Managing A Corporation Located In Michigan Can Create Personal Jurisdiction

In MAG IAS Holdings, Inc. v. Schmuckle (No. 16-1550), the Sixth Circuit issued its first published decision interpreting the reach of specific jurisdiction under Walden v. Fiore, 134 S. Ct. 1115 (2014).  The panel held that Walden stands for the idea that “an out-of-state injury to a forum resident, standing alone, cannot constitute purposeful availment” and that just knowing that out-of-state actions will have effects within the jurisdiction is not enough.  In this case, a chief executive officer in Germany directed certain subsidiaries and their employees in Michigan, met with clients in Michigan, and essentially held himself out as responsible for those subsidiaries.  The panel held that these actions were sufficient to create specific jurisdiction because the plaintiffs’ claim was that Schmuckle had used his power over the Michigan subsidiaries to transfer work and money from Michigan to operations in Germany for his own benefit.  The opinion, written by Judge Gibbons, emphasizes the close connection between the defendant’s deliberate contacts with the forum and the claims alleged in the complaint.

MAG IAS Holdings will be a useful yardstick for parties trying to determine what kind of contacts created by the defendant will be important and how those contacts must relate to the substance of the case.  Note that the other Sixth Circuit case interpreting Walden is the unpublished Maxitrate Tratamento Termico E Controles v. Super Sys., Inc., 617 F. App’x 406 (6th Cir. 2015), which held that Walden conclusively rejected a broad reading of the “effects test” under Calder v. Jones, 465 U.S. 783 (1984).

Split Panel of the Sixth Circuit Holds that Cat’s Paw Theory Applies to FMLA Retaliation Claims

            Last week in Marshall v. Rawlings, a split panel of the Sixth Circuit held that the cat’s paw theory of liability applies to FMLA retaliation claims.  In Marshall, an employee was fired after using FMLA leave.  The employee sued for FMLA retaliation, ADA discrimination, FMLA interference, and intentional infliction of emotional distress.  The district court granted summary judgment to the employer, and the Sixth Circuit reversed the district court’s judgment as to the employee’s FMLA retaliation and ADA discrimination claims and affirmed the dismissal of the other two claims.

            According to the majority, the cat’s paw theory recognizes that a biased lower-level supervisor, who lacks decisionmaking power, may influence an ultimate decisionmaker, resulting in a discriminatory employment action.  Judge Moore, writing for the majority, said that the theory reflects that a decisionmaker may be “detached from day-to-day operations” and thus may “unthinkingly” accept the recommendations of his or her subordinates.  When the cat’s paw theory is applied, an employer cannot shield itself from liability though the willful blindness of its ultimate decisionmakers.  The court stated that when an ultimate decisionmaker takes an adverse employment action in-line with a biased lower-level supervisor’s recommendation, the employer may protect itself from liability by showing that the decisionmaker conducted his or her own independent investigation and determined that the adverse action was justified.

            Judge Sutton dissented in part, writing that he would have affirmed the district court’s judgment based on the application of the honest-belief rule.  Judge Sutton explained that the evidence showed that the two low-level supervisors involved in the decision process “honest[ly] belie[ved]” that the plaintiff had exhibited poor work performance and had made false allegations of harassment.  Thus, these supervisors’ recommendations to the decisionmakers were not motivated by a discriminatory animus.  Further, the two decisionmakers believed that the plaintiff had exhibited poor work performance and had made false harassment allegations. Thus, the decisionmakers demoted and fired the plaintiff for these reasons, which was all that was needed to overcome the plaintiff’s prima facie case.  Judge Sutton also pointed out that the ultimate decisionmaker “was the one who thought of firing” the plaintiff and did so only after meeting with her to discuss her harassment allegations.

 

Appellate Courts and Caseload Pressure

An interesting paper has been making the rounds discussing how appellate courts react to caseload pressure.  After September 11, 2001, the Second and Ninth Circuits had a large influx of immigration appeals that affect the other circuits, and the paper uses this as a “natural experiment.”   In his paper, Mr. Shay Lavie characterizes the Second Circuit as resistant to changing its procedures, and claims that this led to the circuit reversing fewer civil cases as a way of adjusting to increased time pressure.  He calls this a “disturbing” reaction to the increased caseload.  By contrast, he praises the Ninth Circuit for using procedural flexibility to deal with the extra cases by slightly decreasing the rate of dissents and slightly increasing the number of published opinions.  He urges appellate courts to follow the Ninth Circuit’s lead to experiment with more procedural changes.

