Thursday, March 31, 2005
Scout Update
On March 28, H.B. 296, the bill to award college scholarships to all Eagle and Gold Star Scouts (my previous discussion here) was reported out of the Appropriations Committee unfavorably. This effectively kills the bill for this year.
Thursday, March 24, 2005
Making an S of Yourself
The Service today issued a new Form 2553, Election by a Small Business Corporation. The revised instructions can be found here.
Tuesday, March 22, 2005
Previews of Coming Attractions
Maryland follows the so-called lex loci delicti rule with respect to choosing the law to apply in tort actions. That is, the courts will apply the law of the jurisdiction where the wrong occurred. However, it is unclear where the "wrong" occurs in cases of fraud or negligent misrepresentation if the alleged wrong and alleged loss occur in different jurisdictions. In the case of Hardwire, LLC v. The Goodyear Tire & Rubber Co., Judge Bennett certified that question and sent it to the Court of Appeals. He also certified the similar question of what jurisdiction's substantive law governs in the case of tortious interference with economic relationships where the wrongful act and the plaintiff's injury occur in two different jurisdictions.
Choice of law issues presented in cases such as Hardwire are taking on new importance due to the rapidly falling telecommunications prices and the growth of the internet. Even as late as fifteen years ago, most business activity could be tied to a specific physical location. For instance, business deals, even if negotiated via fax or letter, were typically concluded at a discrete place. That is no longer the case, since negotiations are often concluded electronically with even the closing of a deal taking place in more than one location.
Choice of law issues presented in cases such as Hardwire are taking on new importance due to the rapidly falling telecommunications prices and the growth of the internet. Even as late as fifteen years ago, most business activity could be tied to a specific physical location. For instance, business deals, even if negotiated via fax or letter, were typically concluded at a discrete place. That is no longer the case, since negotiations are often concluded electronically with even the closing of a deal taking place in more than one location.
Wednesday, March 16, 2005
Gut Equity
In a case that is likely to be appealed, Judge Deborah Chasanow of the District Court re-affirmed that hard cases make, if not bad law, then strained law. The case, Valley Forge Life Insurance Co. v. Liebowitz, involved a $2 Million life insurance policy.
Bruce Liebowitz was married to Shelley Liebowitz. His father, Howard Liebowitz, is an independent insurance agent. In the late spring of 2000, Bruce applied for a life insurance policy from Valley Forge with a death benefit of $2 Million. His father was the issuing agent. The policy was formally issued on November 1, 2000. Bruce died of esophageal cancer on September 5, 2002.
The application for the policy directly asked about the insured's foreign travel, both past and prospective. Bruce had traveled extensively in the Mideast and had lived in Spain in the two years prior to the date of the application and continued to travel extensively after the application was submitted. However, on the application he denied any foreign travel in the two years prior to the date of the application and he denied any plans to travel out of the country in the future. After his death, Valley Forge brought this action alleging that Bruce had made a material misrepresentation with respect to the policy application and requested that the policy be declared a nullity.
On cross motions for summary judgment, the Court ruled in favor of Mrs. Liebowitz, holding that (i) Howard was the agent of Valley Forge, (ii) that Howard knew of the falsity of the statements on the applications, (iii) Howard's knowledge could be imputed to Valley Forge, and therefore (iv) Valley Forge was estopped from denying coverage due to Bruce's false statements concerning his foreign travel. The Court also ruled that the statements on the application were representations, not warranties, and that Valley Forge, due to its knowledge of the misstatements (via imputation from Howard) waived its right to rescind the contract. The Court did not address the question of whether the misstatements were material, perhaps because that would have required a weighing of conflicting facts, taking it out of summary judgment territory.
Cases like this give insurers a bad reputation. Even though Bruce essentially lied on his application, it is unlikely that Valley Forge would have refused to issue the policy even had it known about Bruce's extensive foreign travel, although there may have been a slight surcharge added to the premium, a trivial amount in the context of this case. Moreover, Bruce's death can in no way be traced to his foreign travel. Going one step further, had Bruce lived another 55 days or so, the policy would likely have become incontestable. Thus, under the circumstances of the case, it appears that Valley Forge was asking to be relieved of its obligations under the contract due to misrepresentations that caused it no material harm.
On the other hand, Howard and Bruce do not present an altogether savory picture. At the least, Howard failed to honor his fiduciary duties to Valley Forge. However, the claimant here was a young widow who was left to care for the toddler child of the deceased. There were no facts that would indicate that she had been in any way complicit in a scheme to cheat the insurer. Under these circumstances, the gut equities clearly favored her and the judgment followed.
Bruce Liebowitz was married to Shelley Liebowitz. His father, Howard Liebowitz, is an independent insurance agent. In the late spring of 2000, Bruce applied for a life insurance policy from Valley Forge with a death benefit of $2 Million. His father was the issuing agent. The policy was formally issued on November 1, 2000. Bruce died of esophageal cancer on September 5, 2002.
The application for the policy directly asked about the insured's foreign travel, both past and prospective. Bruce had traveled extensively in the Mideast and had lived in Spain in the two years prior to the date of the application and continued to travel extensively after the application was submitted. However, on the application he denied any foreign travel in the two years prior to the date of the application and he denied any plans to travel out of the country in the future. After his death, Valley Forge brought this action alleging that Bruce had made a material misrepresentation with respect to the policy application and requested that the policy be declared a nullity.
On cross motions for summary judgment, the Court ruled in favor of Mrs. Liebowitz, holding that (i) Howard was the agent of Valley Forge, (ii) that Howard knew of the falsity of the statements on the applications, (iii) Howard's knowledge could be imputed to Valley Forge, and therefore (iv) Valley Forge was estopped from denying coverage due to Bruce's false statements concerning his foreign travel. The Court also ruled that the statements on the application were representations, not warranties, and that Valley Forge, due to its knowledge of the misstatements (via imputation from Howard) waived its right to rescind the contract. The Court did not address the question of whether the misstatements were material, perhaps because that would have required a weighing of conflicting facts, taking it out of summary judgment territory.
Cases like this give insurers a bad reputation. Even though Bruce essentially lied on his application, it is unlikely that Valley Forge would have refused to issue the policy even had it known about Bruce's extensive foreign travel, although there may have been a slight surcharge added to the premium, a trivial amount in the context of this case. Moreover, Bruce's death can in no way be traced to his foreign travel. Going one step further, had Bruce lived another 55 days or so, the policy would likely have become incontestable. Thus, under the circumstances of the case, it appears that Valley Forge was asking to be relieved of its obligations under the contract due to misrepresentations that caused it no material harm.
