'Statute of limitations is a very real thing in this country'

"The statute of limitations is a very real thing in this country," former President and Republican presidential front-runner Donald Trump told reporters Monday at the New York court where he faces civil fraud claims.

I say the same thing to my 1L class every fall. Finally, some authority to back me up.

Though I can't help but think that the former President is thinking of the E. Jean Carroll matter.  Carroll filed her defamation and battery claims against the former President under New York's Adult Survivors Act (ASA). The act temporarily suspended the statute of limitations for civil claims arising from alleged sexual abuse, allowing a year-long "look-back window." Carroll filed on the day the act took effect.

The ASA opened look-back to all of a complainant's adult life. The window will close on November 23, 2023. In 2019, New York extended the statute of limitations for adult survivor claims from three to 20 years, but the extension is not retroactive. The N.Y. Law Journal reported 67 ASA lawsuits filed by February 2023; according to Katz Banks Kumin, citing The Wall Street Journal, 106 suits had been filed by May 2023. Though in April 2023, The Appeal reported "nearly 1,000" claims under the ASA by incarcerated or formerly incarcerated women against corrections officers.

The ASA was enacted as a political response to the #MeToo movement and a pointed plank in the platform of New York's first female governor, Kathy Hochul. The ASA was modeled on the New York Child Victims Act of 2019, which was in significant part a response to abuse in the Catholic Church.

The Child Victims Act similarly extended the New York limitations period for child survivors' civil claims to a victim's age 55 and opened a look-back window, one year later extended to two, that expired in 2021. That allowance saw "almost 11,000 cases," according to the N.Y. Law Journal. Jeff Anderson has details and data. Child USA tracks such laws across the country.

Bank battles liability for client's pyramid scheme

The federal district court in Massachusetts has continued in recent months to resist Bank of America efforts to extricate itself from allegations of complicity in a pyramid scheme.

The liability theory working against Bank of America (BoA) in the Massachusetts litigation is a theory of ancillary, or secondary, liability.  I'm fond of ancillary liability theories, which put on the hook not just the actor that most directly injured a plaintiff, but the actor's compatriots.

MLM
by Zainabdawood77 via Wikimedia Commons CC BY-SA 4.0

The myriad ways an injured plaintiff can add defendants to a civil claim improve the plaintiff's odds of recovery. So it behooves the plaintiff attorney to think creatively about ancillary liability. Correspondingly, it behooves the defense attorney to be on guard.

A plaintiff can be especially in need of better odds when a principally responsible defendant acted criminally, because criminal defendants tend to come up short on money to right wrongs. Ancillary liability theories in cases of financial crime are especially compelling, because perpetrators of fraud, before they're apprehended, tend to live large on their proceeds and then declare bankruptcy.

Think Bernie Madoff. His wild ride merited a thrilling fictionalization starring Richard Dreyfuss and still drives public interest with a new docuseries on Netflix. That his victims tended to be wealthy adds a sweet note of schadenfreude for American viewers, the vast majority of whom are trapped on the wrong side of the wealth gap.

That same schadenfreude thirsts for the diffusion of liability to more defendants. Plenty of corporations, namely banks and investment firms, and their directors and officers, leached wealth off schemes such as Madoff's, but bear no liability to victims. Ostensibly, these earners did nothing wrong. They merely engaged in lawful business.

Overlay that dynamic on financial opportunism that victimizes ordinary people, and the thirst for accountability becomes about more than schadenfreude. Financial disasters such as the savings-and-loan crisis of the 1980s and the housing crisis of 2008 infused the public with burning resentments that still smolder in the wreckage of the American dream.

In these crises, people were victimized by risks that enterprise externalized while providing no corresponding benefits. When the civil justice system fails to recognize a wrong in the infliction of such losses, we can expect the very insults to the social fabric that the system is supposed to prevent: more wrongdoing, diminished confidence in public institutions, and, ultimately, vigilantism by the afflicted.

Ancillary liability rides to the rescue. Two liability theories are especially useful in cases of financial fraud: "conspiracy" and "aiding and abetting." Those imprecise terms are useful to convey the essence of it, but the civil theories should not be confused with their criminal counterparts, which give rise to the terms.

More accurate descriptions in civil terminology are, respectively, "common design" and "substantial assistance or encouragement." When a principal defendant cannot be held to account, a plaintiff may demand compensation from a co-defendant that participated in a tortious common design with the principal, or from a co-defendant that knowingly substantially assisted or encouraged the principal in accomplishing a tortious objective.

The availability of conspiracy and aiding-and-abetting liability theories in common law business torts is not settled and not without controversy. The commercial defense bar naturally regards theories derived from personal injury law as ill suited to business torts, in which harms are only economic. Commercial actors are expected to safeguard their own interests to some extent in commercial transactions, more than a person exposed to risk of physical injury. Compensating economic loss is not regarded as socially imperative as the making whole of injured persons. The issue offers a window into a broader debate over whether business torts are torts at all, or, rather, a form of common law market regulation. We can leave that question on the shelves of academia for now.

