TORTIOUS INTERFERENCE/ARBITRATION/ DISCOVERY: No authority to vacate emergency arbitration order or stay arbitration proceedings at bidding of non-party to contract, injunction allowing Defendant to dismantle equipment to prevent use by Plaintiff granted under arbitration rules, not NY civil procedure… tortious interference claim rejected on LR 56.1(d) deemed admission of undisputed facts that letters based on good faith belief of breach of agreement… 56(d) not satisfied but additional discovery would not add essential facts, pursuit of settlement not valid excuse for not diligently pursuing discovery… amendment to add factual allegations and conversion claim denied… summary judgment for Defendant granted… Christensen.

Irvine Scientific Sales of California, Microbix Biosystems of Canada, and Rocky Mountain Biologicals of Montana manufacture water products for pharmaceutical and medical industries. Irvine and Microbix entered into a binding letter of intent in 10/12 to begin exclusive negotiations as to Irvine’s purchase of Microbix’s water assets. It provided that “during the period from the date hereof and December 31, 2012, [Microbix] shall not discuss, negotiate, or accept any agreement with any third party for the sale of all or any part of the commercial assets to be acquired.” Nevertheless, on 10/12/12 Microbix entered into a binding letter of intent which provided that Rocky Mountain would be allowed to evaluate certain equipment for manufacture of water products at the facility leased by Microbix in Toronto. Rocky Mountain was allowed 60 days to evaluate the equipment, after which it had the option to sign an agreement to operate the equipment at the facility and pay Microbix rent, negotiate with the landlord to remove the equipment and pay restoration costs, or negotiate a new lease with the landlord relieving Microbix of its lease obligations. On 12/31/12, Irvine and Microbix entered into a Commercial Asset Purchase Agreement whereby Irvine purchased substantially all of Microbix’s water assets including contracts, customer information, and good will. Microbix agreed to maintain confidentiality of all proprietary information and not compete with Irvine directly or indirectly. The agreement did not include sale of the equipment. On 2/1/13 Microbix entered into a Purchase & Sale & Service Agreement with Rocky Mountain under which Rocky Mountain assigned to Skyway Purified Solutions its option to carry on operations at the facility using Microbix’s equipment. Rocky Mountain agreed to pay Microbix rent for the equipment until expiration of Microbix’s lease 7/31/13. Rocky Mountain planned to then negotiate a new lease with the landlord and so agreed to relieve Microbix of its obligation to restore the facility to its original state. While Rocky Mountain has maintained that it had sole rights to the equipment before entering into the equipment agreement, the agreement provides that “Microbix will grant title to SPS for the Water Equipment with completion of the purchase.” Ownership of the equipment is made more ambiguous by other provisions such as the paragraph purporting to clarify ownership which apparently contains a critical typo: “Microbix has previously sold the Water Equipment (listed in SCHEDULE ) to for an amount of $1. RMB has subsequently transferred the rights and use of the equipment to SPS and Microbix has approved the assignment.” The entity to whom Microbix “previously sold the Equipment” is omitted. Assuming that Rocky Mountain purchased it, it appears that perhaps it purchased (for only $1) only the right to use the equipment rather than title to it and sole right of possession, ownership, and control. Irvine soon learned of the equipment agreement and on 3/4/13 wrote Microbix alleging that it constituted a breach of the non-compete provisions of the Irvine-Microbix agreement and demanding remedial measures. On 3/18 Irvine notified Rocky Mountain of the letter to Microbix and demanded that it cease using the equipment. On 3/21 Microbix wrote Rocky Mountain purporting to terminate the equipment agreement, alleging material breaches and asserting that it was signed by one lacking authority. Microbix has steadfastly maintained that the agreement is terminated and has refused to allow Rocky Mountain access to the facility. Rocky Mountain sued Microbix and Irvine 4/4/13. Microbix was dismissed for lack of personal jurisdiction. Irvine moved for summary judgment 5/31/13. Rocky Mountain filed a Rule 56(d) motion to defer summary judgment pending further discovery on the basis that it has not had a reasonable opportunity to conduct discovery because it pursued settlement in lieu of discovery. Irvine opposed the motion. Irvine moved to supplement the record with an Emergency Arbitration Order awarding injunctive relief giving it access to the facility to partially dismantle the equipment to prevent its use by Rocky Mountain. Rocky Mountain sought an order from this Court that would stay the arbitration and vacate the arbitration order, contending that new facts — failing to give Rocky Mountain notice of the emergency arbitration and dismantling of the equipment — constituted a new basis for claims against Irvine of tortious interference with contract or prospective business advantage and for a declaration of rights and legal relations of Rocky Mountain, Skyway, and Irvine vis-à-vis the Irvine-Microbix agreement. At the hearing on all motions 10/11/13 Rocky Mountain’s counsel indicated that its tortious interference claim might be better stated as a claim for conversion.

Rocky Mountain contends that the Court has authority to stay further Irvine-Microbix arbitration and that New York law mandates that the arbitration order be vacated. The Court agrees with Irvine that it cannot stay arbitration or vacate an arbitration order at the bidding of a stranger to the arbitration. A court may vacate an arbitration award “upon the application of any party to the arbitration.” 9 USC 10(a). Only a party to the arbitration may seek a court order vacating an arbitration award. ILWU (9th Cir. 1971). Rocky Mountain’s contention that the order must be vacated because it is void is based on its contention that, because the Irvine-Microbix agreement contains a provision for New York law to resolve contract disputes, New York civil procedure applied to the emergency arbitration and required Rocky Mountain to be joined as a necessary party. However, the agreement provided that arbitration would be conducted under arbitration rules. Pursuant to ICDR Art. 7, the emergency arbitrator rejected Microbix’s contention that Rocky Mountain should be joined, and proceeded to apply the arbitration rules agreed to by the parties in their contract. Rocky Mountain’s motion to vacate the arbitration order is denied.