On the other hand, Howard and Bruce do not present an altogether savory picture. At the least, Howard failed to honor his fiduciary duties to Valley Forge. However, the claimant here was a young widow who was left to care for the toddler child of the deceased. There were no facts that would indicate that she had been in any way complicit in a scheme to cheat the insurer. Under these circumstances, the gut equities clearly favored her and the judgment followed.
Tuesday, March 15, 2005
There Will Be Some Changes Made, Part I
Recently, the Staff of the Joint Committee on Taxation prepared a report entitled Options to Improve Tax Compliance and Reform Tax Expenditures. The proposals in the report would change a broad variety of tax procedures. Even though these proposals have not yet been set forth in a specific bill, it is almost certain that in due course legislation will be introduced that reflects some of these ideas.
Today, and in forthcoming posts, I will address some of the proposals. The first that I will discuss are the proposal to modify the determination of amounts subject to employment or self-employment tax for partners and S corporation shareholders and a related proposal to treat guaranteed payments to partners as payments to nonpartners.
It will come as no surprise to regular readers of this blog that, as the Committee Report notes:
First, all partners of any type of partnership, general, limited, or LLC, would be subject to self-employment tax on their share of self-employment income. This general rule would be subject to a carve-out for certain specified types of income or loss, such as certain rental income, dividends and interest, certain gains, and other items. However, income from service partnerships, described by the report as being partnerships substantially all of whose activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, would be entirely subject to SECA.
Second, the general rule would be further blunted in the case of a partner who did not materially participate in the business of the partnership. In such a case, only that portion of that partner's income that represented reasonable compensation for the services the partner actually rendered to the partnership would be subject to SECA.
Finally, in the most radical departure from current law, S corporation shareholders would be treated for all employment tax purposes as partners. That is, instead of being subject to FICA, they would be subject to SECA. More importantly, unless they did not materially participate in the business of the corporation, all of their income from the corporation (subject to the source limitations noted above) would be subject to SECA. Thus, S corporation shareholders could no longer engage in audit roulette by taking an aggressive position and hoping that the Service would either not challenge the position or that they could compromise with the Service if it did raise a challenge. The change to the manner in which employment taxes are imposed on S corporation shareholders would be coupled with an end to all income tax withholding for these individuals. In other words, they would not be treated in any way as employees for federal tax purposes.
The staff estimates that over a ten-year period beginning in 2006, this proposal would generate $57.4 Billion. It would be effective for tax years beginning after the date of enactment.
The proposal has several shortcomings, either perceived or real.
First, it rejects any carve-out of income from employment tax based upon some imputed return on invested capital. A proposal of this sort had been suggested by the AICPA. Thus income from a radiology practice, for instance, would be completely subject to SECA, even though a significant portion of the income represents a return on capital invested in the practice's expensive equipment. I haven't read the actual text of the proposal, but it would seem that there will have to be fairly complicated anti-abuse provisions to prevent businesses from forming separate equipment or real estate partnerships and entering into leases with their service partnerships to generate SECA-exempt income.
Second, the proposal does not address the "lowly employee" issue. That is, an employee who has only a small percentage of the equity of the business, but who works there full time. As I understand the proposal, all income paid to these employees would be treated as partnership income and none of the affected employees would be subject to withholding. This works a hardship on lower level employees who actually desire to have their taxes withheld from their wages. Also, the Report seems to have overlooked the possibility that it is likely that suddenly "partners" will be popping out the woodwork in order to allow unscrupulous employers to avoid their withholding tax obligations on compensation paid to their employees. Taken to its logical extreme, § 6672 could be, for all practical purposes, written out of the Code entirely.
In a closely related area, there is a seemingly contradictory proposal to repeal § 707(c). Specifically, it is proposed that all compensation for services or use of capital that is not based on the net income (or an item of net income) of the partnership is treated as arising from a transaction between a partnership and a nonpartner. The proposal with respect to employment tax is not discussed here, however it is noted that the under the § 707(c) proposal the income and deduction timing rule for guaranteed payments is repealed and such payments are subject to the income and deduction timing rules for nonpartner payments. What this means, I suspect, is that whether these payments are subject to SECA will continue to be governed by the rules proposed in the employment tax reform area.
If the employment tax law is changed along the guidelines suggested by these proposals, it can be fairly stated that justice in this area will be swift if not particularly fine.
Today, and in forthcoming posts, I will address some of the proposals. The first that I will discuss are the proposal to modify the determination of amounts subject to employment or self-employment tax for partners and S corporation shareholders and a related proposal to treat guaranteed payments to partners as payments to nonpartners.
It will come as no surprise to regular readers of this blog that, as the Committee Report notes:
[T]here are significant differences in the employment tax treatment of individuals who are owners of interests in passthrough entities and who perform services in the business. S corporation shareholder-employees are treated like other employees (i.e., subject to FICA), whereas a broader category of income of some partners (other than limited partners) is subject to self-employment tax. These discontinuities cause taxpayers choice-of-business form decisions to be motivated by a desire to avoid or reduce employment tax, rather than by nontax considerations.The Committee Staff is more than aware of the growing number of taxpayers playing audit roulette in this area. Thus the report notes that:
S corporation shareholders may pay themselves wages below the wage cap, while treating the rest of their compensation as a distribution by the S corporation in their capacity as shareholders. They may take the position that no part of the S corporation distribution to them as shareholders is subject to FICA tax. While present law provides that the entire amount of an S corporation shareholders reasonable compensation is subject to FICA tax in this situation, enforcement of this rule by the government may be difficult because it involves factual determinations on a case-by-case basis.The reform suggested by the Committee has three parts.
First, all partners of any type of partnership, general, limited, or LLC, would be subject to self-employment tax on their share of self-employment income. This general rule would be subject to a carve-out for certain specified types of income or loss, such as certain rental income, dividends and interest, certain gains, and other items. However, income from service partnerships, described by the report as being partnerships substantially all of whose activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, would be entirely subject to SECA.
Second, the general rule would be further blunted in the case of a partner who did not materially participate in the business of the partnership. In such a case, only that portion of that partner's income that represented reasonable compensation for the services the partner actually rendered to the partnership would be subject to SECA.
