SUMMARY OF HEALTHCARE REFORM ACT DECISION

 Healthcare Reform Act is Constitutional – In Part.

Chief Justice Roberts, regarded as one of the more conservative members of the United States Supreme Court, announced that one of the key elements of the Patient Protection and Affordable Care Act of 2010 a/k/a the Health Care Reform Act – the individual mandate is constitutional.  Another element – Medicaid Expansion Sanction – was declared unconstitutional, and the Government was barred from sanctioning States for failing to expand their Medicaid Programs.

This is an apparent loss for Conservatives who argued that the Health Care Reform Act exceeded the powers granted to the federal Government under the Constitution.  In fact, Chief Justice Roberts applied well-settled principles of Constitutional law in analyzing the constitutionality of the Individual Mandate.  He concluded that the Individual Mandate is a tax, and the Constitution clearly grants Congress the power to impose taxes. 

Actually, this opinion is a victory for Conservatives and advocates of states rights.  In a portion of the opinion that will most likely receive less notice, Chief Justice Roberts reigned in the ability for the federal government to use federal funds to force states to participate in programs.  Although Congress is free to use funds as an incentive, it cannot use the threat of denial of funds as a penalty. 

In an apparent effort to fend off criticism from his conservative supporters, Justice Roberts opened his opinion with the statement that:

We do not consider whether the Act embodies sound policies.  That judgment is entrusted to the Nation’s elected leaders. 

He concluded his opinion with the following statement:

The Framers created a Federal Government of limited powers, and assigned to this Court the duty of enforcing those limits.  The Court does so today.  But the Court does not express any opinion on the wisdom of the Affordable Care Act.  Under the Constitution, that judgment is reserved to the people.

Hidden in the decision are many fundamental principles that will likely be cited by the Court in future years.  Here are some key elements:

The “individual mandate” provision of the Healthcare Reform Act requires all Americans to maintain “minimum essential” healthcare insurance coverage. 

·         The Commerce Clause allows Congress to regulate activity.  It does not allow Congress to regulate inactivity.

      ·         “The Commerce Clause is not a general license to regulate an individual from cradle to
             grave, simply because he will predictably engage in particular transactions.” 

·         Congress cannot compel individuals to engage in activity on the ground that their failure to do so affects interstate commerce.

      ·         The Commerce Clause does not permit Congress to mandate participation in commerce.

·          “People, for reasons of their own, often fail to do things that would be good for them or good for society.”   Congress does not have the authority under the Commerce Clause to force people to act or do what Congress believes is best for them.

·         The “Necessary and Proper” Clause is not an independent grant of authority to Congress.  That interpretation would literally gut the federal system of government.

·         The Necessary and Proper Clause has always been interpreted as supplementing the specific powers granted by the Constitution.

·         If it looks like a tax, it is a tax regardless of what Congress called it.

·         Taxes may be levied whether or not the individual engages in an activity.

·          Permitting the Federal Government to force the States to implement a federal program would threaten the political accountability key to our federal system.

·          Congress can use financial rewards as a carrot to encourage states to adopt programs but, the state must have a legitimate choice as to whether to accept federal funds. 

·         Congress is able to use conditions of the use of funds as a carrot. 

·         Congress cannot use the threat to terminate other independent programs to “coerce” behavior.    

·         Calling the penalty a “gun to the head,” Justice Roberts noted that the Medicaid expansion  mandated by the Act would result in the loss of 20% of some State budgets.  This penalty makes the condition an unconstitutional “coercion” and not a carrot.

·         Congress cannot impose post-acceptance or “retroactive” conditions upon States once they accept a program.

See Decision.

THE FAMILY THAT FIGHTS MAKES THE ATTORNEYS A LOT OF MONEY

IF I PUT ALL OF MY MONEY IN TRUST, MY KIDS WON’T BE ABLE TO FIGHT.  WRONG!

No good deed goes unpunished.  Or, in this case, even if you place all of your assets in trust, you cannot stop your family from fighting.

By all accounts, Dad was a good man and a respected attorney in Memphis, Tennessee.  He and Mom recognized the value of placing their assets in trust in order to ensure that their children received adequate funds for their future needs.  A number of trusts were created over the years with the intent of providing for the family.  Dad died in 1994, and the fun began!

Apparently, Son enjoyed life to its fullest.  So much so, that he needed lots of money to live.  Pursuant to the Trust documents, Mom served as Trustee of many of the various Trusts after Dad died.  Sister served as Trustee for some of the Trusts.  At some point, Mom became concerned about Son’s penchant for spending and had the family attorney prepare two amendments to the Trust documents.  Each of these amendments capped the amount that Son received from the Trusts.  Son executed both amendments. 

After Mom died, Son sued his Sister claiming breach of trust.  As a part of his lawsuit, he asked the Court to declare the two amendments to be invalid based upon “undue influence. 

