ODU School Law PP

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51 of 430 DOCUMENTS
CITY OF PHILADELPHIA, TRUSTEE UNDER THE WILL OF STEPHEN

GIRARD, DECEASED, ACTING BY THE BOARD OF DIRECTORS OF CITY
TRUSTS, Appellant v. CUMBERLAND COUNTY BOARD OF ASSESSMENT
APPEALS, Appellee
No. 102 MAP 2011
SUPREME COURT OF PENNSYLVANIA
622 Pa. 581; 81 A.3d 24; 2013 Pa. LEXIS 2547
May 9, 2012, Argued

October 30, 2013, Decided
PRIOR HISTORY: [***1]

Appeal from the Order of Commonwealth Court dated April 4, 2011 at No. 1725 CD 2010 which Reversed the order of
the Court of Common Pleas, Cumberland County, Civil Division, dated July 28, 2010 at No. 07-6943 Civil Term.
Appeal allowed November 2, 2011 at 461 MAL 2011. Trial Court Judge: Merle L. Ebert, Jr., Judge. Intermediate Court
Judges: Dan Pellegrini, Kevin P. Brobson, JJ, James R. Kelley, Senior Judge. 18 A.3d 421 (Pa. Cmwlth. 2011).
City of Philadelphia v. Cumberland County Bd. of Assessment Appeals, 18 A.3d 421, 2011 Pa. Commw. LEXIS 155
(Pa. Commw. Ct., 2011)
CASE SUMMARY:
OVERVIEW: HOLDINGS: [1]-The Pennsylvania Supreme Court held that the Girard Trust, College and Board of
City Trusts (Board) and, by extension, the real estate holdings of the Girard Trust (the property), owned by the City of
Philadelphia, Pennsylvania, as trustee, retained immunity from local property taxation as, collectively, part of the
sovereignty of the Commonwealth of Pennsylvania; [2]-The trial court had correctly concluded that the property was
both immune and exempt from local real estate taxation; [3]-The Court held that the Girard Trust was the beneficiary of
the rental income generated by the property, the City was trustee and held legal title, and the Board was a
Commonwealth agency acting on behalf of the City as administrator of the property, thus, the property was public, used
for public purposes and exempt from local real estate taxation.
OUTCOME: Decision and order reversed; order of the trial court reinstated on grounds of tax immunity.
CORE TERMS: girard, taxation, entity, immunity, orphan, real estate, municipal, exempt, public purposes, bequest,
sovereign, charitable, exemption, immune, appointment, leased, administer, charity, tenant's, administered, private
individual, public charity, instrumentality, municipality, appointed, rental, tax exemptions, common pleas, enabling,
street
LexisNexis(R) Headnotes
Evidence > Procedural Considerations > Burdens of Proof > Allocation

Tax Law > State & Local Taxes > Real Property Tax > Exemptions
[HN1] The Supreme Court of Pennsylvania has defined the concepts of immunity and exemption from local property
taxation as follows: Tax immunity precludes a locality from imposing taxes upon the Commonwealth and its agencies.
Tax exemption, on the other hand, carves out specified property from taxation that the taxing body otherwise has the
authority to tax. Practically speaking, if an entity is immune, the taxing authority bears the burden of establishing why
taxation is permissible; if the entity is exempt, the entity bears the burden of establishing why it should not be subject to
taxation.
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Governments > Local Governments > Administrative Boards

[HN2] 53 Pa. Stat. Ann. §§ 16365-16370 direct that the Philadelphia, Pennsylvania Board of City Trusts members are
to be citizens of Philadelphia appointed by a board of appointment comprised of the judges of the supreme court,
together with the judges of the district court, since abolished, and the court of common pleas of the city and county of
Philadelphia. 53 Pa. Stat. Ann. § 16366. Board members are to serve indefinitely, during good behavior, but could be
removed by two-thirds agreement of the judicial board of appointment. 53 Pa. Stat. Ann. § 16366. Later legislation and
constitutional amendment vests the power of appointment exclusively in the judges of the Court of Common Pleas of
Philadelphia County. Pa. Const. art. V, § 21 (1874) states that the appointment powers of Supreme Court justices were to
be limited; and pursuant to the Constitution's disqualification of Supreme Court justices from appointment of, inter alia,
directors of public boards, such as the Board of City Trusts, such appointments were to be made, going forward, by
county courts of common pleas.
Estate, Gift & Trust Law > Trusts > Administration

Governments > Local Governments > Duties & Powers
[HN3] The Philadelphia v. Fox Court holds that the 53 Pa. Stat. Ann. §§ 16365-16370 is constitutional, emphasizing
that whatever power the City of Philadelphia, Pennsylvania exercises over the Girard assets as trustee was revocable
and subject to alteration, modification, and even dissolution by the sovereign Commonwealth of Pennsylvania, which is
empowered to create municipal corporations like the City, as well as boards of municipal sewerage, streets, and police,
in much the same manner as it had created the Board of City Trusts. If the Pennsylvania Legislature could vest power
in a municipal corporation, the Legislature could also remove or reshape that power; as such, any argument that the
Commonwealth did not retain sovereign power over the City of Philadelphia and, by extension, the Board and the
Girard entities, would fail. The directors of city trusts are a department of the municipality which the Legislature had a
constitutional right to establish. A man who constitutes such a municipality his trustees does so subject to all the
changes which the sovereign power may make in its character and organization.

Governments > State & Territorial Governments > Legislatures
[HN4] The Pennsylvania legislature may alter, modify, or even annul the franchises of a public municipal corporation,
although it may not impose burdens on it without its consent.
Estate, Gift & Trust Law > Trusts > Trustees > Appointment
[HN5] A municipal corporation may be a trustee, under the grant or will of an individual or private corporation, but only
as it seems for public purposes, germane to its objects. The trusts held by the city of Philadelphia, Pennsylvania are
germane to its objects. They are charities, and all charities are in some sense public. If a trust is for any particular
persons, it is not a charity. Indefiniteness is of its essence. The objects to be benefited are strangers to the donor or
testator. The widening and improvement of streets and avenues, planting them with ornamental and shade trees, the
education of orphans, the building of school-houses, the assistance and encouragement of young mechanics, rewarding
ingenuity in the useful arts, the establishment and support of hospitals, the distribution of soup, bread or fuel to the
necessitous, are objects within the general scope and purposes of the municipality. The king himself may be a trustee,
though he cannot be reached by the process of any court without his consent and so may the state, though only for
objects germane to the purposes of government.
Constitutional Law > Bill of Rights > State Application

[HN6] The Fourteenth Amendment, U.S. Const. amend. XIV, applies only to agencies of the state or municipalities
within a state; it is not directed against private, individual actions.

Governments > State & Territorial Governments > Claims By & Against
[HN7] The United States Supreme Court has held that: The Board which operates Girard College is an agency of the
State of Pennsylvania.

Estate, Gift & Trust Law > Trusts > Charitable Trusts
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[HN8] See 20 Pa.C.S. § 5116.
[HN9] Pa. Const. art. VIII, § 2(a)(iii) provides that the Pennsylvania General Assembly may by law exempt from
taxation that portion of public property which is actually and regularly used for public purposes. 72 Pa. Stat. Ann. §
5020-204(a)(7) provides that the following property shall be exempt from all county, city, borough, town, township,
road, poor and school tax, to wit: All other public property used for public purposes nor shall the act or any other act be
construed to exempt from taxation any privilege, act or transaction conducted upon public property by persons or
entities which would be taxable if conducted upon nonpublic property regardless of the purpose or purposes for which
such activity occurs, even if conducted as agent for or lessee of any public authority.
Civil Procedure > Summary Judgment > Appellate Review > Standards of Review
Civil Procedure > Summary Judgment > Standards > Legal Entitlement
Civil Procedure > Appeals > Standards of Review > De Novo Review
[HN10] The question of whether summary judgment is warranted is one of law, and thus the appellate court's standard
of review is de novo and its scope of review is plenary. Summary judgment may be entered only where the record
demonstrates that there remain no genuine issues of material fact, and it is apparent that the moving party is entitled to
judgment as a matter of law.
Governments > Local Governments > Property

[HN11] An arm, agency, subdivision, or municipality of the Commonwealth of Pennsylvania enjoys sovereign
immunity from local real estate taxation. Tax immunity precludes a locality from imposing taxes upon the
Commonwealth and its agencies. Immunity in that context derives from the Commonwealth's sovereign right to be free
of taxation unless some statutory authorization or concession to the contrary exists; that has been long settled. The
Pennsylvania Legislators did not intend to upset the orderly processes of government by allowing the sovereign power
to be burdened by being subjected to municipal taxes. Property owned by the Commonwealth and its agencies and
instrumentalities is presumed to be immune, with the burden on the local taxing body to demonstrate taxability. The
immunity of the Commonwealth from local taxation is mirrored by the parallel tax immunity of property of the federal
government. The doctrine of sovereign immunity is so embedded in constitutional history and practice that the United
States Supreme Court cannot subject the Government or its official agencies to state taxation without a clear
congressional mandate.

[HN12] In Southeastern Pennsylvania Transportation Authority v. Board of Revision of Taxes, the Pennsylvania
Supreme Court has determined that even if an entity is clearly a governmental agency or instrumentality, it may not
automatically claim immunity from local real estate taxation for property leased to third-party commercial entities.

[HN13] The Pennsylvania Supreme Court has concluded that the Penn State cases, which dealt with the unique and
idiosyncratic relationship between the Commonwealth of Pennsylvania and the University of Pennsylvania, did not alter
the long-standing rule that property owned by a municipal authority is immune in the same manner as the sovereign
Commonwealth. The Municipal Authorities Act, 53 Pa.C.S. § 5620 provides: The effectuation of the authorized
purposes of authorities created under the chapter shall be for the benefit of the people of the Commonwealth. Since
authorities will be performing essential governmental functions in effectuating these purposes, authorities shall not be
required to pay taxes or assessments upon property acquired or used by them for such purposes.

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[HN14] In the context of immunity from local real estate taxation based on status as an agency or instrumentality of the
Commonwealth, it is helpful, but not essential, to have an express declaration of Commonwealth status in enabling
legislation. But, some entities may be square pegs that simply do not fit easily into recognized, categorical round holes;
they are sui generis, having neither clear ancestors in law or history, nor contemporary analogs. When those
circumstances arise, existing precedent and authority may be less helpful than usual.

Governments > State & Territorial Governments > Property
[HN15] The Pennsylvania legislators did not intend to upset the orderly processes of government by allowing the
sovereign power to be burdened by being subjected to municipal taxes.
COUNSEL: For Public Financial Management, Inc., AMICUS CURIAE: Sarah Chadwick Cocke, Esq., PFM Group.
For City of Philadelphia, Trustee Under the Will of S. Girard, Deceased, Acting By the Board of Directors,
APPELLANT: Christopher Anil Amar, Esq.; James G. Colins, Esq., Stephen A. Cozen, Esq., Sara Anderson Frey, Esq.,
Cozen O'Connor; Gary Dean Fry, Esq., Archer & Greiner, P.C.; Charles B. Gibbons, Esq., Jack Mentzer Stover, Esq.,
Buchanan Ingersoll & Rooney P.C.; Joseph T. Kelley Jr., Esq., Kelley & Murphy; Howard A. Rosenthal, Esq.
For Cumberland County Board of Assessment Appeals, APPELLEE: Stephen Doublas Tiley, Esq., Frey & Tiley.
For County Commissioners Association of Pennsylvania, APPELLEE AMICUS CURIAE: Robert L. Knupp, Esq.,
Knupp Law Offices, LLC; Anthony T. McBeth, Esq.
JUDGES: BEFORE: CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, ORIE MELVIN, JJ. MR.
CHIEF JUSTICE CASTILLE. Former Justice Orie Melvin did not participate in the decision of this case. Mr. Justice
Eakin, Madame Justice Todd and Mr. Justice McCaffery join the opinion. Mr. Justice Saylor files a concurring opinion
in which Mr. Justice Baer joins.
OPINION BY: CASTILLE
OPINION
[*583] [**25] MR. CHIEF JUSTICE CASTILLE
The issue in this appeal is whether certain property (the "property") in Cumberland County, which is owned by the City
of Philadelphia as trustee of the Stephen Girard Trust and leased by the Board of Directors of City Trusts (colloquially
and hereinafter "the Board of City Trusts" and, [*584] where the context is clear, "the Board") to the Pennsylvania
Office of Attorney General ("OAG"), is subject to local real estate taxation in Cumberland County. The trial court held,
in a grant of summary judgment, that the property was both immune and exempt from local real estate [***2] taxation.1
The Commonwealth Court reversed in a published opinion. For the reasons set forth below, we reverse the
Commonwealth Court and reinstate the order of the trial court, on grounds of tax immunity.
1 [HN1] This Court has defined the concepts of immunity and exemption from local property taxation as follows: "Tax immunity precludes
a locality from imposing taxes upon the Commonwealth and its agencies. Tax exemption, on the other hand, carves out specified property
from taxation that the taxing body otherwise has the authority to tax." Lehigh-Northampton Airport Auth. v. Lehigh County Bd. of
Assessment Appeals, 585 Pa. 657, 889 A.2d 1168, 1172 n.2 (Pa. 2005) (internal quotation marks omitted). Practically speaking, if an entity is
immune, the taxing authority bears the burden of establishing why taxation is permissible; if the entity is exempt, the entity bears the burden
of establishing why it should not be subject to taxation.
[**26] I. Background
Stephen Girard's Will and the entwined nature and status of the Girard entities 2 have produced nearly two centuries of
litigation in multiple contexts. Girard was a unique person and the Girard Trust is a unique legal entity. Born in
Bordeaux, France, on May 20, [***3] 1750, Stephen Girard died on December 26, 1831 at eighty-one years of age; his
life reflects [*585] the early history of the nation and of his chosen home, Philadelphia, Pennsylvania. 3
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2 Collectively, the "Girard entities" are: the Girard Trust, which represents the assets from the Girard Estate that Stephen Girard left in trust
to the City of Philadelphia; Girard College, the school envisioned in Girard's will and sustained by the Trust; and the Board of Directors of
City Trusts, known colloquially and hereinafter as the Board of City Trusts, which since its creation by the General Assembly in 1869 has
administered the Trust and managed the College, with the exception of a ten-year period, discussed infra. At times in this Opinion, the
entities are addressed individually when the role of one or another entity is at issue; at times they will be addressed collectively when the
interconnectedness that characterizes them is at issue. Also in this Opinion, "the Board of City Trusts" (or "Board" where the context is
clear) indicates the party appealing to this Court, which is fully designated as the "City of Philadelphia, Trustee Under the Will of Stephen
Girard, Deceased, Acting by the [Board of [***4] City Trusts]."
3 Historical material in this Opinion derives from prior decisions involving Girard's will (including the Pennsylvania Supreme Court
opinions in Soohan v. City of Philadelphia, 33 Pa. 9, 1 Grant 494 (Pa. 1859), Philadelphia v. Fox, 64 Pa. 169 (Pa. 1870), and two decisions in
the 1950s involving Fourteenth Amendment challenges to the College's segregated student body; and multiple 19th century decisions in the
U.S. Supreme Court), as well as a narrative by the longtime archivist of the Girard Collection and Archives, which includes Stephen Girard's
business and personal papers. See Thomas J. DiFilippo, Stephen Girard, the Man, His College and Estate (1999), available at
http://www.girardweb.com/girard/welcome.htm (last visited Aug. 19, 2013). The chapter on Girard in James D. McCabe, Jr.'s "Great
Fortunes and How They Were Made" (E. Hannaford & Co. 1872) has also been a useful resource.
Girard was born into a family that had established a lucrative business trading in the West Indies in the Caribbean Sea;
he began working in his father's counting house at ten years old, went to sea for the first time at age fourteen in 1764,
and received little if any formal education. Girard left France [***5] permanently in 1773 and ultimately settled in
Philadelphia in 1777 after several years as a trading sea captain; he became a citizen of Pennsylvania in 1778. During
the American Revolution and the years after, he maintained and augmented his growing commercial fortune, becoming
a ship owner and builder in 1789. In the following decades, Girard traded within what is now the United States, to ports
including Charleston, South Carolina, and New Orleans, Louisiana, and all over the globe: the West Indies, Europe, the
Mediterranean, the Baltic and Russia, South America, the East Indies, India, and China. His trading wares included
grain, wine, fruit, hemp, iron, coffee, tea, and silk. Anticipating the War of 1812 with England and its likely effect on
international maritime commerce, Girard shrewdly reduced his trading activity, liquidated his overseas holdings,
collected outstanding foreign debts owed to him, and invested in the First Bank of the United States. Girard became the
foremost banker in Philadelphia and the nation when he acquired the bank itself in 1812 after the federal government
declined to renew the bank's charter, which expired in 1811, twenty years after its [*586] 1791 inception [***6] at the
behest of Alexander Hamilton, the first Secretary of the U.S. Treasury.
[**27] Girard's second career as a banker flourished. He served as a primary financier of the nation during the War of
1812 and on the board of the Second Bank of the United States, which was established after the war, in 1816.4 Having
renounced international trade, Girard invested in land, primarily in Philadelphia (including a working farm located on
the site of the present-day historic district of Girard Estate in South Philadelphia), but also throughout Pennsylvania and
in Kentucky and Louisiana. Some of the Pennsylvania lands Girard acquired, in Columbia County and Schuylkill
County (which includes the borough of Girardville, established in 1832), contained abundant coal; after Girard's death,
coal royalties produced hundreds of thousands of dollars each year, sustaining the Trust in the process.
4 The Second Bank of the United States existed until 1841, but was debilitated in the early 1830s when President Andrew Jackson, long an
opponent, vetoed legislation to renew its charter and subsequently withdrew all federal deposits. In 1836, the bank became a private
corporation. It suspended payments in 1839 and was [***7] liquidated in 1841.
Girard's endeavors were not limited to private enterprise; he was also a selfless public citizen of Philadelphia. The
Pennsylvania Supreme Court described his public service over a century and a half ago in Soohan v. City of
Philadelphia, 33 Pa. 9, 1 Grant 494, 1859 WL 8661 (Pa. 1859):
In the great yellow fever of 1793, which broke out in Water street, within a square of his residence, Mr. Girard distinguished
himself by visiting and attending upon the sick, and by his invaluable services as an active manager of the hospital at Bush Hill.
Seventeen thousand persons left the city, and of the remainder, upwards of four thousand, or nearly a fifth, died. At a meeting of the
citizens of Philadelphia, the Northern Liberties, and district of Southwark, assembled on Saturday, the 22d day of March 1794, and
presided over by Thomas McKean, a signer of the Declaration of Independence, and then chief justice, and afterwards governor of
[*587] the state, their most cordial, grateful, and fraternal thanks were presented to their fellow-citizens named in the proceedings,
"for their benevolent and patriotic exertions in relieving the miseries of suffering humanity on the late occasion." One of these
[***8] citizens, thus gratefully remembered, was Stephen Girard, under whose "meritorious exertions and peculiar care," at the
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Bush Hill hospital, in conjunction with Peter Helm, "every possible comfort was provided for the sick, and decent burial for those
whom their efforts could not preserve from the ravages of the prevailing distemper."
In 1797 and 1798, the fever again prevailed in Philadelphia with fearful violence, and again Mr. Girard exhibited the same enlarged
philanthropy, and the same disregard of danger, by liberal contributions, and personal services to the sick and dying.
In 1802, Mr. Girard was elected a member of the city councils, and so continued for several years. Upon the expiration of the
charter of the first Bank of the United States, he established his own private bank, in the building occupied by the late national
institution, and his first cashier was Mr. George Simpson, the cashier of the late bank.
33 Pa. 9, 1859 WL 8661 at **9-10.