In multi-district litigation pending in the U.S. District of Massachusetts, plaintiffs allege that Bank of America, among other defendants, substantially assisted or encouraged a pyramid scheme, or, more precisely, a "multi-level marketing" scheme (MLM), in the provision of commercial banking services. Bank of America (BoA) vigorously denies the allegations. In August 2022, the court refused to dismiss BoA, finding the allegation of ancillary liability sufficient to warrant discovery. The court has refused to undo its ruling upon motions for reconsideration since.

The principal defendant in the case is Telexfree, a transnational company with U.S. headquarters in Massachusetts. Having started up in 2012, the multibillion-dollar enterprise was an MLM that enlisted "promoters" to sell voice-over-internet-protocol telecommunication services. For a deeper dive into the rank turpitude of MLMs, check out comedian John Oliver's classic treatment in 2016. True to form, after only a year or two, Telexfree collapsed in bankruptcy under pressure from regulators in various countries, especially the Securities and Exchange Commission in the United States and authorities in Brazil. Private civil suits followed.

There is no question that banks such as BoA literally "substantially assisted or encouraged" Telexfree in its illicit enterprise. A company, even an MLM, needs banking services. The tricky part, though, for plaintiffs successfully to allege tortious aiding and abetting, is to show the ancillary defendant's knowledge of the principal defendant's tortious objective. BoA denies that it knew what Telexfree was up to.

Such denials usually fly. Banks at least purport to do business at arm's length. That impression accords with the experience of the average consumer; we don't imagine bankers poring over our checking accounts to second-guess our spending. And there's a sound argument in public policy that banks should not be held liable for the misdoings of their clients. Imposing weighty responsibility on banks, at best, would slow down commerce, and, at worst, could render capital inaccessible, paralyzing the marketplace. 

At the same time, banks with large commercial clients, in fact, routinely do business at much less than arm's length. Banks may well scrutinize clients, indeed may be fiduciarily obliged to scrutinize clients, if their business will place large amounts of capital at risk. Accordingly, the pleadings in Telexfree indicate that BoA worked closely enough with Telexfree executives to know what they were up to.  Indeed, plaintiffs allege that at least one BoA executive voiced concern that Telexfree's business model was not legal, and evidence suggests that BoA closed at least one account for that reason.

Upon the pleadings, then, the district court ruled that BoA had enough "red flags" to know what Telexfree was up to. BoA objected, and the court conceded, that red flags do not equate to the actual knowledge required for aiding-and-abetting liability. But red flags are evidence enough to allow plaintiffs to dig deeper in discovery, the court concluded.

The ruling has caused some angst in the commercial sector, for fear of the slippery slope of bank liability. I respect the worry, but I welcome the court's fresh take and willingness to rebalance the equities in financial fraud. Madoff was a compelling curiosity, and I don't have much sympathy for his high-roller investors. But more troublesome in America are recurring financial crises that seem only to exacerbate wealth disparity. And at the transactional level, MLMs and their like continue to run rampant, defying regulators and bilking not just high rollers, but ordinary people. 

The rabble is restless, as accountability runs thin. Regulators, whether wearing black robes or bearing pointy heads, had better start noticing.

The case is In re: Telexfree Securities Litigation, No. 4:14-md-02566 (D. Mass. received Oct. 22, 2014). HT @ attorneys Anthony D. Mirenda, Leah Rizkallah, and Nick Bergara of Foley Hoag LLP, writing for Mondaq.

Attorneys spell out False Claims Act elements

Nick Youngson CC BY-SA 3.0 Pix4free.org via The Blue Diamond Gallery

Two attorneys in April endeavored to articulate the elements of claims under the False Claims Act.

The False Claims Act (FCA) (DOJ, LII) facilitates lawsuits against persons who defraud the government. An important aspect of the statutory scheme is the authorization of qui tam actions, by which individual litigants may apply for government permission to sue on the public's behalf. Qui tam representatives can be entitled to a percentage of the recovery, which can mean a substantial sum of money. (Consider a case I wrote about in May 2021.)

With government subsidies characterizing recovery from the 2008 financial crisis and then, more recently, the pandemic, I added a sliver of False Claims Act content to my survey of tort-like statutory actions in my 1L Torts II class. I feel obliged to give students at least one exposure to the FCA, because I fear that they will otherwise never see a hint of it in law school. And I don't mind fantasizing that one of my alums one day will win a big qui tam award and think to throw a little love my way. Hey, that's more likely than a meaningful pay raise from my employer.

Accordingly, it's my intention to add the FCA to my Tortz textbook as I develop its second-semester coverage. I might be onto something, because, in April, two attorneys wrote articles articulating FCA fundamentals: A.J. Bolan, healthcare litigation associate at Barnes & Thornburg, wrote a piece for JD Supra, and Molly K. Ruberg, litigation partner at Bass, Berry & Sims, wrote a piece (login wall) for Lexology.

Both writers laid out these elements:

1. A false claim.
2. The false claim was made with the requisite scienter (or knowledge that it was false).
3. The false claim is material to payment.
4. The false claim caused the government to pay money.

Falsity may be express or implied, both writers explained, and most courts require objectively verifiable falsity. Scienter may be accomplished by (1) actual knowledge, (2) deliberate ignorance, or (3) reckless disregard, both writers said.

