Campbell Co. v. Gomez

By: Kiki McArthur

On January 20, 2016 the Supreme Court held that an unaccepted offer for settlement has no force under Rule 68 of the Federal Rules of Civil Procedure and that government contractors are not granted sovereign immunity when in violation of federal law.[1] Mindmatics LLC, a subcontractor of defendant Campbell, sent text messages to a list of consenting 18-24 year old male users regarding Navy services.[2] When Jose Gomez, age 40, received an unsolicited text from Mindmatics, he filed a class action suit asserting that Campbell was in violation of the Telephone Consumer Protection Act (TCPA), 47 U.S.C. §227(b)(1)(A)(iii).[3] The TCPA prohibits sending a text message to a cellular phone using “any automatic dialing system” without the recipient’s prior expressed consent.[4]

Pursuant to Federal Rules of Civil Procedure 68, Campbell offered to settle Gomez’s claim, which Gomez did not accept.[5] Campbell then moved to dismiss the case for lack of subject matter jurisdiction, first arguing that since its offer provided Gomez with complete relief, Gomez’s case was consequently moot.[6] Subsequently, Campbell argued that because Gomez’s case was now moot, and he did not move for class certification beforehand, the putative class claims would be moot as well.[7] The district court denied Campbell’s motion to dismiss but after limited discovery, granted Campbell’s motion for summary judgment.[8] The district court relied on Yearsley v. W. A. Ross Constr. Co., 309 U.S. 18 to hold that since Campbell was a contractor acting on the Navy’s behalf, Campbell was granted sovereign immunity from suit under the TCPA through the Navy.[9] The Ninth Circuit reversed this decision, holding that Gomez’s case was still valid and that Campbell did not qualify for sovereign immunity under any basis, Yearsley or otherwise.[10]

Rule 68 allows a defendant to serve a plaintiff with a settlement offer containing specified terms of judgment and fourteen days to accept.[11] If the offer is not accepted within the time frame, it is considered withdrawn, but does not preclude a subsequent offer.[12] As with other unaccepted contract offers, offers to settle do not create a lasting right or obligation.[13] The Chief Justice’s dissent argues that the decision hands authority for judgment from the federal courts to the plaintiff.[14] The majority believes the Chief Justice’s rational would instead transfer authority to the defendant.[15] The Court also held that though Campbell is a federal contractor, it is not granted sovereign immunity from suit when in violation of the TCPA.[16] Though Mindmatics is the actual company that sent the text message, Campbell is held liable through vicarious liability.[17]

The Supreme Court’s holding that Gomez’s case is still live after refusing Campbell’s settlement offer sets a precedent for businesses, corporations, and other parties, that making settlement offers cannot relieve them from potential court judgment. This decision could prove to be monumental for businesses that, in the past, have blatantly made decisions it knew were harmful because it thought it would just offer settlements to those injured because of its actions. The Court also seems to be sending a clear message that a party has a right to be heard in court.

The Supreme Court’s holding that Campbell is not granted immunity under TCPA communicates that entities will be held responsible for its actions and that excuses will not be tolerated. This decision will force corporations to think through its decisions and actions before claiming it was simply acting blindly as it was told. Furthermore, the decision by the Court proves that it takes the privacy of its citizens very seriously and that violations of the TCPA, no matter how small, will not be tolerated and will discourage other entities from acting in the same regard. This decision will help continue to protect citizens’ right to privacy with respect to their personal cell phone usage.

 

 

[1] Campbell-Ewald Co. v. Gomez, 577 U. S. ____ (2016); Fed. R. Civ. P. 68.

[2] Gomez, 577 U. S. ____.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Fed. R. Civ. P. 68.

[12] Id.

[13] Gomez, 577 U. S. ____.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

When In Doubt, Sever It Out: Adjusting Unconscionable Arbitrator Selection Provisions to Honor Arbitration Agreements

By: Tiana Cherry

On January 13, 2016, Plaintiff Julio Lamboy Ruiz, a condominium owner, refused to go to arbitration after making architectural changes to his home that were alleged to not adhere to the condominium’s bylaws enforced by Millennium Square Residential Association and Millennium Square Unit Owners Association (“the Associations”).[1] Plaintiff claimed the arbitration clause was unconscionable and therefore unenforceable.[2] As a result, Plaintiff sought a declaratory judgment that the architectural changes made to his condominium did not violate the bylaws.[3] Conversely, Defendants filed a motion to stay and moved to compel arbitration.[4] The United States District Court for the District of Columbia granted Defendant’s motion to compel arbitration, directing the parties to sever the unconscionable provision in the arbitration agreement.[5]