At the time of Girard's death in 1831, his estate was valued at nearly $7 million, making him (it is believed) the
wealthiest man in the nation at that time. The estate included ships, land, stock in the public debts of Philadelphia,
Pennsylvania [***9] and the United States, and shares in insurance [**28] companies, Pennsylvania turnpikes and a
bridge, the Franklin Institute, the Schuylkill Navigation Company, the Chesapeake and Delaware Canal, and the
Danville & Pottsville Railroad.
Girard married, but outlived his wife and had no surviving children. In 1830, the year before he died, he met with his
counsel and created what became his last Will and testament, subject to two later codicils; the Will was reprinted and
published in 1874. See WILL AND CODICIL OF THE LATE STEPHEN GIRARD, ESQ. (James B. Chandler 1874) ("Girard
Will" or "the [*588] Will") (cites infra are to specific provisions of the Will, followed by the corresponding page
numbers in the published version). The Girard Will left specific sums to relatives, including Girard's brother and each of
his brother's six children and four other nieces, as well as bequests to friends, life incomes to his maid and to his farm
housekeeper and her family, and bequests to persons indentured to him. The vast majority of his considerable fortune,
however, was left to support charitable and public causes in and about Philadelphia. Thus, Girard left sums to
Pennsylvania Hospital, asylums for orphans [***10] and the deaf and mute, a society for relief of impoverished
shipmasters and their families, and amounts to be invested so as to provide housing fuel for the poor of Philadelphia.
Girard also left specific bequests to establish a public school in Philadelphia, and a neighborhood school just outside the
then-boundaries of the City, in Passyunk Township.5 Girard Will, Clauses I-XVIII, at 3-14.
5 The City of Philadelphia was not enlarged to become the entire County of Philadelphia (including Passyunk Township) until the Act of
Consolidation in 1854; at the time of Girard's death, the city was considerably smaller, encompassing the narrowest point between the
Delaware and Schuylkill Rivers. See Taggart v. Commonwealth, 102 Pa. 354, 1883 WL 13317, *9, 12 Week. Notes Cas. 465, 40 Legal Int.
78 (Pa. 1883) ("The first section of the Act of 2d February 1854 extended the boundaries of the city of Philadelphia so as 'to embrace' the
whole of the territory of the county of Philadelphia."). In a legal challenge to Girard's Will premised upon the alteration and enlargement of
the City effected by the Act of Consolidation, the U.S. Supreme Court in Girard v. City of Philadelphia, 74 U.S. 1, 19 L. Ed. 53, 1868 WL
11147 (1868), described the City's growth, [***11] as follows:
The city of Philadelphia, as originally laid out in 1683, and as incorporated in 1701, was situated upon a rectangular plot
of ground, bounded in one direction by two streets called Vine and South, a mile apart, and in the other by two rivers (the
Delaware and Schuylkill), two miles apart; the corporate title of the city being "the Mayor, Aldermen, and Citizens of
Philadelphia." Upon the neck of land above described the corporate city continued to be contained until 1854; the
inhabitants outside or adjoining it being incorporated at different times, and as their numbers extended, into bodies politic,
under different names, by the State legislature, and with the city, forming the county of Philadelphia. In 1798, the
Revolution having dissolved the old corporation, the legislature incorporated the city with larger powers; and prior to
1854, nearly twenty acts had been passed altering that law, and forming, the whole of them, what was popularly called the
charter of the city; but as already said, from 1683 to 1854, the city limits were the same.
74 U.S. 1, [WL] at *1 (syllabus).
[*589] The residual portion and great majority of Girard's estate, estimated to be worth about $5 million at the time
[***12] of his death, was also left to further public purposes in the city he called home. The Will stated plainly: "I have
sincerely at heart the welfare of the City of Philadelphia." Girard Will, Clause XX, at 18. The directives Girard included
in his Will corroborated this point. Thus, Girard left $500,000 to the "Mayor, Aldermen, and Citizens" of Philadelphia to
remove and to prohibit all buildings made of wood or other combustible materials in the city and to create Delaware
Avenue in place of the former [**29] Water Street, where Girard had kept his riverfront offices, so as to improve the
eastern half of the City. His specifications for these public improvements were set forth in minute detail. Girard
explained that by all of these improvements, "it is my intention to place and maintain the section of the City, above
referred to, in a condition which will correspond better with the general cleanliness and appearance of the whole City,
and be more consistent with the safety, health, and comfort of the Citizens." Girard Will, Clause XXII, ¶¶ 1-3, at 35-40.
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Girard also left $300,000 to the Commonwealth of Pennsylvania to improve canal navigation and to enact laws that
would permit Philadelphia [***13] to improve its port. Notably, each of these civic bequests was conditioned upon the
passage of the laws necessary to enable completion of the public projects Girard envisioned. Girard Will, Clause XXIII,
at 40-41. The remainder of Girard's fortune was left to the City in trust with instructions to establish, build, and
maintain a residential school for "poor male white orphans" -- Girard College -- on a large lot Girard owned, with the
cost of construction not to exceed $2 million. Girard Will, Clause XXI, at 20. However, the residuary portion of the
estate was also to be used for other civic purposes, i.e., to provide a competent police force for the City and to improve
the property and general appearance of the City. Girard noted that his intention in this regard [*590] was "in effect to
diminish the burden of taxation, now most oppressive especially on those, who are the least able to bear it." Girard Will,
Clause XXIV, at 41-42.
Girard's Will made clear that the civic endeavors to be funded from the residuary estate were subject to the "primary
object" that the College be adequately provided for. He expressed this context for the residuary bequests as follows: "To
all which objects, the [***14] prosperity of the City, and the health and comfort of its inhabitants, I devote the said fund
as aforesaid, and direct the income thereof to be applied yearly and every year for ever -- after providing for the College
as hereinbefore directed, as my primary object." Girard also provided for public-works contingencies if his designated
trustee, the City, were to "knowingly and willfully violate" any conditions of the Will: in that instance, the remainder of
the residue would be distributed to the Commonwealth for purposes of internal navigation -- excepting that income from
his Pennsylvania real estate was to be forever applied to maintenance of the College. If the Commonwealth, in turn,
failed to abide by the contingent restrictions placed upon it, the Will further provided, that portion of the remainder of
the Estate was left to the United States for purposes of internal navigation. Girard Will, Clause 24, ¶ 3, at 42-43.
Respecting the purpose of the College, Girard made clear that he desired to provide "a better education as well as a
more comfortable maintenance" than such orphans "usually receive from the application of the public funds." The Will
is replete with meticulous detail [***15] concerning the College, which Girard envisioned as an institution able to step
in where public assistance had not, or could not. Girard noted, for example, that preference was to be given first to
Philadelphia-born orphans, then to those born elsewhere in Pennsylvania, then to those born in New York City, and
finally to those born in New Orleans.6 [**30] The Will also addressed the design of the buildings, [*591] food and
clothing for the students, exercise and recreation, the subjects to be taught, etc. Girard Will, Clauses XX; XXI, including
¶¶ 6 & 7, at 18-31.
6 At his death in 1831, Girard owned nearly 300,000 acres of land in Louisiana and about thirty slaves; these were left in Clause XIX of his
Will to the City of New Orleans, which today has both a Stephen Girard Street and a Stephen Girard Avenue.
In addition to designating the City as Trustee of the College, Girard's Will obliged the City and the Commonwealth, if
they were to accept his generosity, to pass the laws necessary to effectuate his various bequests. Thus, respecting the
bequests to improve the City's physical infrastructure, the Will stated that funds would be disbursed: "as soon as such
laws shall have been enacted by the constituted [***16] authorities of the said Commonwealth as shall be necessary,
and amply sufficient to carry into effect, or to enable the constituted authorities of the City of Philadelphia to carry into
effect, the several improvements above specified[.]" Girard directed that the legislation was to be passed expediently,
within one year, or the funds would be redirected. Girard Will, Clause XXIII, at 40-41. Both the City and the
Commonwealth responded quickly; indeed, within three months of Girard's death, the General Assembly adopted
special legislation in the form of the Act of March 24, 1832, P.L. 176, which authorized and directed the City of
Philadelphia to carry the Will into effect.7 Less than two weeks later, by the Act of April 4, 1832, P.L. 275, the General
Assembly authorized the select and common councils of the City to provide for the election or appointment of such
officers as deemed essential to duly execute "the duties and trusts enjoined and created by" Girard's Will. In
Commonwealth v. Brown, 392 F.2d 120 (3d Cir. 1968), cert. denied, 391 U.S. 921, 88 S. Ct. 1811, 20 L. Ed. 2d 657
(1968), the U.S. Court of Appeals for the Third Circuit described some of the ensuing developments:
[*592] Philadelphia accepted the bequests and [***17] by ordinance set up a plan to administer the College by a Trusts Board. In
1833 a building committee of the City Council was appointed, a president of the College was chosen under an ordinance created for
that purpose and the cornerstone of the main building laid. Construction was concluded in 1847 and the College opened the first of
the following year. Down to 1869 the City Council operated the College directly, first by way of the trustees until 1851 when the
latter offices were abolished, and the Council again took over direct management. In 1869 the Commonwealth enacted a law which
gave Philadelphia a local Board of Trusts to take over the control of Girard College. . . . Broadly summing up the Commonwealth
and City's intimate association with Girard College the District Court, with full justification in the record, found as fact that:
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Beginning in 1831 and continuing to date [1968], the Commonwealth of Pennsylvania and the City of
Philadelphia, by the enactment of statutes and ordinances, by the use and supervision of public officials,
appointed by legislative and judicial bodies, by rendering services and providing tax exemptions, perpetual
existence and exemption [**31] from tort liability [***18] have given aid, assistance, direction and
involvement to the construction, maintenance, operation and policies of Girard College.
Id. at 121.
7 The Pennsylvania Constitution in effect at the time, the Constitution of 1790, did not contain a proscription against special laws. That
limitation was first adopted in the Constitution of 1874, and is found in the current Constitution in Article III, Section 32. See Pennsylvania
Turnpike Comm'n v. Commonwealth, 587 Pa. 347, 899 A.2d 1085, 1094 (Pa. 2006) (describing history and noting that "main purpose" of
special law restriction was to "'put an end to the flood of privileged legislation for particular localities and for private purposes, which was
common in 1873'"; and quoting Haverford Township v. Siegle, 346 Pa. 1, 28 A.2d 786, 788, 34 Mun. L Rep. 101 (Pa. 1942)).
When the College opened in 1848 it housed approximately 200 orphan students who were about eight years old, under
the aegis of the City Council. Notably, prior to that time, the City had made use of Girard's residuary bequest to support
the other public endeavors which Girard had subsidized in his Will "to diminish the burden of taxation, now most
oppressive especially on those, who are the least able to bear it." Thus, as [***19] the Soohan Court noted: "Until 1847,
annual appropriations were made out of the residuary estate, for the support of the police, the improvement of the city
property, and the general appearance of the city, and in effect to diminish the burden of taxation, but they ceased of
course with the completion [*593] of the college -- the erection of which had entirely exhausted the special fund of
two millions." 33 Pa. 9, 1859 WL 8661, at *14.8
8 The value of Girard's residuary bequest was diminished significantly by the financial panic of 1837. In re Estate of Girard, 386 Pa. 548,
127 A.2d 287, 289 (Pa. 1956).
Additional special legislation was adopted to satisfy other stipulations in Girard's Will respecting the College and
obligations placed upon the City as his trustee. For example, the Will required that the City or its appointees be
authorized to ensure that an orphan's relatives could not interfere with or withdraw a child from the College once the
child was admitted, while another paragraph in the same Clause provided that when orphan students arrived at ages 14-
18, they were to be "bound out" by the City to various "suitable occupations." Girard Will, Clause XXI, ¶¶ 5 & 9, at 30,
32. The General Assembly responded [***20] in 1847, passing a "Special Act"9 by which guardians of prospective
Girard College orphans were authorized to bind such children by indenture, as the Will indicated, to the City as trustee,
effectively making the City the guardian of every Girard College orphan, prohibiting interference by the child's
relatives, and authorizing the City to bind the students out until they reached their majority. See Soohan, 33 Pa. 9, 1859
WL 8661, at **1-2, *14; see also In re Estate of Girard, 386 Pa. 548, 127 A.2d 287, 321-22 (Pa. 1956) (Musmanno, J.,
dissenting) (describing state and local implementing legislation; noting that "between September 15, 1832 and
December 18, 1869, the Council enacted 48 different ordinances devoted exclusively to the Girard College").
9 Act of February 27, 1847, P.L. 178, 53 P.S. §§ 6792-6797. These provisions were ultimately repealed. See Act of November 19, 1959, P.L.
1526, § 10.
In March 1869, the General Assembly responded to an apparent crisis in the management of the Trust and College. The
Pennsylvania Senate heard testimony and discussed the state of affairs. Under the leadership of the City and Council, as
described in the legislative record, "the college, like Noah's ark, has been 'drifting [***21] along' and 'tiding along,'
without pilot or helmsman, upon the great deep, for a long time past." Pa. Senate Legislative Record, March 31, 1869, at
849-59. The [*594] solution was an Act of June 30, 1869, which ousted the existing directors, removed the Girard
Trust assets from the control of the city council, a political body subject to political influences, and created the Board of
City Trusts; the legislation is currently at 53 P.S. §§ 16365-16370.10 The statutes [HN2] directed that Board of City
Trusts members were to be citizens of Philadelphia [**32] appointed by a "board of appointment" comprised of "the
judges of the supreme court, together with the judges of the district court [since abolished] and the court of common
pleas of the city and county of Philadelphia." 53 P.S. § 16366.11 Board members were to serve indefinitely, "during
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[*595] good behavior," but could be removed by two-thirds agreement of the judicial board of appointment. 53 P.S. §
16366.
10 In addition to Girard's bequest, other trusts administered by the Board of City Trusts have included legacies from Benjamin Franklin, the
Freemasons, Mary Shields, who bequeathed $10,000 to the City upon her death in 1880 "to distribute coal to indigent [***22] widows,
single women and men, without respect to color," and John Scott, a chemist and druggist who left, at his death in 1815, a fund of $4,000, the
interest on which would fund awards to "ingenious men and women who make useful inventions." 53 P.S. § 16365 (historical and statutory
notes). Early Scott awardees invented or improved relatively prosaic items characteristic of the Industrial Revolution: the washing machine,
the cash register, the chemical fire extinguisher, and the typewriter; in 1889, Thomas Edison won for his invention of the mimeograph. Since
then, a number of recipients have been scientists of world renown, including a number of Nobel laureates. These include physicist Marie
Curie (1921), aviation pioneer Orville Wright (1925), Thomas Edison (who won again in 1929), radio pioneer Guglielmo Marconi (1931),
electricity innovator Nikola Tesla (1934), penicillin discoverer Alexander Fleming (1944), nuclear chemist and Manhattan Project participant
Glenn Seaborg (1952), John Bardeen (1954), who won the Nobel Prize in Physics twice (for development of transistor technology in 1956
and again in 1972 for work on the theory of superconductivity), polio vaccine discoverer [***23] Jonas Salk (1957), and internet technology
pioneer David J. Farber (1996). The 2011 recipients were neurochemist David E. Kuhl and cancer researcher Jenny P. Glusker; and the 2012
recipients were physicist Paul J. Steinhardt and medical researchers Dr. John Q. Trojanowski & Dr. Virginia Man-Yee Lee. See
http://www.garfield.library.upenn.edu/johnscottaward(full).html (last visited Aug. 19, 2013).
11 Later legislation and constitutional amendment vested the power of appointment exclusively in the judges of the Court of Common Pleas
of Philadelphia County. Article V, Section 21 of the 1874 Pennsylvania Constitution stated that the appointment powers of Supreme Court
justices were to be limited; and the Act of May 25, 1874, P.L. 228, provided that pursuant to the Constitution's "disqualification" of Supreme
Court justices from appointment of, inter alia, directors of public boards, such as the Board of City Trusts, such appointments were to be
made, going forward, by county courts of common pleas.
As a result of administration of the Trust being left to the City, changes in the City itself as reflected in the 1854 Act of
Consolidation, and then changes in the administration of the Trust, [***24] as effected by the 1869 Act, extensive
litigation involving the Girard entities ensued during the nineteenth century. In 1956, this Court summarized the
nineteenth century litigation in In re Estate of Girard, supra, as follows:
The Supreme Court held in Vidal v. Girard's Executors, 2 How. 127, 43 U.S. 127, 11 L.Ed. 205 [(1844)], in an elaborate opinion by
Mr. Justice Story, that the city was legally capable of taking the bequest of the estate for the erection and support of the college
upon the trusts designated in the will, and that these were valid charitable trusts and capable of being carried into legal effect.
In Girard v. City of Philadelphia, 7 Wall. 1, 74 U.S. 1, 19 L.Ed. 53 [(1868)], the decision in the Vidal case was affirmed, and it was
held that the Consolidation Act had not changed the identity of the city so as to affect in any way its administration of the trust.
The Court stated . . . : "Now, if this were true, [that the city had become unable to administer the trust] the only consequence would
be, not that the charities or trust should fail, but that the chancellor should substitute another trustee." In City of Philadelphia v.
Heirs of Stephen Girard, 45 Pa. 9 [(Pa. 1863)], [***25] our own Court likewise held that the trusts created [**33] in the will were
valid, and pointed out that the distinction must carefully be observed between the purposes and provisions of the trust itself and
any problems or difficulties arising from the mode of its administration, the former not being affected by the latter; attention was
called to the important fact that Girard stated that it was his "primary object" to construct and maintain the college. In City of
Philadelphia v. Fox, 64 Pa. 169 [Pa. 1870], it was once again held that Philadelphia could act as a trustee to carry out the trusts
under Girard's will, and that the Act of June 30, 1869, P.L. 1276, 53 P.S. §§ 6481-6486, providing for the administration by a Board
[*596] of Directors of City Trusts of the trusts confided to the city, the Board being "dissociated from the general government of
the city," was a valid enactment. And finally, in Girard's Appeal, 4 Penny. 347 [ (Pa. 1880)], dealing with another attack on the will
by Girard's heirs, it was held that they were concluded by the decree of the United States Supreme Court in the Vidal case, and that
the establishment of the Board of Directors of City Trusts was legal and proper. [***26] . . .
Id. at 290.
The 1870 decision in Philadelphia v. Fox, at 64 Pa. 169, is of particular interest to the inquiry before us. The challenge
in Fox, by the City through its Solicitor (Mayor Daniel M. Fox and City Council were the ostensible defendants), was to
the power of the General Assembly to replace the City as Trustee with the Board of City Trusts, a new municipal entity
of the Legislature's creation that was "dissociated from the general government of the city." 64 Pa. 169, 1870 WL 8678,
at *13. [HN3] The Fox Court held the legislation to be constitutional, emphasizing that whatever power the City
exercised over the Girard assets as trustee was revocable and subject to alteration, modification, and even dissolution by
the sovereign Commonwealth, which was empowered to create municipal corporations like the City, as well as boards
of municipal sewerage, streets, and police, in much the same manner as it had created the Board of City Trusts. And, if
the Legislature could vest power in a municipal corporation, the Legislature could also remove or reshape that power; as
such, any argument that the Commonwealth did not retain sovereign power over the City of Philadelphia and, by
extension, the Board [***27] and the Girard entities, would fail.12 Id.; see also Appeal of Girard, 4 Pennyp. 347, [*597]
*10 (Pa. 1880) ("The directors of city trusts are a department of the municipality which the Legislature had a
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constitutional [**34] right to establish. A man who constitutes such a municipality his trustees [sic], does so subject to
all the changes which the sovereign power may make in its character and organization.").
12 The Fox Court's explication of the relationship of the Commonwealth to the City was consistent with the U.S. Supreme Court's
interpretation two years earlier in Girard v. Philadelphia, 74 U.S. 1, 19 L. Ed. 53 (1868). In that case, heirs of Stephen Girard claimed in
essence that when the Legislature consolidated and expanded the City to encompass the County by the Act of Consolidation of 1854, the
original municipal entity responsible for administering the Trust ceased to exist, with the consequence that the assets should revert to
Girard's heirs. The High Court disagreed, noting:
[HN4] The legislature may alter, modify, or even annul the franchises of a public municipal corporation, although it may
not impose burdens on it without its consent. In this case the corporation has assented to accept the changes, [***28]
assume the burdens, and perform the duties imposed upon it . . . . If the trust be not rightly administered, the cestui que
trust [beneficiary], or the sovereign may require the courts to compel a proper execution. . . . Charity never fails; and it is
the right, as well as the duty of the sovereign, by its courts and public officers, as also by legislation (if needed), to have
the charities properly administered.
74 U.S. at 15 (citations omitted).
Notably, in deciding the issue concerning the authority to shift the trusteeship from the City to the Board of City Trusts,
the Fox Court also addressed the foundational question of the propriety of a municipal entity undertaking to manage the
estate of a private person at all:
Such [HN5] a municipal corporation may be a trustee, under the grant or will of an individual or private corporation, but only as it
seems for public purposes, germane to its objects. I am aware that it has been said by high authority in England that it may take and
hold in trust for purposes altogether private. But the administration of such trusts, and the consequent liabilities incurred, are
altogether inconsistent with the public duties imposed upon the municipality. . [***29] . . It certainly is not compellable to execute
such trusts, nor does it seem competent to accept and administer them. The trusts held by the city of Philadelphia, which are
enumerated in the bill before us, are germane to its objects. They are charities, and all charities are in some sense public. If a trust
is for any particular persons, it is not a charity. Indefiniteness is of its essence. The objects to be benefited are strangers to the donor
or testator. The widening and improvement of streets and avenues, planting them with ornamental and shade trees, the education of
orphans, the [*598] building of school-houses, the assistance and encouragement of young mechanics, rewarding ingenuity in the
useful arts, the establishment and support of hospitals, the distribution of soup, bread or fuel to the necessitous, are objects within
the general scope and purposes of the municipality. The king himself may be a trustee, though he cannot be reached by the process
of any court without his consent . . . and so may the state, though as I take it under the Constitution, only for objects germane to the
purposes of government.
64 Pa. 169, 1870 WL 8678 at *12 (citations omitted).

