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Court Denies Pre-Enforcement Review of NJDEP Direct Oversight Determination

Month: March 2023

Court Denies Pre-Enforcement Review of NJDEP Direct Oversight Determination

Posted on by Christie Bowness

The New Jersey Supreme Court has long recognized a presumption of judicial review of administrative action grounded in the State constitution. The presumption of judicial review of agency actions, however, often does not extend to pre-enforcement review. When the New Jersey Department of Environmental Protection (“NJDEP”) issues an administrative compliance order to abate an environmental hazard, the absence of pre-enforcement review leaves the order’s recipient in a difficult position. Indeed, the recipient is left with only two choices: (1) refuse to comply with the order and wait for NJDEP to enforce the order in court, while incurring significant daily penalties for non-compliance or (2) consent to NJDEP’s order rather than incur civil penalties or risking an unfavorable outcome in litigation. As the Appellate Division’s recent decision in In re NJDEP Direct Oversight Determination Against Solvay Specialty Polymers USA, LLC demonstrates, New Jersey courts remain reluctant to grant pre-enforcement review of administrative compliance orders.

NJDEP issued a statewide directive in March 2019 holding Solvay and several other entities responsible for discharging per-and polyfluoroalkyl substances (“PFAS”), into the air, land and water near its facility (“Site”), which sits on the Delaware River. (See our earlier article discussing another case arising from this Site). The directive required specific steps to be taken, including estimating future costs of remediation for which Solvay would be responsible, operation and maintenance of drinking water treatment systems, production of information on PFAS and reimbursement of NJDEP costs.   The directive stated that if Solvay failed to comply, it would be subject to civil penalties in the form of treble damages under the Spill Compensation and Control Act (“Spill Act”). After Solvay failed to comply, the Department issued a determination that Solvay’s remediation of the Site was subject to direct oversight due to Solvay's failure to comply with the site-specific timeframes set forth in the statewide directive and the injury to one or more sensitive natural resources by contamination from the Site.

Although licensed site remediation professionals generally oversee the remediation of contaminated sites under the Site Remediation Reform Act (“SRRA”), including selecting and implementing the remedial action, the SRRA also authorizes the Department to undertake “direct oversight” of the remediation.  NJDEP can impose direct oversight if the party responsible for conducting remediation fails to complete the cleanup within mandatory timeframes (i.e., “compulsory oversight”) or if NJDEP determines that an injury has been caused to at least two environmentally sensitive natural resources (i.e., “discretionary oversight”).  NJDEP asserted that Solvay was subject both to compulsory direct oversight due to its failure to comply with site-specific timeframes and discretionary direct oversight because one or more natural resources (i.e., the Delaware River) were injured by contamination from the Site.

Solvay appealed NJDEP’s decision and contended that NJDEP’s direct oversight determination violated its due process rights as set forth in In re Kimber Petroleum Corp., 110 N.J. 69 (1988), in which the New Jersey Supreme Court held that treble damages could not be imposed, even where the party ultimately was liable under the Spill Act, if a party had “good cause” not to comply with a Spill Act directive. Specifically, Solvay argued that it was entitled to pre-enforcement judicial review before it was subject to Direct Oversight. Solvay further contended NJDEP’s determination that it was subject to Direct Oversight was arbitrary, capricious and unreasonable because NJDEP had not adopted surface water standards or screening criteria for PFAS. Shortly after Solvay appealed, NJDEP filed a complaint in Superior Court to compel Solvay to complete the remediation of the Site and to determine whether Solvay failed to comply with the directive.

In ruling against Solvay, the court emphasized that the mere issuance of a direct oversight determination does not automatically trigger the due process protections set forth in Kimber. The court explained Kimber made clear that the adjudication of a good-cause defense to a directive only occurs after the recipient refuses to comply with the directive and NJDEP elects to bring an enforcement action in court to enforce the directive. In finding that Solvay was not entitled to pre-enforcement review, the court emphasized that NJDEP’s direct oversight determination was not a monetary penalty, which would require an adjudicatory hearing before any penalties could be imposed. Rather, the court found the Department’s determination was merely an enforcement tool through which it sought compliance with the statewide directive while its enforcement action — and Solvay’s good-cause defenses — are being adjudicated in the Law Division.  As a result, Solvay’s due process rights were not violated and pre-enforcement review was not warranted because treble damages would only be assessed if Solvay’s grounds for disobeying the directive were not objectively reasonable, i.e., Solvay lacked “good cause” for its non-compliance. Thus, the court reasoned that if NJDEP’s directive was later deemed to be legally insufficient or otherwise invalid, a court could invalidate the directive when NJDEP seeks to enforce it, thereby providing Solvay due process by affording it a full and fair opportunity to oppose the directive before any deprivation of property occurs.

