Court Decisions

BANKRUPTCY Wife’s marital assets part of ex-husband’s estate Marital assets that were awarded to the wife in a state court matrimonial proceeding are nonetheless part of the husband’s bankruptcy estate if a Chapter 7 petition is filed after the state court’s decision but before the judgment is entered, the 2d U.S. Circuit Court of Appeals ruled on Nov. 6. Musso v. Ostashko, No. 05-6935. Tanya Ostashko was awarded all of the marital assets in her divorce from Vladimir Ostashko, in part because a New York federal court found that the husband had engaged in a fraudulent debt collection transaction to deprive the wife of any marital assets. Three months later, before judgment on the marital property award was entered in state court, the bank Vladimir Ostashko had used for the fraudulent conveyance filed an involuntary Chapter 7 bankruptcy petition against him. The bankruptcy proceeding was stayed until the state court judgment was signed. Tanya Ostashko sought a declaration that the marital assets awarded to her were not part of Vladimir’s bankruptcy estate. The bankruptcy court denied the motion, but a New York federal court reversed. The 2d Circuit reversed. Because Tanya Ostashko’s interest in the marital assets did not vest until after the involuntary petition was filed (that is, before judgment in state court), the property is part of the bankruptcy estate. The court cited four premises underlying its decision: (1) Under New York law, the distribution of marital assets is a remedy, and enforcement of that remedy is the same as enforcement of other judgments; (2) New York adheres to the bright-line rule that the priority of judgment creditors is determined by when the judgments are docketed or executed; (3) 11 U.S.C. 544, the so-called “strong arm” provision of the Bankruptcy Code, gives bankruptcy trustees the rights of a hypothetical perfected judgment lien creditor as of the petition date; and (4) the state court judgment settled the rights between husband and wife, not between their creditors.   Full text of the decision CIVIL PRACTICE Federal rules, not ‘Erie,’ apply in diversity cases In diversity cases, the Federal Rules of Evidence, not the Erie doctrine, govern the admissibility of evidence, the 10th U.S. Circuit Court of Appeals held on Nov. 7. Sims v. Great American Life Ins. Co., No. 04-5135. Lawrence Sims died when the speeding car he was driving sailed off a rural road. Great American Life Ins. Co. denied his wife’s life insurance claim, deeming the death a suicide. Sims’ wife sued, claiming breach of contract and bad faith. An Oklahoma federal jury, hearing the case based on diversity jurisdiction, found the death to be accidental and awarded her $1.4 million in compensatory and punitive damages. The court denied Great American’s motion for judgment as a matter of law at the close of the trial. Great American appealed, claiming that the district court had improperly applied state law, rather than the Federal Rules of Evidence, to exclude evidence showing that Sims wasn’t wearing his seat belt on the night he died, and reports and testimony from the coroner and investigating officers who believed Sims’ death to be suicide. The 10th Circuit reversed the denial of judgment as a matter of law for Great American on the bad-faith and punitive damages claims, but affirmed the judgment on compensatory damages. Great American insisted that the Federal Rules of Evidence, not the Erie doctrine, govern questions of admissibility in federal diversity cases. According to the 1938 opinion, Erie R.R. v. Tompkins, 304 U.S. 64, federal courts in diversity actions apply the substantive law of the state in which they sit. The 10th Circuit said that where a conflict exists between the federal rules and state law, the federal rules govern unless the state law reflects substantive concerns. CONSTITUTIONAL LAW Nonenforcement of code justifies takings claim There was nothing inappropriate about a takings claim against the state of Vermont over its failure to enforce state building codes that led to the deterioration of apartment buildings and the consequent eviction of tenants, the Vermont Supreme Court ruled on Nov. 9. Alger v. Department of Labor and Industry, No. 2006 VT 115. Citing “a long history of [code] violations" at a St. Albans, Vt., apartment building, the Department of Labor and Industry ordered the building shut down. The building's tenants received neither a hearing date to protest the closure, nor assistance to find new housing. They sued the department and amended their complaint to add other tenants who had been forced out of other apartment buildings. The complaint alleged that the department had abused its authority through its wholesale failure to enforce its own rules of inspection and correction, which amounted to an impermissible taking of property. The plaintiffs sought class certification to include all Vermont residents living in apartment units under the department's control. The