U.S. 4th Circuit Court Of Appeals Case Summaries: June 2, 2008
Posted on: Tuesday, 3 June 2008, 09:00 CDT
Commercial Law
Duties under Fair Credit Reporting Act
BOTTOM LINE: District court properly denied defendant's motions for judgment as a matter of law and for remittitur after jury returned verdict for plaintiff for defendant's violations of its duties as a furnisher of information under Fair Credit Reporting Act.
CASE: Saunders v. Branch Banking and Trust Co. of Virginia, No. 07-1108 (decided May 14, 2008) (Judges Michael, MOTZ, & Keeley (sitting by designation)).
COUNSEL: Alan Durrum Wingfield, Troutman & Sanders, L.L.P., Richmond, VA, for Appellant. Richard John Rubin, Santa Fe, NM, for Appellee.
FACTS: On August 31, 2003, Rex Saunders purchased an automobile from Richmond Mitsubishi, and the dealer assigned his loan for the car to Branch Banking & Trust Company of Virginia (BB&T). When Saunders did not subsequently receive a payment book for the new car, he telephoned BB&T and was told that he owed no money on any loan. Thereafter, he visited a BB&T branch and obtained a copy of his loan statement at the bank, revealing that he owed nothing, and checked with the Department of Motor Vehicles, which indicated no liens on the vehicle.
On March 8, 2004, Saunders received a letter from BB&T, informing him his payments were "seriously delinquent," that his loan was in default, and that BB&T had accelerated the payment schedule so that he owed a total balance of $20,441.19, including principal, interest, late fees, and "other applicable charges," all of which was to be paid in full within ten days.
Thereafter, Saunders met with a BB&T lending officer, and said that he would meet his obligations under the loan, but refused to pay any penalties or late fees. The bank refused to waive the late fees or penalties, however. BB&T subsequently repossessed Saunders' car and informed him that he could only redeem it by paying the full amount due, including principal, interest, late fees, and a repossession expense.
On October 24, 2005, Saunders sued BB&T in federal district court, alleging that it violated its duties as a furnisher of information under the Fair Credit Reporting Act (FCRA) by failing to report the dispute. The jury returned a verdict finding that BB&T had intentionally violated its duties under FCRA, awarding Saunders punitive damages.
BB&T appealed to the 4th Circuit, which affirmed.
LAW: FCRA requires credit reporting agencies (CRAs) to follow procedures in reporting consumer credit information that both "meet[] the needs of commerce" and are "fair and equitable to the consumer." 15 U.S.C. [section]1681(b). In addition to the duties it imposes on CRAs, FCRA also imposes duties on "furnishers of information." [section]1681s-2. Under [section]1681s-2(a), FCRA prohibits any person from furnishing information to a CRA that the person knows is inaccurate.
If a consumer notifies a CRA that he disputes the accuracy of an item in his file, FCRA requires the CRA to notify the furnisher of the dispute. [section]1681i(a)(2). FCRA requires furnishers to determine whether the information that they previously reported to a CRA is "incomplete or inaccurate." [section]1681s-2(b)(1)(D).
Here, given the evidence before it, the jury could reasonably have concluded that BB&T's decision to report the debt without any mention of a dispute was "misleading in such a way and to such an extent that it can be expected to have an adverse effect." Dalton v. Capital Associated Indus., Inc., 257 F.3d 409, 415 (4th Cir. 2001). The district court did not err in so holding.
Constitutional Law
Standing to assert First Amendment claims
BOTTOM LINE: Plaintiff, both individually and as the personal representative of her husband, who died in a landfill explosion, lacked standing to raise a First Amendment challenge to provisions of a settlement agreement between landfill operators and third parties.
CASE: Stephens v. County of Albemarle, Va. et al., No. 07-1478 (decided May 9, 2008) (Judges WILLIAMS, Hamilton & O'Connor (sitting by designation)).
COUNSEL: Deborah Chasen Wyatt, Wyatt & Associates, P.L.C., Charlottesville, VA, for Appellant. Alvaro Antonio Inigo, Zunka, Milnor, Carter & Inigo, Ltd., Charlottesville, VA, for Appellees.