After 1870, with the validity of [***30] the Trust reaffirmed, and more stable governance through the Board of City
Trusts and ample revenue from Girard's coal lands and other properties, Girard College flourished. At the turn of the
twentieth century, the school had over 1500 students, with hundreds more on a waiting list.
In the mid-twentieth century, however, further litigation arose. In 1954, a lawsuit challenged the racial segregation of
the College arising from the Will's stipulation that the pupils be "poor male white orphans," after two otherwise
qualified applicants were denied admission by the Board of City Trusts solely on account of their race. The rejected
applicants sued, alleging that the race restriction violated the Fourteenth Amendment to the U.S. Constitution. The
ensuing legal battle over segregation at Girard College would last over a decade.
The City and the Commonwealth agreed with the applicants, but the Board defended the policy. The Orphans' Court of
Philadelphia County rejected the claim, and refused to order that the applicants be admitted. On appeal, the
Pennsylvania Supreme Court affirmed in a divided opinion. In re Estate of Girard, 386 Pa. 548, 127 A.2d 287 (Pa.
1956). The majority noted that the Fourteenth Amendment [***31] [HN6] applies only to agencies of the state or
municipalities within the state; it is not directed against private, individual actions. The majority then rejected the
applicants' claim that state action was implicated in [**35] the decisions enforcing the Will's race restriction [*599]
because the City was appointed trustee by Girard and had thereafter accepted the duties he imposed and administered
the Trust. The majority reasoned, in central part, that:
It is true that Girard appointed the City of Philadelphia as the trustee to administer the trust according to the terms of his will, but
he certainly did not intend thereby to empower it to conduct such administration in its public or governmental capacity, or to bring
into play any of its proprietary rights since it is merely the title holder of Girard's property and not its beneficial owner. As a trustee
it was to act and could act only in a fiduciary capacity, exercising no State or governmental function or power in the slightest
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degree, but being limited to the same rights, powers and duties, no more and no less, as those of any private individual or trust
company acting as trustee. . . . All provisions of the will show that it was not intended to [***32] be a public school . . . . The
situation, therefore, is not to be confused with the so-called de-segregation cases which dealt with public schools where no
discrimination in respect to race, creed or color, as the United States Supreme Court has decided, is permissible under the
Fourteenth Amendment. . . . The college has been supported and maintained for now over a century by Girard's estate; not a penny
of State or city money has ever gone into it; no taxpayer has ever been called upon to contribute to it; true, it is exempt from local
taxation, but so are all other charities even though restricted as to their beneficiaries and managed by private trustees.
127 A.2d at 293-94 (footnote omitted). The majority added that, even if the Board of City Trusts were deemed to be
engaged in state action, the remedy would not be to strike the racial restriction, but to appoint a different, private trustee.
Id. at 295-96.
Justice Michael A. Musmanno dissented in a lengthy opinion. After noting the many provisions in the Will designed to
improve the City, the dissent opined that "[i]t is difficult to imagine a testamentary disposition more completely
interwoven with the public's welfare and responsibilities [***33] than the Girard will." The dissent further observed
that Girard's [*600] dream of a college for the education of the poor would have "died a-borning without State action,"
describing the various acts required to be adopted by the General Assembly before many of the testamentary bequests
could be made effective. The dissent stressed that the General Assembly "could have refused to accept [Girard's]
largesse," but it instead accepted every proposition and condition advanced in his Will. Id. at 321-24 (Musmanno, J.,
dissenting).
The dissent further suggested that the question of whether the Trust was a public institution (and thus subject to the
Fourteenth Amendment), in fact was resolved by the Fox decision of 1870, in passages that the Court majority had
failed to acknowledge when it discussed Fox. The dissent stressed the observations in Fox that a municipal corporation
may act as a trustee under the grant or will of a private individual or corporation "only as it seems for public purposes,
germane to its objects." 127 A.2d at 325 (Musmanno, J., dissenting) (quoting Fox, 64 Pa. 169, 1870 WL 8678 at *12).
The dissent also emphasized that, in effectuating his bequests, Girard had called upon the General [***34] Assembly,
the City Council of Philadelphia, its mayor and its treasurer to implement his intentions; the Commonwealth then
"added for his benefit" the services of the Court of Common Pleas in appointing the members of the Board of City
Trusts, all in order to [**36] effectuate the directives of the Will. Id. at 326.
The dissent next addressed the majority's reasoning that Girard's appointment of the City to administer the trust did not
mean that he had empowered it "in its public or governmental capacity." The dissent responded, again along the lines of
the Fox decision: "how else can a City act except in its public or governmental capacity?" Id. at 332. The dissent
responded to the majority's statement that the City was acting only in a fiduciary capacity by similarly noting that:
The City does not have a fiduciary existence. It has only a municipal existence. The fact that it owns and operates a golf course
does not make it a country club; the fact that it stages open air light opera does not make it a recreation park promoter. There is not
a private school in the whole [*601] State of Pennsylvania which is controlled and managed by a City or any municipality as is
the Girard College.
Id. at 332.
Finally, [***35] responding to the majority's claim that there was no relevant distinction between Girard College and
the smallest of private schools, the dissent rejoined:
The Girard College has a board of directors made up of the Mayor of Philadelphia, the President of City Council, and twelve
members appointed by the Courts of Common Pleas. This Board thus represents the body politic, the public, the citizenry of the
County of Philadelphia, a sovereign subdivision of the sovereign State. Since our judges are elected by the people, as are the Mayor
and President of City Council, the Board of City Trusts is therefore an expression of the people themselves. The private school, on
the other hand, is strictly a private commercial enterprise run for profit. The legal principles which control Girard College are
separated by a chasm as wide as the constitution itself from a private school owned by private individuals, and run by private
individuals, all for the monetary advantage of private individuals. Private schools receive no tax exemption. For that reason alone
the legal principles which guide their destiny are quite different from those which apply to Girard College which enjoys a tax
exemption annually [***36] of $550,700. In re Ogontz School Tax Exemption Case, 361 Pa. 284, 65 A.2d 150, 41 Mun. L Rep. 5
[(1949)]. No private school in the State can boast the governmental direction, control, and privileges which are as much a part of
Girard College as the buildings themselves.
Id. at 332-33.13
13 The citation to Ogontz apparently referenced the following analysis:

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In its argument Appellee stresses the fact that the [Ogontz] School was chartered "as a non-profit corporation" and that
"no one receives directly or indirectly any profit from the school." These facts do not clothe the School with exemption
from taxation. Those who establish and conduct an institution may declare that in doing so they do not intend to make a
profit from anyone and they may conduct it without pecuniary profit to anyone, and yet it may not be "an institution of
purely public charity." In determining an institution's status in this respect it must be viewed from the standpoint of the
public. Can the public look upon Ogontz School as an institution where each year three hundred students or the vast
majority of them can obtain lodging, food and instruction for nothing (as, for example, 1800 orphan boys do at Girard
College), or for a charge [***37] so far below the value of the things they get that what they get are charitable gifts? The
answer is, "No." The vast majority of those three hundred students who attend the Ogontz School pay not only for all they
get, but they pay for more than they get, at least to an extent sufficient to enable the School to provide what is equivalent
to free board, lodging and instruction to about 10% of its students.
In re Ogontz School, 361 Pa. 284, 65 A.2d 150, 163-64, 41 Mun. L Rep. 5 (Pa. 1949).
The applicants sought further review in the U.S. Supreme Court, which summarily [**37] reversed and remanded in a
unanimous [*602] per curiam decision. Commonwealth v. [Board of City Trusts], 353 U.S. 230, 77 S. Ct. 806, 1 L.
Ed. 2d 792 (1957). The High Court noted that Girard's Will named the City as Trustee; that the provisions of the Will
were carried out by the Commonwealth and the City; and that "[s]ince 1869, by virtue of an act of the Pennsylvania
Legislature, the trust has been administered and the college operated by the 'Board of Directors of City Trusts of the
City of Philadelphia.'" Id. at 231. On these undisputed facts, [HN7] the Court held that:
The Board which operates Girard College is an agency of the State of Pennsylvania. Therefore, even though the Board was acting
[***38] as a trustee, its refusal to admit [the student applicants] to the college because they were Negroes was discrimination by the
State. Such discrimination is forbidden by the Fourteenth Amendment. Brown v. Board of Education, 347 U.S. 483, 74 S.Ct. 686,
98 L.Ed. 873 [(1954)]. Accordingly, the judgment of the Supreme Court of Pennsylvania is reversed and the case is remanded for
further proceedings not inconsistent with this opinion.
353 U.S. at 231.

