint because they grouped Defendants together, which was contrary to the necessary “individualized inquiry” for personal jurisdiction. The State’s “generalized allegations” were “an attempt to attribute JUUL’s business activities to its corporate officers and directors.” Personal jurisdiction, however, cannot be exercised over a corporation’s officers and directors merely because there is personal jurisdiction over the corporation. And even when the State identified individual conduct, it failed to establish a sufficient connection between the conduct and North Carolina and failed to show that the few forum contacts by some of Defendants were related to the State’s claims.

Relying on the Keeton market-exploitation test,^[100] the State argued that Defendants had purposefully availed themselves of the privilege of conducting activities in North Carolina by reviewing and approving JUUL’s nationwide ads with knowledge that the ads would appear in North Carolina. The market-exploitation test considers factors such as sales volume, customer base, and revenues. The court reasoned that this test, while perhaps suitable for JUUL, was not appropriate for Defendants, particularly because any contacts that Defendants may have had with North Carolina needed to be assessed individually and based on their own activities. The best test for this case’s facts was the Calder effects test.^[101] But the State did not cite Calder, and in any event, the State failed to show that Defendants expressly aimed conduct at North Carolina, a requirement of the effects test.

§ 1.3.14. Philadelphia Commerce Case Management Program

American Mushroom Cooperative f/d/b/a Eastern Mushroom Marketing Cooperative, Inc., et al. v. Saul Ewing Arnstein & Lehr LLP^[102] (Grant of reconsideration and grant of judgment on the pleadings in favor of law firm and against former client on statute of limitations grounds, dismissing legal malpractice claim). Judge Nina W. Padilla held that Pennsylvania’s two-year statute of limitations for negligence, and four-year statute of limitations for breach of contract, barred the American Mushroom Cooperative from pursuing claims that Saul Ewing’s allegedly incorrect legal advice caused past and ongoing harm. The Mushroom Cooperative was a long-time client of Saul Ewing. The Mushroom Cooperative alleged that in 2000 to 2002, Saul Ewing gave erroneous antitrust advice. In 2003, the Justice Department commenced an investigation, and in 2004 the Mushroom Cooperative and the DOJ entered into a consent judgment requiring the Mushroom Cooperative to reverse some of the actions advised by Saul Ewing. Multiple civil antitrust lawsuits followed. In 2009, a federal judge issued an opinion finding that other advice given by Saul Ewing was erroneous. According to the Mushroom Cooperative, this led to thirteen years of antitrust litigation and costly settlements.

The Mushroom Cooperative sued Saul Ewing in March 2020, demanding that its former counsel pay for the settlements and all of the counsel fees the Mushroom Cooperative had incurred because of its ex-lawyers since the outset of the DOJ inquiry in 2003. Judge Padilla granted Saul Ewing’s motions pursuant to Pennsylvania’s occurrence rule for legal malpractice claims. Under the occurrence rule, a breach of duty, and not the realization of a loss, triggers the accrual of a claim. The exception is the equitable discovery rule, which applies if Plaintiff is unaware of the existence of the injury or its cause, despite due diligence.

Judge Padilla noted that Saul Ewing gave its alleged bad advice in 2000 to 2002. Therefore, the Mushroom Cooperative had to file its lawsuit, at the latest, by 2006. Even if the discovery rule applied, then the Mushroom Cooperative was certainly aware of its claim in 2004, when it executed the DOJ consent judgment. That the Mushroom Cooperative may have subsequently sustained more than $50 million in damages, in the form of counsel fees and settlements, and continued to pay, did not result in new or separate legal malpractice claims. “[F]or Statute of Limitations purposes, a client cannot wait until its injuries become overwhelming before bringing suit.”

Federal Realty Investment Trust n/k/a/ Federal Realty OP, LP v. RAO 8 INC. d/b/a Dunkin Donuts, Mital H. Rao and Radha M. Rao^[103] (Denial of commercial tenant’s petition to open confessed judgment due to tenant’s failure to follow requirements in lease to extend term). Judge Nina W. Padilla held that Federal Realty, the landlord, properly confessed judgment against Dunkin Donuts, the tenant, for damages and possession because Dunkin Donuts did not comply with provisions in its lease for sending notice. Dunkin Donuts sent Federal Realty a letter notifying Federal Realty that Dunkin Donuts was exercising an option to remain in the premises for five additional years. However, Dunkin Donuts did not send the letter through a nationally recognized overnight carrier, or by registered or certified mail with a return receipt, as specified in the lease. Federal Realty stated that it did not receive the notice letter. Thereafter, Federal Realty sent Dunkin Donuts a renewal proposal, which Dunkin Donuts did not accept. There were subsequent negotiations, which were inconclusive. In the meantime, the lease had expired, but Dunkin Donuts remained in the premises and continued to pay rent in the amount set forth in the lease. After Dunkin Donuts failed to honor a demand to vacate indicating that Federal Realty had a new tenant, Federal Realty confessed judgment, as allowed by the lease. In Pennsylvania, a confession of judgment (or cognovit or warrant of attorney) clause is a contractual device that allows a commercial party to cause the entry of judgment against a counterparty upon the occurrence of a default under their agreement, without further notice.

Judge Padilla upheld the confessed judgment on the ground that Dunkin Donuts failed to send its notice letter to Federal Realty by he means required in the lease: using a nationally recognized overnight courier, or by registered or certified mail with a return receipt. There was no evidence that Federal Realty received the letter and accepted the exercise of the option. On the contrary, the fact that there were subsequent negotiations confirmed that Federal Realty did not receive the letter. Furthermore, the payment and acceptance of rent post-lease expiration did not extend the term of the lease. Under the lease, Dunkin Donuts became a holdover tenant. That Dunkin Donuts continued to pay rent in the amount set forth for the lease term, and not in the greater amount due from a holdover tenant, was an additional default by Dunkin Donuts justifying the court to allow the confessed judgment to stand. The court ordered Dunkin Donuts to vacate within thirty days.

John J. Dougherty v. National Union Fire Insurance Company of Pittsburgh, PA^[104] (Grant of mandatory preliminary injunction requiring D&O insurer to advance legal expenses for criminal defense of corporate officer). Judge Ramy I. Djerassi held that John Dougherty, the business manager of a labor union, met all six requirements to compel a D&O insurer to pay the counsel fees and costs he had and would incur defending against a criminal indictment. This was so even though Dougherty sought a “mandatory” injunction. In Pennsylvania, a mandatory injunction is a request for affirmative relief (such as the payment of defense expenses), and has an even higher burden than conventional equitable relief intended to maintain the status quo.

Judge Djerassi first concluded that Dougherty had a clear right to relief under the language of the insurance policy. The policy used the mandatory “shall” to impose a duty on the carrier to advance defense costs. Furthermore, even though the government indicted him after the expiration of the policy, Dougherty afforded timely notice by informing the carrier of his claim within thirty days of when the policy expired and just two weeks after the government served a search warrant relating to his indictment, which was prior to the end of the policy. The Court also rejected the carrier’s invocation of a mandatory arbitration clause in the policy. With the criminal trial imminent, Judge Djerassi found that there was inadequate time for the ADR process.

With Dougherty on the verge of trial, the potential prejudice to Dougherty’s constitutionally protected liberty interest was central to Judge Djerassi’s decision and the Court’s finding that Dougherty met the remaining five elements for injunctive relief. Judge Djerassi found that the withholding of the advancement of criminal defense costs purchased through an insurance policy was irreparable harm that damages could not compensate. Greater injury would result to Dougherty’s constitutional interest from denying injunctive relief than the harm to the insurer from granting it. Moreover, injunctive relief would preserve the status quo by upholding Dougherty’s presumption of innocence and preventing prejudice to him while he litigated the merits of the underlying coverage dispute. Additionally, Judge Djerassi found that forcing the carrier to pay was a remedy reasonably tailored to guard Dougherty’s right to counsel, and an injunction would not adversely affect the public interest because “the advancement of defense costs protects constitutional liberty and the rule of law.”

The Court required the carrier to pay Dougherty’s invoices forthwith, through to the final disposition of his criminal case [where, ultimately, the government convicted him].

§ 1.3.15. Rhode Island Superior Court Business Calendar

J-Scape Seasonal Property Care, LLC. V. Schartner^[105] (Before the Superior Court was a Motion to Show Cause filed by the purported landlord and tenant of a real property (collectively the Movants), to which landscape contractor servicing the property objected). “This matter arises from contractor’s complaint to enforce a mechanic’s lien in the amount of $73,300.27 (the Lien) plus interest for work performed and materials furnished to tenant of property located in, Exeter, Rhode Island. The Movants argued that the Lien should be discharged from the landlord owned property because plaintiff/contractor failed to provide notice to the tenant, as required by R.I.G.L. §34-28-4.1 …” “Here, the Movants presented credible evidence to support the existence of the tenant’s status under the lease…” “Given the clear and competent evidence as well as the unwavering testimony regarding [tenant’s] occupation and payment of rent on a monthly basis, the Movants have satisfied their burden to give rise to a rebuttable presumption that the Movants have a landlord-tenant relationship with respect to the Exeter Property…” and the Court thereby confirmed the tenant and landlord relationship at the Exeter Property.

The Court found: “As a tenant of… the Exeter Property, [it] was entitled to receive notice of a possible mechanic’s lien pursuant to §34-28-4.1. …”

The Court concluded: “Contractor clearly did not provide proper notice to tenant at the Exeter Property — and significantly departed from the notice requirements of §34-28-4.1, facts that prove fatal to Contractor’s ability to claim and perfect the Lien with respect to the Exeter Property. … Therefore, pursuant to §34-28-17.1(a), the Movants have satisfied their burden of proof by demonstrating a lack of probability of judgment in [Contractor’s] favor regarding the mechanic’s lien on the Exeter Property because it is void for failure to provide the requisite notice pursuant to §34-28-4.1. …” “For the reasons stated above, this Court deemed the mechanic’s lien currently in place on the Exeter Property to be void and unenforceable based on [Contractor’s] failure to provide the requisite notice pursuant to §34-28-4.1.”

East Greenwich Cove Builders, LLC v. Schnaier ^[106] (Plaintiff brought summary judgment motion to declare a purchase and sale agreement for a condominium unit unenforceable on the grounds that the agreement did not adequately describe the property to be sold). The agreement referenced the property as Unit 8 but at the time Unit 8 had not been declared as a condominium unit or constructed. In addition, the agreement purportedly incorporated plans and specs as an exhibit, but no such exhibit was attached. The Court found that the documents did not satisfy the statute of frauds or the contract principle of the inclusion of essential terms. The Court also found that the description of the unit was so indefinite and uncertain that parol evidence could not be introduced to complete the description. Finally, the Court found that the defendant could not overcome the statute of frauds with the doctrine of part performance exception as the defendant did not take possession of the property or improvements or pay a substantial part of the purchase price.

Green Development, LLC v. Exeter Real Estate holdings ^[107] (Decision of Superior Court following a three-day bench trial). Among other contract interpretation issues at play the court addressed the issues of whether a document sent with a DRAFT watermark is an offer and whether parties can modify a contract’s written terms by subsequent oral agreement even if the contract requires modifications in writing.

Chace IV v. Chace Jr.^[108] (Plaintiffs brought actions against trustees related to their management of a trust). Plaintiffs sought trust accounting, removal of the trustees and appointment of successor trustees. The trust was silent as to the governing law that should apply. Plaintiffs argued that Florida law should apply (testator’s domicile at death), and the defendants argued that Rhode Island law should apply.

Both parties agreed that Rhode Island case law is silent regarding which state’s laws apply to lawsuits arising out of the administration on a trust. Restatement (Second) Conflict of Laws § 271 states that the law of the state where the trust is to be administered governs when there is no local law designated by the testator to govern the administration of the trust. The court adopted this approach because the Supreme Court adopted the Second Restatement’s approach to conflicts of laws. Further, the court found that Rhode Island was the place of administration of the trust based on a number of factors including that one of the trustees was a Rhode Island resident, trust documents list Rhode Island as the address for the trust, Rhode Island lawyers and accountants were employed by the trust for administration tasks, and the family’s entity is based on Rhode Island.

Whelen Corrente & Flanders LLP v. Nadeau ^[109] (In a fee dispute between clients and their law firm, the court upheld an arbitration clause in the fee agreement). In a case of first impression, the court held that, unlike an agreement to arbitrate malpractice claims under Rule 1.8 of the Rules of Professional Conduct, an agreement to arbitrate fee disputes does not require informed consent or client consultation with independent counsel. The court also rejected the clients’ claims that the fee arbitration clause was unconscionable.

Cashman Equip. Corp., Inc. v. Cardi Corp., Inc.^[110] (In a multiparty dispute over a construction project, the court held a trial on the claims between two of the parties). At the conclusion of Plaintiff’s case in chief, the court granted Defendant’s motion for judgment as a matter of law under R.C.P. 52(c). Thereafter, the court granted Defendant’s motion that this constitute a final judgment under R.C.P. 54(b). The court granted the motion after concluding that the judgment resolved the issues between these two parties and there was no just reason for delay. The court rejected Plaintiff’s argument that Defendant’s claim to attorneys’ fees under R.I. Gen. Laws Section 9-1-45 was discharged in Plaintiff’s Chapter 11 bankruptcy. That claim did not arise until the court granted the judgment as a matter of law after the confirmation of Plaintiff’s Chapter 11 plan.

234 Realty, LLC v. First Hartford Realty Corp. and 287 Realty, LLC v. First Hartford Realty Corp.^[111] (The parties entered into an agreement where the defendant was to pay the plaintiff certain referral fees for real estate transactions). Plaintiff brought suit against the Defendant alleging that Defendant failed to report fees received from real estate transactions resulting in fewer payments to Plaintiff. When Plaintiff inquired further about this, Defendant allegedly withheld information from Plaintiff.

Plaintiff sought the appointment of a special master to audit Defendant to determine whether information had been withheld and whether fees were being properly paid. The accountant appointed by the special master incurred significant expenses in auditing Defendant, due in large part to Defendant’s inability to maintain adequate records and reluctance to provide records. Defendant objected to the accountant’s fees as unreasonable on multiple grounds, including that the work was not adequately supervised, involved unnecessary work because the accountant did not rely on third-party data and the accounting firm failed to use less expensive resources on the file. The court found that the fees were fair and reasonable contrary Defendant’s expert’s testimony. Plaintiff also moved the court to shift the fees entirely to Defendant. Defendant countered that it is well-established law in Rhode Island that fee shifting should not occur until a final determination is made on the merits. The court decided to allocate costs before final determination on the merits because Rule 53(g)(3) states “[a]n interim allocation may be amended to reflect a decision on the merits.” Fed. R. Civ. P. 53(g)(3). The entire costs incurred by the accountant were allocated to Defendant largely because the accountant had significant difficulty getting information/documents from Defendant that only added to the amount of fees incurred.

Erskine Flow v. FS Group RI, LLC ^[112] (A receiver obtained a $2.425 million offer to buy the receivership property from an unrelated third party). Another party submitted a higher offer containing terms and conditions that were not in the first offer. The court approved the first offer over the objection of the petitioner in the receivership. The court granted the mortgagee’s motion to require the objecting petitioner to post a $1.25 million surety bond if it appealed the sale order.

Josephson, LLC v. Affiliated FM Ins Co.^[113] (Plaintiff real estate investment company brought an insurance claim for business interruption coverage due to Covid-19). Plaintiff claimed that COVID-19 rendered all of its insured properties (which included hotels, leased residential and commercial properties) “partially or fully unusable for their intended purposes.” The court noted that “the common theme among COVID-19 insurance disputes is that the resolution of the matter depends upon the policy’s language and the facts as alleged by the insured and as applied to the applicable policy at issue.” In this instance the court found that COVID-19 does not constitute a “physical loss of damage” as required by this policy relying largely upon the fact that the policy included clear and unambiguous “communicable disease” coverage that do not require a showing of “physical loss or damage.” Secondly, the court agreed with majority of other jurisdictions in including that COVID-19 cannot cause “physical loss or damage” to property “where no physical alteration or damage has occurred to the property.” The court distinguished COVID-19 from a case of mold contamination as it does not permanently exist on surfaces or otherwise require physical repair to remedy its presence on the property.

§ 1.3.16. West Virginia Business Court Division

JB Exploration 1, LLC v. Blackrock Enterprises, LLC^[114] (Breach of contract bifurcated jury/bench trial). This case was referred to the Business Court Division on April 27, 2018, and involves a dispute related to a lease acquisition agreement to acquire leases and other oil and gas interests in Pleasants County, West Virginia. The court conducted the trial in two phases: a jury trial from March 2-12, 2021, and a bench trial from September 22-23, 2021. In the first phase, the jury was tasked with determining whether Blackrock breached the lease acquisition agreement. Depending on the jury’s findings, the Court would determine in the second phase whether a mining partnership existed and what, if any, damages were appropriate.

Under the lease acquisition agreement, the parties were to work together to acquire various oil and gas leases in a designated area in Pleasants County, West Virginia. The jury determined that Blackrock breached the agreement by, among other things, not timely responding to offers to buy into leases acquired by JB. The court also found that Blackrock failed to pay its share of costs to acquire and develop oil and gas leases and other interests in the designated area.

Following a bench trial for the second phase, the court determined that the lease acquisition agreement was a partnership and that the proper remedy was judicial dissolution of the partnership. The court further held that Blackrock was not entitled to any buyout of its partnership share and must convey its interests to JB. The case has been disposed of as of mid-2022.

Westlake Chem. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA^[115] (Collateral estoppel). This case was referred to the Business Court Division on October 11, 2019, and concerns an insurance coverage dispute involving the alleged failure of several insurance companies to cover Plaintiff Westlake Chemical Corporation for property damage at its Marshall County, West Virginia plant caused by a railroad tank car rupture and resulting chlorine release that occurred in August 2016. In a previous civil action in Pennsylvania, a jury had determined that Axiall Corporation, which Westlake acquired after the accident, was entitled to $5.9 million for property damage to its plant from Defendant which caused the accident. But Axiall submitted claims to Defendants for $278,000,000 for damage to the plant, the exact same damages it claimed in the Pennsylvania litigation.

Defendants moved for partial summary judgment, arguing that the Pennsylvania verdict was binding on this action, because it addressed the same damages Westlake claimed in this action. The court agreed with Defendants and held that Westlake was collaterally estopped from litigating the amount of damages because the same damages were at issue in both actions, and Axiall, Westlake’s predecessor in interest, had a full and fair opportunity to litigate the damages issue in the Pennsylvania action. The case remains pending in the Business Court Division.

Covestro, LLC v. Axiall Corp. et al.^[116] (Non-mutual collateral estoppel). This case was referred to the Business Court Division on May 22, 2019, and involves the same chlorine gas leak as was at issue in the immediately previous case. In this consolidated case, Covestro, which owned a plant nearby the Axiall plant where the railroad car carrying chlorine gas ruptured, sued Axiall and other defendants for damages to its plant caused by the chlorine gas. The leak created a large gas cloud that travelled south to the neighboring Covestro Plant and other lands. Axiall also sued Alltranstek, LLC, Rescar Companies, and Superheat FGH Services, Inc. for their role in causing the leak.

As in the previous case, the court applied the jury verdict in the Pennsylvania action to adjudicate many of the claims at issue. Though Covestro was not a party to the Pennsylvania action, the court held that Axiall—found 40% at fault in that action—could not relitigate the jury’s finding that it was negligent and therefore liable to Covestro for its damages. The court also rejected Axiall’s arguments that it did not have a duty to Covestro or that transporting chlorine gas was not abnormally dangerous.

Similarly, the court held that Axiall could not relitigate its claims against Defendants in the Pennsylvania action. In particular, the court held that Axiall could not hold Superheat liable for any damages, because the Pennsylvania jury had determined that Superheat was 0% negligent. This case remains pending in the Business Court Division.

§ 1.3.17. Wisconsin Commercial Docket Pilot Project

St. Croix Hospice, LLC v. Moments Hospice of Eau Claire, LLC^[117] (Employment agreement; tortious interference with contract). In St. Croix, the court grappled with cross motions for summary judgment related to claims for breach of contract and tortious interference with contract. St Croix Hospice (“SCH”) and Moments were competing hospice companies. When Moments expanded into the SCH’s Wisconsin territory and advertised employment opportunities, SCH’s regional Associate Medical Director (the “Medical Director”) and several SCH employees left SCH to work for Moments. In addition, several of SCH’s patients transferred to Moments. SCH subsequently filed suit, asserting: (1) the Medical Director had breached his Medical Director Services Agreement with SCH—which prohibited him from entering into agreements with or working with any of SCH’s hospice competitors—when he left SCH to work for Moments; (2) claims for tortious interference with contract against the Medical Director and Moments, alleging that Moments had interfered with the confidentiality, non-disclosure, and non-solicitation provisions in the SCH’s agreements with its employees; and (3) a claim for vicarious liability against Moments, alleging that Moments is vicariously liable for the Medical Director and other employees breaching their contracts with SCH.

The court granted SCH summary judgment on its breach of contract claim against the Medical Director, finding that he had breached the clear language of the Medical Director Services agreement when he entered into an agreement to serve as Moments’ medical director. However, the court granted summary judgment to Moments on SCH’s other claims. The court found that the employment agreements that formed the basis of SCH’s tortious interference claim might provide grounds for employee discipline, but were not actionable contractual obligations. Further, because those agreements did not prohibit former employees from soliciting business from patients or recruiting workers, SCH could not show that any violation occurred. Additionally, SCH’s evidence (an e-mail and unauthenticated text message) did not establish that any former SCH employees had in fact breached their employment agreements. The court also found that it would have to take unwarranted inferential leaps to find that the fact that a handful of SCH’s patients had transferred to Moments meant that Moments had interfered with SCH’s patient contracts. Further, there were no facts in the record describing in what way Moments had dissuaded the Medical Director from performing his contractual obligations to SCH. The court also granted Moments’ motion for summary judgment on SCH’s claim for vicarious liability, holding that as a matter of law, Moments could not be vicariously liable for employees’ conduct that predated their hire, nor could Moments be vicariously liable for the Medical Director’s conduct because he was an independent contractor. The court found SCH’s other proffered evidence did not show that any former SCH employee had breached their agreement with SCH.

§ 1.3.18. Wyoming Chancery Court

Wright McCall LLC v. DeGaris Law, LLC^[118] (Personal jurisdiction over nonresident member of resident LLC). This case presents a personal jurisdiction dispute not uncommon to states known for their business-entity-formation industries. A Wyoming LLC sued to expel a nonresident member. The nonresident member moved to dismiss for lack of personal jurisdiction. In response, the Wyoming LLC argued the member consented to personal jurisdiction when it executed an operating agreement containing Wyoming dispute-resolution and governing-law provisions. And, in any case, the nonresident member had sufficient minimum contacts because it executed an operating agreement with Wyoming-centric provisions.

The court disposed of the jurisdiction-by-consent theory. Operating agreement language naming arbitration in Cheyenne or Denver as the “exclusive forum for adjudication of any disputes” constituted agreement to arbitrate in Cheyenne but it did not constitute consent to litigate a merits-based claim in a Wyoming court. The Wyoming LLC pointed to another provision deeming the contract made in Wyoming and governed by Wyoming law. Unmoved, the court held that personal jurisdiction could not be premised on conceptualistic theories of place of contracting and a clause stating Wyoming law would apply is not consent to jurisdiction because the concepts of governing law and personal jurisdiction differ.

As to the specific-jurisdiction theory, the court reasoned personal jurisdiction over an LLC does not extend to its members because an LLC is a distinct entity that insulates its members from company obligations. Independent of the company, the nonresident lacked minimum contacts with Wyoming. Executing an operating agreement mattered not to the minimum contacts analysis because it was part and parcel of LLC membership. And the governing-law and dispute-resolution provisions did not confer jurisdiction for the reasons noted above.

In sum, this case affirms three principles: (1) consent to arbitrate in a particular state is not consent to litigate merit-based claims in the courts of that state; (2) a choice-of-law provision stating a specific state’s law will apply does not constitute consent to personal jurisdiction in that state; and (3) personal jurisdiction cannot be premised on mere membership in a resident LLC.

1. This 2023 chapter marks Lee Applebaum’s 20th year. Lee started this chapter and faithfully has guided it as editor and contributing author. We are grateful for Lee’s decades of dedicated service to this effort and his overall tireless efforts to promote and support business courts throughout the country. Lee continues practicing law at Fineman, Krekstein and Harris, authoring his Business Courts Blog, and his contact information remains as provided above. ↑

2. 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]. ↑

3. 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. 8, 2023). ↑

4. Business Courts Bench Book, supra note 1, at xx. ↑

5. Business Courts History, supra note 1, at 207, 211. ↑

6. American College of Business Court Judges, https://masonlec.org/divisions/mason-judicial-education-program/american-college-business-court-judges/ (last visited Jan. 7, 2023). ↑

7. See Meeting Agenda, Law & Econ. Ctr, https://web.cvent.com/event/f06f6ba1-bc11-4111-9bfa-31315f28630d/websitePage:8deb4542-d9c4-4193-9354-d3f8f3426f81 (last visited Jan. 7, 2023). ↑

8. Diversity Clerkship Program, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/diversity/ (ABA login required) (last visited Nov. 7, 2022). ↑

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. 8, 2023). ↑

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. 8, 2023). ↑

11. A.B.A. Section of Business Law Judges Initiative Committee, https://www.americanbar.org/groups/business_law/committees/judges/ (ABA login required) (last visited Jan. 8, 2023). ↑

12. Business Court Representatives, ABA: Bus. Law Section, https://www.americanbar.org/groups/business_law/initiatives_awards/bcr/ (ABA login required) (last visited Jan. 8, 2023). ↑

13. Id. ↑

14. 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. 8, 2023). ↑

15. 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. 8, 2023). ↑

16. New business court docket curriculum developed for courts nationwide, Nat’l Ctr. for State Courts, https://www.ncsc.org/newsroom/at-the-center/2020/new-business-court-docket-curriculum-developed-for-courts-nationwide?SQ_VARIATION_52227=0 (last visited Jan. 8, 2023) [hereinafter Business Courts Curriculum]. ↑

17. www.businesscourtsblog.com. ↑

18. See, e.g., Business Court Studies and Reports 2000–2009, Bus. Courts Blog (Jan. 5, 2019), https://www.businesscourtsblog.com/business-court-studies-and-reports-2000-2009; Business Court Studies and Reports 2010–2018, Bus. Courts Blog (Jan. 5, 2019), https://www.businesscourtsblog.com/business-court-studies-and-reports-2010-2018; 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. ↑

19. 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 (2022), https://businesslawtoday.org/2022/02/recent-developments-in-business-courts-2022/; Weixia Gu, Jacky Tam, The Global Rise of International Commercial Courts: Typology and Power Dynamics, 22 Chi. J. Int’l L. 443 (2022), https://cjil.uchicago.edu/publication/global-rise-international-commercial-courts-typology-and-power-dynamics; Pierluigi Matera, Delaware’s Dominance, Wyoming’s Dare: New Challenge, Same Outcome?, 27 Fordham J. Corp. & Fin. L. 73 (2022) https://ir.lawnet.fordham.edu/jcfl/vol27/iss1/2/; Richard G. Niess, Why The Current Business Court Needs Reform, 95 Wis. Law 42 (Feb. 2022), https://www.wisbar.org/NewsPublications/WisconsinLawyer/Pages/Article.aspx?Volume=95&Issue=2&ArticleID=28904; Douglas L. Toering and Fatima Bolyea, Touring the Business Courts , 42 Michigan Bus. L. J. 11 (Spring 2022), https://higherlogicdownload.s3.amazonaws.com/MICHBAR/ebd9d274-5344-4c99-8e26-d13f998c7236/UploadedImages/pdfs/journal/Spring22.pdf#page=13; Paul G. Swanson, Far from being ‘shadowy,’ Wisconsin’s business court is dispensing justice, serving the public, Milwaukee Journal Sentinel (April 15, 2022), https://www.jsonline.com/story/opinion/2022/04/15/wisconsin-business-court-dispensing-justice-serving-public/7316571001/; Hon. Saliann Scarpula, Julie North & Scott Reents, New York Commercial Division Leads the Way With New E-Discovery Rules, New York Law Journal (May 10, 2022), https://www.law.com/newyorklawjournal/2022/05/10/new-york-commercial-division-leads-the-way-with-new-e-discovery-rules/?slreturn=20230008162847; International Commercial Courts, The Future of Transnational Adjudication, Cambridge University Press (2022), https://www.cambridge.org/us/academic/subjects/law/public-international-law/international-commercial-courts-future-transnational-adjudication?format=HB; Michael I. Green, Crowded at the Top: An Empirical Description of the Oligopolistic Market for International Arbitration Institutions, 31 Minn. J. Int’l L. 281 (2022), https://minnjil.org/wp-content/uploads/2022/06/Green_v31_i1_281_322.pdf; Zhiyu Li, Specialized Judicial Empowerment, 32 U. Fla. J.L. & Pub. Pol’y 491 (Summer 2022), https://ufjlpp.org/wp-content/uploads/2022/11/FL_JLPP_32-3_Li.pdf; Alyssa S. King & Pamela K. Bookman, Traveling Judges, 116 American Journal of International Law 477 (July 2022), https://www.cambridge.org/core/journals/american-journal-of-international-law/article/traveling-judges/265194C20619E88E512064CB2988BC90; Douglas L. Toering, Fatima M. Bolyea, and Brian P. Markham,  Interview with Judge Christopher Yates, Touring the Business Courts , Michigan Bus. L. J.  (Summer 2022), https://connect.michbar.org/businesslaw/newsletter/summer22; Douglas L. Toering, Ian Williamson, and Nicole B. Lockhart, Interviews with Judge Timothy P. Connors and Judge Victoria A. Valentine; Ten Years of Business Courts in Michigan, Touring the Business Courts, Michigan Bus. L. J. (Fall 2022), https://connect.michbar.org/businesslaw/newsletter/fall22; Ben Burningham, A Year of Firsts, 46 Wyo. Lawyer 16 (Dec. 2022), https://digitaleditions.walsworth.com/publication/?m=10085&i=770773&p=16&ver=html5. ↑