Interestingly, an earlier article by Mr. Bert Huang analyzed the exact same data and found that both the Second and Ninth Circuits artificially decreased their reversal rates in civil cases in response to the extra cases.  He argues that they may have spent less effort on each case, resulting in fewer reversals, as a rational response to having less time.   Each article used different statistical techniques to predict what the expected reversal rates would have been without the influx of immigration cases—and then arrived at opposite conclusions.

I am skeptical about the analysis in both articles—certainly neither gives circuits a strong reason to revise their practices or procedures.  (Mr. Lavie, in particular, gives very little evidence that changes in procedure produced the results he highlights.)  In the Sixth Circuit, we have seen that the time it takes to decide appeals increases substantially as caseload increases, that it takes longer to reverse than to affirm, but we have not seen evidence of a connection between caseload and items like per curiam opinions that might indicate less effort spent deciding cases.

One additional reason to be wary of sweeping policy prescriptions based on changes in a single statistic over a handful of years is that there is so much variation year-to-year.  Below are the percentage of civil cases reversed for the Second, Sixth, and Ninth circuits from 1997 to 2016:

Graph

Looking at this data, my chief question would be what happened in the Second Circuit during 2005 to increase the reversal rate in civil cases from less than 3% to over 11%!  Whatever happened during 2005 would doubtless overwhelm any small effects caused by an increase in immigration appeals.  And measuring an “artificial” dip in reversal rates during 2003 and 2004 would also be difficult because the rates were already vanishingly low.  It is also interesting that the Sixth and Ninth Circuits appear to follow a very similar pattern for changes in reversal rates over time.

In a follow-up post next week, we’ll look at the connection between the Sixth Circuit’s caseload and its reversal rates.

Sixth Circuit Continues Trend of Limiting Information That May Be Filed Under Seal

Recently, in an unpublished decision, the Sixth Circuit illustrated that it was continuing last year’s trend in holding that district courts should allow parties to seal records only when compelling justifications exist. Danley v. Encore Capital Grp., Inc., No. 16-1670, 2017 U.S. App. LEXIS 3388 (6th Cir. Feb. 22, 2017).  As you may recall, the Sixth Circuit issued a series of decisions last year that distinguished between the standards that apply to protective orders during discovery and sealing records in court filings. See Rudd Equip. Co. v. John Deere Constr. & Forestry Co., 834 F.3d 589 (6th Cir. 2016); Klingenberg v. Fed. Home Loan Mortg. Corp., 658 F. App’x 202 (6th Cir. 2016); Shane Grp., Inc. v. Blue Cross Blue Shield, 825 F.3d 299 (6th Cir. 2016).

In a very broad sense, the Sixth Circuit determined that parties during discovery may liberally designate information as subject to a protective order on a showing of good cause. Shane Grp., Inc., 825 F.3d at 305 (citing Fed. R. Civ. P. 26(c)(1)).  But “[a]t the adjudication stage . . . different considerations apply” because the public has a strong interest in information placed in the public record. Id. (internal quotation marks and citation omitted).  Thus, according to the Sixth Circuit, the proponent should explain why there are compelling reasons for sealing the records and why those reasons outweigh the public’s interest in disclosure. Id. at 307.  Further, even when compelling justifications exist, the district court’s order must be narrowly tailored to serve the proffered justifications. Id. at 306.  The district court “must set forth specific findings and conclusions, which justify nondisclosure to the public.” Id. (internal quotation marks and citation omitted).  In Danley, the Sixth Circuit reversed the district court’s order granting in part and denying in part the plaintiff’s motion to unseal documents because the district court failed to set forth specific reasons why the public’s interest in access was outweighed by the compelling justifications for nondisclosure and why the sealing itself was no broader than necessary.  2017 U.S. App. LEXIS 3388, at *12–13.  In doing so, the Court stated that a district court’s “obligation to explain the basis for sealing court records . . . is independent of whether anyone objects to it.” Id. at *13 (internal quotation marks and citation omitted).

