State of Maryland, Comptroller of Maryland v. Ciotti (Maryland U.S.D.C.)

Filed: December 16, 2009.

Opinion by Judge Frederick Motz.

Held: A debtor that owes additional Maryland State taxes after a federal determination of additional income cannot discharge such debt in bankruptcy if it did not report the federal determination to the State.

Facts: The IRS audited the debtor’s prior tax returns and found additional taxable income. Maryland law requires that taxpayers file a report of federal adjustment with the State upon such an IRS determination. The debtor did not do so, but the IRS itself reported the adjustment to Maryland tax authorities. As a result, the Comptroller of Maryland made adjustments to the debtor’s tax returns that resulted in increased tax liability. The debtor subsequently filed for Chapter 7 bankruptcy and sought a declaration that her additional State tax liability as a result of the upward adjustment was discharged. The bankruptcy court granted the discharge, and the State appealed to the district court.

Analysis: Whether the debtor’s additional State tax liability can be discharged turns on the meaning of the words “or equivalent report or notice” added to 11 U.S.C. § 523(a)(1)(b) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Section 523(a)(1) provides that a debtor shall not be discharged from any debt for a tax “with respect to which a return, or equivalent report or notice, if required – (i) was not filed or given” (emphasis added). Accordingly, the issue is whether the debtor’s failure to report the federal adjustment to the State amounts to an “equivalent report or notice” that was “not given.”

Reversing the bankruptcy court, the district court held that the failure to report was indeed a failure to provide an equivalent report. In so holding, the district court looked to legislative history provided by a House of Representatives report which addresses the changes made to section 523(a)(1). The district court also expressly rejected the bankruptcy court’s reasoning that the report required under Maryland law is not a “return” – and thus cannot be deemed to be the “equivalent of a return.” The court stated that to equate “return” and “equivalent report or notice” would render the latter phrase redundant. In addition, the inclusion of “or given” provides further evidence that Congress contemplated something less formal than a “return.”

The district court opinion is available in PDF. The bankruptcy court opinion, which was reversed by the district court, is also available in PDF.

Erie Insurance Exchange v. Davenport Insulation, Inc. (Maryland U.S.D.C.)

Filed: December 9, 2009

Opinion by Judge Benson E. Legg

Held: The court denied the plaintiff insurance company's motion to reconsider denial of its motion to remand. This validated the court's prior determination that the "reciprocal exchange" insurance company's policyholders are its customers, not its members, for purposes of diversity jurisdiction.

Facts: An insurance company sued its subrogation target in the Circuit Court for Queen Anne's County. The defendant removed based on diversity jurisdiction. The insurance company moved to remand. The insurance company argued that, because it is a reciprocal insurance exchange, it constitutes an unincorporated association. Under Fourth Circuit law, an unincorporated association is a citizen of each state in which its members reside. The insurance company argued that, because some of its policyholders reside in the defendant's home state, there was no diversity.

The court rejected the insurance company's argument for remand. Relying on an analogous case from the Northern District of Illinois (Garcia v. Farmers Insurance Exchange, 121 F. Supp. 2d 667 (2000)), the court reasoned that the insurance company's policyholders are its customers, not its members. Thereafter, the court granted summary judgment in favor of the defendant. After summary judgment, the insurance company moved for reconsideration of its motion to remand.

Analysis: The insurance company relied on a new case from the Northern District of Illinois that directly conflicts with the decision that the court relied upon (Lavaland, LLC v. Erie Insurance Exchange, 2009 WL 3055489 (2009)). The new opinion held that the insurance company was a citizen of every state in which its policyholders reside. The new case also was consistent with an unpublished decision issued by Judge Andre M. Davis in the District of Maryland (Hiob v. Progressive American Insurance Co., 2008 WL 5076887 (2008)).

Nonetheless, the court noted that case law limits the reasons for which the court may grant relief under the given circumstances, after judgment has been entered. This includes where "such action is appropriate to accomplish justice." This exception is limited to "situations involving extraordinary circumstances."

