Wasserman's Appellate Summaries

July 10, 2000
By Lawrence Wasserman, Esq.

Netlaw Libraries welcomes attorney Lawrence Wasserman as a new website contributor. We are pleased to announce that his guest column, which synopsizes the recent decisions from the Ninth Circuit Court of Appeals, the California Supreme Court, the six California appellate districts, as well as some of the recent and interesting decisions from the U.S. Supreme Court, will be appearing as a regular feature for members and guests visiting the Netlaw Libraries website. We hope that you will find it to be a good way to start your legal research day and welcome your comments and criticisms regarding the column.

Fielder v. UAL Corporation
Case No. 98-35511
U.S. Court of Appeals for the Ninth Circuit

CIVIL RIGHTS-HOSTILE ENVIRONMENT-SEXUAL DISCRIMINATION BY CO WORKER-CONSTRUCTIVE DISCHARGE-LIMITATION OF ACTION-PERIOD OF LIMITATIONS COMMENCES WHEN THERE IS ACTUAL RESIGNATION-CONTINUING VIOLATION
Fielder endured a long period of sexual harassment by a coworker. The response of management to her reports of this conduct were ignored, ineffectual or counter productive. She filed claims of sex discrimination, retaliation and constructive discharge against her employer, UAL. Summary judgment was for UAL, on the ground that the claims were barred by the statute of limitations and that she was estopped from asserting her constructive discharge claim because she did not timely resign.
HELD: A hostile work environment exists when a plaintiff shows: (1) they were subjected to sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature; (2) that this conduct was unwelcome; and (3) that the conduct was sufficiently severe or pervasive to alter the conditions of the victim's employment and create an abusive working environment. Co-worker hostility or retaliatory harassment, if sufficiently severe, may constitute adverse employment action for purposes of a retaliation claim. To satisfy the continuing violation theory, the plaintiff must show that a hostile environment exists and it continued into the period of limitations. Fielder presented sufficient evidence to support a finding that the discriminatory acts are related closely enough to the acts outside the limitations period. Fielder presented ample evidence from which a jury could find an intolerable working environment. Her constructive discharge claim period began to run when she actually resigned. Reversed and remanded.

United States v. Charlesworth
Case No. 98-10515
U.S. Court of Appeals for the Ninth Circuit

CRIMINAL-SENTENCING-DENIAL OF DOWNWARD ADJUSTMENT-USE OF PRE-SENTENCE REPORT HEARSAY-OTHER CRIME DURING ESCAPE
Charlesworth was transferred to a halfway house, where he was to remain until he was released on parole. He signed out for work release and failed to return. Charlesworth pleaded guilty to escape. The Pre-Sentence Report indicated that Charlesworth was involved with a counterfeiting operation when apprehended. The district court did not allow a four-level reduction for escape from non-secure custody under the U.S. Sentencing Guidelines Manual because the Guideline disallows the reduction if the defendant committed a felony while unlawfully absent from custody.
HELD: The burden of proof is on the party seeking to adjust the offense level to establish by a preponderance of the evidence why the adjustment is merited. A district court need not find that a defendant was convicted of committing a felony while on escape status, but can deny the reduction if a preponderance of the evidence establishes that the defendant committed a disqualifying offense even if there has been no formal conviction. Although the use of hearsay evidence may violate due process if the sentencing judge relied upon information which is materially false or unreliable, Charlesworth did not object to any of the facts set forth in the PSR regarding the offenses he allegedly committed while on escape status. Affirmed.

Pershing Park Villas Home Association v. Bingham
Case No. 98-56261
U.S. Court of Appeals for the Ninth Circuit