Finally, in the most radical departure from current law, S corporation shareholders would be treated for all employment tax purposes as partners. That is, instead of being subject to FICA, they would be subject to SECA. More importantly, unless they did not materially participate in the business of the corporation, all of their income from the corporation (subject to the source limitations noted above) would be subject to SECA. Thus, S corporation shareholders could no longer engage in audit roulette by taking an aggressive position and hoping that the Service would either not challenge the position or that they could compromise with the Service if it did raise a challenge. The change to the manner in which employment taxes are imposed on S corporation shareholders would be coupled with an end to all income tax withholding for these individuals. In other words, they would not be treated in any way as employees for federal tax purposes.
The staff estimates that over a ten-year period beginning in 2006, this proposal would generate $57.4 Billion. It would be effective for tax years beginning after the date of enactment.
The proposal has several shortcomings, either perceived or real.
First, it rejects any carve-out of income from employment tax based upon some imputed return on invested capital. A proposal of this sort had been suggested by the AICPA. Thus income from a radiology practice, for instance, would be completely subject to SECA, even though a significant portion of the income represents a return on capital invested in the practice's expensive equipment. I haven't read the actual text of the proposal, but it would seem that there will have to be fairly complicated anti-abuse provisions to prevent businesses from forming separate equipment or real estate partnerships and entering into leases with their service partnerships to generate SECA-exempt income.
Second, the proposal does not address the "lowly employee" issue. That is, an employee who has only a small percentage of the equity of the business, but who works there full time. As I understand the proposal, all income paid to these employees would be treated as partnership income and none of the affected employees would be subject to withholding. This works a hardship on lower level employees who actually desire to have their taxes withheld from their wages. Also, the Report seems to have overlooked the possibility that it is likely that suddenly "partners" will be popping out the woodwork in order to allow unscrupulous employers to avoid their withholding tax obligations on compensation paid to their employees. Taken to its logical extreme, § 6672 could be, for all practical purposes, written out of the Code entirely.
In a closely related area, there is a seemingly contradictory proposal to repeal § 707(c). Specifically, it is proposed that all compensation for services or use of capital that is not based on the net income (or an item of net income) of the partnership is treated as arising from a transaction between a partnership and a nonpartner. The proposal with respect to employment tax is not discussed here, however it is noted that the under the § 707(c) proposal the income and deduction timing rule for guaranteed payments is repealed and such payments are subject to the income and deduction timing rules for nonpartner payments. What this means, I suspect, is that whether these payments are subject to SECA will continue to be governed by the rules proposed in the employment tax reform area.
If the employment tax law is changed along the guidelines suggested by these proposals, it can be fairly stated that justice in this area will be swift if not particularly fine.
Thursday, March 10, 2005
Like Grant Taking Richmond
The Fourth Circuit issued an unpublished opinion today in the case of Chaplin v. DuPont Advance Fiber Systems that contains a passage that is so weird that I'm left muttering "WTF?"
The case involves Rule 11 sanctions against an attorney for bringing a case for alleged Title VII claims for national origin, religious, and racial discrimination without any evidentiary support. The Court upheld the imposition of sanctions because various factual elements of the plaintiffs' claims were missing entirely.
However, in the course of its opinion, the Court said as follows:
Now, employment and labor law is not my field of concentration. Nor do I have an advanced degree in American history. But I seem to recall that some time ago there was a group of rebels who attempted to secede from this nation and to form a government that went by the name of the Confederate States of America. This alleged government was never recognized by the United States of America and the rebellion was ultimately quashed. That being the case, how can anyone claim discrimination based on national origin if the claimed national origin is a nation that never existed?
Shouldn't someone tell the Fourth Circuit that the Civil War is over and that the Union won?
Update
The District Court in the Chaplin case got it right. The reported decision, found at 293 F.Supp.2d 622 (E.D.Va. 2003), shows the appeals panel here in even a worse light since the District Court relied on a previously unpublished Fourth Circuit opinion in support of the proposition that "Confederate-American" is not a protected class. ("This Court finds, as did the Fourth Circuit Court of Appeals in an unpublished opinion, that 'Confederate-American' is not a protected class. See Terrill v. Chao, 31 Fed. Appx. 99, 100 (4th Cir.), cert. denied, 537 U.S. 823, 154 L. Ed. 2d 32, 123 S. Ct. 108 (2002).")
The case involves Rule 11 sanctions against an attorney for bringing a case for alleged Title VII claims for national origin, religious, and racial discrimination without any evidentiary support. The Court upheld the imposition of sanctions because various factual elements of the plaintiffs' claims were missing entirely.
However, in the course of its opinion, the Court said as follows:
[I]t is quite possible that an employee could have cognizable causes of action for both national origin discrimination and race discrimination. An employer could discriminate against all Caucasian employees, as well as all employees of Confederate Southern American descent, or that employer could discriminate against only Caucasian employees who were also of Confederate Southern American descent. An attorney representing a member of both classes should not be threatened with the risk of sanctions for bringing causes of action for both race discrimination and national origin discrimination.(Emphasis added.)
Now, employment and labor law is not my field of concentration. Nor do I have an advanced degree in American history. But I seem to recall that some time ago there was a group of rebels who attempted to secede from this nation and to form a government that went by the name of the Confederate States of America. This alleged government was never recognized by the United States of America and the rebellion was ultimately quashed. That being the case, how can anyone claim discrimination based on national origin if the claimed national origin is a nation that never existed?
Shouldn't someone tell the Fourth Circuit that the Civil War is over and that the Union won?
Update
The District Court in the Chaplin case got it right. The reported decision, found at 293 F.Supp.2d 622 (E.D.Va. 2003), shows the appeals panel here in even a worse light since the District Court relied on a previously unpublished Fourth Circuit opinion in support of the proposition that "Confederate-American" is not a protected class. ("This Court finds, as did the Fourth Circuit Court of Appeals in an unpublished opinion, that 'Confederate-American' is not a protected class. See Terrill v. Chao, 31 Fed. Appx. 99, 100 (4th Cir.), cert. denied, 537 U.S. 823, 154 L. Ed. 2d 32, 123 S. Ct. 108 (2002).")
Monday, March 07, 2005
Walking the Dog, Part I
One of the problems with attempting to respond quickly to new developments is that my comments are either incomplete or not well thought out. (Some would argue that this is true of all of my comments on any issue regardless of the amount of time that I have to consider them.) Frequently, I put up a post and then subsequently think of additional comments that I should have made or comments that I might want to retract. Often, this happens during my nightly walk with my dog, Houston.