Sixth Circuit Clarifies Exhaustion Requirement in ERISA Suits

In Hitchcock v. Cumberland University 403(b) DC Plan, the Sixth Circuit decided what could be a very important case in ERISA litigation. Practitioners are familiar with the common injunction upon plaintiffs to exhaust administrative remedies before they seek relief in court, as well as the limited and narrow exceptions to that requirement. But the question has remained open whether exhaustion is required where plaintiffs allege a violation of statutory rights under ERISA, rather than merely a wrongful denial of benefits.

In Hitchcock, Plaintiffs were a class of employees at Cumberland University who participated in the University’s 403(b) plan. Since 2009, Cumberland had abided by an earlier-adopted 5% contribution for employees. But in October 2014, the University amended its plan to make the contribution discretionary, and on a retroactive basis. It proceeded to announce that contributions for the 2013-2014 and 2014-2015 years would be zero. There were also questions regarding notice of the amendment to change contributions, and whether the amendment was permitted under an earlier Summary Plan Description. Plaintiffs’ lawsuit included allegations against the University of violating ERISA itself.

The District Court granted the University’s motion to dismiss the ERISA claim for failure of the plaintiffs to first exhaust internal administrative remedies. The Sixth Circuit reversed and remanded, holding, as a matter of first impression, that the exhaustion requirement is inapplicable where plaintiffs’ allegation is of violations of statutory rights. The opinion drew, and then emphasized, a distinction between actions brought to enforce the terms of a plan – such as a basic wrongful denial claim – and those claims brought to enforce the statute itself – wherein, as here, a plaintiff asserts that the terms of a plan violate ERISA itself. In this case, for instance, the Plaintiffs had not sought merely monetary damages for the denial of benefits, and they were not challenging the University’s calculations. Rather, they were challenging the legality of the University’s amendment as a violation of the plain text of ERISA. The Sixth Circuit held that “the legality of the amendment is a question best suited for the courts to decide.” The court recognized that in so holding, it joined one side of a split among the circuits. The court’s interpretation joined the Third, Fourth, Fifth, Ninth, Tenth, and D.C. Circuits. The Seventh and Eighth Circuits, on the other hand, have held that the exhaustion prerequisite applies even where the plaintiff is asserting statutory rights.

Judge Thapar To Be Nominated To The Sixth Circuit

As we predicted last November, President Trump will announce today that he is nominating Judge Amul Thapar for one of the two open seats on the Sixth Circuit.  Judge Thapar is currently serving as a district judge in the Eastern District of Kentucky, and formerly served as the U.S. Attorney for that district.  He is universally well-liked and respected by bench and bar—which might be the reason he will be one of the first (if not the first) circuit-court nominees from President Trump.  He’s also already been vetted, as Judge Thapar was one of the final four nominees for the recent Supreme Court nomination.

We urge the Senate to move quickly on this nomination.  One Sixth Circuit judgeship has been open since 2013, when Judge Martin retired, and another opened just a few weeks ago when Judge Boggs took senior status.  Open judgeships have been piling up around the country – to the detriment of the federal courts – and non-controversial nominees like this should be expedited.

Sixth Circuit To Rehear Legislative Prayer Case En Banc

Last week, the Sixth Circuit granted en banc review in Bormuth v. County of Jackson, where a split panel had held that a district court had erred in rejecting the plaintiff’s argument that the prayer preceding a Michigan county’s Board of Commissioners’ monthly meeting violated the First Amendment by coercing residents to support and participate in the exercise of religion. The panel not only reversed the district court’s grant of summary judgment in favor of the county, but found that the plaintiff was entitled to summary judgment.

The majority identified several factors that distinguished this case from legislative prayers previously found acceptable, including: (1) a legislator—as opposed to a nongovernmental figure like a chaplain—offered the prayer; (2) the content of the prayers was “exclusively Christian because of an intentional decision” of the legislators, who specifically sough to exclude other kinds of prayers from being offered; and (3) the purpose was “to promote religion to the public.”  The majority found that the prayers were unduly coercive because the public was directed to participate, the board singled out the non-participating plaintiff for opprobrium, and the board allocated “benefits and burdens” based on participation.