Under the Federal Arbitration Act (“FAA”):

“[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”[6]

Arbitration agreements under the FAA “may be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.”[7] To successfully demonstrate unconscionability under District of Columbia law, there must be (1) an absence of meaningful choice on the part of one of the parties, and the (2) contract terms must be unreasonably favorable to the opposing party.[8] However, in an “egregious situation,”[9] proving only “one or the other [form of unconscionability] may suffice.”[10]

In the present case, Plaintiff argues that the first element of unconscionability is met because he, like other condominium owners, was not given an option to bargain over the bylaws before agreeing to them and therefore the bylaws were a contract of adhesion.[11] Plaintiff further argues that the second element of unconscionability is met for three reasons: (1) the bylaws do not require the arbitrators to provide a written decision justifying their award; (2) the bylaws do not provide for discovery of any sort, and impose an arbitration schedule that bars discovery; and (3) the bylaws do not allow Plaintiff to select arbitrators.[12]

The Court considered Plaintiff’s claims and used the District of Columbia’s test for unconscionability to determine whether the arbitration agreement was unenforceable.[13] The Court found that Plaintiff failed to meet the first element of unconscionability because Plaintiff did not provide any evidence that the bylaws were a contract of adhesion.[14] The Court explained that Plaintiff was not “powerless” or without “real choice” because Plaintiff chose the condominium knowing its bylaws[15] and Plaintiff failed to show that there was no opportunity for negotiation and that the services could not be obtained elsewhere.[16]

Conversely, the Court found that Plaintiff established the second element of unconscionability.[17] The Court concluded that Plaintiff’s first two arguments that the arbitration agreement did not require a written explanation for the arbitrator’s awards and that discovery was not allowed failed because “nothing in D.C. law suggests that arbitration agreements without Plaintiff’s preferred characteristics are substantively unconscionable.”[18] However, the Court did find that the arbitration provision that precluded Plaintiff from participating in the arbitrator-selection process proved to be unconscionable because it did not give Plaintiff any role in the selection process.[19] Instead of ruling that the contract was unenforceable, the Court concluded that the arbitrator-selection provision in the contract should be severed.[20] The Court explained that although some courts have held that the specification of an arbitrator was integral to the parties’ agreement to arbitration, this case differed because the bylaws did not specify a particular arbitrator or forum, but instead specified an arbitrator selection mechanism.[21]

This decision has a broader impact on District of Columbia condominium owners and other potential consumers in the area. Consumers should pay attention to the bylaws of contracts they agree to and attempt to sever unconscionable provisions prior to signing agreements. Severing such provisions could save consumers time and resources. Furthermore, severing off provisions such as the one in the present case could give consumers more freedom of choice in who will arbitrate any potential disputes and allow consumers to remain involved in the contracts that they must adhere to.

[1] See Ruiz v. Millennium Square Residential Ass’n, 2016 BL 8900 (D.D.C. Jan. 13, 2016).

[2] See Ruiz, 2016 BL 8900 at * 1-2; see also Federal Arbitration Act (“FAA”), 9 U.S.C. § 1.

[3] See Ruiz, 2016 BL 8900 at * 2.

[4]   Id.

[5] See Ruiz, 2016 BL 8900 at * 8.

[6] 9 U.S.C. § 2.

[7] Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 68 (2010).

[8] Curtis v. Gordon, 980 A.2d 1238, 1244 (D.C. 2009) (citing to Urban Invs., Inc. v. Branham, 464 A.2d 93, 99 (D.C.1983)).

[9] Urban Invs., Inc. v. Branham, 464 A.2d 93, 99 (D.C.1983).

[10] Urban Invs., Inc. v. Branham, 464 A.2d 93, 99 (D.C.1983).

[11] See Ruiz, 2016 BL 8900 at * 4.

[12] Id.

[13] Id.

[14] See Andrew v. Am. Imp. Ctr., 110 A.3d 626, 633 (D.C. 2015) (stating that “a contract of adhesion is . . . [when] one imposed upon a powerless party, usually a consumer, who has no real choice but to accede to its terms”).

[15] Ruiz, 2016 BL 8900 at * 4 (citing to Moore v. Waller, 930 A.2d 176 , 182 (D.C. 2007)).

[16] Id.

[17] Id.

[18] Id.

[19] See Ruiz, 2016 BL 8900 at * 6.