INSURANCE-WITHDRAWAL OF DEFENSE BY INSURER-STANDING TO SUE FOR BAD FAITH AFTER BANKRUPTCY-LIABILITY FOR DAMAGES BY DEFAULT JUDGMENT WHEN WITHDRAWAL OF DEFENSE BY INSURER
The Pershing Park Villas Homeowners Association sued real estate developer Bigham and others for defects and property damage in the construction of a twelve-unit condominium. Bigham tendered the defense of the suit to their property damage insurer. Reliance Insurance Company, assumed the defense under a reservation of rights. Four months before trial, Reliance obtained a legal opinion from outside counsel that there was no policy coverage and withdrew its defense without obtaining a declaration of noncoverage from the court. Homeowners then obtained a default judgment against Bigham. Reliance refused to pay the judgment. Bigham filed for protection under the Bankruptcy Code, but did not list any claim against an insurer as an asset. Bigham and Homeowners sued, Homeowners contending that it was a third-party beneficiary of the policy under California Insurance Code. Partial summary judgment was for Bigham and Homeowners for the entire amount of the default judgment. Reliance's motion in limine, contending Bigham did not have standing because the claim was an asset of his bankruptcy estate, was denied. The jury verdict was for plaintiffs, including punitive damages awarded Bigham.
HELD: It cannot be said that the district court clearly erred in excluding any nonjurisdictional issues of standing not designated for trial in the pretrial order. Because issues of constitutional standing are jurisdictional, they must be addressed whenever raised. The irreducible constitutional minimum of standing requires a plaintiff to show injury in fact, causation of that injury by the defendant's conduct, and redressability of the injury by the requested relief. The elements of constitutional standing are present notwithstanding the possibility that the developers' claims against Reliance may remain property of their bankruptcy estates. When Reliance refused to defend and the Bigham did not employ counsel it can be said the ensuing default judgment is proximately caused by the insurer's breach of the duty to defend. The tort of bad faith is not predicated on negligence, but on the bad faith failure to provide any defense at all and does not require showing the amount of damage that may have resulted from a negligent defense. Reversed inasmuch as the judgment awards damages to the Homeowners and fails to award the amount of the default judgment to the developers. Affirmed in all other matters.

Stuart v. UNUM
Case No. 97-55659
U.S. Court of Appeals for the Ninth Circuit

INSURANCE-ERISA PREEMPTION-REQUIREMENTS FOR SAFE HARBOR EXCEPTION TO ERISA PREEMPTION
Stuart participated, through his employer, in a group long term disability insurance policy issued by UNUM. His claim for benefits was denied under preexisting condition exclusion. UNUM removed the state court action filed by Stuart to district court. The district court found UNUM failed to show the plan was subject to ERISA. The court remanded to state court and awarded costs to Stuart.
HELD: A group insurance plan offered to employees is within the safe harbor regulation established by the Secretary of Labor and is exempt from ERISA coverage when: (1) No contributions are made by an employer or employee organization; (2) Participation in the program is completely voluntary for employees or members; (3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and, (4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs. A group insurance plan cannot be excluded from ERISA coverage when an employer fails to satisfy any one of the four requirements of the safe harbor regulation. The district court erred when it concluded that the Policy was inadmissible hearsay. Hearsay is an out-of-court statement introduced to prove the truth of the matter asserted. The policy tended to prove that Desert Hospital and UNUM intended to create an ERISA plan because the Policy specifically refers to ERISA. UNUM demonstrated that Desert Hospital contributed to the disability plan, that the plan was an employee benefit plan subject to ERISA, and that removal to the district court was proper. Reversed.

Southwest Marine v. Danzigi
Case No. 98-56724
U.S. Court of Appeals for the Ninth Circuit

OTHER-JURISDICTION OF ACTION TO REVIEW ARMED SERVICES BOARD OF CONTRACT APPEAL DECISION-REVIEW OF INTERLOCUTORY ORDER-EXCEPTION TO FINAL JUDGMENT RULE
The Secretary of the Navy brought an action seeking a refund of approximately $2 million allegedly overpaid to Southwest Marine's predecessor in interest. The Armed Services Board of Contract Appeals entered judgment for Southwest. The matter was referred to the district court, which reversed the ASBCA, entered judgment in favor of the Navy and remanded to the ASBCA for computation of damages.
HELD: The district court's exercise of jurisdiction was proper and that the district court correctly held on the merits that the Navy was entitled to reimbursement. Affirmed.