The facts of this story are interesting.  The first amendment was executed by Son at his home in Hendersonville.  He then returned the document to Memphis.  No one, other than Son, was present when that amendment was executed.  Therefore, how can Son claim undue influence?

The second amendment was executed by Son in the presence of Mom, Sister and the attorney.  There is no question that he did so freely.  In fact, Son stated that he did not even read the document.  Again, how can Son claim undue influence? 

As the Court of Appeals explained, the two elements of “undue influence” are (a) a confidential relationship and (b) benefit to the other party.  Mom and Son had a confidential relationship because Mom was the Trustee of the Trusts.  But, the second element is a benefit to Mom.  Mom did not receive any benefit from the amendments – she was not a beneficiary of the trusts. 

But, Sister was also a trustee of some of the trusts when the amendments were executed.  She was the contingent beneficiary upon Son’s death.  Therefore, she satisfied both elements – a confidential relationship and a benefit – because she would receive any funds that Son had not spent.  By all accounts, however, if any arm-twisting occurred, it was Mom doing the twisting. 

That, the court stated, does not matter.  The beneficiary of the arm-twisting does not need to be the one doing the twisting!  Because Sister satisfied both elements, a presumption of undue influence exists.  We then look at the means used, and the effect upon the donor.  If too much means were used and Son can convince the Court that he did not act based upon “free will,” then the amendments are invalid.

THE MORAL OF THIS STORY - IF YOU ARE GOING TO TWIST ARMS, MAKE SURE THAT YOU ARE NOT IN A RELATIONSHIP WITH THE TWISTEE, BECAUSE EVEN IF YOUR MOTIVES ARE PURE, TENNESSEE COURTS ADOPT “FREE WILL.”

For more on this story, see Betty C. GoffCartwright v. Jackson Capital, et al., No. W2011-00570-C0A-R3-CV (Tenn. Ct. App., June 5, 2012). www.tncourts.gov/sites/default/files/cartwrightbopn.pdf

REAL ESTATE AND MEDICAID - YOU CAN'T TAKE IT WITH YOU WITHOUT PAYING FOR IT

Courtesy of Justice Koch, we now have a complete history of probate court appeal since the beginning of time.  Ultimately, the decision is that appeals from Putnam County Probate Court go to the Court of Appeals and not the Circuit Court.  More importantly, the proper procedure for dealing with an appeal to the wrong court is to transfer, not dismiss, the case.

More importantly, this case highlights a peculiarity of Tennessee law.  Real property that passes by devise is not included in the probate estate.  The executor, however, may bring that property into the estate if necessary to satisfy claims of creditors.  Real Property that passes by survivorship or by the entireties is not subject to claim by the executor.  More importantly, it is not subject to claim by TennCare for reimbursement for Medicaid nursing home purposes.  So, if you want to put Mom in a Medicaid nursing home bed and avoid TennCare, have Mom convey the property to you as a joint tenant with right of survivorship.  Of course, Medicare has a “reachback” of 5 years, but it is worth a try.

See In Re Estate of Ardell Hamilton Trigg.

RETALIATORY DISCHARGE AND EMPLOYEES WITH CONTRACTS FOR A DEFINITE TERM - THERE IS A DIFFERENCE

Tennessee law protects employees who report illegal acts by their employers from retaliation.   In addition to the statutory protection (Tenn. Code Ann. § 50-1-304), there is a “common law” protection.  But, that common law protection does not apply to all employees. 
In Tennessee, the common law protection against retaliatory discharge applies only to “at-will” employees.  If the employee has an employment agreement for a definite term (e.g., one year), the employee is not an “at will employee.”  He or she is not protected from retaliatory discharge.  
     
What if the employment agreement gives the employer the right to terminate at any time without cause?  That was the question in Petschonek v. TheCatholic Diocese of Memphis.  W2011-02216-COA-R9-CV (Tenn. Ct. App., May 23, 2012).  The contract at issue provided a one year term and stated that the principal could terminate the contract at any time for any reason.  The contract granted the employee 30 days of compensation as liquidated damages if the principal exercised this right.  Likewise, the employee could terminate the contract prior to the end of the term if the employee paid liquidated damages to the employer. 

The court of appeals held that the inclusion of a right to terminate the contract before expiration of its term does not change the essence of the agreement.  It remains a contract for a definite term.  The court emphasized that the contract at issue included “mutual” rights to terminate the contract and mutual obligations. 

Now, the unanswered question.  What if the contract did not allow the employee to terminate the contract?  What if the contract did not provide for “liquidated” damages to the employee upon termination by the employer without cause?  In those instances, would the employee have a common law protection from retaliatory discharge.

MORAL OF THE STORY.  Often, the inclusion or exclusion of language in a contract often has important legal consequences.  In this case, the employer’s willingness to give 30 days pay probably avoided a bundle of attorney’s fees.