20. See, e.g., Delaware Corporate & Commercial Litigation Blog, http://www.delawarelitigation.com (last visited Jan. 8, 2023); Mass Law Blog, http://www.masslawblog.com (last visited Jan. 8, 2023); New York Business Divorce Blog, http://www.nybusinessdivorce.com (last visited Jan. 8, 2023); NY Commercial Division Blog, https://www.pbwt.com/ny-commercial-division-blog/ (last visited Jan. 8, 2023); New York Commercial Division Practice, https://www.nycomdiv.com/ (last visited Jan. 8, 2023); Duane Morris Delaware Business Law Blog, http://blogs.duanemorris.com/delawarebusinesslaw/ (last visited Jan. 8, 2023); Commercial Division Blog: Current Developments in the Commercial Division of the New York State Courts, http://schlamstone.com/commercial/ (last visited Jan. 8, 2023); The North Carolina Business Litigation Report, http://www.ncbusinesslitigationreport.com (last visited Jan. 8, 2023); The Nevada Business Court Report, https://www.sierracrestlaw.com/news-blog/ (last visited Jan. 8, 2023); It’s Just Business (North Carolina), https://itsjustbusiness.foxrothschild.com/ (last visited Jan. 8, 2023); The Westchester Commercial Division Blog, https://www.westchestercomdiv.com/ (last visited Jan. 8, 2023); and the New York Commercial Division Roundup, https://www.newyorkcommercialdivroundup.com/ (last visited Jan. 8, 2023). ↑

21. Uniform Standing Order for All Commercial Calendars (Effective August 29, 2022), available at https://www.cookcountycourt.org/Portals/0/Law%20Divison/General%20Administrative%20Orders/Section/Commercial%20Calenadar%20Uniform%20Standing%20Order%20(effective%208-29-22).pdf?ver=5QWdf7NLsCZ6X7SsX_F_iQ%3d%3d. ↑

22. Ninth Judicial Circuit of Florida, About the Court, Judges, Circuit Judges, Judge John E. Jordan (Dec. 2, 2022), available at https://www.ninthcircuit.org/about/judges/circuit/john-e-jordan. ↑

23. Eleventh Judicial Circuit of Florida, About the Court, Civil Court, Complex Business Litigation (Dec. 2, 2022), available at https://www.jud11.flcourts.org/About-the-Court/Ourt-Courts/Civil-Court/Complex-Business-Litigation. ↑

24. Seventeenth Judicial Circuit of Florida, Circuit Civil (Dec. 2, 2022), available at http://www.17th.flcourts.org/01-civil-division/. ↑

25. Thirteenth Judicial Circuit of Florida, Judicial Directory, Judge Darren D. Farfante (Dec. 2, 2022), available at https://www.fljud13.org/JudicialDirectory/DarrenDFarfante.aspx. ↑

26. Business Court (Dec. 2, 2022), available at https://ninthcircuit.org/divisions/business-court. ↑

27. Katheryn Hayes Tucker, ‘A Solid Foundation’: State-wide Business Court Judge Resigns, Daily Report (June 23, 2022, 01:17 PM), https://www.law.com/dailyreportonline/2022/06/23/a-solid-foundation-statewide-business-court-judge-resigns/. ↑

28. History, Georgia State-wide Business Court, https://www.georgiabusinesscourt.com/history/ (last visited Dec. 14, 2022). ↑

29. O.C.G.A. § 15-5A-7(b)(3)(A). ↑

30. Tucker, supra note 31. ↑

31. Id. ↑

32. Id. ↑

33. Mason Lawlor, Judge Walt Davis Returning to Private Practice at Jones Day Atlanta, Daily Report (Sept. 22, 2022, 6:28 PM), https://www.law.com/dailyreportonline/2022/09/22/judge-walt-davis-returning-to-private-practice-at-jones-day-atlanta/. ↑

34. State-Wide Business Court Welcomes New Judge and Bids Farewell to Inaugural Judge, GACourtsJournal (Sept. 27, 2022), https://georgiacourtsjournal.org/2022/09/27/georgia-state-wide-business-court-welcomes-new-judge-and-bids-farewell-to-inaugural-judge/. ↑

35. Id. ↑

36. Iowa Judicial Branch, Iowa Business Specialty Court | Iowa Judicial Branch (iowacourts.gov). ↑

37. Id. ↑

38. Id. ↑

39. Id. ↑

40. Mich. Comp. L. 600.8033(3)(c). ↑

41. The scope of Rules 2.407 and 2.408 is not limited to business courts. Rule 2.407 applies generally to all types of cases, and Rule 2.408 applies to civil cases. See Mich. Ct. R. 2.407(B); Mich. Ct. R. 2.408. ↑

42. Mich. Ct. R. 2.407(B)(5). ↑

43. Mich. Ct. R. 2.407(C). ↑

44. See Mich. Ct. R. 2.407(B)(2) (providing that “courts may determine the manner and extent of the use of videoconferencing technology and may require participants to attend court proceedings by videoconferencing technology.”) (emphasis added); Mich. Ct. R. 2.408(A)(1) (“A court may, at the request of any participant, or sua sponte, allow the use of videoconferencing technology by any participant in any civil proceeding.”) (emphasis added). ↑

45. Mich. Ct. R. 2.407(B)(4)–(5). ↑

46. Mich. Ct. R. 2.407(B)(6)–(7), (10). ↑

47. The order is accessible via the following link: https://www.courts.michigan.gov/siteassets/rules-instructions-administrative-orders/proposed-and-recently-adopted-orders-on-admin-matters/adopted-orders/2020-08_2022-08-10_formor_pandemicamdts.pdf. Additionally, practitioners can now monitor proposed Michigan Court Rules at the following webpage: https://www.courts.michigan.gov/openforcomment. ↑

48. Wyo. Stat. Ann.§§ 5-13-101 through -203. ↑

49. Wyo. Stat. Ann. § 5-13-115(b). ↑

50. Id. ↑

51. Wyo. Stat. Ann. § 5-13-104(h). W.R.C.P.Ch.C. 1. ↑

52. Hannah Black, State chancery court marks one year of handling business law, Wyo. Trib. Eagle (Dec. 11, 2022), https://www.wyomingnews.com/news/local_news/state-chancery-court-marks-one-year-of-handling-business-law/article_25b06f74-7811-11ed-ab4b-6f0907104642.html. ↑

53. Ben Burningham, A Year of Firsts: Chancery Court Turns One Year Old, 45 Wyo. Law 6 (Dec. 2022), https://digitaleditions.walsworth.com/publication/?m=10085&i=770773&p=4&ver=html5. ↑

54. Wyo. Stat. § 5-13-109(b). ↑

55. 2021 Wyo. Sees. Laws ch. 6, §1; 2022 Wyo. Sess. Laws ch. 12, § 1. ↑

56. See Texas Judicial Council 2022 Civil Justice Committee Report and Recommendations, https://www.txcourts.gov/media/1455006/2022_civil-justice-report-recommendations.pdf; see also, Lee Applebaum, www.businesscourtsblog.com, https://www.businesscourtsblog.com/texas-committee-recommends-creation-of-pilot-business-court-repost-from-november-2022/. ↑

57. No. CV 2020-006219, 2022 WL 223907 (Ariz. Super. Ct. Jan. 21, 2022). ↑

58. No. CV 2015-095504, 2022 WL 4594545 (Ariz. Super. Ct. Sep. 07, 2022). ↑

59. No. CV 2021-017685, 2022 WL 4594546 (Ariz. Super. Ct. Mar. 28, 2022). ↑

60. C.A. No. N21C-05-048 PRW CCLD, 274 A.3d 287 (Del. Super. Ct. Apr. 14, 2022). ↑

61. C.A. No. N20C-07-052 AML CCLD, 2022 WL 1499828, (Del. Super. Ct. May 11, 2022). ↑

62. C.A. No. N21C-01-204 MMJ CCLD, 2022 WL 2304048 (Del. Super. Ct. June 27, 2022). ↑

63. Insight Global, LLC v. Marriott Intern., Inc., No. 21-GSBC-0017, 2022 WL 2965497 (Ga. Bus. Ct. June 08, 2022). ↑

64. Elavon, Inc. v. People’s United Bank, Nat. Ass’n, No. 21-GSBC-0023, 2022 WL 765096 (Ga. Bus. Ct. Mar. 01, 2022). ↑

65. No. 49D01-1908-PL-035770, (Ind. Comm. Ct., Marion Cnty., Sep. 23, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

66. See Indiana Commercial Court Rule 5, https://www.in.gov/courts/rules/commercial/index.html#_Toc62198782 ↑

67. No. 02D02-2105-PL-000224, (Ind. Comm. Ct., Allen Cnty., May 18, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

68. No. 49D01-2108-PL-028354, (Ind. Comm. Ct. Marion Cnty., Mar. 30, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

69. No. 49D01-2104-PL-013161, (Ind. Comm. Ct. Marion County, Feb. 25, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

70. No. 49D01-2004-PL-014788, (Ind. Comm. Ct., Marion Cnty., Jun. 9, 2022), https://public.courts.in.gov/mycase/#/vw/Search or https://public.courts.in.gov/CCDocSearch. ↑

71. No. EQCE087096 (Iowa Dist. Ct. Polk Co. Mar. 10, 2022). ↑

72. No. CVCV096902 (Iowa Dist. Ct. Scott Co. June 17, 2022). ↑

73. No. 21-CI-004795 (Jefferson Cir. Ct. Div. Ten Bus. Ct. Dkt. April 8, 2022), https://kycourts.gov/Courts/Business-Court/Documents ↑

74. No. BCD-REA-2021-00004, 2022 WL 1539589 (Me. B.C.D. May 09, 2022). ↑

75. No. 20-1519-BLS1 (Feb. 28, 2022) (Krupp, J.). ↑

76. Case No. 1684CV03176-BLS2 (June 22, 2022) (Salinger, J.). ↑

77. Case No. 2184CV01937-BLS1 (Sept. 12, 2022) (Kazanjian, J.). ↑

78. No. 2021-002117-CB (Macomb Cnty. Cir. Ct. May 2, 2022), https://www.courts.michigan.gov/49d861/siteassets/business-court-opinions/c16-2021-2117-cb(may2,2022).pdf. ↑

79. No. 21-187710-CB (Oakland Cnty. Cir. Ct. July 12, 2022), https://www.courts.michigan.gov/4a0143/siteassets/business-court-opinions/c06-2021-187710-cb(07.12.22).pdf. ↑

80. No. 18-11072-CBB (Kent Cnty. Cir. Ct. Mar. 30, 2022), https://www.courts.michigan.gov/496a69/siteassets/business-court-opinions/c17-2018-11072-cbb(march30,2022).pdf. ↑

81. No. 21-011302-CB (Wayne Cnty. Cir. Ct. Apr. 16, 2022), https://www.courts.michigan.gov/49a433/siteassets/business-court-opinions/c03-2021-011302-cb(april16,2022).pdf. ↑

82. No. 20-CV-11498, 2021 U.S. Dist. LEXIS 67054 (E.D. Mich. Apr. 7, 2021). ↑

83. No. 218-2021-CV-0880, 2022 N.H. Super. LEXIS 8 (June 15, 2022) (Anderson, J.). ↑

84. No. 216-2020-CV-00555, 2022 N.H. Super. LEXIS 4 (April 14, 2022) (Anderson, J.). ↑

85. No. 216-2020-CV-00312, 2022 N.H. Super. LEXIS 1. (January 14, 2022) (Anderson, J.). ↑

86. Docket No. UNN-L-1018-22 (N.J. Super. Law Div. August 5, 2022 (unpublished)). ↑

87. Docket No. BER-L-4341-18 (N.J. Super. Law Div. October 17, 2022 (unpublished)). ↑

88. 74 Misc. 3d 1203(A) (Sup. Ct. N.Y. Cty. Jan. 20, 2022) ↑

89. 74 Misc. 3d 1204(A) (Sup. Ct., Albany Cty. Jan. 24, 2022). ↑

90. 74 Misc.3d 1208(A) (Sup. Ct. Suffolk Cty. Feb. 9, 2022). ↑

91. No. 806643/2021, 2021 NY Slip Op 51289(U) (Sup. Ct. Erie Cty. Dec. 8, 2021). ↑

92. 74 Misc.3d 1205 (Sup. Ct. Albany Cty. Jan. 25, 2022). ↑

93. No. 651394/2021, 2022 BL 127452 (Sup. Ct. N.Y. Cty. Mar. 11, 2022). ↑

94. 75 Misc.3d 661 (Sup. Ct. N.Y. Cty. Apr. 21, 2022). ↑

95. No. 19-CVS-17741, 2022 NCBC 28 (Mecklenburg Cnty. Super. Ct. May 26, 2022) (Bledsoe, C.J.), https://www.nccourts.gov/documents/business-court-opinions/lee-v-mcdowell-2022-ncbc-28. ↑

96. No. 21-CVS-3276, 22 NCBC 52 (Buncombe Cnty. Super. Ct. Sept. 19, 2022) (Davis, J.), https://www.nccourts.gov/documents/business-court-opinions/davis-v-hca-healthcare-inc-2022-ncbc-52. ↑

97. No. 19 CVS 19887, 2022 NCBC 19 (Mecklenburg Cnty. Super. Ct. Apr. 22, 2022) (Earp, J.), https://nccourts.gov/documents/business-court-opinions/aspen-specialty-ins-co-v-nucor-corp-2022-ncbc-19. ↑

98. No. 19-CVS-5659, 2022 NCBC 11 (Wake Cnty. Super. Ct. Feb. 15, 2022) (Robinson, J.), https://www.nccourts.gov/documents/business-court-opinions/emrich-enters-llc-v-hornwood-inc-2022-ncbc-11. ↑

99. No. 21-CVS-3727, 2022 NCBC 64 (Durham Cnty. Super. Ct. Oct. 27, 2022) (Conrad, J.), https://www.nccourts.gov/documents/business-court-opinions/north-carolina-ex-rel-stein-v-bowen-2022-ncbc-64. ↑

100. See Keeton v. Hustler Mag., Inc., 465 U.S. 770 (1984). ↑

101. See Calder v. Jones, 465 U.S. 783 (1984). ↑

102. March Term, 2020, No. 02211 (June 13, 2022), 2022 Phila. Ct. Com. Pl. Lexis 18 (Padilla, J.), https://www.courts.phila.gov/pdf/opinions/200302211_1024202214119856.pdf. ↑

103. March Term, 2022, No. 2719 (July 25, 2022), 2022 Phila. Ct. Com. Pl. Lexis 11 (Padilla, J.), https://www.courts.phila.gov/pdf/opinions/220302719_92020221623250.pdf. ↑

104. November Term, 2021, No. 640 (March 17, 2022), 2022 Phila. Ct. Com. Pl. Lexis 4 (Djerassi, J.), https://www.courts.phila.gov/pdf/opinions/211100640_3182022113126751.pdf. ↑

105. No. WM-2021-0323 (R.I. Super. Jan. 21, 2022) (Taft-Carter, J.). ↑

106. No. KC-2020-0521 (R.I. Super. July 14, 2021) (Licht, J.). ↑

107. Nos. WC-2020-0346, WC-2020-0471, WD-2021-0065 (R.I. Super. Jan. 14, 2022) (Licht, J.). ↑

108. No. PC-2021-00953 (R.I. Super. Feb. 28, 2022). ↑

109. 2022 WL 668279 (R.I. Super. Feb. 28, 2022) (Stern, J.). ↑

110. 2022 WL 577873 (R.I. Super. Feb. 18, 2022) (Taft-Carter, J.). ↑

111. No. PC-2019-6794, No. PC-2019-6808 (R.I. Super. Feb. 22, 2022). ↑

112. No. PC-2021-03625 (R.I. Super. Apr. 14, 2022) (Stern, J.). ↑

113. No. PC-2021-03708 (R.I. Super. March 29, 2022) (Stern, J.). ↑

114. No. 18-C-2 (W. Va. Cir. Ct. Pleasants Cnty. Apr. 25, 2022). ↑

115. No. 19-C-59 (W. Va. Cir. Ct. Marshall Cnty. Mar. 3, 2022). ↑

116. No. 18-C-202 (W. Va. Cir. Ct. Marshall Cnty. Aug. 29, 2022). ↑

117. No. 2020CV117 (Wis. Cir. Ct. St. Croix Cnty. Jan 28, 2022). ↑

118. Wright McCall LLC v. DeGaris Law, LLC, 2022 WYCH 2 (Wyo. Ch. Ct. 2022). ↑

Editors

Contributors

§ 1.1. Introduction

We are pleased to present the rapidly growing Chapter on Artificial Intelligence.  This year, we have added a new component by including significant blockchain cases.  Why?  Both AI and blockchain represent emerging technologies that present vexing legal issues for clients, business lawyers, litigators and the judiciary. This Chapter seeks to serve as a guide for those seeking a better understanding of this rapidly evolving legal landscape. 

It is no surprise that the number of cases and complexity of issues are proliferating.  With regard to AI, issues around bias and fairness continue to predominate as use cases and adoption across industries expand.  Questions around IP ownership and registrability, especially with generative AI tools, are also quickly becoming a hot topic. And Mr. Thaler continues to advance the question through  litigation of whether AI software systems can obtain a patent or copyright for its output. See e.g. Thaler v. Vidal, 43 F.4th 1207 (Fed. Cir. 2022) (affirming the district court holding in Thaler v. Hirshfeld, 558 F. Supp. 3d 238 (E.D. Va. 2021) that an artificial intelligence software system cannot be listed as an “inventor” on a patent application given that the language of the Patent Act requires inventors to be “natural persons”. This case arose after plaintiff Stephen Thaler filed two patent applications with the USPTO for which the inventor was identified as an AI machine named “DABUS”.)   And at the moment this Chapter is going to the printer, the Copyright Office just released its first guidance on generative AI. See https://public-inspection.federalregister.gov/2023-05321.pdf.  We will cover this in depth in next year’s Chapter as events continue unfold in this space.

Facial recognition applications, both in the government and private sectors, are raising a host of constitutional, statutory and privacy claims. And biometric-based litigation has also exploded.  Other emerging issues include the role of AI tools in content moderation as part of a broader conversation on internet publisher immunity, and whether software aimed to support aspects of legal services delivery, including software that uses AI, violates rules against the unauthorized practice of law.  With regard to blockchain, the spectacular collapse of FTX has brought into sharp focus the tension between centralized exchanges and the promise of Web 3.0 DeFi applications and protocols, and serves as  a reminder that the nascent blockchain industry is not immune to garden-variety fraud. While there continues to be substantial SEC action claiming various tokens are unregistered securities, practitioners and judges alike can benefit from a deeper understanding of blockchain technology, layer 1-3 protocols, and how, when and why “crypto” matters to blockchains.

We also made certain judgments as to what should be included.  Notably, we added some ongoing cases with particularly interesting AI issues, including two cases recently heard by the United States Supreme Court, and other cases related to recent developments in generative AI.  We omitted cases decided prior to 2022 that were reported in previous iterations of the Chapter after evaluating whether there were any significant updates to those cases with respect to AI; in most cases there were not.s.  With respect to class action lawsuits filed under the Illinois Biometric Information Privacy Act (BIPA) (740 ILCS 14), to the extent the allegations focus more on the data rather than the associated AI applications, we have not included a comprehensive summary of those BIPA cases.[1]  And as AI continues to be a subject of legislative proposals, we omitted the 2021 and 2020 legislative updates that were included in the Chapter in prior years and focus only on 2022.

Finally, I want to thank my colleagues, Adam Aft, Sam Kramer, Alex Crowley, Amarachi Abakporo, Mariana Oliver, and Marcela Pertusi Hernández for their assistance in preparing this chapter.  Adam is a knowledgeable and accomplished AI attorney, Sam is a knowledgeable and accomplished blockchain attorney and Alex, Amarachi, Marcela and Mariana are recent joiners to our team with much exuberance for AI.

We hope this Chapter provides useful guidance to practitioners of varying experience and expertise and look forward to tracking the trends in these cases in future year’s Chapter.

Bradford Newman

Palo Alto, California

§ 1.2. Artificial Intelligence

Cases

United States Supreme Court

There were no qualifying decisions within the United States Supreme Court in 2022.

Pending Cases of Note

Gonzalez v. Google LLC and Twitter v. Taamneh. On February 21 and 22, 2023, the US Supreme Court heard oral arguments for Gonzalez v. Google and Twitter v. Taamneh, which some have called “Cases That Could Break the Internet”.[2] These are the first cases interpreting Section 230 of the Communication Decency Act (47 U.S.C. § 230) ever to be decided by the Supreme Court Both cases arose from an action filed against Google, Twitter, and Facebook by the father of a victim of ISIS-linked terrorism claiming, in part, that the platforms were liable for aiding and abetting international terrorism by not doing enough to keep terrorists off the platforms.[3] Notably, with respect to Google, the plaintiff claimed that Google’s use of machine learning algorithms to analyze and suggest content to users assisted ISIS in propagating terrorism and that Section 230 does not grant immunity to Google from liability for such content.[4] Decisions by the Supreme Court holding the platforms liable for the alleged claims could significantly impact the internet overall as platforms could become less willing to hosting certain kinds of content for fear of incurring liability for that content.  Next year’s Chapter will address the Supreme Court’s opinions in these important Section 230 cases.

First Circuit

There were no qualifying decisions within the First Circuit in 2022.

Second Circuit

There were no qualifying decisions within the Second Circuit in 2022.

Third Circuit

United States v. Turner, No. 19-763 (WJM), 2022 U.S. Dist. LEXIS 17318 (D.N.J. Jan. 31, 2022) (under which the Court found that an evidentiary hearing was warranted to determine the admissibility of a photo array that was generated using facial recognition software that operates by manipulating or normalizing the input image by scaling, rotating, or aligning the image.)

Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., No. 20-613-LPS, 2022 U.S. Dist. LEXIS 75493 (D. Del. Apr. 26, 2022) (denying Thomson Reuters’ and West Publishing Corporation’s motion to dismiss ROSS Intelligence’s claim alleging that the plaintiffs tied their legal research tool to their public law database in violation of the Sherman Antitrust Act and granting the plaintiffs’ motion to dismiss the counterclaims alleging that 1) the plaintiffs brought anticompetitive sham litigation to the court and 2) that the plaintiffs engaged in unfair competition under Delaware law. ROSS Intelligence had developed an artificial intelligence-based legal research application that the plaintiffs previously alleged was developed using certain Westlaw materials, notably Westlaw’s Headnotes and Key Number System, without the plaintiffs’ authorization. See Thomson Reuters Enter. Ctr. GmbH v. ROSS Intelligence Inc., 2021 U.S. Dist. LEXIS 59945 (D. Del. 2021).)

Pending Cases of Note

Getty Images (US), Inc. v. Stability AI, Inc., D. Del., No. 1:23-cv-00135, filed Feb. 3, 2023 (alleging that Stability AI copied over 12 million of Getty Images’ photographs and associated captions and metadata without authorization and “removed or altered Getty Images’ copyright management information, provided false copyright management information, and infringed Getty Images’ famous trademarks”. Getty asserts that it has licensed its photographs for AI and machine learning purposes to others before, but that Stability AI is using Getty’s photographs without authorization to train its Stable Diffusion machine learning-driven image-generation model. Getty Images filed similar litigation against Stability AI in the United Kingdom in January 2023.)[5]

Fourth Circuit

In re Peterson, Nos. 19-24045, 19-24551, 2022 Bankr. LEXIS 1537, at *103 (Bankr. D. Md. June 1, 2022) (holding that the provision of a software application to assist pro se debtors filing for bankruptcy protection constitutes the practice of law by a non-lawyer as the software provides users with legal advice when it limits the options presented to the user based upon the user’s specific characteristics, thereby affecting the user’s discretion and decision-making. Notably, Upsolve denied that its software did not involve any AI, machine learning, or natural language processing algorithm. The court, however, did not comment specifically on AI in its opinion but focused instead on the software’s functions. This case would appear to put AI tools having functions related to legal services that are more complicated than Upsolve’s software at risk of unauthorized practice of law violations.)

Fifth Circuit

There were no qualifying decisions within the Fifth Circuit in 2022.

Sixth Circuit

Changizi v. HHS, No. 2:22-cv-1776, 2022 U.S. Dist. LEXIS 81488 (S.D. Ohio May 5, 2022) (granting defendant’s motion to dismiss plaintiff’s claims based on Plaintiff’s lack of standing and, in the alternative, on the content of their claims, stating that 1) the plaintiff’s First Amendment claim fails as allegations that defendant exercises coercive power over Twitter to censor certain users based on the information they share about COVID-19 do not satisfy the requirements under the “state compulsion” framework and because Plaintiff did not make a sufficient argument that another exception to the state-action doctrine applies and 2) Plaintiff’s Fourth Amendment claim fails as the Surgeon General’s (defendant) Request for Information from “technology platforms” to provide defendant with data concerning “sources of COVID-19 misinformation” did not constitute a search under the Constitution. As an additional point, the court cited a statement from the Surgeon General, in which he urged social media platforms to improve upon the monitoring of misinformation by “increas[ing] staffing of multilingual content moderation teams” and “improv[ing] machine learning algorithms in languages other than English since non-English-language misinformation continues to proliferate….”)

Bond v. Clover Health Invs., Corp., 587 F. Supp. 3d 641 (M.D. Tenn. 2022) (denying Defendant’s motion to dismiss plaintiff’s claims that defendant defrauded the market by engaging in unlawful activities and making misleading statements about the success and value of its healthcare business and technological developments, including an AI-powered software called the “Clover Assistant”. Defendant suggested that Clover Assistant was intended to improve patient care, but, in practice, the Assistant appeared to merely increase Defendant’s profit from Medicare reimbursements without meaningfully improving care. Furthermore, the operator’s medical expertise and skill (e.g., qualified physician or not) affected the accuracy of the results produced by Clover Assistant. Separately, defendant struggled to even get physicians to use Clover Assistant. This case provides an example of how, in practice, AI tools may not always live up to the hype.)

Ogletree v. Cleveland State Univ., No. 1:21-cv-00500, 2022 U.S. Dist. LEXIS 150513 (N.D. Ohio Aug. 22, 2022) (holding that a university’s scan of plaintiff student’s room using virtual room scanning technology during a remote exam was unreasonable under the Fourth Amendment. Plaintiff argued that test integrity could be preserved by instead using alternatives such as artificial intelligence to detect suspicious movement or plagiarism.)

Seventh Circuit

Trio v. Turing Video, Inc., No. 21 CV 4409, 2022 U.S. Dist. LEXIS 173465 (N.D. Ill. Sept. 26, 2022) (holding that a company’s use of an artificial intelligence algorithm to locate an individual’s forehead and collect the individual’s forehead temperature in conjunction with facial recognition software to determine whether individuals were wearing face masks is enough to state a plausible claim that biometric data has been “collected” and “stored” for purposes of BIPA.)

Carpenter v. McDonald’s Corp., 580 F. Supp. 3d 512 (N.D. Ill. 2022) (holding that plaintiff has a plausible claim under BIPA Section 15(b) based on factual allegations that McDonald’s used a third-party voice assistant technology in its restaurants’ drive-through lanes to collect and use biometrics (voice recordings) directly from customers without their consent.)

Doe v. Apple Inc., No. 3:20-CV-421-NJR, 2022 U.S. Dist. LEXIS 222988 (S.D. Ill. Aug. 1, 2022) (denying Apple’s motion to dismiss plaintiffs’ claim that data sent to Apple’s iCloud Photos Library known as “Sync Data” contains biometric information or biometric identifiers and, thus, falls within the parameters of BIPA. Plaintiffs alleged that Sync Data contains biometric information or biometric identifiers subject to BIPA because it is created by “combin[ing] faceprint data processed on Apple Devices with user-inputted tags, users’ input regarding whether faces belong to particular individuals, and other data including key faces and face crops that are recognized by Apple’s faceprint algorithm.” Plaintiffs further alleged that Apple collected or possessed users’ Sync Data via its automatic iCloud transfer of Sync Data to Apple’s servers. The court concluded that the plaintiffs had provided sufficient facts to state a plausible claim that Sync Data contains biometric information and Apple collects or possesses users’ Sync Data.) See also Sosa v. Onfido, Inc., 600 F. Supp. 3d 859 (N.D. Ill. 2022).

Eighth Circuit

There were no qualifying decisions within the Eighth Circuit.

Ninth Circuit

Angel Techs. Grp. LLC v. Facebook Inc., No. CV 21-8459-CBM(JPRx), 2022 U.S. Dist. LEXIS 116427 (C.D. Cal. Jun. 30, 2022) (granting the defendant’s motion to dismiss the plaintiff’s patent infringement claim because the plaintiff’s patent for its digital photo tagging technology, which uses artificial intelligence algorithms to function, failed to establish an inventive concept in its claims. The patent merely claims that artificial intelligence algorithms will be used as part of the technology without providing details as to how Plaintiff has improved upon the algorithms or how they are implemented, rendering the patents at issue ineligible for patent protection.)

United States ex rel. Osinek v. Permanente Med. Grp., Inc., No. 13-cv-03891-EMC, 2022 U.S. Dist. LEXIS 81890 (N.D. Cal. May 5, 2022) (denying the defendant’s motion to dismiss in part as to the plaintiff’s claim alleging that the defendant fraudulently used its Natural Language Processing Software to identify new diagnosis codes to submit as additional claims to Medicare without reviewing such diagnosis codes before sending out the claims. The Software used an algorithm to search through electronic medical records to identify new diagnoses that could be used for submission of additional risk adjustment Medicare claims.)

