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ADR Unequal arbitration- rights provision invalid The arbitration provision in a take-it-or-leave-it auto loan agreement was procedurally and substantively unconscionable and unenforceable against the borrower, the Wisconsin Supreme Court held on May 25. Wisconsin Auto Title Loans Inc. v. Jones, No. 2003AP2457. Wisconsin Auto Title Loans Inc. offered Kenneth Jones an auto loan that included an arbitration provision stipulating that all disputes relating to the loan agreement must go to binding arbitration, but that Wisconsin Auto has the right to use the judicial process to enforce Jones’ payment obligations in a default. Jones failed to make the proper payments, and Wisconsin Auto issued a notice of default and sued to repossess Jones’ car. Jones filed a counterclaim, alleging that Wisconsin Auto had willfully concealed consumer loan transaction costs from its customers, and that the loan agreement was unconscionable under Wisconsin law. Wisconsin Auto moved to compel Jones to arbitrate. A trial court denied the motion, ruling that the arbitration clause was unconscionable. An intermediate appellate court affirmed. The Wisconsin Supreme Court affirmed and remanded. The court said that the arbitration provision was unconscionable procedurally because Wisconsin Auto was in the business of providing such loans, was experienced in drafting such loan agreements and was in a position of substantially greater bargaining power than Jones, who was indigent and in need of cash. The provision was unconscionable substantively because of the “broad, one-sided, unfair” parenthetical that would allow Wisconsin Auto full access to the courts, free of arbitration, while limiting Jones to arbitration.   Full text of the decision APPEALS ‘Unitherm’ no bar to new trial for prejudiced party The U.S. Supreme Court’s recent decision, Unitherm Food Systems Inc. v. Swift-Eckrich Inc., doesn’t preclude a new trial for a party prejudiced by an erroneous admission of evidence, even if it had made no post-verdict motions, the 7th U.S. Circuit Court of Appeals held on May 22. Fuesting v. Zimmer Inc., No. 04-2158. Arthur Fuesting sued Zimmer Inc., the maker of his failed prosthetic knee, for negligence. An Illinois federal district court admitted the testimony of Feusting’s expert witness, Dr. James Pugh, over Zimmer’s motion to exclude it. The jury returned a verdict for Fuesting. Zimmer did not file or renew any motions after the verdict, but did file an appeal, saying that the admission of the testimony was erroneous. The 7th Circuit held that Pugh’s testimony was scientifically unreliable and that the district court committed prejudicial error in admitting it. Because the remaining evidence was insufficient for Fuesting to establish his claims as a matter of law, the circuit court reversed and remanded, instructing the lower court to enter judgment for Zimmer. Meanwhile, the U.S. Supreme Court decided in Unitherm that an appellate court may not review the sufficiency of evidence supporting a jury verdict under Fed. R. Civ. P. 50(a) when the party requesting the review had neither renewed the motion for judgment as a matter of law under Rule 50(b), nor moved for a new trial under Rule 59. Fuesting petitioned for a rehearing. The 7th Circuit vacated its judgment in favor of Zimmer and remanded for a new trial. The court said, “Our prior decision, finding prejudicial error in the admission of Dr. Pugh’s testimony, went too far in awarding judgment for Zimmer. There was other evidence . . . supporting Fuesting’s claims even after Dr. Pugh’s testimony was excluded, and Unitherm makes clear that we were not permitted to assess the sufficiency of the remaining evidence in the absence of a post-verdict motion. However, we do not disturb our conclusion that the admission of Dr. Pugh’s testimony prejudiced Zimmer, and Zimmer is entitled to relief.” BANKRUPTCY A ‘deepening insolvency’ claim must allege fraud To support a claim for deepening insolvency, a party must allege fraudulent conduct, not mere negligence, the 3d U.S. Circuit Court of Appeals ruled on May 26. In re CitX Corp. Inc., No. 05-2760. During the dot-com era, CitX Corp. Inc. formed a relationship with a fraudulent company, Professional Resources Systems International Inc. (PRSI), ostensibly to create an Internet shopping mall for home-based merchants. The partnership ended when the Florida attorney general shut down PRSI. At the time, the company owed CitX more than $2.4 million. Using documents compiled by its accountant to show that CitX was worth $2.4 million, CitX sold $1 million worth of securities, which it rapidly spent and then filed for Chapter 11, then Chapter 7, bankruptcy. CitX’s trustee, Gary Seitz, sued CitX’s accountant, Dertweiler, Hershey and Associates, in a Pennsylvania federal court for malpractice and “deepening insolvency.” The court granted Dertweiler’s summary judgment. The 3d Circuit affirmed. Though deepening insolvency