trial court denied class certification and dismissed the complaint, ruling that the department's closure order was part of its police power and not subject to scrutiny under either a due process or taking analysis. The Vermont Supreme Court affirmed the denial of class certification, but reversed the dismissal. The court said that the department owes the plaintiffs a legal duty to enforce the housing code. The department's wholesale failure to enforce the code was a violation of this duty. Though dismissal of the due process claim was appropriate, the takings claim should not have been dismissed because, but for the department's failures to act earlier, the property would not have deteriorated to the point that it had to be shut down and the tenants forced to leave. DAMAGES Noneconomic damages possible under Ohio law Under Ohio's Consumer Sales Practices Act, both economic and noneconomic damages are available, the Ohio Supreme Court found on Nov. 8. Whitaker v. M.T. Automotive Inc. d.b.a. Montrose, No. 2005-0331. Craig Whitaker entered into a lease agreement with Montrose Toyota to lease a new truck for $230 a month, and put down a deposit of $1,537. The following week, Montrose told Whitaker that it could only find a bank to finance the lease at $297 a month. Even with Whitaker's father as co-signer on the deal, the monthly payments were increased to $240 a month. After Whitaker declined to accept the increased payments, Montrose terminated the deal, took the truck and refused to return the deposit. Whitaker sued under Ohio's Consumer Sales Practices Act. The jury awarded a general verdict of $105,000, which it trebled to $315,000. An intermediate appellate court reversed, ruling that noneconomic damages are not available under Ohio's consumer law. The Ohio Supreme Court reversed, holding that Ohio's consumer law "prohibits suppliers from committing either unfair or deceptive consumer sales practices or unconscionable acts or practices," and allows a consumer to recover his or her damages. The court said that the unrestricted term "damages" encompasses all forms of compensatory relief, including noneconomic damages. ELECTION LAW Frequent redistricting no state constitution breach The Georgia legislature's redrawing of state Senate districts more than once every 10 years does not violate the Georgia Constitution, the Georgia Supreme Court held on Nov. 6. Blum v. Schrader, No. S06A1766. In 2006, the Georgia Legislature redrew three state Senate districts. After challenging the redistricting unsuccessfully in federal court, voters in the new districts filed suit in Georgia state court, arguing that the redistricting violated the 1983 Georgia Constitution because the changed language in the constitution did not allow the legislature to redraw districts more than once every 10 years following each national census. The court rejected the challenge. Affirming, the Georgia Supreme Court held that, despite the change in language between the 1976 and 1983 constitutions, the legislature was free to redraw the districts as often as it saw fit, so long as it used the most recent census figures. The court said that, though the 1983 constitution provided that the legislature can change districts "as necessary after each United States decennial census," it did not limit redistricting to once every 10 years. "[A] requirement that apportionment be undertaken 'as necessary' after each census is clearly not an unambiguous limitation on the frequency with which the reapportionment power may be exercised between censuses. Thus, as was the case under the 1976 constitution, so long as the latest census figures are used, nothing . . . prevents the [legislature] from apportioning contiguous territory into Senate and House districts as frequently as a majority of its members determines is expedient." INSURANCE LAW 'Under construction' can mean building renovation A trial court erred in granting summary judgment to an insurer that denied coverage based on an insurance policy exclusion for vacant buildings because an exception covering buildings while "under construction" did not limit coverage to periods while the structure was being erected, the California Supreme Court held on Nov. 13. TRB Investments Inc. v. Fireman's Fund Ins. Co., No. S136690. TRB Investments had an insurance policy from Fireman's Fund Insurance Co., covering a property, a former bank building, in Bakersfield, Calif. The policy contained an exclusion for periods when the building was vacant, but it also contained an exception to the exclusion that provided for the building to be covered while it was "under construction." Air conditioning and electrical contractors were working on the vacant building when a water heater or water line burst, causing extensive damage. TRB filed a claim, but Fireman's Fund denied it, based on the building being vacant. TRB sued, arguing the building was under construction and that the construction exception should apply. The trial and intermediate