Does v. Reddit, Inc., 51 F.4th 1137 (9th Cir. 2022) (granting the defendant’s motion to dismiss the plaintiffs’ child sex trafficking claims as the plaintiffs failed to allege that the defendant knowingly participated in or benefited from a sex trafficking venture through users posting child pornography on its site. Furthermore, the plaintiffs could not directly connect Reddit’s revenue to the child pornography posted on its site, apart from the fact that the subreddits with child pornography posted on them also had advertisements from which Reddit generated revenue. Notably, the plaintiffs pointed out that Reddit was delayed in employing automated image-recognition technologies like “PhotoDNA,” which can detect child pornography and prevent it from being posted on the site.)

Pending Cases of Note

DOE 1 et al v. GitHub, Inc. et al, N.D. Cal., No. 4:22-cv-06823, filed Nov. 10, 2022 (class action lawsuit brought by owners of copyrighted materials published on GitHub against GitHub, Microsoft, and OpenAI (“Defendants”) in which the plaintiffs assert that, among other claims, in developing their machine learning systems using the plaintiffs’ copyrighted materials (software code) without authorization and propagating those systems, defendants violated the Digital Millenium Copyright Act, the Lanham Act, unfair competition law, the California Consumer Privacy Act, and contracts including open-source licenses and GitHub’s Terms of Service.)[6]

Andersen et al v. Stability AI Ltd. et al, N.D. Cal., No. 3:23-cv-00201, filed Jan. 13, 2023 (class action lawsuit brought by three full-time artists (“Plaintiffs”) against Stability AI, Inc., MidJourney, Inc., and DeviantArt, Inc. (“Defendants”) asserting claims of copyright infringement, violation of the Digital Millenium Copyright Act, violation of publicity rights, and violation of unfair competition law against Defendants. The Plaintiffs allege that Stability AI developed its “Stable Diffusion” AI-based image generation product using the Plaintiffs’ copyrighted images without authorization and further that the Defendants each used the Stable Diffusion product for commercial gain by selling images “in the style of” the Plaintiffs’ copyrighted images.)[7]

Tenth Circuit

Young v. Tesla, Inc., No. 1:21-cv-00917-JB-SCY, 2022 U.S. Dist. LEXIS 145747 (D.N.M. Aug. 15, 2022) (granting in part and denying in part the defendant’s motion to dismiss plaintiff’s claims for breach of contract, unjust enrichment, civil conversion, negligence per se, and fraud, in which plaintiff argued that the defendant gave the false impression that the vehicle could drive itself without human intervention, and that it would have this capability by the end of 2019. To determine what the term “Full Self-Driving Capability” means, the Court analyzed the defendant’s description of the term “Full Self-Driving Capability” on its website.)

Eleventh Circuit

There were no qualifying decisions within the Eleventh Circuit.

DC Circuit

There were no qualifying decisions within the DC Circuit.

Pending Cases of Note

Thaler v. Perlmutter, D.C. Cir. No. 1:22-cv-01564, filed June 2, 2022 (asserting that human authorship is not legally required for copyright registration in the US. Similar to Stephen Thaler’s attempts to register patents as invented by the AI machine “DABUS”, Thaler attempted to register a copyright to a two-dimensional artwork titled “A Recent Entrance to Paradise” as created by an AI machine named “Creativity Machine”. The US Copyright Office rejected his application because it had no human author.)[8]

Court of Appeals for the Federal Circuit

Thaler v. Vidal, 43 F.4th 1207 (Fed. Cir. 2022) (affirming the district court holding in Thaler v. Hirshfeld, 558 F. Supp. 3d 238 (E.D. Va. 2021) that an artificial intelligence software system cannot be listed as an “inventor” on a patent application given that the language of the Patent Act requires inventors to be “natural persons”. This case arose after plaintiff Stephen Thaler filed two patent applications with the USPTO for which the inventor was identified as an AI machine named “DABUS”.)

Administrative

US Copyright Office (USCO)

Recent Decision of Note

Cancellation of original copyright registration for Zarya of the Dawn (Registration # VAu001481096)[9] (under which the USCO cancelled the original copyright registration for comic book “Zarya of the Dawn” to Kristina Kashtanova because Ms. Kashtanova had not disclosed as part of her application that the images in the comic book were created using Midjourney’s artificial intelligence technology. Based on the common-law principle and USCO practice that copyright registrations may not be granted to non-human authors, the USCO determined that no copyright registration should have been provided with respect to the comic book images. The USCO rejected Ms. Kashanova’s argument that her efforts to use Midjourney to create the comic book images and her subsequent efforts to edit the images qualified as human authorship of the images overall. The USCO replaced the original copyright registration with a new registration covering only the content authored by a human, “namely, the ‘text’ and the ‘selection, coordination, and arrangement of text created by the author and artwork generated by artificial intelligence.'”)

Legislation

We organize the enacted and proposed legislation into (i) policy (e.g., executive orders); (ii) algorithmic accountability (e.g., legislation aimed at responding to public concerns regarding algorithmic bias and discrimination); (iii) facial recognition; (iv) transparency (e.g., legislation primarily directed at promoting transparency in use of AI); and (v) other (e.g., other pending bills such as federal bills on governance issues for AI).

Policy

2022

• Blueprint for an AI Bill of Rights. US Office of Science and Technology Policy. Lays out protections for Americans in regard to the design, development, and deployment of AI and other automated technologies.

Algorithmic Accountability

2022

• [Fed] Algorithmic Accountability Act of 2022. Bill S 3572 (Pending Feb. 2022). Directs the Federal Trade Commission to require impact assessments of automated decision systems and augmented critical decision processes.
• [Fed] Digital Civil and Human Rights Act of 2022. Bill HB 7449 (Pending Apr. 2022). Establishes prohibitions on the use of automated systems in a discriminatory manner.
• [Fed] Government Ownership and Oversight of Data in Artificial Intelligence Act of 2021. Bill HB7296 (Pending Mar. 2022). Establishes an Artificial Intelligence Hygiene Working Group, among other decrees.
• [Fed] Political BIAS Emails Act of 2022 Political Bias In Algorithm Sorting Emails Act of 2022. Bill SB 4409 (Pending Jun. 2022). Bans email providers from using filtering algorithms with respect to political emails.
• [CA] Social Media Platform Duty to Children Act. Bill CA A.B. 2408 (Pending Jun. 2022). Prohibits a social media platform, as defined in the Act, from using a design, feature, or affordance that the platform knew, or by the exercise of reasonable care should have known, causes a child user, as defined, to become addicted to the platform.
• [CA] The California Age-Appropriate Design Code Act. Bill CA A.B. 2273 (Pending Sep. 15, 2022). Enacts the California Age-Appropriate Design Code Act, which establishes requirements for businesses that provide an online service, product, or feature likely to be accessed by children.
• [DC] Stop Discrimination by Algorithms Act of 2021. Bill B24-0558 (Pending Dec. 2021). Prohibits users of algorithmic decision-making to use the same in a discriminatory manner and requires corresponding notices to individuals whose personal information is used in certain algorithms to determine employment, housing, healthcare and financial lending.
• [IL] Video Interview Demographic. Bill H.B. 53 (Effective Jan. 2022). Seeks to avoid algorithmic discrimination in first-pass hiring interviews conducted using AI.
• [IL] Amendment to the Illinois Human Rights Act. IL H.B. 1811 (Pending Mar. 2022). Amends the Illinois Human Rights Act to provide that an entity that uses predictive data analytics in its employment decisions or to determine creditworthiness may not consider the applicant’s race or zip code when used as a proxy for race to reject an applicant for employment or credit.
• [KY] An Act relating to credit. Bill HB779 (Pending Mar. 2022). Prohibits the violation of a person’s constitutional rights based on predictive behavior analysis.
• [MA] An Act Relative to Algorithmic Accountability and Bias Prevention. Bill MA H.B. 4029 (Pending Jul. 2021). Requires covered entities to conduct impact assessments of existing high-risk automated decision systems and new high-risk automated decision systems prior to implementation.
• [MA] An Act Relative to Data Privacy. Bill MA H.B. 136, see also SB 2687 (Pending Feb. 2022). Creates the Data Accountability and Transparency Agency and requires data aggregators that utilize automated decision systems to perform (i) continuous and automated testing for bias on the basis of a protected class; and (ii) continuous and automated testing for disparate impact on the basis of a protected class as required by the agency.
• [NJ] An Act concerning discrimination and automated decision systems and supplementing P.L.1945, c.169 (C.10:5-1 et seq.). Bill S 1402 (Pending Feb. 2022). Prohibits certain discrimination by automated decision systems.
• [NJ] An Act concerning discrimination in automobile insurance underwriting and supplementing P.L.1997, c.151. Bill A 537 (Pending Jan. 2022). Requires automobile insurers using automated or predictive underwriting systems to annually provide documentation and analysis to the Department of Banking and Insurance to demonstrate that there is no discriminatory outcome in the pricing on the basis of race, ethnicity, sexual orientation, or religion, that is determined by the use of the insurer’s automated or predictive underwriting system.
• [NY] An Act to Amend the Labor Law, in Relation to Establishing Criteria for the Use of Automated Employment Decision Tools. Bill NY A 7244 (Pending Feb. 2022). Amends New York’s labor law to include a provision banning employers from using automated employment decisions tools that have not been subject to a disparate impact analysis.
• [RI] An Act Relating to State Affairs and Government – Department of Business Regulation. Bill RI H 7230 (Pending Jan. 2022). Amends the “Department of Business Regulation” laws to include a section prohibiting discriminatory insurance practices through the use of algorithms or predictive models.
• [WA] Making 2021-2023 Fiscal Biennium Operation Appropriations. Bill WA S 5693 (Enacted Mar. 31, 2022). Allocates part of the budget towards the office of the chief information security officer, who must determine how automated decision making systems will be reviewed before they are adopted. Part of that review will include auditing of those systems.

Facial Recognition Technology

2022

• [AL] Facial recognition technology, use of match as the sole basis of probable cause or arrest, prohibited. Bill SB 56 (Enacted April 6, 2022). Prohibits state or local state or local law enforcement agencies from using facial recognition match results as the sole basis for making an arrest or for establishing probable cause in a criminal investigation.
• [CO] Artificial Intelligence Facial Recognition. Bill CO S 113 (Enacted Jun. 8, 2022). Creates a task force aimed at considering use of facial recognition services.
• [RI] Rhode Island Consumer Protection Gaming Act. Bill H. 7222, S. 2491 (Pending 2022). Prohibits the use of facial recognition technology and biometric recognition technology in video-lottery terminals at pari-mutuel licensees in the state or in online betting applications and prohibits the use of certain other technologies in state gaming operations.

Transparency

2022

• [Fed] Justice in Forensic Algorithms Act of 2021. Bill HB 2438 (Pending Oct. 2021). Establishes national standards for the use of computational forensic software in criminal investigations.
• [CA] Platform Accountability and Transparency Act. Bill CA S.B. 1018 (Pending Feb. 2022). This bill would require a social media platform to disclose to the public, on or before October 1, 2024, and annually thereafter, statistics regarding the extent to which, in the 3rd and 4th quarters of the preceding calendar year and first and 2nd quarters of the current calendar year, items of content that the platform determined violated its policies were recommended or otherwise amplified by platform algorithms, disaggregated by category of policy violated.
• [MA] An Act Establishing An Internet Bill of Rights. Bill MA H.B. 4152 (Pending Sep. 2021). Requires businesses, when collecting data from data subjects, to disclose the existence of automated decision-making, including profiling as well as the significance and the predicted consequences of the processing for the data subject, and provides other rights to data subjects concerning their data.
• [MA] An Act establishing the Massachusetts Information Privacy Act. E.g., Bill MA H.B. 4514 (Pending 2022). Requires businesses to disclose in their privacy policies whether they use automated decision systems and if they do, to use them only to the extent necessary for carrying out their purpose.
• [NY] New York Privacy Act. Bill NY S 6701 (Pending May 2022). Includes privacy protections for New York consumers and requires, among other things, “meaningful human review” of algorithmic or automated decision-based outputs and transparency around automated decisions that produce “legal or similarly significant effects.”

Other

2022

• [Fed] AI JOBS Act of 2022 Artificial Intelligence Job Opportunities and Background Summary Act of 2022. Bill HB 6553 (Pending Feb. 2022). Requires the Secretary of Labor, in collaboration with specified individuals and entities, to prepare a report on artificial intelligence and its impact on the workforce.
• [Fed] Artificial Intelligence Training for the Acquisition Workforce Act. Bill S. 2551 (related to H.B. 7683) (Enacted October 17, 2022). This bill requires the Office of Management and Budget (OMB) to establish or otherwise provide an artificial intelligence (AI) training program for the acquisition workforce of executive agencies (e.g., those responsible for program management or logistics), with exceptions.
• [Fed] To include certain computer-related projects in the Federal permitting program under title XLI of the FAST Act, and for other purposes. Bill HB 7870 (Pending – May 2022). Provides for the expedited review of infrastructure projects concerning semiconductors, artificial intelligence and machine learning, high-performance computing and advanced computer hardware and software, quantum information science and technology, data storage and data management, or cybersecurity.
• [IL] Illinois Future of Work Act. Bill IL S.B. 2481 (Pending Feb. 2021). Creates the Illinois Future of Work Act and the Illinois Future of Work Task Force, which is given the responsibility to identify and assess the new and emerging technologies that have the potential to significantly affect employment, wages, and skill requirements and determine how to deploy these technologies to benefit workers and the public good, among other duties.
• [MA] An Act Establishing a Commission on Automated Decision-Making by Government in the Commonwealth. Bill MA H.B. 4512, see also Bill S 60 (Pending Apr. 2022). Establishes a commission within the executive office of technology services and security for the purpose of studying and making recommendations relative to the use by the commonwealth of automated decision systems that may affect human welfare.
• [NJ] An Act Requiring the Commissioner of Labor and Workforce Development to Conduct Study and Issue Report on Impact of Artificial Intelligence on Growth of State’s Economy. Bill NJ A 168 (Pending Jan. 2022). Requires the Commissioner of Labor and Workforce Development to conduct a study and then issue a report with findings assessing the impact of AI tools on labor productivity and economic growth for the state of New Jersey.
• [NY] An Act creating “The Commission to Study the Impact of  Automation and Artificial  Intelligence on the New York Labor Force”; and providing for the repeal of such provisions upon expiration thereof. Bill A 09885 (Pending Apr. 2022). Creates the Commission to Study the Impact of Automation and Artificial Intelligence on the New York Labor Force.
• [PA] An Act amending the act of April 9, 1929 (P.L.177, No.175), known as The Administrative Code of 1929, in powers and duties of the Department of State and its departmental administrative board, providing for artificial intelligence registry.. Bill HB2903 (Pending Oct. 2022). An Act amending The Administrative Code of 1929, providing for the creation of an artificial intelligence registry, a registry of businesses operating artificial intelligence systems in the Commonwealth of Pennsylvania.
• [RI] An Act Relating to State Affairs and Government. Bill RI S 2514 (Pending Mar. 2022). Establishes a commission tasked with reviewing and assessing the uses of and purposes for which AI systems are used by the state.
• [RI] An Act Relating to State Affairs and Government. Bill RI HB 7223 (Pending Feb. 2022). Establishes a commission to study the use of artificial intelligence in the decision-making process of state government.
• [VT] An act relating to the creation of the Artificial Intelligence Commission. Bill H.410 (Enacted May 2022). Creates the Division of Artificial Intelligence, which will be responsible for overseeing anything related to the development, procurement, or use of AI by State government.

§ 1.3. Blockchain

Cases

United States Supreme Court

SEC v. W. J. Howey Co., 328 U.

S. 293, 66 S. Ct. 1100 (1946). The term “security” includes the catch-all term investment, which this court defined as composed of four elements: (i) an investment of money, (ii) in a common enterprise, (iii) with a reasonable expectation of profits, (iv) to be derived from the entrepreneurial or managerial efforts of others.

First Circuit

CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492 (D. Mass. 2018). My Big Coin Pay Inc. moved to dismiss the case, arguing that the CFTC had no jurisdiction over the particular virtual currency at issue, My Big Coin (MBC). The Court held that the CFTC had sufficiently alleged that MBC “is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin).” 

United States v. Mansy, No. 2:15-cr-198-GZS, 2017 U.S. Dist. LEXIS 71786 (D. Me. May 11, 2017). The court upheld a virtual currency-related unlicensed money transmitting indictment.

Second Circuit

CFTC v. Hdr Glob. Trading Ltd., No. 1:20-cv-08132, 2022 U.S. Dist. LEXIS 82960 (S.D.N.Y. May 5, 2022). The court found that BitMEX and related entities, operated an unregistered trading platform, violating AML rules, and various CFTC regulations.

Friel v. Dapper Labs, No. 1:21-cv-05837-VM (S.D.N.Y. Oct. 8, 2021). Class action developer of NBA TopShots NFTs for sale of unregistered securities.

Securities and Exchange Commission v. BitConnect, et al., No. 1:21-cv-07349 (S.D.N.Y., filed September 1, 2021). The court entered judgments against Glenn Arcaro and his company, Future Money Ltd., for the promotion of the BitConnect “lending program” because of  the sale of unregistered securities and failing to be registered as broker-dealers with the SEC.

CFTC v. Control Finance-Limited, No 19-cv—5631 (June 17, 2019). CFTC alleged defendant exploited public enthusiasm for Bitcoin by fraudulently obtaining and misappropriating at least 22,858.822 Bitcoin—worth at least $147 million at the time—from more than 1,000 customers. $571,986,589 fine/restitution.

CFTC v. Gelfman Blueprint, Inc., No. 17-CV-07181 (PKC), 2018 U.S. Dist. LEXIS 207379 (S.D.N.Y. Oct. 1, 2018). Defendants, who solicited investments in Bitcoin, were charged with fraud, misappropriation, and issuing false account statements. The CFTC argued that Defendants ran a virtual currency Ponzi scheme by soliciting more than $600,000 from approximately 80 persons. The CFTC stated the respondents’ scheme was a fake strategy, where “payout of supposed profits … in actuality consisted of other customers’ misappropriated funds.”

CFTC v. McDonnell, 332 F.Supp. 3d 641 (E.D.N.Y. 2018). The district court stated that “virtual currency may be regulated by the CFTC as a commodity.” Moreover, the CFTC’s “broad statutory authority… and regulatory authority… extend to fraud or manipulation in the virtual currency derivatives market and its underlying spot market.”

United States v. Murgio, 209 F.3d 698 (S.D.N.Y. 2016). The court concluded that to establish criminal liability under the unlicensed money transmitting business statute, the USAO must prove that a person or business (a) transferred on behalf of the public; (b) funds; (c) in violation of State or Federal licensing and registration requirements, or with knowledge that the funds were derived from a criminal offense.

Third Circuit

We are not including any foundational Blockchain cases from this Circuit.

Fourth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Fifth Circuit

Notable Pending Case

CFTC v. Mirror Trading International, No. 1:22-cv-635, W.D. Tex. (June 30, 2022). CFTC charged defendants with commodity pool fraud, among other violations, arising from defendants’ acceptance of at least 29,421 Bitcoin—with a value of over $1,733,838,372, making this action the largest fraudulent scheme involving Bitcoin charged in any CFTC case.

Sixth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Seventh Circuit

We are not including any foundational Blockchain cases from this Circuit.

Eighth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Ninth Circuit

Securities and Exchange Commission v. Payward Ventures, Inc. (D/B/A Kraken) and Payward Trading, Ltd. (D/B/A Kraken), No. 3:23-cv-00588 (N.D. Cal.). Kraken settled charges with the SEC that its staking-as-a-service program failed to register with the SEC.  Kraken paid a $30M fine and shut down its program.

Notable Pending Case

SEC v. Wahi, et al., No. 2:22-cv-01009 (W.D. Wash. July 21, 2022). The Securities and Exchange Commission brought insider trading charges against a former Coinbase product manager, his brother, and his friend for perpetrating a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform. 

Tenth Circuit

We are not including any foundational Blockchain cases from this Circuit.

Eleventh Circuit

CFTC v. Fingerhut, No. 1:20-cv-21887 (S.D. Fla. Nov. 17, 2021). CFTC alleged defendants fraudulently solicited tens of millions of customers and prospective customers to open and fund off-exchange binary options and digital assets trading accounts.

DC Circuit

We are not including any foundational Blockchain cases from this Circuit.

Federal Circuit

We are not including any foundational Blockchain cases from this Circuit.

Administrative

CFTC

• CFTC, In the Matter of Coinbase, Inc., Order, CFTC docket no. 21-03 (Mar. 19, 2021). The CFTC found that Coinbase, Inc. had violated the anti-manipulation rules by reporting false, misleading, or inaccurate transaction information and became subject to secondary, principal-agent liability for wash sales by a former employee.
• In the Matter of Tether Holdings Limited (2021). Order requiring Tether to pay a civil monetary penalty of $41 million and to cease and desist from any further violations of the CEA and CFTC regulations for making untrue or misleading statements and omissions of material fact in connection with the U.S. dollar tether token (USDT) stablecoin.
• CFTC Staff Advisory No. 18-14, Advisory With Respect to Virtual Currency Derivative Product Listings (May 21, 2018). Guidance reiterating that “bitcoin and other virtual currencies are properly defined as commodities.”
• CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60,335 (proposed Dec. 20, 2017). The CFTC proposed that “actual delivery” occurs when (1) the buyer has the ability to take possession and control of the amount purchased and to use it freely, and (2) the offeror or seller does not retain any interest or control over the commodity purchased on margin, leverage, or other financing at the expiration of 28 days from the date of the transaction.
• In re BFXNA Inc., CFTC No. 16-19 (June 2, 2016). The CFTC found that Bitfinex violated the Commodity Exchange Act (CEA) for failing to register as a Futures Commission Merchant (FCM) and offering margined retail commodity transactions without actual delivery to participants that were not eligible contract participants (ECPs). Actual delivery is not defined in the CEA; therefore, it is subject to CFTC interpretation. Here, participants of Bitfinex did not have access to the private key needed to access or spend these bitcoins. Consequently, the CFTC found the actual delivery requirement had not been met.
• In the Matter of Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29 (2105). The CFTC held, for the first time, that Bitcoin and other virtual currencies are “commodities” subject to regulation under the Commodity Exchange Act: 7 U.S.C. § § 1-27; 17 C.F.R. § 1 et seq.
• In re TeraExchange LLC, CFTC No. 15-33, Sept. 24, 2015. The CFTC brought an enforcement action against Tera for failing to enforce the prohibition against wash trades provided in Tera’s rules. Tera had facilitated a prearranged bitcoin swap transaction, so it settled this enforcement action in September of 2015 with a cease and desist order.

FinCEN

• In the Matter of BTC-e (2017). FinCEN, assessed a civil penalty against Canton Business Corporation (“BTC-e”) for willfully violating U.S. AML laws, arresting a Russian national for his role at the BTC-e exchange. FinCEN argued BTC-e and the Russian national (together with an unnamed co-conspirator) facilitated ransomware, computer hacking, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. The Acting Director for FinCEN, in addressing the indictments, commented that “[t]his action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency. Treasury’s FinCEN team and our law enforcement partners will work with foreign counterparts across the globe to appropriately oversee virtual currency exchanges and administrators who attempt to subvert U.S. law and avoid complying with U.S. AML safeguards.”
• In the Matter of Ripple Labs Inc. (2015). FinCEN took an action against Ripple Labs Inc., a virtual currency exchanger, and its wholly-owned subsidiary, XRP II, LLC. It assessed a civil penalty for violating the BSA because it failed to implement an adequate AML program. the Department of Justice imposed a $450,000 forfeiture on it.

OFAC

• A Notice by the Foreign Assets Control Office on 12/04/2018. OFAC took action against two Iranian-based individuals involved in the exchange of bitcoin ransom payments. They also identified two digital currency addresses associated with the individuals, marking the first time the division publicly attributed digital currency addresses individuals on the SDN list.

OCC

• Interpretive Letter #1170 July 2020. Letter clarifying national banks’ and federal savings associations’ authority to provide cryptocurrency custody services for customers.
• Comptroller’s Licensing Manual Supplement: Considering Charter Applications From Financial Technology Companies (2018). Manual providing detail on how the OCC would evaluate applications for a special purpose national bank charter from fintech companies and clarifies the OCC’s expectations that companies with a fintech business model demonstrate a commitment to financial inclusion. 

SEC^[10]

• SEC v. Terraform Labs Pte Ltd and Do Hyeong Kwon (2023). SEC is alleging the defendants sold unregistered “crypto asset securities” and securities-based swaps. The Agency also claims that Terras token price was not at all stabilized by the LUNA stablecoin mechanism; rather, the price was artificially maintained by means of an undisclosed firm buying a large amount of UST in exchange for discounted LUNA.
• In the Matter of GTV Media Group, Inc., et al. Admin. Proc. (2021). SEC found that GTV and Saraca solicited individuals to invest in their offering of a digital asset security that was referred to as either G-Coins or G-Dollars. As a result of the unregistered securities offerings the Respondents collectively raised approximately $487 million.
• TurnKey No-action Letter (2019). This letter provides some guidance as to the limited circumstances under which a virtual currency offering will be treated as a security.
• In the Matter of Gladius Network LLC (2019). Gladius Network LLC had raised close to $13 million in 2017. The ICO was not registered under the securities laws and did not qualify for a registration exemption. In 2019, Gladius entered into a settlement with the SEC.
• In the Matter of Block.one (2019). The SEC settled charges against blockchain technology company Block.one for conducting an unregistered initial coin offering of digital tokens (ICO) that raised the equivalent of several billion dollars over approximately one year. The company agreed to settle the charges and paid a $24 million civil penalty.
• In the Matter of CARRIEREQ, INC., D/B/A AIRFOX (2018). Carrier EQ Inc. had raised an estimated $15 million in digital asset sales. The company agreed to return funds to token purchasers, register their tokens as securities, file periodic reports with the SEC, and pay the SEC $250,000 in penalties.
• In the Matter of Paragon Coin, Inc. (2018). Paragon Coin had raised an estimated $12 million in digital asset sales. The company agreed to return funds to token purchasers, register their tokens as securities, file periodic reports with the SEC, and pay the SEC $250,000 in penalties.
• In the Matter of MUNCHEE INC. (2017). Cease and desist order concluding that a “utility token” issued by Munchee Inc. constituted an unregistered offering of securities.
• The DAO Report (2017). The SEC found that some virtual currency tokens that have been created and issued in the context of ICOs (Initial Coin Offerings) are securities, subject to its jurisdiction.

SEC and DOJ

Notable Pending Case

• SEC action and DOJ indictment against Samuel Bankman-Fried, filed or announced Dec. 13, 2022. On December 13, 2022, the SEC charged Samuel Bankman-Fried, founder and CEO of FTX Trading Ltd., a crypto asset trading platform, with defrauding equity investors in the company.[11] According to the SEC, Bankman-Fried diverted customers’ funds to his privately-held crypto hedge fund, raising more than $1.8 billion from investors. The US Department of Justice (“DOJ”) separately charged Bankman-Fried with eight criminal counts, including wire fraud, money laundering, and securities fraud.[12] As of February 13, 2023, the SEC civil suit has been stayed, as the continuation of the suit could potentially allow Bankman-Fried to improperly tailor his defense in the criminal case.

[1] See, e.g., Daichendt v. CVS Pharmacy, Inc., No. 22 CV 3318, 2022 U.S. Dist. LEXIS 217484 (N.D. Ill. Dec. 2, 2022); Vance v. Microsoft Corp., No. C20-1082JLR, 2022 U.S. Dist. LEXIS 189250 (W.D. Wash. Oct. 17, 2022); Rogers v. BNSF Ry. Co., No. 19 CV 3083, 2022 U.S. Dist. LEXIS 173322 (N.D. Ill. Sept. 26, 2022); Wise v. Ring LLC, No. C20-1298-JCC, 2022 U.S. Dist. LEXIS 138399 (W.D. Wash. Aug. 3, 2022); Karling v. Samsara Inc., No. 22 C 295, 2022 U.S. Dist. LEXIS 121318 (N.D. Ill. July 11, 2022); Zellmer v. Facebook, Inc., No. 3:18-cv-01880-JD, 2022 U.S. Dist. LEXIS 60239 (N.D. Cal. Mar. 31, 2022); Gutierrez v. Wemagine.ai LLP, No. 21 C 5702, 2022 U.S. Dist. LEXIS 14831 (N.D. Ill. Jan. 26, 2022); Naughton v. Amazon.com, Inc., No. 20-cv-6485, 2022 U.S. Dist. LEXIS 8 (N.D. Ill. Jan. 3, 2022); In re Clearview AI, Inc., Consumer Priv. Litig., 585 F. Supp. 3d 1111 (N.D. Ill. 2022).

[2] Gonzalez v. Google LLC, Oyez, https://www.oyez.org/cases/2022/21-1333 (last visited Feb 24, 2023); Twitter, Inc. v. Taamneh, Oyez, https://www.oyez.org/cases/2022/21-1496 (last visited Feb 24, 2023); Isaac Chotiner, Two Supreme Court Cases That Could Break the Internet, New Yorker (Jan. 25, 2023), https://www.newyorker.com/news/q-and-a/two-supreme-court-cases-that-could-break-the-internet. See also Amy Howe, “Not, like, the nine greatest experts on the internet”: Justices seem leery of broad ruling on Section 230, SCOTUSblog (Feb. 21, 2023), https://www.scotusblog.com/2023/02/not-like-the-nine-greatest-experts-on-the-internet-justices-seem-leery-of-broad-ruling-on-section-230/; Brian Fung & Tierney Sneed, Takeaways from the Supreme Court’s hearing in blockbuster internet speech case, CNN (updated Feb. 21, 2023), https://www.cnn.com/2023/02/21/tech/supreme-court-gonzalez-v-google/index.html; Johana Bhuiyan & Kari Paul, How two supreme court battles could reshape the rules of the internet, The Guardian (Feb. 21, 2023), https://www.theguardian.com/law/2023/feb/21/us-supreme-court-twitter-google-lawsuit-internet-law. 

[3] Gonzalez v. Google LLC, Oyez, supra note 2; Twitter, Inc. v. Taamneh, Oyez, supra note 2.