is a cause of action under Pennsylvania state law, only fraudulent conduct will support such a claim; mere negligence isn’t enough. Nor is deepening insolvency a valid theory of damages for a negligence cause of action. CONSTITUTIONAL LAW Honolulu’s aerial ads ban is no free speech threat A Honolulu ordinance banning aerial advertising violated neither the First nor the 14th amendments to the U.S. Constitution, the 9th U.S. Circuit Court of Appeals held on May 23. Center for Bio-Ethical Reform v. City and County of Honolulu, No. 04-17496. The City and County of Honolulu had a long history of ordinances to protect the visual landscape and famous natural attractions. In 1978, Honolulu enacted Revised Ordinance of Honolulu � 40-6.1, which banned aerial advertising. The Center for Bio-Ethical Reform, an anti-abortion group, sought to fly planes over Honolulu’s beaches carrying banners showing aborted fetuses. It sued the city, arguing that the ordinance infringed on its free speech rights under the First Amendment and its right to equal protection under the 14th Amendment. The center said also that federal law pre-empted the ordinance. A Hawaii federal court granted summary judgment to Honolulu. Affirming, the 9th Circuit held that the airspace above Honolulu was a nonpublic forum and that, as a result, the ordinance did not have to survive strict scrutiny. In addition, federal law did not pre-empt the ordinance, the court said. “Nor does the Ordinance violate the First Amendment or the Equal Protection Clause of the Fourteenth Amendment. Honolulu’s airspace is a nonpublic forum, and the Ordinance is reasonable, viewpoint neutral, and rationally related to legitimate governmental interests.” OK to fire officers who were porn participants The terminations of deputy sheriffs for appearing in pornographic photographs and videotapes did not violate the First Amendment, the 11th U.S. Circuit Court of Appeals held on May 26. Thaeter v. Palm Beach County Sheriff’s Office, No. 03-13177. Ronald Thaeter and Timothy Moran, deputy sheriffs with the Palm Beach County Sheriff’s Office in Florida, participated in sexually explicit photographs and videotapes that were disseminated on pay-per-view Web sites. Following an anonymous complaint to the sheriff’s office, the Bureau of Internal Affairs investigated the matter, and the officers were terminated. The Hearing Review Board did not sustain the terminations, but the sheriff overruled the board. The Termination Review Board determined that the officers should return to work. When the sheriff failed to reinstate them, the officers filed suit in a Florida federal court under 42 U.S.C. 1983 alleging violation of their right of free speech and association and seeking injunctive relief and monetary damages against the sheriff’s office. The court dismissed their complaints for failure to state a claim on which relief could be granted. Affirming, the 11th Circuit found that the officers violated the regulation requiring prior approval for off-duty employment. As the officers’ expressive speech was not a matter of public concern and could affect the efficiency and reputation of the sheriff’s office, it did not qualify for the balancing test normally reserved for government employees exercising their First Amendment rights. EMPLOYMENT ERISA pre-empts Mich. state reimbursement law The state of Michigan must wait for a pension plan to send benefit payments to a prisoner before it can attach those funds in reimbursement proceedings, the 6th U.S. Circuit Court of Appeals ruled on May 23 in an issue of first impression. DaimlerChrysler Corp. v. Cox, No. 05-1716. Four Michigan prisoners receive pension benefits from DaimlerChrysler Corp. Michigan law allows the state to get a court order entitling it to seek up to 90% of a prisoner’s assets for reimbursement for the cost of incarceration. Because state law allows prisoners to receive mail only at the facility where they are incarcerated, the state treasurer ordered the four prisoners to instruct DaimlerChrysler to send their pension benefits to their prison addresses. The benefits would be deposited into the prisoners’ institutional accounts and distributed to the state. Three of the prisoners refused, prompting the Michigan attorney general to direct DaimlerChrysler to send the benefit checks to their prison addresses. DaimlerChrysler refused. A Michigan federal court ruled that the notices to DaimlerChrysler were pre-empted by the anti-alienation provisions of the Employee Retirement Income Security Act. The 6th Circuit affirmed, and voided the notices because they directed DaimlerChrysler to send benefits to an address not designated by a beneficiary. Michigan law seeks to divert prisoners’ funds against their wishes before they are paid. However, a state must wait for a pension plan to send the benefit payments at the direction of the prisoner before it is able to encumber those payments. Once a pension plan has sent the payments to a beneficiary and relinquished