appellate courts held for the insurer. Reversing, the California Supreme Court said, "We believe the more reasonable interpretation is that the term 'under construction' as used in the vacancy exclusion was meant to be the functional equivalent of 'construction, renovation or addition' as used in the cancellation endorsement, i.e., the latter provides a more detailed gloss on the former." LEGAL PROFESSION Only statewide standard of care binds attorneys Expert witnesses testifying in legal malpractice cases in Tennessee state court need only be familiar with the applicable statewide professional standards of care, not the standards applicable to a given locality, the Tennessee Supreme Court ruled on Nov. 6. Chapman v. Bearfield, No. E2004-02596-SC-R11-CV. Sued for legal malpractice by his former clients in a medical malpractice case, Rick Bearfield argued in his motion for summary judgment that his conduct fell within the professional standard of care applicable to attorneys "in the upper East Tennessee area." The plaintiffs responded with their own expert who said that Bearfield's conduct fell below statewide professional standards. The trial court granted Bearfield's motion, ruling that the plaintiffs' expert's affidavit didn't meet what the judge called "the locality rule" in that it didn't demonstrate familiarity with the professional standards in the eastern part of the state. An intermediate appellate court reversed, finding no basis for a "locality rule." The Tennessee Supreme Court affirmed, holding that "There is only one standard of care for attorneys practicing in Tennessee: a statewide standard." While there may be local rules of practice that vary from one jurisdiction to another, there are no local standards of care. Consequently, an expert testifying in a legal malpractice case need only be familiar with the statewide standards. TORTS Wrongful death suit must prove breach of duty In a wrongful death suit against a psychiatrist for the suicide of her patient, a plaintiff must prove by substantial evidence that the psychiatrist breached the standard of care and that the breach was the proximate cause of the patient's death, the Alabama Supreme Court held on Nov. 9. Patton v. Thompson, No. 1031809. With a 30-year history of serious psychiatric illness that included suicide attempts, Peggy Sue Ellis was admitted to Baptist Medical Center Montclair three times before her final admission on Nov. 11, 1999. Dr. Rita Patton gave her medication and placed her on suicide watch. Ellis' condition deteriorated during her stay, and her medication was increased. On Nov. 23, she was discharged. Three days later, she was found dead in her apartment from a drug overdose. The administrator of Ellis' estate sued Patton and the clinic for wrongful death. The state trial court twice denied the defendants' motions for judgment as a matter of law and declared a mistrial after the jury was unable to return a verdict. Reversing and remanding, the Alabama Supreme Court concluded that the lower court erred when it determined that the plaintiff had established proximate cause based on the foreseeability of the suicide. Foreseeability is relevant to the existence of a duty, not to proximate cause, which must be shown by establishing a causal connection between the breach of duty and the injury. WORKERS' COMPENSATION Employer closest in time to disabling event liable An employer who was closest in temporal proximity to a firefighter's disabling event is responsible for compensating him, the Nevada Supreme Court held on Nov. 9. Employers Ins. Co. of Nevada v. Daniels, No. 44575. From 1970 to 1985, Duane Daniels worked as a firefighter for the city of North Las Vegas, Nev. In 1991, he began to work as a firefighter at the Nevada Test Site for Bechtel Nevada Corp. At a physical in 1991, Daniels' doctor noted that he had risk factors for heart disease. In 1994, he was prescribed medication to keep his pulse regular. In 1999, test results revealed a possible silent heart attack. His disability claim was denied, but a hearing officer reversed, prompting Bechtel to appeal. In 2000, Daniels suffered an actual heart attack and was diagnosed with conditions that included heart disease. His doctor declared him permanently disabled as a firefighter. Daniels filed claims with both Bechtel and North Las Vegas. The city's insurer denied his claim, but an appeals officer determined that the city's insurer was responsible for the claim. The Nevada Supreme Court reversed. Under Nev. Rev. Stat. � 617.457(1), the heart disease of full-time firefighters who have been employed for five years or more before the date of disablement is conclusively presumed to arise from employment. Applying the last injurious exposure rule, the court placed responsibility for disability compensation on Bechtel because Daniels was disabled for purposes of the statute in 2000, during his employment with Bechtel, when a doctor declared him unable to work as a firefighter.