Notably, the court gave little consideration to Solvay’s contention that discretionary direct oversight was not appropriate here because NJDEP had yet to promulgate surface water standards for PFAS.  Solvay argued that, without having promulgated actual standards or screening criteria for PFAS, NJDEP could not conclude that the surface water injury to the Delaware River and its tributaries was attributable to Solvay’s site. The court’s ruling on this issue was somewhat surprising in light of the case law requiring NJDEP to promulgate remediation standards in compliance with Administrative Procedure Act notice and comment rulemaking procedures before it can enforce such standards against a regulated entity. See Federal Pacific Electric Co. v. NJDEP 334 N.J. Super. 323 (App. Div. 2000). The court, however, largely sidestepped this issue and found that the record contained ample evidence that the presence of PFAS caused injury to natural resources, Solvay was not in compliance and its remediation efforts were insufficient.

The Solvay decision provides no relief to recipients of an administrative compliance order to abate an environmental hazard. Going forward, courts likely will continue to preclude an alleged responsible party from challenging the merits of an administrative compliance order prior to an NJDEP enforcement or cost recovery action.

For more information, please contact the author Michael Spinello at mspinello@riker.com or any attorney in our Environmental Practice Group.

Appellate Court Affirms Strength of “Continuance of Insurance” Title Policy Condition

Posted on by Christie Bowness

In the November 2022 matter of Shah v. Fidelity National Title Insurance Company, No. A165816, LEXIS 7239 (Nov. 30, 2022), the California First District Court of Appeal (“the Court”) issued a decision interpreting a “Continuance of Insurance” Condition in the Standard ALTA Owner Policy against a unique factual backdrop involving adverse possession, invalid title transfers, and the after-acquired title doctrine, ultimately affirming the Condition justified the denial of an insured’s title claim where the insured son’s trust had voluntarily transferred his title to the property to a separate trust with his parents as trustee.

Background

The origin of this matter dates back to 1959, at which time non-party Mary Silva obtained a life estate in an open tract of grazing land in San Jose (“the Property”), which was to pass to her heirs as the remaindermen upon her death.  In December 1995, she contracted to sell the Property to Plaintiff Jay C. Shah (“Plaintiff”), executing a grant deed transferring her interest to the “Jay C. Shah Living Trust” (“the Trust”).  During the sale process, Ms. Silva never informed Plaintiff she only held – and he was thus only purchasing – a life estate interest in the Property.

As part of the sale transaction, Defendant Fidelity National Title Insurance Company (“Fidelity”) issued Plaintiff a title insurance policy containing a standard ALTA “Continuance of Insurance” Condition (“the Condition”), which provided that post conveyance, coverage would continue “in favor of an insured only so long as the insured retains an estate or interest in the land.”  Ms. Silva died in May 2002, with title to the Property passing to her heirs upon her death.  However, the heirs never took possession of the Property, and in June 2002, Plaintiff, as trustee of the Trust, recorded a grant deed transferring the property to his parents in their role as trustees of their own trust, the “Shah 1978 Revocable Trust.”

In September 2007, Plaintiff borrowed $350,000.00 against the Property from a private lender using a deed of trust as the security instrument.  Plaintiff was unable to repay the loan when it came due nine months later, causing the lender to record a notice of default and set a trustee’s sale for February 2009.  In January 2009, Plaintiff attempted to refinance to avoid foreclosure.  During the refinancing process, Ms. Silva’s life estate and Plaintiff’s corresponding defect in title was discovered by the escrow title holder company, which disclosed the defect to Plaintiff and refused to issue title insurance to the proposed new lender.  The refinancing then fell through and the Property was sold via a February 2009 trustee sale.

Quiet Title Action and Title Claim Denial

In March 2009, Plaintiff brought a quiet title action alleging he had obtained ownership of the Property by having adversely possessed it from the time he first obtained an interest in December 1995, claiming that since his purchase he had used and maintained the Property, paid taxes concerning it, rode horses on it, entered an agricultural lease to allow a rancher to have livestock graze upon it, collected rent generated by the Property, and had never actually surrendered possession of the Property to his parents despite the June 2002 transfer.