In turn, the Supreme Court of Pennsylvania remanded to the Orphans' Court, which construed the U.S. Supreme Court's
determination as meaning no more than that the Board of City Trusts was constitutionally incapable of administering
the College in accordance with Girard's racial restriction. [*603] The lower court's solution was not to admit the
applicants, but to remove the Board as trustee of Girard College, as per the alternative dictum in the 1956 majority
opinion in In re Estate of Girard, and to replace the Board with thirteen private citizens who, it was presumed, could
enforce the racial restriction in the Will. The applicants again appealed to the Pennsylvania Supreme Court, with the
dispositive question being narrowly framed by the Court [***39] as "whether the action of the Orphans' Court is
consistent with the opinion of the Supreme Court of the United States." In re Girard College Trusteeship, 391 Pa. 434,
138 A.2d 844, 846 (Pa. 1958).
In a 4-1 decision (two Justices did not participate), the Court majority answered that question in the affirmative,
reasoning that:
As we read the Supreme Court's opinion, what it holds, and all that it was presumably intended to hold, in view of what was then
before the Court, is that the [Board of City Trusts], being a State agency, is incapable of administering Girard College in strict
compliance with the founder's prescribed racial restriction on admissions without being guilty of a violation of the Fourteenth
Amendment. However, the Supreme Court did not say that there is any Constitutional or other legal barrier to the removal of the
Board of City Trusts as trustee of Girard College in order that the Orphanage can be administered in accordance with all of the
testator's express directions including the qualifications for admission to the student body. On the other hand, there is high authority
for such procedure where a trustee is either unable or fails or refuses to administer a trust in accordance [***40] with the lawful
directions of the settlor.
[**38] Id. at 847. The majority added that the "inability" of the Board of City Trusts to "apply constitutionally" the
racial criterion in the will "affects the trustee and not the trust." In so concluding, the Court majority approved the
Orphans' Court's opinion, which had stated: "'It is a universally accepted rule of law that the disqualification or
incompetency of a trustee shall not be permitted to defeat the purposes of a charitable trust, nor to impeach its validity,
nor to derogate [*604] from its enforcement -- the trustee must be fitted to the trust and not the trust to the trustee.'"
Id. at 847-48.
Justice Musmanno again dissented, beginning by stressing again the many civic improvements provided for in Girard's
Will, and then noting:
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It is difficult to visualize the will of a private individual more dedicated to public business than Stephen Girard's. Schools, streets,
docks, canals, river distribution, public hospitals, and asylums are items which one finds in the budget of nations, states, and
municipal corporations, not private householders. These are matters for the consideration of the State, and indeed the State of
Pennsylvania recognized that [***41] fact at once.
Id. at 855 (Musmanno, J., dissenting). The dissent opined that, "[b]y law and the provisions of the Girard will, the status
of Girard College has been one of constant state and municipal responsibility," and added that "[f]or 126 years Girard
College has been administered as a public institution by public officials in their public capacities for the benefit of the
public." The dissent also questioned the authority of the courts to negate the 1869 Act, which created the Board of City
Trusts to manage the Trust and College, as well as the other four statutes and forty-eight City ordinances that had been
adopted to address issues specific to the College. The dissent further noted that the City's status as trustee was a specific
directive by Girard; and if the City failed to accept the duty, the trusteeship would pass on to the Commonwealth,
another public entity. Id. at 858.
The dissent supported its point concerning the essentiality of the City's role by quoting Clause XXI, Paragraph 9 of the
Will, which noted that Girard left "many details" respecting the College to the Mayor, Aldermen and Citizens of
Philadelphia and that he did so with "more confidence" precisely because: [***42] "from the nature of my bequests and
the benefit to result from them, I trust that my fellow citizens of Philadelphia will observe and evince special care and
anxiety in selecting members for their City Councils and other agents." From this language, the dissent concluded that
Girard had [*605] made clear that his underlying purpose in creating the Trust was to benefit Philadelphia and its
people, and the "best sentinels to stand guard over his bequeathed treasures were the representatives of those who would
enjoy his largess." For all of these reasons, the dissent disagreed with the majority's notion that the court could simply
substitute private trustees for the public trustee actually named by Girard, particularly where the municipal trustee was
capable, competent, and willing to continue acting as trustee. Id. at 863-65.
The applicants, again with the concurrence of the Commonwealth and the City, sought a writ of certiorari, which was
denied. See Commonwealth v. [Board of City Trusts], 357 U.S. 570, 78 S. Ct. 1383, 2 L. Ed. 2d 1546 (1958). However,
after more than a decade of litigation and pressure, including an appearance by Rev. Dr. Martin Luther King, Jr. at an
August 1965 protest rally, the continuing segregation at [***43] the College was finally deemed unconstitutional
[**39] by the Third Circuit, notwithstanding the state judicial substitution of "private" trustees for the municipal trustee
provided for by Girard (and later implemented by the General Assembly by the Act of November 19, 1959, P.L. 1526).
See Commonwealth v. Brown, 392 F.2d 120, supra.
The Brown court recounted the relevant provisions of Girard's Will respecting the role of the City as trustee; the City's
acceptance of the role; the implementing legislation by the General Assembly; the creation of the Board of City Trusts
to manage the Trust in 1869; and the City's successful management of the College up until the ouster of the Board by
the Orphans' Court in 1958, and the appointment by that court of trustees of its own selection. At the end of this
recitation, the Brown court noted the obvious: that "the Orphans' Court of Philadelphia County has been substantially
involved with the supervision of the Girard Estate." The Brown court further noted that the Board trustees had taken no
appeal from their ouster by the Orphans' Court following remand, but instead the appeal was pursued by the child
plaintiffs to the Supreme Court of Pennsylvania; [***44] that, as we have already noted, our Court affirmed the
Orphans' Court's decision to substitute [*606] private trustees in 1958; and that certiorari review was sought and
denied. Id. at 120-23.
In defending against the claim that the continuing segregation of the College violated the Fourteenth Amendment, the
court-appointed trustees relied upon, inter alia, our Court's 1958 decision. The Third Circuit was unpersuaded:
What the State [Supreme] Court did was turn the matter over to its Orphans' Court which eliminated the City as trustee and
installed its own group, sworn to uphold the literal language of the Girard will, a move effectively continuing the very segregation
which had been condemned by the United States Supreme Court. True, the latter had denied the application for certiorari. Times
without number that Court has plainly ruled that there is no inference permissible from its denial of application for certiorari,
favorable or unfavorable to either side of a litigation. Certainly in the whole muddy situation flowing from the State excision of the
City Board, thereby taking away the linchpin of the Girard will, the then existing state litigation picture did not bring into the
necessary [***45] sharp focus, the set piece maneuver which had completely circumvented the Supreme Court's directive. We,
however, as above seen, do have all of that amazing effort to maintain Girard's discriminatory status before us in its true
perspective.
Id. at 123. The court then stressed the "self-evident" and "close, indispensable relationship" between the College, the
City and the Commonwealth "intended by Mr. Girard, meticulously set out in his will and faithfully followed" for 127
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years, until the Orphans' Court substituted new trustees of its own choosing. The court further noted that the "ironic
result" of the judicial removal of the Board of City Trusts was that Pennsylvania's involvement with Girard College had
become more powerful than provided for by Girard, given the role devised and played out by the Orphans' Court. Id.
After citing decisions of the U.S. Supreme Court issued before and after this Court's Girard decisions in the 1950s --
High Court cases that were deemed clearly dispositive of the equal protection question -- the Brown court noted that the
[*607] Girard entities' "definitive position in this period of being more than ever operated by an agency of the state
does not simply emanate [***46] from the momentum" of legitimate [**40] participation by the City and the
Commonwealth in the management of the Trust and College over the years. Rather, that position as a state agency also
arose as "the obvious net consequence of the displacement of the City Board by the Commonwealth's agent and the
filling of the Girard Trusteeships with persons selected by the Commonwealth and committed to upholding the letter of
the will," which Pennsylvania state courts enabled in the 1950s. Id. at 125. In the Brown court's view:
Those radical changes pushed the College right back into its old and ugly unconstitutional position. Had the City Trustees been left
undisturbed it is inconceivable that this bitter dispute before us would not have been long ago lawfully and justly terminated. It is
inconceivable that those City Trustees would not have with goodwill opened the College to all qualified children. Given everything
we know of Mr. Girard, it is inconceivable that in this changed world he would not be quietly happy that his cherished project had
raised its sights with the times and joyfully recognized that all human beings are created equal.
Id. at 125.14
14 Far less litigious was the school's decision [***47] to admit female students in 1982; the first coed class entered in 1984. See
http://www.girardcollege.edu/page.cfm?p=358. Also, the school gradually admitted fewer and fewer actual "orphans" in favor of "functional
orphans," who were defined as children from inadequate means, regardless of their parental status. See In re Long's Estate, 5 Pa. D. & C.3d
602, 614 (Pa. Com. Pl. 1978) (defining "functional orphans" as "boys whose natural parent or parents, in the judgment of the trustee, are not
furnishing them proper maintenance, care or supervision, and who, being of good character and behavior, and having the potential for
scholastic achievement, would benefit from the programs offered at Girard College . . . ." ). By the mid-1980s, all but one of the incoming
Girard College class of 77 students were "functional orphans."
The U.S. Supreme Court denied certiorari in Brown in late May of 1968. Within weeks thereafter, the private board of
trustees filed a petition in the Orphans' Court to dissolve the private board and restore the responsibility and authority
for the Trust and College assets in the Board of City Trusts; the [*608] first black students entered Girard College that
fall. And, one [***48] year later, the General Assembly legally restored the Board and, effective immediately, repealed
the legislation that had acquiesced in and implemented this Court's 1958 decision allowing for installment of the private
board of trustees. See Act of July 18, 1969, P.L. 163 (three subsections: section 1 is a positive statement of law
effectively returning responsibility for city trusts to the Board of City Trusts; section 2 repeals the 1959 legislation;
and section 3 provides for immediate effectiveness); this legislation was originally codified at 20 P.S. § 3301. Section
3301 was repealed by the Act of June 30, 1972, P.L. 508. Concurrently, subsection (1) of 20 P.S. § 3301, the positive
statement of law restoring the Board, was enacted, and ultimately became codified at 20 Pa.C.S. § 5116; the provision
was amended in 1978 to lower the age at which an "orphan" was no longer subject to or protected by the legislation,
from 21 to 18 years of age.15
15 The current legislation reads as follows:
[HN8] Whenever any city of the first class of this Commonwealth shall be charged with the administration of any
charitable use or trust for both the maintenance and education of orphans, it shall, without [***49] application to any
court, act as guardian of the person and estate of each of such orphans, through the same agency that administers the
charitable use or trust. In case any such orphan child, at or before the time said city is charged with the administration of
such a charitable use or trust, or during the remaining time it acts as guardian of his estate, shall possess or become
entitled to any effects or property, the said city shall be entitled, in like manner as other guardians, to demand and receive
the same from any person having possession thereof, or owning the same, and to give acquittance therefor; and it shall be
the duty of the said city to take care of the same as guardians, and to make the same productive as far as reasonably can
be, and to deliver and pay over the same with the increase, less expenditures made in the exercise of a reasonable
discretion, to the said orphan, on his attaining the age of 18 years, or to his legal representatives if he shall die before
attaining that age.
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[**41] II. The Litigation Below