9 USC 3 allows courts to stay litigation pending arbitration and §4 allows a court to compel arbitration, but absent from the Arbitration Act is any mechanism for a Court to stay arbitration pending resolution of related litigation. Wolsey (9th Cir. 1988). An order staying arbitration entered into pursuant to a valid arbitration clause would violate mandates of the USSC. More to the point, “under the Arbitration Act, an arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement.” MHCMH (US 1983). Rocky Mountain’s motion to stay Irvine-Microbix arbitration proceedings is denied.

Likely sensing the hurdles in requesting a stay of arbitration and vacation of an arbitration award, Rocky Mountain reformulates its motion in its reply brief as a motion for injunctive relief requiring Irvine to return the control panel to the facility, which it asserts will restore the status quo. The Court need not address arguments raised the first time in a reply brief, but returning the control panel will not restore the status quo, but would amount to a mandatory injunction, the burden for which Rocky Mountain cannot meet, and would constitute direct interference with the arbitration order.

Irvine’s properly supported Statement of Undisputed Facts establishes that the letters were sent in a good faith effort to protect its legitimate business interests based on the Irvine-Microbix agreement. Rocky Mountain did not file a statement of undisputed facts, which is deemed an admission that no material facts are in dispute. LR 56.1(d). Rocky Mountain contends that application of the LR in the context of its 56(d) motion “is absurd,” but can point to no exception to the LR. Regardless, it has still not offered any statement of undisputed facts or any properly supported evidence to dispute Irvine’s, and thus the Court will treat the facts offered by Irvine as true and undisputed. It is undisputed that Irvine sent the letters to Microbix and Rocky Mountain based on a good faith belief that Microbix was in breach of the Irvine-Microbix agreement. Even if its actions resulted in severance of the equipment agreement, Irvine cannot be held liable for tortious interference when it acted in “honest furtherance of [its] own business enterprise.” Quinlivan (Mont. 1934). Even if Irvine was mistaken in its belief that Microbix was in breach of the agreement, it cannot be held liable when it acted in good faith. Grenfell (Mont. 2002). Irvine is entitled to summary judgment on tortious interference.

Rocky Mountain has failed to satisfy 56(d). The evidence provided by Irvine affirmatively negates the factual issues which Rocky Mountain contends remain controverted, and many of the sought-after-facts are not essential to opposing Irvine’s motion. Regardless, the Court will address each issue. For example, Rocky Mountain seeks discovery into “the timing of Irvine’s negotiations with Microbix.” The evidence establishes that the negotiations formally began 10/1/12 when the parties entered into a binding letter of intent and concluded 12/31/12 when they executed the Irvine-Microbix agreement. Further discovery will not establish anything different, nor does Rocky Mountain provide any information to suggest that any other facts exist relative to the timing of the negotiations. While timing may be relevant to Irvine’s intent, the evidence of record affirmatively establishes the timing. Irvine entered negotiations with Microbix before Rocky Mountain began negotiating with Microbix. Irvine closed its deal with Microbix before Rocky Mountain executed the equipment agreement. The timing thus evidences Irvine’s good faith and justification in sending the letters.

While the Court does not find that Rocky Mountain has been dilatory in seeking discovery, it cannot be said to have diligently pursued it as required for a 56(d) motion. Mackey (9th Cir. 1989). It filed its complaint 4/11/13. Irvine’s summary judgment motion has been pending nearly 5 months, yet Rocky Mountain has not conducted any discovery. Its decision to pursue settlement does not excuse it from diligently pursuing discovery. Cervantes (7th Cir. 1999).

Rocky Mountain’s motion to add factual allegations as to the arbitration and Irvine’s actions pursuant to the arbitration order must be denied because the proposed amendment is futile and Foman (US 1962) factors weigh against it. Its motion is brought while summary judgment is pending, all of its claims as amended are subject to immediate summary judgment, and amendment would unduly prejudice Irvine by forcing it to continue litigating meritless claims and needlessly delay resolution of the case.

Rocky Mountain’s motion to add a claim for conversion is also denied. A ruling that would deem this action tortious would subvert the arbitration process and impose contradictory rulings and thus be futile. The motion also presents a new theory without alleging new facts at a stage where summary judgment is pending, without adequate explanation except that the new theory occurred to it during the hearing and it believes it is more appropriate.

Judgment for Irvine; the case is closed.

Rocky Mountain Biologicals and Skyway Purified Solutions v. Irvine Scientific Sales, 41 MFR 110, 10/31/13.

William VanCanaghan & Nathan Wagner (Datsopoulos, MacDonald & Lind), Missoula, for Plaintiffs; Stephen Bell, Denver, and Ben Kappelman, Minneapolis (Dorsey & Whitney), for Irvine.

 

INSURANCE/MAIL FRAUD: Materiality lacking in claim under “white glove” mansion policy for living expenses based on ambiguous standard of living clause (not actual cost) even though payment was based on misrepresented condition/ownership of temporary housing during repair of wind/fire damaged mansion… case should not have gone to jury, motions for acquittal of insured and broker granted, convictions reversed… Molloy.

Christin Didier and Surayya Nasir were convicted of mail fraud and conspiracy to commit mail fraud 3/12/13 after a week long trial. The Court vacated the convictions in 7/13, and this rationale follows.