The court held that the case did not present extraordinary circumstances. In making this determination, the court noted that the Lavaland case was decided before the court entered summary judgment, and the insurance company had not raised it with the court. Rather, the insurance company only brought the case to the court's attention after the court ruled against it. The court stated that the insurance company, "believing that it might obtain a favorable outcome in this Court, took a calculated risk. Accordingly, [the insurance company] is not entitled to relief."

In addition, the insurance company did not take an interlocutory appeal from the court's decision on the motion to remand. The failure to file an appeal is fatal to a claim of extraordinary circumstances.

The letter opinion is available in PDF.

Animal Welfare Institute v. Beech Ridge Energy, LLC (Maryland U.S.D.C.)

Filed: December 8, 2009

Opinion by Judge Roger R. Titus

Held: Defendants were enjoined from constructing new wind turbines and operating a wind farm during certain months because the project would kill endangered bats in violation of the Endangered Species Act (“ESA”) and the Defendants failed to obtain an "incidental taking permit."

Facts: “This is a case about bats, wind turbines, and two federal policies, one favoring the protection of endangered species, and the other encouraging development of renewable energy resources.”

The Defendants ignored evidence that endangered bats are present in the area of the wind farm project and ignored requests by federal officials to conduct more extensive surveys as to the presence of these bats. The Defendants failed to obtain an incidental taking permit, that would have permitted the construction in spite of the risk to the wildlife.

Analysis: The ESA makes it unlawful to take any endangered species within the United States. The definition of take includes “to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, or collect, or to attempt to engage in any such conduct.”

Anyone who knowingly takes an endangered species in violation of the ESA is subject to significant civil and criminal penalties. In order to provide a safe harbor from these penalties, the ESA includes an “incidental taking permit” process that allows a person or other entity to obtain a permit to lawfully take an endangered species without fear of incurring penalties.

The Court found that there is a virtual certainty that construction and operation of the wind farm will take endangered Indiana bats in violation of the ESA. The only avenue available to the Defendants to continue construction and regular operation of the wind farm is to obtain an incidental taking permit.

The full opinion is available in PDF.

Thomas v. Capital Medical Management Associates, LLC (Ct. of Special Appeals)

Date: December 7, 2009
Opinion by Judge Alexander Wright, Jr.

Held:

Because the defendants, a doctor and a medical practice, failed to raise negative averments in their answer concerning their capacity to be sued, they were precluded from disputing their status as parties to the contract. Further, because terms in the agreement were found to be ambiguous, parol evidence was admissible to prove that the defendants had additional duties to facilitate the plaintiff billing company's collection efforts. The plaintiff was entitled to recover lost profit for work yet to be performed because it was able to prove the losses with reasonable certainty. Finally, because the indemnification clause in the agreement did not expressly provide for recovery of attorney fees in a first-party enforcement claim, the plaintiff was precluded from recovering attorney fees and costs.

Facts:

The defendant doctor and medical practice retained the plaintiff billing company to process its bills. The billing company terminated the contract after 16 months and sued, alleging that the defendants failed to provide the billing company with timely information, failed to compensate the billing company, and failed to take steps necessary to ensure that the bills processed by the billing company would be paid.

The trial court ruled in favor of the billing company and awarded it contract damages, including lost profit for work not yet performed. The trial court also awarded attorneys' fees and costs.

The defendants appealed, arguing four issues: (1) The defendants were not proper parties to the lawsuit; (2) The defendants had no contractual duty to provide the information and assistance at issue; (3) The plaintiff was not entitled to damages for work yet to be performed; and (4) The plaintiff was not entitled to attorneys' fees pursuant to the contract's indemnification clause.

Analysis:

(1) The defendants were parties to the agreement

The defendants argued that neither was actually a party to the contract. The Court rejected the argument. The Court noted that the defendants failed to raise negative averments concerning their capacity in the answer as required by Maryland Rule 2-323(f). Instead, the defendants admitted that there was an agreement between the parties and averred that it spoke for itself. Accordingly, the Court held that a written contract was properly executed between the parties and the defendants were bound by it.

(2) Parol evidence established that the defendants had duties to facilitate the plaintiff's billing work

The trial court accepted the plaintiff's theory that the defendants had a duty to provide demographic information and to perform certain credentialing so that the plaintiff could process the defendants' bills. On appeal, the defendants argued that there was no such duty written into the contract. The Court found the terms of the contract ambiguous. Reviewing the parol evidence, the Court concluded that the trial court properly held that the defendants had such a duty.