Simultaneous with filing suit, Plaintiff also tendered a claim to Fidelity for coverage of his quiet title action.  Fidelity denied this claim, quoting the Condition and citing that Plaintiff’s transfer of the Property to his parents had terminated coverage, as post-transfer Plaintiff was “no longer the owner of an estate or interest” in the Property and Fidelity accordingly no longer owed him any contractual obligation under his title policy.  Plaintiff’s quiet title action was ultimately settled, with Plaintiff incurring $135,000.00 in total expenses in connection therewith.

The Coverage Action

A. The Trial Court Decision

In June 2011, Plaintiff brought an action against Fidelity for its denial of his claim, alleging Fidelity’s actions constituted breach of contract and breach of the covenant of good faith and fair dealing.  Fidelity ultimately prevailed via summary judgment, with the trial court holding its interpretation of the Condition was correct and its denial justified, as coverage had been terminated when Plaintiff voluntarily transferred the Property to his parents.

However, the mechanism of this termination was hardly straightforward.  The trial court explained that Plaintiff had indeed obtained title to the Property via adverse possession, finding Plaintiff’s adverse possession period began to run upon Ms. Silva’s death, with title vesting in May 2007 – five years after her death, as California’s adverse possession statute only requires five years of use.  Upon vesting, title then passed directly to Plaintiff’s parents via the after-acquired title doctrine, which provides that when unvested title is transferred, but then later vests, the newly-vested title passes directly to the transferee of the unvested title.  Thus, when Plaintiff had filed his March 2009 lawsuit, he held no title and was owed no coverage by Fidelity.

B. The Appeal

Plaintiff appealed the grant of summary judgment to the Court, which ultimately affirmed both the outcome and reasoning of the trial court.  The Court began by confirming that while Plaintiff’s June 2002 transfer to his parents was ineffective at the time it was performed – as his life estate interest had expired and he held no title to transfer – upon the vesting of title via adverse possession in May 2007, the prior June 2002 conveyance became valid, title immediately passed to his parents via the after-acquired title doctrine, and the Condition was triggered terminating title coverage as Plaintiff no longer held any interest in the Property.

The Court also interpreted and commented upon the Condition’s “estate or interest” language, concluding that the language was “not ambiguous” and was clearly consistent with the very “purpose of title insurance,” which is the provision of “title protection,” not “occupancy” protection or the protection of a “right to collect rents or profits.”  Thus, when Plaintiff transferred title and no longer held an “estate or interest” in the Property, there was no longer any “title” for Fidelity to protect, and the termination of Plaintiff’s policy was justified.

Takeaways

While this Opinion primarily affirms the strength and validity of “Continuance of Insurance” obligations, it also demonstrates that a trust is capable of possessing property for purposes of adverse possession, and that once title vests following a prior transfer of unvested title, the transfer will be deemed effective as of the vesting date and will not be back-dated to the original transfer date.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, James Mazewski at jmazewski@riker.com, Kevin Hakansson at khakansson@riker.com or Kori Pruett at kpruett@riker.com.

Illinois District Court Holds ECOA Protections Inapplicable to Prospective Loan Applicants

Posted on by Christie Bowness

On February 3, 2023, the Northern District of Illinois (“the Court”) issued an important opinion in the matter of Bureau of Consumer Financial Protection v. Townstone Financial, Inc. and Barry Struner, No. 20-cv-4176, LEXIS 18405 (N.D. Ill., Feb. 3, 2023), addressing the longstanding discrepancy between the congressionally-approved language of Equal Credit Opportunity Act (“ECOA”) section 1691(a), which provides that the ECOA applies only to “applicants,” and the agency promulgated “Regulation B,” which seemingly expands the ECOA’s reach to both “applicants” and “prospective applicants,” ultimately resolving the disparity by holding that the ECOA’s scope is limited only to actual credit applicants.

The ECOA and “Regulation B”

The ECOA was passed by Congress in 1974 with the intent to remediate and prevent creditor discrimination, providing that it is “unlawful for any creditor to discriminate against any applicant with[] respect to any aspect of a credit transaction . . . on the basis of race, color, religion, national origin, sex[,] marital status, or age.”  15 U.S.C. § 1691(a) (emphasis added).  In 1975 various non-congressional ECOA enforcement regulations were created by the Federal Reserve Board, among them the so-called “Regulation B” found at 12 C.F.R. § 1002.4(b), which seemingly expanded ECOA’s scope by providing that a creditor “shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”  (emphasis added).