control of those payments, the attachment of those funds by a creditor does not constitute an alienation. GOVERNMENT U.S. can demand funds’ return for bad accounting The federal government need not show that a state had misspent job-training money granted under a federal statute in order to demand a refund, the 1st U.S. Circuit Court of Appeals held on May 26. Edmonds v. Chao, No. 05-2009. Under the federal Job Training Partnership Act, the U.S. Department of Labor (DOL) distributed funds to Massachusetts for use in employment training and rehabilitation programs. The state, in turn, distributed funds to the city of Lynn, which allegedly failed to comply with record-keeping requirements and was suspected of mismanaging the funds. The federal government claimed that the state had failed to monitor Lynn’s use of the funds according to procedures specified by DOL. The record-keeping requirements of the statute, whereby certain source documentation must be presented to show how the money was spent, were not followed, so the department’s Administrative Review Board ordered the state to repay about $9 million. The state objected, saying that the record-keeping requirements are not substantive obligations. The 1st Circuit affirmed, holding that a violation of the financial accountability rules can give rise to liability. It said that in order to demonstrate compliance with the substantive regulations, a state must show “source documentation” so as to earn the right to avoid repaying the funds. It is up to the state to prove that it had properly spent the funds, or risk a repayment order. It is not up to DOL to prove that the funds were misspent, in the absence of correct documentation. LEGAL PROFESSION Lawyer’s sexual contact violated rules of conduct The District of Columbia’s Board of Professional Responsibility erred in recommending censure, rather than a 30-day suspension, as a sanction for a lawyer’s unwanted sexual advances on a commuter train, the District of Columbia Court of Appeals held on May 18 in a case of first impression. In re Harkins, No. 05-BG-517. John Harkins, a member of the District of Columbia Bar with no prior disciplinary history, approached a woman on a Washington commuter train, followed her around and touched her inappropriately. Harkins was convicted of misdemeanor sexual abuse. The district’s Board of Professional Responsibility concluded that the conviction did not constitute a sanctionable ethics violation under D.C. Rules of Professional Conduct Rule 8.4 (b). The rule states that it is professional misconduct for an attorney to “[c]ommit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects.” The board recommended that, if the D.C. Court of Appeals determines that there had been a violation, public censure would be the appropriate disciplinary sanction. Bar counsel objected, arguing that a 30-day suspension was the appropriate punishment for Harkins’ conduct. Rejecting the board’s recommendation, the D.C. Court of Appeals, the district’s high court, said that there had been an ethics violation under Rule 8.4 (b) and that a 30-day suspension was warranted. Despite Harkins’ lack of prior disciplinary history, the nature of his conduct, coupled with his questionable moral fitness, justify sanctions more serious than public censure. The court said, “Despite not directly implicating honesty or trustworthiness, sexually abusive contact, because of its inherently violent nature, calls into question one’s fitness as a lawyer and thus falls within the ambit of Rule 8.4 (b).” WORKERS’ COMP Hurt pest-control worker can sue homeowner Home extermination services are included within the definition of household domestic services and are specifically excluded as statutory employees under Nevada’s workers’ compensation statutes, the Nevada Supreme Court ruled on May 25. Seput v. Lacayo, No. 44309. Pestaway Corp., a pest-control contractor, sent employee Alexander Seput to the home of Dr. Enrique Lacayo to provide monthly extermination services. While working at Lacayo’s house, Seput fell through a hole on the second floor, seriously injuring himself. Seput sued Lacayo for premises liability. The trial court granted Lacayo’s motion to dismiss based on immunity as a landowner under Nevada’s workers’ compensation laws. The Nevada Supreme Court reversed. In Nevada, an employer who participates in the workers’ compensation system receives immunity from any litigation involving an employee’s injury. Nev. Rev. Stat. � 616A.110(4) provides that people providing domestic services are exempt from the definition of an employee. Monthly pest-control services fall under the definition of domestic services. As a person providing household domestic services to Lacayo, Seput is not his employee for purposes of workers’ compensation under Section 616A.110(4). Lacayo thus does not fall within the scope of the workers’ compensation system and isn’t immune from a tort action.

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