3. The plaintiff was properly awarded damages for lost profits

The defendants argued that the award of damages for lost profit on future work was entirely speculative. The Court stated that a claimant may recover for lost profit if the loss is reasonably foreseeable and can be proven with reasonable certainty. Damages can be proven by reference to some fairly definite standard, such as market value, established experience, or direct inference from known circumstances.

At trial, the plaintiff proved its lost profit by means of testimony from its billing manager. She had experience in medical billing and was acquainted with the plaintiff's transactions. After considering the records of prior collections, she calculated an estimate of the lost expected profit on the work yet to be performed. The Court approved of the method and affirmed the award.

4. The plaintiff was not entitled to recover for attorneys' fees

An indemnification clause in the contract was the only clause that provided for recovery of attorneys' fees. The Court noted that a party may recover attorneys' fees pursuant to contract only if the contract expressly provides for it. Here, the indemnification clause did not expressly provide for attorney's fees for enforcement in a first-party breach of contract action. Accordingly, the Court held that the plaintiff was not entitled to recover its fees from the defendants.

The full opinion is available in PDF.

Schelhaus v. Sears Holding Co. (Maryland U.S.D.C.)

Filed: December 3, 2009
Opinion by Judge J. Frederick Motz

Held: Plaintiff’s complaint against employment agency and former employer claiming that reporting the reason for the plaintiff's prior termination to a new employer violated the Fair Credit Reporting Act was sufficient to survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6).

Facts: Plaintiff was an employee in a Sears department store until he was fired for “award fraud” for giving a discount to a customer, giving away a power cord to an appliance, and taking other actions to improperly garner benefits under a sales program. The plaintiff made a written statement to Sears security personnel admitting to this conduct but contended that his supervisors knew and approved of his conduct.

Following his termination from Sears, the plaintiff was hired by a new employer. The new employer conducted a background check on the plaintiff by contacting the employment agency for information. Sears had previously sent a report to the employment agency indicating the reasons for the plaintiff’s dismissal. The agency told the new employer that the plaintiff was fired for committing award fraud. The new employer then fired the plaintiff.

The plaintiff complained to the employment agency, challenging the veracity of his employment history report. The employment agency asked Sears to provide all information supporting the report of a termination for award fraud. In response, Sears provided the employment agency with the plaintiff's written statement admitting to the conduct. The employment agency then told the plaintiff that it had deleted all information from his employment record that had not been verified. The plaintiff later discovered that his employment record remained unaltered, including the allegations of award fraud, and filed suit against Sears and the employment agency.

Both defendants moved to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6).

Analysis: The Fair Credit Reporting Act (FCRA) imposes investigation obligations on those who learn that information they have furnished to credit reporting agencies is inaccurate. Further, a consumer reporting agency violates the FCRA if (1) the consumer report contains inaccurate information and (2) the reporting agency did not follow reasonable procedures to assure maximum possible accuracy.

The plaintiff alleged that Sears violated the FCRA because it failed to conduct an investigation into the veracity of the conclusion that the plaintiff committed award fraud, failed to provide the employment agency with information supporting its report, and then failed to amend its initial report of award fraud.

The plaintiff alleged that the employment agency violated the FCRA because it failed to follow reasonable procedures to assure the maximum possible accuracy of Sears’ report when it did not conduct an independent evaluation, possessed no supporting documentation at the time of its report to the new employer, ultimately failed to review any foundation for Sears’ report, and failed to conduct a reasonable investigation to determine whether the disputed information was accurate.

The defendants argued that the plaintiff’s written statement admitting to the alleged fraudulent conduct precluded the plaintiff from bringing actions against them under the FCRA.

The Court held that the plaintiff’s written statement to Sears security personnel did not preclude the plaintiff from raising plausible FCRA claims . The Court noted that while the plaintiff admitted to certain conduct in his written statement, he also contended that he acted with managerial knowledge and supervision. Without details of Sears’ policies and procedures and any definition of “award fraud” the Court could not find that the plaintiff’s claims were deficient.

The full opinion is available in PDF.