This criminal case was tried to a jury but it should have not been given to them for decision. It was submitted on a theory of mail fraud, but, upon reflection, that theory cannot be sustained when the proof of materiality is at odds with a contractual obligation to pay what was supposedly gained by fraud. Chubb, the alleged victim of mail fraud, was obligated to pay Didier a substantial sun, undefined except in ambiguous language in its policy, because she could not live in her lake mansion due to covered losses. It argued to state and federal regulatory and investigative agencies that it had been victimized when she misrepresented the nature of her temporary residence. But, because it was obligated to pay an amount sufficient to maintain her standard of living in a mansion with multiple bedrooms, multiple baths, and even a ballroom, whatever she said could not have been material to Chubb. Materiality cannot be proven when the entity supposedly victimized by mail fraud is obligated to pay what the US claims was a loss caused by fraudulent representations of the insured. Every day there are thousands if not hundreds of thousands of insurance claims, in many of which the carrier pays the policy value of the roof destroyed by wind, the collision damage from a wreck, or the estimated value of windshield damage. Every day adjusters engage in thousands of transactions and adjustments concerning liability payments, home owner claims, or replacement value disputes. If the US’ theory is correct about materiality being a separate issue from the contractual obligation to pay, each of these events could give rise to indictment for mail fraud. Is it mail fraud when the owner of a damaged car gets the 3 estimates, obtains payment by mail from the carrier, but then has someone else do the work, pocketing the difference or savings? Is it fraud if the owner never has the damage repaired? Is it mail fraud when the water heater leaks and destroys the beautiful wood floor in the kitchen and the adjuster issues a check in the mail for the replacement cost and the homeowner elects to install linoleum or not fix the floor but pockets the difference? Is it mail fraud when the adjuster compromises the PI claim with a 3rd party by erroneously telling them comparative fault applies when the injured person is an innocent passenger, using the underpayment to bolster corporate and personal profits? Is it mail fraud when an auto carrier tells an insured in Montana that policy limits cannot be stacked, contrary to established law? Is it mail fraud when Chubb issues a “white glove” policy that requires it to maintain a standard of living and its adjuster unilaterally uses the wires to declare the “cost is too much” even though the policy requires it to pay according to a subjective standard? Materiality cannot legally exist if the purported victim is contractually obligated to pay what it was allegedly deprived of by misrepresentation or lies. That is why a judgment of acquittal must be entered here.

Didier bought a large mansion in Somers in 7/05. It was built in 1903 and had 14 bedrooms, multiple fireplaces, 3 bathrooms, and a ballroom. It was on 5 acres and has extraordinary views of Flathead Lake. She also purchased a white glove policy on the home written by Pacific Indemnity, a division of Chubb Ins. The Masterpiece Policy premium was nearly $1,000/mo. The mansion was damaged by a tornado in 7/07. She filed a claim with Chubb, which begin adjusting so repairs could be made. Either due to damage to the boiler from the wind or lack of fuel, Didier began using diesel heaters and the fireplaces that winter. A fire in 1/08 caused extensive damage to the residence, rendering it uninhabitable. Chubb agreed that losses from the wind and fire were covered and that it was necessary for her to vacate for at least 6 months until repairs were completed. A major clause anticipated this event and provided assurance that her standard of living would not be altered. Chubb was obligated to pay whatever it took to make sure Didier maintained her standard of living, regardless of where she lived, even if her normal expenses went up.

If your house cannot be lived in because of a covered loss to your house or, if applicable, to your contents, we cover the reasonable increase in your normal living expenses that is necessary to maintain your household’s usual standard of living. We cover this increase for the reasonable amount of time required to repair, replace or rebuild your house or your contents, or if you permanently relocate, the shortest amount of time required for your household to settle elsewhere. This period of time is not limited by the expiration of this policy.

The policy required undefined payment, constrained only by her usual standard of living at the mansion.

Resolving an ambiguous clause to favor Chubb is inconsistent with the general rules of interpretation and turns payment of a contractual obligation into a sword of conviction simply because the carrier paid what it owed, but did so based on mistaken reasons imparted by its insured. The focus of the obligation to pay is not on where the insured chooses to live when expelled from her mansion by a loss, but what is the cost of keeping her standard of living the same, even if it costs more than her actual expenses, based on the mansion she could no longer inhabit. The nature of the mansion and Didier’s use & enjoyment of it presented a challenge to Chubb in meeting its guarantee to provide replacement housing that would maintain her standard of living. The mansion and estate were exceptional properties in the Flathead Valley. The size of the mansion, its historic character, the surrounding estate, and panoramic views of Flathead Lake are rare, especially in a replacement rental. The loss was complicated by Didier’s living situation. She used the property in a way that was specialized and somewhat incompatible with many rentals. She had been living with her elderly mother who had Alzheimer’s. She also had several dogs with some estimates of 20-30 Pugs. When Chubb was handed this unique high-end loss it retained a temporary housing vendor, ALE Solutions, and authorized it to offer Didier and her household hotel accommodations as a stopgap to provide shelter during the winter. It was unworkable because she had concerns about her mother and dogs. While ALE was searching for housing that would match the standard of living in the mansion, Didier stayed at the mansion despite the fire damage. She offered to live in a mobile home, but that was not acted on by ALE and Chubb due to cost. ALE located a bed & breakfast in Whitefish willing to cancel its reservations to accommodate Didier. Chubb’s adjuster Peterson said “no” because the owner was not willing to sign a 6-month lease with option to renew. ALE found a fully furnished home with 8 bedrooms. Peterson rejected the corporate property due to the $40,000/mo cost. He told ALE to look for a place costing $10,000-$15,000/mo. In other words, Chubb acknowledged that it had to pay based on replacement cost, not the value of where Didier, her mother, and her dogs actually lived. ALE eventually reached an agreement with the bed & breakfast owner to rent the 6-bedroom, 3½ bath property for just over $10,000/mo for 6 months with an option to renew. Didier rejected it because it was too far from Somers. She informed ALE 1/28/08 that she had a lead on a property in Rollins. She put ALE in contact with Nasir, who represented herself as broker for Didier Family Trust and began communicating with ALE by fax and mail. ALE sent the “preap” to Didier. She completed it and faxed it back. Notably, these communications were not with Chubb. The preap represented that the Rollins property was 6,900 sq ft with 5 bedrooms and 2 baths. This was false. It proposed a base of $15,250/mo, a $7,000 security deposit, a $5,000 pet deposit, a $200 application fee, a $1,500 cleaning fee, and a 10% broker fee. Chubb did not question coverage for any of the claims. ALE transferred the preap to an electronic format and processed it for Chubb’s approval. ALE confirmed Nasir’s role as broker for the Didier Family Trust and that the broker fee was a 1-time fee. It needed confirmation that the property was not Didier’s own property and was actually held in trust by her extended family. Didier confirmed. Didier, her mother, and the dogs stayed in the Somers mansion surrounded by smoke and fire damage and without adequate heat until 1/27/08, then moved to the Rollins property before Peterson had given final approval to ALE to lease it. There was an email exchange 1/31 between Peterson and ALE. Didier had been very demanding about acceptable accommodation. Peterson expressed frustration and approved the Rollins proposal to just “shut this lady up.” Chubb eventually approved it as temporary housing on terms Didier proposed. On 2/4 ALE received a lease, payment letter of commitment, temporary housing agreement, and move-in form for Rollins. The payment letter was executed between ALE and the landlord detailing the nature of the transaction. The temporary housing agreement was also executed between ALE and Didier detailing the transaction as temporary replacement housing. The move-in form was completed by Didier detailing the condition of the property. All of these documents were based on information in the preap and flow from Peterson’s approval of it. ALE sent a $10,875 check for the broker and application fees, by mail or common carrier from an office in Illinois to Nasir in California, which she deposited. It also sent checks to the Didier Family Trust to Didier’s sister in Lewistown, who sent the check to Didier’s Somers address. Didier deposited the checks at Glacier Bank in the name of C.D. Didier Family Trust, Christin Didier. 7 checks totaling $122,791.50 were sent by DHL, FedEx, and USPS for 6 months rent, security deposit, pet deposit, and cleaning fee.