[20] Id.; see also D.C. Code §§ 42-1902.08(a), 42-1901.02(5) (stating that “The D.C. Condominium Act specifically provides that “[a]ll provisions of the condominium instruments” “shall be deemed severable, and any unlawful provision thereof shall be void.”)

[21] See Ruiz, 2016 BL 8900 at * 7.

 

U.S. v. Falcon

By: Monisha Rao

In U.S. v. Falcon, the United States Court of Appeals for the Ninth Circuit upheld that the Higher Education Technical Amendments of 1991 (“HETA”), which eliminated statutes of limitations on collecting defaulted student loans, did not violate student debtors’ due process rights when it allowed the U.S. Department of Education to collect loan payments that were defaulted prior to the enactment of HETA.

Between 1983 and 1991, Mark J. Falcon obtained guaranteed student loans or Stafford Loans totaling $47,900 as well as a guaranteed student loan from the Higher Education Loan Plan (“HELP”) totaling $4,000. Falcon signed promissory notes in order to obtain each of his loans stating that he would pay all amounts disbursed as well as interest and fees. The promissory notes were guaranteed by a guaranty agency that in turn was reinsured by the U.S. Department of Education. Falcon allegedly defaulted on the HELP Loan in 1993 and the Stafford Loan in 1997. The guaranty agency paid the defaulted loans and the U.S. Department of Education reimbursed the agency. On January 4, 2011 United States filed a case against Falcon and filed a motion for summary judgment. The United States claimed that Falcon owed a total of $112,563.51 on the Stafford Loans and $10,088.21 on the HELP Loan. The district court found in favor of the United States and Falcon filed a motion to the decision raising the constitutional argument that eliminating the statute of limitations for federal guaranteed student loan collection violates his due process rights. The district court denied Falcon’s motion and he subsequently appealed.

Falcon’s main argument was that HETA violates the due process clause because it creates a perpetual cycle of debt for a certain class of borrowers.[1] Falcon argued that eliminating the statute of limitations of student loan debt collection violates due process because it creates “oppressive effects and has created a special hardship.”[2]

The Ninth Circuit Court of Appeals relies on other circuits in holding that HETA and its retroactive effect do not violate due process rights.[3] The Court rejected Falcon’s contention that eliminating the statute of limitations created “special hardships” because Falcon did not have a defense under the six-year statute of limitations, and even if he did “congressional repeal of a statute of limitations does not violate the due process clause.”[4] Falcon himself acknowledged that no court has found that the repeal of limitations constitutes any hardship. The Court further reasons that even if Falcon did have a valid defense, the Court does not find that repealing a statue of limitations is a violation of due process.

The Ninth Circuit Court of Appeals judgment in Falcon impacts both the federal and private loan industry. Federal loans are perceived to be a safer option than private loans. Generally federal loans, such as Stafford Loans, have lower interest rates and give students an opportunity to find a job before being expected to make loan payments. There is also the opportunity to have federal loans forgiven after a certain period of time. The decision of Falcon and the cases it cites magnifies a disadvantage to taking out federal loans instead of private loans. There is still a statute of limitations for private loan debt collection and unless a creditor decides to sue within the limitation period, a student debtor does not have to pay the remaining balance. The policy argument behind the Falcon decision seems to be that it would be economically inefficient to allow students to default on their student loans and not face the consequences of paying the amount owed. The difference in the statute of limitations between federal and private loans can potentially impact the number of students willing to take out federal loans. With the abundance of information about paying student loan debt and recommending students default on their loan payments; it is possible that more students will seek out private loans and take a chance by defaulting.

[1] U.S. v. Falcon, (9th Cir. 2015).

[2] Id.

[3] Id.

[4] Id.

United States v. Balboa

By: Catriona Coppler

 

In 2013, Michael Balboa was convicted of securities fraud, conspiracy to commit securities fraud, wire fraud, conspiracy to commit wire fraud, and investment advisor fraud.[1] Balboa was sentenced to forty-eight months imprisonment and ordered to pay $390,243, 873.92 in restitution.[2] On appeal, in United States v. Balboa,[3] Balboa challenged the sufficiency of the evidence supporting the conspiracy counts and the loss determination used to calculate his sentence.[4] The United States Court of Appeals for the Second Circuit found no merit in Balboa’s arguments and therefore affirmed the District Court’s judgment.[5]