FACTS: After Patricia Stephens' husband, Wayne Stephens, died in an explosion at a landfill near Ivy, Virginia, she filed suit in federal district court against the landfill's operators -- the County of Albemarle, Va., the City of Charlottesville, and the Rivanna Solid Waste Authority (RSWA) (collectively, the Operators).
Stephens claimed that two settlement agreements between the Operators and third-parties unconstitutionally conditioned government benefits on the relinquishment of the third parties' First Amendment rights to speak freely about the landfill, thereby depriving her and her husband of their rights to receive information concerning safety and environmental hazards posed by the landfill.
Upon reconsidering its dismissal of multiple counts of her complaint, the district court concluded that because Stephens' complaint alleged the existence of one or more willing speakers and also alleged that she and her husband were potential recipients of speech from the parties to the settlement agreements because they lived in Albemarle County near the landfill, she had standing to pursue her First Amendment claims, both in her own right and on behalf of her husband.
Thereafter, the district court granted summary judgment in favor of the Operators. Without revisiting the issue of standing, the court also rejected Stephens' claims on the merits.
Stephens appealed to the 4th Circuit, which vacated and remanded for dismissal of Stephens' case.
LAW: To satisfy Article III's standing requirements, a plaintiff must show that: (1) she has suffered an "injury in fact" that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., 528 U.S. 167, 180- 81 (2000) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560- 61 (1992)).
"It is now well established that the Constitution protects the right to receive information and ideas" from a willing speaker. Stanley v. Georgia, 394 U.S. 557, 564 (1969). But to have standing to assert a right to receive speech, a plaintiff must show that there exists a speaker willing to convey the information to her. See FOCUS v. Allegheny County Court of Common Pleas, 75 F.3d 834, 838- 39 (3d Cir. 1996)).
Here, Stephens presented evidence that at least one of the signatories to each settlement agreement would be a willing speaker in the absence of the agreements. She did not, however, offer any indication that these willing speakers would have discussed the landfill with her or her husband in the past or that they would presently discuss the landfill with her if they were not constrained by the settlement agreements.
Stephens merely speculated that she and/or her husband would have been, and that she continued to be, potential recipients of information had the involved individuals not been subject to restrictions imposed by the settlement agreements. However, because Stephens did not provide any factual support for her claim, she could not demonstrate that the speech restrictions in the settlement agreements caused her, or her husband, any injury.
Accordingly, both individually and as Wayne Stephens' personal representative, she lacked standing to pursue her First Amendment claims.
Criminal Law
ERISA theft offenses
BOTTOM LINE: District Court properly determined that unpaid employer contributions were assets of pension plan within meaning of ERISA theft offenses.
CASE: United States v. Jackson, No. 07-4103; United States v. Carey, No. 07-4094 (decided May 1, 20080 (Judges Williams, KING & Motz).
COUNSEL: Melissa Windham Friedman, Anderson & Friedman, Roanoke, VA; Joseph Abraham Sanzone, Sanzone & Baker, P.C., Lynchburg, VA, for Appellants. Thomas Ernest Booth, United States Department of Justice, Washington, for Appellee.
FACTS: John Jackson served as President and Chief Executive Officer of the Burruss Company -- a floor manufacturing business -- from 1989 until October 2000. Larry Carey began working for Burruss in 1976, and eventually became its Chief Financial Officer, a position he held until October 2000.
Burruss maintained three separate ERISA plans, for both pension and health purposes, that covered most of its 1200 to 1400 employees. Either Jackson or Carey were designated as the Plan Administrator for each of the plans.
When Burruss began experiencing financial difficulties in 1998, Jackson and Carey converted large sums of money from loans to Burruss based on inflated and false representations of the company's worth, and failed to make timely contributions to the ERISA plans.
They were subsequently indicted in federal district court on ERISA theft and false statement offenses, among other charges.
Following a trial, Jackson and Carey were found guilty and sentenced to 108 and 87 months in prison, respectively.
Both Jackson and Carey appealed to the 4th Circuit, which affirmed.
LAW: To prove ERISA theft offenses, the prosecution was obligated to establish the elements of [section]664, i.e., that Jackson and Carey (1) committed acts of embezzlement or conversion; (2) that such acts of embezzlement or conversion involved the moneys, funds, or assets of an ERISA plan; and (3) that such acts were committed with the specific intent of depriving the ERISA plan of its moneys, funds, or assets. See 18 U.S.C. [section]664; see also United States v. Whiting, 471 F.3d 792, 800-01 (7th Cir. 2006).