Under the statute, materiality means “having a natural tendency to influence, or be capable of influencing, the payment or receipt of property,” both writers quoted. Courts disagree over whether causation must be but-for or proximate, they agreed.

Privilege shields attorney from bankruptcy creditor's claim of sham proceeding to hide client's assets

mohamed hassan CC0 via PxHere

The litigation privilege shields an attorney from tort liability in the conduct of a case, the Massachusetts high court held, even if there was fraud.

The question of litigation privilege arose in connection with a bankruptcy. Creditors of a construction company alleged that its bankrupt owner had transferred assets to his wife in a sham adversarial divorce proceeding, and that their lawyer had orchestrated the plan. Besides attaching property of the debtor, the creditors sued the lawyer who had represented the debtor's wife in the divorce while the debtor appeared pro se. 

The litigation privilege protects participants in litigation, including lawyers and witnesses, from liability arising from their participation in the litigation. The privilege is often employed in defense against tort actions such as defamation and interference with contract.

The litigation privilege is better characterized as an absolute privilege, rather than a qualified privilege, though the line between the two is not always bright.  Qualified privileges usually can be vitiated by malice, whether common law "ill will" malice or actual "reckless disregard" malice.

Closer to impregnable, an absolute privilege can be vulnerable on questions of scope, but usually not on grounds of culpability. For example, the Texas Supreme Court in 2021 declined to extend the litigation privilege to protect an attorney against defamation allegations based on extra-judicial statements to media to garner pre-suit publicity for litigation by the Animal Legal Defense Fund against the commercial owner of the Houston Downtown Aquarium. The privilege failed because of the remoteness of pre-suit publicity from the litigation process, not because of the alleged scienter of the attorney.

The Supreme Judicial Court recounted the common law history of the litigation privilege.

The roots of the litigation privilege can be found in English common law, with the first reported decision dismissing an action against an attorney on the ground of the privilege issued in 1606. See Brook v. Montague ... (K.B. 1606); [T. Leigh] Anenson, Absolute Immunity From Civil Liability: Lessons for Litigation Lawyers [Pepp. L. Rev.] (2004).... In that case, an English court held that an attorney accused of slandering his client's adversary during a previous trial—by asserting that the adversary was a convicted felon—was immune from suit.... The court decided that "[a] counsellor in law retained hath a privilege to enforce any thing which is informed him by his client, and to give it in evidence, it being pertinent to the matter in question, and not to examine whether it be true or false."

Courts in the United States adopted this doctrine in the Nineteenth Century and frequently cited the early English cases in doing so. See, e.g., Marsh v. Elsworth ... (N.Y. Super. Ct. 1869) [citing Brook]; Mower v. Watson [Vt. 1839 (citing Buckley v. Wood (K.B. 1591))]. Over time, the scope of the doctrine has broadened. See [Paul T.] Hayden, Reconsidering the Litigator's Absolute Privilege to Defame ... (1993). Nearly every State, including Massachusetts, has adopted the formulation of the privilege set forth in the Restatement (Second) of Torts, [§ 586 (1977),] which provides:

An attorney at law is absolutely privileged to publish defamatory matter concerning another in communications preliminary to a proposed judicial proceeding, or in the institution of, or during the course and as a part of, a judicial proceeding in which he participates as counsel, if it has some relation to the proceeding.

"The privilege applies regardless of malice, bad faith, or any nefarious motives on the part of the lawyer so long as the conduct complained of has some relation to the litigation." Anenson, supra....

The court also recounted the purpose of the privilege, to "promote[] zealous advocacy by allowing attorneys 'complete freedom of expression and candor in communications in their efforts to secure justice for their clients'" (quoting Mass. precedent). The privilege simultaneously enhances judicial efficiency by precluding "meta-litigation" (my word choice) by disgruntled adversaries. (The same argument has been used to reject civil process torts.)

The litigation is not a privilege to commit wrongs, the court cautioned. Lawyers are subject to a court's inherent authority to sanction, by which a court can compel compensation to a wronged party. And lawyers are subject to bar discipline for violating the rules of professional conduct.

In the instant case, then, the complainants were not permitted to predicate an action for fraud based on the defendant-lawyer's in-court representation of the debtor's wife in the divorce proceedings.

A closer question arose as to the defendant's potential liability for conduct outside the courtroom, what the complainants characterized as orchestration of a fraudulent scheme. But the court resisted the effort to articulate a pattern of conduct apart from the litigation or expression in the course of litigation. The court cited and followed the lead of other state high courts, holding "that the litigation privilege shields an attorney from liability for actions taken during the course of litigation." The court cited a Restatement comment articulating a broad basis for the privilege "upon a public policy of securing to attorneys as officers of the court the utmost freedom in their efforts to secure justice for their clients."

"The litigation privilege thus applies to [the attorney's] advice and to the services he rendered," the court concluded.

The creditors are not without remedy, the court noted, evidenced by their efforts in collateral litigation to attach debtor assets notwithstanding the bankruptcy. Moreover, the court reiterated, civil immunity "would not shield the attorney from any applicable sanction for conduct contrary to the rules of professional responsibility, nor would it suggest to other attorneys that such behavior is acceptable."