Custom Chrome v. Internal Revenue Service
Case No. 98-71378
U.S. Court of Appeals for the Ninth Circuit

TAXATION-VALUATION OF OPTIONS TO PURCHASE SHARES AS PART OF LOAN PAYMENT-TIME OF VALUATION-AMOUNT OF VALUATION-DEDUCTIBILITY OF ACQUISITION EXPENSES
Jordan Company entered into an agreement with Tyrone Cruze, the sole shareholder of Custom Chrome, to purchase all of Cruze's stock for $16.75 million, along with an extra $5 million for a covenant not to compete and an additional $2.6 million to enable him to pay federal taxes for prior years. In connection with the buyout of Cruze, the acquisition company incurred expenses of $1,342,347. Of that amount, $692,347 represented finance charges for the loan provided and the remaining $650,000 was for legal and professional fees. Part of the purchase price was financed by a loan from the First National Bank of Boston, which received a promissory note plus options to purchase 12% of the shares of Custom Chrome. The warrants also contained a put option that allowed FNBB to sell a portion of the warrants back to Custom Chrome at specified times according to a formula price. On its federal income tax returns, FNBB reported the warrants on its books with a value of $1,000, but it did not report any income relating to the issuance of the warrants. Several years later Custom Chrome had a public stock offering. FNBB exercised its warrants and received stock valued at $3.07 million. Custom Chrome deduction of the $3.07 million plus the acquisition expenses on its income tax return was disallowed by the IRS. The Tax Court found the warrants should be valued at the time of issuance and that they had no value at the time of issuance because they were at the same price as the stock itself and future value was speculative. The Tax Court also upheld disallowance of $650,000 of expenses incurred in the purchase of Cruze's stock.
HELD: When a loan is provided at a face value higher than the amount actually loaned, the debtor is allowed to deduct the difference over the life of the loan as Original Issue Discount, while the creditor realizes the OID as ordinary income. These options should be valued at the time the warrants were granted. Under any well-established and reliable financial method, the options in this case clearly did not have zero value. On the question of the expenses of acquisition, the purchase of Cruze's shares was a repurchase by Custom Chrome of its stock. Under the I.R.C. expenses incurred in a repurchase of shares, other than those involving financing, are treated as nondeductible capital expenses and were thus properly excluded by the Tax Court. Affirmed in part and reversed in part and remanded.

Mendenhall v. National Transportation Safety Board
Case No. 98-70211
U.S. Court of Appeals for the Ninth Circuit

OTHER-EQUAL ACCESS TO JUSTICE ACT-AWARD OF FEES FOR ADMINISTRATIVE AND LEGAL EFFORT-EFFECT OF FAILURE TO APPEAL RULING
When the Ninth Circuit held that the position of the Federal Aviation Administration in certain enforcement proceedings was not substantially justified it remanded the matter to the NTSB with instructions to award the Mendenhall attorneys' fees from the date on which the FAA should have recognized the untenability of its position and abandoned those enforcement proceedings. Because the FAA had acted in bad faith, the NTSB was directed to award attorneys' fees at a reasonable market rate, notwithstanding the relevant statutory fee caps. On remand the NTSB noted that Equal Access to Justice Act provides differently for attorneys' fees that are incurred during administrative enforcement proceedings and those that are incurred during judicial proceedings.
HELD: The EAJA provides that prevailing parties in certain adversary proceedings may recover attorneys' fees from the government. Although Mendenhall applied to the NTSB for attorneys' fees pursuant to the section relating to administrative proceedings, the Court directed the NTSB in Mendenhall I to award Mendenhall attorneys' fees incurred during the FAA enforcement proceeding pursuant to the section relating to the award of fees to the same extent that any other party would be liable under the common law. The Court concluded that it had erred in making that order. Because the government did not petition for review of the NTSB's order, Mendenhall's award cannot be reduced. Indeed, as to the attorneys' fees that Mendenhall incurred before this court on petition for review, her award should be increased, because for those she was entitled to remuneration at a reasonable market rate, and she adequately demonstrated that the reasonable market rate was between $250 and $315 per hour. Petition granted in part and denied in part and remanded.