Although [section]664 does not explicitly provide that unpaid employer contributions constitute ERISA plan assets, [section]1103 of Title 29 specifies that such assets are held in trust, and not for the employer's benefit. When an ERISA employer has paid wages or salaries to its employees, it is contractually bound to contribute to any ERISA plan that it maintains. United States v. LaBarbara, 129 F.3d 81 (2d Cir. 1997). An employer must comply with its contractual obligations to make contributions to its ERISA plan, and such a contractual obligation constitutes an "asset" of the ERISA plan. Id. at 88.
When Burruss established its ERISA pension plans, it bound itself to the terms thereof. Both Plans mandated annual contributions based upon hours worked, and wages and salaries paid. Burruss could properly extricate itself from those ERISA obligations only by proper termination of the Plans. See 29 U.S.C. [section]1103. Thus Burruss' unpaid contributions to the Plans constituted the "moneys, funds, or assets" thereof for purposes of [section]664.
Criminal Procedure
Challenge to warrant affidavit
BOTTOM LINE: District court erred in denying defendant's motion for evidentiary hearing to challenge veracity of warrant affidavit where defendant made substantial preliminary showing that warrant affiant may have omitted critical facts.
CASE: United States v. Tate, No. 07-4026 (decided May 6, 2008) (Judges NIEMEYER, Motz & Duncan).
COUNSEL: Martin Gregory Bahl, Office of the Federal Public Defender, Baltimore, MD, for Appellant. Debra L. Dwyer, Assistant United States Attorney, Office of the United States Attorney, Baltimore, MD, for Appellee.
FACTS: On December 16, 2005, Agent Charles Manners of the Baltimore City Police Department applied for and obtained a search warrant for Davon Tate's residence at 709 North Longwood Street in Baltimore. The warrant authorized a search for and seizure of drugs and related paraphernalia, as well as guns and other specified items.
To obtain the search warrant, Agent Manners submitted an affidavit to a circuit court judge, which contained three substantive sections. First, the affidavit contained a short description of Manners' general knowledge of drug activity in the 700 block of North Longwood Street and at Tate's residence in particular. Second, it recited the results of a criminal records check on Tate, which revealed numerous past drug and other criminal incidents in which Tate had been involved. Finally, it described a trash investigation that Manners conducted at Tate's residence the day before.
With respect to the trash investigation, Manners stated in the affidavit that he retrieved two black trash bags, which were easily accessible from the rear yard of 709 North Longwood Street. Recovered from one trash bag were seven ziplock bags containing marijuana and a piece of printed mail listing 709 North Longwood Street as the address of residence. Manners also found tobacco and hollowed out cigar shells in the trash bags. He asserted that marijuana users often hollow out cigar shells, discard an amount of tobacco, and replace it with marijuana for smoking.
Based on Manners' affidavit, the court issued the search warrant for Tate's residence, and the officers executing the warrant recovered a firearm from Tate's bedroom.
Tate was charged in federal district court with possession of a firearm after having been convicted of a felony. He subsequently filed a motion to suppress the firearm recovered from his bedroom and statements he made to officers who had executed the search warrant. Tate additionally challenged the affidavit submitted to procure the search warrant, asserting that Manners deliberately misled the judge who issued the warrant by omitting facts about the location of the trash that he searched.
In support of his request for an evidentiary hearing on his challenge to the affidavit, Tate submitted an affidavit from Dominic Gaymon, who lived with Tate, corroborating Tate's claim that the trash bags were located on the home's back steps at the rear door of the residence at the time Manners searched.
Tate also submitted a letter from the Baltimore Department of Public Works, indicating that the day of the trash search was not a trash collection day. Additionally, he submitted an affidavit from a private investigator, who verified that the rear yard of Tate's residence was fenced and that the garbage containers were located near the back door of the home, as well as photographs and a prior warrant affidavit signed by Manners in which he described searching trash bags left on the street for trash collection.
The district court denied Tate's suppression motion and his request for an evidentiary hearing to challenge the warrant affidavit. Tate subsequently pleaded guilty and was sentenced to 78 months' imprisonment. As part of his plea, he reserved the right to appeal the denial of his suppression motion and request for an evidentiary hearing regarding his challenge to the warrant affidavit.