Background

It is against this legal backdrop that this matter unfolded, involving Townstone Financial, Inc. (“Townstone”), a Chicago-based mortgage broker/lender that conducted the vast majority of its business within the Chicago-Naperville-Elgin metro area (“Chicago MSA”).  In 2014, Townstone began advertising its services via its own AM radio show – the eponymous “Townstone Financial Show” – which post-airing was converted into podcast form and disseminated on the internet.  The format of the show involved hosts, who were self-proclaimed “Chicago real-estate experts,” examining various hot-topic mortgage and lending-related issues and fielding on-air calls.

Shortly after the show’s commencement, Townstone was accused of issuing problematic statements discouraging prospective African-American mortgage applicants from applying for a loan, with these statements including: (1) a host, when discussing a city with an 80.3% African-American population, stating that when you drive through the city “[y]ou drive very fast . . . and you don’t look at anybody or lock on anybody’s eyes. . . .  You look at your dashboard, you don’t lock on anybody”; (2) the hosts stating that listeners looking to sell their homes should discard their Confederate flags; and (3) the hosts stating that Friday through Monday in South Side Chicago was “hoodlum weekend.”

Beyond these controversial statements, Townstone’s lending data also demonstrated that while it had received 2,700 total mortgage applications between 2014 and 2017, only 37 of these applications were from African-Americans in the Chicago MSA region where Townstone conducted the majority of its business.

In July 2020, the Bureau of Consumer Financial Protection (“CFPB”) – a federal agency tasked with independently enforcing the ECOA – filed suit with the Court, alleging that Townstone’s statements had violated the ECOA by triggering Regulation B’s prohibition against discouraging prospective applicants from seeking out mortgages.  In response, Townstone moved to dismiss the Complaint on the basis that the CFPB was attempting to impermissibly expand the ECOA’s reach beyond its original congressional intent, as the express language of the statute limited its application only to parties who had actually applied for credit.

ECOA held inapplicable to prospective applicants

To resolve this dispute, the Court was required to settle the “question of whether the [CFPB]’s interpretation of [Regulation B] is one that [the] ECOA permits.”  It did so by looking to the text of the ECOA using the two-step framework issued by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984), beginning under step-one by examining 15 U.S.C. § 1691(a) and the corresponding definitions in section 1691a(b) to ascertain whether “Congress ha[d] directly spoken to the precise question at issue.”  The Court found that Congress had done so, holding the plain text of the ECOA “clearly and unambiguously prohibit[ed] discrimination against applicants, which the ECOA clearly and unambiguously define[d] as a person who applies to a creditor for credit.”  The Court thus held that “Congress ha[d] directly and unambiguously spoken on the issue at hand” and there was, therefore, no need to “move on to the second step of the Chevron analysis because it is clear that the ECOA does not apply to prospective applicants.”

The Court continued on to provide ample case law supporting its interpretation, and further opined concerning the CFPB’s authority and capacity to enact regulations, which the Court observed was “not limitless.”  The Court found that Regulation B overstepped the CFPB’s grant of authority, as the ECOA’s “entire statutory scheme revolves around applicants” and “the statute does not prohibit or discuss conduct prior to the filing of an application.”  The Court found that the CFPB was impermissibly attempting to “regulate outside the bounds of the ECOA, [despite] the ECOA clearly mark[ing] its boundary with the term ‘applicant.’”

Of interesting note, while the CFPB put forth case law in which its interpretation of Regulation B had been upheld or relied upon, the Court swept these authorities aside without consideration, holding that a court’s prior reliance on a regulation or statute “when the validity of that regulation [or statute] [was] not [in] dispute” was wholly inapplicable to the Chevron interpretation question currently before it and required no deference.

Thus, the Court granted Townstone’s motion, holding that it could “only defer to an agency’s interpretation . . . no matter how laudable its purpose, when [the interpretation] survives the two-step Chevron framework.  The [] provision of Regulation B with respect to ‘prospective applicants’ does not survive Chevron step one, [and] so the Court does not defer to the CFPB’s interpretation.”  Therefore, as the “CFPB [could] not amend its pleading in a way that would change the language of the ECOA,” dismissal with prejudice was warranted.

Takeaways

The potential application of this holding is important and far-reaching, as Regulation B has been in existence for many years and the inconsistency between the regulatory language and the ECOA’s direct provisions has been an oft-litigated issue in all districts.  This decision and holding provides a solid basis to argue in any district (as Chevron is universal) that the ECOA’s protections cannot be extended to prospective applicants.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, James Mazewski at jmazewski@riker.com, Kevin Hakansson at khakansson@riker.com or Kori Pruett at kpruett@riker.com.