United States v. Sharma/University of Southern California
Case No. 98-56020
U.S. Court of Appeals for the Ninth Circuit

OTHER-FALSE CLAIMS ACT-COMPUTATION OF PERCENTAGE OF RECOVERY OF PROCEEDS TO FALSE CLAIMS ACT PRIVATE PLAINTIFF DOES NOT INCLUDE ATTORNEY FEES AWARDED
In 1996, Dr. Ramesh Sharma brought a qui tam action against USC under the False Claims Act. The U.S. elected not to intervene in the case, but later objected to the calculation of Sharma's recovery in the Settlement Agreement with USC. The government disputed the inclusion of attorneys' fees as part of the proceeds of the settlement to which Sharma was entitled. The trial court agreed with the government and reduced Sharma's recovery by eliminating the attorney fees and approved the settlement as modified.
HELD: The FCA provides that the district court must approve a proposed settlement in a qui tam case (in which a party sues on behalf of the government). The statute provides that a relator may receive not less than 25 percent and not more than 30 percent of the proceeds of the action or settlement and shall be paid out of such proceeds. Such person shall also receive an amount for reasonable expenses plus reasonable attorneys' fees and costs. The FCA requires attorneys' fees and costs to be awarded against the defendant, rather than taken out of the proceeds of the FCA recovery. The district court did not err in modifying the parties' Settlement Agreement to bring it into compliance with the FCA. Affirmed.

Sony Computer Entertainment America v. Bleem, LLC/Herpolsheimer
Case No. 99-17137
U.S. Court of Appeals for the Ninth Circuit

ORDER
Amendment to opinion filed on May 4, 2000, not affecting the judgment.

Lealao v. Beneficial California
Case No. A085992
California Court of Appeal, First District, Division Two

CIVIL-METHOD OF DETERMINATION OF ATTORNEY FEES IN CLASS ACTION-FEE SHIFTING-FEE SPREADING-ADJUSTMENT OF LODESTAR AMOUNT
Lealao successfully pursued a class action against Beneficial California to a settlement agreement. The settlement agreement did not require that class counsel�s fee be deducted from the refunds received by members of the class, nor did it specify the amount of the fee class counsel would receive. The agreement provided only that Beneficial would pay class counsel such reasonable attorneys� fees and costs as determined by the Court. Looking only to the hourly rates claimed by the class action attorneys and paralegals, and the time they expended on the case, the court awarded reasonable attorney fees in the amount of $425,000. Lealao appealed the amount of attorney fees awarded.
HELD: In so-called fee shifting cases, in which the responsibility to pay attorney fees is statutorily or otherwise transferred from the prevailing plaintiff or class to the defendant, the primary method for establishing the amount of "reasonable" attorney fees is the lodestar method. The lodestar (or touchstone) is produced by multiplying the number of hours reasonably expended by counsel by a reasonable hourly rate. Once the court has fixed the lodestar, it may increase or decrease that amount by applying a positive or negative "multiplier" to take into account a variety of other factors, including the quality of the representation, the novelty and complexity of the issues, the results obtained, and the contingent risk presented. Fee spreading occurs when a settlement or adjudication results in the establishment of a separate or so-called common fund for the benefit of the class. Because the fee awarded class counsel comes from this fund, it is said that the expense is borne by the beneficiaries. Percentage fees have traditionally been allowed in such common fund cases, although, the lodestar methodology may also be utilized in this context. In cases in which the value of the class recovery can be monetized with a reasonable degree of certainty and it is not otherwise inappropriate, a trial court has discretion to adjust the basic lodestar through the application of a positive or negative multiplier where necessary to insure that the fee awarded is within the range of fees freely negotiated in the legal marketplace in comparable litigation. The record reveals nothing about this case which would make it manifestly inappropriate to evaluate the lodestar as a percentage of the recovery and adjust it accordingly if it can be determined that the lodestar is significantly different from the range of percentage fees freely negotiated in comparable litigation. Reversed and remanded.

People v. Mitchell
Case No. B123823
California Court of Appeal, Second District, Division Seven