Tate appealed to the 4th Circuit, which vacated and remanded.
LAW: In Franks v. Delaware, 438 U.S. 154 (1978), the Supreme Court held that under limited and carefully circumscribed circumstances, a defendant may challenge an affidavit offered to procure a search warrant against the defendant. "[W]here the defendant makes a substantial preliminary showing that a false statement knowingly and intentionally, or with reckless disregard for the truth, was included by the affiant in the warrant affidavit, and if the allegedly false statement is necessary to the finding of probable cause, the Fourth Amendment requires that a hearing be held at the defendant's request." Id. at 155.
If, at that hearing, the allegation of perjury or reckless disregard is established by a preponderance of the evidence, and, with the affidavit's false material set aside, the remaining content is insufficient to establish probable cause, the search warrant must be voided and the fruits of the search excluded to the same extent as if probable cause was lacking on the face of the affidavit." Id. at 155-56.
There is a "presumption of validity" with respect to warrant affidavits, and to overcome that presumption, a defendant must allege "deliberate falsehood" or "reckless disregard for the truth" and include with the allegations "an offer of proof." Id. at 171. The defendant must not only point out specifically the portion of the affidavit that is claimed to be false and give reasons why it is false, but must also furnish "[a]ffidavits or sworn or otherwise reliable statements of witnesses" or explain their absence. Id. Allegations of "negligence or innocent mistake are insufficient." Id. The burden of making the necessary showing is thus a heavy one to bear.
Here, Tate did not challenge the accuracy of any affirmative statement made by Manners in his affidavit. Rather, he argued that Manners omitted facts, thereby making the affidavit deceptive. When relying on an omission, rather than on a false affirmative statement, Tate's burden increased even more. See United States v. Colkley, 899 F.2d 297, 301 (4th Cir. 1990).
To satisfy the Franks' intentional or reckless falsity requirement for an omission, the defendant must show that facts were omitted "with the intent to make, or in reckless disregard of whether they thereby made, the affidavit misleading." Colkley, 899 F.2d at 300. The omission must be "designed to mislead" or must be made "in reckless disregard of whether [it] would mislead." Id. at 301.
Thus, in order for Tate to be entitled to a Franks hearing on his challenge of Manners' affidavit, he was required to make a substantial preliminary showing that Manners omitted material facts that when included would defeat a probable cause showing and that the omission was designed to mislead or was made with reckless disregard of whether it would mislead. Id. This showing must include a detailed "offer of proof." Franks, 438 U.S. at 171.
Tate made a showing that clearly described the nature of Manners' omissions; he gave reasons for why he considered the omissions to be deliberately deceptive and material; and he proffered evidence in support of his position, including affidavits. See Franks, 438 U.S. at 171.
The question remained whether his showing was substantively sufficient to entitle him to a Franks hearing. Tate's showing reduced to the claim that in order for Manners to have investigated Tate's trash, which provided the essential basis for demonstrating probable cause, Manners would have had to jump the fence which enclosed Tate's backyard, trespass on Tate's property, and search trash that was stored in a container that had not been abandoned for pick-up.
The proffered facts set forth by Tate tended to show that Manners violated his reasonable expectation of privacy because the trash was not out at the curb for collection on the date of Manners' search, but rather in a container near the rear steps of the home. Also, based on Manners' affidavit from another case involving a trash search, where he described the trash as being at the typical location for pick-up, Manners may have deliberately omitted that language from his affidavit in this case.
Accordingly, Tate's evidence was sufficient to constitute a "substantial preliminary showing" of a deceptive omission, as required by Franks, 438 U.S. at 155.
The government argued that Tate failed to show that Manners knowingly or recklessly omitted material facts because a "reasonable, literal reading" of the affidavit is that "the officer was either in the yard when retrieving the trash or that the bags came from the yard." When an omission is involved, the question is not whether the affidavit was "literally true," but whether Tate's offer of proof made a showing that the warrant affidavit omitted facts by design to mislead the issuing judge as to the constitutionality of the trash search that established probable cause.
Of course, the omitted facts must have been material. In Colkley, the 4th Circuit noted that an officer cannot be expected to include in an affidavit every piece of information gathered in the course of an investigation. Id. at 300. Instead, to be material under Franks, an omission "must be such that its inclusion in the affidavit would defeat probable cause." Colkley, 899 F.2d at 301.