The ongoing attempts of the Board of City Trusts to fulfill Girard's vision, maintain the Trust and College, and secure
its continuing ability to provide high quality [***50] residential and tuition-free education for low-income students,
nearly 80% of whom come from Philadelphia, sets the stage for this appeal.
[*609] In November 2001, the Board purchased the Property in Cumberland County's Borough of Lemoyne for nearly
$4 million. When it acquired the Property, the Board also acquired a tenant: the OAG had been leasing the building on
the Property for office space since 1999; the rent was set at $42,677 per month, or $512,130 per year. The ensuing rental
income is used by the Board solely to fund the Trust and maintain the College. In March 2002, the County began
billing the Board for real estate taxes of $6,275 and school district taxes of $18,217 on the Property. The Board paid, but
sought relief from the taxes, arguing that as an instrumentality of the Commonwealth, it was immune from local real
estate taxation; it also asserted that as an agency of the City of Philadelphia, which owns the Property, it is exempt from
local real estate taxation because the Property is leased to the OAG for a public purpose. Application for Exemption,
8/28/02. For reasons not disclosed in the record, the matter remained unresolved for five years, during which time the
Board [***51] continued to pay the annual taxes under protest; the total amount paid was $242,580.
In October 2007, the County's Board of Assessment Appeals ("County") denied the application of the Board of City
Trusts, which sought relief from local real estate taxation on the Property, and in November 2007, the Board of City
Trusts filed a petition for review with the Cumberland County Court of Common Pleas, which was granted. The County
answered in timely fashion, and in April 2010, the Board of City Trusts filed a motion for summary judgment renewing
its two alternative arguments: that it is immune from local real estate taxation as a Commonwealth agency and that it is
also exempt from local taxation because the Property is used by the OAG for a public purpose. The Board of City
Trusts sought a declaration of non-taxability and reimbursement of taxes paid since 2002, which by then exceeded
$300,000. In response, the County maintained that neither immunity nor exemption from local real estate taxation was
warranted.
After argument, the trial court granted the Board of City Trusts' motion for summary judgment in an order dated July
[*610] 30, 2010. In an accompanying opinion, the court credited both alternative [***52] arguments forwarded by the
Board. On the question of tax exemption, which it examined first, the court looked to the common law of trusts, noting
that trusts are characterized by a division of legal (trustee) and equitable (beneficiary) interests in trust property. The
court found that the Girard Trust is the beneficiary of the rental income generated by the property, the City is trustee
and holds legal title, and the Board [**42] is a Commonwealth agency acting on behalf of the City as administrator of
the Property. The court stated that because the City holds clear legal title to the Property, it is "public property." The
court added that because the Property is rented to the OAG, it is "public property used for public purposes" and exempt
from local real estate taxation under the Pennsylvania Constitution and the County Assessment Law. 16 The key indicator,
the court continued, was not that the Property generated rental income, but that the "primary use of the Property is office
space for the Attorney General which is clearly public in nature." Trial Ct. Op., 7/28/10, at 5-7.
16 PA. CONST. art. VIII, § 2(a)(iii) [HN9] ("The General Assembly may by law exempt from taxation . . . [t]hat portion of [***53] public
property which is actually and regularly used for public purposes . . . ."); 72 P.S. § 5020-204(a)(7) ("The following property shall be exempt
from all county, city, borough, town, township, road, poor and school tax, to wit: . . . All other public property used for public purposes . . .
nor shall this act or any other act be construed to exempt from taxation any privilege, act or transaction conducted upon public property by
persons or entities which would be taxable if conducted upon nonpublic property regardless of the purpose or purposes for which such
activity occurs, even if conducted as agent for or lessee of any public authority . . . .").
On the question of immunity from taxation, the court concluded that the Board of City Trusts properly could assert
immunity as a Commonwealth agency. The court acknowledged the "long and colorful history" of the Girard Trust, and
the difficulty courts have had in ascertaining the precise nature of the Board. The court looked first to the entity's
enabling legislation of 1869. Although the statute did not expressly state that the Board was a Commonwealth agency,
in the court's view, the statutory scheme revealed a legislative intent [***54] that the Board exercise "some
governmental function" by stepping into the shoes of the City to administer property [*611] held by the City in trust.
The court then cited the U.S. Supreme Court's 1957 finding in Commonwealth v. [Board of City Trusts] that "the Board
which operates Girard College is an agency of the Commonwealth." The court added that other courts have recognized
the Board as a Commonwealth agency in various contexts. For example, the Commonwealth Court held in Moore v.
[Board of City Trusts], 809 A.2d 420 (Pa. Cmwlth. 2001) (decided Jan. 18, 2001; publication ordered Oct. 28, 2002),
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that the Board may claim sovereign immunity from negligence causes of action. Even more emphatic, according to the
trial court, was the Third Circuit's 1968 desegregation decision in Brown, which is discussed above. The trial court
stressed that the Brown court found multiple ties and links between the Board and various Commonwealth agencies and
entities, emphasized Commonwealth control through the statutory supervision and reporting requirements to which the
Board of City Trusts is subject, and specified tax exemptions as one of the probable goals of the "special relationship"
between the Board [***55] and the Commonwealth that Girard's Will contemplated. The trial court also found it
compelling that other counties had agreed or accepted that Board-administered property is immune or exempt from
local real estate taxation. The trial court thus concluded that the Board is a Commonwealth agency and, as a matter of
law, is immune (as well as exempt) from local real estate taxation. Trial Ct. Op., 7/28/10, at 7-10.
On appeal by the County, a Commonwealth Court panel reversed in a published opinion. City of Philadelphia v.
Cumberland Cty. Bd. of Assessment Appeals, 18 A.3d 421 (Pa. Cmwlth. 2011). Like the trial court, the panel traced the
difficulty courts have had in pinpointing the legal status of the College and the Board of City Trusts. [**43] The panel
declined to hold that either the Girard Trust or the Board is a Commonwealth agency merely because the manner of
selection of Board of City Trusts members was provided for by the General Assembly. The panel decided that it is the
nature of a trust, and not the manner in which its trustees are installed, that determines proper classification. The panel
also concluded that although the legislative scheme creating the Board [*612] ensured annual reporting [***56] to the
General Assembly, the Board members otherwise have no duty to or ongoing functional relationship with the
Commonwealth, and other than creating the Board, the General Assembly has no oversight or say in how the Board
operates and conducts its affairs, carries out the intentions of Girard's Will, and supports and sustains the Trust and
College. 18 A.3d at 426-27.
Nor, according to the panel, are the Board of City Trusts or the Girard Trust local agencies of the City of Philadelphia,
since those entities would have to have been the creation of the City and be subject to City oversight, laws, and officials,
which they are not. Aside from annual reporting, the panel stated, the Board operates independently of and without
compensation from the City, even though the City is legally the trustee of the Girard Trust. According to the panel,
because the Trust and the Board are neither Commonwealth nor City agencies, they must be private entities and there is
therefore no basis for immunity from local real estate taxation. In support of this reasoning, the panel cited generally to
the analysis and "last pronouncement" of this Court, in the second of the desegregation cases decided in the [***57]
1950s, stating that the Girard Trust was a private, not a public charity. See id. at 427-28 (describing In re Girard
College Trusteeship, 391 Pa. 434, 138 A.2d 844 (Pa. 1958)).
The panel then turned to the question of whether the Property is exempt from local real estate taxation because the
Trust and the Board of City Trusts are components of an institution of purely public charity consonant with the
Institutions of Purely Public Charity Act of 1997. See 10 P.S. § 376. The statutory criteria for determining purely public
charity status include fulfilling a charitable purpose, an entirely non-profit motive, gratuitous provision of services or
products to legitimate subjects of charity, and that the entity seeking exemption relieves the government of some
burden, such as public education. The panel concluded that the Trust, as owner of the Property, qualifies as a purely
public charity, but noted that even a purely public charity must ensure that its property is actually and regularly used to
advance the institution's [*613] charitable purpose in order to maintain eligibility for the statutory exemption. 18 A.3d
at 428-29.
According to the panel, the Board's leasing of the Property to the OAG in order to [***58] generate income for the
Trust was not a legitimate basis for tax exemption. The panel looked to a test articulated in Appeal of Archdiocese of
Philadelphia, 151 Pa. Commw. 480, 617 A.2d 821, 823 (Pa. Cmwlth. 1992), which required proof: "(1) that the
premises are not the source 'from which any income or revenue is derived' by the Lessor [here, the Board of City
Trusts]; (2) that any rent paid was merely nominal; and (3) that the Lessee [here, the OAG] was itself the recipient of
the Lessor's charity." To the panel, because the property arrangement here did not meet those criteria, exemption was not
warranted. 18 A.3d at 429.
In a footnote, the panel added that even if the Girard Trust is a local agency of the City of Philadelphia, the
arrangement at issue -- rental of the Property to generate income to fund the College -- did not [**44] amount to
"public property used for public purposes." Even though the OAG is a Commonwealth agency, the panel found that the
nature of the tenant did not alter the non-public essence of the underlying arrangement. Id. at 429 n.15. The
Commonwealth Court denied the Board's application for reargument.
The City, as Girard trustee acting through the Board of City Trusts, filed a petition [***59] seeking discretionary
review in this Court, which we granted, accepting the twin issues of immunity and exemption, as stated in the petition:
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(1) Is the [Board of City Trusts], created in 1869 by the Pennsylvania Legislature to exercise and discharge duties and powers of
the City of Philadelphia, a governmental agency as the United States Supreme Court and numerous federal and state court decisions
have previously held, and thus entitled to immunity from local taxes?
(2) Is the property at issue, title to which is held by the City of Philadelphia, administered by the [Board of City [*614] Trusts]
and leased to the [OAG], exempt from local property taxation as public property used for a public purpose?
612 Pa. 481, 31 A.3d 654 (Pa. 2011).

[HN10] The question of whether summary judgment is warranted is one of law, and thus our standard of review is de
novo and our scope of review is plenary. Summary judgment may be entered only where the record demonstrates that
there remain no genuine issues of material fact, and it is apparent that the moving party is entitled to judgment as a
matter of law. Chepkevich v. Hidden Valley Resort, L.P., 607 Pa. 1, 2 A.3d 1174, 1182 (Pa. 2010). This Court's inquiry
is therefore confined to whether [***60] the Girard entities are entitled to judgment as a matter of law, i.e., whether the
Property is either immune to, or exempt from, local real estate taxation.
III. The Parties' Arguments

The parties proceed with arguments tracking those made below. On immunity, the Board of City Trusts notes that, even
before it came into existence, the General Assembly had recognized and intended that management of the Girard assets
was to be a public and governmental endeavor powered by state legislation, beginning with General Assembly
legislation enacted within months after Girard's death that enabled the directives of his Will to take effect under City
control. When the City's initial approach to administering the Trust faltered and the College suffered, as we have
detailed in Part I above, the General Assembly stepped in again and by the Act of June 30, 1869, created the Board of
City Trusts and vested it with broad rights and powers to perform its work on behalf of the City, subject to annual
reporting to both the General Assembly and the Philadelphia City Council. Board of City Trusts Brief at 8-11.
The Board avers that the plain language of its enabling legislation reflects its status as an "alter [***61] ego" of the
City, as it is specifically granted all of the "duties, rights, and powers" necessary to administer all charitable assets
vested in the City, including the specific power to "make all leases, contracts [*615] and agreements whatsoever" that
may be necessary to do so. The Board posits that it was acting within its capacity as a special government agency
undertaking a statutorily authorized activity, as well as carrying out the terms of Girard's Will, when it merely leased a
City-owned property and managed the ensuing rental income for the benefit and continued endowment and maintenance
of Girard College. The Board adds that transcripts of the General Assembly debate preceding adoption of the 1869 Act
that created the Board reveal that the goal [**45] was to remove management of the Girard assets from City
appointees, who had succumbed to political corruption and mismanagement, and place authority instead, including
appointment power, in the hands of Commonwealth judicial officials. It was believed, the Board relates, that
Commonwealth personnel would be less likely to allow the Girard entities to fall victim to local City influence
peddling, to the detriment of the Trust assets. The Board [***62] remarks that its composition remains subject to
Commonwealth control because the judges of the Court of Common Pleas of Philadelphia County maintain statutory
authority over appointment, approval, and removal of Board members, as set forth in 53 P.S. §§ 16365-16370. Board of
City Trusts Brief at 11-14.
Next, the Board of City Trusts points to decisions from the U.S. Supreme Court, the Third Circuit, and the
Commonwealth Court that have treated it as a Commonwealth agency. Most notably, the Board quotes the High Court's
1957 per curiam reversal of this Court's initial desegregation decision. After noting that Girard's Will named the City as
trustee, the Board stresses that the pertinent provisions of the Will were, in fact, carried out by the City and the
Commonwealth, that the Board had administered the Trust and College since 1869 by virtue of an Act of the General
Assembly, and that the High Court held that: "the Board which operates Girard College is an agency of the State of
Pennsylvania." , Commonwealth v. [Board of City Trusts] 353 U.S. at 231. The Board also cites the 1968 Brown case,
where the Third Circuit noted that Girard "deliberately and specially involved [*616] the State in the [***63]
designated use of his testamentary property," as well as the Commonwealth Court's Board of City Trusts sovereign
immunity decision in Moore. Board of City Trusts Brief at 15-18.
As a practical matter, the Board continues, the negative impact of a first-time determination that Girard Trust-owned
property is subject to local property taxation will be substantial and will fall upon entities that serve the public in
numerous ways. The Board notes that an estimated $110 million in tax-exempt bonds were issued in reliance upon the
status of the Board as a governmental entity pursuant to the federal Internal Revenue Code. This agency status has also
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been accepted by the Internal Revenue Service ("IRS"). According to the Board, upholding the decision below could
lead to mandatory redemption obligations, termination fees, and conversion to private activity bonds subject to taxation,
all of which would undermine the financial capacity and capability of the Girard entities. 17 The Board adds that its
employees, as well as employees of Girard College and other associated entities have long been deemed to be public
employees subject to Pennsylvania's Public Employee Relations Act. If the Board is [***64] now held not to be a
governmental agency, the labor relations and practices governing the Girard entities will be rendered unstable during a
very difficult economic situation. And, if Board-managed property is deemed subject to local real estate taxation in
Cumberland County, the Board expects that all similar property, wherever located in the Commonwealth, will almost
surely be taxed as well, posing a danger to the Trust funds currently devoted solely to operating and sustaining the
College in fulfillment of Stephen Girard's testamentary wishes and instructions. Board of City Trusts Brief at 18-20.
17 The amicus brief filed by Public Financial Management, Inc., in support of the Board of City Trusts, which is summarized infra, provides
greater detail on this argument.
[**46] Under trust law as well, the Board of City Trusts adds, the Girard Trust is not private, but a public nonprofit
charitable entity created by Stephen Girard's Will as an educational [*617] resource to help lift disadvantaged children
of the City and Commonwealth out of poverty, while relieving some of the public burden of educating those very same
children. The Board heralds Girard's bequest as providing that future needy individuals [***65] -- eligible students not
designated, named, or identified in the Will itself -- would receive a quality education fully funded by scholarship,
which continues to benefit the community and the public. The Board cites as support the Restatement (Third) of Trusts
(2003), which distinguishes public and charitable trust purposes, in part, as those created for the benefit of the public at
large or "indefinite members thereof," whereas private trusts benefit "identified or identifiable beneficiaries."
According to the Board, the Girard Trust is clearly a public charity and continued immunity from local real estate
taxation is therefore warranted. Board of City Trusts Brief at 20-24 (citing Restatement (Third) of Trusts (2003), §§ 27,
28 & cmts.).
Finally, turning to tax exemption, the Board alternatively asserts that the "public property/public purpose" exemption set
forth in the Pennsylvania Constitution at Article VIII, § 2(a)(iii) and the General County Assessment Law at 72 P.S. §
5020-204(a)(7) applies here. The Board cites cases where this Court has indicated that this particular exemption is not
negated when a property generates rental income, so long as the purpose and character of [***66] the use remains
public in nature. Board of City Trusts Brief at 24 (citing Appeal of Twp. of Moon, 387 Pa. 144, 127 A.2d 361 (Pa.
1956) and Appeal of Mun. Auth. of Borough of West View, 381 Pa. 416, 113 A.2d 307 (Pa. 1955)). The Board also cites
Commonwealth Court cases holding that property leased to various agencies and governmental bodies, both federal and
Commonwealth, has been deemed exempt, such as Dauphin County General Authority v. Dauphin County Board of
Assessments, 768 A.2d 895, 899 (Pa. Cmwlth. 2000) ("[B]oth properties acquired by the Authority . . . are used
exclusively for public purposes, namely, to house federal and Commonwealth agencies and offices. Hence, both
properties are exempt from taxation."). The Board asserts that the Property, which is leased to OAG, is no [*618]
different. As such, the Board concludes, the Property falls squarely within the public property/public purpose exemption
from local real estate taxation. Board of City Trusts Brief at 24-25.
The Board of City Trusts' amicus is Public Financial Management, Inc. ("PFM"), a national firm headquartered in
Philadelphia that has been the Board of City Trusts' financial advisor since 2008. PFM warns that if property
throughout the Commonwealth [***67] managed by the Board is suddenly deemed subject to local real estate taxation,
the negative impact on the ability of the Board to fund Girard College and other entities under its aegis, like the Wills
Eye Institute, would be significant. PFM states that the Board currently maintains approximately $110 million in debt in
the form of tax free bonds, which were issued at times when the IRS determined that the Board is exempt from taxation
as a governmental entity and political subdivision of the Commonwealth. According to PFM, the IRS has consistently
upheld the Board's governmental status, dating at least back to 1942 and as recently as 2008. To maintain and grow the
value of the Girard Trust assets, these bonds are sold, transferred, and acquired in the public market in reliance on their
remaining tax free. PFM states that if the Commonwealth Court's determination [**47] stands, the IRS could well
revoke the entity's tax exempt status, with the result that income received by those holding the bonds could become
subject to taxation and those debt holders, in turn, could call for redemption of the bonds and seek penalties or other
retributive action. PFM further notes that the uncertainty created [***68] by the current litigation has already stifled the
ability of the Board to take advantage of improving market conditions in order to refinance its debt and secure longer-
termed letters of credit. PFM Brief at 5-12.
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The County responds that the Property is subject to local real estate taxation because it is not owned by the Board of
City Trusts, but by the Girard Trust, a private nongovernmental entity; the County posits that the Property may not
simply be claimed on behalf of the Board in order to take advantage [*619] of the entity's asserted status as a
governmental entity or agency. The County argues that while the Girard Trust is a charitable trust that serves public
interests by funding and operating Girard College, it is not a public trust, and it is also not a governmental entity. The
County views the cases cited by the Board as inapposite because those cases did not establish specifically that the
Girard Trust or Girard College were governmental entities or arms or agencies of the Commonwealth for the specific
purpose of local real estate taxation. According to the County, the cases prove only that the Board was deemed a state
actor in its capacity as administrator of the Girard Trust [***69] and that, for Fourteenth Amendment purposes,
impermissible state action occurred in the 1950s when the Orphans' Court replaced the sitting Board trustees with
private individual trustees in order to keep the College segregated. County Brief at 7-13
[**48] The County's position is that it is necessary to retain some distinction between the Girard Trust and Girard
College, which are not governmental entities, and the Board of City Trusts. The County relies upon In re Milton
Hershey School, 590 Pa. 35, 911 A.2d 1258 (Pa. 2006) (alumni of school funded by charitable trust did not have
standing to sue for rescission of agreement made by trust, school, and Attorney General regarding management of trust
assets and school) for the premise that the nature of a trust alone determines whether the trust is private or public, and
not the nature of its trustees. The County echoes the Commonwealth Court's analysis that the City, as trustee of the
Girard Trust, may have legal title to the assets held in trust, but this is not the same as the City actually owning the
assets; equitable title to the assets, as well as any beneficial interest therein, remains with its beneficiaries: the Girard
Trust and Girard College. And, [***70] the County continues, when real estate taxation is at issue, immunity or
exemption determinations depend upon the real owner. The County thus cites cases that focus on ownership and control
versus title or registration in the context of local taxation, including Appeal of Board of School Directors of Owen J.
Roberts School District, 500 Pa. 465, 457 A.2d 1264 (Pa. [*620] 1983) (mere registration of title in name of
Commonwealth not always sufficient to establish ownership and exemption from local real estate taxation). Here, the
County asserts, neither the Board of City Trusts nor the City, both of which are bound by the terms of Stephen Girard's
Will, has the level of ownership and control over the Girard Trust assets to satisfy the rule the County derives from the
Roberts School District case: any power the Board and the City may exercise over the Property is circumscribed by the
instructions and conditions in Girard's Will limiting use and control of the Trust assets to the funding and operation of
Girard College. County Brief at 13-20.
The County further argues that even if the Property were owned and controlled by the Board of City Trusts, immunity
would still not be appropriate because the Board [***71] of City Trusts is not a Commonwealth agency. The County
stresses a difference between a true Commonwealth agency and a local agency or other entity that is merely or partially
"governmental in nature" and not immune. According to the County, although the Board was created by the General
Assembly, and its members are appointed by the judiciary, the Board has nothing to do with either the executive or
administrative government of Pennsylvania and is therefore not a Commonwealth agency. The County adds that the
mere fact that the General Assembly provided the statutory method by which appointments to the Board are made does
not make the Board itself a Commonwealth agency. County Brief at 21-24.
Moreover, the County asserts that the fact that the Board of City Trusts is a state actor for Fourteenth Amendment
purposes or in other regards does not necessarily mean it is an immune agency in the context of local real estate
taxation. This "shifting" status, the County states, is not unusual, and was addressed by this Court in a real estate
taxation case involving Penn State University. See Pennsylvania State Univ. v. Derry Twp. Sch. Dist., 557 Pa. 91, 731
A.2d 1272, 1274 (Pa. 1999) ("The difficulty in [***72] determining the status of PSU arises from the fact that it is not
merely funded by the Commonwealth, but in certain very limited respects it has governmental [*621] characteristics,
while in other regards it is plainly non-governmental. . . . [A]n entity's status as an agency or instrumentality varies,
depending on the issue for which the determination is being made."). According to the County, the Board enjoys a
greater degree of autonomy from legislative oversight than this Court described as characteristic in the Penn State case:
the Commonwealth does not fund the Board and has no actual or direct representation on it, the Board members and
directors are not public officers, and the property at issue is not functionally controlled by the Commonwealth. If
anything, the County asserts, the 1869 statutory scheme established the Board as an arm of the City of Philadelphia, not
of the Commonwealth. County Brief at 24-30.
Finally, the County states that even if the Board of City Trusts is viewed as a Commonwealth agency, the Property does
not function as Commonwealth property and is not controlled by the Commonwealth. The Property is used as an
investment to generate rental income to support [***73] the private Girard charity, the County asserts, and is not being
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used for the sort of governmental purpose that immunizes it from local real estate taxation. The County distinguishes the
"state agency" conclusions of the Third Circuit and the U.S. Supreme Court in the desegregation cases, arguing that the
constitutional question in that litigation is inapposite. The County also critiques the reliance of the Board on the
tort/sovereign immunity case of Moore. The County asserts that even if a finding of immunity for one purpose
(protection from tort liability) is deemed applicable to another purpose (relief from local property taxation), Moore was
overruled by Burcik v. Caplen, 805 A.2d 21 (Pa. Cmwlth. 2002). County Brief at 30-38.
The County also disagrees with the Board of City Trusts' alternative assertion that the property should be deemed
exempt from taxation. The County asserts that even if the Board and the City are local government entities, the use of
the Property as an investment to generate rental income for Girard College is not the type of "public purpose" eligible
for [*622] exemption. To the County, the fact that the [**49] tenant is the OAG does not turn the private investment
and [***74] income-generation ownership use of the Property by the Board into a public purpose. Only if the tenant
function is related to the owner's function and rent is purely incidental, the County asserts, will the "public property for
public purposes" exemption apply. Such "singularity of purpose with unity of consort" is not present here, the County
avers, where the OAG is an outside party, of no relation to the Board, Girard Trust, or Girard College, and the rent is
over $40,000 per month, which clearly is not incidental. County Brief at 39-42 (quoting Wesleyville Borough v. Erie
Cty. Bd. of Assessment Appeals, 676 A.2d 298 (Pa. Cmwlth. 1996)).
Turning to the available legislative history, the County notes that the General Assembly's goal in creating the Board of
City Trusts was to remove control of the Girard Trust and College from corruptive urban political and government
influence that had resulted in a dark era for the College, but not necessarily to relocate that control in the hands of the
Commonwealth. Instead, the County posits that the Board was established to operate more like the private boards of
trustees that manage other charitable entities. Other than appointing directors [***75] of the Board, the County adds,
the Commonwealth has never been involved; nor is the City so involved. The County also avers that the Property is not
exempt from taxation as the property of a "purely public charity," since it is not used solely by or in furtherance of the
Girard Trust's charitable purposes. Finally, the County dismisses the Board's concerns with substantial adverse effects,
arguing that it merely seeks to place the Girard Trust on equal footing with other private charitable entities. The County
concludes by discounting the concerns of the Board and its amicus PFM that subjecting the Property to local real estate
taxation will harm the Trust's ability to support and fund the College; to the County, favoring the Trust and the College
affects the ability of counties and localities to provide for publicly educated students. County Brief at 42-47.
[*623] The County's amicus, the County Commissioners Association of Pennsylvania, echoes the County's position
that although the Board of City Trusts is a "state actor" in the context of Fourteenth Amendment racial discrimination
analysis, it is not thereby an agency of the Commonwealth for all purposes. The Commissioners also restate [***76]
the County's point that a trust may not be characterized by the nature of its trustee; hence, even though the City is the
trustee and the Board was created and empowered by the General Assembly to act for the City, the Girard Trust is
essentially a private entity. County Commissioners' Brief at 8-18.
In reply, the Board of City Trusts reasserts that while it may be uniquely structured and empowered under the terms of
its enabling legislation, it is clearly an instrumentality of the Commonwealth, and numerous courts have agreed with
that determination rather than cabin the Board within narrow categorical limits. The Board points out that in the Penn
State case, the university board of trustees was constituted mainly of private individuals, with only six of thirty-two
trustees appointed by the Governor. By contrast, the Board asserts, through the power vested in the Philadelphia
judiciary to appoint Board members, the Commonwealth retains control over the governance of the Board. The Board
defends the Girard Trust as a charitable entity that is public, not private, and adds that the Girard Trust and the Board
are not distinct entities having different ownership interests, but maintain [***77] "legal unity" such that the public
charitable nature of the overall enterprise [**50] is shared. Board of City Trusts Reply Brief at 1-9.
IV. Immunity From Local Real Estate Taxation
A. Decisional Law Background