HOW NOT TO RUN A BUSINESS - MINORITY SHAREHOLDERS AND BREACH OF FIDUCIARY DUTY

In 1994, Husband and his brother start a business.  Because they are intelligent, they incorporate that business.  Brother owns 50% of the corporation’s stock, Husband owns 25% of the stock and Wife owns 25% of the stock.  All is well until 2007 when Husband and Wife divorce.  According to the court, Wife had a “personal relationship” with a Company employee which appeared to precipitate this result. 

Normally, property, such as stock in a family business, would be transferred to one spouse as a part of the property settlement.  In this case, for reasons unknown, Wife kept her stock in the Company after the divorce.  And, Wife continued to be employed by the Company.

Then, in May, 2008, Husband fired Wife – now ex-Wife.  The Company then employed Husband’s new wife. 

At this point, the soap opera changes from a mildly interesting story to a tutorial on corporate law.  Husband testified that as CEO, “I am the company.”  He forgot, however, that Tennessee corporate law protects minority shareholders.  Here are a few of his mistakes: 

1.         Notices of Meetings.  Although Wife was a Director, she did not receive notice of meetings of the Board of Directors.  This included the meeting at which Husband decided to fire Wife.

2.         Bonuses to Insiders.  Husband, new wife and Brother all received bonuses.  These bonuses were not approved by a vote of “disinterested” Directors – in this case Wife.

3.         Actions of the Board.  The Husband and Brother decided to forego exercising an option to purchase property without holding a Board meeting.

4.         Removal of Plaintiff as a Director.  The Husband and Brother removed Wife as a Director without her knowledge.

The trial court concluded that the Husband and his Brother instituted a “systematic scheme” to deny Wife her rights as a shareholder.   The court concluded that they acted with malice and avarice toward Wife.  Consequently, the Court found that Husband and Brother violated their fiduciary duty to Wife.

The Moral of this Story.  If you divorce your business partner, buy out all of the stock.  Husband and Brother could have avoided a lot of attorney’s fees if they had merely purchased Wife’s stock. 

Proffit v. Smoky MountainWoodcarvers Supply, Inc., No. E2011-0180-COA-R3-CV (Tenn. Ct. App. May 15, 2012).

FRAUD AND PLEADING - AS WELL AS SOME CHANCERY COURT JURISDICTION ISSUES

Fraud must be alleged with particularity.  That is a simple statement, but is one that causes many attorneys a lot of problems. 

First, some ground rules.  In Tennessee, the courts look at the substance of the complaint, not the form of the complaint.  But, the court will not create a cause of action if the complaint does not allege sufficient facts.  You cannot rely upon allegations of law.  Finally, if you allege fraud, you must allege more than a “short and plain” statement.  The circumstances constituting fraud or mistake must be alleged with particularity.  That means the complaint must include the details.

According to the court of appeals, the term “fraud” for purposes of Rule 9.02 includes any cause of action alleging misrepresentation, including fraudulent concealment and conversion.  To allege these causes of action, the complaint must state the specific representations at issue and identify the persons who made and who received the false information.

This case discusses a cause of action that I did not realize exists in Tennessee – the tort of “aiding and abetting.”  That tort arises if the defendant knows of the wrong being committed and gives substantial assistance or encouragement to the bad actors.  Unlike civil conspiracy, this tort does not require participation in the activities or even knowledge of what actually is occurring.  Even though this tort extends to things other than “fraud,” the court of appeals states that the facts constituting “substantial” assistance must be plead with particularity. 

Two other concepts noted in this opinion.  “Intangible” property cannot be converted.  Money is intangible.  Therefore, the theft of money is not “conversion” unless the amount of money is specific and the funds are identifiable.  If someone removes $100.00 from your bank account, the amount is specific and the funds are identifiable.  If a convenience store is robbed, the perpetrator is not guilty of conversion.  Chancery Courts do not possess jurisdiction over claims for unliquidated damages.  If the exact amount of damages is alleged, the claim is not unliquidated.

So, read those civil procedure rules carefully when you draft your complaint and avoid being the attorney of record in the textbook case on appropriate pleading for the rest of eternity.       

See PNC Multifamily Capital Institutional Fund XXVI Limited Partnership, et al. v. Bluff City Community Development Corporation, et al.

AGREED JUDGMENTS ARE UNENFORCEABLE

Loan workouts occur every day.  Often, the lender requires the borrower to provide an “agreed judgment” as a part of the workout.  This is intended to ensure that the lender does not have to litigate the case. 

If the debtor “revokes” his agreement to the judgment before the judgment is filed or signed by a judge, the agreed judgment is worthless.  All the debtor needs to do is assert a defense of breach of contract.

The good news is that the Court will enforce the terms of the loan modification agreement.  If the debtor, as in this case, failed to make a required $30,000.00 payment, the Court will grant summary judgment.

See The People's Bank v. Raymond E. Lacy.