Here, the district court correctly recognized that the information obtained from the trash search -- the marijuana residue - - was essential to a finding of probable cause to search Tate's residence. In addition, if Tate's facts were true, the inclusion of the allegedly omitted information -- that Manners illegally searched Tate's trash -- would have defeated probable cause. If the trash investigation was conducted illegally, the facts derived from it would have to be stricken from the affidavit. See United States v. Karo, 468 U.S. 705, 719 (1984). Without the facts drawn from the trash investigation, the remaining contents of the affidavit would not have supported a finding of probable cause.
Thus, Tate carried his burden of making a substantial preliminary showing that Manners knowingly and intentionally, or with reckless disregard for the truth, omitted a material statement in the affidavit he offered in support of the warrant to search Tate's residence. Accordingly, the judgment of conviction and sentence was vacated, and the case remanded for a Franks hearing.
COMMENTARY: The court 's holding in Franks rests on the principle that probable cause under the Fourth Amendment must be demonstrated by a "truthful showing," but the court pointed out immediately that a "truthful showing" must be understood in the practical context of procuring search warrants. Franks, 438 U.S. at 165.
A "truthful showing" does not mean "'truthful' in the sense that every fact recited in the warrant affidavit is necessarily correct, for probable cause may be founded upon hearsay and upon information received from informants, as well as upon information within the affiant's own knowledge that sometimes must be garnered hastily." Id. The court further noted, "surely it is to be 'truthful' in the sense that the information put forth is believed or appropriately accepted by the affiant as true. Because it is the magistrate who must determine independently whether there is probable cause, it would be an unthinkable imposition upon his authority if a warrant affidavit, revealed after the fact to contain a deliberately or reckless[ly] false statement, were to stand beyond impeachment." Id.
Criminal Procedure
Jury instruction
BOTTOM LINE: Where district court's supplemental jury instruction clarifying that travel across state lines included travel to District of Columbia, jury could not have interpreted the instruction as resulting in constructive amendment of indictment.
CASE: United States v. Lentz, No. 06-4691 (decided May 12, 2008) (Judges Michael, TRAXLER & King).
COUNSEL: Meghan Suzanne Skelton, Assistant Federal Public Defender, Office of the Federal Public Defender, Baltimore, MD, for Appellant. Erik Russell Barnett, Assistant United States Attorney, David Brian Goodhand, Office of the United States Attorney, Alexandria, VA, for Appellee.
FACTS: Jay Lentz was indicted in federal district court on charges of interstate kidnapping resulting in the death of his ex- wife, Doris.
Following Lentz' trial, the court read the indictment to the jury, including the allegation that Lentz had transported Doris in interstate commerce from Virginia to Maryland. In providing instruction on the element of "interstate commerce," the court defined the term as "commerce or travel between one state and another state," and advised that "a person is transported in interstate commerce whenever that person moves or travels across state lines or moves or travels from one state to another state."
In response to a subsequent jury question as to whether a car traveling from Virginia to Washington D.C. constituted the legal requirements of interstate commerce, since Washington D.C. is not a state, the court provided a supplemental instruction indicating that travel across "state lines" for purposes of interstate commerce included travel encompassing the District of Columbia.
Thereafter, the jury found Lentz guilty, and he was sentenced to life imprisonment.
Lentz appealed to the 4th Circuit, which affirmed.
LAW: After an indictment is returned, "its charges may not be broadened through amendment except by the grand jury itself." Stirone v. United States, 361 U.S. 212, 216 (1960). Thus, the "court cannot permit a defendant to be tried on charges that are not made in the indictment against him." Id. at 217. If a constructive amendment is found, the error is fatal and reversible per se. See id. at 219; see also United States v. Foster, 507 F.3d 233, 242 (4th Cir. 2007).
Here, the court's supplemental instruction did not result in the crime of conviction differing from the crime charged in the indictment because the indictment charged that Doris traveled from Arlington, Virginia, her home, to Fort Washington, Maryland, where Lentz lived, but did not allege or require that the path of travel encompass a direct crossing of the Virginia/Maryland line.