CRIMINAL-PROCEDURE-METHOD OF CORRECTION OF ERROR IN ABSTRACT OF JUDGMENT-ENHANCEMENT OF SENTENCE BASED ON TWO CRIMES FROM SAME CONDUCT
Mitchell was charged in February 1997 with the crime of felony drunk driving and also on the same occasion committed the separate felony of driving with blood alcohol over .08 percent. A second information charged him with felony drunk driving in June 1997. He was convicted of all three charges. The pre-sentence report revealed an extensive criminal history, including two convictions for arson. Mitchell's motion to dismiss one of the arson conviction allegations was denied. The trial court imposed a full 25-years-to-life Three Strikes sentence for the February 1997 drunk-driving offense. It imposed a concurrent 25-years-to-life sentence for the separate contemporaneous offense of driving with excess blood alcohol. It dismissed a "strike" as to the June 1997 drunk driving offense only, and for that offense sentenced appellant, as a second strike offender, to six years in prison (three years doubled), to run consecutive to the 25 years. Mitchell appealed and the People request correction of the abstract of judgment, which omitted fines and penalty assessments that the trial court imposed when orally pronouncing sentence.
HELD: An abstract of judgment is not a judgment of conviction. The abstract cannot add to or modify the judgment which it purports to digest or summarize. An error in the abstract does not change the judgment, and does not inject error into an otherwise correct judgment. An error in the abstract is simply clerical error, which should be corrected by a request to the clerk of the court, and if unsuccessful, by motion. An error in the abstract of judgment is not appealable. The arson convictions were the result of Mitchell setting fire to a garage (an unoccupied building) which spread to the nearby house (an occupied building). A sentence enhancement may be based on two crimes which arise out of the same conduct. The request to correct the abstract of judgment was denied. The judgment was modified to provide that Mitchell's sentence for the Vehicle Code violation is stayed.

Montenegro v. Diaz
Case No. E025810
California Court of Appeal, Fourth District, Division Two

FAMILY LAW-CHANGE OF CUSTODY-REQUIREMENT FOR CHANGED CIRCUMSTANCES
Deborah Diaz had custody of Gregory Montenegro, her son by respondent Alex Montenegro, from the day Gregory was born. Alex sought custody vigorously and repeatedly. On Alex�s third application, when Gregory was five years old, the trial court awarded him custody of Gregory. It reasoned that this change was in Gregory�s best interest because Alex was willing to share Gregory and to cooperate and communicate regarding his care, whereas Deborah was not.
HELD: The trial court erred by determining Gregory�s best interest afresh. Since there had already been two prior judicial determinations of custody the trial court should have limited its consideration to changed circumstances since the last such determination. Reversed.

Barnes v. Workers' Compensation Appeals Board
Case No. S082111
Supreme Court of California

WORKER'S COMPENSATION-LIMITATION PERIOD FOR MODIFICATION OF A PRECAUTIONARY AWARD OF MEDICAL CARE
Barnes suffered a compensable industrial injury and is granted a precautionary award for future medical care. More than five years later, the employer, Employment Development Department petitioned to terminate its future liability for such care, contending the employee�s continuing physical problems are not the result of the original industrial injury, was granted. The Court of Appeal affirmed.
HELD: Once an applicant�s disability has become permanent and stationary, it may be possible to predict he or she will require medical treatment in the future as a result of an industrial injury, even if there is no present manifestation of symptoms. In such circumstances, the Board can, in addition to a general award of present medical benefits, authorize what is known as a precautionary or provisional award of future medical treatment. The statute provides for a five-year limitation period for rescinding altering or amending an award of compensation. The time for challenging the validity of the 1982 order on that ground expired five years after the date of the injury. Reversed.

People v. Cox
Case No. S070959
Supreme Court of California

CRIMINAL-INVOLUNTARY MANSLAUGHTER-NECESSITY THAT ACT BE INHERENTLY DANGEROUS OF DANGEROUS UNDER THE CIRCUMSTANCES
Cox was convicted of involuntary manslaughter by an unlawful act not amounting to felony, to wit, misdemeanor battery. At his trial the jury was instructed that, as a matter of law, battery is an inherently dangerous offense and therefore a predicate for involuntary manslaughter without any further proof regarding the circumstances surrounding commission of that underlying misdemeanor. The court of appeal affirmed.
HELD: In every crime or public offense there must exist a union, or joint operation of act and intent, or criminal negligence. An unlawful act on which a charge of involuntary manslaughter is predicated must be inherently dangerous, that is, dangerous in the abstract, or dangerous under the circumstances of its commission. To say that because proof of battery requires general criminal intent it is unnecessary to further show that the commission of the battery was dangerous under the circumstances leading to the victim�s death merely begs the question at hand. The involuntary manslaughter instruction given below was incorrect insofar as it informed the jury that misdemeanor battery is an inherently dangerous offense in the abstract. The Court of Appeal erred in approving the trial court�s erroneous instruction on the nature of the elements of involuntary manslaughter. Reversed and remanded.

Wasserman's Archived Appellate Summaries

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