[4] Gonzalez v. Google LLC, Oyez, supra note 2; Twitter, Inc. v. Taamneh, Oyez, supra note 2.

[5] See Getty Images Statement, Getty Images (Jan. 17, 2023), https://newsroom.gettyimages.com/en/getty-images/getty-images-statement.

[6] DOE 1 et al. v. GitHub, Inc. et al., Law360, https://www.law360.com/cases/636440b38ffd4c01fca4d260 (last visited Feb. 24, 2023).

[7] Andersen et al. v. Stability AI Ltd. et al., Law360, https://www.law360.com/cases/63c5472a538a25007d823161 (last visited Feb. 24, 2023).

[8] Thaler v. Perlmutter et al., Law360, https://www.law360.com/cases/629911df44c8c20586b4073c (last visited Feb. 24, 2023).

[9] Letter from Robert J. Kasunic to Van Lindberg (February 21, 2023), https://copyright.gov/docs/zarya-of-the-dawn.pdf. See also Zarya of the Dawn, Registration record VAu001480196, US Copyright Office, https://publicrecords.copyright.gov/detailed-record/34309499; Zarya of the Dawn, Registration record TXU002356581, US Copyright Office, https://publicrecords.copyright.gov/detailed-record/34743281.

[10] The SEC also maintains a list of the most recent charges it has brought regarding digital assets, available at https://www.sec.gov/spotlight/cybersecurity-enforcement-actions.

[11] Securities and Exchange Commission v. Samuel Bankman-Fried, No. 1:22-cv-10501, S.D.N.Y. (Dec. 13, 2022), https://www.sec.gov/litigation/complaints/2022/comp-pr2022-219.pdf.

[12] United States Attorney Announces Charges Against FTX Founder Samuel Bankman-Fried, The United States Attorney’s Office for the Southern District of New York (Dec. 13, 2022), https://www.justice.gov/usao-sdny/pr/united-states-attorney-announces-charges-against-ftx-founder-samuel-bankman-fried.

Bloomberg recently reported that some lenders were setting up trading desks focused on private debt. Together with the recent events in the banking market and regulatory capital-driven exposure reductions that have been underway for some time now, this has caused many lenders to examine the restrictions on loan sales imposed by borrowers via assignment consent rights and the disqualified lender list (the “DQ List”)—the list of entities that are disqualified from becoming lenders or participants under the credit agreement.

This once-off list was originally limited to a handful of commonly known “loan to own” funds—those funds purchasing distressed debt with the intention of taking action against the borrower and gaining a controlling stake in the company. Today, it has grown to be a list containing, in many cases, every single competitor in a given sponsor’s market. Long before the Great Financial Crisis, these lists picked up momentum as borrowers became more and more concerned about who owned their debt. Capital markets desks, now eager to trade potentially troubled loans, may be surprised to discover how extensive the DQ Lists have become and how permanent the restrictions on trading are. While DQ lists are not common on many subscription loans, similar concepts do exist in many large sponsor deals via competitor anti-assignment clauses and related consent rights.

Just last year, the Loan Syndications and Trading Association (LSTA) published a market advisory outlining some of the more recent changes to the disqualified institution provisions set forth in the LSTA’s Model Credit Agreement Provisions (the “MCAPs”). It contained certain updates to the 2014 LSTA DQ Structure, which was originally formulated to balance competing interests of borrowers, sponsors, and lenders. For years, market participants grappled with the many issues surrounding the DQ Lists: At what point in the transaction were they required to be delivered? Could the borrower add to the DQ List? Did it go away upon a default? What happened if the loan sale was to an affiliate of an entity on the DQ List? Could the list be publicly disclosed? To whom and how? And the list (no pun intended) went on… Who would be responsible for enforcement? What happened if the loans ended up with an entity on the DQ List who in turn traded the loan to another party? What would be the mechanics of an unwind?

Here is a brief review of the LSTA DQ structure with some commentary about where the market generally landed. Perhaps now is the time to revisit some of the negotiated points to allow the debt to more freely trade. Lengthy DQ Lists negotiated during a period of low interest rates and abundant credit may now cause heartburn when banks want to quickly liquidate and trade their positions.

Creation of the DQ List

Entities included on the DQ List include (i) any entities the borrower identified to the agent at or prior to the closing of the commitment letter, (ii) any other entities that the borrower identified to the agent from time to time that are competitors of the borrower or its subsidiaries, and (iii) any affiliates of those entities that are identified to the agent. Emphasis should be on early delivery of the DQ List because far too often the DQ List is the last thing to be delivered prior to close, leaving very little time for the agent to review the list and determine whether it is reasonable. Does this list contain all or most of the likely purchasers of the debt once it is distressed? Likely it does. Has the trading desk been consulted and reviewed the list? Is there sufficient liquidity in this loan to warrant the size of the list that has been delivered? Don’t overlook the affiliate point: some of the largest credit funds and potential buyers may be affiliates of sponsors on the DQ List.

Additions to the DQ List

Under the LSTA DQ Structure, borrowers are permitted to add competitors to the list with sufficient notice, understanding that the borrower is required to deliver confidential information, such as financial statements and management reports, under the credit agreement, and permitting competitors to see that information is of utmost concern. Borrowers are not, however, typically allowed to add financial institutions, as that should be determined at the outset and they represent the most likely purchasers of debt.

Expiration of the DQ List

Here is where the rubber hits the road. Lenders argue that once there is a default, all bets are off: the list falls away, and the lenders should be able to freely trade the loan because the borrower has stopped performing—the benefit of the bargain has expired. Borrowers, on the other hand, often have the opposite view: a default situation is exactly the time when lenders should be restricted from selling the loans to purchasers and competitors whose interests diverge from the borrower/sponsor. The LSTA DQ Structure permits the DQ List to stay in place, and large cap sponsors are largely successful in the broadly syndicated loan market on this point; however, the same is not true in many fund finance or middle market transactions. While in the broadly syndicated loan market, this approach might make sense given the wide variety of participants, in the middle market, and in certain parts of the fund finance market, these loans do not enjoy the same kind of liquidity, and as a result, the pool of potential purchasers is far fewer. In a newly minted private debt trading platform, participants may want to reexamine their positions on this issue.

Disclosure of the DQ List

Lenders were always hesitant to disclose the existence of DQ Lists because, among other things, the entities on the DQ Lists were also their clients. Sponsors similarly wanted confidentiality around whom they were restricting. Nondisclosure presents challenges in the broadly syndicated market, however. Purchasers of loans need to know at the outset the extent to which there are limitations on the sale of these loans. The MCAPs settled this by making it easier for lenders to see the DQ List by authorizing the administrative agent to post the DQ List on Intralinks or a similar debt platform on the public side.

Liability for Violations of the DQ List

Taking a cue from the LSTA DQ Structure, most documents make clear that the administrative agent has no liability for monitoring the DQ List; the DQ List has no retroactive application, and transferring a loan to a Disqualified Lender does not void the trade but rather allows the borrower to, among other things, “limit the Disqualified Institution’s access to confidential information, engaging in fundamental lender actions or taking part in creditor decisions.” As a remedy, the borrower may also buy back the loans, thereby settling the operational nightmare of unwinding a trade.

***

Is it time to revisit these extensive DQ Lists and the various credit agreement permutations and ask whether the negotiated provisions are the right construct for each segment of the market? Might lenders want more flexibility as they examine the vast portfolios of loans they have amassed over the last decade of low interest rates? Might they be better off with limited lists that fall away upon a default, and certainly, upon a payment default? Should some of these restrictions be applicable in a nearly $3TN broadly syndicated market? Similarly, should the same constructs be applied in the much less liquid middle market fund finance market? There is no time like the present…

Last year, an individual employed by Trulieve Inc., who was responsible for grinding and handling cannabis at Trulieve’s cultivation site in Massachusetts, died due to asthma-related complications following exposure to “occupational quantities of whole and ground cannabis,” according to an Occupational Safety and Health Administration (OSHA) hazard letter issued in June 2022. Under a settlement agreement with OSHA, Trulieve agreed to study the potential hazards of ground marijuana dust.

OSHA Will Regulate the Cannabis Industry

Federal courts and regulating bodies have already demonstrated an interest in enforcing federal employment laws in the marijuana industry, despite the fact that cannabis remains classified as an illegal substance under the federal Controlled Substance Act (CSA). In those cases, instead of addressing the legality of marijuana at all, the federal courts squarely focus on the legal factors an individual must prove to prevail in the litigation.

Now it appears that the federal government intends to take the additional step of regulating the workplace safety of cannabis companies under the Occupational Health and Safety Act (Act) by taking a similar approach, i.e., treating the cannabis company as if it is legitimate, notwithstanding the federal illegality of marijuana.

In other words, cannabis and cannabis-ancillary businesses can no longer hide behind the federal illegality of cannabis to shield against enforcement actions by the federal government when it comes to protecting employees from hazards in the workplace. Cannabis employers are subject to the same OSHA regulations as other industries, and that includes following the general duty clause, which states that employers should provide “a place of employment which [is] free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.”

Indeed, Trulieve is not the first or only cannabis-related company on OSHA’s radar. In June 2022, OSHA cited PharmaCann Inc. for potential workplace hazards at a greenhouse in Montgomery, New York. OSHA and PharmaCann settled that case, with PharmaCann agreeing to pay an $18,853 fine. While neither the Trulieve nor the PharmaCann case involved a general duty clause violation, OSHA’s demonstrated interest in regulating this industry opens the door to such a violation in the future if cannabis companies do not comply with OSHA workplace safety regulations.

Further compounding this issue is the fact that many states have their own workplace safety agencies (modeled after OSHA), with their own regulations and enforcement mechanisms separate from and in addition to OSHA. Cannabis employers need to be aware of and compliant with these state laws and state agency regulations as well.

To add an additional layer of complication to the important issues surrounding employee safety in the cannabis context, the cannabis industry is still in its infancy; there are many workplace safety issues that are currently unknown. In Trulieve’s case, the fact that cannabis dust could trigger an asthmatic reaction was likely foreseeable. However, not much is known about the exact scientific or medical correlation between cannabis dust and asthma, which means that there are presently no established permissible exposure levels OSHA regulators can use to determine when exposure becomes a hazard.

Avoiding Workplace Injuries

While all workplace environments pose some dangers for injury, cannabis employees are most likely at the highest risk during the production process. These hazards can include exposure to pesticides, carbon dioxide, carbon monoxide, corrosive materials, cleaning products, and highly flammable materials such as butane. Noisy, heavy, or dangerous equipment and machinery can likewise pose risks. To that end, cannabis employers should have a comprehensive plan in place for federal and state workplace safety compliance.

Recommended safety components of such a plan generally include the following:

Employee Training: First and foremost, cannabis employers must ensure that their employees are properly trained on the use of all equipment and tools, and that proper supervision is provided at all necessary times. Employers should document the training they provide their employees.

Written Safety Program: In addition to proper employee training, a properly written safety program is the blueprint for OSHA (and state-specific regulatory) compliance. Indeed, OSHA requires specific written procedures for safety related to the handling of hazardous materials. This manual should cover, for example, employee and supervisor safety responsibilities, incident reporting, emergency plans, disciplinary action, and proper use of tools and equipment. The safety program should identify all aspects of the company’s operations and the hazards associated with each procedure and set forth measures to mitigate or, preferably, eliminate those hazards.

Accountability: Similar to training, disciplinary actions must be documented, whether for minor infractions or serious violations. In the event of an OSHA citation, disciplinary action records are one of the first pieces of information OSHA will request. Employers should embrace an accountability program, as it protects both the employer and the employees, given that it will provide a significant impact in reducing workplace injuries.

Safety Auditing: Lastly, it is recommended that regular safety audits are performed, which will help an employer identify areas in need of improvement. An employer should be proactive and should not simply rely on an accountability program as a driver to reduce workplace injuries and ensure OSHA compliance.

As the cannabis industry continues to grow and make headlines, it will inevitably attract additional scrutiny from federal agencies such as OSHA. The trend in recent cases addressing these issues demonstrates that cannabis employers must ensure they are providing a safe workplace for their employees and comply with all OSHA regulations (along with state workplace regulations), as if they were operating within any other industry.

This article is related to a Showcase CLE program that took place at the ABA Business Law Section’s Hybrid Spring Meeting on Saturday, April 29, 2023. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.

The Wizard of Oz follows the story of Dorothy Gale, Toto the Dog, the Scarecrow, the Tin Man, and the Cowardly Lion as they travel down the Yellow Brick Road to the Emerald City in search of the Wizard of Oz. In some respects, the Scarecrow’s quest for a Brain, the Tin Man’s quest for a Heart, and the Cowardly Lion’s quest for Courage have parallels found in the ABA Model Rules of Professional Conduct (the “Rules”).

The Scarecrow’s quest for a brain implicates Rule 1.1: Competence; it also connects to appreciating the ethical obligations of maintaining the confidentiality of information relating to the representation of the client under Rule 1.6 (and how the lawyer’s Rule 1.6 ethical obligation to maintain confidentiality is related to, and yet distinct from, the attorney-client privilege evidentiary rule). Likewise, understanding is needed to appreciate that, as recognized by Rule 1.2, the client in the attorney-client relationship is the principal and the attorney is the agent; and yet, under Rule 1.4, the lawyer has an ethical obligation to communicate with the client and provide information and guidance to the client so that the client can make informed decisions about the representation.

The Tin Man’s quest for a heart reminds us that, as lawyers, we are also public citizens having special responsibility for the quality of justice. With respect to this special responsibility, the Preamble to the Rules recognizes: “A lawyer should be mindful of deficiencies in the administration of justice and of the fact that the poor, and sometimes persons who are not poor, cannot afford adequate legal assistance. Therefore, all lawyers should devote professional time and resources and use civic influence to ensure equal access to our system of justice for all those who because of economic or social barriers cannot afford or secure adequate legal counsel.” In that regard, Rule 6.1 addresses “voluntary pro bono publico service,” the work that we lawyers should aspire to do, and what efforts and endeavors qualify under the Rule. In addition, Rule 8.4(g) identifies as professional misconduct harassment or discrimination based on “race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, marital status or socioeconomic status in conduct related to the practice of law.” These Rules remind us that, as lawyers, we have a higher calling.

The Cowardly Lion’s quest for courage calls us to recognize, among other things, that under Rule 1.2(b), lawyers are sometimes asked to represent unpopular clients or clients from whom the lawyer’s own beliefs and opinions differ greatly. Rule 1.2(b) reminds us that just because a lawyer represents a client does not mean that the lawyer shares their client’s political, social, or moral opinions. Other Rules implicate the need for an attorney to sometimes tell a client “no” or that, as Rule 1.4(a)(5) makes clear, a lawyer cannot and will not take action in representing the client that will be contrary to the Rules of Professional Conduct or other laws. Likewise, Rule 1.2(d) prohibits a lawyer from advising the client to engage in a criminal or fraudulent act or from assisting the client in doing so. The lawyer may—and probably should—not only advise the client against such criminal or fraudulent action, but also advise the client about the possible adverse consequences of their continuing down that criminal or fraudulent path.

In addition, depending on the circumstances, the lawyer may also be permitted to disclose otherwise protected information relating to the representation of a client. At least four of Rule 1.6(b)’s exceptions to a lawyer’s ethical obligation to maintain confidentiality permit disclosure either when third parties are about to be harmed by the client’s actions or when the lawyer is required by other law or court order to make such a disclosure. Furthermore, when a lawyer is representing an organization or entity, it may be necessary—and required—under Rule 1.13(b) for that lawyer to report “up the ladder” when a client constituent is engaging or about to engage in conduct that either violates the law or violates a legal obligation of the organizational client—and such conduct is likely to result in substantial injury to the client. It takes courage to stand up to the client and tell the client no. But sometimes it has to be done, as the Rules of Professional Conduct recognize.

This article is related to a Showcase CLE program that took place at the ABA Business Law Section’s Hybrid Spring Meeting on Friday, April 28, 2023. All Showcase CLE programs were recorded live and will be available for on-demand credit, free for Business Law Section members.

Blockchain technology has become a buzzword in the business world, and its applications are rapidly expanding. With the rise of cryptocurrencies, smart contracts, and other decentralized applications, blockchain has opened up new possibilities for businesses to operate more securely, transparently, and efficiently. This article will explore the basics of blockchain, smart contracts, crypto, and Web 3.0 and how they are relevant for business lawyers. We will also examine some of this technology’s current business, litigation, and regulatory risks.

What Is Blockchain?

Blockchain is a decentralized digital ledger that records transactions securely and transparently. It was first introduced in 2008 by an anonymous person or group under the pseudonym Satoshi Nakamoto as a core technology behind Bitcoin, the first cryptocurrency. Blockchain is a distributed database that stores information in blocks, and each block is linked to the previous one, forming a chain of blocks. These blocks are verified and validated by a network of computers, known as nodes, that work together to ensure that each transaction is legitimate and accurate.

Decentralization

One of the key features of blockchain technology is its decentralization. Decentralization refers to the absence of a central authority controlling the network. In traditional systems, a central authority such as a government or a financial institution is responsible for maintaining the database and verifying transactions. In a decentralized system, there is no central authority. Instead, the network of nodes is responsible for verifying and validating transactions. This makes blockchain more secure, transparent, and resilient to attacks, as it eliminates the need for a single point of failure.

Why Crypto Matters

Cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrencies are decentralized, meaning they are not backed by any government or financial institution. They are created and managed using blockchain technology. The most well-known cryptocurrency is Bitcoin, which was created in 2009.

The main advantage of cryptocurrencies is their decentralization, which makes them resistant to censorship, fraud, and theft. Cryptocurrencies also offer faster and cheaper transactions compared to traditional payment methods, and they can be used for cross-border transactions without the need for intermediaries.

Smart Contracts

Smart contracts are self-executing contracts programmed to execute automatically when certain conditions are met. Smart contracts are based on blockchain technology, and they use blockchain’s decentralized architecture to enable parties to engage in transactions without intermediaries. The code that powers smart contracts is stored on the blockchain and executed automatically when pre-defined conditions are met.

Smart contracts can be used for a wide range of applications, including digital identity verification, supply chain management, and real estate transactions. They can also be used for financial transactions, such as lending and insurance, where the contract terms can be automatically executed based on predefined conditions.

Web 3.0

Web 3.0, also known as the decentralized web or the semantic web, is the next generation of the internet. It is based on blockchain technology and aims to create a decentralized and open internet. Web 3.0 will enable users to take control of their own data and online identity, eliminating the need for intermediaries such as social media platforms and search engines.

Web 3.0 will enable a wide range of decentralized applications, including decentralized finance (DeFi), decentralized social networks, and decentralized marketplaces. These applications will be built on blockchain technology and will be powered by smart contracts.

Business Risks

Blockchain technology offers many benefits for businesses, including improved security, transparency, and efficiency. However, it also comes with some risks. One of the main risks of blockchain is the lack of regulation. The decentralized nature of blockchain makes it difficult for regulators to monitor and regulate the market. This can lead to fraudulent activities and scams, which can cause financial loss to investors.

Another risk associated with blockchain is the possibility of cyber-attacks. While blockchain is designed to be secure and resilient to attacks, it is still susceptible to hacking attempts, especially at the application layer. Smart contracts, which are a key component of blockchain technology, are also vulnerable to attacks. In 2016, for example, a hacker exploited a vulnerability in a smart contract on the DAO (Decentralized Autonomous Organization) network and stole around $50 million worth of Ether.

Litigation Risks

The use of blockchain technology can also give rise to litigation risks. Smart contracts, for example, are programmed to execute automatically based on predefined conditions. If the code contains errors or if the conditions are not properly defined, it can lead to unintended consequences and disputes. In addition, the lack of regulation in the blockchain space can lead to legal uncertainty and disputes over ownership and liability.

Regulatory Risks

Regulatory risks are also a concern in the blockchain space. The lack of regulation can make it difficult for businesses to operate and raise funds. For example, ICOs (Initial Coin Offerings), which are a common way for blockchain-based startups to raise funds, are largely unregulated, and there have been many cases of fraud and scams. As a result, regulators around the world are taking steps to regulate the blockchain space, which can lead to additional compliance costs for businesses.

Conclusion

Blockchain, smart contracts, crypto, and Web 3.0 are rapidly transforming the business landscape. They offer many benefits, including improved security, transparency, and efficiency. However, they also come with regulatory, litigation, and business risks. As a result, businesses and lawyers need to be aware of these risks and take steps to mitigate them. This includes understanding the regulatory landscape, ensuring the security of smart contracts and other blockchain applications, and being prepared to handle disputes and litigation that may arise. With proper planning and risk management, businesses can harness the power of blockchain technology and unlock new possibilities for growth and innovation.

Editors

§ 1.1. Supreme Court

Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022).  The Supreme Court was called on to address the Bankruptcy Clause found in Article I, Section 8, Clause 4 of the Constitution, which authorizes Congress to establish “uniform laws on the subject of Bankruptcies” throughout the United States.  The issue in question was the nonuniform nature of Congress’ enactment of a significant fee increase that exempted debtors in two states and whether that variation violated the uniformity requirement of the Constitution.

The Court began by noting that “[b]ankruptcy cases involve both traditional judicial responsibilities and extensive administrative rules.”  While prior law vested bankruptcy judges with the responsibility to handle both the judicial and administrative responsibilities, Congress created the United States Trustee Program (the “Trustee Program”) to separate these judicial and administrative functions.  Ultimately, Congress made the Trustee Program permanent and expanded it nationwide.  However, stakeholders in North Carolina and Alabama resisted. Thus, Congress expanded the U.S. Trustee Program to all federal judicial districts except for those in North Carolina and Alabama.  In those districts, the prior system (the “Administrator Program”) continued.  The Trustee Program, which covers 48 states, is funded by user fees paid to the United States Trustee System Fund, with the bulk of those funds being paid by chapter 11 debtors who pay a fee in each quarter of the year that their case remains pending.  The Bankruptcy Administrator Program that exists in North Carolina and Alabama is not funded by user fees but instead is funded by the Judiciary’s annual budget.  In 1994, the Ninth Circuit held it unconstitutional that the Administrator Program states did not have to pay user fees.  Accordingly, Congress enacted a law authorizing the Judicial Conference to require Administrator Program districts to pay fees equal to those imposed in Trustee Program districts.  Thereafter, the Judicial Conference adopted a standing order for such fees to be paid.

Eventually, Congress faced a shortfall in the United States Trustee System Fund and enacted a temporary, but significant, increase in the fees paid in large chapter 11 cases (the “2017 Act”).  When that additional fee was triggered, the fee increased from $30,000 to $250,000 per quarter.  The North Carolina and Alabama districts did not immediately adopt this increase.  A year later, the Judicial Conference ordered those districts to implement the amended fee schedule.  Even then, substantial differences remained between the fees faced by debtors in the Trustee Program and those in the Administrator Program.  First, the date on which the new fees took affect differed by approximately six months and, in the Administrator Program districts, the fee increase only applied to newly filed cases, while in Trustee Program districts the increased fee applied to pending cases.

In 2008, Circuit City Stores, Inc. sought chapter 11 protection in the Eastern District of Virginia and was subjected to the Trustee Program.  When its plan was confirmed, the maximum quarterly fee was $30,000.  However, the bankruptcy case was still pending when Congress raised the fees for chapter 11 debtors in Trustee Program districts.  This resulted in an increase of almost $600,000 in fees that the petitioner had to pay for three quarters.  The petitioner objected to the fee increase in the bankruptcy court as a violation of the Constitution’s Bankruptcy Clause.  The bankruptcy court agreed and imposed the lower fees.  The Fourth Circuit reversed.  It interpreted the Bankruptcy Clause as forbidding “only ‘arbitrary’ geographic differences” and found that distinction between Trustee Program districts and Administrator Program districts to not be arbitrary.  The Supreme Court granted certiorari to resolve a circuit split.

The first question before the Court was “whether the 2017 Act is subject to the Bankruptcy Clause’s uniformity requirement at all.”  142 S. Ct. at 1778.  The respondent argued that there was a distinction between substantive bankruptcy laws and administrative acts.  The Supreme Court disagreed.  The Court noted the language of the clause is broad and that the Court had never before distinguished between substantive and administrative bankruptcy laws or suggested that the uniformity requirement would not apply in both cases.  The Court further stated that the courts that had considered this question to date, regardless of the ultimate outcome, had accepted that the statute is subject to the Clause’s uniformity requirement. 

The Court then turned to the question of whether the 2017 Act was a permissible exercise of congressional power.  The Court began by noting that, while the Bankruptcy Clause confers broad authority on Congress, the Clause also imposes a limitation on that authority.  Namely, the laws enacted must be uniform.  The Court’s prior opinions addressing this uniformity requirement made it clear that they “stand for the proposition that the Bankruptcy Clause offers Congress flexibility, but does not permit arbitrary geographically disparate treatment of debtors.”  Id. at 1780.  With that in mind, the Court found that there was no dispute that the fee increase was not geographically uniform.  “The only remaining question [was] whether Congress permissibly imposed nonuniform fees because it was responding a funding deficit limited to the Trustee Program districts.”  Id. at 1781.  The Court found that this shortfall “existed only because Congress itself had arbitrarily separated the districts into two different systems with different cost funding mechanisms, requiring Trustee Program districts to fund the Program through user fees while enabling Administrator Program districts to draw on taxpayer funds by way of the Judiciary’s general budget.”  Id. at 1782.  The Court held that “[t]he Clause does not allow Congress to accomplish in two steps what it forbids in one.”  Id.  The Court concluded by stating that it was not addressing the constitutionality of the dual scheme of the bankruptcy system itself but only the decision to impose different fee arrangements in those two systems.  The Court took pains to note that nothing in the opinion should be “understood to impair Congress’ authority to structure relief differently for different classes of debtors or to respond to geographically isolated problems.  The Court holds only that the uniformity requirement of the Bankruptcy Clause prohibits Congress from arbitrarily burdening only one set of debtors with a more onerous funding mechanism than that which applies to debtors in other States.”  Id. at 1782-83.  Accordingly, the Court of Appeals for the Fourth Circuit was reversed, and the case was remanded for further proceedings.

§ 1.2. First Circuit

Coughlin v. LAC Du Flambeau Band of Lake Superior Chippewa Indians (In re Coughlin), 33 F.4th 600 (1st Cir. 2022).  In a split decision, the First Circuit held that the Bankruptcy Code abrogates tribal sovereign immunity, agreeing with the Ninth Circuit and deepening the split with the Sixth Circuit.  Compare Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004) (holding that the Bankruptcy Code abrogates sovereign immunity for tribes), with Buchwald Cap. Advisors, LLC v. Sault Ste. Marie Tribe of Chippewa Indians (In re Greektown Holdings), 917 F.3d 451, 460-61 (6th Cir. 2019) (holding that the Code does not abrogate immunity). 

After voluntarily filing for protection under chapter 13 of the Bankruptcy Code, the debtor moved to enforce the automatic stay to prohibit further collection efforts by creditor Lendgreen, a subsidiary of the Lac Du Flambeau Band of Lake Superior Chippewa Indians (the “Band”), which had engaged in aggressive collection tactics despite the commencement of the debtor’s bankruptcy.  In opposition, Lendgreen and its corporate parents asserted sovereign immunity and moved to dismiss the enforcement proceeding.  The bankruptcy court agreed with the Band and granted dismissal.  But in a 2-1 decision, the First Circuit reversed.

Relying on Supreme Court precedent established in Michigan v. Bay Mills Indian Community, 572 U.S. 782 (2014), which requires that Congress must have “unequivocally express[ed]” its intent to abrogate sovereign immunity, id. at 790 (internal quotation marks omitted), the majority concluded that Congress had been clear in its intention.  First, the majority examined the language of section 106(a), which provides that “[n]otwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to . . . Section[] 362. . . .”  11 U.S.C. § 106(a)(1).  From this, the majority concluded that Congress was clear in its intention to abrogate sovereign immunity as to governmental units.  The majority next examined whether native tribes fall within the Bankruptcy Code’s definition of “governmental units.”  See 11 U.S.C. § 101(27) (defining “governmental unit”).  Noting that the definition encompasses “essentially all forms of government,” Coughlin, 33 F.4th at 605, and that Congress has long considered tribes to be “domestic dependent nations,” id. at 606-07, the majority found that tribes are domestic governments, and therefore within the meaning of “governmental unit” as defined by the Bankruptcy Code. 

The majority rejected the Band’s, the Sixth Circuit’s, and the dissent’s argument that Congress cannot abrogate tribal sovereign immunity unless it expressly discusses tribes somewhere in the statute.  The majority termed it an impermissible “magic-words requirement,” contrary to controlling Supreme Court precedent established in FAA v. Cooper, 566 U.S. 284 (2012).  See id. at 291 (“Congress need not state its intent in any particular way.  We have never required that Congress use magic words.”). 

The dissent, on the other hand, posited that a court must have “perfect confidence” in its interpretation that Indian tribes were included in the definition of “governmental unit” as an “other . . . domestic government.”  Coughlin, 33 F.4th at 614 (Barron, C.J. dissenting) (quoting Dellmuth v. Muth, 491 U.S. 223, 231 (1989)).  While the dissent noted that it was certainly possible that the term “governmental unit” includes Native tribes, it is not “clearly and unequivocally” evident that Congress intended to abrogate tribal sovereign immunity.  See id. at 622.

Fin. Oversight & Mgmt. Bd. for P.R. v. Cooperativa de Ahorro y Credito Abraham Rosa (In re Fin. Oversight & Mgmt. Bd. for P.R.), 41 F.4th 29 (1st Cir. 2022).  Splitting from the Ninth Circuit’s decision in Cobb v. City of Stockton (In re City of Stockton, Cal.), 909 F.3d 1256 (9th Cir. 2018), the First Circuit recently affirmed the decision of the court overseeing the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”) that claims for just compensation arising from takings under the Fifth Amendment takings claims cannot be discharged or impaired by bankruptcy plans.