Didier had filed Ch. 11 in 7/07, prior to the wind and fire events. She represented that Rollins was owned in trust and was not an asset available for liquidation. (She is not charged with bankruptcy fraud). In 7/09 her case was converted by Ch. 7 by Judge Kirscher and her schedule of assets was amended and the trust designation removed. She objected to sale of the property because she claimed it was owned in trust. Kirscher ruled that she was the trustor, trustee, and sole beneficiary. Rollins was eventually sold by the bankruptcy trustee.

In 2/08 Chubb’s Special Investigation Unit began work to validate her claim and evaluate her replacement housing, including hiring PI Markey to visit it. The SIU discovered her control over and benefit from the Didier Family Trust and revealed Rollins to be a cabin of 860 sq ft, 2 bedrooms, no bathrooms, no indoor plumbing. Representations as to other amenities & furnishings on the move-in form were also at odds with the actual condition. Instead of an in-ground pool, there was only an above-ground pool. Didier had fudged and lied about Rollins. In examinations by Markey, she explained the description of Rollins on the preap as consistent with her definition of bedrooms, bathrooms, and methods of calculating square fee, and admitted that she was in control of the Didier Family Trust and thus was the real owner of Rollins. In a surprise examination under oath with Nasir at a San Diego restaurant, Nasir confirmed her role as broker for the Didier Family Trust and offered to send her file to Markey but never did. Chubb complained to the Montana CSI in 1/09. (Had it denied Didier’s claim it surely would have been subjected to a bad faith claim; going to CSI insulated it from potential civil liability.) In an interview while represented by counsel, she justified her temporary housing claim by stating that the rent was based on a conversation with an ALE rep, who stated that she was due whatever it cost for hotel fees regardless of where she ended up and likened her decision to live at Rollins to a decision to replace kitchen linoleum with dollar store linoleum at her option regardless of the cost associated with maintaining her standard of living. She claimed she was completely transparent about ownership of Rollins and that ALE expressed no issue with the ownership. Nasir was interviewed by phone. She refused to answer many questions without reviewing her file, and agreed to retrieve it and contact CSI but did not.

Didier was charged with 7 counts of mail fraud and 1 count of conspiracy to commit mail fraud. Nasir was charged with 1 count of mail fraud and 1 count of conspiracy to commit mail fraud. At the close of the US’ case, Didier moved for judgment of acquittal due to insufficient evidence that she had the capacity to form specific intent to defraud or conspire with Nasir and failure to prove that her statements and representations were material to any act by Chubb. Nasir also asked for judgment of acquittal for lack of evidence of unlawful agreement to which she was a party and that Didier’s mental disease or defect made such an agreement impossible. The motions were taken under advisement pending the verdict, and then renewed following the verdict, along with a motion by Nasir for a new trial.

Didier’s and Nasir’s statements and representations were not material to Chubb’s acts under the policy. While Neder (US 1999) expressly incorporates materiality as an element of mail fraud, it did not define it. One meaning, as articulated in Gaudin (US 1995) and embraced by the Peterson (9th Cir. 2008), is that a statement is material if it “has a natural tendency to influence, or is capable of influencing, the addressee’s decision.” Materiality is distinct from other elements of common law fraud. “The common-law requirements of `justifiable reliance’ and `damages,’ for example, plainly have no place in the federal fraud statutes.” Neder.This is because 18 USC 1341 prohibits a “scheme to defraud,” not the completed fraud. While the language of the mail fraud statute is consistent with a requirement to prove materiality, it, by its own terms, does not impose a requirement of proof of actual reliance and damages. Id. The jury was instructed to determine whether “the statements made or facts omitted as part of the scheme were material; that is, they had a natural tendency to influence, or were capable of influencing, a person to part with money.” It was also given a detailed instruction (Inst. 15) on materiality, above & beyond the general elements instruction. The relevant question was whether Didier and Nasir concocted a scheme to defraud that had a natural tendency to influence or was capable of influencing Chubb’s determination of what to pay Didier for her losses when that amount was contractually constrained to maintaining her standard of living in the Somers mansion. Were their misrepresentations material, “constituting an inducement or motive to the act or omission of the other party?” Id.; (Story, Commentaries on Equity Jurisprudence §195 (10th ed. 1870)). Inst. 15 was given because the additional living expenses clause of the policy is ambiguous as a matter of law. The heading of the paragraph reading “extra living expenses” could give rise to an interpretation that the insured is only due payment for additional expenses incurred as a consequence of the covered loss, as argued by the US. However, the text guarantees payment for “the reasonable increase in your normal living expenses that is necessary to maintain your household’s usual standard of living.” This obligated the carrier to pay based on the standard of living enjoyed at the Somers mansion, with all its accoutrements. The ambiguity raises reasonable doubt about the materiality element as a matter of law. The preambulatory statement “actual living expenses” suggests that the amount paid by Chubb was to be based on the actual cost of temporary housing. Under this interpretation, Defendants’ actions could have been material to Chubb’s determination of the amount. The text of the policy means the amount to be paid was driven by Didier’s normal, usual standard of living at the mansion. Chubb knew this was a high-end policy, generous in its obligation to the insured, and cannot now claim mail fraud because the insured was paid more than Rollins should have cost.