Rather than merely post updates or addenda to existing posts, I will, from time to time, be posting comments under the "Walking the Dog" subject line that represent a more distanced perspective on matters that had been the subject of earlier postings. And, it represents a great excuse to post pictures of Houston as an antidote to those detestable cat-bloggers (but see here).
In any event, some additional thoughts on Chawla and on the practice of newspapers linking (or, in the case of the Baltimore Sun, not linking) to source documents for their stories.
Chawla
Chawla is technically an unpublished opinion. That is, it is not recommended for publication in the national reporting system and has no precedential authority. However, it still presents practical difficulties for planners.
The most well-known variety of trust that is designed to hold policies of insurance on the lives of the individual who established the trust is the so-called Crummey trust. Gallons of estate planning ink have been spilled describing these trusts and praising their virtues. I suspect that the total premiums paid to insurance carriers each year from Maryland residents for policies held by Crummey trusts is far in excess of the $2.45M that was at issue in Chawla.
Notwithstanding the fact that Chawla is technically "unpublished," it has been, for all practical purposes, published. Through this weblog for instance and in weblogs such as the E-LawLibrary. Is publication via a weblog with an admittedly limited readership sufficient to put practitioners on notice that there may be a fatal defect with the Crummey trust concept? Does the discussion in other professional internet outlets and the Washington Post create a situation wherein a practitioner should know of the case?
Even though the case is not precedential. What does that mean, as a practical matter, to a planner offering advice? Can he or she simply ignore the opinion? How does the planner deal with factors in the opinion that undermine its value? For instance, in Chawla the beneficiary of the trust was a person who had previously been informed that she had no insurable interest in the life of the creator of the trust. Does that mean that a trust has an insurable interest if it has as its beneficiary a person who does have an insurable interest in the creator's life (e.g., the trust settlor's child)?
As to the first question, I do not believe that we need to stop forming trusts that hold life insurance policies. At the worst, there should be a legislative fix in place by next year since there would seem to be no overarching public policy reason for the decision other than that the Court felt that it was constrained by the statute and rules of statutory interpretation. However, we are probably now required to tell clients that there is a decided case that casts a bit of a shadow on this planning technique. I believe that we are also required to inform clients who already have trusts in place that hold insurance policies if we have continuing contact and activity with respect to the clients and the trusts. We do not, however, have to contact all clients for whom we have formed trusts that continue to hold insurance policies, since we have no continuing obligation to these clients once our representation is concluded.
As to the second question, I think that we have to read the opinion as it was delivered. That is, the opinion holds, without any qualification, that trusts cannot be the beneficiaries of life insurance policies, except as set forth in the narrow exception explicitly set forth in the statute. We can tell clients that we hope that there will be a judicial "gloss" that limits the opinion, just as we could tell clients that it is, in our opinion, unlikely that other courts will reach the same conclusion. But we should not mislead clients as to what Chawla says. It says what it says, not what we hope it says.
Linking
I attempt whenever possible to link the source of material that I am discussing. I do this because it allows the curious reader to jump to the material and determine for himself or herself whether my discussion was fair and complete. Where, as was the case with Chawla, the source material is not publicly available on the web, I post it on my website and link to that location. This procedure should be standard operating procedure for all news media.
It is all well and good for newspapers to discuss and excerpt, say, the President's State of the Union Address. But they should provide an easily available link to the text of the speech. In cases like The Sunpapers v. Ehrlich, where the documents are not freely available online, mainline media should make them available online and then link to them. In that way, the reader can make a decision as to whether he or she wants to read the reporter's views on the way in which the case is developing or to read the actual filings for himself or herself to make his or her own determination. Seen in that regard, newspapers and other media become not a final destination, but a point of embarkation.
As I mentioned at the time, I thought that the Sun was not serving it's readers well when it failed to make the source documents in its lawsuit with the Governor widely available. Obviously, in many cases, news media will be our only "eyes and ears" to current events. War reporting, for instance, cannot be formated in such a way that it can be easily linked to. But when reporting on public debates on policy issues, Social Security for instance, links to source documents should be readily available. Thus, readers should be informed that (i) the various predictions as to when, if ever, the Social Security trust fund begins to run dry were conclusions developed using a variety of statistical assumptions, (ii) that the assumptions and conclusions are set forth in lengthy reports which can be easily downloaded from the web,and (iii) the reader should be given the urls where the reports can be obtained. While most readers will lack the time or inclination to read the reports, at least the media will be acting as honest brokers in giving them a roadmap to further information.
Rather than merely post updates or addenda to existing posts, I will, from time to time, be posting comments under the "Walking the Dog" subject line that represent a more distanced perspective on matters that had been the subject of earlier postings. And, it represents a great excuse to post pictures of Houston as an antidote to those detestable cat-bloggers (but see here).
In any event, some additional thoughts on Chawla and on the practice of newspapers linking (or, in the case of the Baltimore Sun, not linking) to source documents for their stories.
Chawla
Chawla is technically an unpublished opinion. That is, it is not recommended for publication in the national reporting system and has no precedential authority. However, it still presents practical difficulties for planners.
The most well-known variety of trust that is designed to hold policies of insurance on the lives of the individual who established the trust is the so-called Crummey trust. Gallons of estate planning ink have been spilled describing these trusts and praising their virtues. I suspect that the total premiums paid to insurance carriers each year from Maryland residents for policies held by Crummey trusts is far in excess of the $2.45M that was at issue in Chawla.
Notwithstanding the fact that Chawla is technically "unpublished," it has been, for all practical purposes, published. Through this weblog for instance and in weblogs such as the E-LawLibrary. Is publication via a weblog with an admittedly limited readership sufficient to put practitioners on notice that there may be a fatal defect with the Crummey trust concept? Does the discussion in other professional internet outlets and the Washington Post create a situation wherein a practitioner should know of the case?
Even though the case is not precedential. What does that mean, as a practical matter, to a planner offering advice? Can he or she simply ignore the opinion? How does the planner deal with factors in the opinion that undermine its value? For instance, in Chawla the beneficiary of the trust was a person who had previously been informed that she had no insurable interest in the life of the creator of the trust. Does that mean that a trust has an insurable interest if it has as its beneficiary a person who does have an insurable interest in the creator's life (e.g., the trust settlor's child)?