This case arises from objections lodged by former property owners (the “Takings Claimants”) filed in opposition to a version of the plan of adjustment proposed by the Financial Oversight and Management Board for Puerto Rico (the “Board”) based on the treatment the plan afforded the Takings Claimants’ proofs of claim.  The proofs of claim at issue (the “Takings Claims”) sought just compensation for prepetition takings of their private property by the Commonwealth of Puerto Rico (the “Commonwealth”).  The Taking Claims were comprised of two different varieties:  the first were claims for just compensation pursuant to the Commonwealth’s “quick take” eminent domain statute, which requires the Commonwealth to hold an estimated compensation amount in escrow; and the second variety—so-called “inverse condemnation claims”—arose when the Commonwealth curtailed an owner’s property right without tendering a deposit.  The plan of adjustment sought to pay the Takings Claimants (i) the full amount of any eminent domain claims for which there was a deposit and (ii) a pro rata amount for (a) any eminent domain claim amounts in excess of the deposit and (b) all inverse condemnation claims.  The Takings Claimants argued before the lower court that the Fifth Amendment prohibits the impairment of the Takings Claims on account of which the Takings Claimants were constitutionally entitled to “just compensation.”  As such, they argued that the plan could not be confirmed unless their claims were paid in full.  The lower court agreed with the Takings Claimants and directed the Board to modify the plan accordingly.  The Board made the adjustments, but included language in the modified plan that preserved the Board’s right to appeal the lower court’s ruling that the Takings Claims were required to be paid in full.  This appeal followed.

Before reaching the question on appeal—whether the Fifth Amendment foreclosed confirmation of a plan which impairs or discharges claims for just compensation resulting from a prepetition taking—the First Circuit first considered whether it needed to reach the constitutional question at all.  The United States had intervened to argue that the First Circuit should avoid the constitutional question, and instead hold that the lower court was justified in its holding pursuant to the court’s equitable powers under section 944(c)(1) of the Bankruptcy Code.  Because the First Circuit found the record clear that the lower court had not relied on its discretionary powers, it found the constitutional question unavoidable.

The First Circuit then turned to the Board’s arguments as to why the Fifth Amendment did not preclude it from impairing the Takings Claims.  First, the Board argued that the Fifth Amendment’s Takings Clause no longer applied to the Takings Claims because the Takings Claimants did not have rights in the confiscated property at the time the petitions for relief under PROMESA were filed.  Because Supreme Court precedent under Knick v. Township of Scott, 139 S. Ct. 2162 (2019) determined that the “right to full compensation arises at the time of taking,” id. at 2170, the Board argued that the plan could not violate the Fifth Amendment where the property had already been taken.  The First Circuit disagreed, holding that Knick did not stand for the proposition that a subsequent denial of just compensation did not invoke Fifth Amendment concerns.  To do so would be to treat the Fifth Amendment right to receive just compensation as “a mere monetary obligation that may be dispensed with by statute.”  Fin. Oversight & Mgmt. Bd. for P.R., 41 F.4th at 43.

The Board’s second argument was premised on the notion that claims for just compensation under the Fifth Amendment were in the nature of ordinary money damages, which are routinely adjusted in bankruptcy.  Again, the First Circuit rejected this argument.  Noting that the Fifth Amendment does not prohibit the taking of private property, but rather prohibits the taking of such property without just compensation, the appellate court found that just compensation “serves also as a structural limitation on the government’s very authority to take private property for public use.”  Id. at 44.  As such, just compensation constituted a “constitutional obligation” which the government cannot alter.  See id. (quoting First English Evangelical Luther Church of Glendale v. Los Angeles Cnty., 482 U.S. 304, 315 (1987)).  The Board’s reliance on the majority holding in City of Stockton did not persuade the First Circuit, which sided instead with the Stockton dissent and the Bankruptcy Court for the Eastern District of Michigan.  See In re City of Detroit, 524 B.R. 147, 269-70 (Bankr. E.D. Mich. 2014). 

The First Circuit then summarily disposed of additional arguments by the Board in reaching its conclusion that lower court properly found that the Board’s original treatment of the Takings Claims was prohibited by the Constitution.

Fin. Oversight & Mgmt. Bd. for P.R. v. Federacion de Maestros de P.R., Inc. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 32 F.4th 67 (1st Cir. 2022).  In this decision arising from the proceedings under Title III of the Puerto Rico Oversight Management and Economic Stability Act (“PROMESA”), the First Circuit held that adjustments to the statutory pension plans for certain public school teachers provided for under the confirmed Title III Plan of Adjustment (the “Plan”) were valid modifications of the Commonwealth’s obligations and that PROMESA preempted Commonwealth laws to the extent that they were inconsistent with the Commonwealth’s adjusted pension liabilities.  

In 2013, the Puerto Rico Legislative Assembly enacted a statute which sought to end the Teachers Retirement System’s prior defined benefit pension plan.  The defined benefit pension plan, enacted by Commonwealth statute, provided for a specified monthly benefit amount upon retirement.  The monthly benefit amount varied based on, among other things, age and years of service of the participant.  It also included cost-of-living adjustments.  The new legislation proposed to freeze accruals under the existing defined benefit pension plan and to transfer active and future participants to a defined contribution plan, funded by employee and employer contributions.  The Puerto Rico Supreme Court ultimately overturned the aspect of the legislation that required teachers hired before August 2014 to transfer to the defined contribution plan.

The Plan proposed by the Financial Oversight and Management Board (the “Board”)—the body designated under PROMESA to address the Commonwealth’s debt restructuring—provided that (i) future accruals under the defined benefit plan, held by teachers hired prior to August 2014, would be frozen, and (ii) cost-of-living adjustments going forward would be eliminated.  Various organizations representing the teachers (the “Teachers’ Associations”) objected to confirmation of the Plan before the court overseeing the Title III proceedings (the “Title III Court”), but the Title III Court confirmed the Plan over such objections.  The Teachers’ Associations appealed the confirmation.

On appeal, the Teachers’ Associations presented three arguments as to why the Plan could not be confirmed, all of which the First Circuit ultimately rejected.  First, the Teachers’ Associations argued that neither the Plan nor the Title III Court’s order could render the Commonwealth statutes providing for the continued payment of pension benefits ineffective.  Second, they argued that enabling legislation was required to implement changes to the Commonwealth’s pension obligations.  Finally, they argued that the pension modifications contravened legislation establishing prerequisites for the issuance of new debt, such that the Plan could not be consummated.  

The First Circuit dismissed the Teachers’ Associations’ first challenge, which objected to the Plan provisions eliminating the continued accrual of defined pension benefits with cost-of-living adjustments, on two grounds.  First, the circuit court held that the Commonwealth’s pension obligations, although statutory, were in the nature of contractual obligations, and could therefore be rejected under section 365 of the Bankruptcy Code, as incorporated by PROMESA.  The First Circuit found that PROMESA expressly preempted the Commonwealth laws not only directly, see 28 U.S.C. § 2103 (“The provisions of this chapter shall prevail over any general or specific provisions of territory law, State law, or regulation that is inconsistent with this chapter.”), but also by incorporating section 1123(a)(3) and (5) of the Bankruptcy Code, see 48 U.S.C. § 2161(a).  Section 1123(a)(3) and (5) provide that, “Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall . . . (3) specify the treatment of any class of claims or interests that is impaired under the plan; . . . [and] (5) provide adequate means for the plan’s implementation . . . .”  11 U.S.C. § 1123(a)(3), (5).  Because the Commonwealth laws codifying the defined benefit plan accruals and the cost-of-living adjustments directly conflicted with the Plan’s treatment of the pension participants’ claims, the circuit court found that the Plan, by virtue of PROMESA, preempted the Commonwealth laws.  Second, the First Circuit found that the Commonwealth laws were preempted by PROMESA as a matter of conflict preemption because the Commonwealth laws posed an obstacle to the purpose of PROMESA, namely the successful restructuring of the Commonwealth’s financial obligations. 

The First Circuit then quickly rejected the Teachers’ Associations’ second contention—that enabling legislation was required to modify the Commonwealth’s pension obligations.  Pointing to the text of PROMESA section 314(b)(5), which conditions plan confirmation on obtaining “any legislative, regulatory, or electoral approval necessary under applicable law,” the court found that there was no law requiring legislative approval to modify the Commonwealth’s pension obligations.  

Finally, the First Circuit rejected the Teachers’ Associations’ third argument that the Commonwealth law titled Act 53-2021 required that the Plan contain “zero cuts to pensions of current retirees and current accrued benefits,” including the defined benefit plan accruals and the cost-of-living adjustments.  The court was unconvinced that freezing further accruals or cost-of-living eliminations were the type of “cuts” referred to in the statute.  By contrast, the statute specified that the Plan not include a provision from a previous version of Plan which would reduce pension payments in excess of $1,500 by up to 8.5%.  The court found that the confirmed Plan satisfied the statute’s requirements by eliminating such provision. 

§ 1.3. Second Circuit

Gunsalus v. Cnty. of Ontario, 37 F.4th 859 (2d Cir. 2022).  The Second Circuit joined the Third, Sixth, and Seventh Circuits in holding that the Supreme Court precedent established in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994)—that a foreclosure sale conducted in accordance with state law was entitled to a presumption that the debtor received “reasonably equivalent value” under section 548 of the Bankruptcy Code—was limited to mortgage foreclosures of real estate.  The Fifth, Ninth, and Tenth Circuits, in contrast, hold that the Supreme Court’s decision in BFP extends to protecting tax foreclosures from fraudulent conveyance actions. 

When a married couple accrued approximately $1,300 in unpaid real estate taxes, a tax lien attached to their family home.  The county subsequently instituted proceedings to foreclose on the property pursuant to the “strict foreclosure” procedures pursuant to New York’s Real Property Tax Law (“RPTL”).  In June 2016, the state trial court entered a final judgment in favor of the county, awarding the county possession of, and title to, the home.  In May 2017, the county scheduled an auction.  The married couple then filed a chapter 13 petition.  Notwithstanding the filing, the county subsequently sold the home for $22,000.  Pursuant to the RPTL, the county retained the proceeds in excess of the lien (here, roughly $20,700). 

The debtors commenced an adversary proceeding to set aside the 2016 transfer of their home to the county as a fraudulent conveyance under section 548 of the Bankruptcy Code.  After the bankruptcy court initially dismissed the complaint, relying on BFP, the district court reversed and remanded back to the bankruptcy court.  On remand, the bankruptcy court found that the debtors did not receive “reasonably equivalent value” when their home (which was worth at least $22,000) was seized in payment of a $1,300 tax bill.  The county appealed.

The Second Circuit affirmed, holding that BFP’s presumption of reasonably equivalent value —by its own terms—applied only to mortgage foreclosures of real estate.  The Supreme Court expressly left open the question of whether other foreclosures, such as tax lien foreclosures, would be entitled to the same presumption.  In so holding, the Second Circuit found that it was essential to the holding in BFP that the underlying foreclosure action include some sort of auction or sale “which would permit some degree of market forces to set the value of the property even in distressed circumstances.”  37 F.4th at 865 (citing BFP, 511 U.S. at 545-49).  Here, the auction that was ultimately conducted by the county was almost a year after the transfer that the debtors sought to avoid (i.e., when the county took title to their home).  Other procedural safeguards present in BFP were likewise absent under the RPTL.  Therefore, the presumption that the foreclosure was a transfer for “reasonably equivalent value” did not apply.  

MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), Nos. 20-1846-bk, 20-1953-bk, 2021 BL 481940, 2021 US App Lexis 37358, 2021 WL 5986997 (2d Cir. Dec. 17, 2021).  In a summary order, the Second Circuit held that the failure to obtain a stay of a sale approval order creates a jurisdictional bar for appellate review under section 363(m) of the Bankruptcy Code.  Due to the split amongst the circuits as to the effect of section 363(m)—with the Second and Fifth holding that it creates a jurisdictional bar to appellate review, and the Third, Sixth, Seventh, Ninth, and Tenth holding that it only limits the relief an appellate court may grant—the Supreme Court granted certiorari.  MOAC Mall Holdings LLC v. Transform Holdco LLC (In re Sears Holdings Corp.), Nos. 20-1846-bk, 20-1953-bk, 2021 BL 481940, 2021 US App Lexis 37358, 2021 WL 5986997 (2d Cir. Dec. 17, 2021), cert. granted, 142 S. Ct. 2867 (2022) (No. 21-1270).

This case arises from the chapter 11 proceedings of Sears Holding Corporation (“Sears”) and its subsequent asset sale to Transform Holdco LLC (“Transform”) pursuant to section 363(b).  The sale to Transform, approved by the bankruptcy court by order dated February 8, 2019 (the “Sale Order”), included the right to designate which assignee would assume Sears’s lease with MOAC Mall Holdings LLC (“MOAC”).  On September 5, 2019, the bankruptcy court entered a subsequent order (the “Assignment Order”) authorizing Transform to assign the lease to its wholly-owned subsidiary, Transform Leaseco LLC (“LeaseCo”).  MOAC moved to stay the assignment of the lease, but the bankruptcy court denied the motion.  MOAC nonetheless appealed the Assignment Order to the district court.  The district court, however, declined to review the case, holding that it lacked jurisdiction to review the Assignment Order under section 363(m), since the assignment was integral to the Sale Order.

According to the Second Circuit’s interpretation, section 363(m) provides that, in the absence of a stay, appellate review of a final sale under subsections (b) or (c) of section 363 is limited to challenges as to the “good faith” nature of the sale.  See 11 U.S.C. § 363(m).  In prior precedent, the Second Circuit had also extended the limitations of section 363(m) to any transactions “integral to a sale authorized under § 363(b).”  2021 WL 5986997, at *2 (citing Contrarian Funds LLC v. Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231, 250 (2d Cir. 2010)). 

The Second Circuit agreed with the district court, holding that the district court did not have jurisdiction to review the Assignment Order.  The assignment was integral to the sale since both the Sale Order and the Assignment Order explicitly stated that the assignment (and others similarly categorized) were integral to the sale.  Thus, section 363(m) placed the Assignment Order beyond the district court’s appellate review.  Although MOAC argued before the Second Circuit that section 363(m) does not create a jurisdictional bar to appellate review of a section 363 sale, the Second Circuit was unpersuaded. 

Springfield Hosp., Inc. v. Guzman, 28 F.4th 403 (2d Cir. 2022).  Becoming the first federal circuit court of appeals to address a question on which lower courts were divided, the Second Circuit ruled that the federal government could deny a Paycheck Protection Program (“PPP”) loan to a debtor in bankruptcy solely due to the applicant’s bankruptcy status.

In the early days of the COVID-19 pandemic in 2020, Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which, among other things, (i) established the PPP to provide small businesses with potentially forgivable loans to keep their workers employed during COVID-related shutdowns and (ii) delegated responsibility for administering the program to the Small Business Administration (the “SBA”).  As a matter of policy, the SBA decided to automatically deny PPP loans to any applicant who was in bankruptcy proceedings.  Chapter 11 debtors Springfield Hospital, Inc. and Springfield Medical Care Systems, Inc. (together, the “Debtors”) were denied PPP funds solely due to their status as debtors.  They commenced an adversary proceeding, seeking an injunction to restrain the SBA from denying PPP loans to applicants solely based on bankruptcy status.  Specifically, they argued that section 525(a) of the Bankruptcy Code prevented discrimination based on bankruptcy status in reviewing PPP loan applications.  The bankruptcy court agreed, finding that PPP loans were “other similar grant[s]” within the scope of section 525(a).  Following the SBA’s appeal, the bankruptcy court certified the matter for direct appeal to the Second Circuit.

The Second Circuit reversed, determining that the PPP was a loan guaranty program that did not fall within the ambit of section 525(a)’s “other similar grant” language.  In reaching its conclusion, the Second Circuit considered the plain text of section 525(a), prior precedent interpreting section 525(a), and congressional actions subsequent to the CARES Act.  The Second Circuit determined that the plain text of section 525(a), which provides that “a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to . . . a bankrupt or debtor under the Bankruptcy Act . . . solely because such bankrupt or debtor is or has been . . . a bankrupt or debtor under the Bankruptcy Act.”  11 U.S.C. § 525(a).  Relying on the ordinary meaning of the term “grant” and the canon of construction noscitur a sociis, the court concluded that loans did not fall within the “other similar grant[s]” catchall within section 525(a).   

Next, the Second Circuit looked to its section 525(a) precedent: Goldrich v. New York State Higher Education Services Corp. (In re Goldrich, 771 F.2d 28, 30 (2d Cir. 1985) (holding that a student loan guarantee is not an “other similar grant”), and Stoltz v. Brattleboro Housing Authority (In re Stoltz), 315 F.3d 80, 90 (2d Cir. 2002) (holding that a public housing lease is an “other similar grant”).  Notwithstanding the Debtors’ argument that Goldrich was either abrogated by subsequent amendment to section 525 or superseded by Stoltz, the appellate court found that Goldrich was still binding, and established that section 525(a) does not cover loan programs. 

Finding Goldrich to be good law, the Second Circuit then considered whether the PPP constituted a loan program of the sort that Goldrich determined to be outside of section 525(a).  The court took particular note of Congress’ choice to characterize the PPP loans as a “loan” in the CARES Act, rather than as a “grant.”  The court then found that the substance of the PPP conclusively demonstrated that it was a loan guaranty program.  First, PPP loans shared several other common loan features, including set interest rates, maturation dates, refinancing terms, and deferral mechanisms.  Second, the forgiveness mechanism did not automatically convert PPP funds from loans into grants because forgiveness was neither automatic nor guaranteed.  Finally, the Second Circuit noted that the PPP loans were distinguishable from the public housing leases in Stoltz because a debtor could still seek traditional loans from a bank or receive other governmental support grants even if the debtor was denied a PPP loan, unlike the public housing leases in Stoltz, which were essential to the debtor’s fresh start. 

Finally, the Second Circuit cautiously considered subsequent legislation.  Congress had amended section 525(a) to expressly bar discrimination in connection with certain other categories of CARES Act benefits—but not the PPP—through the Consolidated Appropriations Act, 2021.  The exclusion of the PPP from the amendment bolstered the Second Circuit’s conclusion that the PPP did not fall within section 525(a)’s protection.

§ 1.4. Third Circuit

In re Boy Scouts of Am., 35 F.4th 149 (3d Cir. 2022).  The Third Circuit affirmed the lower courts’ rulings that no conflict existed concerning Sidley Austin LLP’s (“Sidley”) representation of Boy Scouts of America and Delaware BSA, LLC (together, the “Debtors”) and Century Indemnity Co. (with its affiliates, “Century”), and that the courts did not abuse their discretion in approving Sidley’s retention under section 327 of the Bankruptcy Code.

Prior to the bankruptcy filing, Century issued insurance to the Debtors, and hired Sidley to assist with certain reinsurance issues related to the Debtors’ insurance.  The Debtors also retained Sidley to act as restructuring counsel, but in its engagement letter, Sidley specified that it would not advise on insurance issues and the Debtors engaged a separate law firm to handle those issues.  Sidley established a formal ethics screen between its restructuring and reinsurance teams, and eventually formally withdrew from the representation of Century in February 2020.  Sidley also filed the Debtors’ bankruptcy petitions in February 2020 and filed its retention application to represent the Debtors under section 327 of the Bankruptcy Code in March 2020.  In September 2020, the Sidley attorneys working on the Debtors’ restructuring switched law firms, taking the matter with them, and thus, the Debtors were no longer a client of Sidley.

The bankruptcy court found that no privileged or confidential information was shared between the two legal teams at Sidley and further found that the representation under section 327 was proper because “Sidley’s representation of Century did not render it unable to represent BSA effectively.”  35 F.4th at 155.  The bankruptcy court further considered the relevant Rules of Professional Conduct and noted that any perceived harmful effects were nullified by the Debtors’ separate insurance counsel and the ethical wall in place at Sidley.  The district court affirmed, finding no actual conflict and that the bankruptcy court exercised proper discretion in not disqualifying Sidley over perceived violations of the ethical rules.  Century appealed to the Third Circuit.

First, the Third Circuit briefly discussed standing and mootness, finding in favor of Century on both counts.  With respect to standing in bankruptcy appeals, the appellant must be a “person aggrieved” by an order of the bankruptcy court—that is, “the order of the bankruptcy court ‘diminishes their property, increases their burdens, or impairs their rights.’”  Id. at 157 (quoting In re Combustion Eng’g, Inc., 391 F.3d 190, 214 (3d Cir. 2004)).  The Third Circuit found that retention of counsel “implicate[s] the integrity of the bankruptcy court proceeding as a whole,” Id. (quoting In re Congoleum Corp., 426 F.3d 675, 685 (3d Cir. 2005)), and thus, Sidley’s retention sufficiently affected the interests of Century.  On the mootness issue, notwithstanding Sidley’s withdrawal as counsel to the Debtors, “the possibility remains that we could order the disgorgement of its fees” and thus, the appeal was not moot.  Id. 

On the merits, the Third Circuit explained that Sidley’s retention was proper because it did not hold or represent an interest adverse to the estate and it was disinterested.  When there are actual conflicts of interest, attorneys face per se disqualification, but where the conflicts are only potential, the bankruptcy court retains considerable discretion.  Whether an actual conflict arises boils down to whether “it is likely that a professional will be placed in a position permitting it to favor one interest over an impermissibly conflicting interest.”  Id. at 158 (quoting In re Pillowtex, Inc., 304 F.3d 246, 251 (3d Cir. 2002)).  Said differently, the issue is “whether a possible conflict implicates the economic interests of the estate and might lessen its value.”  Id.  In this regard, the bankruptcy court had explained that it was “in no way convinced that Sidley generally cannot effectively represent BSA” and found no actual conflict existed.  Id. at 159.

However, Century argued that in addition to satisfying section 327 of the Bankruptcy Code, professionals must also abide by, and not violate, the Model Rules of Professional Conduct—here, Rules 1.7 and 1.9.  While the Third Circuit stated that “a court’s decision on retention may be informed by counsel’s conduct implicating the Rules of Professional Conduct,” there was no requirement to do so.  Id. at 161.

Even evaluating the asserted Model Rule violations, the Third Circuit found no abuse of discretion by the lower courts.  The Third Circuit again stressed the court’s power to fashion appropriate remedies in the face of asserted ethical violations and noted that disqualification can sometimes be more disruptive than helpful.  Even if the asserted violations were well-founded (and none of the courts found that to be true), the Third Circuit confirmed that Century was not adversely affected because no confidential or privileged information was shared with Sidley’s bankruptcy team.  On balance, however, if Sidley were disqualified, the Debtors would have been adversely affected.  The Third Circuit concluded that the bankruptcy court properly focused on section 327 and there was no abuse of discretion in approving Sidley’s retention.

ESML Holdings, Inc. v. B. Riley FBR, Inc. (In re Essar Steel Minnesota, LLC), 47 F.4th 193 (3d Cir. 2022).  The Third Circuit confirmed that where a post-confirmation adversary proceeding is “core,” the “close nexus test” does not apply.  The court also enforced the Supreme Court’s decision in Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009), holding that the bankruptcy court plainly had authority to interpret and enforce its own prior orders.

During ESML Holdings Inc. and Essar Steel Minnesota LLC’s (together, the “Debtors”) bankruptcy cases, Chippewa Capital Partners, LLC (“Chippewa”) emerged as the plan sponsor, agreeing to acquire the Debtors and provide exit financing.  Chippewa’s affiliate engaged B. Riley & Co., LLC (“B. Riley”) as its financial advisor and agreed to pay B. Riley a restructuring fee if it was successful in acquiring the Debtors.  However, one day prior to the effective date of the plan, B. Riley and Chippewa amended its engagement to bind the reorganized debtors.  B. Riley then sought its success fee of $16 million from the reorganized debtors.  When the reorganized debtors refused to pay, B. Riley filed a complaint in Minnesota.  In response, the reorganized debtors filed an adversary proceeding in the Delaware bankruptcy court.  B. Riley moved to dismiss the adversary complaint, arguing that its claim was not pre-effective date and therefore was not enjoined by the plan.  The reorganized debtors argued that the amendment was not binding on the reorganized debtors and, in any event, any claim arising from the amendment was enjoined by the plan and confirmation order.  After oral argument, the bankruptcy court ruled that it lacked subject-matter jurisdiction and dismissed the adversary proceeding.  The reorganized debtors appealed, and the district court certified the issue directly to the Third Circuit.

After performing an in-depth analysis of statutory bankruptcy jurisdiction, the Third Circuit found that the bankruptcy court had jurisdiction.  First, the Third Circuit foreclosed B. Riley’s argument that the “close nexus test” applied, holding that it does not apply to “core proceedings.”  “Core proceedings” include determinations as to the dischargeability of particular debts, objections to discharge, and confirmations of plans, and are conferred to the jurisdiction of the bankruptcy court under 28 U.S.C. § 157(b).  Because this action involved core proceedings, the bankruptcy court clearly had jurisdiction.  In addition, the Third Circuit noted that the bankruptcy court had jurisdiction to redress a possible contempt of its plan and confirmation order.  Finally, the Third Circuit confirmed that the bankruptcy court had jurisdiction to interpret and enforce its own prior order—here, the discharge and injunction provisions of the plan and confirmation order—under the Supreme Court’s decision in Travelers.  Accordingly, the Third Circuit reversed and remanded to the bankruptcy court.

In re Szczyporski, 34 F.4th 179 (3d Cir. 2022).  In a case arising out of a couple’s chapter 13 case, the Third Circuit followed the Fifth Circuit in determining that a shared responsibility payment for failing to maintain health insurance in accordance with the Affordable Care Act (“ACA”) is a tax for bankruptcy purposes that is entitled to priority under the Bankruptcy Code.

The facts of this case are straightforward.  In July 2019, Robert and Bonnie Szczyporski (together, the “Debtors”) filed a chapter 13 petition.  The IRS filed a proof of claim that included $927 for a shared responsibility payment owed by the Debtors for failing to maintain health insurance in 2018 in accordance with the ACA.  In February 2020, the bankruptcy court confirmed the Debtors’ plan, but reserved on the Debtors’ objection to the IRS’s proof of claim.  The bankruptcy court later held that the shared responsibility payment was a tax (not a penalty) for bankruptcy purposes, entitled to priority under section 507(a)(8) of the Bankruptcy Code.  The district court affirmed, and the Debtors timely filed an appeal to the Third Circuit.

The Bankruptcy Code does not define “tax,” and the Supreme Court teaches that courts should look at the actual effects instead of the label when determining whether an exaction is a tax.  In making its determination, the Third Circuit considered the six Lorber-Suburban factors that ask whether the exaction is: (i) an involuntary pecuniary burden laid upon individuals or property; (ii) imposed by, or under authority of the legislature; (iii) for public purposes; (iv) under the police or taxing power of the state; (v) universally applicable to similarly situated entities; and (vi) whether granting priority status to the government will disadvantage private creditors.  34 F.4th at 185 (quoting In re United Healthcare Sys., Inc., 396 F.3d 247, 253 (3d Cir. 2005)).  The court also considered “any relevant factor,” calling its examination of the exaction “flexible.”  Id. (quoting United Healthcare Sys., 396 F.3d at 255, 256)).

The Third Circuit found that all six Lorber-Suburban factors indicated that the exaction is a tax.  Even if the fifth and sixth factors were not satisfied, as argued by the Debtors, the court concluded that other relevant factors weighed in favor of finding that the exaction is a tax.  First, the payment is not “exchanged for a government benefit not shared by others,” 34 F.4th at 187 (quoting United Healthcare Sys., 396 F.3d at 260), and the government can “’manipulate the [payment] to encourage or discourage’ health insurance purchases,” id. (quoting United Healthcare System, 396 F.3d at 254).  Second, the payment is calculated and administered like a tax—paid in connection with taxpayers’ tax returns, does not apply to individuals who do not pay federal income taxes because their household income is too low, calculated using factors familiar to the tax context, enforced by the IRS, and assessed and collected in the same manner as taxes.  Finally, notwithstanding its statutory label as a “penalty,” the payment does not share any typical penal characteristics.  Therefore, the Third Circuit found that the exaction was a tax for bankruptcy purposes.

The Third Circuit also found that the tax was entitled to priority under section 507(a)(8) because the tax was based on the taxpayer’s income.  The court posited that the plain language of the statute “grants priority not only to traditional income taxes, but also to taxes, like the shared responsibility payment, whose amounts are calculated based on the taxpayer’s income.”  Id. at 188.  The court then demonstrated how a taxpayer’s income played an essential role in determining the amount of the shared responsibility payment owed by using examples from the IRS’s payment estimator.  Finally, the court brushed aside arguments that the IRS labeled the payment an “excise” tax because such labels or titles have no legal effect.  In affirming the lower courts on these issues, the Third Circuit joined the Fifth Circuit in holding that the shared responsibility payment is a tax entitled to priority under the Bankruptcy Code.  Cf. United States v. Chesteen (In re Chesteen), 799 F. App’x 236, 240-41 (5th Cir. 2020).

§ 1.4. Fourth Circuit

Beckhart v. Newrez LLC, 31 F.4th 274 (4th Cir. 2022).  The Fourth Circuit held that the bankruptcy court’s ability to hold creditors in contempt for violating a chapter 7 discharge order, as articulated by Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), applies equally to a confirmation order arising out of a chapter 11 case.

This case arises from the chapter 11 filing of a married couple who, at the time of their filing, owned several properties, including a house in Kure Beach, North Carolina, for which the mortgage payments were ten months in arrears at the time of filing.  The bankruptcy court confirmed the debtors’ plan of reorganization, which provided that the debtors would retain possession of the house and the creditor would retain a secured claim for the outstanding mortgage balance, payable according to the original terms of the loan.  Several years later, a new loan servicer, Shellpoint, took over the debtors’ mortgage.  Notwithstanding that the debtors paid the mortgage timely following the bankruptcy, Shellpoint sent notices to the debtors regarding a past due balance for the payments missed prior to bankruptcy.  Although the debtors explained that they had gone through a bankruptcy, Shellpoint continued sending notices.  After approximately five years, Shellpoint instituted foreclosure proceedings against the debtors.  The debtors then filed an emergency motion for contempt in the bankruptcy court.  The bankruptcy court granted the debtors’ motion, finding Shellpoint in contempt for violating the confirmation order and ordering Shellpoint to pay the debtors over $114,000 in sanctions.  On appeal, the district court reversed, finding that the bankruptcy court had failed to apply the Taggart standard and that Shellpoint had not acted willfully in violating the confirmation order because it had relied on the advice of outside counsel.  The debtors appealed to reinstate the bankruptcy court’s contempt order, arguing that Taggart does not extend beyond violations of discharge orders in chapter 7 cases.