The supplemental instruction merely eliminated any confusion over whether Doris had to have traveled directly across a purely state- to-state border. The court did not vary the terms of the indictment or change the elements of the crime and supplemental instruction did not result in the jury convicting Lentz "of a crime other than that charged in the indictment." United States v. Randall, 171 F.3d 195, 203 (4th Cir. 1993).
Criminal Procedure
Search and seizure
BOTTOM LINE: District Court properly denied defendant's motion to suppress evidence seized by police where the officers had a reasonable, articulable suspicion that defendant was illegally carrying a firearm.
CASE: United States v. Black, No. 06-4986 (decided May 14, 2008) (Judges NIEMEYER & Floyd (sitting by designation)) (Judge Gregory, dissenting)).
COUNSEL: David Lassiter, Jr., Jefferson & Lassiter, Richmond, VA, for Appellant. Richard Daniel Cooke, Office of the US Attorney, Richmond, VA, for Appellee.
FACTS: On the evening of December 17, 2005, police officers patrolling a "high-crime" neighborhood observed a group of four or five people gathered near a breezeway in front of a building. The officers exited the vehicle and approached Sean Black, whose right hand was placed awkwardly inside his right coat pocket and "cupped," as if grasping an object.
When the one officer asked Black to remove his hands from his pocket, Black initially did not respond. When the officer then ordered Black to remove his hand -- stating, "I don't want to have to shoot you" -- Black complied, revealing a large bulge in his pocket. Upon conducting a subsequent pat-down, the officer removed a loaded handgun from Black's pocket. A search incident to arrest also recovered heroin from Black's person.
Following an indictment in federal district court, Black filed a motion to suppress. The court denied that motion, concluding that the seizure was justified because the officer had a reasonable, articulable suspicion that Black was illegally carrying a firearm.
After the jury found Black guilty, the district court sentenced him to 360 months' imprisonment.
Black appealed to the 4th Circuit, which affirmed.
LAW: The Fourth Amendment prohibits unreasonable seizures of persons, but "law enforcement officers do not violate the Fourth Amendment by merely approaching an individual on the street or in another public place." Florida v. Bostick, 501 U.S. 429, 434 (1991) (quoting Florida v. Royer, 460 U.S. 491, 497 (1983)). "Police may question citizens without implicating Fourth Amendment protections. Indeed, officers remain free to seek cooperation from citizens on the street without being called upon to articulate any level of suspicion or justification for their encounters." United States v. Burton, 228 F.3d 524, 527 (4th Cir. 2000) (citing INS v. Delgado, 466 U.S. 210, 216 (1984)).
Because such encounters are voluntary, a citizen approached by a police officer in this way has the "right to ignore his interrogator and walk away." Terry v. Ohio, 392 U.S. 1, 33 (1968). Indeed, a citizen need not even leave the area to avoid speaking with the police; he has a "right to go about his business or to stay put and remain silent in the face of police questioning." Illinois v. Wardlow, 528 U.S. 119, 125 (2000).
A Terry stop is supported by reasonable suspicion if the "totality of the circumstances" presented the detaining officer with a "particularized and objective basis" to conclude that a crime may have been committed or was being committed. United States v. Mayo, 361 F.3d 802, 805 (4th Cir. 2004) (quoting United States v. Arvizu, 534 U.S. 266, 273 (2002).
Here, the initial encounter with Black was voluntary. In the totality of the circumstances that followed, the officer had a reasonable suspicion that Black had a firearm concealed in his pocket and therefore was justified in conducting a Terry stop and patting Black down. See Mayo, 361 F.3d at 806-07. Accordingly, the district court properly denied Black's suppression motion.
Labor and Employment
ERISA preemption
BOTTOM LINE: Because ERISA does not preempt state law breach of contract claim brought by third party company hired to perform only non-discretionary administrative services, district court properly denied defendant's motion to dismiss.
CASE: Great West Life & Annuity Ins. Co. v. Information Systems & Networks Corp., No. 07-1502, (decided April 11, 2008) (Justice O'Connor (retired, sitting by designation), Judges Williams & HAMILTON).
COUNSEL: Norman Henry Singer, Singer and Associates, P.C., Bethesda, MD, for Appellant. Thomas G. Collins, Buchanan, Ingersoll & Rooney, P.C., Harrisburg, PA, for Appellee.