The case is Bassichis v. Flores (Mass. July 1, 2022). Justice Serge Georges, Jr. wrote the unanimous opinion.

Court rejects qui tam suit against big banks because whistleblower relied on publicly available data

"Big Ballin' Money Shot" by Louish Pixel CC BY-NC-ND 2.0

A whistleblower alleged that a who's who of big banks is improperly manipulating the municipal bond market to profit at the expense of Massachusetts taxpayers.  But the Massachusetts high court today rejected the whistleblower's lawsuit because he relied on public data.

This case is of interest because it arises under, and narrows, a state false claims act.  With the federal government doling out billions of dollars in pandemic relief to corporate America, I've predicted, and it doesn't take a crystal ball, that we're going to see a rise in corruption and a corresponding rise in enforcement actions.  One key enforcement mechanism is a false claims act.  In anticipation of good work to be had for lawyers in the false claims vein in coming years, I added the subject this spring to coverage in my 1L Torts II class.

False claims cases, or "qui tam actions," allow any person, a member of the general public called "a relator," to bring a lawsuit on behalf of the government, that is, the public, to recover money lost to fraud or misfeasance.  Derived conceptually from Roman law and carried on in Anglo-American common law for centuries, "qui tam" is short for a Latin phrase meaning one who sues on behalf of the king and for oneself.  Relators are incentivized by being entitled to a cut of any recovery.  Qui tam is authorized in the United States by federal law (§§ 3729-3722, and at DOJ) and the laws of many states (at Mass. AG), varying in their particulars, and also can be a part of sectoral enforcement mechanisms, especially in healthcare and finance.

In the instant case, relator "B.J." Johan Rosenberg, an investment analyst and capital adviser with experience in municipal securities, alleged that banks are pricing municipal bonds and manipulating the market in ways that profitably breach their obligations to their public clients.  Defendants in the Massachusetts case include Chase, Citi, Bank of America, Merrill Lynch, and Morgan Stanley.

The Supreme Judicial Court (SJC) dug into the particulars, which make my eyes glaze over and remind me why I have a financial adviser.  Suffice to say that Rosenberg understands this stuff well.  In 2019, Bloomberg described him as the "mystery man behind $3.6 billion in muni lawsuits," referring to qui tam actions in California, Illinois, and Massachusetts.  In 2015, Bloomberg reported, Rosenberg patented "MuniPriceTracker," a software designed to "ferret out Wall Street chicanery."

"If we're going to have software patents, let's at least have a level playing field"

by Opensource.com CC BY-SA 2.0

Rosenberg's analytical software is key in the instant case, and there the problem arises.  The false claims act in Massachusetts law (§§ 5A to 5O), as in federal law, bars claims based on publicly available information, whether from government reports or "news media."  The theory is that a qui tam statute should incentivize whistle-blowing by persons privy to information that the government and public are not, rather than potentially rewarding someone who rushes to the courthouse with old information.  As the SJC put it: "Where the essential features of an individual's purported chicanery already have been illuminated, ... affording a private party an incentive to bring suit is unwarranted, as it would add nothing to the Commonwealth's knowledge[.]"

The tricky bit in the instant case is that Rosenberg ran his software analysis on publicly available data.  That sourcing disallowed his action.  The court reasoned: "[I]t suffices that other members of the public, albeit with sufficient expertise and after having conducted some analysis, could have identified the true state of affairs by conducting the same data-crunching exercise as did the relator, using the data publicly available on the [Electronic Municipal Market Access] website."

Well, maybe.  To me, the phrase, "with sufficient expertise" is working overtime in that reasoning.  Rosenberg's method is sophisticated enough to be patent-worthy.  I don't think the average taxpayer spends weekends crunching market numbers, however publicly available they are.  And there's no evidence that anyone's doing it at the AG's office, either.  I worry that this narrowing of false claims to exclude "sweat of the brow" extrapolation from public records ill equips society to respond to sophisticated corporate malfeasance that can be revealed only by equally sophisticated detective work.

But I've already confessed my ignorance of finance.  You can read the 36-page opinion and decide for yourself.  Or choose among the views of the amici: the CFA Institute and Taxpayers Against Fraud Education Fund supported Rosenberg, and the Greater Boston Chamber of Commerce and New England Legal Foundation supported the banks.

The case is Rosenberg v. JPMorgan Chase & Co., No. SJC-12973 (Mass. May 11, 2020).  Justice Dalila Wendlandt wrote the opinion, affirming the lower court, for a unanimous SJC of six justices.  She was an accomplished patent attorney before going on the bench.

Sovereign immunity shields Texas power overseer from liability for now: not so privatized after all

NASA satellite image of Houston with area blackouts, Feb. 16

The cold-induced electric-power disaster in Texas is raising questions about the accountability of "ERCOT," the Electric Reliability Council of Texas.

ERCOT is responsible for about 90% of the Texas electricity market.  During the storm and record cold of last week, Texans experienced rolling outages and some prolonged blackouts.  Deaths and injuries, from hypothermia and carbon monoxide poisoning, are attributed to the cold and blackouts, as well as billions of dollars in property damage.  Governor Greg Abbott has blamed ERCOT for failure to prepare the state's electrical system for a foreseeable winter weather event and promised an investigation.