As to the first question, I do not believe that we need to stop forming trusts that hold life insurance policies. At the worst, there should be a legislative fix in place by next year since there would seem to be no overarching public policy reason for the decision other than that the Court felt that it was constrained by the statute and rules of statutory interpretation. However, we are probably now required to tell clients that there is a decided case that casts a bit of a shadow on this planning technique. I believe that we are also required to inform clients who already have trusts in place that hold insurance policies if we have continuing contact and activity with respect to the clients and the trusts. We do not, however, have to contact all clients for whom we have formed trusts that continue to hold insurance policies, since we have no continuing obligation to these clients once our representation is concluded.
As to the second question, I think that we have to read the opinion as it was delivered. That is, the opinion holds, without any qualification, that trusts cannot be the beneficiaries of life insurance policies, except as set forth in the narrow exception explicitly set forth in the statute. We can tell clients that we hope that there will be a judicial "gloss" that limits the opinion, just as we could tell clients that it is, in our opinion, unlikely that other courts will reach the same conclusion. But we should not mislead clients as to what Chawla says. It says what it says, not what we hope it says.
Linking
I attempt whenever possible to link the source of material that I am discussing. I do this because it allows the curious reader to jump to the material and determine for himself or herself whether my discussion was fair and complete. Where, as was the case with Chawla, the source material is not publicly available on the web, I post it on my website and link to that location. This procedure should be standard operating procedure for all news media.
It is all well and good for newspapers to discuss and excerpt, say, the President's State of the Union Address. But they should provide an easily available link to the text of the speech. In cases like The Sunpapers v. Ehrlich, where the documents are not freely available online, mainline media should make them available online and then link to them. In that way, the reader can make a decision as to whether he or she wants to read the reporter's views on the way in which the case is developing or to read the actual filings for himself or herself to make his or her own determination. Seen in that regard, newspapers and other media become not a final destination, but a point of embarkation.
As I mentioned at the time, I thought that the Sun was not serving it's readers well when it failed to make the source documents in its lawsuit with the Governor widely available. Obviously, in many cases, news media will be our only "eyes and ears" to current events. War reporting, for instance, cannot be formated in such a way that it can be easily linked to. But when reporting on public debates on policy issues, Social Security for instance, links to source documents should be readily available. Thus, readers should be informed that (i) the various predictions as to when, if ever, the Social Security trust fund begins to run dry were conclusions developed using a variety of statistical assumptions, (ii) that the assumptions and conclusions are set forth in lengthy reports which can be easily downloaded from the web,and (iii) the reader should be given the urls where the reports can be obtained. While most readers will lack the time or inclination to read the reports, at least the media will be acting as honest brokers in giving them a roadmap to further information.
Sweat the Big Stuff AND the Small Stuff
In Mission West Properties, L.P. v. Republic Properties Corp., the Court of Special Appeals spent a good deal of effort to establish a relatively simple proposition, namely that personal jurisdiction cannot be obtained over a limited partnership simply because personal jurisdiction can be exercised over a general partner.
In essence, a dispute broke out among a variety of parties. The dispute concerned various business ventures in California. So far as I can determine, the only connection to Maryland was that the general partner of Mission West Properties, L.P. was a REIT that was organized under Maryland law. (Actually, re-organized under Maryland law. The REIT had initially been organized under California law and had its principal place of business in that state. It subsequently reorganized under Maryland law, presumably due to this state's favorable and advanced REIT statute.)
Ultimately, the Court of Special Appeals ruled that (i) a limited partnership is a juridical entity separate and apart from its partners and (ii) due process requirements must be met with respect to the entity in order to allow the exercise of personal jurisdiction over the entity.
The most interesting aspect of the case, however, is the procedural path that it took to get the jurisdictional issue before the appellate court. It illustrates the inefficiencies of the procedural rule against piecemeal appeals, a rule that is designed to promote efficiency.
The challenge to the exercise of personal jurisdiction had been made early in the litigation process and the lower court had rebuffed the attack. Ultimately, there was a week long bench trial and numerous substantive questions at issue in the appeal. This course presumably cost the litigants a good deal of time and money, all for naught.
Indeed, the Court of Special Appeals was somewhat embarrassed by the awkwardness of this process. It noted that the statute of limitations had not been blown because a lawsuit had been filed in California and it had been stayed, essentially suspending the running of the statute. Had that not been the case, one presumes that limitations would have expired and the aggrieved party would be without a remedy.
The Mission West Properties case illustrates once again that a well drafted contract will outline the remedies available in the event that the contract breaks down, including a provision concerning the courts that have jurisdiction over any dispute and the agreement of the parties to submit to the exercise of personal jurisdiction by those courts.
In essence, a dispute broke out among a variety of parties. The dispute concerned various business ventures in California. So far as I can determine, the only connection to Maryland was that the general partner of Mission West Properties, L.P. was a REIT that was organized under Maryland law. (Actually, re-organized under Maryland law. The REIT had initially been organized under California law and had its principal place of business in that state. It subsequently reorganized under Maryland law, presumably due to this state's favorable and advanced REIT statute.)
Ultimately, the Court of Special Appeals ruled that (i) a limited partnership is a juridical entity separate and apart from its partners and (ii) due process requirements must be met with respect to the entity in order to allow the exercise of personal jurisdiction over the entity.
The most interesting aspect of the case, however, is the procedural path that it took to get the jurisdictional issue before the appellate court. It illustrates the inefficiencies of the procedural rule against piecemeal appeals, a rule that is designed to promote efficiency.
The challenge to the exercise of personal jurisdiction had been made early in the litigation process and the lower court had rebuffed the attack. Ultimately, there was a week long bench trial and numerous substantive questions at issue in the appeal. This course presumably cost the litigants a good deal of time and money, all for naught.
Indeed, the Court of Special Appeals was somewhat embarrassed by the awkwardness of this process. It noted that the statute of limitations had not been blown because a lawsuit had been filed in California and it had been stayed, essentially suspending the running of the statute. Had that not been the case, one presumes that limitations would have expired and the aggrieved party would be without a remedy.
The Mission West Properties case illustrates once again that a well drafted contract will outline the remedies available in the event that the contract breaks down, including a provision concerning the courts that have jurisdiction over any dispute and the agreement of the parties to submit to the exercise of personal jurisdiction by those courts.
Saturday, March 05, 2005
Lawyers (Not) In Love
There can be significant value in reading "unpublished" judicial opinions. That is, opinions that, while available on the web, are not formally adopted by the issuing court for purposes of establishing precedent. A prime case on point is Sanders v. Mueller just handed down by the Fourth Circuit.