[HN11] An arm, agency, subdivision, or municipality of the Commonwealth enjoys sovereign immunity from local real
estate taxation. "Tax immunity precludes a locality from imposing taxes upon the Commonwealth and its agencies."
Lehigh-Northampton Airport Auth. v. Lehigh County Bd. of Assessment, 585 Pa. 657, 889 A.2d 1168, 1172 n.2 (Pa.
2005). [*624] Immunity in this context derives from the Commonwealth's sovereign right to be free of taxation unless
some statutory authorization or concession to the contrary exists; this has been long settled. Id. at 1175; see also
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Commonwealth v. Dauphin Cty., 335 Pa. 177, 6 A.2d 870, 872 (Pa. 1939) ("The legislators did not intend to upset the
orderly processes of government by allowing the sovereign power to be burdened by being subjected to municipal
taxes.").18 Property owned by the Commonwealth and its agencies and instrumentalities is presumed to be immune, with
the burden on the local taxing body to demonstrate taxability. Id. at 1180 n.9.
18 The immunity of the Commonwealth from local [***78] taxation is mirrored by the parallel tax immunity of property of the federal
government. See Kern-Limerick v. Scurlock, 347 U.S. 110, 122, 74 S. Ct. 403, 98 L. Ed. 546 (1954) ("The doctrine of sovereign immunity is
so embedded in constitutional history and practice that this Court cannot subject the Government or its official agencies to state taxation
without a clear congressional mandate.").
This Court has considered taxation immunity questions several times in recent decades, albeit none of the cases involve
an entity remotely like the Girard Trust and College. In Delaware County Solid Waste Authority v. Berks County Board
of Assessment, 534 Pa. 81, 626 A.2d 528 (Pa. 1993), the Court addressed whether a solid waste authority in one county
could claim immunity from taxation for property the authority owned in another county and maintained as a landfill.
The Court concluded that the authority was an "independent agency" of the Commonwealth through analysis of its
enabling legislation, the Municipal Authority Act of 1945, 53 P.S. §§ 301-322, and exercised sufficient control or
"incidents of ownership" over the property, which was used for an "authorized governmental purpose," that immunity
was not defeated. 626 A.2d at 531-33.
In [***79] Pennsylvania State University v. County of Centre, 532 Pa. 142, 615 A.2d 303 (Pa. 1992) "(Penn State I"),
the Court considered the status of the university for immunity purposes. The Court noted how the university had
changed and grown since its modest origins in 1855 as a state-created institution to prepare youths to pursue
occupations in agriculture; the [*625] school became a federal land grant college in 1863 and by the second half of the
twentieth century derived most of its funding from the federal government, tuition, and other private sources. The Court
concluded that, although the Centre County Court of Common Pleas had held in Pennsylvania State College v. County
of Centre, (No. 2 Equity November Term 1937, filed August 24, 1939) that the university was a Commonwealth agency,
that status was not etched in stone. Rather, the Court found that the immunity question presented a genuine issue of
material fact to be determined at trial on remand.
Although that particular litigation did not result in a subsequent reported opinion, the question of Penn State's status as
an agency or instrumentality of the Commonwealth [**51] entitled to local tax immunity arose again in Pennsylvania
State University v. Derry Township School District, 557 Pa. 91, 731 A.2d 1272 (Pa. 1999) (for convenience, "Penn State
II") [***80] . At issue was immunity from taxation by Dauphin County of the university-owned Hershey Medical
Center, which encompasses the university's medical school and teaching hospital, medical research facilities, and a
children's hospital. Relying heavily on Penn State I, the Penn State II Court found that although the university remained
"state-related," and was once easily a Commonwealth agency, it had become so autonomous in so many regards that it
could no longer be seen as part of or controlled by the Commonwealth. The Court stressed that for certain quasi-public
entities, status as an agency or instrumentality could vary, and that Commonwealth funding alone (the university then
received hundreds of millions of dollars in state funds each year) did not confer agency status. The Court noted that, like
regular state agencies, the university's employees were state employees who participate in the state pension plan, but
unlike state agencies, the university was not subject to full compliance with the Right to Know Act. The Court reasoned
that the "pivotal factor" should be "whether the institution's real property is so thoroughly under the control of the
[***81] Commonwealth that, effectively, the institution's property functions as Commonwealth property." The Court
[*626] then noted that the university's real property was controlled by a board of thirty-two trustees, of which only ten
represented "government" seats either held or appointed by the Commonwealth's executive branch. The Court opined
that the Commonwealth did not have either functional or legal control over the university's real property, and thus, no
basis existed on which the university could be deemed immune from taxation of its medical school and hospital
properties. 731 A.2d at 1273-75.
[HN12] In Southeastern Pennsylvania Transportation Authority [SEPTA] v. Board of Revision of Taxes, 574 Pa. 707,
833 A.2d 710 (Pa. 2003), the Court determined that even if an entity is clearly a governmental agency or
instrumentality, it may not automatically claim immunity from local real estate taxation for property leased to third-
party commercial entities. The Court noted that SEPTA is part of the Commonwealth sovereign and entitled to
presumed immunity; its enabling legislation also authorizes it to lease real estate in order to raise revenue and reduce
expenses. Nevertheless, to the extent that SEPTA was acting [***82] as a "commercial landlord" at its headquarters
building in Philadelphia, the Court held that leasing real estate to commercial tenants who were not part of or associated
Page 23
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with SEPTA, "solely to raise revenue," was outside the scope of SEPTA's immunity because the activity was not
sufficiently connected to SEPTA's stated purpose of providing a metropolitan public transportation system. Although the
lease arrangements raised revenue and lessened the need for public funding, they were still commercial ventures not
eligible for immunity: "In that respect, SEPTA is like any other commercial landlord with which it competes as a
landlord." 833 A.2d at 716-20.
Two years later, in Lehigh-Northampton Airport Authority, supra, the Court concluded that the regional airport authority
at issue was immune from local real estate taxation even though, unlike SEPTA, the authority's enabling legislation did
not expressly confer Commonwealth sovereign status. The authority owned twenty-one properties: the airport itself,
plus hangars, airplane parking aprons, cargo processing and [*627] air courier facilities, federal customs and postal
service facilities, and [**52] various areas used for training, maintenance, and [***83] storage. The trial court,
following Penn State II, held that because the Commonwealth did not exercise ownership-style control over the
authority's property, the authority was not immune; the Commonwealth Court affirmed. [HN13] This Court reversed,
however, concluding that the Penn State cases, which dealt with the unique and "idiosyncratic" relationship between the
Commonwealth and the university, did not alter the longstanding rule expressed in Delaware County that property
owned by a municipal authority is immune in the same manner as the sovereign Commonwealth. The Lehigh-
Northampton Court observed that the airport authority was a creature of the Municipality Authorities Act of 1945, and
expressly entitled to immunity under that legislation. 889 A.2d at 1177-80 (quoting Municipal Authorities Act, 53
Pa.C.S. § 5620: "The effectuation of the authorized purposes of authorities created under this chapter shall be for the
benefit of the people of this Commonwealth . . . . Since authorities will be performing essential governmental functions
in effectuating these purposes, authorities shall not be required to pay taxes or assessments upon property acquired or
used by them for such purposes.").
From [***84] the foregoing, it is evident that [HN14] in the context of immunity from local real estate taxation based
on status as an agency or instrumentality of the Commonwealth, it is helpful, but not essential, to have an express
declaration of Commonwealth status in enabling legislation. But, some entities may be "square pegs" that simply do not
fit easily into recognized, categorical round holes; they are sui generis, having neither clear ancestors in law or history,
nor contemporary analogs. When these circumstances arise, existing precedent and authority may be less helpful than
usual. See In re Gower's Estate, 445 Pa. 554, 284 A.2d 742, 743 (Pa. 1971) ("We believe that this particular case is [s]ui
generis and that it is difficult to derive much guidance from the particular facts of cases previously decided by this
Court.").
[*628] A. The Girard Trust and College