The Fourth Circuit rejected the debtors’ limited interpretation of the Supreme Court’s ruling in Taggart.  Looking to the Supreme Court’s rationale in Taggart, the Fourth Circuit found that the Supreme Court used general principles of equity and provisions of the Bankruptcy Code applicable to all chapters to reach its conclusion.  In so doing, however, the Court noted that, while bankruptcy courts are capable of holding creditors in civil contempt, they should not do so when “there is a fair ground of doubt as to the wrongfulness of the defendant’s conduct.”  31 F.4th at 277 (citing Taggart, 139 S. Ct. at 1801-02). 

The Fourth Circuit then looked to the bankruptcy court’s decision.  Agreeing with the district court, the Fourth Circuit found that the bankruptcy court had not applied the Taggart standard.  However, it found error with the district court’s decision as well, finding that the district court had erred in giving controlling weight to the fact that Shellpoint had relied on legal advice from outside counsel.  Therefore, the Fourth Circuit vacated the district court’s order, with instructions to the district court to vacate the bankruptcy court’s order as well and remand for further proceedings consistent with Taggart.

Cook v. United States (In re Yahweh Ctr., Inc.), 27 F.4th 960 (4th Cir. 2022).  The IRS is not immune from avoidance actions under section 544(b)(1), according to the Fourth Circuit.  Nonetheless the Fourth Circuit upheld dismissal of the avoidance actions, brought under the North Carolina Uniform Voidable Transactions Act (the “North Carolina UVTA”), holding that the IRS tax penalty obligations sought to be avoided were not the types of transactions that the statute was designed to avoid. 

In 2016, Yahweh Center, a not-for-profit corporation, sought relief under chapter 11 of the Bankruptcy Code.  The IRS filed a proof of claim against Yahweh Center for certain unpaid taxes, including penalties and interest.  After the bankruptcy court confirmed Yahweh Center’s plan of reorganization, Richard P. Cook was appointed to serve as plan trustee.  As plan trustee, Cook then sued the United States to avoid certain tax penalties Yahweh Center had incurred and to recover certain payments for tax penalties that Yahweh had made prepetition under the North Carolina UVTA.  Cook argued that Yahweh Center did not receive “reasonably equivalent value” in exchange for the penalties and the penalty payments.  The bankruptcy court granted the government’s motion to dismiss the avoidance action, in spite of first rejecting the government’s argument that it was immune from suit.  The district court affirmed on grounds similar to the bankruptcy court.  This appeal followed. 

The Fourth Circuit first considered the government’s sovereign immunity argument.  The government argued that it should be immune from suit because there was no unsecured creditor who could sue the government in whose shoes the plan trustee could stand, under section 544(b)(1) of the Code.  However, the Fourth Circuit rejected this argument, holding that section 106(a) explicitly abrogated sovereign immunity as to section 544(b)(1).  11 U.S.C. § 106(a)(1).  In addition, the court found that the government had waived sovereign immunity by filing its proof of claim under section 106(b).   

Turning to the substance of the claims, the Fourth Circuit considered followed the Sixth Circuit’s decision in Southeast Waffles, LLC v. U.S. Dep’t of Treasury/I.R.S. (In re Southeast Waffles, LLC), 702 F.3d 850 (6th Cir. 2012).  In Southeast Waffles, the Sixth Circuit held that tax penalty obligations were not avoidable under the Bankruptcy Code’s fraudulent transfer provision or the Tennessee Uniform Fraudulent Transfer Act.  In so holding, the Sixth Circuit found that tax penalties were not “within the ambit of the ‘exchanges’ targeted in the fraudulent-transfer laws.”  See id. at 858-59.  The Fourth Circuit similarly found that the North Carolina UVTA presumes a voluntary exchange between the debtor and the creditor pursuant to an oral or written agreement.  Because no such agreement took place with respect to the IRS tax penalties, the Fourth Circuit held that such tax penalties were not the types of obligations contemplated by the North Carolina UVTA.  Therefore, the North Carolina UVTA could not be the “applicable law” grounding the plan trustee’s section 544(b)(1) claim.  Accordingly, the plan trustee’s fraudulent conveyance claims were properly dismissed.

§ 1.6. Fifth Circuit

Fed. Energy Regul. Comm’n v. Ultra Res., Inc. (In re Ultra Petroleum Corp.), 28 F.4th 629 (5th Cir. 2022).  In this case, the Fifth Circuit was asked to determine whether a debtor’s rejection of a filed-rate contract in bankruptcy relieved it of its obligation to continue performance without first seeking the approval the Federal Energy Regulatory Commission (“FERC” or the “Commission”).  Secondly, the court was asked whether section 1129(a)(6) of the Bankruptcy Code required the bankruptcy court to obtain FERC’s approval before confirming the plan.

The debtor was an energy company whose primary business was the production of natural gas.  The debtor entered into a contract with a pipeline to reserve space for transportation of its gas.  Under that contract, the debtor was to pay a monthly reservation charge, regardless of how much gas it actually shipped.  When it entered bankruptcy proceedings, the debtor sought permission to reject its natural gas shipping contract.  The pipeline company objected and asked the bankruptcy court  to refrain from issuing a decision until proceedings could be had before FERC, arguing that FERC had exclusive authority to decide whether the debtor should be relieved of its obligations under the filed-rate contract.  The bankruptcy court denied that request but asked that FERC participate as a party-in-interest and comment on any harm to the public interest.  FERC responded by filing a motion for reconsideration, arguing that formal proceedings before the Commission were required because it could only speak to such matters through its orders and could not comment on the public interest through counsel.  The bankruptcy court denied that motion.  Following an evidentiary hearing, in which FERC participated, the bankruptcy court granted the motion to reject.  The bankruptcy court held that it had the authority to approve rejection of the contract under prior Fifth Circuit precedent and, even given the rejection question heightened scrutiny considering the effect on the public interest, rejection was still appropriate as it would not harm the supply of natural gas and would simply benefit the debtor’s estate.  The bankruptcy court emphasized that rejection neither modified nor abrogated the underlying contract and did not amount to a rate change requiring approval under section 1129(a). 

In resolving the underlying questions, the Fifth Circuit noted that they concern “a clash of two congressionally constructed titans, FERC and the bankruptcy courts.”  28 F.4th at 635.  But a prior Fifth Circuit decision had conclusively resolved this contest.  See Mirant Corp. v. Potomac Elec. Power Co. (In re Mirant Corp.), 378 F.3d 511 (5th Cir. 2004).  In that case, the Fifth Circuit held that FERC had the exclusive authority to determine rates and that any attempt to modify rates would need to go through the Commission.  Mirant, 378 F.3d at 519.  But it distinguished the action of the bankruptcy court because rejection is a breach of the contract and FERC does not have exclusive authority over a breach of contract claim.  Id.  The Fifth Circuit also held that the Bankruptcy Code has no exception to the rejection power for wholesale electric contracts at issue in Mirant.  Id. at 521.  “This lack of an exception signaled a congressional intent to permit rejection since other areas featured ‘specific limitations and exceptions to the [section] 365(a) general rejection authority.”  Id.  Mirant thus recognized that a more rigorous standard than the simple business judgment rule would apply where the public interest was concerned: 

First, ‘the power of the [bankruptcy] court to authorize rejection of a [filed-rate contract] does not conflict with the authority given to FERC to regulate rates.’  . . .   Second and related, rejection ‘is not a collateral attack upon [the] contract’s filed-rate because that rate is given full effect when determining the breach of contract damage resulting from the rejection.’  . . .  Third, in ruling on a rejection motion, bankruptcy courts must consider whether the rejection harms the public interest or disrupts the supply of energy, and must weigh those effects against the contract’s burden on the bankruptcy estate.

Ultra Res., 28 F.4th at 638-39 (quoting Mirant, 378 F.3d at 518, 522, 525) (citations omitted) (alterations in original).  Given that prior decision, the Fifth Circuit held that “what FERC casts as a pitched battle is actually a settled truce.”  28 F.4th at 639.  And the result was straight forward.  The bankruptcy court had the “‘power . . . to authorize rejection of’ a filed-rate contract and such rejection ‘[did] not conflict with the authority given to FERC to regulate rates.’”  28 F.4th at 641 (quoting Mirant, 378 F.3d at 518).  The Fifth Circuit found that the bankruptcy court complied with its obligations to consider the public interest. 

The Fifth Circuit also considered and rejected FERC’s argument that FERC was required to conduct the full proceedings before the bankruptcy court could rule.  The Fifth Circuit noted that nothing in Mirant could be read “as requiring a bankruptcy court to allow FERC to conduct a hearing before the court can decide on rejection.”  Id. at 642.  The court then clarified, holding that the bankruptcy court “must invite FERC to participate in the bankruptcy proceedings as a party-in-interest.  Whether FERC ultimately decides to participate is up to it, but the court must at least extend the invitation.”  Id.  at 642-43.  In this case, because the bankruptcy court did so, its ruling was affirmed.

Gulfport Energy Corp. v. Fed. Energy Regul. Comm’n, 41 F.4th 667 (5th Cir. 2022).  In another Federal Energy Regulatory Commission (“FERC”) case, the Fifth Circuit reaffirmed its position that bankruptcy courts can reject filed-rate contracts without FERC’s consent.

In this case, FERC anticipated the Gulfport Energy Corporation’s insolvency and issued orders, before Gulfport sought bankruptcy relief, purporting to (i) require Gulfport to obtain FERC’s approval before it could reject its natural gas transportation service agreements (the “TSAs”) in bankruptcy and (ii) bind Gulfport to continue performing under the TSAs, even if it rejected them during bankruptcy.  After Gulfport filed for bankruptcy, it asked the Fifth Circuit to vacate FERC’s orders. 

Before getting to the facts of the case, the Fifth Circuit opened its opinion by noting that the Bankruptcy Code “allows debtors to breach and cease performing executory contracts if the bankruptcy court approves.”  41 F.4th at 671.  It then cited Mirant Corp. v. Potomac Electric Power Co. (In re Mirant Corp.), 378 F.3d 511 (5th Cir. 2004), Federal Energy Regulatory Commission v. FirstEnergy Solutions Corp. (In re FirstEnergy Solutions, Corp.), 945 F.3d 431, 446 (6th Cir. 2019), and Federal Energy Regulatory Commission v. Ultra Resources, Inc. (In re Ultra Petroleum Corp.), 28 F.4th 629 (5th Cir. 2022) as cases holding that debtors may reject regulated energy contracts, even if FERC would prefer that they not. 

The Fifth Circuit then noted that there were two federal statutes at issue.  The first was the Bankruptcy Code and its rejection provisions in section 365.  The second was the Natural Gas Act, which regulates firms that move and sell natural gas in interstate commerce.  Under the Natural Gas Act, rates are filed with FERC and any changes must also be approved by FERC.  The Federal Power Act imposes material identical requirements on electric power companies.  Examining a prior clash of these statutes, the Fifth Circuit discussed its holding in Mirant.  Approximately two decades ago, FERC attempted to utilize its rate-setting authority to block a bankrupt power company from rejecting filed-rate contracts.  The Fifth Circuit disagreed, noting that rejection does not change or cancel a contract, but rather constitutes a breach.  Mirant, 378 F.3d at 515, 519.  Thus, it did not implicate FERC’s authority because neither the contract nor the filed rate thereunder were altered.  Id. at 519.  Accordingly, under Mirant, the debtor did not need FERC’s consent to reject its filed-rate contracts and FERC could not negate such a rejection by requiring continued performance.  Id. at 523.  The Fifth Circuit noted that, while, initially, FERC appeared to acknowledge Mirant, more recently, FERC had decided that Mirant did not need to be followed.  FERC’s rulings pressed forward the rationale that was specifically rejected in Mirant, “namely. that rejection ‘modif[ies] or abrogate[s]’ a filed-rate contract.”  Gulfport, 41 F.4th at 673 (quoting ETC Tiger Pipeline, LLC, 171 FERC ¶ 61,248, at ¶ 20, reh’g denied, 172 FERC ¶ 61,155 (2020)).

Turning to the substance of the appeal, the Fifth Circuit first addressed FERC’s position that Gulfport’s petition to review its orders was nonjusticiable and that FERC’s orders were binding on Gulfport.  In discussing its jurisdiction to review FERC’s orders, the court focused on the legal effects of FERC’s orders as a justiciable injury.  “FERC’s orders left no doubt that Gulfport could not reject the TSAs or cease performing them without [FERC’s] approval—no matter what the bankruptcy court decided.”  41 F.4th at 678.  Because FERC orders have legal force and it can enforce its orders with civil penalties, Gulfport had standing to challenge the orders.  Gulfport was thus injured and had standing.  The Fifth Circuit also found that FERC’s order were ripe for review and had not been mooted by Ultra Resources.  Therefore, the court found that Gulfport’s challenge was justiciable over which the Fifth Circuit had jurisdiction.   

The court then turned to the merits of the dispute.  It held, contrary to Gulfport’s argument, that FERC did not abuse its discretion in issuing the orders because it articulated a rational reason for its orders—to remove uncertainty in the event Gulfport filed for bankruptcy.  Accordingly, FERC had authority to issue the orders.  Notwithstanding that determination, the Fifth Circuit held that the orders were unlawful.  “Each rests on the premise that rejecting a filed-rate contract in bankruptcy is something more than a breach of contract.  That premise is wrong, so we must vacate the orders.”  41. F4th at 682.   In so holding, the court rejected the pipeline company’s argument that the Supreme Court’s decision in Mission Products Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019) somehow overruled Mirant and Ultra Resources.  To the contrary, the court noted that Mission Products buttressed those decisions by making clear that rejection cannot be treated as something more than a breach of contract.  Thus, FERC cannot prevent rejection.  It cannot bind a debtor to continue to pay the filed-rate after rejection.  And it cannot usurp the bankruptcy court’s authority to decide the rejection issue.  Accordingly, the petitions for review were granted and the challenged orders were vacated.

Keystone Gas Gathering, L.L.C. v. Ad Hoc Comm. of OPCO Unsecured Creditors (In re Ultra Petroleum Corp.), 51 F.4th 138 (5th Cir. 2022).  In this case, the Fifth Circuit faced the unusual situation of an insolvent debtor regaining solvency (due to soaring natural gas prices) during the course of the bankruptcy case. 

Here, two groups of creditors complained that the plan proposed by the debtor fell short.  They contended that, pursuant to their prepetition Master Note Purchase Agreement (the “MNPA”), they were entitled to a “make-whole amount,” which was a lump-sum calculated to give them the present value of the interest payments they would have received but for the bankruptcy.  They also claimed they were owed postpetition interest at the rates specified under the MNPA and the Revolving Credit Facility (the “RCF”), respectively, which were both materially higher than the federal judgment rate provided under the plan.  The creditors thus objected to their classification as “unimpaired” under the plan.  Initially, the bankruptcy court held that the creditors were impaired unless they were paid the full amount permitted under applicable non-bankruptcy law.  The debtors appealed and, in 2019, the Fifth Circuit reversed the bankruptcy court, holding that “[w]here a plan refuses to pay funds disallowed by the Code, the Code—not the plan—is doing the impairing.”  Keystone Gas Gathering L.L.C. v. Ad Hoc Comm. of Unsecured Creditors of Ultra Res., Inc. (In re Ultra Petroleum Corp.), 943 F.3d 758, 765 (5th Cir. 2019).  The Fifth Circuit remanded the case to the bankruptcy court to determine whether the creditors’ disputed claims were indeed disallowed under the Bankruptcy Code.  Id. at 765-66.  On remand, the bankruptcy court held that the Code did not bar either the make-whole amount or postpetition interest (for a solvent debtor), and thus the creditors were entitled to the those amounts under the plan.  In re Ultra Petroleum Corp., 624 B.R. 178, 191-204 (Bankr. S.D. Tex. 2020).  The debtors appealed a second time.

The Fifth Circuit first began by questioning whether the make-whole amount constituted unmatured interest, disallowed under section 502(b)(2) of the Code.  The court concluded that it does.  It then addressed the question of whether the “solvent-debtor exception” survived the enactment of the Code in 1978 and still applies to suspend the Code’s disallowance of unmatured interest in the event the debtor proves solvent.  The court held that the exception did, indeed, survive intact.  The court’s decision was buttressed by its historical analysis.  It noted that, “For some three centuries of bankruptcy law, courts have held that an equitable exception to the usual rules applies in an unusual case of a solvent debtor.”  51 F.4th at 150.  That is, bankruptcy’s ordinary suspension of post-petition interest is itself suspended when the debtor is solvent, the legitimate bankruptcy interest of equitably distributing a limited pie no longer being viable.  The debtors responded by noting that section 502(b)(2) does not distinguish between solvent and insolvent debtors.  And the debtors cited to a number of bankruptcy court opinions and circuit court cases from the First and Seventh Circuits for the proposition that section 502(b)(2) applies regardless of solvency.  Citing Supreme Court precedent, the court held it must defer to prior bankruptcy practice unless expressly abrogated by the Code.  “The Court has endorsed a substantive cannon of interpretation regarding the Bankruptcy Code vis-à-vis preexisting bankruptcy doctrine.  Namely, abrogation of a prior bankruptcy practice generally requires an ‘unmistakably clear’ statement on the part Congress; any ambiguity will be construed in favor prior practice.”  Id. at 153-54.  The provisions of the Code simply did not clear this high hurdle.  Accordingly, the solvent-debtor exception applied and the debtors were required to pay the make-whole amount.  The debtors then argued that otherwise applicable non-bankruptcy law would prohibit enforcement of the make-whole amount as a penalty.  The court concluded, however, that the provision was enforceable under New York law, which was applicable.

Finally, turning to the question of the applicable postpetition interest rate, the Fifth Circuit was required to decide whether the federal rate specified under 28 U.S.C. § 1961(a) or the higher contractual default rate applied.  The court concluded that the cram-down provisions of the Code did not preclude unimpaired creditors from receiving default rate postpetition interest in excess of the federal judgment rate.  It concluded that the statute’s reference to the legal rate merely set a floor, but that equity allows for the parties’ contractual rate in the solvent debtor context.

NexPoint Advisors, L.P. v. Highland Cap. Mgmt., L.P. (In re Highland Cap. Mgmt., L.P.), 48 F.4th 419 (5th Cir. 2022).  The Fifth Circuit reaffirmed its narrow interpretation of the doctrine of equitable mootness, reversing the bankruptcy court’s approval of an exculpation clause contained in the debtor’s plan to the extent it pertained to non-debtors, notwithstanding that the plan had been substantially consummated. 

Highland Capital Management, LP managed billion-dollar, publicly-traded investment portfolios for almost three decades.  However, in 2019, unpaid judgments and liabilities forced Highland Capital to seek chapter 11 bankruptcy protection.  A “nasty breakup” between Highland Capital and its co-founder ensued.  The bankruptcy court was able to mediate with the largest creditors and ultimately confirm a plan of reorganization amenable to most.  But objecting creditors filed over a dozen objections to the plan.  Certain parties, including the co-founder and the United States Trustee, objected to the plan’s exculpation of certain non-debtors as unlawful.  Given the co-founder’s “continued litigiousness,” the plan purported to shield Highland Capital and various bankruptcy participants from lawsuits through an exculpation provision, which was to be enforced by an injunction and a gatekeeper provision (collectively, the “Protection Provisions”).  Among other things, the Protective Provisions essentially excluded the protected parties, which encompassed nearly all bankruptcy participants, from any claims based on conduct in connection with the case or the plan; barred anyone from interfering with the implementation or consummation of the plan; and required anyone intending to pursue a claim against a protected party to first seek a bankruptcy court determination that the claim was colorable.  The bankruptcy court approved the plan as proposed. After confirmation and the occurrence of several conditions precedent, the plan took effect.  The co-founder and other objecting parties timely appealed directly to the Fifth Circuit. 

Highland Capital moved to dismiss the appeal as equitably moot, as the plan had been substantially consummated.  The Fifth Circuit disagreed and denied the motion.  The court noted that, in the Fifth Circuit, equitable mootness is to be applied on a claim-by-claim basis, instead of appeal-by-appeal basis.  Although no stay had been issued and it was undisputed that the plan had been substantially consummated, the court held that those factors alone were not sufficient to trigger equitable mootness.  Instead, the court would consider whether it could craft relief for each claim that would not have significant adverse consequences to the reorganization.  After first dispatching with Highland Capital’s argument that the court could not afford the appellants any relief without unravelling the entire plan, the court addressed the two claims for which Highland Capital had articulated a basis for equitable mootness:  the challenges to the Protection Provisions and a challenge that the plan violated the absolute priority rule (which the court noted was “nearly forfeited for inadequate brief”).  The court concluded that neither provided a basis for equitable mootness.  With regard to the Protection Provisions, Highland Capital argued that, without them, its officers, employees, trustees, and oversight board members would all resign rather than be exposed to the co-founder’s litigation.  The court rejected this argument, stating that “the goal of finality sought in equitable mootness analysis does not outweigh a court’s duty to protect the integrity of the process.”  48 F.4th at 431 (quoting In re Pac. Lumber Co., 584 F.3d 229, 252 (5th Cir. 2009)).  Because “the legality of a reorganization plan’s non-consensual non-debtor release is consequential to the Chapter 11 process,” it “should not escape appellate review in the name of equity.”  Id. at 431-32 (citing Pac. Lumber, 584 F.3d at 252).  As for the absolute-priority-rule challenge, the debtor failed to identify a single case in which the Fifth Circuit had declined to review treatment of a class of creditors plan’s resulting from a cramdown.  There was no evidence that junior classes had received any distributions.  The relief requested would, thus, not affect third parties and, therefore, the appeal was not equitably moot. 

Turning to the merits of the appeal, the Fifth Circuit noted that the appellants “fire[d] a bankruptcy-law blunderbuss.”  Id. at 432.  The court affirmed the bankruptcy court on the merits as to Appellants’ challenges to the plan’s classification, compliance with the absolute priority rule, compliance with Bankruptcy Rule 2015.3, and sufficiency of the evidence.  But the Fifth Circuit reversed the bankruptcy court with respect to Appellants’ challenge of the exculpation of certain non-debtors, which the court held exceeded the statutory authority granted by section 524(e) of the Bankruptcy Code.  Section 524(e) of the Code provides that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any entity for such debt” in a chapter 11 proceeding.  11 U.S.C. § 524(e).  The court found that the exculpation ran afoul of that statutory bar by extending the exculpation beyond the debtor, the unsecured creditors committee, and the independent directors.  Accordingly, it reversed and struck the unlawful parts. 

The court recognized the existence of a circuit split concerning the reach of section 524(e).  The Fifth Circuit and the Tenth Circuit hold that the Code “categorically bars third-party exculpations absent express authority in another provision of the Bankruptcy Code.”  Id. at 436 (collecting cases).  But the Second, Third, Fourth, Sixth, Seventh, Ninth, and Eleventh Circuits allow—to varying degrees—limited third-party exculpations.  Id. (collecting cases).  The panel was bound to apply Fifth Circuit precedent established in Pacific Lumber, which only identified two bases to exculpate non-debtors: (i) section 524(g), regarding asbestos injunctions, and (ii) section 1103(c), providing limited qualified immunity to creditors’ committee members for actions within the scope of their statutory duties.  The court noted that the Fifth Circuit had also recognized a limited qualified immunity for bankruptcy trustees unless they act with gross negligence.  Highland Capital failed to identify any other sources, so the court could not find a basis for the full extent of the exculpations provided for under the approved plan.  As a result, the Fifth Circuit struck the non-debtor exculpations for all non-debtors other than the members of the unsecured creditors’ committee and the independent directors (who were entitled to all the rights and powers of a trustee under section 1107(a), and therefore entitled to exculpation).   

Notwithstanding the unlawful exculpation provisions, the court found that the injunction and gatekeeper provisions were perfectly lawful.  The plan was sufficiently specific as to what would constitute interference with the implementation and consummation of the plan such that the injunction was neither overbroad nor vague.  With regard to the gatekeeping function, the Fifth Circuit found that bankruptcy courts customarily performed that function.  However, the court noted that the bankruptcy courts would have to determine whether they had subject-matter jurisdiction to pre-approve such claims.  Accordingly, the court left the gatekeeping provision intact.

§ 1.7. Sixth Circuit

I.R.S. v. Juntoff (In re Juntoff), 636 B.R. 612 (B.A.P. 6th Cir. 2022).  In a 2-1 decision, the Bankruptcy Appellate Panel for the Sixth Circuit joined the Fifth Circuit to hold that the “shared-responsibility payment” (the “SRP”) assessed under the Affordable Care Act (the “ACA”) for failure to purchase health insurance was a “tax . . . measured by income or gross receipts” within the meaning of section 507(a)(8)(A).  Accordingly, claims by the IRS against individual debtors for amounts due for SRP-related liabilities were properly entitled to priority treatment.   

The ACA requires non-exempt individuals either to maintain a minimum level of health insurance or to pay a penalty.  26 U.S.C. § 5000A.  For the tax years 2017 and 2018, the ACA provided that those individuals who did not maintain a “minimum level of health insurance” would have to make a SRP with their annual federal tax payment.  26 U.S.C. § 5000A(b)(1).  The SRP amount was the greater of a flat amount or 2.5% of a taxpayer’s taxable income.  26 U.S.C. § 5000A(c)(2)(A), (B)(iii).  The debtors in these consolidated appeals neither maintained the required health insurance minimums nor paid the assessed SRP in 2017 and 2018, respectively.  When the debtors subsequently commenced proceedings under chapter 13 of the Bankruptcy Code, the IRS filed proofs of claims against the debtors for their respective unpaid SRPs and asserted that its claims were entitled to priority treatment under section 507(a)(8).  The debtors each objected, asserting that the SRP liability was not entitled to priority treatment.  The bankruptcy court agreed, issuing a consolidated memorandum opinion sustaining the debtors’ objections.  This appeal followed. 

The majority first addressed the preliminary question of whether the SRP was a tax—eligible for priority treatment under the Bankruptcy Code—or an ineligible penalty, which question the bankruptcy court had failed to address.  The IRS argued that the Supreme Court’s decision in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012) that the SRP was a tax was determinative.  The debtors argued that, to the contrary, Sebelius was not binding as to the question of whether the SRP is a tax for the purposes of the Bankruptcy Code’s priority scheme.  The majority found that Sebelius was not dispositive because the opinion differentiated its treatment of the SRP as a tax versus a penalty depending on the purpose for which it was reviewed.  For instance, when considering whether the Anti-Injunction Act barred review of the SRP because it was a tax, the Court concluded that the SRP was a penalty, and therefore not beyond the Court’s review.  But when considering whether the SRP was constitutional, the Court deemed the SRP a tax and examined whether it was a valid exercise of Congress’ taxing power.  Accordingly, the majority considered the context in which the SRP was being reviewed significant.  Since Sebelius did not address the SRP in the context of the Bankruptcy Code’s priority scheme, it was not binding precedent.   

The majority then looked to Sixth Circuit precedent to examine whether the SRP was a “tax” or a “penalty.”  The parties agreed that the SRP satisfied all but one of the six factors laid out in the Sixth Circuit’s “functional examination” framework:  whether the SRP was a pecuniary obligation universally applicable to similarly situated entities.  The debtors asserted that the SRP was not universally applicable (and therefore not a tax) based on the discretion afforded to the Secretary of Health and Human Services to grant hardship exemptions from the SRP.  The majority held that universal applicability is determined at the point at which the exaction is levied, and does not take into account whether an exemption might apply.  As such, the SRP was universally applicable and constituted a “tax” under governing Sixth Circuit caselaw.

Finally, the majority considered whether the SRP was a “tax . . . measured by income or gross receipts” within the meaning of section 507(a)(8)(A).  The bankruptcy court had concluded that the SRP was not measured by income because of the availability of a flat rate.  Because income did not factor into every taxpayer’s assessment, the bankruptcy court held that the SRP was outside of the scope of section 507(a)(8)(A).  The majority disagreed, holding that the SRP was “measured by” income because the SRP was determined by reference to income, even if it was just one of several factors.  Accordingly, the majority reversed, and found that the SRP was entitled to priority under section 507(a)(8)(A).

The dissent, however, was not persuaded that the SRP constituted a tax.  Among its considerations, the dissent posited that construing the SRP as a tax defeated fundamental bankruptcy policies by affording the IRS a higher priority than other creditors.  The dissent also argued that the SRP could only be framed as a tax because of its placement within the Internal Revenue Code, which was insufficient to justify priority treatment under the Bankruptcy Code.  And finally, the dissent disagreed with the majority’s application of the “functional examination.”  The dissent was persuaded that the SRP was not “universally applicable” because it only applied to individuals who did not maintain a minimum level of health insurance.  While the individual insurance mandate was universally applicable, the dissent noted, the SRP was not, and could be avoided by simply complying with the individual mandate.

§ 1.8. Seventh Circuit

Archer-Daniels-Midland Co. v. Country Visions Coop., 29 F.4th 956 (7th Cir. 2022).  The Seventh Circuit found that a purchaser’s failure to ensure that a known creditor had notice of a bankruptcy sale affecting the creditor’s rights constituted bad faith, which negated the purchaser’s entitlement to section 363(m) protection.