The case deals with the claims of Maryland attorney Robert Sanders against a Michigan law firm, Olsman, Ganos & Mueller, growing out of three product liability cases. The three cases involved allegedly defective auto airbags. All three cases had been referred to Olsman, Ganos by Sanders. He brought suit against the firm in order to recover a share of the attorneys' fees recovered by Olsman, Ganos.
In the lower court, Olsman, Ganos had been granted summary judgment in two of the cases, the Greer and Holtquist cases. In the third case, Ambrose, the lower court had set aside a jury award of $300,000 in favor of Sanders, reducing the award to $1.
In the Ambrose matter, the plaintiffs had initially been represented by local counsel. Subsequently, they sought advice from Sanders who ultimately referred them to Olsman, Ganos. The local firm and Olsman, Ganos agreed upon a 45/55 fee split.
Initially, Sanders and Olsman, Ganos had agreed to a one-third/two-thirds fee split. However, Olsman, Ganos asked to modify the fee split in light of the fee split with local counsel. Olsman, Ganos' proposed modification was to split the fee based upon the "totality of the circumstances," including how much work Sanders performed, his role in referring the client to Olsman, Ganos, how much of the litigation expenses he paid, and several other factors. This arrangement only applied where there was a fee split with local counsel, as in the Ambrose case. In other cases, the initial one-third/two-thirds arrangement would stand. It was also agreed that, in all events, Sanders would be allowed to work on the cases.
Sanders rendered substantial services in the Ambrose case, by his calculation working 1,500 hours over a two year period. At one point, he worked full-time on the case for a three month period. Days before the trial in Ambrose, the case settled. A total of $1M in attorneys' fees were paid, $550,000 ot Olsman, Ganos. Although Sanders had no agreement with the local firm involved, that firm gratuitously paid him $20,000 in appreciation for his efforts. However, his efforts to reach a deal with Olsman, Ganos broke down completely. Not only did Olsman, Ganos refuse to pay him a fee in the Ambrose case, it barred him from performing any work on the Greer and Holtquist cases. Subsequently, those two cases settled and Olsman, Ganos recovered attorneys' fees in both cases.
The Ambrose Case Claim
The lower court overturned the jury award with respect to the Ambrose case, holding that Sanders had failed to present evidence that would have allowed the jury to determine with any "reasonable degree of certainty" the fair value of his services in excess of the $20,000 he received from the local counsel. Thus, the lower court concluded that Sanders had proven liability, but not damages.
Sanders' claim with respect to the Ambrose case fee was based upon the theory of quantum meruit. The Fourth Circuit distinguished between two types of quantum meruit claims, one based upon an implied-in-fact contract, usually referred to as quantum meruit, and the other based on an implied-in-law contract, generally referred to as unjust enrichment. In the first type, the award is the reasonable value of the work performed by the plaintiff. In unjust enrichment cases, the award is based upon the gain bestowed upon the defendant. The Court held that Sander's claim was in the nature of a "true" quantum meruit claim. As applied to the facts of the case, the issue could then be reduced to the time and effort Sanders expended compared to the time and effort expended by all of the other attorneys in the case. Since there was evidence that Sanders' time and effort represented as much as 50% of the total time and effort of all of the attorneys, which would have supported an award of $500,000, the Court reinstated the $300,000 judgment awarded by the jury.
The Claims in the Greer and Holtquist Cases.
The district court had rejected Sanders' claims in the Greer and Holtquist cases because it concluded that the arrangement between Sanders and Olsman, Ganos constituted a "clear and flagrant" violation of Rule 1.5(e) of the Maryland Rules of Professional Conduct. That rule regulates agreements concerning fee divisions between attorneys. It requires (i) that the division be proportional to the services rendered by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation, (ii) that the client be advised of the participation of all of the lawyers involved, and (iii) that the total fee be reasonable. While it may extend to holding fee-sharing agreements in clear and flagrant violation of the rule unenforceable, a violation of the rule is not a per se defense to the enforceability of a fee-sharing agreement. Rather, it is in the nature of an equitable defense.
The Fourth Circuit held that a two-step analysis had to be conducted to determine whether Rule 1.5(e) should be applied to bar a claim for a fee-split. First, there has to be a finding that the rule had actually been violated. Second, if the rule had been violated, seven factors had to be weighed to reach a conclusion that the agreement is unenforceable.
Because there was no written agreement with respect to the fee split, Sanders had to show that his claim was proportional to the total work expended on the cases. However, Olsman, Ganos had prevented him from working on these cases. The Fourth Circuit rejected Olsman, Ganos' bootstrapping efforts and ruled that it was estopped to raise the proportionality requirement since Sanders' lack of work was due to Olsman, Ganos' actions. The appellate court also found that the clients had been informed of Sanders' participation and that there was no evidence that they objected. Since both sides agreed that the total fee was reasonable, the final element of the rule was met.
Significantly, the Court went on to state that, even if it had concluded that there had been a violation of Rule 1.5(e), it would have reversed the summary judgements since several, if not all, of the enumerated factors "militate in favor of enforcing the fee-sharing agreement." In particular, the Court ruled that a reasonable fact-finder could conclude that Olsman, Ganos was at least equally culpable for the violation of the rule as was Sanders and that Olsman, Ganos had raised the defense simply to escape an otherwise valid contractual obligation. The Court thus reversed the claims with respect to these two cases for further proceedings in the district court.
Finally, the Court rejected Sanders' quantum meruit claims in the Greer and Holtquist cases. He had based those claims on the contention that his work in the Ambrose case benefitted the prosecution of the two later cases. The court felt that he had not presented any evidence to support this contention.
A Few Comments
The case now goes back to the district court. Sanders has at least a $300,000 judgment in his pocket and a reasonable expectation as to an award in the second two cases.
The opinion by the Fourth Circuit is helpful because of its discussion of the concept of quantum meruit and because of its discussion of how Rule 1.5(e) operates in a fee-splitting dispute. As to the later issue, it correctly rejected a reflexive per se application of a Rule 1.5(e) bar in fee-splitting cases. This makes sense, since the rule was designed to protect clients, not as a sword for attorneys trying to wriggle out of arrangements that they had agreed to with other attorneys. Even if it does not establish explicit precedent, the opinion should be read at least as a partial road map for any attorney dealing with a fee-split dispute.