Judge Griffin dissented, pointing out (among other things) that the majority opinion conflicted with the recent Fourth Circuit in Lund v. Rowan County. The majority cast doubt on the correctness of Lund, distinguished it, and also pointed out that the Fourth Circuit is rehearing it en banc.

We have posted previously on the increasing rarity of en banc review, so the Sixth Circuit’s decision to rehear demonstrates the significance of this case.  Legislative prayers and the Establishment Clause have long been a thorny topic.  We will continue to keep an eye on this case, as well as Lund, which is likely to be reheard first and has the potential to serve as persuasive authority.

The Sixth Circuit Weighs in on the Phrase “Applicable Nonbankruptcy Law” Under the Bankruptcy Code

In Metropolitan Government of Nashville & Davidson County v. Hildebrand, the Sixth Circuit explains how to read the phrase “applicable nonbankruptcy law” as used in the Bankruptcy Code.  The chapter 13 individual bankruptcy case discussed the phrase in the context of 11 U.S.C. § 511(a), which provides that the appropriate interest rate for tax claims is whatever “applicable nonbankruptcy law” provides.

The decision

The case involved a Tennessee statute that purported to avoid the general prohibition against postpetition penalties (rather than interest) on tax claims with the following language:   “For purposes of any claim in a bankruptcy proceeding pertaining to delinquent property taxes, the assessment of penalties pursuant to this section constitutes the assessment of interest.”  Tenn. Code Ann. § 67-5-2010(d).  The Sixth Circuit rejected application of this statute, holding that the plain language of the phrase “applicable nonbankruptcy law” refers to “any law that is not aimed solely at bankruptcy proceedings.”

The Sixth Circuit based its ruling on its prior rulings acknowledging that states have concurrent authority to pass bankruptcy laws, and that the content of this particular Tennessee statute was clearly aimed only at bankruptcy proceedings.  The Court further noted that if Congress intended for section 511(a) to mean any law other than the Bankruptcy Code, then it could have easily used other language to convey that intention (e.g., “laws outside the Bankruptcy Code”).  Indeed, many other Bankruptcy Code sections use other variations of the phrase, like “applicable law” in section 365(c)(1)(A) and “applicable provisions of this title” in section 1129(a)(1) and (a)(2).  To determine whether a specific law is a “nonbankruptcy” law, the Sixth Circuit’s ruling says to look to the content of the law itself, not who enacted the law or where it can be found.

Future application

Hildebrand clarifies that we cannot assume that references in the Bankruptcy Code to applicable nonbankruptcy law simply means any applicable law outside of the Bankruptcy Code.  State laws can thus be “bankruptcy” laws depending upon their content—an important distinction when counsel is faced with an otherwise unfavorable “applicable law” outside of what is strictly contained in the Bankruptcy Code.

Consider, for example, a state statute permitting a sale of assets free and clear of liens, but only if the sale is through a bankruptcy proceeding.  Would that statute be considered “applicable nonbankruptcy law,” such that a debtor could argue it has met the standard for a sale free and clear of liens under section 363(f)(1) of the Bankruptcy Code and that it does not need to obtain consent under section 363(f)(2) or demonstrate the existence of other circumstances delineated under section 363(f)?  Under the Sixth Circuit’s ruling, such a statute would likely be considered a bankruptcy law because its content is focused on bankruptcy.

The Sixth Circuit’s decision is relevant to both chapter 13 and chapter 11 reorganizations, and anywhere in the Code that refers to non-bankruptcy law, such as issues related to a debtor’s power to sell assets free and clear of liens (section 363(f)), a debtor’s inability to assume contracts and leases (section 365(c)), and the enforceability of subordination agreements (section 510(a)).

Sixth Circuit Rejects Commissioner’s Claim that Taxpayers Aren’t Allowed to Avoid Roth IRA Limits

In Summa Holdings, Inc. v. Comm’r of Internal Revenue, a unanimous panel reversed the judgment of a United States Tax Court and rejected the Tax Commissioner’s attempt to reclassify a series of transactions which had originally allowed two taxpayers to avoid Roth IRA contribution limits and lower their tax obligations.  The Court recognized that the petitioners’ complicated series of transactions were essentially a strategy for funneling money into Roth IRAs without triggering the contribution limits but that the taxpayers had fully complied with the text of the tax laws in doing so.