Balboa, an employee of Millennium Global Emerging Credit Fund (“Millennium Global”), was the portfolio manager of the Millennium Global Emerging Credit Fund (“Fund”).[6] A portion of the Fund invested in payment-adjusted warrants issued by the Government of Nigeria based on the price of oil (“Nigerian Warrants”).[7] Investors of the Fund were told that an independent valuation agent would value the Fund’s holdings.[8] However, Balboa corrupted the valuation process by feeding inflated valuations, or marks, to financial brokers.[9] These inflated marks were then passed along to the independent valuation agent as if they reflected the prices that the brokers were actually seeing in the market.[10] Consequently, the Fund appeared to investors to be worth more than it really was.[11]

On Appeal, Balboa argued that the conspiracy charges could not stand because the co-conspirators did not know that the valuations Balboa gave to them were invalid.[12] The Court reviewed this challenge for plain error, which required that the error prejudicially affected Balboa’s substantial rights and seriously affected the “fairness, integrity, or public reputation of judicial proceedings.”[13] For an error to affect a defendant’s substantial rights, it must be prejudicial, or not harmless, and have affected the outcome of the district court’s proceedings.[14] Here, the Court found no such error.[15] Rather, the Court drew all reasonable inferences in favor of the government and held that a conspiratorial agreement may be established merely by proof of a tacit understanding.[16] So while the co-conspirators may not have known they were passing on inflated marks, the fact that the co-conspirators knew and admitted to helping Balboa defeat the valuation process was sufficient to demonstrate “purposeful behavior” that “furthered the goals of the conspiracy,” which therefore demonstrated a tacit understanding.[17]

The Court also rejected Balboa’s argument that the investors’ loss was a result of the 2008 global economic downturn rather than Balboa’s fraudulent scheme.[18] The Court rejected this argument because the economic downturn would not have affected investors had Balboa not fraudulently induced them to invest in the first place.[19] Rather, the Court held that when “an investor puts money into a fraudster’s hands, and ultimately receives nothing of value in return, his loss is measured by the amount of principal invested.”[20] As a result, the loss was the amount investors invested, which in this case was over $390 million.[21]

This case demonstrates how willing courts are to impose steep sanctions on those who engage in securities fraud. In this brief and succinct opinion, the Court quickly disposes of all arguments thereby illustrating that it is unwillingly to grant leniency to those that engage in clearly fraudulent behavior. Additionally, because the Court found no clear error in the sentence of forty-eight months imprisonment and $390,243, 873.92 in restitution, it demonstrates the Court’s willingness to impose heavy sanctions on those that engage in this type of fraudulent behavior.[22] As a result of this case, those who are thinking of engaging in securities fraud may be dissuaded now that courts have made it clear that such heavy sanctions are appropriate and very few defenses will be accepted. This could serve to deter those who are seeking to engage in securities fraud thereby resulting in safer, fairer markets.

 

 

[1] United States v. Balboa, 622 F. App’x 31, 32 (2d Cir. Nov. 18, 2015).

[2] Id.; Def.-Appellant’s Br. 14.

[3] 622 F. App’x 31 (2d Cir. Nov. 18, 2015).

[4] Id. at 32.

[5] Id. at 33.

[6] United States v. Balboa, No. 1(S1) 12 Cr. 196(PAC), 2013 WL 6196606, at * 1 (S.D.N.Y. Nov. 27, 2013).

[7] Id.

[8] Appellee’s Br. 2-3; accord Def.-Appellant’s Br. 3.

[9] Appellee’s Br. 3; accord Balboa, 2013 WL 6196606, at * 1.

[10] Appellee’s Br. 3.

[11] Appellee’s Br. 3; accord Balboa, 2013 WL 6196606, at * 1.

[12] Def.-Appellant’s Br. 16.

[13] United States v. Balboa, 622 F. App’x 31, 32 (2d Cir. Nov. 18, 2015).

[14] United States v. Thomas, 274 F.3d 655, 668 (2d Cir. 2001)

[15] See Balboa, 622 F. App’x at 32.

[16] Id.

[17] See Appellee’s Br. 19-20; Balboa, 622 F. App’x at 32.

[18] Balboa, 622 F. App’x at 32-3.

[19] Carmen Germaine, 2nd Circ. Affirms Ex-Hedge Fund Manager’s Fraud Conviction, Law 360 (Nov. 18, 2015).

[20] Balboa, 622 F. App’x at 32 (quoting United States v. Hsu, 669 F.3d 12, 121 (2d Cir. 2012)).

[21] See id.

[22] See Def.- Appellant’s Br. 14.

Estate of Redstone v. C.I.R.