EPA Proposes New PFAS Reporting Requirements for the Toxic Release Inventory

Posted on by Jessica Civetta

The U.S. Environmental Protection Agency (“EPA”) released a proposed rulemaking in December to add per- and polyfluoroalkyl substances (“PFAS”) subject to reporting under the Emergency Planning and Community Right-to-Know Act (“EPCRA”) and the Pollution Prevention Act to the list of Lower Thresholds for Chemicals of Special Concern.

Under the EPCRA, certain facilities that manufacture, process or otherwise use listed chemicals in amounts above reporting threshold levels must annually report environmental releases and other waste management quantities of the listed chemicals. This “Toxic Release Inventory,” or “TRI,” provides EPA and the public with information regarding the releases and use of chemicals from covered facilities.  EPA states that the proposed changes will result in greater reporting of the use and waste management of PFAS, including PFAS contained in chemical mixtures and trade name products.

In the rulemaking, EPA notes that PFAS tend to accumulate and remain in the environment and the human body for extended periods of time. Due to this longevity, PFAS are commonly known as “forever chemicals.” PFAS have been used for several decades in a variety of consumer and industrial products.

EPA’s proposal notes that these PFAS already have a lower reporting threshold of 100 pounds.  Besides that existing requirement, the addition of these PFAS to the list of chemicals of special concern would eliminate the use of the de minimis exemption for PFAS and the option to use the less burdensome Form A.

Facilities subject to EPA’s TRI Program generally must submit TRI “Form R,” but, if certain threshold requirements apply, the less burdensome “Form A” may be submitted instead. Form R is a more comprehensive annual report of the use and release of listed chemicals, which includes one chemical per form. Form A is a more general form on which multiple chemicals may be reported on a single form. Unlike Form R, Form A requires only the identity of the listed chemical and does not require the submission of any information on releases, waste management, source reduction, or any other chemical-specific information.  The rulemaking would eliminate the option for the use of Form A for PFAS, and would “result in an additional 605 to 1,997 Form R reports being filed annually.”

EPA further proposes to “remove the availability of the de minimis exemption for purposes of the Supplier Notification Requirements for all chemicals on the list of chemicals of special concern.” As this proposal applies beyond PFAS compounds to all chemicals listed as “chemicals of special concern,” it will likely have an even broader impact. Under the existing de minimis exemption, suppliers are not required to provide notifications for mixtures or trade name products containing listed chemicals where the chemical concentration is below one percent (1%) of the mixture. EPA’s concern is that this exemption accounts for concentration but not quantity. So, “it is possible that significant quantities of chemicals of special concern can be overlooked by reporting facilities if suppliers can use the de minimis exception.” EPA proposes to eliminate this exception for all chemicals of special concern, including PFAS, and suggests this change “will help ensure that purchasers of mixtures and trade name products containing such chemicals are informed of their presence in mixtures and products they purchase.”

Potential affected industries are myriad.  According to EPA’s rule proposal, firms engaged in the industrial inorganic chemicals, coal and metal mining, and solvent recovery services industries, among many others, could be impacted by these new rules.

For more information on EPA’s proposed changes to TRI reporting, please contact the author Jordan Asch at jasch@riker.com or any attorney in our Environmental Practice Group.

New York Court Issues Comprehensive Summary of Adverse Possession Principles and Awards Plaintiff Possession of Defendant’s Property

Posted on by Jessica Civetta

On February 21, 2023, the New York Supreme Court (“the Court”) issued its opinion in Gelles v. Sauvage, NY Slip Op 50120(U) (Sup. Ct. 2023), a factually interesting but relatively straightforward adverse possession dispute, providing a comprehensive summary of New York’s adverse possession law, its various elements and nuances, and an example of the forms of proof sufficient to establish a valid claim.

Amy Gelles (“Plaintiff”) is the owner of 6031 Huxley Avenue in the Bronx, New York, while Maria P. Sauvage (“Defendant”) is the owner of the adjacent property located at 6030 Huxley Avenue.  In April 2015, Defendant destroyed a garage that sat on the property line between the two properties and erected a chain-link fence in the middle of where the garage used to stand.  Plaintiff subsequently brought suit for, among other causes of action, quiet title by adverse possession under New York Real Property Actions and Proceedings LAW (“RPAPL”) § 1501(1), alleging she had obtained title to the garage and the sections of land on which it previously stood by virtue of adverse possession.

Plaintiff ultimately moved for partial summary judgment on her quiet title by adverse possession claim.  In assessing her motion, the Court first reiterated the essential elements of adverse possession, which requires that a plaintiff demonstrate their possession of a property was: “(1) hostile and under a claim of right, (2) actual, (3) open and notorious, (4) exclusive, and (5) continuous for the statutory period of 10 years.”  The Court noted that the “hostility” element is not as combative as its wording may suggest and is presumptively satisfied where there has been simple “possession of the land/premises, accompanied by all the usual acts of ownership.”  Similarly, the regular removal of trash or waste and general maintenance of a property will presumptively satisfy the “open and notorious” element of the claim.