National Weather Service Tower Cam, Midland, Feb. 20

Naturally, many Texans are wondering about legal liability for ERCOT.  I noticed a tweet from Houston Chronicle business reporter Gwendolyn Wu, who said that ERCOT has "sovereign immunity."  I found that hard to believe.  Wu cited a Chronicle story (subscription), from the bygone innocent age of fall 2019, in which business writer L.M. Sixel said just that.  As it turns out, the problem of ERCOT immunity is sitting, undecided, in the Texas Supreme Court at this very moment.

Legally, ERCOT is a nonprofit corporation formed in 1970 to oversee electric power distribution in Texas.  Because Texas has its own grid that doesn't cross state lines, the power system is not regulated by the federal government.  ERCOT has been at the heart of Texas's love affair with deregulation and privatization, a push that began in earnest in 1999 and found no bounds at the threshold of critical infrastructure.  State legislation in 1999 called on the Texas Public Utility Commission (PUC) to designate an exclusive "independent system operator" to oversee the Texas power grid, and ERCOT easily got the job that it more or less already had.

Yet ERCOT is neither wholly private nor a success story.  Its near monopoly control of Texas power comes with PUC oversight.  Despite that oversight, ERCOT has posted a remarkable record of abuse and failure.  As Sixel recounted in the Chronicle, executives went to prison in the 20-aughts for a financial fraud aggravated by lack of transparency and exposed by whistleblowers.  About the same time, Texans saw rolling blackouts, even while their deregulated electricity prices shot 30% over the national average.  Then, in 2011, a winter storm with single-digit temperatures caused blackouts across Texas.  It was that event that led federal regulators to recommend that ERCOT and the PUC winterize the system, a recommendation that was never heeded.

Frmr. Gov. Rick Perry tours ERCOT on March 14, 2012.

(photo by Gov. Rick PerryCC BY-NC-ND 2.0)

Apparently, an embarrassing record has not dampened the mood at ERCOT.  The "nonprofit," which is run by a board majority comprising power industry heavyweights, brought in $232m in revenue in 2018, Sixel reported in 2019, and chief executive Bill Magness took home $750,000 in 2017.  Sixel described ERCOT HQ (pictured below) near real-estate-red-hot Austin: "Its sprawling, modern glass and metal building has plush interiors with on-site fitness facilities that include a gym and sport court for volleyball, basketball and pickleball."  In contrast, the PUC "operates from two floors of crammed cubicles in ... a dilapidated structure close to the campus of the University of Texas at Austin.  DeAnn Walker, the commission chairman, earns $189,500 a year."

It was also in 2011 that ERCOT set out toward the immunity question now pending.  After the rolling outages of the 20-aughts, ERCOT wanted to see new sources of power added to the system.  Enter Panda Power, which invested $2.2bn to construct three power plants.  Alas, Panda later alleged in court, ERCOT had deliberately inflated market projections to incentivize investments; the power plants delivered only a fraction of the anticipated returns.  Panda sued ERCOT for $2.7bn in damages on theories including fraud and breach of fiduciary duty.

After almost a year of defending the case, ERCOT devised a new theory of sovereign immunity in Texas common law.  ERCOT performs exclusively governmental, not private, functions, it alleged, and works wholly under the control of the PUC.  Despite its statutory role as an "independent system operator," ERCOT insisted that it is not an independent contractor.  Rather, ERCOT styled itself as "a quasi-governmental regulator, performing an essential public service."  Panda argued that ERCOT is not entitled to sovereign immunity because it is "a non-governmental, non-profit corporation that receives no taxpayer dollars and retains discretion," particularly, Panda exhorted, when it furnishes false market data to power providers. 

In April 2018, reversing the district court, the Texas Court of Appeals agreed with ERCOT.  In a functionalist analysis, the intermediate appellate court grounded its decision in the legislative delegation of ultimate fiscal authority over ERCOT in the PUC.  The court wrote (citations omitted):

[A]s to separation-of-powers principles, [the statute] shows the legislature intended that determinations respecting system administration fees and ERCOT's fiscal matters, as well as any potential disciplinary matters or decertification, should be made by the PUC rather than the courts. Further, as the certified [independent service operator] provided for in [the statute], ERCOT is a necessary component of the legislature's electric utility industry regulatory scheme. A substantial judgment in this case could necessitate a potentially disruptive diversion of ERCOT's resources or a decertification of ERCOT not otherwise intended by the PUC.

According to Sixel, that decision rendered ERCOT "the only grid manager in the nation with sovereign immunity."

Pixabay image by Clker-Free-Vector-Images

Panda appealed to the Texas Supreme Court, which heard oral argument (MP3, PDF) on September 15, 2020, but has not ruled.

Meanwhile, a curious procedural imbroglio arose in the lower courts to gum up the works.  While Panda was busy lodging its appeal with the Texas Supreme Court, it didn't head off the intermediate appellate court's mandamus order to the district court to dismiss the case, which it did.  Panda then appealed that dismissal on a separate track, and the intermediate appellate court stayed oral argument on that second appeal, waiting to see what the Supreme Court would do with the first appeal.