The indictment charged Didier and Nasir with defrauding Chubb — not ALE and not Bankruptcy Court. Thus Chubb and its agents are the only possible source of evidence of materiality of Defendants’ acts. The trial record is threadbare on this question. Markey’s testimony confirmed the incongruities between the Rollins property as described and as it existed; he did not testify about decisions related to what Didier was due. Peterson testified to the high-end, liberal nature of the policy; his testimony did not establish that Chubb would have paid less under the policy had Defendants accurately described Rollins. The only thing it establishes is that Chubb’s decision as to what to pay tracked with the ambiguous policy terms. He cited the need to compensate the insured to maintain the standard of living enjoyed at the covered property, and also claimed the payment was for extra expenses. Neither alternative proved that Chubb was not obligated to pay under policy terms or that it would have paid less but for Defendants’ misrepresentations. Without this evidence, materiality of their acts cannot be proven. Indeed, Chubb may have paid just to get “that woman” out of its hair.

The US’ argument that Defendants’ representations & statements about the condition of Rollins to ALE were ultimately material to Chubb because Chubb contracted with ALE holds no water because Chubb was ultimately obligated to pay what was due under the policy. There was no testimony by Chubb that the representations were material to its calculation of what was due to maintain Didier’s usual standard of living, and testimony of ALE employees indicated that ALE did not calculate the amount owed under the policy. Chubb simply approved or denied the housing found by ALE. It set a range for what it owed at $10,000-$15,000/mo, no different in essence from what it paid. The proof as to Chubb’s determination of Didier’s normal standard of living is related to its denial of the $40,000/mo corporate property and its charge to ALE to find something more comparable to the mansion. Both Peterson and ALE’s rep testified that after the corporate property was rejected, Chubb limited ALE’s search criteria to properties renting $10,000-$15,000/mo. Thus the condition, ownership, or actual value of Rollins was not and could not have been material to Chubb’s obligation to compensate Didier that amount for her usual standard of living.

Another way to look at the problem is to invert it. Substituting Chubb as the defendant charged with wire fraud illustrates the untenable nature of the US’ case. ALE found the corporate property and presented it to Chubb. Peterson balked at the $40,000/mo price even though the policy could be read to require it. Chubb took a position that ALE should only consider replacement properties with similar “useable space” to the Somers mansion, although nothing in the policy allowed Chubb to redefine the standard of living clause. Was this mail fraud? Chubb devised a plan to deprive its insured of a benefit which it was due under one interpretation of the policy, leading Didier to believe she was entitled to replacement property based only on usable space of the covered property, and used the mails by sending checks to her for a property with a smaller size and price than the $40,000 corporate property originally proposed.

The US insists that the linchpin of its wire fraud charge was Defendants’ representations & statements to ALE about ownership of Rollins and that these lies were material to Chubb’s payment. However, for the representations about ownership of Rollins to be material to Chubb, there would have to be proof that it would have acted differently had it known that the Didier Family Trust was solely controlled by Didier. The US could have called witnesses to establish this but did not. The notes and history compiled by ALE indicate that Peterson’s supervisor authorized Didier to move to Rollins. Peterson did not and could not testify that ownership of Rollins was material to his supervisor.

In Bryant (8th Cir. 2010), with analogous facts, the policy stated: “We will pay the actual charges incurred for a provider of Home Health Care up to the Home Health Care Daily benefits as shown in the Policy Schedule.” The Chubb policy is at best ambiguous, stating that it is obligated to pay “Extra living expenses” and simultaneously pay what “is necessary to maintain your household’s usual standard of living.” The ambiguity of this crucial term raises doubts at to materiality of Defendants’ representations and actions. Chubb wrote the policy, charged significant premiums for the coverage, and deemed it a liberally construed white glove policy. The US seeks to rewrite the “standard of living” language to mean “actual charges incurred” to satisfy proof of materiality. It cannot do so based on the policy language. Given ambiguity of the policy and absence of proof as to Chubb’s decision to authorize Rollins, no reasonable finder of fact could find Defendants guilty beyond a reasonable doubt. Chubb could have written its policy with more precise language reflecting its obligation to pay only actual cost of replacement housing. It instead based its obligation on an ambiguous term generously providing coverage for living expenses based on a standard of living in a 14-bedroom mansion. The US cannot invoke this ambiguity by attempting to establish mail fraud, effectively making the grand jury and this criminal Court an enforcement mechanism for a policy dispute between a carrier and its insured.

Defendants’ arguments as to mens rea, Didier’s interpretation of the policy, questions sent out by the jury, Nasir’s analysis of documentary evidence, and spoliation are insufficient to set aside the verdict.

Judgment of acquittal is granted and the case is closed. (The US has appealed.)

US v. Didier and Nasir, 41 MFR 72, 10/4/13.

Colin Stephens (Smith & Stephens), Missoula, for Didier; Federal Defender Michael Donahoe for Nasir; AUSA Timothy Racicot.

 

INJUNCTION: TRO/preliminary injunction denied in challenge of Disadvantaged Business Enterprise requirement for highway contract… Lovell.