FACTS: Information Systems and Networks Corp. ("ISN") established a health care benefit plan for its employees. ISN hired Great West to perform certain non-discretionary administrative services under the plan.
Great-West's state law claims against ISN arose from Great West's performance of only one of those nondiscretionary administrative services, namely, its non-discretionary duty to front the payment of claims made by ISN employees and their dependents for self-funded benefits under the plan. ISN, in turn, agreed to reimburse Great West for any such payments.
ISN then notified Great West of its intention to terminate the contractual relationship. Thereafter, Great West demanded that ISN reimburse it $93,999.73, representing the balance amount of benefit claims Great West paid out on behalf of ISN under the self-funded portion of the Plan. ISN refused to pay, and Great West filed suit in federal district court.
ISN moved to dismiss Great West's complaint on the grounds that the state law breach of contract and unjust enrichment claims were pre-empted by ERISA, 29 U.S.C. [section]1144(a). The district court denied that motion.
ISN appealed to the 4th Circuit, which affirmed.
LAW: ERISA does not preempt a state law breach of contract claim, nor an alternatively pled state law unjust enrichment claim brought by a third party company hired to perform only non-discretionary administrative services, under the self-funded portion of a employer health care benefit plan covered by ERISA, and against the sponsor of such plan for reimbursement of money in nondiscretionary payments the third party company fronted to satisfy the self-directed benefit claims.
This was particularly true where, as here, the plan administrator, with full discretion to determine whether a claim for self funded benefits should be paid or denied (and who also serve as the sponsor's chief financial officer) expressly acknowledged the debt and recommended to the sponsor's chief executive officer that it should be paid, and resolution of either claim required no interpretation of the plan nor was it in any way dependant on the plan being governed by ERISA.
Taxation
Disallowed deductions
BOTTOM LINE: Government properly disallowed a tax deduction where the underlying financial transaction did not qualify as a "lease- in, lease out" transaction; the taxpayer did not acquire a genuine leasehold interest or incur genuine indebtedness as a result of the transaction.
CASE: BB&T Corporation v. United States, No. 07-1177 (decided April 29, 2008) (Judges WILLIAMS, Wilkinson & Duffy (sitting by designation)).
COUNSEL: William Kearns Davis, Bell, Davis & Pitt, P.A., Winston- Salem, NC, for Appellant. Judith Ann Hagley, United States Department of Justice, Tax Division, Washington, for Appellee.
FACTS: BB&T Corporation, a U.S. financial services company based in the Southeast, entered into a "lease-in/lease-out" transaction (LILO) with Sodra Cell AB (Sodra), the business division of a Swedish wood pulp manufacturer.
The property at issue was a 22 percent interest in the pulp manufacturing equipment at one of Sodra's mills. BB&T entered into the LILO hoping to reduce its tax liability. After the Internal Revenue Service disallowed the deductions BB&T claimed, BB&T sued for a refund.
The district court granted summary judgment in favor of the Government.
BB&T appealed to the 4th Circuit, which affirmed.
LAW: In a typical LILO, a U.S. taxpayer leases property from a tax-exempt entity and simultaneously leases that property back to the owner. The tax-exempt owner's sublease has a shorter term than the taxpayer's lease. When the sublease expires, the owner may exercise an option to buy back the remainder of the taxpayer's lease. Thus, in practical terms, the tax-exempt property owner continues to use the property during the sublease term just as it did before the transaction and bears no risk of losing control of its asset(s).
The taxpayer, meanwhile, receives tax benefits by deducting the rental payments on its lease, amortizing certain transaction costs, and, depending on its financing arrangement, deducting interest payments. The chief tax risk associated with entering into a LILO is the possibility that the IRS will deem the transaction a sham.
The district court concluded that although the form of the transaction involved a lease financed by a loan, BB&T did not actually acquire a genuine leasehold interest or incur genuine indebtedness because of the result of the transaction.
The court correctly found that BB&T had styled the LILO as a lease financed by a loan, but did not in substance acquire a genuine leasehold interest or incur genuine indebtedness. Thus, the Government was entitled to disallow the deductions.
Originally published by The Daily Record Staff.
(c) 2008 The Daily Record (Baltimore). Provided by ProQuest Information and Learning. All rights Reserved.
Source: The Daily Record (Baltimore)
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