One month after the Supreme Court heard oral argument, it ordered the parties to file supplemental briefs, which they did in November 2020 (ERCOT, Panda), to answer whether the district court's dismissal mooted the case in the Supreme Court.  Panda insisted that there is a live controversy still before the court.  ERCOT wrote that Panda should have asked for a stay of dismissal in the lower court, and it didn't.  Bad Panda.

House chamber in the Texas Capitol (picryl)

It looks to my outsider eyes like the Supreme Court badly wants not to decide the case.  And that was before the winter storm of 2021.  If the court does kick the case, the intermediate appellate court's ruling for sovereign immunity will stand, and any 2021 complainants will be out of luck.  ERCOT's supplemental brief read anyway with a good deal of confidence about how things would go in the Supreme Court, so maybe it's only a question of which appellate court will bear the people's ire.  While the courts dithered, Panda Energy, a division of Panda Power Funds, folded, and Texas froze.

The best answer to the people's woes lies in their state legislature.  Maybe Texas legislators can be made to understand that privatization is not really privatization when the reins, along with sovereign immunity and a market monopoly, are simply handed over to a nominally independent and hardly nonprofit oligarchy.

Or maybe legislators are on their way to Cancún and points warmer.

The case is In re Panda Power Infrastructure Fund, LLC, No. 18-0792 (now pending), appealing Panda Power Generation Infrastructure Fund, LLC v. Electric Reliability Council of Texas, Inc., No. 05-17-00872-CV (Tex. Ct. App. 5th Dist. Dallas Apr. 16, 2018), reversing No. CV-16-0401 (Tex. Dist. Ct. 15th Grayson County 2017).  The latter appeal is Electric Reliability Council of Texas v. Panda Power Generation Infrastructure Fund, LLC, No. 05-18-00611-CV (oral argument stayed Aug. 20, 2019).

[UPDATE, April 3, 2021.] The Texas Supreme Court ducked the immunity issue in ERCOT v. Panda with a "hotly contested" "non-decision."  DLA Piper has the story (Mar. 29, 2021).

Mary Trump sues President, family, alleges three decades' fraud in oversight of her father's estate

Author of Too Much and Never Enough (2020), Mary L. Trump on Thursday sued her uncle, the President, and her aunt, retired federal judge Maryanne Trump Barry, for ongoing fraud and breach of fiduciary duty in oversight of the estate of Mary's father, Fred Trump, Jr., since his death in 1981.

The case comes just two months after a failed bid by presidential brother Robert S. Trump to enjoin publication of Mary's book, and one month after Mary's release of audio recordings in which her aunt condemned the President. Considering the First Amendment and the futility of last-minute injunction, the court in the earlier case refused to enforce the confidentiality provisions of a family agreement that settled litigation arising from the deaths of Robert, Maryanne, and the President's parents, Mary's grandparents, Fred and Mary Anne, in 1999 and 2000. Robert S. Trump died on August 15, 2020. Try to keep up.

To navigate the statute of limitations, Mary Trump alleges that she only became aware of the fraud upon the publication of investigative journalism by The New York Times in 2018 (pay wall; about).  Links to the dockets, the complaint in the latest Mary L. Trump case, and the court decision denying injunction in the Robert S. Trump case are now posted at the Trump Litigation Seminar blogsite, a project of The Savory Tort. HT @ TLS students Spencer K. Schneider and Richard Grace. 

Appeals court reviews fundamentals of multiple liabilities in remanding business tort case

A Massachusetts Appeals Court decision Friday reaffirmed the rule against double recovery, the finality of settlement, and other fundamentals in a business case of joint tortfeasors.  The case is a good refresher for law students and lawyers on multiple liabilities in tort.


A company sued its former secretary-treasurer and a tax consultant for breaches of fiduciary duty through fraudulent concealment, resulting in financial loss in excess of about $288,000.  The company president, a husband, and the former principal, a wife, were recently divorced, and the latter’s separation on both counts was settled upon a $50,000 payment.  The couple furthermore stipulated an allocation of about $40,000 for the purchase of the wife’s company shares.

The company prevailed against the tax consultant on default judgment.  However, the court determined that the terms of the settlement, and specifically the allocated share purchase, inclusively credited the company with the $288,000 of the wife’s liability.

Under widely accepted state doctrine of joint tortfeasor liability in American law, a joint tortfeasor at judgment is credited with the plaintiff’s past settlement against a departed joint tortfeasor.  The rule encourages settlement by encouraging a well bargaining defendant to settle out, while deterring needless litigation by respecting the common law maxim that “a party can have but one satisfaction for the same injury.”

In accordance with the doctrine, then, the trial court ruled that the plaintiff had been made whole, so would collect nothing more from the tax consultant, however negligent.

That was an error on the merits, the Appeals Court ruled.  “Settlements are motivated by a wide range of factors, some non-monetary, and may involve significant payments or no payment at all,” the court wrote.