Plaintiff submitted various pieces of evidence in support of her motion, foremost among them an affidavit wherein she averred that when purchasing the 6031 Huxley property in June 1997, she was told during the closing that the garage was partially located on Defendant’s property.  She testified that despite knowing this she intentionally used the garage anyway, maintaining it, storing personal vehicles and various materials in it, allowing guests to make use of it, for large periods of time leasing it out to others for use and keeping any rents received, and at all times solely possessing the keys allowing access.

She further affirmed that her exclusive use of the garage commenced in 1997 and continued unabated until the garage’s destruction.  During these years of use, she performed general maintenance to the garage and its surrounding driveway and landscape, including the wholesale replacement of the concrete floor, brick repair, and the fabrication and installation of new garage doors.  Only once did Defendant ever request to use the garage, in 2006, with said request being denied by Plaintiff.  Without prior forewarning, while Plaintiff was at work in April 2015, Defendant hired workers to dismantle the garage and erect a fence in its place.  Plaintiff called the police in an attempt to prevent its destruction but they declined to intervene.

As supporting materials Plaintiff also submitted: (1) deeds and diagrams of the two properties, which confirmed that the garage sat “such that the property line of record between both properties nearly bisect[ed] the garage in half”; (2) a “closing agreement” dated June 1997 which specifically referenced the garage and the fact it partially sat on Defendant’s property; (3) photographs depicting both the use and maintenance of the garage over the years and its destruction; (4) various check receipts and letters from prior renters demonstrating that the garage had been rented out over the years; and (5) several other less relevant forms of documentary evidence.

Based on these proofs, the Court ultimately held that “with her evidence, plaintiff establishes that she adversely possessed the [] Garage and to the extent it sat on land belonging to 6030, such land as well.”  Specifically, the Court observed that from 1997 through its destruction in 2015, Plaintiff had exclusively used the garage despite knowing it was not hers, without ever having obtained permission from Defendant to do so, and had made various improvements and repairs to the structure over time.  Such use “[f]or purposes of adverse possession . . . sufficiently establishe[d] each and every element required by prevailing law.”

While Defendant offered several grounds as opposition, none were availing.  First, Defendant contended that adverse possession of property to which another party held legal title was not possible, an argument the Court found “so nonsensical that at best it is bizarre and at worst, it is frivolous.”  Defendant also argued that because, over the years, the garage at times lacked doors, it was thus accessible to the public and Plaintiff’s use was therefore not “exclusive.”  This contention was dispatched with similar verve, with the Court holding that exclusivity is not negated merely because other parties can potentially access the land, or even when other parties are permitted to use the land.  Finally, Defendant alleged that Plaintiff “could have done more” in its maintenance of the garage – however, the Court observed that this was not the requisite standard, and all that was necessary was that Plaintiff had regularly maintained the property, which she had.

Takeaways

This Opinion serves as a useful primer on adverse possession, conveniently providing a comprehensive discussion of its various elements, the considerations unique to each element, and examples of the proof and application of each element.  Practically, it also shows that our courts will not hesitate to apply the adverse possession doctrine when applicable, even when it would seem inequitable to do so, such as here where the Plaintiff freely admits to possessing knowledge that she lacked the right or permission to utilize the possessed property but opted to do so anyway.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, James Mazewski at jmazewski@riker.com, Kevin Hakansson at khakansson@riker.com or Kori Pruett at kpruett@riker.com.

U.S. Supreme Court Disallows Innocent Partner’s Discharge of Debt From Partner’s Fraud

Posted on by Christie Bowness

On February 22, 2023, the United States Supreme Court (“the Supreme Court”) issued its Opinion in the matter of Bartenwerfer v. Buckley, No. 21-908, LEXIS 943 (Feb. 22, 2023), holding that per 11 U.S.C. § 523(a)(2)(A), a partnership member is not entitled to discharge a debt incurred by the fraud of another partnership member, regardless of the fact the innocent member had no knowledge of the fraud.