The case deals with the claims of Maryland attorney Robert Sanders against a Michigan law firm, Olsman, Ganos & Mueller, growing out of three product liability cases. The three cases involved allegedly defective auto airbags. All three cases had been referred to Olsman, Ganos by Sanders. He brought suit against the firm in order to recover a share of the attorneys' fees recovered by Olsman, Ganos.
In the lower court, Olsman, Ganos had been granted summary judgment in two of the cases, the Greer and Holtquist cases. In the third case, Ambrose, the lower court had set aside a jury award of $300,000 in favor of Sanders, reducing the award to $1.
In the Ambrose matter, the plaintiffs had initially been represented by local counsel. Subsequently, they sought advice from Sanders who ultimately referred them to Olsman, Ganos. The local firm and Olsman, Ganos agreed upon a 45/55 fee split.
Initially, Sanders and Olsman, Ganos had agreed to a one-third/two-thirds fee split. However, Olsman, Ganos asked to modify the fee split in light of the fee split with local counsel. Olsman, Ganos' proposed modification was to split the fee based upon the "totality of the circumstances," including how much work Sanders performed, his role in referring the client to Olsman, Ganos, how much of the litigation expenses he paid, and several other factors. This arrangement only applied where there was a fee split with local counsel, as in the Ambrose case. In other cases, the initial one-third/two-thirds arrangement would stand. It was also agreed that, in all events, Sanders would be allowed to work on the cases.
Sanders rendered substantial services in the Ambrose case, by his calculation working 1,500 hours over a two year period. At one point, he worked full-time on the case for a three month period. Days before the trial in Ambrose, the case settled. A total of $1M in attorneys' fees were paid, $550,000 ot Olsman, Ganos. Although Sanders had no agreement with the local firm involved, that firm gratuitously paid him $20,000 in appreciation for his efforts. However, his efforts to reach a deal with Olsman, Ganos broke down completely. Not only did Olsman, Ganos refuse to pay him a fee in the Ambrose case, it barred him from performing any work on the Greer and Holtquist cases. Subsequently, those two cases settled and Olsman, Ganos recovered attorneys' fees in both cases.
The Ambrose Case Claim
The lower court overturned the jury award with respect to the Ambrose case, holding that Sanders had failed to present evidence that would have allowed the jury to determine with any "reasonable degree of certainty" the fair value of his services in excess of the $20,000 he received from the local counsel. Thus, the lower court concluded that Sanders had proven liability, but not damages.
Sanders' claim with respect to the Ambrose case fee was based upon the theory of quantum meruit. The Fourth Circuit distinguished between two types of quantum meruit claims, one based upon an implied-in-fact contract, usually referred to as quantum meruit, and the other based on an implied-in-law contract, generally referred to as unjust enrichment. In the first type, the award is the reasonable value of the work performed by the plaintiff. In unjust enrichment cases, the award is based upon the gain bestowed upon the defendant. The Court held that Sander's claim was in the nature of a "true" quantum meruit claim. As applied to the facts of the case, the issue could then be reduced to the time and effort Sanders expended compared to the time and effort expended by all of the other attorneys in the case. Since there was evidence that Sanders' time and effort represented as much as 50% of the total time and effort of all of the attorneys, which would have supported an award of $500,000, the Court reinstated the $300,000 judgment awarded by the jury.
The Claims in the Greer and Holtquist Cases.
The district court had rejected Sanders' claims in the Greer and Holtquist cases because it concluded that the arrangement between Sanders and Olsman, Ganos constituted a "clear and flagrant" violation of Rule 1.5(e) of the Maryland Rules of Professional Conduct. That rule regulates agreements concerning fee divisions between attorneys. It requires (i) that the division be proportional to the services rendered by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation, (ii) that the client be advised of the participation of all of the lawyers involved, and (iii) that the total fee be reasonable. While it may extend to holding fee-sharing agreements in clear and flagrant violation of the rule unenforceable, a violation of the rule is not a per se defense to the enforceability of a fee-sharing agreement. Rather, it is in the nature of an equitable defense.
The Fourth Circuit held that a two-step analysis had to be conducted to determine whether Rule 1.5(e) should be applied to bar a claim for a fee-split. First, there has to be a finding that the rule had actually been violated. Second, if the rule had been violated, seven factors had to be weighed to reach a conclusion that the agreement is unenforceable.
Because there was no written agreement with respect to the fee split, Sanders had to show that his claim was proportional to the total work expended on the cases. However, Olsman, Ganos had prevented him from working on these cases. The Fourth Circuit rejected Olsman, Ganos' bootstrapping efforts and ruled that it was estopped to raise the proportionality requirement since Sanders' lack of work was due to Olsman, Ganos' actions. The appellate court also found that the clients had been informed of Sanders' participation and that there was no evidence that they objected. Since both sides agreed that the total fee was reasonable, the final element of the rule was met.
Significantly, the Court went on to state that, even if it had concluded that there had been a violation of Rule 1.5(e), it would have reversed the summary judgements since several, if not all, of the enumerated factors "militate in favor of enforcing the fee-sharing agreement." In particular, the Court ruled that a reasonable fact-finder could conclude that Olsman, Ganos was at least equally culpable for the violation of the rule as was Sanders and that Olsman, Ganos had raised the defense simply to escape an otherwise valid contractual obligation. The Court thus reversed the claims with respect to these two cases for further proceedings in the district court.
Finally, the Court rejected Sanders' quantum meruit claims in the Greer and Holtquist cases. He had based those claims on the contention that his work in the Ambrose case benefitted the prosecution of the two later cases. The court felt that he had not presented any evidence to support this contention.
A Few Comments
The case now goes back to the district court. Sanders has at least a $300,000 judgment in his pocket and a reasonable expectation as to an award in the second two cases.
The opinion by the Fourth Circuit is helpful because of its discussion of the concept of quantum meruit and because of its discussion of how Rule 1.5(e) operates in a fee-splitting dispute. As to the later issue, it correctly rejected a reflexive per se application of a Rule 1.5(e) bar in fee-splitting cases. This makes sense, since the rule was designed to protect clients, not as a sword for attorneys trying to wriggle out of arrangements that they had agreed to with other attorneys. Even if it does not establish explicit precedent, the opinion should be read at least as a partial road map for any attorney dealing with a fee-split dispute.
Tuesday, March 01, 2005
Quit While You're Ahead.