In Part I of this Opinion, we reviewed: the specifics of Stephen Girard's Will, Trust, and resulting College for orphans;
the fact that the City and the Commonwealth accepted Girard's public bequests and the conditions attached to them; the
nature of the ensuing and enabling legislation, both at the local and state level, that followed to accommodate the
[***85] conditions of the Will; and the extensive decisional law arising in connection with the Girard entities
explaining, inter alia, why it was appropriate for municipal government to administer such a trust, and the relationship
of the Commonwealth to the City in that administration. We did so in detail because the nature and history of the Trust
and College provides essential background in properly identifying the Girard entities for purposes of local tax immunity
and exemption. This Court's most recent decisions concerning the Girard entities are now over half a century old, and
involved Fourteenth Amendment-based desegregation challenges. The majority decisions in those cases went to great
lengths -- over strong dissents from Justice Musmanno -- to describe the entities as purely private. The first decision
was summarily reversed by the U.S. Supreme Court, which held, unequivocally, that the Board of City Trusts was an
agency of the Commonwealth. In the second decision, the Court majority affirmed a remarkable substitution by the
Orphans' Court of "private" trustees in place of the ready, willing and able public trustees designated by Girard himself,
and embodied, by virtue of a 1869 [***86] Act of the General [**53] Assembly, in the Board of City Trusts. The
effect of that second decision, though not reviewed directly by the U.S. Supreme Court, was disapproved by the Third
Circuit ten years later in Brown, supra, which held in essence that the Orphans' Court's substitution of private trustees,
and this Court's affirmance of that action as against a renewed equal protection challenge, was an effort to avoid
compliance with the U.S. Supreme Court's initial summary reversal. The practical effect of the Third Circuit's decision,
and responsive legislation by the General Assembly effectively readopting the Act of 1869, has been to restore the
status quo ante with [*629] respect to the Board; it is a Commonwealth agency, at least for Fourteenth Amendment
purposes.
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In light of the history we have outlined, it is safe to say that the Court's majority decisions in the 1950s segregation
challenges did not represent the Court's finest hour. Moreover, given the U.S. Supreme Court's summary reversal, and
the eventual legislative restoration of the Board of City Trusts, we believe an assessment of the proper status of the
Girard entities is not constrained by the analyses in the disapproved majority [***87] decisions in the desegregation
cases.
Bringing our own independent judgment to bear, we think that the nature of the Girard entities was more accurately
grasped and described in Justice Musmanno's dissenting opinions. By any measure, Stephen Girard's Will represented a
remarkable act of public largesse, providing for numerous civic projects to improve the City and the Commonwealth,
including but by no means limited to establishing the College. Girard's bequests helped to: develop the eastern half of
the City, improve navigation, finance the police, remove buildings that were fire hazards, and establish support for the
poor and infirm; all in an effort to defray some of the important costs of government. Girard's bequests addressed core
municipal functions. Furthermore, Girard made clear that he named the City as trustee precisely because the
government was answerable to the citizenry: "from the nature of my bequests and the benefit to result from them, I
trust that my fellow citizens of Philadelphia will observe and evince special care and anxiety in selecting members of
their City Councils and other agents." Girard Will, Clause XXI, ¶ 9.
Neither the City nor the Commonwealth was obliged [***88] to accept the manifold duties envisioned as a condition of
Girard's public generosity, and it was not initially clear whether they properly could do so -- but both governmental
entities freely and immediately accepted the charge. Acquiescing in those conditions did not just entail accepting the
duties of trusteeship, but the conditions also required the passage of special state legislation and city ordinances to
satisfy specific conditions of the Will, including legislation -- unusual, to say [*630] the least -- that made the City the
guardian of the orphans attending Girard College (so as to preclude relatives from interference), and authorized the City
to bind the students out as apprentices until they reached majority. Moreover, as the Fox Court stressed in reviewing the
constitutionality of the Act creating the Board of City Trusts -- a point of precedent appreciated by Justice Musmanno,
but overlooked by the Court majority in both desegregation decisions -- municipal entities are not empowered to accept
duties of trusteeship to administer private trusts. Rather, as Fox noted, municipal corporations may undertake such
duties of administration, and the liabilities they incur, "only as it seems [***89] for public purposes, germane to its
objects." The Fox Court stressed that Girard's Trust, like other trusts then also managed by the City and subject to the
Board of City Trusts, were appropriate for municipal [**54] management precisely because they were "germane" to
the objects of municipal government: "The widening and improvement of streets and avenues, planting them with
ornamental and shade trees, the education of orphans, the building of school-houses, the assistance and encouragement
of young mechanics, rewarding ingenuity in the useful arts, the establishment and support of hospitals, the distribution
of soup, bread or fuel to the necessitous, are objects within the general scope and purposes of the municipality." 64 Pa.
169, 1870 WL 8678 at *12.
The Board of City Trusts maintains that the properties it manages are immune from taxation because the General
Assembly's intention in 1869 was to establish an instrumentality of the Commonwealth that would be Philadelphia-
oriented and would oversee charitable assets on behalf of the City of Philadelphia, while remaining subject to
Commonwealth oversight through annual reporting requirements and judicial authority over appointments to the Board.
Given [***90] the intense legislative involvement of the General Assembly in providing for the operation of the Trust,
culminating in its creation of the Board, we have little doubt that this is so; but that fact does not necessarily answer the
question of whether the Board [*631] was intended to be an agency of the Commonwealth for purposes of municipal
tax immunity.
The simple answer to that distinct question is that the legislation creating the Board of City Trusts was not addressing
tax immunity, nor has any subsequent legislation specifically addressed the matter. Part of the difficulty in this appeal
arises from the fact that it is argued to us, in large part, in the usual manner of common law advocacy: the parties invoke
other cases and entities, and then quite ably reason by analogy and distinction. But, the terms of the Girard Will and
Trust, the acceptance of those terms by the Commonwealth and the City, the legislation passed to satisfy the terms and
conditions of Girard's bequests, and the creation of the Board itself, all predate by many decades Pennsylvania
decisional law respecting tax immunity for Commonwealth agencies. Indeed, the parties have cited no reported
appellate cases, and our [***91] research has revealed none, involving sovereign immunity from local real estate
taxation until the first half of the twentieth century. See Commonwealth v. Dauphin County, 6 A.2d at 872 (Pa. 1939)
[HN15] ("The legislators did not intend to upset the orderly processes of government by allowing the sovereign power
to be burdened by being subjected to municipal taxes."). There was no particular reason for the General Assembly in
1869 to directly address "agency" status for purposes of municipal taxation; such taxation was simply not an issue.
Page 25
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2013 Pa. LEXIS 2547, ***
In this historical and legal landscape, it would seem to be a fool's errand to attempt to determine whether the Girard
entities comprise a Commonwealth agency in the modern sense by squeezing a sui generis creature of the nineteenth
century -- when the Commonwealth itself was in its infancy -- into a twentieth century (and largely late twentieth
century, at that) decisional paradigm deriving from disputes concerning waste disposal sites, airports, and evolving land
grant universities. It is enough, we believe, to recognize the quintessentially public nature of the bequests and the
intimate, immediate, and ongoing Commonwealth governmental relationship with [***92] the Girard Entities,
including the Board of City Trusts. Part [*632] of this history also includes the facts, which are not disputed or
rebutted by the County, that the Girard entities historically have not been subject to local real estate taxation, and that
the Board has been deemed a Commonwealth agency for purposes of the Internal Revenue Code. We recognize, of
[**55] course, that the fact that a prior challenge has not been made to the status quo does not mean that a challenge,
once made, must fail. See Commonwealth v. Gilmour Manuf. Co., 573 Pa. 143, 822 A.2d 676, 681-82 (Pa. 2003). But,
the historical status of the Girard entities properly gives us pause before stepping in, as a judicial matter, and rendering a
decision that may well upset reliance interests and cause severe economic dislocation.
What is plainly apparent, however, is that any disruption in the status of the Girard entities, for purposes of local real
estate taxation, is a matter posing questions of policy more properly assessed by the General Assembly. There is no
denying that there are competing interests here. As the County notes, every dollar of property tax not paid by an entity
such as Girard, which owns property within Cumberland [***93] County for the benefit of a charity operating in
Philadelphia County, is a dollar that must be found elsewhere to educate the students within Cumberland County. But,
this is true of all property deemed that of the Commonwealth sovereign and its agencies. Whether a Commonwealth
agency such as the Board of City Trusts should properly continue to share in the immunity of the Commonwealth
government is a matter that the General Assembly obviously can address and announce affirmatively. And, given the
General Assembly's historical interest in, and concern with the Girard Entities, we believe it better that that policy
decision be considered and decisively rendered by that body, rather than by a Court attempting to apply new doctrines to
old, and rather unique, relationships.
We conclude, therefore, that the Trust, College and Board of City Trusts and, by extension, the real estate holdings of
the Girard Trust, retain immunity from local property taxation as, collectively, part of the sovereignty of the
Commonwealth of Pennsylvania. We therefore reverse the decision and order [*633] of the Commonwealth Court and
reinstate the order of the trial court.
V. Exemption From Local Taxation

Our grant of [***94] allowance of appeal also included the Board of City Trusts' alternate argument that it is exempt
from local real estate taxation. Given our holding above concerning sovereign immunity, we need not reach this
question, and we offer no view upon it.
VI. Conclusion
For the foregoing reasons, we reverse the decision and order of the Commonwealth Court and reinstate the order of the
trial court.
Former Justice Orie Melvin did not participate in the decision of this case.
Mr. Justice Eakin, Madame Justice Todd and Mr. Justice McCaffery join the opinion.
Mr. Justice Saylor files a concurring opinion in which Mr. Justice Baer joins.
CONCUR BY: SAYLOR
CONCUR
MR. JUSTICE SAYLOR
The majority opinion is noteworthy in terms of its scope, thoroughness, and thoughtfulness concerning the creation,
history, and sui generis character, of the Girard Trust. I find it persuasive, as well, to the degree it sets forth the basis for
considering the Trust to be a Commonwealth entity, and I ultimately agree that the Commonwealth Court's order should
be reversed under the circumstances.
Page 26
622 Pa. 581, *; 81 A.3d 24, **;
2013 Pa. LEXIS 2547, ***
Nevertheless, I cannot join the opinion in full, as I see no reason to depart from this Court's precedent concerning the
scope of tax immunity that a [***95] Commonwealth body enjoys. Although, as the majority recognizes, the Trust was
created before much of our tax-immunity and tax-exemption [**56] case law was developed, it does not follow -- to
my mind at least -- that this circumstance provides the Trust with a blanket protection from any kind of tax-immunity
analysis or any type of limitation [*634] on the scope of its immunity based on the principles that have emerged from
this Court's cases.
In Leigh-Northampton Airport Authority v. Lehigh County Board of Assessment Appeals, 585 Pa. 657, 889 A.2d 1168
(2005), the Court observed that, although a public entity may be immune from local taxation, the scope of that
immunity is limited where the entity leases some of its property "to unrelated organizations or otherwise . . . acquire[s]
or use[s] it for some purpose not related to the operation of the [owner's] facility." Id. at 673, 889 A.2d at 1178. In
discussing SEPTA v. Board of Revision of Taxes, 574 Pa. 707, 833 A.2d 710 (2003), and Delaware County Solid Waste
Authority v. Berks County Board of Assessment Appeals, 534 Pa. 81, 626 A.2d 528 (1993), moreover, the Leigh-
Northampton Airport Authority Court likewise explained that "immunity is assumed unless [***96] the agency acts
outside of its authorized governmental purposes." Lehigh-Northampton Airport Auth., 585 Pa. at 675, 889 A.2d at 1179
(emphasis added). As a matter of sound logic, this restriction -- the emphasized language in the above-quoted sentence
-- should apply to any Commonwealth entity (including the Trust) regardless of when that entity came into being.
SEPTA is even closer to this case because it involved a Commonwealth body, the Southeastern Pennsylvania
Transportation Authority, that leased part of its office space to tenants whose activities were unrelated to the
performance of SEPTA's purposes. The Court determined that such leased space was taxable, reasoning that the
property "is being used for something other than as part of SEPTA's operation. Very simply, SEPTA is acting as a
commercial landlord, which is clearly distinct from acting as a metropolitan transportation authority[.]" SEPTA, 574 Pa.
at 719, 833 A.2d at 717 (internal quotation marks omitted). Presently, the Girard Trust is also acting as a commercial
landlord insofar as the subject property in Cumberland County is concerned. Although the tenant, unlike in SEPTA, is
public and not commercial in nature, the [***97] public-versus-private character of the tenant is immaterial to the
immunity issue since that question hinges on whether the [*635] agency, in thus renting out the property, is acting
within or outside of its own authorized purposes. Accord Lehigh-Northampton Airport Auth., 585 Pa. at 675, 889 A.2d
at 1179.
Here, the tenant's activities are entirely unrelated to the Girard Trust or Girard College. As such, the Trust is using the
property solely to raise revenue. It follows that, pursuant to the principles set forth in this Court's precedent, the property
is excluded from the scope of the Trust's immunity. Indeed, to hold otherwise, as the majority does, gives the Trust and
its tenants an unfair competitive advantage, as the Trust may, in the future, lease the property to commercial enterprises
at below-market rates due to its avoidance of real estate taxes. Although the Trust may have been established for
beneficial public purposes, Pennsylvania's tax laws were never intended to supply it or its commercial tenants with such
a windfall at the expense of county taxpayers.
With that said, I nonetheless agree that the property should not be subject to taxation under the present circumstances
because [***98] it is being used for a public purpose. In particular, I would find that it is exempt, rather than immune,
from taxation, see Lehigh-Northampton Airport Auth., 585 Pa. at 676 n.9, 889 A.2d at 1180 n.9 [**57] (noting that
immunity is a threshold issue, and a non-immune parcel may be tax-exempt on a separate basis), so long as the public
use continues. See PA. CONST. art. VIII, §2(a)(iii) (permitting the General Assembly to exempt from taxation "[t]hat
portion of public property which is actually and regularly used for public purposes"); 53 Pa.C.S. §8812(a)(8) ("The
following property shall be exempt from all county, city, borough, town, township, road, poor, county institution district
and school real estate taxes: . . . [a]ll other public property used for public purposes . . ..");1 see also Appeal of Mun.
Auth. of Borough of West View, 381 Pa. 416, 420, 113 A.2d 307, 309 (1955) (recognizing that leased property is
exempt from taxation where the lessee uses it for [*636] a public purpose). See generally Wesleyville Borough v. Erie
Cnty. Bd. of Assessment Appeals, 676 A.2d 298, 302 (Pa. Cmwlth. 1996) ("The controlling test for tax exemption is not
whether the property . . . has been leased out, but [***99] whether the use of the property so leased is for a public
purpose.").2 This makes a practical difference in that, under an exemption framework, the property could become
taxable in the future if it is leased for a non-public use. Such a result, in my opinion, would comport with both
controlling law and fundamental fairness.
1 Section 8812(a)(8) represents the 2010 recodification, in the new Consolidated County Assessment Law, of a substantively similar
provision in the now-repealed Fourth to Eighth Class County Assessment Law of 1943. See 72 P.S. §5453.202(a)(7) (repealed).
Page 27
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2013 Pa. LEXIS 2547, ***
2 The Commonwealth Court expressed that the property is not being put to a public use regardless of the identity of the lessee because it is
being used "solely as an investment property that generates rental income." City of Phila. v. Cumberland Cnty. Bd. of Assessment Appeals,
18 A.3d 421, 429 n.15 (Pa. Cmwlth. 2011). This position is substantially inconsistent with the cases cited above as well the discussion in
Appeal of Allegheny County, 425 Pa. 578, 581, 229 A.2d 890, 891 (1967).
Mr. Justice Baer joins this concurring opinion.