In 2007, Olsen Brothers Enterprises granted a right of first refusal (the “ROFR”) on a parcel of land (the “Parcel”) to Country Visions Cooperative (“Country Visions”).  Soon after, Olsen Brothers dissolved and distributed its assets to its partners; Country Vision’s ROFR survived the dissolution.  Three years later, the former partners of Olsen Brothers filed for bankruptcy. They did not provide any form of notice to Country Visions and did not inform the bankruptcy judge about the ROFR.  In 2011, the bankruptcy court approved the debtors’ plan, pursuant to which the Parcel was sold, free and clear of all other interests, to Archer-Daniels-Midland (“ADM”).  Country Visions did not receive an opportunity to match ADM’s offer.

In 2015, ADM arranged to resell the Parcel, again without first offering it to Country Visions.  Country Visions sued ADM in Wisconsin state court for, alleging that the sale violated its ROFR.  In response, ADM moved the bankruptcy court to enjoin Country Visions’ suit in state court, arguing that, because the sale was free and clear, ADM was protected as a good faith purchaser pursuant to section 363(m) of the Bankruptcy Code.  The bankruptcy court declined to grant ADM’s motion, instead finding that ADM knew of Country Visions’ ROFR and failed to raise it with the bankruptcy court at the time of the 2011 sale.  The bankruptcy concluded that such actions did not comport with those of a good faith purchaser, and so ADM was not entitled to section 363(m) protection.  The district court affirmed.

On appeal, the Seventh Circuit affirmed the rulings of the lower courts.  In so doing, the court bypassed the due process issues revolving around notice to Country Visions, holding that the statutory question mooted the constitutional issue.  The court noted that it could only reach the due process question if ADM could demonstrate that it was a good faith purchaser entitled to section 363(m) protection.  On the question of good faith, the court agreed with the lower courts that “someone who has both actual and constructive knowledge of a competing interest, yet permits the sale to proceed without seeking the judge’s assurance that the competing interest-holder may be excluded from the proceedings, is not acting in good faith.”  Id. at 959.  Therefore, the court found that ADM was not protected by section 363(m) and would have to defend Country Visions’ state court suit.

Sheehan v. Breccia Unlimited Co. (In re Sheehan), 48 F.4th 513 (7th Cir. 2022).  This holding from the Seventh Circuit notes a significant limitation on the ability of bankruptcy courts to enforce the automatic stay.  Although bankruptcy courts are afforded in rem jurisdiction over all property in a debtor’s estate—“wherever located,” 28 U.S.C. § 1334(e)(1); see also 11 U.S.C. § 541(a)—the bankruptcy courts cannot enforce such jurisdiction if they do not have personal jurisdiction over the party holding the property. 

In this case, an Irish national living in Illinois sought protection under chapter 11 of the Bankruptcy Code in an attempt to prevent an Irish receiver from foreclosing on and selling certain property that the debtor had, located in Ireland.  Shortly after commencing the bankruptcy proceedings, the debtor brought an adversary proceeding seeking to enforce the automatic stay against not only the receiver, but also the foreclosing creditor, the receiver’s employer, and the potential purchaser of certain of the foreclosed property, all of whom were Irish.  All defendants moved to dismiss for lack of personal jurisdiction and insufficient service of process.  In response to the motions to dismiss, the debtor requested discovery relating to testimony in declarations submitted in support of the motion to dismiss.  The bankruptcy court for the Northern District of Illinois granted the motions to dismiss for lack of personal jurisdiction and lack of sufficient service, but did not specifically address the debtor’s request for discovery.  The district court affirmed, noting that the bankruptcy court had not abused its discretion in denying the debtor’s discovery requests sub silentio.  The debtor then appealed to the Seventh Circuit.

The Seventh Circuit affirmed the lower courts’ rulings.  On appeal, the debtor had argued that, due to the bankruptcy court’s in rem jurisdiction over the subject property, the property was legally located in Illinois (notwithstanding its actual location in Ireland).  As a result, so the argument went, the defendants’ actions to seize and sell the property must have also occurred in Illinois, thereby constituting minimum contacts with the forum.  The Seventh Circuit held that the debtor could not “bootstrap” personal jurisdiction in such a circular manner.   

The circuit court then proceeded to examine whether the bankruptcy court had specific personal jurisdiction, in accordance with precedent established by the Supreme Court and the Seventh Circuit.  Here, the Irish defendants had litigated the foreclosure in Irish courts and the property had already been placed into a receivership for liquidation in Ireland.  The fact that the actions taken in Ireland had affected the debtor in Illinois was insufficient to confer personal jurisdiction, where the defendants had not intentionally “taken aim” at Illinois in its actions. 

The circuit court also affirmed the lower courts’ denial of the debtor’s request for discovery, likening the request to a fishing expedition.

§ 1.9. Eighth Circuit

Kelley. v. Safe Harbor Managed Account 101, Ltd., 31 F.4th 1058 (8th Cir. 2022).  In a recent examination of the section 546(e) safe harbor provision, the Eighth Circuit followed the Second Circuit in holding that a customer of a financial institution can qualify as a financial institution for the purpose of excluding a transfer from avoidance.  The Circuit Court upheld the district court’s determination that the initial transferee constituted a financial institution by virtue of its customer status notwithstanding a lack of clarity as to the transfer in which the initial transferee was functioning as customer.  This interpretation potentially expands the section 546(e) safe harbor to encompass any transaction involving the customer of a commercial or savings bank when the bank is acting as agent or custodian for the customer in connection with a securities contract. 

The underlying avoidance action arises from the liquidation of the Petters Company, Inc. (“PCI”) and its affiliates, after the Ponzi scheme perpetrated by Thomas Petters was uncovered in September 2008.  The plaintiff, the trustee of the Petters Company, Inc. Liquidating Trust, filed hundreds of lawsuits seeking to recover payments made by the companies to early investors, including an avoidance action against the initial transferee, a feeder fund named Arrowhead Capital Partners II, L.P. (“Arrowhead”).  The scheme, insofar as Arrowhead was involved, was structured as follows:  (i) on July 18, 2011, a special purpose subsidiary of PCI entered into a Credit Agreement with a special purpose subsidiary of Arrowhead; and (ii) on the same day, Arrowhead entered into a Note Purchase Agreement with its SPE to purchase the notes evidencing the loans under the Credit Agreement.  Investors would invest in Arrowhead by putting money into a “custodial” account at Wells Fargo Bank in Arrowhead’s name.  Arrowhead would then use the funds to buy the PCI notes from its own SPE.  When the PCI entity made payments on the notes, Arrowhead would flow the funds back its investors.  After obtaining a default judgment against Arrowhead in the amount of $942 million, the trustee sought to avoid a $6.9 million payment that Arrowhead had passed along to one of its investors, Safe Harbor Managed Account 101, Ltd. (“Safe Harbor”).  In 2002, Safe Harbor had entered into a Limited Partnership Agreement and Subscription Agreement with Arrowhead, investing a total of $6 million.  In 2003, Safe Harbor redeemed its investment for a total of $6.9 million. 

After the bankruptcy court ruled that section 546(e) did not immunize Safe Harbor from the trustee’s avoidance action on a motion to dismiss, the case was subsequently sent to the district court for a jury trial.  There, Safe Harbor sought summary judgment, again on the grounds that section 546(e) immunized the transfers from PCI to Arrowhead.  Section 546(e) provides that “the trustee may not avoid a transfer . . . that is a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract, as defined in section 741(7), . . . that is made before the commencement of the case. . . .”  11 U.S.C. § 546(e).  In other words, in order to be exempt from avoidance, a transaction must involve a transfer (i) by, to, or for the benefit of a “financial institution,” and (ii) that is made “in connection with a securities contract.”  The district court granted summary judgment, finding that section 546(e) applied to the initial transfer as between PCI and Arrowhead (and therefore excluded the subsequent transfer from Arrowhead to Safe Harbor) because (i) Arrowhead was a “financial institution,” (ii) the Note Purchase Agreement was a “securities contract,” and (iii) the transfers were made “in connection with” the Note Purchase Agreement.  On appeal, the trustee argued that the district court erred in finding that Arrowhead was a financial institution and that the Note Purchase Agreement was a securities contract.

First, the court examined whether Arrowhead qualified as a “financial institution.”  The Bankruptcy Code defines “financial institution” as including the customer of “an entity that is a commercial or savings bank” when that “entity is acting as agent or custodian for [the] customer . . . in connection with a securities contract (as defined in section 741).”  11 U.S.C. § 101(22)(A).  The parties did not dispute that Wells Fargo is commercial bank or that Arrowhead was its customer, but did dispute whether Wells Fargo was acting as Arrowhead’s custodian.  The trustee attempted to argue that the Supreme Court’s holding in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) was controlling, rather than the Second Circuit’s later decision in Deutsche Bank Trust Co. Americas v. Large Private Beneficial Owners (In re Tribune Co. Fraudulent Conveyance Litigation), 946 F.3d 66 (2d Cir. 2019).  Merit provided that “the relevant transfer for purposes of the § 546(e) safe-harbor inquiry is the overarching transfer that the trustee seeks to avoid under one of the substantive avoidance provisions,” id. at 893, but left open the question of whether a party to the overarching transfer may qualify “as a ‘financial institution’ by virtue of its status as a ‘customer’ under § 101(22)(A),” id. at 890 n.2.  In Tribune, the Second Circuit held that a party to the transaction could qualify as a “financial institution” by virtue of its “customer” status, and therefore fall within the section 546(e) safe harbor.  946 F.3d at 80-81.  The Eighth Circuit found no error in the district court’s reliance on the precedent established in Tribune, and agreed that Arrowhead qualified as a “financial institution” by virtue of its status as a customer of Wells Fargo.  The court also dismissed the trustee’s arguments that Wells Fargo only functioned as a custodian on behalf of Arrowhead with respect to the transfers between Arrowhead and its investors (as opposed to the transfers between Arrowhead and PCI subject to avoidance), because the trustee failed to articulate why the distinction mattered. 

The court next examined whether the transfers were made “in connection with a securities contract, as defined in section 741(7).”  Section 741(7) defines “securities contract” to include “a contract for the purchase, sale, or loan of a security. . . .”  11 U.S.C. § 741(7)(A)(i).  The Bankruptcy Code definition of a “security” encompasses a note.  See 11 U.S.C. § 101(49)(A)(i).  The district court held, and the Eighth Circuit affirmed, that the Note Purchase Agreement fell squarely within the definition of a securities contract.  However, when considering whether the subject transfers were made “in connection with” the Note Purchase Agreement, the Eighth Circuit remanded the matter back to the district court for further factual findings.

Lariat Co. v. Wigley (In re Wigley), 15 F. 4th 1208 (8th Cir. 2021).  The Eighth Circuit held that the cap on landlord claims found in section 502(a)(6) of the Bankruptcy Code does not preclude a finding of nondischargeability due to actual fraud under section 523(a)(2)(A).

Landlord Lariat Companies, Inc. was awarded more than $2 million in damages after suing Michael Wigley in state court for past due and future accruing rent resulting from a restaurant lease termination, which Mr. Wigley had personally guaranteed.  But while the state court action had been pending, Mr. Wigley transferred certain assets to his wife, Barbara Wigley.  Lariat then sued Mrs. Wigley (and later joined Mr. Wigley) in state court under the Minnesota Uniform Fraudulent Transfer Act, seeking to avoid the transfers between husband and wife.  The state court entered judgment in favor of the landlord, holding Mr. and Mrs. Wigley jointly and severally liable for more than $780,000.  Mr. Wigley thereafter filed for chapter 11 bankruptcy and Lariat filed a claim, which the bankruptcy court capped pursuant to section 502(a)(6), to the extent the claim involved the restaurant lease termination.  After Mr. Wigley satisfied the capped claim of approximately $637,000, Mrs. Wigley moved to vacate the fraudulent transfer judgment against her, which the state court denied.  Mrs. Wigley then filed for bankruptcy and Lariat filed a claim for more than $1 million, representing the fraudulent transfer judgment plus accrued interest, to which Mrs. Wigley objected.  The bankruptcy court determined that Lariat’s discharged claim in Mr. Wigley’s bankruptcy case did not extinguish Mrs. Wigley’s liability to Lariat, but also held that, because Lariat’s claim in Mrs. Wigley’s proceeding arose from a lease termination, the landlord cap under section 502(a)(6) should apply.  Lariat’s claim against Mrs. Wigley was allowed in the amount of approximately $331,000, which Mrs. Wigley satisfied.  While Mrs. Wigley’s objection to Lariat’s claim was pending, however, Lariat filed a complaint in the bankruptcy court seeking to except its claim from discharge pursuant to section 523(a)(2)(A) because the debt was obtained by “actual fraud.”  The bankruptcy court entered judgment in favor of Lariat after a two-day trial.  The bankruptcy appellate panel affirmed, and Mrs. Wigley appealed.

On appeal before the Eighth Circuit, Mrs. Wigley contended that the bankruptcy court incorrectly excepted Lariat’s claim from discharge because doing so invalidated any relief that she had been granted by the landlord-cap and undermined the purpose of section 502(b)(6).  The circuit court disagreed, holding that the application of section 502(b)(6) and the subsequent satisfaction of the allowed section 502(b)(6) claim did not preclude the balance of the fraudulent transfer claim from being excepted from discharge pursuant to section 523(a)(2)(A). 

Mrs. Wigley also argued on appeal that the bankruptcy court erred in concluding that she committed “actual fraud.”  The Eighth Circuit found that the bankruptcy court did not clearly err in finding that Mrs. Wigley had received a fraudulent transfer from Mr. Wigley and that the record supported the bankruptcy court’s finding that Mrs. Wigley participated with the requisite wrongful intent.  Specifically, the Eighth Circuit noted that Mrs. Wigley wrongful intent was established by evidence showing, among other things, that the family was in financial distress at the time of the transfer, that the Wigleys “regularly discussed their financial situation and reviewed their accounts together,” and that Mrs. Wigley was aware that Mr. Wigley had been sued.

§ 1.10. Ninth Circuit

Ad Hoc Comm. of Holders of Trade Claims v. Pac. Gas & Elec. Co. (In re PG&E Corp.), 46 F.4th 1047 (9th Cir. 2022).  In a 2-1 decision, the Ninth Circuit became the first circuit to address the question of what postpetition interest rate a solvent debtor must pay creditors whose claims are designated as unimpaired pursuant to section 1124(1) of the Bankruptcy Code, overturning both the bankruptcy and district courts.  Prior to this decision, bankruptcy courts were split as to whether the federal judgment rate or the contractual rate should apply.  Compare In re Ultra Petroleum Corp., 624 B.R. 178, 203-04 (Bankr. S.D. Tex. 2020) (holding that unimpaired creditors must receive postpetition interest at the contract rate), with In re Hertz Corp., 637 B.R. 781, 800-01 (Bankr. D. Del. 2021) (holding that unimpaired creditors are entitled to receive interest at the federal judgment rate).  

PG&E filed its chapter 11 petition in January 2019 to help address its potential liabilities stemming from a series of wildfires that occurred from 2015-2018.  At the time of its filing, PG&E was solvent, reporting $71.4 billion in assets and $51.7 billion in known liabilities.  Due to its solvency, PG&E proposed in its chapter 11 plan to pay non-wildfire-related trade claims in full, and to pay postpetition interest at the federal judgment rate of 2.59 percent, accruing from the date of PG&E’s bankruptcy filing through the date of distribution.  Based on this treatment, PG&E categorized such claims “unimpaired,” pursuant to section 1124, with the result that holders of such claims were not entitled to vote on the plan (see 11 U.S.C. § 1126(f) (providing that a class that is not impaired is “conclusively presumed to have accepted the plan”)) nor entitle to the benefits of the “best interests” test under section 1129(a)(7) (see id. § 1129(a)(7) (applying only to “each impaired class of claims or interests”)).  The plaintiffs objected to the proposed treatment, arguing that, because PG&E was solvent, they were required to receive postpetition interest at the contractual or default state law rates to be considered unimpaired.  The bankruptcy court disagreed, finding that it was bound by the Ninth Circuit’s decision in Onink v. Cardelucci (In re Cardelucci), 285 F.3d 1231 (9th Cir. 2002), which entitled all unsecured creditors of a solvent-debtor only to postpetition interest at the federal judgment rate.  The bankruptcy court further held, in the alternative, that if Cardelucci did not control, the Bankruptcy Code limited unsecured creditors of a solvent debtor to postpetition interest at the federal interest rate.  The district court affirmed, on the grounds that Cardelucci controlled.

The majority reversed both the bankruptcy court and the district court.  After first considering the origins of the so-called “solvent debtor” exception and the nature of impairment, as defined under the Bankruptcy Code, the majority turned to the application of Cardelucci, as the primary support on which the lower court decisions were based.  The majority clarified that Cardelucci only held that the phrase “interest at the legal rate,” as used in section 726(a)(5) referred to the federal judgment rate as defined by 28 U.S.C. § 1961(a).  Because section 726(a)(5) is only applicable in chapter 11 vis-à-vis the best interests test, which itself is only applicable to impaired claims, the majority concluded that Cardelucci did not dictate the postpetition interest rate applicable to unimpaired claims. 

The majority then addressed the bankruptcy court’s alternative holding that the plaintiffs’ claims were still unimpaired, despite only receiving postpetition interest at the federal judgment rate, because the plaintiffs had received what they were entitled to under the Code—that is to say, all “legal, equitable, and contractual rights” related to their claims.  In the majority’s view, the only way in which to arrive at such a conclusion was by determining that the Bankruptcy Code had displaced the solvent debtor exception, which, by its terms, requires application of the contractual or state law rate for postpetition interest.  After finding that neither section 502(b)(2) nor section 726(a)(5) unambiguously abrogated the plaintiffs’ entitlement to their equitable right in postpetition interest, the majority then turned to the statutory history of section 1124.  Section 1124(3) provided that a creditor was unimpaired if it was paid “the allowed amount of [its] claim.”  After the court in In re New Valley Corp., 168 B.R. 73, 79-80 (Bankr. D.N.J. 1994) held that a creditor was unimpaired under section 1124(3) if it received the full principal of its claim—without any postpetition interest, the provision was repealed to prevent New Valley’s “unfair result” from happening again.  See H.R. Rep. No. 103-835, § 214 at 48 (1994).  The majority interpreted this Congressional action to confirm its finding that creditors of a solvent debtor who are impaired must receive postpetition interest on their claim and remanded the matter back to the bankruptcy court for a determination on the equitable rates that should apply.

In contrast, the dissent, written by Circuit Judge Ikuta, argued that an unimpaired creditor of a solvent debtor is not entitled to any postpetition interest, essentially abandoning the solvent debtor exception.  The dissent premised its position on section 502(b)(2) of the Code, which provides that claims for “unmatured interest” are not allowed.  11 U.S.C. § 502(b)(2).  Such a provision, the dissent position, was a clear abrogation of the solvent debtor exception.  Furthermore, the dissent rejected the majority’s position that section 502(b)(2) prohibited including unmatured interest as part of a claim, but permitted earning postpetition interest on a claim.  As such, the failure to include postpetition interest on a claim against a solvent debtor could not render that claim impaired.

Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733 (9th Cir. 2022).  The Ninth Circuit held that global-warming-related state tort claims asserted by government municipalities against energy companies as producers and promoters of fossil fuels did not have a sufficiently close nexus to the energy companies’ bankruptcy cases such that they were “related to” those companies’ bankruptcies, as required for removal of claims to federal court pursuant to 28 U.S.C. § 1452(a).

In July 2017, several California municipalities brought state-court actions against more than thirty energy companies for public and private nuisance, strict liability for failure to warn, strict liability for design defect, negligence, negligent failure to warn, and trespass related to the companies’ production and promotion of fossil fuels and their impact on global warming and rising sea levels.  The energy companies removed the actions to federal court, asserting multiple bases for subject-matter jurisdiction, including but not limited to, jurisdiction pursuant to 28 U.S.C. § 1452(a) due to the fact that the claims were “related to” bankruptcy cases.  The district court rejected all of the energy companies’ grounds for removal, including “related to” bankruptcy jurisdiction, but stayed its remand orders to allow the companies to appeal.  The Ninth Circuit affirmed the district court’s determination only as to federal-officer removal, holding that it did not appellate jurisdiction to review the district court’s order as to the other basis for removal under 28 U.S.C. § 1447(d).  The energy companies then appealed to the Supreme Court.  While their petition for certiorari was pending, the Supreme Court decided BP p.l.c. v. Mayor & City Council of Baltimore, 141 S. Ct. 1532 (2021), which interpreted section 1447(d) as permitting appellate review of all grounds for removal.  The Supreme Court then granted the petition for writ of certiorari in this case, vacated the Ninth Circuit’s prior decision, and remanded for further proceedings in light of Baltimore.

After reviewing the district court’s remand order a second time—this time considering all bases for removal articulated by the energy companies–the Ninth Circuit again affirmed the district court’s remand order, finding that the energy companies had failed to adequately articulate any basis upon which the district court could find subject-matter jurisdiction to remove the cases, including “related to” bankruptcy jurisdiction. 

In its holding related to bankruptcy jurisdiction, the Ninth Circuit relied heavily on its own precedent regarding “related to” bankruptcy jurisdiction under 28 U.S.C. § 1334(b).  First, the circuit court noted that, in the Ninth Circuit, the determination of what “related to” means, as used in section 1334(b), depends on whether a plan has been confirmed by the bankruptcy court.  If a plan has not been confirmed, “related to” is interpreted broadly, and any proceeding that “could conceivably have an effect” on the bankruptcy estate, In re Fietz, 852 F.2d 455, 457 (9th Cir. 1988), will fall within the district court’s jurisdiction.  But after plan confirmation, a proceeding is “related to” a bankruptcy case only if there is a “close nexus to the bankruptcy plan or proceeding.”  In re Pegasus Gold Corp., 394 F.3d 1189, 1194 (9th Cir. 2005).   

The energy companies based their claims for bankruptcy removal jurisdiction on the bankruptcy proceedings of defendants Peabody Energy Corp. and Texaco, Inc.  Because both defendants had plans confirmed before the commencement of the municipalities’ suits, the Ninth Circuit required a showing of a “close nexus” to the bankruptcy plans of each of Peabody and Texaco to ground removal jurisdiction.  The energy companies argued that the plans of both were implicated to determine whether the municipalities’ claims were barred.  In particular, with respect to Peabody’s plan, the energy companies argued that a bankruptcy court had previously interpreted Peabody’s plan to determine whether the municipalities’ claims could be prosecuted against Peabody.  The Ninth Circuit determined that merely reading the plans to determine whether the plans barred certain claims was not sufficient to create a “close nexus” that conferred “related to” jurisdiction on the district court.  Accordingly, the Ninth Circuit affirmed the district court’s remand order as it pertained to bankruptcy removal jurisdiction under 28 U.S.C. § 1452(a).

Harrington v. Mayer (In re Mayer), 28 F. 4th 67 (9th Cir. 2022).  Answering a question left open by the Supreme Court in Ritzen Group, Inc. v. Jason Masonry, LLC, 140 S. Ct. 582 (2020), the Ninth Circuit reversed the district court to hold that an order denying stay relief—without prejudice—was final and appealable where it conclusively resolved the request for stay relief. 

After a dispute arose between two real estate business partners, Harrington and Mayer, litigation ensued in Massachusetts state court.  Shortly before the scheduled jury trial, Mayer filed a petition for relief under chapter 7 of the Bankruptcy Code in the Southern District of California.  As a result, the Massachusetts court placed the state court action on inactive status.  Harrington filed a complaint in the bankruptcy court, seeking a determination that his claims against Mayer were nondischargeable.  The complaint largely reiterated Harrington’s allegations contained in the Massachusetts state court actions.  In addition, Harrington filed a proof of claim against Mayer, seeking over $2 million in damages, based on the same Massachusetts state law claims.  Harrington subsequently filed a motion for relief from the automatic stay to allow the Massachusetts suit to proceed to trial.  The bankruptcy court denied Harrington’s lift stay motion without prejudice.  Harrington filed a motion for leave to appeal, but the district court denied the motion on the grounds that (i) the bankruptcy court’s denial of the motion for relief from the stay was without prejudice, and (ii) Harrington had failed to establish his entitlement to an interlocutory appeal.  Harrington appealed, arguing that the bankruptcy court’s order denying stay relief was a final order and was immediately appealable as an abuse of discretion.   

Relying on Ritzen, the Ninth Circuit found that the bankruptcy court had “unreservedly denied relief” on Harrington’s motion for relief from the stay.  The circuit court found that the bankruptcy court clearly conveyed that it was reserving to itself adjudication of Harrington’s claims vis-à-vis his nondischargeability action.  By determining that Harrington’s claims would be litigated in bankruptcy court in California and not Massachusetts state court, the bankruptcy court had rendered a decision resolving Harrington’s substantive right to pursue litigation in the state court on a final basis.  Therefore, the order was final and appealable. 

The circuit court also observed that the bankruptcy court’s denial of stay relief without prejudice was intended to convey that the bankruptcy court was willing to consider alternate stay relief requests from Harrington (as long as the requests were for a purpose other than pursuing the Massachusetts state court litigation), rather than that the order was not final and appealable.  Accordingly, the Ninth Circuit reversed the district court’s denial of leave for appeal.   

NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 638 B.R. 403 (B.A.P. 9th Cir. 2022).  The Ninth Circuit Bankruptcy Appellate Panel became one of the first appellate panels to rule on a debtor’s subchapter V eligibility.  The panel held that section 1182(1)(A)’s requirement that a debtor must be “engaged in commercial or business activities” is not limited to the debtor’s core or historical operations, as long as the debtor is “presently” engaged in some sort of commercial or business activity, and the activity need not be profit oriented.

RS Air, LLC was formed in 2001 to provide aircraft transportation services, to buy and sell fractional ownership interests in private aircraft, and to provide depreciation tax benefits to its sole member.  As part of its operations, RS Air routinely contracted with NetJets Aviation, Inc., a private jet charter company, and certain of its affiliates (collectively, “NetJets”) for the purchase or lease of the fractional ownership interests described above.  The two companies maintained a healthy business relationship until July 2017, when the parties sued each other in state court for breach of contract following a non-injury runway crash.  In November 2020, on the eve of trial, RS Air filed for chapter 11 under subchapter V.  NetJets objected to RS Air’s subchapter V designation, arguing that RS Air was ineligible under section 1182(1)(A) because for it was not currently “engaged in commercial or business activities.”  In its ruling, the U.S. Bankruptcy Court for the Northern District of California placed the burden of proving ineligibility on NetJets and then overruled NetJets’ objection, finding that RS Air was “engaged in commercial or business activities” on the date of filing because:  (1) RS Air transformed its business from flight services to investigating and litigating with NetJets; (2) RS Air intended to resume fractional jet ownership with a different partner; (3) RS Air paid its aircraft registry fees; (4) RS Air remained in good standing as a Delaware LLC; and (5) RS Air filed and paid taxes as required.  NetJets renewed its objection during the confirmation hearing, but the bankruptcy court again overruled NetJets, holding that it was bound by its prior decision under the “law of the case” doctrine.  NetJets then appealed the confirmation order.

The BAP first addressed NetJets’ arguments on appeal that the bankruptcy court erred in finding that RS Air was “engaged in commercial or business activities” under section 1182(1)(A).  Reviewing the decisions of other bankruptcy courts to have considered the issue, the BAP held that there was no requirement for a debtor to maintain its core or historical operations on the date of filing.  The debtor did, however, have to be “presently” engaged in some type of commercial or business activities at the time of filing in order to satisfy section 1182(1)(A).  The BAP considered that the scope of commercial and business activities was sufficiently broad to encompass such activities of the sort that RS Air had engaged, such as pursuing litigation with NetJets, paying aircraft registration fees, remaining in good standing under Delaware law, and paying taxes.  As a corollary this determination, the BAP also found that the fact that RS Air did not have a “profit motive” did not negate RS Air’s subchapter V eligibility.  

The BAP then addressed the issue of which party bears the burden of proving the debtor’s subchapter V eligibility.  Looking to other analogs under the Bankruptcy Code, the panel found that the bankruptcy court erred in allocating the burden of proof to NetJets.  Rather, the burden should be on the debtor to establish eligibility.  However, the BAP concluded that the bankruptcy court’s error was harmless because RS Air demonstrated that it was engaged in commercial or business activities on the petition date, which was the only eligibility factor subject to challenge. 

Finally, the BAP refused to find that the bankruptcy court had abused its discretion when it adopted the law of the case doctrine to refuse reconsideration of NetJets’ confirmation objection on grounds of RS Air’s eligibility.

Perryman v. Dal Poggetto (In re Perryman), 631 B.R. 899 (B.A.P. 9th Cir. 2021).  Requesting continuances and attending status conferences in connection with a litigation commenced prepetition do not constitute violations of the automatic stay.  In other words, the automatic stay does not require a litigant in a prepetition lawsuit to dismiss his or her claims against the debtor once the debtor files a bankruptcy petition. 

Jerome Perryman and Karen Dal Poggetto were previously married.  In 2017, Dal Poggetto filed a petition for dissolution of the marriage.  Under the terms of the parties’ marital settlement agreement and the judgment entered in their dissolution proceeding, Perryman was awarded the marital home, but was required to pay Dal Poggetto out for her interest in the home in the amount of $29,000.  Perryman was required to execute a promissory note and deed of trust against the home to collateralize the payable to Dal Poggetto.  When Perryman failed to do so, Dal Poggetto filed a Request for Order in the dissolution proceeding, seeking to enforce the terms of their agreement (i.e., execution of the note and deed).  In addition, Dal Poggetto sought sanctions and attorneys’ fees.  Shortly before the matter was set to be heard in the dissolution proceedings, Perryman commenced proceedings under chapter 13 of the Bankruptcy Code.  Perryman provided notice of the bankruptcy filing to Dal Poggetto and also filed a notice of stay in the dissolution proceeding.  The Request for Order was continued several times during the pendency of Perryman’s bankruptcy proceedings in deference to the automatic stay.  During this time, Dal Poggetto did not pursue the Request for Order, but merely sought to continue the hearings in the dissolution proceeding until Perryman’s bankruptcy proceedings were resolved.  After approximately eighteen months of continuances, Perryman sought a motion for contempt against Dal Poggetto, arguing that her requests for continuances constituted continued prosecution of the Request for Order and were willful violations of the automatic stay.  Dal Poggetto argued that she was not moving forward with the Request for Order; it was only being continued while Debtor’s Chapter 13 case proceeded, pending a later discharge, if any.  The bankruptcy court denied the contempt motion.  This appeal followed. 