MDT advertised 6/27/13 for bids on the Arrow Creek Slide Project to correct 2 large slides on Hwy 80 20 miles north of Stanford. The slides are moving at 1-2/mo and if the project is not undertaken soon a redesign at significant cost to MDT may be required. Delay through winter and spring will diminish safety and may disrupt the highway for public use. DOT’s Disadvantaged Business Enterprise Program requires states receiving federal highway funding to set goals for use of disadvantaged enterprises. MDT established a goal of 5.83% DBE participation, which DOT approved in 4/11. It set a goal of 2% on the Arrow Creek project. A bidder must demonstrate that 2% of the contract amount will be performed by DBE subcontractors. Weeden Const. was low bidder at $14,770,163.01. It concedes that it relied on only 1.87% DBE subcontractors; MDT notes that its bid actually identified only .81% DBE subcontractors. The other 5 bidders ranged from 2.19% to 6.98%. Weeden attempted to utilize the good faith exception to the DBE requirement. MDT’s DBE Participation Review Committee found that it failed to demonstrate a good faith effort to solicit DBE subcontractors. The DBE Review Board affirmed the Review Board. It found that Weeden had received a DBE bid for traffic control but decided to do that work itself to lower its bid, and that its mass emailing to 158 DBE subcontractors was a pro forma effort not credited by the Review Board or federal guidance as an active & aggressive effort. Proposed intervenor DeAtley Const. contends that it submitted the lowest bid of $15,552,004.46 and that its DBE utilization was 3.3%. Weeden seeks an injunction to prevent MDT from letting the contract to another bidder (presumably but not necessarily, DeAtley). It claims that the DBE program violates equal protection and there is no evidence of discrimination in Montana highway construction and therefore no government interest that would justify favoring DBE entities. It claims that its right to due process has been violated by MDT not providing reasonable notice of the good faith requirements and that it was not given notice of DeAtley’s letter challenging Weeden’s bid based on the 2% requirement. It asserts that it has a constitutionally protected property interest in award of the contract.

The injunctive relief criteria favor Defendants. It is not a certainty that Weeden will suffer irreparable harm absent preliminary relief. It has obtained 6 state highway contracts valued at $26 million in the past 4 years. MDT has $50 million more in projects to be let during the rest of 2013 alone. Weeden has demonstrated capacity to obtain other contracts that might allow it to put its employees and equipment work. Although it asserts that the good faith effort rules are “confusing, non-specific, and contradictory, the other bidders were able to exceed the 2% requirement without any difficulty. The balance of equities do not tilt in favor of the one bidder who did not meet the requirements, especially when numerous others ably demonstrated ability to meet them. It is also questionable whether Weeden raises serious questions on the merits of its equal protection claim. It is “the inability to compete on equal footing in the bidding process, not the loss of a contract,” that defines injury in fact. NFCAGCA (US 1993). Weeden was not deprived of the ability to compete on equal footing with the other bidders, so it suffered no equal protection injury and lacks standing to assert an equal protection claim as if it were a non-DBE subcontractor. In any event, MDT presents significant evidence of under-utilization of disadvantaged businesses generally, which supports a narrowly tailored race & gender preference program. Weeden points out that some business categories in Montana’s highway industry do not have a history of discrimination (construction businesses in contrast to professional). AGC (9th Cir. 2013) rejected a similar argument requiring evidence of discrimination in every segment of the highway industry before a preference program can be implemented. It held that Caltrans’ DBE program need not isolate construction from engineering contracts or prime from subcontracts to determine if the evidence in each category gives rise to an inference of discrimination. Instead, California — and, by extension, Montana — is entitled to look at the evidence “in its entirety” to determine if there are “substantial disparities in utilization of minority firms” practiced by some elements of the construction industry. There is no allegation that MDT has exceeded any federal requirement or done other than comply with DOT regulations. Given the similarities between Weeden’s claim and AGC’s equal protection claim against Caltrans, it does not appear likely that Weeden will succeed on its equal protection claim. The Court rejects its bald assertion that it has a protected property right in a contract that has not been awarded to it where the agency retains discretion to determine responsiveness. When an official has discretion to award or withhold the contract, Montana does not recognize a legitimate claim of entitlement to the contract in a disappointed bidder. ISC (Mont. 1995). Montana requires that a public contract for construction, repair, or public works go to the lowest responsible bidder. MCA 18-1-102(1)(a). “`Lowest responsible bidder” does not merely mean the lowest bidder whose pecuniary ability to perform the contract is deemed the best, but the bidder who is `most likely in regard to skill, ability and integrity to do faithful, conscientious work, and promptly fulfill the contract according to its letter and spirit.”’ Debcon (Mont. 2001); Koich (Mont. 1941). This statute confers broad discretion in the award of a public works contract, which cannot be set aside absent evidence of bad faith, fraud, or corruption. Id. Thus a low bidder such as Weeden acquires no vested property right in a contract until it has been awarded, which has not yet occurred. Further, it was granted notice, hearing, and appeal from MDT’s decision denying the good faith exception. Thus it does not appear likely that it will succeed on its due process claim. Finally, the public interest favors immediate correction of the slides. Potential damage to Weeden can be remedied by money damages and is outweighed by the need for public safety.

DeAtley’s motion to intervene is granted. Weeden’s application for TRO and preliminary injunction is denied.

Weeden Const. v. MDT, 41 MFR 56, 9/4/13.

Gregory Gould & Mark Lancaster (Luxan & Murfitt), Helena, and Ronald Schmidt (Schmidt, Schroyer, Moreno, Lee & Bachand), Rapid City, for Weeden; David Ohler & Valerie Wilson (MDT); Sarah Simkins (Johnson, Berg & Saxby), Kalispell, for DeAtley.

DISABILITY DISCRIMINATION: Airline passenger’s complaint of being wrongly hassled about his ventilator preempted by FAA, reconsideration of preliminary injunction against MHRB proceeding denied, permanent injunction granted… Lovell.

Dustin Hankinson was scheduled to fly from Missoula on Compass Airlines to receive an award in DC for disability advocacy. He was arriving after all other passengers had boarded. He has Duchenne Muscular Dystrophy and uses a ventilator and power wheelchair. A flight attendant, who believed he had to present a medical certificate before he could bring a portable oxygen concentrator on board, directed the gate agent to tell him he could not board. The door was shut and the gate agent denied Hankinson permission to board. He was only bringing a ventilator, not a POC, and he had cleared it with Delta. The Conflict Resolution Officer recommended letting Hankinson board and the pilot agreed to do so. Hankinson chose not to board allegedly due to what he perceived as a hostile environment. He and his companion received refunds. He then filed a complaint with DOT, which referred to Delta. Both flight attendants were suspended and then fired. The captain was suspended for 7 days without pay for lack of leadership and he and the first officer were given additional training as to passengers with disabilities. The CRO admitted that a violation of the Air Carrier Access Act had occurred and Delta apologized for its and Compass’s errors. DOT informed Hankinson that it does not necessarily take a formal enforcement action unless a violation is particularly egregious or numerous complaints indicate a pattern, and that it would take his complaint into account if any future complaints were filed. Compass had a training video on passengers with disabilities created for presentation to its remaining 417 flight attendants and all Compass pilots. After receiving DOT’s disposition and warnings to Delta and Compass, Hankinson filed a charge against Compass with the MHRB, which set a hearing. Compass sought a declaration in this Court that the ACAA and regulations preempt all of his claims and requested a TRO, which the Court granted, followed by a preliminary injunction. Hankinson filed a Younger motion to dismiss, a summary judgment motion, and a motion for reconsideration of the preliminary injunction. Compass also requests summary judgment.