The Court summarized that a qualifying corporation may elect to be treated for tax purposes as a domestic international sales corporation (DISC). An exporter may avoid corporate income tax by paying a DISC commissions of up to 4% of the exporter’s gross receipts or 50% of net income from qualified exports.  The DISC pays no tax on the commission (up to $10,000,000).  The DISC may pay dividends to its shareholders and those shareholders may include Roth IRAs.  Roth IRA account holders do not deduct their contributions from pre-tax income, but an account holder may take tax-free withdrawals including on accrued gains.

In this case, a family owned a manufacturing company, Summa Holdings. In 2001, the sons opened Roth IRAs.  Each Roth IRA purchased shares of DISC JC Export.  The family then formed JC Holding, which bought from the IRAs the DISC shares.  JC Holding became the sole shareholder in JC Export, and each IRA was a 50% shareholder in JC Holding.  Summa Holding would pay tax free commissions to JC Export, which in turn would distribute dividends to JC Holding, which were taxed at 33%.  The remaining balance would be distributed as dividends to the Roth IRAs.  As a result, the family was able to transfer to the Roth IRAs from 2002 to 2008 more than $5 million––far in excess of the usual Roth IRA contribution limits.

The Court rejected the Commissioner’s attempt to reclassify the transactions under the substance-over-form doctrine and balked at the Commissioner’s contention that when taxpayers are presented with alternative methods of structuring a transaction, the taxpayer must choose that which results in higher tax liability. The Court noted that Congress created DISCs to encourage companies to export goods by lowering their taxes and that the Commissioner cannot fault taxpayers for taking advantage of tax savings so long as they fully comply with the “printed and accessible words of the tax laws.”

Sixth Circuit Labor Cases

Labor law and regulation has recently been a contentious topic of litigation and policymaking. That promises to continue through 2017, and we expect the Sixth Circuit to issue important decisions in this area. The Trump administration has pledged to loosen regulation on labor markets while, at the same time, making several public displays of reconciliation with national unions. At the Supreme Court, the vacancy left by the passing of late Justice Scalia assured a deadlocked tie in the Friedrichs case, just as the nomination of Judge Gorsuch to the Court may bring the opportunity to test longstanding precedent. And at the state level, legislatures continue to pass right-to-work laws over the opposition of organized labor.

Perhaps the most contentious issue in labor disputes today is the security or agency fee charged to non-members. These fees have proven controversial, and many on the right-to-work side of the divide see them as additional forced and unjustified contributions to labor unions.  The Sixth Circuit late last year issued a significant ruling regarding agency fees. In UAW Local 3047 v. Hardin County, the Court considered whether a municipality – here, Hardin County, Kentucky, along with several others – was permitted to ban, by ordinance and pursuant to home rule authority, union agency fees. The question was ultimately one of Section 14(b) of the NLRA. While the NLRA generally preempts state labor law, that section specifically authorizes states to pass right-to-work laws. The provision reads:

“Nothing in the subchapter shall be construed as authorizing the execution or application of agreements requiring membership in a labor organization as a condition of employment in any State or Territory in which such execution or application is prohibited by State or Territorial law.”

In other words, “States or Territories” are permitted to regulate agency fees – but what about the political subdivisions of states? The Sixth Circuit held, to the surprise of many, that the language included Hardin County and other municipalities like it. The court reasoned that “State” in the provision includes not only a state as a whole, but also its political subdivisions. This conflicted with the interpretation of other courts on the matter.

This decision could have a significant impact on policymaking, especially in Ohio – the last of the Sixth Circuit’s states without a right-to-work law. In Columbus, the state legislature is already considering passing one, but the legislation is, nonetheless, running into the same headwinds that doomed S.B. 5 in 2011. Should the provision fail in either the state house or senate, a natural next move for right-to-work advocates may be county-by-county legislation in the mold of Hardin County. Ohio, after all, provides a similar measure of home rule authority as in Kentucky. With the Sixth Circuit’s notable decision, that option just became much more plausible.

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