The Bankruptcy Appellate Panel (the “BAP”) affirmed the bankruptcy court.  The BAP analogized the status conferences and continuances to postponement and rescheduling of a foreclosure sale, which the Ninth Circuit determined was not a violation of the automatic stay in First National Bank of Anchorage v. Roach (In re Roach), 660 F.2d 1316, 1318-19 (9th Cir. 1981) and Mason-McDuffie Mortgage. Corp. v. Peters (In re Peters), 101 F.3d 618, 620 (9th Cir. 1996).  The panel then rejected Perryman’s argument that, by continuing to hold status conferences and to adjourn the Request for Order, Dal Poggetto was engaged in the “continuation of a judicial action” under section 362(a)(1).  According to the panel, such continuances and status hearings were “commonplace” and did not “constitute prosecution of the matter.”  Thus, because the status conferences did not “disturb the status quo,” there was no violation of the automatic stay.  

Smart Cap. Invs. I LLC v. Hawkeye Ent. LLC (In re Hawkeye Ent. LLC), 49 F.4th 1232 (9th Cir. 2022).  The Ninth Circuit confirmed that if a default has occurred under a real property lease—regardless of whether the default is ongoing or has already been cured or whether the default was material—a landlord is still entitled to the curative requirements under section 365(b)(1) of the Bankruptcy Code, including adequate assurance of future performance.  However, where the default has already been cured, the form of additional “adequate assurance” provided by the debtor may be limited.

Landlord Smart Capital Investments had leased four floors and part of a basement to Hawkeye Entertainment, LLC for use as a dance club.  Because the lease was significantly under market, Smart Capital attempted to terminate the lease due to Hawkeye’s alleged nonmonetary defaults.  Ultimately, Hawkeye sought relief under chapter 11 of the Bankruptcy Code, and shortly thereafter moved to assume the lease before Smart Capital could complete termination of the lease.  The bankruptcy court held a trial on Hawkeye’s motion, ultimately holding that the defaults described by Smart Capital were not material and therefore did not trigger Smart Capital’s entitlement to adequate assurance pursuant section 365(b)(1), under which a contract counterparty is only entitled to adequate assurance “[i]f there has been a default” in the contract.  The district court affirmed.

The Ninth Circuit, however, disagreed with the bankruptcy court’s limitation on a contract counterparty’s right to receive adequate assurance pursuant to section 365(b)(1).  Hawkeye argued that section 365(b)(1) was inapplicable because (1) there was no current default and (2) the defaults were not material.  The circuit court overruled both.  On the first argument, the Ninth Circuit noted that Congress could have employed alternate constructions of the phrase “[i]f there has been a default” that would have clarified whether cured defaults qualified for the purpose of triggering section 365(b)(1), such as “if there was a default” or “if there is a default.”  But the fact that Congress chose “[i]f there has been a default,” signifying that section 365(b)(1) applies where a default has occurred, regardless of whether that default has been resolved or is ongoing.  As to Hawkeye’s second argument, the Ninth Circuit rejected Hawkeye’s and the bankruptcy court’s interpretation that a default must be “material”—such that it warrants forfeiture under California law—in order to trigger section 365(b)(1).  The court noted that there was no basis for such an interpretation, which appeared to conflate the term “default” with “termination,” contravening the ordinary meaning of the term “default.”

Notwithstanding the Ninth Circuit’s holdings on the law, the court went on to find that the bankruptcy court had not committed reversible error by misconstruing the applicability requirements of section 365(b)(1).  Rather, because Hawkeye had already cured any defaults and had promised to adhere to the terms of the lease going forward, and because Smart Capital could not identify any additional assurance that would have substantively impacted its right to full performance of the lease, Smart Capital had already received all of the “adequate assurance of future performance” to which it was entitled under section 365(b)(1)(C).

§ 1.11. Tenth Circuit

Bear Creek Trail, LLC v. BOKF, N.A. (In re Bear Creek Trail, LLC), 35 F.4th 1277 (10th Cir. 2022).  In this case, the Tenth Circuit held that a debtor’s former management lacks standing to file an appeal on behalf of the debtor after an order converting the case from chapter 11 to chapter 7 has been entered.  Following the entry of the conversion order, the Tenth Circuit found that the chapter 7 trustee is the only one who has authority to file an appeal on behalf of the debtor. 

An individual failed to repay a mortgage loan from BOKF, N.A. (d/b/a Bank of Texas).  After a Texas state court awarded the bank a judgment against the individual in the amount of approximately $1.3 million, the court thereafter appointed a receiver to take possession of and sell all of the individual’s assets, including his interests in several corporate entities.  One of the entities, Bear Creek Trail, LLC (the “Debtor”), filed a chapter 11 bankruptcy.  The receiver appointed by the Texas state court moved to convert the Debtor’s case to a chapter 7 liquidation.  The bankruptcy court granted the motion and appointed an interim chapter 7 trustee.  The attorney who had represented the Debtor in its original chapter 11 filing then sought to appeal the conversion order.  The district court dismissed the appeal, holding that only the chapter 7 trustee had authority to file a notice of appeal.  This appeal followed.

The Tenth Circuit affirmed the district court’s dismissal, finding that the Debtor’s former management and its former attorney lacked authority to appeal the conversion order on behalf of the Debtor.  Following the conversion and the appointment of a chapter 7 trustee, the Debtor’s former management no longer had authority to act on behalf of the Debtor.  However, the Debtor’s former management and other parties in interest did retain the ability to file an appeal on their own behalf, which they declined to do in this case.  This failure rendered additional arguments that the Debtor had “aggrieved party” standing to appeal unsupportable.  Accordingly, the district court properly dismissed the appeal.

§ 1.12. Eleventh Circuit

Auriga Polymers Inc. v. PMCM2, LLC., 40 F.4th 1273 (11th Cir. 2022).  The Eleventh Circuit joined the Third Circuit in holding that the “new value” defense to preference liability, pursuant to section 547(c)(4) of the Bankruptcy Code, is not subject to reduction due to the receipt of postpetition transfers. 

On July 16, 2017, Beaulieu Group, LLC and its affiliates commenced chapter 11 cases.  Subsequently, the bankruptcy court confirmed Beaulieu’s liquidating plan, pursuant to which a liquidating trust was established.  All of Beaulieu’s assets, including its causes of actions, were transferred to the trust to be managed by the liquidating trustee.  The trustee then filed a complaint which sought, among other things, (i) to avoid $2.2 million in payments made by Beaulieu to creditor Auriga in the ninety days before Beaulieu’s bankruptcy filing, pursuant to section 547(b) of the Bankruptcy Code, and (ii) to reclassify Auriga’s $694,502 section 503(b)(9) claim to a general unsecured claim to the extent any amounts were included as part of Auriga’s new value defense.  In response, Auriga counterclaimed for a declaratory judgment that (as relevant here) its use of the new value defense pursuant to section 547(c)(4) did not preclude Auriga from recovering the same value as an administrative expense claim pursuant to section 503(b)(9).  Ultimately, the dispute came down to whether $421,119, representing value provided by Auriga within twenty days of Beaulieu’s bankruptcy filing, could be used to offset Auriga’s preference liability pursuant to the new value defense, when the debtor had established a reserve to pay the amount as an administrative expense pursuant to section 503(b)(9). 

The bankruptcy court denied Auriga summary judgment as to the $421,119 amount, holding that Auriga could not use the value provided as both a section 503(b)(9) administrative claim and as a preference defense under section 547(c)(4).  In so holding, the bankruptcy court relied on an earlier adversary proceeding brought by the liquidating trustee against another creditor, wherein the bankruptcy court held that funds held in reserve to pay section 503(b)(9) claims were “otherwise unavoidable transfer[s]” pursuant to section 547(c)(4), and so could not be used to offset preference liability.  The bankruptcy court also purported to rely on the Eleventh Circuit’s decision in Kaye v. Blue Bell Creameries, Inc. (In re BFW Liquidation, LLC), 899 F.3d 1178 (11th Cir. 2018), in which the court held that “[n]othing in the language of § 547(c)(4) indicates that an offset to a creditor’s § 547(b) liability is available only for new value that remains unpaid.”  Id. at 1189.  Utilizing this logic that all requirements for the new value defense must be explicitly provided by the language the statute, the bankruptcy court found that postpetition transfers, including reserves for payment of section 503(b)(9) administrative expenses, may qualify as “otherwise unavoidable transfers” that were excepted from the section 547(c)(4) new value defense because there was no time limitation provided in the statute.

On appeal, Auriga argued that (1) the $421,119 could not be used to offset its new value defense because the funds were held in reserve and were not paid to Auriga, and (2) “otherwise unavoidable transfers” could not be interpreted to include postpetition transfers.  While the Eleventh Circuit summarily rejected Auriga’s argument that the reserves did not qualify as a transfer, the court agreed with Auriga that such transfers made postpetition did not affect a creditor’s new value defense.  In so holding, the court noted that the bankruptcy court had erred in extrapolating from BFW Liquidation that subsequent transfers, whenever they occur, could offset a new value defense simply because the language of section 547(c)(4) did not contain a time limitation for such transfers.  BFW Liquidation involved a prepetition transfer, and so the case did not require the court to consider whether transfers pursuant to section 547(c)(4) were inherently time limited, notwithstanding the absence of explicit language so indicating.  The court then examined the statutory context.  Similar to the Third Circuit in Friedman’s Liquidating Trust v. Roth Staffing Cos. LP (In re Friedman’s Inc.), 738 F.3d 547 (3d Cir. 2013), the Eleventh Circuit concluded that, due to several clues contained in the statutory context, the term “otherwise unavoidable transfer,” as used in section 547(c)(4), must refer only to transfers made prepetition.  Accordingly, the postpetition reserve on account of the $421,119 did not reduce Auriga’s new value defense.

Jackson v. Le Centre on Fourth, LLC (In re Le Centre on Fourth, LLC), 17 F.4th 1326 (11th Cir. 2021).  On facts similar to those presented to the Supreme Court in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010), the Eleventh Circuit held that a chapter 11 debtor’s failure to adhere to Bankruptcy Rule 2002(c)(3) in providing notice to creditors of third-party releases contained in the debtor’s plan did not violate due process where the creditors received actual notice of the content of the debtor’s plan.

A guest staying at a hotel on property owned by the debtor was severely injured when he was struck from behind by a car driven by the hotel’s valet parking attendant.  The injured guest and his wife subsequently sued the valet driver and the valet company in Kentucky state court for damages related to the injuries sustained.  The guests then sought to amend their complaint to add the debtor-property owner, the hotel, and the hotel’s manager.  Because of the debtor-property owner’s bankruptcy filing, the guests sought limited relief from the automatic stay before the bankruptcy so that they could pursue nominal claims against the debtor, solely for the purpose recovering on the debtor’s insurance policy.  The guests were thereafter included as creditors entitled to notice in the bankruptcy proceedings.

As the debtor’s bankruptcy proceedings progressed, the debtor filed a plan and disclosure statement, which included third-party release provisions which extended to both the hotel and the hotel manager.  The guests, through their attorney, received copies of the filings, as well as copies of the bankruptcy court’s order setting the date for the confirmation hearing.  However, the guests did not appear at the confirmation hearing nor file an objection to confirmation of the plan.  The bankruptcy court subsequently confirmed the plan, including the third-party releases, which the bankruptcy court found “integral” to the debtor’s reorganization. 

Following the entry of the confirmation order, the debtor, the hotel, and the hotel manager sought to dismiss the guests’ state court suit against them as barred by the confirmation order, which contained a discharge injunction, and by the releases contained in the debtor’s plan.  In response, the guests moved the bankruptcy court to clarify that neither the confirmation order nor the plan precluded them from nominally asserting claims against the debtor, the hotel, and the hotel manager to reach their insurance.  The guests also argued that applying the releases against them would violate due process because the debtor had failed to provide notice that complied with Bankruptcy Rule 2002(c)(3).  The debtor, the hotel, and the hotel manager opposed the relief sought other than permitting the guests to proceed nominally against the debtor, which the debtor conceded.  The bankruptcy court denied the motion, finding that the guests had received actual notice of the debtor’s plan and the releases contained therein, and therefore there was no due process violation.  The bankruptcy court also held that the guests could not proceed against the hotel or the hotel manager, even nominally, because such claims, through various indemnity agreements between the parties, could result in direct indemnity claims against the debtor.  The district court affirmed.

On further appeal, the Eleventh Circuit affirmed as well.  On the due process argument, the circuit court applied the reasoning from the Supreme Court’s decision in United Students Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010).  There, the Court held that notice required under the Bankruptcy Rules of a chapter 13 debtor’s intent to discharge accrued interest on the debtor’s student loans was a right granted by a procedural rule, and the failure of the debtor to follow those rules did not violate the creditor’s constitutional right to due process because the creditor had actual notice of the contents of the debtor’s plan.  Although Espinosa arose in the context of a chapter 13 proceeding, the Eleventh Circuit nonetheless found it applicable here, where the guests’ attorneys had received the actual plan documents containing the release provisions, in spite of the fact that the debtor did not provide a notice of hearing on the confirmation of the plan complying with Bankruptcy Rule 2002(c)(3). 

The Eleventh Circuit then addressed whether the district court had erred in not allowing claims to proceed nominally against the hotel and hotel manager.  Because the bankruptcy court was authorized to release non-debtor, third parties pursuant to section 105(a) of the Bankruptcy Code, the circuit court determined that the applicable standard of review was abuse of discretion.  The circuit found no error in the bankruptcy court’s conclusion that permitting nominal claims to proceed against the hotel and hotel manager could impose an economic burden on the debtor, and therefore the bankruptcy court acted within its discretion in denying the guests’ request to modify the confirmation order.

Reynolds v. ServisFirst Bank (In re Stanford), 17 F.4th 116 (11th Cir. 2022).  The Eleventh Circuit was asked to determine whether the district court had properly dismissed an appeal of a sale order as moot pursuant to section 363(m) of the Bankruptcy Code.  Affirming the district court, the Eleventh Circuit found that the appeal was statutorily moot because section 363(m) precluded the court from providing a remedy where the sale had not been stayed and had already been consummated.  

Robert and Frances Stanford (the “Stanfords”) owned American Printing Company (“APC”).  Prior to commencing their respective chapter 11 cases, the Stanfords and APC had borrowed money from ServisFirst Bank in the amount of $5 million and $7.2 million, respectively.  The Stanfords’ loan was secured by real property (the “Property”).  In addition, the Stanfords and APC guaranteed each other’s loans.

After the Stanfords and APC each commenced their chapter 11 proceedings, APC obtained debtor-in-possession financing from ServisFirst in the amount of $13.2 million, which “rolled up” the $12.2 million in debt that APC owed or had guaranteed.  Approximately one month later, the Stanfords sought bankruptcy court approval for the sale of the Property to ServisFirst in exchange for a $3.5 million credit bid.  The bankruptcy court approved the sale, and expressly found that ServisFirst was a good faith purchaser under section 363(m) of the Bankruptcy Code. 

Shortly after the sale was approved, in a surprise turn, the Stanfords moved to amend the sale order and stay the sale, arguing for the first time that APC’s roll-up had discharged the Stanfords of any liability on their $5 million loan and that ServisFirst therefore did not have valid lien on the Property that it could use to credit bid.  The bankruptcy court denied the motion to amend.  On the merits, the bankruptcy court held that the roll-up had only made APC a co-obligor on the Stanford’s $5 million loan and did not discharge the Stanford’s liability for the loan.  The bankruptcy court also found that the Stanfords were barred by the doctrines of equitable estoppel, judicial estoppel, and law of the case from raising an objection to ServisFirst’s credit bid.  When the Stanfords appealed both the sale order and the order denying their motion to amend, they also sought a stay of the sale pending appeal.  The bankruptcy court conditionally granted the stay if the Stanfords posted a $1.5 million supersedeas bond, which the Stanfords did not do. The sale of the Property to ServisFirst was eventually consummated, at which point ServisFirst moved the district court to dismiss the appeal as moot under section 363(m).  The district court granted ServisFirst’s motion, and this appeal followed.  

On appeal, the Stanfords argued that section 363(m) did not apply because (i) section 363(m) only applies to sales authorized by the Bankruptcy Code, not by the bankruptcy court, and (ii) ServisFirst was not a good faith purchaser.  The Eleventh Circuit rejected both arguments.  On the Stanfords’ first argument, the circuit court found that the language of section 363(m) was clear that it applied to all “authorization[s] under subsection (b) or (c)” of section 363, 11 U.S.C. § 363(m), and did not contain a qualifier that such authorizations must be “proper” under the Bankruptcy Code.  In addition, the circuit noted that, since section 363(m) is conditioned on “such authorization and such sale or lease [being] stayed pending appeal,” id., the term “authorization” must refer to authorization by a bankruptcy court order, and not the Code, since the Code cannot be stayed.

Before addressing the Stanfords’ arguments as to whether ServisFirst was a good faith purchaser, the Eleventh Circuit first concluded that appellate courts are entitled to review whether a buyer acted in good faith for the limited purpose of determining whether section 363(m) applied.  So concluding, the circuit court then addressed the Stanfords’ argument that ServisFirst lacked good faith because it provided no value in the sale (due to its hollow credit bid).  The Eleventh Circuit rejected the Stanfords’ argument, holding that the bankruptcy court had not clearly erred in its finding—based on the Stanfords’ own motion—that ServisFirst was a good faith purchaser.  The bankruptcy court had concluded that the APC roll-up did not affect ServisFirst’s lien on the Property, and therefore, the credit bid did represent cognizable value.  But, the Eleventh Circuit continued, even if the lien dispute had not been resolved, there was precedent for using a contested lien to credit bid under section 363(k).  

After concluding that section 363(m) applied, the Eleventh Circuit next determined whether it precluded the relief sought by the Stanfords.  Although the Stanfords argued that ServisFirst could simply pay cash, rather than unwinding the sale, the court found that the form of payment—credit bid versus cash—was a central element of the purchase that could not be altered without undoing the sale itself.  Accordingly, the Stanfords’ appeal was properly dismissed as moot pursuant to section 363(m). 

Circuit Judge Jordan joined the court’s opinion except as to Part III.A.1, which addressed the Stanfords’ textual arguments pertaining to applicability of section 363(m).  Although Judge Jordan concurred in the judgment, he arrived via a different route: he reasoned that the Stanfords were precluded, pursuant to the invited error doctrine, from appealing an order granting their own sale motion.

Spring Valley Produce, Inc. v. Forrest (In re Forrest), 47 F.4th 1229 (11th Cir. 2022).  In a case of first impression for that circuit, the Eleventh Circuit determined that the exception to discharge contained in section 523(a)(4) of the Bankruptcy Code—which excepts debts “for fraud or defalcation while acting in a fiduciary capacity” from discharge—does not apply to debts incurred by a produce buyer who is acting as a trustee pursuant to the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a et seq. (“PACA”).

The Forrests were owners and officers of a market (“Central Market”) that purchased over $260,000 worth of produce from Spring Valley Produce (“SVP”) for which Central Market never paid.  Because SVP and Central Market were both licensed under PACA at the time of the transactions, when SVP sold its produce to Central Market, Central Market became obligated to hold such produce in trust for SVP until Central Market paid SVP for the produce.  See 7 U.S.C. §499e(c)(2).  The trust arises automatically on delivery of the produce. 

The Forrests subsequently filed for chapter 7, shortly after which SVP commenced an adversary proceeding seeking a declaratory judgment that the Forrests’ personal liability for the $260,000 PACA-related debt was nondischargeable under section 523(a)(4).  The Forrests moved to dismiss the proceeding, arguing that section 523(a)(4) does not apply to PACA-related debts because PACA does not require trust assets to be segregated nor does it prohibit the use of trust assets for non-trust purposes.  The bankruptcy court agreed and granted the Forrests’ motion to dismiss.  SVP appealed and the bankruptcy court certified its order for direct appeal the Eleventh Circuit.

Noting a lack of uniformity among bankruptcy courts in the circuit for determining whether section 523(a)(4) applied, the Eleventh Circuit began by delineating a clear standard governing when section 523(a)(4) excepted a debt from discharge.  Drawing on Supreme court precedent and the Restatement (Third) of Trusts, as well as precedent from its own and other circuits, the Eleventh Circuit announced the following test for determining whether a debtor is acting in a “fiduciary capacity” under section 523(a)(4): 

First, the fiduciary relationship must have (1) a trustee, who holds (2) an identifiable trust res, for the benefit of (3) an identifiable beneficiary or beneficiaries. . . .   Second, the fiduciary relationship must define sufficient trust-like duties imposed on the trustee with respect to the trust res and beneficiaries to create a technical trust. . . .  [T]he two most important trust-like duties . . .  are the duty to segregate trust assets and the duty to refrain from using trust assets for a non-trust purpose.  Third, the debtor must be acting in a fiduciary capacity before the act of fraud or defalcation creating the debt. 

47 F.4th at 1241.  Turning to the case at hand, the Eleventh Circuit then found that PACA satisfied the first prong because it created a trustee, an identifiable trust res, and identifiable beneficiaries.  But the circuit court found that PACA failed the second prong, since the statute did not impose sufficient trust-like duties to create a technical trust.  PACA neither required the segregation of trust assets nor precluded trustees from using trust assets for non-trust purposes.  While these facts alone were not determinative, the court did not find the existence of other trust-like duties that enabled it to conclude that a PACA trust qualified as a technical trust.  Rather, the court concluded that a PACA trust was more similar to a constructive trust than a technical trust, which did not fall with section 523(a)(4)’s exception to discharge.  After briefly considering certain policy-based arguments, the Eleventh Circuit then affirmed the bankruptcy court’s dismissal of SVP’s adversary action. 

U.S. Pipe & Foundry Co. v. Holland (In re U.S. Pipe & Foundry Co.), 32 F.4th 1324 (11th Cir. 2022).  A divided panel of the Eleventh Circuit held that the chapter 11 plans of three debtors, confirmed in 1995, discharged the debtors’ obligation to pay various retiree health benefits mandated by the Coal Industry Retiree Health Benefit Act of 1992, 26 U.S.C. §§ 9701 et seq. (the “Coal Act”), notwithstanding that the debtors were not purported to be liable for such obligations until 2016.  The majority found that, because the debtors were made jointly and severally liable for such statutory obligations as “related persons” to a coal company in 1992, the obligations were “claims” within the meaning of section 101(5) of the Bankruptcy Code that arose prior to plan confirmation and thus were discharged.  Circuit Judge Anderson concurred in part and dissented in part, agreeing with the majority that one category of benefits was a claim arising prior to confirmation, but rejecting that view as to the other two categories of benefits.  

This case begins with the Coal Act.  The Coal Act sought to ensure that retiree funds established to provide coal workers and their immediate families with health benefits for the rest of their lives would not become insolvent.  It did so by making certain coal companies and their “related persons”—defined broadly to include companies under common ownership as of July 20, 1992, see 26 U.S.C. § 9701(c)(2)—jointly and severally liable for funding three types of obligations:  (1) paying premiums to a “Combined Benefit Fund,” 26 U.S.C. § 9704(a); (2) continuing to provide health-care benefits to workers, id. § 9711(a), (b), (c)(1); and (3) if the covered entities fail to provide healthcare in accordance with section 9711, paying premiums to the 1992 United Mineworkers of America Benefit Plan (the “1992 Plan”), id. § 9712(b)(2)(B), (d)(1), (d)(4).  The obligations continued for so long as the coal company and its related person were in business (which business need not be limited to the coal industry).  See id. §§ 9701(c)(7), 9704(f)(2)(B), 9711(a).  

In 1989, Walter Industries, Inc. and its subsidiaries, including United States Pipe & Foundry Co., JW Aluminum Company, and JW Window Components LLC (collectively, the “Jim Walter Companies”), as well as a coal company called Jim Walter Resources, Inc. (“JW Resources”), filed for chapter 11 protection in the Middle District of Florida.  On July 20, 1992, because of Walter Industries’ ownership of both the Jim Walters Companies and JW Resources (a coal company covered by the Coal Act), they all became “related persons” under the Coal Act.  Notwithstanding that all of the companies were jointly and severally liable as “related persons” under the Coal Act, the trustees for the Combined Benefit Fund and the 1992 Plan (the “Trustees”) only filed a proof of claim for past due amounts against JW Resources; they did not file proofs of claims for future Coal Act obligations.  In 1995, the bankruptcy court confirmed a consensual plan of reorganization, pursuant to which all claims that arose before the effective date were discharged, unless otherwise included in the plan.  Walter Industries (now Walter Energy, Inc.), but no other debtors, expressly assumed the Coal Act obligations.  The Trustees did not object to the plan.

In the years that followed, the Jim Walter Companies separated from Walter Energy and exited the coal industry.  When Walter Energy filed a second bankruptcy proceeding in 2015, the Jim Walter Companies were not involved.  But in its 2015 bankruptcy filing, Walter Energy obtained bankruptcy court approval to terminate its Coal Act obligations.  In April 2016, Walter Energy stopped paying its obligations. As a result, in July 2016, the Trustees gave notice to the Jim Walter Companies that they were liable for the Coal Act obligations.  The Jim Walter Companies eventually commenced adversary proceedings in their original 1989 proceedings, asserting that they were discharged from all Coal Act obligations in 1995 and that the Trustees were barred from enforcing such obligations against them.  The bankruptcy court granted summary judgment to the Trustees, applying the test from County Sanitation District No. 2 of Los Angeles County v. Lorber Industries of California, Inc. (In re Lorber Industries of California, Inc.), 675 F.2d 1062 (9th Cir. 1982) to determine whether the Coal Act obligations were in the nature of a tax, which could not be discharged, as opposed to a contingent claim, which would have been discharged.  The bankruptcy court concluded that the Coal Act obligations were “unquestionably a tax,” and so were not dischargeable.  The district court affirmed on similar grounds.  

On appeal, however, the Eleventh Circuit ignored the Lorber test, finding the Coal Act obligations were clearly in the nature of “claims” under the Bankruptcy Code and that the determinative question was whether the claims arose before or after confirmation of the plan in 1995.  Both the majority and the dissent proceeded to analyze each category of obligation under the Coal Act to determine when the “claim” arose.  While the majority found that all three categories were claims based on pre-confirmation conduct (i.e., the Jim Walter Companies’ association with JW Resources as of July 20, 1992), the dissent agreed only as to the obligation to pay premiums to the Combined Benefit Fund, and posited that the obligation to provide section 9711 benefits and to pay the 1992 Plan premiums only arose after Walter Energy stopped paying in 2016.  

The majority’s reasoning relied on the fact that statutory liability was fixed as of July 20, 1992.  Although the amount of the obligations was contingent, it still constituted a “right to payment,” and therefore was in the nature of an unliquidated claim, which could be discharged in bankruptcy.  The Trustees’ argument that the obligations did not become enforceable until 2016 also did not persuade the majority that the obligations were not “claims” because the term “claim” is defined so broadly under the Bankruptcy Code as to include “a cause of action or right to payment that has not yet accrued or become cognizable.”  32 F.4th at 1332 (quoting 2 Collier on Bankruptcy ¶ 101.05[1] (16th ed. 2022)). 

The dissent, like the majority, conducted a distinct analysis for the three types of obligations, but arrived at a different conclusion.  Circuit Judge Anderson agreed with the majority’s conclusion that the obligation to pay the Combined Benefit Fund premiums was a claim pursuant to section 101(5)(A), and therefore discharged in 1995, but disagreed with their conclusion that the section 9711 obligation was a claim under section 101(5)(B).  Judge Anderson argued that, in order to constitute a “right to an equitable remedy for breach of performance,” 11 U.S.C. § 101(5)(B), the breach of performance must necessarily occur pre-confirmation.  Since the breach of performance did not occur until 2016, when Walter Energy and the Jim Walter Companies failed to provide health-care benefits in accordance with section 9711, the ensuing claim could not have been discharged in 1995.  And because the obligation to pay 1992 Plan premiums was triggered only when Walter Energy and the Jim Walter Companies failed to provide health-care benefits in accordance with section 9711, that claim too also arose in 2016, and could not have been discharged in 1995.

The Mendes Hershman Student Writing Contest is a highly regarded legal writing competition that encourages and rewards law students for their outstanding writing on business law topics. Papers are judged on research and analysis, choice of topic, writing style, originality, and contribution to the literature available on the topic. The distinguished former Business Law Section Chair Mendes Hershman (1974–1975) lends his name to this legacy. Read the abstract of this year’s second-place winner, Zachary R. Hunt of Cornell Law School, Class of 2024, below. The full article is forthcoming in Volume 109 of the Cornell Law Review, scheduled for publication in December 2023.

Innovations in financial technology have enabled nonbank firms to market, originate, and service consumer loans entirely online via web-based lending platforms. These online lenders promote themselves as a faster, disintermediated alternative to traditional lending that leverages technology to provide borrowers with convenient and near‑instantaneous access to a wider variety of credit products. Yet despite its claimed advantages, the online lending industry remains perpetually entangled in litigation and controversy surrounding its prevailing business model. Most prominently, lawmakers, regulators, and courts are sharply divided as to whether online lending platforms should be able to escape otherwise applicable state usury laws by “partnering” with chartered depository institutions to originate high-interest loans. Experts also question the (mis)alignment of incentives between parties at each stage of the lending process, particularly given that the online lender performs a traditionally bank‑like role in the transaction but typically bears no economic interest in the loans it originates. In response, this Note argues that a recent settlement between Colorado authorities and two online lenders offers a uniquely practicable template for resolving these interrelated challenges by applying pressure to the incentive mechanisms that lead online lenders to originate high-risk—and therefore high-interest—loans that state usury laws would ordinarily prohibit.