LR 7.3(b) permits reconsideration of “any interlocutory order” if the facts or law are materially different from those presented before entry of the order and the party did not know such fact or law or new material facts emerged or a change of law occurred. Hankinson requests reconsideration based on Gilstrap (9th Cir. 2013), which is recent case law that is binding precedent. Relying on Elassad (3rd Cir. 2010) (bodily injury/aircraft stairway case where no federal regulation was directly implicated) and Abdulla (3rd Cir. 1999) (bodily injury due to lack of warning of turbulence), Gilstrap concluded that a state law remedy may be available for violation of FAA regulations. However, Hankinson does not claim bodily injury and therefore the Insurance Clause (requiring carriers to carry insurance for bodily injury, death, and property) does not justify that exception to complete field preemption. Further, DOT has provided detailed advice to carriers to interpret Part 382 to safeguard the dignity of disabled passengers and guide interactions with them. Unlike Gilstrap, any state claims of infliction of emotional distress are intertwined with the preempted claims and would require a trial of the alleged violations of ACAA regulations. Thus there is an implied preemption, the Insurance Clause does not provide the exception to preemption, and the state claims are factually predicated upon federal regulatory violations. To the extent that ACAA regulations ought to be viewed as economic as opposed to safety, the explicit preemption by the Airline Deregulation Act is implicated. A state action alleging wrongful denial of air transportation (whether by outright denial of boarding or by hostile environment) is an enforcement of a general law affecting a carrier’s services. Allowing state claims to regulate airlines indirectly by allowing non-bodily injury tort claims based on regulatory violations could result in a state-by-state patchwork, inconsistent with Congress’ major effort to leave such decisions, where federally unregulated, to the marketplace. Rowe (US) Hankinson’s motion for reconsideration of the preliminary injunction is denied.

The Younger test is not met because, unlike the attorney discipline in Hirsch, aviation is not a significant state interest. The Montana Legislature has stated that its aviation policy is to cooperate with federal authorities in “effecting a uniformity of the laws,” accomplish “the purposes of federal legislation,” and eliminate “costly and unnecessary duplication of functions.” §67-1-102.

Hankinson’s hostile environment claim is derivative of and would require trial of ACAA violations. The only reason there is no DOT ruling on an ACAA violation related to his “hostile environment” claim is that he never presented it to Compass or DOT. It is inextricably intertwined with the ACAA regulations that werepresented, but the Court has found that such claims are FAA field-preempted. Whether or not Congress intended an exclusive administrative remedy or one coupled with the Insurance Clause exception, it seems highly unlikely that it intended a hybrid whereby a passenger could submit some of his claims for administrative enforcement by DOT while reserving his factually related claims for adjudication by a state agency. That is the case presented here, which the Court finds distinguishable from Gilstrap.

Summary judgment for Compass. HRB is enjoined from jurisdiction over Hankinson’s complaint.

Compass Airlines v. MHRB and Hankinson, 41 MFR 1, 8/12/13.

Christopher Mangen & Daniela Pavuk (Crowley Fleck), Billings, Jeffrey Ellis (Quirk & Bakalor), NYC, and David Hayes (Trans States Holding), Bridgeton, Mo., for Compass; Linda Deola & Brian Miller (Morrison, Sherwood, Wilson & Deola), Helena, for Hankinson.

VEHICLE DEALERSHIP: Limitation of Remedies not procedurally or substantively unconscionable under Texas law, prohibits dealer from asserting claim for lost profits due to breach of contract involving trucks with non-compliant air brakes… fraud claim subject to Montana law, barred by 2-year statute that ran from time Japanese employee deposition revealed that compliance certificates were false… punitives, pled as separate cause, are not stand-alone cause, claim fails because substantive claims fail… repurchase claim subject to Montana law, barred by 2-year statute for claims arising out of statutory liability… constructive fraud claim not ripe for decision, but also subject to 2-year fraud statute… Molloy.

Montana Trucks and UD Trucks North America (formerly Nissan Diesel) entered into a dealer sales & service agreement in 2003 which specified that Montana Trucks was an authorized seller of UD trucks and UD would provide vehicles that complied with Federal Motor Vehicle Safety Standards. MT purchased 8 UD3300 trucks 12/06-12/07. Although UD represented that they were certified for the US, they were noncompliant with FMVSS §121 air brake rules. UD recalled the 3300s in 2007 because they did not satisfy air brake regulations.

Also in 2006, Pioneer Drive entered into a similar sales agreement with UD. Randy Botsford was president of PD and a majority owner of MT. Randy’s brother Terry Botsford was attorney for PD and had an ownership interest in MT. Mark Byington was PD’s CFO and had an ownership interest in MT. UD made the same representations to PD as to UD3300 compliance with §121. PD sued Nissan Diesel (now UD Trucks) in 7/08 for, inter alia, breach of contract for failing to supply compliant trucks. ND removed to this Court in 8/08. Terry Botsford received reports from Link-Radinski that found noncompliant brakes. ND denied the noncompliance. ND Japan employee Kazuaki Sasame was deposed in 2/10. Randy Botsford and Byington attended. Sasame testified that the compliance certificates that accompanied the trucks were false. ND settled with PD in 4/10 for a confidential amount and Sasame’s deposition was sealed.