Background

In 2005, Kate Bartenwerfer (“Plaintiff”) and her then-boyfriend and later husband, David Bertenwerfer (“David”), jointly purchased a San Francisco home with the intention of remodeling the property and “flipping” it for a profit. The two formed a legal partnership and undertook the renovations as ostensible equal partners; however, in reality, David handled all facets of the remodeling project and Plaintiff remained uninvolved. The home was eventually listed for sale and purchased by Kieran Buckley (“Defendant”), based, in part, on attestations by both Plaintiff and David that there were no defects in the property. Contrary to these attestations, post-purchase Defendant discovered numerous significant property defects, including permitting issues, roof leaks, and defective windows. Defendant sued Plaintiff and David for these defects in California state court, ultimately prevailing and obtaining a joint judgment against them for more than $200,000 in damages (“the Judgment”).

Plaintiff and David subsequently filed for Chapter 7 bankruptcy seeking to discharge the Judgment. Defendant opposed, submitting an adversary complaint alleging the Judgment was nondischargeable under section 11 U.S.C. § 523(a)(2)(A) of the Federal Bankruptcy Code, which prohibits the discharge of “any debt . . . for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.” The dischargeability issue proceeded to trial, where Plaintiff claimed she had no knowledge that the attestations were fraudulent. While this assertion was true, the bankruptcy court nevertheless held that neither party could discharge the Judgment, holding that David had knowingly concealed the defects from Defendant and “imput[ing] David’s fraudulent intent to [Plaintiff] because the two had formed a legal partnership” for the renovation project.

The Road to the Supreme Court

This outcome was appealed to the Ninth Circuit Bankruptcy Appellate Panel, which disagreed with the lower court, holding that David’s fraudulent intent could only be imputed to Plaintiff if she “knew or had reason to know” of his fraud. The matter was remanded and another trial conducted using this revised standard. Ultimately, it was held that while the Judgment remained enforceable against David, it was dischargeable by Plaintiff as she lacked knowledge of David’s fraud. A subsequent appeal to the Bankruptcy Appellate Panel resulted in an affirmance.

Another appeal followed, this time to the Ninth Circuit Court of Appeals, where, in the published opinion of Bartenwerfer v. Bartenwerfer, 860 F. App’x 544 (9th Cir. 2021), the Court of Appeals reversed in part, creating the bright-line rule that any debtor who is liable for their partner’s fraud cannot discharge that debt in bankruptcy regardless of their own personal culpability for the fraud. To resolve the apparent confusion over the operation of 11 U.S.C. § 523(a)(2)(A), the Supreme Court granted certiorari to issue a clear ruling on the intended scope and meaning of the provision.

The Supreme Court Affirms the Non-Dischargeability of the Judgment

To settle this statutory interpretation issue, the Supreme Court turned to historical precedent, observing the 1885 decision issued in Strang v. Bradner, 114 U.S. 555 (1885), which involved similar factual circumstances. Therein, one member of a three member business partnership lied to secure promissory notes for the benefit of the partnership itself, with the two innocent parties subsequently seeking to discharge the debt owed in bankruptcy on the basis that the third partner’s lies were “not made [at] their direction [or] with their knowledge.” The Strang Court denied this request, holding that the fraud of one partner was to be considered the fraud “of all,” as each partner “was [an] agent and representative” of the partnership itself.

The Supreme Court next considered what it deemed to be “the linchpin” to resolution of the issue, that being Congress’s “post-Strang” legislation. Specifically, the Supreme Court noted that thirteen years after Strang – in July 1898 – Congress overhauled our nation’s then-bankruptcy law, altering the statutory predecessor to the current section § 523(a)(2)(A) which, at the time,  read as follows:

No debt created by the fraud or embezzlement of the bankrupt . . . shall be discharged.

Post-1898 amendment, this language was changed to provide as follows:

A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as . . . are judgments in actions for frauds, or obtaining property by false pretenses or false representations.

The Supreme Court held that the deletion of the term “of the bankrupt” from the revised statutory provision evidenced an “unmistakable” Congressional intent to adopt the holding issued in Strang, holding that by doing so “Congress cut from the statute the strongest textual hook counseling against the outcome in Strang.” Accordingly, the Supreme Court formally adopted the Strang line of reasoning and affirmed the Court of Appeals, holding that Plaintiff could not discharge the Judgment in bankruptcy.

As a side issue, the Supreme Court also commented upon Plaintiff’s assertion that the underlying bankruptcy policy of providing debtors with a “fresh start” counseled against refusing the discharge of the Judgment. The Supreme Court held this assertion “earn[ed] credit for color but not much else,” noting that the Bankruptcy Code was intended to serve creditors as much as debtors, and that it was not the Supreme Court’s place to second-guess Congress’s conclusion that a creditor’s interest in recovering the full payment of debts obtained by fraud outweighed a debtor’s interest in a “fresh start.”