Justice Desmond

[T]here are many reasons [the husband] could have agreed on behalf of [the company] to dismiss the complaint against [the wife].  To name just one, having in-depth knowledge of [her] financial status, [he] may well have concluded that [she] would be unable to pay any judgment against her.  In any event, it was clearly erroneous to conclude that the plaintiff had been made whole based on no more than (i) the mere existence of a settlement [on] multiple legal claims and (ii) hearsay assertions that a discount had been given.

The court remanded for the trial court to reassess the actual measure of credit against liability represented by the share allocation, thus the remaining liability owed to the plaintiff by the tax-consultant defendant.

The case is Custom Kits Co. v. Tessier, No. 19-P-503 (Mass. App. Ct. May 1, 2020).  Associate Justice Kenneth V. Desmond Jr. wrote for a unanimous panel with Justices Wendlandt and McDonough.

The Mystery of the Student Loan Fraud, or Of In Pari Delicto, Respondeat Superior, et Cetera

A still mysterious financial fraud perpetrated on students of Merrimack College resulted in a high court ruling last week on agency law with important implications for tort liability and the equitable doctrine of in pari delicto.

Students at Merrimack College Orientation in 2015.
By Merrimack College (CC BY-NC-ND 2.0)

Merrimack is located in North Andover, Massachusetts (where the recent gas explosions occurred).  Merrimack is a small liberal arts college founded in the Roman Catholic tradition after World War II especially to serve returning vets.  Despite the depressed market in higher education, Merrimack this fall reported a record-size freshman class and plans to join Division I athletics.

In 2014, Merrimack financial aid director Christine Mordach pleaded guilty to federal criminal fraud charges, and in 2015, she was sentenced to a year’s imprisonment and ordered to pay $1.5 million in restitution.  She had been accused of perpetrating a scheme that replaced college scholarship awards with federal loan money on the college books.  The scheme came to light when a new accounting system started to inform students of federal Perkins debts they did not know they had.

Why Mordach did what she did is the mystery.  The scheme shored up the college’s bottom line through lean times, because money paid out of college coffers in grants was replaced with borrowed dollars that students would be on the hook to pay back.  But there was no evidence that Mordach was ordered to execute the scheme.  To the contrary, she seems to have taken steps to conceal it, which she did so well that Merrimack auditor KPMG gave the college a clean bill of health while the fraud was ongoing.

That brings us to the instant civil case.  Merrimack seeks to recover against KPMG on a range of theories, including breach of contract, professional malpractice, and negligent misrepresentation, for KPMG’s failure to detect the fraud.  KPMG won dismissal in the superior court upon the doctrine of in pari delicto.  Literally Latin for “in equal fault,” in pari delicto translates as the clean hands doctrine of equity.  In tort, the doctrine prevents a tortfeasor from recovering against a co-tortfeasor or innocent party—such as a bank robber who blames a co-conspirator for his bullet wound, or the burned arsonist who would blame firefighters for too slow a rescue.  Merrimack appealed the dismissal to the Massachusetts Supreme Judicial Court (SJC).

Being a doctrine in equity, rather than a rule, in pari delicto calls for a fact-sensitive application, operating as a function of the parties’ relative moral blameworthiness.  Thus in a 1985 case discussed in the instant opinion, the U.S. Supreme Court allowed would-be beneficiaries of insider trading to sue their tipsters for losses resulting from misinformation, even if both plaintiffs and defendants were wrongdoers.  The plaintiffs’ trading upon a failure to disclose was not “substantially equal” in moral culpability to the tipsters’ illegal insider disclosures, the Court decided, and public policy favored holding the tipsters to civil account.

KPMG Boston (Google Maps Aug. 2017)

KPMG argues more than just Merrimack’s benefit derived from a favorable financial picture.  KPMG argued successfully in the superior court that Mordach’s actions must be imputed strictly to Merrimack upon the tort-and-agency doctrine of respondeat superior, because Mordach was an employee of Merrimack and acted within the scope of her employment.  So if intentional fraud is imputed to Merrimack, then in pari delicto precludes recovery against KPMG for the diminished culpability state of mere negligence.

On the one hand, the SJC reasoned, look at the problem from the perspective of Merrimack students:  Were they to have sued Merrimack—not actually necessary, as the college spent $6 million to square its affairs with students—there is little doubt that Mordach’s intentional tort would have imputed strictly, even to an otherwise innocent Merrimack, through respondeat superior.  From where the student sits, the fraud was perpetrated by Merrimack’s financial aid office: Mordach and college, one and the same.  Merrimack might have sought indemnity from employee Mordach, but that’s always true in respondeat superior cases (notwithstanding employment contract).

On the other hand, the SJC reasoned, look at the problem from the perspective of Merrimack College:  Strict liability through the action of respondeat superior imputes liability irrespective of fault and certainly says nothing about moral blameworthiness.  Merrimack as liable to students is never adjudicated as bearing fault.  From a moral standpoint, Merrimack is at worst guilty of neglect, or failure to act, such as by negligent supervision of its financial-aid director.  So notwithstanding strict legal liability, Merrimack’s negligence would implicate moral blameworthiness of a magnitude less than what the college alleges of KPMG.