UD terminated the dealer agreement with MT in 1/09. MT demanded that UD repurchase 2 trucks pursuant to MCA 30-11-702. UD refused, ostensibly because they had been modified. MT sued UD in 2/12 for breach of contract, fraud, and punitives. The date of the MT suit is 2 years, 2 weeks after the Sasame depositions. UD requests summary judgment.

The Limitation of Remedies provision prevents MT from asserting its claim for consequential damages for breach of contract. Since only 2 of the 3 parts ofRestatement of Conflict of Laws §187(2)(b), which Montana relies on, are met, the choice-of-law provision will be enforced and Texas law is applied to the breach of contract claim. Both parties eventually agreed that Texas law applies to the contract claim. MT claimed in its 2nd amended complaint that lost profits are the damages it suffered. Not until its response to UD’s summary judgment motion did it assert that it suffered additional damages from continuing to acquire operating loans based on UD’s representations that the trucks were compliant. UD requested summary judgment on “contract damages,” so the analysis is limited to lost profits because they are the only damages claimed in the complaint. Lost profits are consequential damages. Tex. Bus. & Com. Code 2.715. The Limitations of Remedies provision precludes consequential damages including lost profits. MT argues that the limitation is unconscionable under TBCC 2.719. Texas law requires a showing of substantive and procedural unconscionability. Blount (Tex. App.-Dallas 1968) declared that unconscionability results when “no man in his senses and not under a delusion would enter into and no honest and fair person would accept” a contract on such terms. MT notes that it was not allowed to revise the contract despite its requests. However, there is no showing that it was oppressed or unfairly surprised by the limitation. Lindemann (5th Cir. 1987), in which the plaintiff was unable to negotiate exclusion of consequential damages, found no procedural unconscionability even though one party had superior bargaining power. The same result rings true here. MT also insists that the contract was substantively unconscionable because it limited its direct & consequential damages while only limiting UD’s consequential damages. Since MT only pled consequential damages, the briefs addressed the limitation of consequential damages, which is not unconscionable because it applies equally to both parties. Construing the facts favorably to MT, no reasonable jury could find that the agreement is procedurally or substantively unconscionable. The Limitations of Remedies prohibits MT from asserting lost profits due to a breach of contract. Summary judgment for UD on breach of contract.

UT is also entitled to summary judgment on fraud. The fraud claim is not subject to the choice-of-law provision. “Claims arising in tort are not ordinarily controlled by a contractual choice of law provision. Rather, they are decided according to the law of the forum state.” Sutter (9th Cir. 1992). The exception arises when the provision is sufficiently broad that it encompasses all possible claims. In that case, the choice-of-law provision references only the “agreement” and likely would be read narrowly by the 9th Circuit to exclude noncontractual claims. Narayan (9th Cir. 2010). The fraud claim is governed by Montana law. It is barred by the 2-year limit at MCA 27-2-203 since 2/1/10, the date of the Sasame deposition, is the latest possible date that MT became aware of its claimed cause and yet it did not file its complaint until 2/15/12. MT argues that the statute was tolled by fraudulent concealment because Randy Botsford (the agent) was subject to a confidential protective order in the PD litigation and could not share the information with MT (the principal). UT counters that Botsford was a majority member of MT, holding a 75% share, and could have committed it to action on his own vote, and since he was present at the deposition and was a majority owner of MT, the principal-agent analogy falls short. That depends on the assumption that the principal and agent are different, which is not the case. MT moved 1/23/13 to stay the protective order in the PD litigation to give MT access to documents filed under seal. It argued that the protective order covered “the confidential settlement agreement and the discovery materials and depositions in the Pioneer litigation relating to the braking system and when Defendant knew or should have known about the brake issue” and that “Montana Trucks’ access to this information is paramount to pursuing this action.” I denied the motion to stay but made MT a party to the protective order so it could access the documents. The knowledge that Botsford acquired at the Sasame deposition can be imputed to the same Botsford who is a majority member of MT because he did in fact use that knowledge to the advantage of MT in this litigation by requesting access to the PD documents. MT only has access to the Sasame deposition and other key documents because it knew to ask for them. Randy Botsford had actual knowledge of UT’s fraud 2/1/10, and because he held a majority interest in MT, UT’s fraud was presumptively within MT’s knowledge the same day. Summary judgment for UT on actual fraud.

Punitives are not a stand-alone cause, although MT pled them as a separate cause, but are a type of damages available to one who has been awarded compensatory damages. MCA 27-1-220. MT’s claim for punitives thus fails because the underlying substantive claims fail.

The statutory right of repurchase is supplemental to any agreement between the retailer and manufacturer, MCA 30-11-713(1)(a), and the retailer may elect to pursue contract remedies or the statutory remedy, 713(2). The parties agree that MT has no contractual basis for its repurchase claim because the agreement allows but does not require UD to repurchase the 3300 trucks and parts. MT’s repurchase claim is therefore not subject to the choice-of-law provision, but to Montana law, which provides a 2-year statute for claims arising out of statutory liability. The statute began running 4/17/09 when UD refused to repurchase 2 trucks, and MT did not file its complaint until 2/15/12 and is thus barred from asserting its statutory repurchase claim.

MT asserted a new claim for constructive fraud pursuant to MCA 28-2-406 in its 2nd amended complaint while UD’s motion for summary judgment was pending. Because UD did not address this claim in its motion, it is not ripe for decision. However, both fraud and constructive fraud are subject to a 2-year statute. If the statute bars MT’s fraud claim, it also bars its constructive fraud claim. It must distinguish applicability of the statute to its constructive fraud claim as a matter of law or present a unique fact issue, or summary judgment will be granted on that claim sua sponte under Rule 56(f)(3).

Montana Trucks v. UD Trucks North America, 40 MFR 456, 8/12/13.

Patrick HagEstad, Philip Condra, and Lon Dale (Milodragovich, Dale & Steinbrenner), Missoula, for MT; Billy Donley, David Jarrett, and Richard Mandelson (Baker & Hostetler), Houston & Denver, and Kathleen DeSoto (Garlington, Lohn & Robinson), Missoula, for UD.