Takeaways

While the potential application of this holding is far-reaching, the principle to be taken away is simple: a partnership member must choose their partners carefully and be cognizant of their partners’ actions, as those actions can bind that member to debts.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, James Mazewski at jmazewski@riker.com, Kevin Hakansson at khakansson@riker.com or Kori Pruett at kpruett@riker.com.

CMS Issues Another Fact Sheet on the End of the COVID-19 Public Health Emergency

Posted on by Christie Bowness

Since January 31, 2020, the United States has operated under the COVID-19 Public Health Emergency ("PHE") in connection with COVID-19. Declared pursuant to Section 319 of the Public Health Service Act, the PHE granted the federal government broad emergency rulemaking and funding powers to address COVID-19. Every ninety days since January 31, 2020, the Secretary of Health and Human Services ("HHS") has renewed the PHE.

However, on February 9, 2023, HHS announced that it was renewing the PHE for the last time. In its recent Letter to U.S. Governors, HHS announced that the PHE would expire on May 11, 2023, providing states 90 days’ notice to prepare for the policy waivers and flexibilities that will end concurrently with the PHE.

HHS has issued a fact sheet summarizing the COVID-19 policies and programs that will be affected by the end of the PHE. In general, federal agency rule waivers and flexibilities issued pursuant to the PHE are set to expire unless they have been specifically extended or codified in prior rulemaking. Examples of specific programs and policies that HHS anticipates will be affected by the end of the PHE include:

  • Coverage for COVID-19 Testing: The requirement for private insurance companies to cover the costs of diagnostic COVID-19 testing without cost sharing, both for OTC and laboratory tests, will end. Medicare beneficiaries who are enrolled in Part B will continue to have coverage without cost sharing for laboratory-conducted COVID-19 tests when ordered by a provider, but their current access to free over-the-counter COVID-19 tests will end. Additionally, State Medicaid programs must provide coverage without cost sharing for COVID-19 testing until the last day of the first calendar quarter that begins one year after the last day of the COVID-19 PHE (September 30, 2024), after which coverage may vary by state.
  • PHE-Related Payment Rates: Certain changes to provider payment rates and reimbursement guidelines are set to terminate concurrently with the end of the PHE. For example, under the CARES Act, hospitals received a 20% increase in Medicare payment rates under the hospital inpatient prospective payment system ("IPPS") for the treatment of COVID-19 payments. The heightened hospital-IPPS reimbursement rate for treating COVID-19 patients will terminate concurrently with the PHE on May 11, 2023.
  • COVID-19 Data Reporting: At the end of the COVID-19 PHE, HHS will no longer have the authority to require COVID-19 testing and immunization data from labs. However, hospital data reporting will continue as required by the CMS conditions of participation through April 30, 2024, though reporting frequency may be subject to change.
  • Prescription of Controlled Dangerous Substances ("CDS") via Telemedicine: The ability of health care providers to dispense controlled substances via telemedicine without an in-person interaction would return to pre-PHE restrictions. However, HHS and the Drug Enforcement Agency ("DEA") are planning rulemaking to extend these flexibilities.
  • Public Readiness and Emergency Preparedness ("PREP") Act Liability Protections: PREP Act liability protections for countermeasure activities that are not related to any federal agreement (e.g., products entirely in the commercial sector or solely a state or local activity) will end unless another federal, state, or local emergency declaration is in place for the area where countermeasures are administered.
  • Certain FDA COVID-19-related guidance documents that affect clinical practice and supply chains will end or be temporarily extended. FDA published several dozen guidance documents to address challenges presented by the COVID-19 PHE, including limitations in clinical practice or potential disruptions in the supply chain. FDA is in the process of addressing which policies are no longer needed and which should be continued, with any appropriate changes, and the agency will announce plans for each guidance prior to the end of the PHE.

Moreover, HHS emphasized that many programs and policies initiated during the PHE will not end concurrently with the PHE. Such programs and policies include the revised telehealth flexibilities under Medicare (extended through December 2024 by the 2023 Consolidated Appropriations Act) and the existing EUAs for COVID-19 vaccines, tests, and treatments (issued pursuant to Section 564 of the Federal Food, Drug, and Cosmetic Act and not subject to expire with the PHE).

Additionally, certain agencies have previously issued guidance anticipating the end of the PHE, such as the CMS Roadmap for the End of the COVID-19 Public Health Emergency which was released in August 2022. On February 27, 2023, CMS issued another PHE Fact Sheet providing further clarification on the end of the PHE.

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