By: Suzanne Riopel

A recent decision in the Tax Court is a reminder of the ambiguity in the distinction between “gifts” and “ordinary business transactions” in the context of family-owned businesses.[1] In Estate of Redstone v. C.I.R., the court held that the federal gift tax did not apply to a decedent’s transfer of stock in trust for his children.[2] In 1959, the decedent, Edward Redstone, his father, and his brother each held a one-third ownership interest in their family’s business, National Amusements, Inc. (NAI).[3] In 1972, Edward filed a lawsuit against his father for failure to transfer 100 shares to him, and both parties eventually reached a settlement agreement that allowed NAI to buy back two-thirds of the stock for 5 million with the remaining one-third transferred in trust for the benefit of Edward’s children.[4] During O’Conner v. Redstone in 2006, the IRS discovered this gift tax deficiency on a transfer of stock in trust, and in 2013, it issued a statement of deficiency holding the decedent liable for 1.3 million in federal gift taxes, fraud, and negligence.[5]

A transfer of property “for less than an adequate and full consideration in money or money’s worth” is subject to the federal gift tax[6] unless the transfer was in the ordinary course of business.[7] Courts will determine that a transfer is in the ordinary course of business if it is “bona fide, at arm’s length, and free of any donative intent” under the objective facts and circumstances.[8] In a family business, transactions between relatives are subject to greater scrutiny[9], and courts will additionally consider whether the parties had a genuine controversy and the value of the property involved, whether parties retained legal counsel and engaged in adversarial negotiations, whether the certainty and cost-savings of settlement motivated the parties, and whether the settlement was under judicial supervision.[10]

The court held that the transfer of the decedent’s stock satisfied the above requirements. Although the IRS seeks to prevent taxpayers from advantageously using the provisions of the Internal Revenue Code as tax shelters, this transaction was bona fide because there was no indication that the decedent and his father faked an estrangement between them to avoid tax liability on a gratuitous transfer of stock.[11] Prior to the settlement, the father-son relationship deteriorated when his father favored the oldest son, Sumner, marginalized Edward in the family business, and personally criticized how Edward raised his son.[12] Based on the events leading up to the settlement agreement, the court determined that the transfer was “at arm’s length.” Edward’s interactions with his father were akin to dealings with a stranger: the decedent retained legal counsel, commenced two lawsuits, undertook extensive negotiations, and agreed to settle only when it was economically advantageous.[13] Furthermore, the decedent’s transfer of one-third of his stock in trust for his children was devoid of donative intent.[14] Although the court assumes that children are the objects of a parent’s affection, the decedent repeatedly rejected the offer to place the stocks in trust for the benefit his children.[15] Instead, he conceded to the terms of the settlement agreement when it entitled him to receiving a payment for the majority of the stock.[16]

The circumstances in Estate of Redstone provide a model example of a winning tax case. Family businesses remain the backbone of the U.S. economy with 5.5 million of them contributing to fifty-seven percent of the GDP.[17] Traditionally, owners and managers prefer that his or her descendants retain ownership or control the family business, but issues usually arise over succession, roles and responsibilities, and sibling rivalry, especially in smaller businesses. The presumption that familial transactions have donative intent is problematic because an owner has an opportunity, under the guise of a parental figure, to undercut an employee (and relative) by requiring a transfer of his property to another relative. Estate of Redstone rightfully holds in favor for the defendant, and its clear-cut analysis allows potential complainants to gauge their likelihood of success on the merits. Although this case will likely not affect estate planning, family businesses that are concerned with retaining stock ownership should consider a provision within employment contracts to hold the stock in trust at the onset of employment.

[1]Estate of Redstone v. C.I.R., No. 8401–13, 2015 WL 6458095 (T.C. 2015).

[2]Id.

[3]Id. at 3.

[4]Id. at 5.

[5]Id. at 6.

[6]26 U.S.C.A. § 2512 (West 1981).

[7]26 C.F.R. § 25.2511–1(g)(1) (1997).

[8]Weller v. Comm’r, 38 T.C. 790, 806 (1962).

[9]Id.

[10]Estate of Noland v. C.I.R., 47 T.C.M. (CCH) 1640, 1644-1645 (1984).

[11]Estate of Redstone v. C.I.R., No. 8401–13, 2015 WL 6458095 (T.C. 2015).

[12]Id. at 4, 9.

[13]Id. at 9.

[14]Id. at 10.

[15]Id.

[16]Id. at 10.

[17]Univ. of Vt., Family Business Facts, https://www.uvm.edu/business/vfbi/?Page=facts.html (last visited Nov. 27, 2015).