Older practitioners in Maryland will sometimes make reference to "Maryland Rule 2"--"Quit while you're ahead." Meaning, stop arguing when it's obvious that the Court is preparing to rule in your favor. (Maryland Rule 1 is, well, Rule 1.)
A recent decision from the U.S. District Court for Eastern District of Virginia, Chawla v. Transamerican Occidental Life Insurance Co. (February 3, 2005) serves to prove that judges would be well-advised to adhere to the spirit, if not the precise letter, of the rule. In that case, the Court had more than adequate grounds to apply well-accepted legal principles to decide cross motions for summary judgment. Then, the Court broke new ground merely to bolster its ruling. This additional basis for the Court's ruling, if widely adopted, would threaten the widely used estate planning technique of having a trust own life insurance policies.
In May of 2000, Geisinger, the decedent, applied for a $1M life insurance policy naming Ms. Chawla as the sole beneficiary. Transamerican refused to issue the policy on the basis that Chawla had no insurable interest in Geisinger's life. In response, Geisinger established a trust, with himself and Chawla as trustees, and had the trust purchase the policy. Later that year, the trust purchased additional insurance on Geisinger, bringing the total death benefit to $2.45M. Geisinger died in late September, 2001.
At the time that the policy was initially issued, Geisinger had serious health issues: In October of 1999, he had been operated on for the partial removal of a brain tumor. Thereafter, he suffered from a variety of residual neurological affects. Also, in October of 1999, he was diagnosed with "chronic alcohol poisoning in conjunction with known chronic alcohol abuse." In the period leading up to the point at which the initial insurance policy was issued, he was hospitalized on several occasions due to both the brain tumor and the alcoholism. After the issuance of the policy, Geisinger suffered further serious incidents due to the alcoholism. Of course, none of these issues were disclosed on the application for the insurance policy or the application for the increased death benefit. After the Geisinger's death, Transamerican acted to rescind the policy and refunded all of the premiums previously paid.
Applying Maryland law (the insurance contracts were entered into in Maryland), the Court had no difficulty in concluding that the policy and the increase in the death benefit had been procured through a material misrepresentation. After all, Geisinger's health was on a clear downward trajectory and he failed to disclose any of the relevant facts on his application. (It is worthy of some note that Ms. Chawla's husband, a physician, had examined Geisinger and his report was submitted with the insurance application. The report did not refer to the brain tumor or the alcoholism and confirmed Geisinger's "good health.")
The evidence to support the Court's ruling on the basis of Geisinger's misrepresentation was more than sufficient to allow the Court to rule in favor of Transamerican. The Court should have stopped there. Instead, the Court went on to offer an alternative basis for its decision, namely that the trust lacked an insurable interest in Geisinger's life.
For a variety of reasons, most significantly the minimization of estate taxes, individuals will often form a trust and have the trust acquire an insurance policy on their life. This is a fairly standard planning tool. The Court's ruling, if allowed to stand and broadly applied, would destroy this tool completely. (A practitioner quoted in an article in the Washington Post notes that the statute upon which the ruling was based has analogues in a "half-dozen" other states. While I am not an expert in this area, I suspect that the number of states with similar statutes may actually be higher.)
The Court's alternative holding is simply gratuitous. Even though the action was brought in a federal court in Virginia, choice of law principles should have been invoked to require the Court, if not counsel, to apply Maryland Rule 2.
A recent decision from the U.S. District Court for Eastern District of Virginia, Chawla v. Transamerican Occidental Life Insurance Co. (February 3, 2005) serves to prove that judges would be well-advised to adhere to the spirit, if not the precise letter, of the rule. In that case, the Court had more than adequate grounds to apply well-accepted legal principles to decide cross motions for summary judgment. Then, the Court broke new ground merely to bolster its ruling. This additional basis for the Court's ruling, if widely adopted, would threaten the widely used estate planning technique of having a trust own life insurance policies.
In May of 2000, Geisinger, the decedent, applied for a $1M life insurance policy naming Ms. Chawla as the sole beneficiary. Transamerican refused to issue the policy on the basis that Chawla had no insurable interest in Geisinger's life. In response, Geisinger established a trust, with himself and Chawla as trustees, and had the trust purchase the policy. Later that year, the trust purchased additional insurance on Geisinger, bringing the total death benefit to $2.45M. Geisinger died in late September, 2001.
At the time that the policy was initially issued, Geisinger had serious health issues: In October of 1999, he had been operated on for the partial removal of a brain tumor. Thereafter, he suffered from a variety of residual neurological affects. Also, in October of 1999, he was diagnosed with "chronic alcohol poisoning in conjunction with known chronic alcohol abuse." In the period leading up to the point at which the initial insurance policy was issued, he was hospitalized on several occasions due to both the brain tumor and the alcoholism. After the issuance of the policy, Geisinger suffered further serious incidents due to the alcoholism. Of course, none of these issues were disclosed on the application for the insurance policy or the application for the increased death benefit. After the Geisinger's death, Transamerican acted to rescind the policy and refunded all of the premiums previously paid.
Applying Maryland law (the insurance contracts were entered into in Maryland), the Court had no difficulty in concluding that the policy and the increase in the death benefit had been procured through a material misrepresentation. After all, Geisinger's health was on a clear downward trajectory and he failed to disclose any of the relevant facts on his application. (It is worthy of some note that Ms. Chawla's husband, a physician, had examined Geisinger and his report was submitted with the insurance application. The report did not refer to the brain tumor or the alcoholism and confirmed Geisinger's "good health.")
The evidence to support the Court's ruling on the basis of Geisinger's misrepresentation was more than sufficient to allow the Court to rule in favor of Transamerican. The Court should have stopped there. Instead, the Court went on to offer an alternative basis for its decision, namely that the trust lacked an insurable interest in Geisinger's life.
For a variety of reasons, most significantly the minimization of estate taxes, individuals will often form a trust and have the trust acquire an insurance policy on their life. This is a fairly standard planning tool. The Court's ruling, if allowed to stand and broadly applied, would destroy this tool completely. (A practitioner quoted in an article in the Washington Post notes that the statute upon which the ruling was based has analogues in a "half-dozen" other states. While I am not an expert in this area, I suspect that the number of states with similar statutes may actually be higher.)
The Court's alternative holding is simply gratuitous. Even though the action was brought in a federal court in Virginia, choice of law principles should have been invoked to require the Court, if not counsel, to apply Maryland Rule 2.
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