When co-tortfeasors both commit an intentional tort, in pari delicto precludes liability of one to the other.  But that’s not necessarily so when merely negligent co-tortfeasors A and B unwittingly combine efforts to cause loss to C, incidentally causing loss also to B.  In the subsequent action B v. A, the old contributory negligence rule, as a complete defense, would have effectuated the clean-hands doctrine.  But contemporary tort law commits negligent co-tortfeasors to comparative-fault analysis.  In a modified-comparative-fault jurisdiction such as Massachusetts, B may recover from A if A bore more fault than B, and B’s recovery is reduced in proportion to B’s own share of fault. 

The SJC decided that moral blameworthiness, not legal liability exposure, must be the guiding principle for an equitable doctrine.  Merrimack might be on the hook hypothetically for respondeat superior liability, and even negligent supervision.  But neither of those rules suggests moral blameworthiness greater than KPMG’s.  The case might be different if Mordach has been a senior executive of Merrimack; she was not.  And there is no evidence that Merrimack knew what Mordach was up to, much less directed her actions.

So in the absence of an intentional tortfeasor between Merrimack and KPMG, in pari delicto does not apply.  If Merrimack’s negligence contributed to its own losses, that will come out in the comparative-fault wash.  That conclusion is bolstered by a comparative-fault-like mechanism in Massachusetts statute that applies specifically to client-versus-auditor malpractice claims.  Accordingly, the SJC reversed and remanded.

Chief Justice Gants at UMass Law (2016)

The SJC received amicus briefs from the American Institute of Certified Public Accountants, the Massachusetts Academy of Trial Attorneys (MATA), and the Chelsea Housing Authority.  For the MATA, attorney Jeffrey Nolan argued, like in the U.S. Supreme Court insider trading case, that liability exposure is needed to hold KPMG accountable, especially in a market dominated by the Big Four accounting firms.  The housing authority also backed Merrimack, attorney Susan Whalen recounting her client’s victimization by internal misconduct that went undetected by accountants.  She asserted that in pari delicto has “the perverse result of de facto immunity for gross levels of negligence” by auditors (Law360, subscription required).

All of that is not to say that KPMG will be held liable.  Besides fault yet to be proved, the SJC affirmed the superior court’s leave for KPMG to amend its answer, adding a defense of release.  Ut victoriam tyranne?

The case is Merrimack College v. KPMG LLP, No. SJC-12434 (Mass. Sept. 27, 2018).  The opinion was authored by Chief Justice Ralph D. Gants, a graduate of Harvard undergrad and law, one-time AUSA, and 2016 recipient of an honorary law degree from UMass Law School.

'False claims of love': Mass. App. speaks from the heart for Valentine's Day

Just in time for Valentine's Day, the Massachusetts Court of Appeals rejected a divorcee's lawsuit for "false claims of love."

The plaintiff's eight claims were aptly characterized by the court as sounding in fraud, battery (i.e., contact upon improperly procured consent), infliction of emotional distress, and unjust enrichment.  All of these claims turned on misleading inducement to marry as a common, operative allegation.

Massachusetts by statute "abolished the common law actions for alienation of affection," "reflect[ing] the Legislature's public policy decision to no longer consider judicial remedy appropriate for what is only 'an ordinary broken heart.'"  Christopher Robinette wrote succinctly about the "heart balm torts"—alienation of affections, criminal conversation, seduction, and breach of promise to marry—in November at Tortsprof Blog.  Reading between the lines of the law, the court explained that legislators meant to preclude any cause of action that would require "'explor[ing] the minds of' consenting partners" (quoting precedent).

This case was not about failure to marry, but about marriage under allegedly false pretenses.  Same difference, the court held, with respect to claims of fraud or misrepresentation: plaintiff's "artful pleadings fail to hide the fact that these claims, based on events that occurred prior to the marriage, are precluded ...."  The same result controlled battery, as the consent analysis plainly would defy the inferred legislative intent.

As to IIED, the plaintiff could not meet the threshold of "extreme and outrageous," neither through allegation of an adulterous affair, even if calculated to inflict emotional injury, nor through failure to disclose "concealment of past sexual or romantic history."  Massachusetts courts at least in theory recognize a cause of action for negligent infliction of emotional distress (NIED)--the truly pure case of it is far rarer than recitation of the theory--but found the record "bereft of physical harm manifested by objective symptomatology."  On both points, one must recall Jones v. Clinton, 990 F. Supp. 657 (E.D. Ark. 1998), per the Hon. Susan Weber Wright.  This case also well exemplifies why NIED is not sound doctrine, a point the Supreme Judicial Court might ought revisit one day.

On unjust enrichment and related theories, the court concluded that any unjustness was predicated on the earlier rejected fraud, and otherwise, the plaintiff was in no way of feeble mind.

The court summed up: "[N]ot all human actions in the context of the dissolution of a marriage have an avenue for legal recourse, no matter how much anger, sorrow, or anxiety they cause." Broadened to all affairs of the heart, the conclusion well restates essential tort policy, lest we become the caricature of the litigious society.

The case is Shea v. Cameron, No. 16-P-1479 (Mass. Ct. App. Feb. 9, 2018), per Agnes, Sacks, and Lemire, JJ.