Page 29Page 29
2013 U.S. Dist. LEXIS 140205, *
52 of 430 DOCUMENTS
SANDY N. WEBB, Plaintiff, v. GREEN TREE SERVICING, LLC, Defendant.
Civil Action No. ELH-11-2105
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND
2013 U.S. Dist. LEXIS 140205
September 30, 2013, Decided

September 30, 2013, Filed
PRIOR HISTORY: Webb v. Green Tree Servicing LLC, 2012 U.S. Dist. LEXIS 104953 (D. Md., July 27, 2012)
CORE TERMS: mortgage, tenant, lease, deposition, rent, inspection, summary judgment, default, deed, cross-motions,
covenants, borrower, phone, email, servicer, reply, discovery, electronic, material facts, notice, renter, surreply, vacant,
phone number, admissible, monthly, window, message, collection, undisputed
COUNSEL: [*1] Sandy N. Webb, Plaintiff, Pro se.
For Green Tree Servicing LLC, Defendant: Brian L Moffet, LEAD ATTORNEY, Gordon Feinblatt Rothman Hoffberger,
Baltimore, MD; John Jun Young Lee, Gordon Feinblatt LLC, Baltimore, MD.
JUDGES: Ellen Lipton Hollander, United States District Judge.
OPINION BY: Ellen Lipton Hollander
OPINION
MEMORANDUM OPINION
Sandy N. Webb, plaintiff, 1 sued her mortgage servicer, Green Tree Servicing, LLC ("Green Tree"), defendant, alleging
several torts and statutory violations arising out of Green Tree's conduct with respect to her mortgage. 2 In particular, in
her Amended Complaint (ECF 26), plaintiff asserted five counts: interference with a business relationship (Count I);
breach of contract (Count II); trespass to land (Count III); violation of the Fair Debt Collection Practices Act
("FDCPA"), 15 U.S.C. §§ 1692 et seq. (Count VI); and common law negligence based on breach of the statutory duties
imposed by the FDCPA (Count VII). Those five counts survived challenges to the sufficiency of pleading. See Webb v.
Green Tree Serv'g, LLC, Civ. No. ELH-11-2105, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464 (D. Md. Dec. 9,
2011) (ECF 16 & 17) ("Webb I") (granting in part and denying in part motion to dismiss) and 2012 U.S. Dist. LEXIS
79451, 2012 WL 2065539 (D. Md. June 7, 2012) [*2] (ECF 52 & 53) ("Webb II") (granting in part and denying in part
motion to strike amended complaint). In so ruling, I determined that all of the common law claims in this case are
governed by Maryland law. See Webb I, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *4 n.12; Webb II, 2012
U.S. Dist. LEXIS 79451, 2012 WL 2065539, at *6 n.7. 3
1 Plaintiff is an attorney licensed to practice law in Maryland and a member of the bar of this Court. However, she resides in Oregon. Webb
is self-represented in this case.
2 Plaintiff filed suit in the Circuit Court for Queen Anne's County, Maryland. Green Tree removed the suit to federal court on the basis of
diversity jurisdiction. See 28 U.S.C. § 1332(a); 1441; see also Notice of Removal (ECF 1). More than $75,000 is in controversy, and the
citizenship of the parties was completely diverse at the time the action commenced. See Webb v. Green Tree Serv'g, LLC, Civ. No. ELH-11-
2105, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *1 n.2 (D. Md. Dec. 9, 2011) (ECF 16). See also Grupo Dataflux v. Atlas
Global Gp., L.P., 541 U.S. 567, 571, 124 S. Ct. 1920, 158 L. Ed. 2d 866 (2004) (stating that diversity jurisdiction in cases removed from
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2013 U.S. Dist. LEXIS 140205, *
state court depends on citizenship at time case is initiated, not time case is removed); Athena Automotive, Inc. v. DiGregorio, 166 F.3d 288,
290 (4th Cir. 1999) [*3] ("Because diversity jurisdiction depends on the citizenship status of the parties at the time an action commences, we
must focus our jurisdictional inquiry solely on that time."); Forrest v. Green Tree Serv'g, LLC, Civ. No. ELH-13-1525, 2013 U.S. Dist.
LEXIS 89479, 2013 WL 3270447, *3-5 & n.3 (D. Md. June 25, 2013) (recognizing that, although Green Tree subsequently became a citizen
of Maryland due to a change in the membership of the company, the change in citizenship does not affect jurisdiction in previously
commenced actions).
3 Plaintiff's Amended Complaint is the operative pleading. Hereafter, unless otherwise specified, references to plaintiff's "complaint" refer to
her Amended Complaint.
Plaintiff's original Complaint (ECF 2) contained claims of invasion of privacy by intrusion upon seclusion (Count IV) and non-statutory
negligence (Count V). Those counts were subsequently dismissed. See Webb I, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *10-
12. When plaintiff filed her Amended Complaint, adding the two FDCPA-related counts, she continued the numbering of the counts with
Counts VI and VII, despite the dismissal of Counts IV and V. In a subsequent ruling, I struck a portion of Count VII, which alleged
negligence based on breach [*4] of statutory duties under the Protecting Tenants at Foreclosure Act, Pub. L. No. 111-22, 123 Stat. 1632, §§
701 et seq. (2009), as amended by Pub. L. No. 111-203, 124 Stat. 1376, § 1484 (2010), and its Maryland state-law counterpart, Md. Code
(2010 Repl. Vol., 2011 Supp.), § 7-105.6(b)(2) of the Real Property Article. See Webb II, 2012 U.S. Dist. LEXIS 79451, 2012 WL 2065539,
at *7-8. I also observed that, although Count VII is captioned "Negligence Per Se," Maryland does not adhere to a negligence per se regime
in actions for negligence based on the violation of statutory duties. See 2012 U.S. Dist. LEXIS 79451, [WL] at *6.
Thereafter, the case proceeded to discovery. In the course of discovery, Green Tree filed a Third-Party Complaint (ECF
39) against Five Brothers Mortgage Company Services and Securing, Inc. ("Five Brothers"), a business entity that
plaintiff alleged had acted as Green Tree's agent. Upon the conclusion of discovery, the Third-Party Complaint was
voluntarily dismissed, pursuant to Fed. R. Civ. P. 41(a). See ECF 70 & 73.
Three motions are now at issue. Green Tree filed a Motion for Summary Judgment (ECF 74) and a supporting
memorandum (ECF 74-1) (collectively, the "Motion"); plaintiff filed a Cross-Motion for Summary Judgment [*5]
("Cross-Motion") (ECF 75); and Green Tree filed a Motion for Sanctions pursuant to Rule 11 of the Federal Rules of
Civil Procedure ("Sanctions Motion") (ECF 77). 4 The summary judgment motions have been fully briefed, 5 and no
hearing is necessary to resolve them. See Local Rule 105.6. For the reasons that follow, I will grant Green Tree's Motion
and deny plaintiff's Cross-Motion. Pursuant to Local Rule 105.8(b), I will direct plaintiff to respond to the Sanctions
Motion and, in the interim, deny that motion, without prejudice to Green Tree's right to renew the Sanctions Motion
following plaintiff's submission. 6
4 The parties also filed a flurry of ancillary motions relating to various aspects of the briefing of the cross-motions for summary judgment,
which are discussed and resolved infra.
5 In connection with the cross-motions for summary judgment, I have considered Green Tree's Motion; plaintiff's Cross-Motion (including
her opposition to the Motion); Green Tree's consolidated reply in support of its Motion and opposition to the Cross-Motion ("Green Tree
Reply") (ECF 79); plaintiff's reply ("Webb Reply") (ECF 80); and other supplemental submissions, as discussed, infra.
6 Pursuant to [*6] Local Rule 105.8(b), which governs motions for sanctions, I cannot resolve the Sanctions Motion until plaintiff responds
to it, if and as ordered by the Court. Local Rule 105.8(b), entitled "Responses Required Only Upon Court Order," provides: "Unless
otherwise ordered by the Court, a party need not respond to any motion filed under Fed. R. Civ. P. 11 or 28 U.S.C. § 1927. The Court shall
not grant any motion without requesting a response."
Factual Background
At all times relevant, Ms. Webb owned a parcel of real property in Grasonville, Maryland, containing a single family
home, which she purchased in December 2006 (the "Property" or the "Residence"). See Deposition of Sandy N. Webb at
31 ("Webb Dep."). 7 Ms. Webb financed her purchase of the Property by means of a mortgage loan in the amount of
$209,900 from National City Mortgage ("National City"), a lending institution that is not a party to this case. The loan
was evidenced by a promissory note (the "Note"), see Ex.B to Motion (ECF 74-3), dated December 21, 2006, between
Ms. Webb as "Borrower" and National City as "Lender." Under the Note, plaintiff was obligated to repay the mortgage
loan over a thirty year period, with interest [*7] at a fixed annual rate of 6.375%, by monthly payments of $1,309.51
due on the first of each month. See id. at 1. The loan obligation was secured by a Deed of Trust executed by Ms. Webb,
also dated December 21, 2006, see Deed of Trust, Ex.C to Motion (ECF 74-4), placing the Property in trust for the
benefit of National City, as security for repayment under the Note. 8
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2013 U.S. Dist. LEXIS 140205, *
7 Both sides have submitted excerpts from various depositions as exhibits. As to each deposition, I cite to the pagination of the deposition
transcript, rather than the pagination of any particular excerpt submitted by either party. Excerpts from Ms. Webb's deposition are contained
in ECF 74-2 and ECF 77-5.
8 Under Maryland law, the real property security arrangement established by a deed of trust is technically distinct from a "common law
mortgage." Legacy Funding LLC v. Cohn, 396 Md. 511, 513 n.1, 914 A.2d 760, 761 n.1 (2007). The principal distinction is this:
"There are two parties to a mortgage; the mortgagor (debtor) and the mortgagee (creditor). Deeds of trust are three party
instruments; the grantor (debtor), the grantee (trustee) and the cestui que trust or beneficiary (creditor). When a mortgage
is used, the property [*8] is conveyed directly to the creditor. With a deed of trust, the property is conveyed to a third
party in trust for the benefit of the creditor."
Wellington Co., Inc. Profit Sharing Plan v. Shakiba, 180 Md. App. 576, 594, 952 A.2d 328, 339 (2008) (citation and emphasis omitted).
Despite the "differences between the two instruments, [the Maryland appellate courts] have generally treated them the same" and, in cases
involving deeds of trust, courts often "refer to the instruments as mortgages and the debtors as mortgagors." Legacy Funding, 396 Md. at
513 n.1, 914 A.2d at 761 n.1; see LeBrun v. Prosise, 197 Md. 466, 473-74, 79 A.2d 543, 547 (1951) ("For most purposes [a] deed of trust is
a mortgage.") (emphasis in original); Manor Coal Co. v. Beckman, 151 Md. 102, 115-16, 133 A. 893 (1926) ("'A deed of trust to secure a
debt is in legal effect a mortgage.'") (citation omitted). The trustee under the Deed of Trust here was Lawyers Title Insurance Corporation, a
non-party.
Ms. Webb resided at the Property from mid December 2006 until May 2008. See Webb Dep. at 41, 46, 55-56. After
unsuccessfully placing the Property on the market for sale in the Spring of 2008, see id. at 54-56, Ms. Webb moved
[*9] to Oregon in May 2008. Id. at 46. Beginning in June 2008, Ms. Webb rented the Property to a series of tenants. See
id. at 56.
At some point, PNC Bank became National City's successor by merger. Subsequently, PNC Bank assigned the Deed of
Trust and the Note, "together with all interest secured thereby, all liens, and any rights due or to become due thereon,"
to Green Tree, by an Assignment of Mortgage (the "Assignment") filed in the Land Records of Queen Anne's County,
Maryland, on March 30, 2010. Assignment, Ex.1 to Cross-Motion (ECF 75-1 at 1-2). 9
9 Green Tree also submitted a copy of the Assignment as Exhibit D to its Motion (ECF 74-5), but the copy submitted by Green Tree does not
include the signature page. Although the Assignment was filed in the land records on March 30, 2010, it states that its "Effective Date" was
November 1, 2009. Assignment at 1. It was executed by a vice president of PNC Bank on February 18, 2010. Id. at 2. The parties dispute
which of those dates is the date that Green Tree "obtained" or "received" the debt, within the meaning of the FDCPA. See 15 U.S.C. §
1692a(4), (6)(F)(iii). Their dispute is addressed in the Discussion.
By a Lease Agreement (the "Lease") [*10] dated August 6, 2010, Ms. Webb rented the Property to a tenant, Christina
Klamp, for a term described in the Lease as "a term of 12 months, beginning on 8/15/10, and ending at 11:59 PM on
8/30/11." Lease at 1, Ex.22 to Cross-Motion (ECF 75-22 at 2-6). The monthly rent under the Lease was $1,200. See id.
In September 2010, just over a month after the Lease was executed, Ms. Webb's husband, 10 a Naval reservist, sustained
a serious injury to his back while on duty in San Diego. See Webb Dep. at 135. Ms. Webb's husband underwent
hospitalization due to the injury and was unable to work for several months, which placed significant financial strain on
the couple. See id. at 134-37. Because their "income was dramatically reduced overnight" due to her husband's injury,
id. at 135, Ms. Webb ceased making monthly payments toward the mortgage on the Property as of October 2010; the
payment due on September 1, 2010, was the last monthly mortgage payment that was made by Webb. See id. at 134.
10 Ms. Webb married her husband sometime after she purchased the Property. See Webb Dep. at 40.
The acts of Green Tree and its alleged agent, Five Brothers, that are at issue in this suit occurred during Ms. Klamp's
[*11] tenancy, after Ms. Webb became delinquent on her mortgage payments. In order to frame the issues properly, it is
necessary to set out the alleged facts as plaintiff presented them in her complaint, 11 before presenting the undisputed
material facts drawn from the summary judgment record that is now before the Court.
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2013 U.S. Dist. LEXIS 140205, *
11 Although the Amended Complaint added two new counts and revised plaintiff's damages requests, it presented the same substantive
factual allegations as the original Complaint.
A. Facts Alleged in the Amended Complaint

Although Ms. Webb was in default of her payment obligations in January 2011, "the Residence had not been foreclosed
on." Amended Complaint ¶ 10. Ms. Webb "was informed on January 18, 2011 by her tenant" (i.e., Ms. Klamp, although
the complaint does not identify the tenant by name) that Ernest Wood, 12 a representative of Green Tree, "was calling her
and asking questions about Mrs. Webb's whereabouts because Green Tree 'needed to get a hold of her regarding her
mortgage status.'" Id. ¶ 13. The tenant (i.e., Ms. Klamp) "was contacted at work and home by Green Tree about the
homeowner's mortgage status," and Mr. Wood was "harassing the tenant or telling her inappropriate [*12] and private
information about the collection matter," despite the fact that "Mrs. Webb was in contact with Green Tree and Green
Tree knew where Mrs. Webb lived because she was in weekly contact via phone with Green Tree's representative." Id.
Ms. Webb told Mr. Wood "on January 19 & 20, 2011 that he could not contact the tenant living at the Residence, either
at the home or at work." Id. However, Mr. Wood "continued calling the tenant at work and home on the days of January
18, 19 & 20." Id.
12 Mr. Wood, an employee of Green Tree, was identified only as "Ernie" in the complaint. See Amended Complaint ¶ 13.
On January 27, 2011, an unidentified person "was walking around the Residence and approached the tenant, and told the
tenant they were coming back the next day to clear the tenant's stuff out of the Residence, put new locks on the doors,
and board up the windows because the home had been foreclosed by the bank." Id. ¶ 7. This unidentified person
allegedly was an "employee" of Five Brothers. Id. ¶ 8. The Five Brothers employee "was found on the Residence
property looking around and clearly inside the private areas of the yard and peering through windows." Id. "The tenant
contacted Mrs. [*13] Webb because she was 'freaked-out' and confused about the situation." Id. ¶ 7.
Ms. Webb alleged that she was able to speak by phone with the Five Brothers employee at the Property, who gave her
Five Brothers' toll-free phone number, stating: "'[I]t didn't matter what [Mrs. Webb] had to say, it only mattered to the
employee if the Residence was on a list to be cleared and boarded up because he [(the employee)] takes his direction
only from the mortgage company who owns the home.'" Id. ¶ 8 (quoting employee) (brackets and alterations in
original). According to plaintiff, she had not received any notice of an inspection of the Property from Green Tree. Id. ¶
29.
Despite spending "a large part of January 27, 2011 on the phone" with representatives of Five Brothers and Green Tree
"trying to clear up the confusion and the improperly ordered . . . home clean-out," Ms. Webb claimed that she was
unable to receive assurance that the Residence would not be cleared out. Id. ¶ 8. When Ms. Webb called Five Brothers'
toll-free number, a Five Brothers employee told her that "'if she paid her bills this wouldn't be a problem,'" and then
hung up on her. Id. ¶ 9 (quoting employee). Ms. Webb called back [*14] and spoke with a "supervisor who told her the
only way it would call off the moving/close-up crew was if the mortgage lender told her to take the Residence off the
list of recently acquired homes," and that "Five Brothers needed nothing besides the phone call from the bank to
schedule a clean-out when the bank owned the property." Id. Ms. Webb called Green Tree but was unable to speak with
Mr. Wood and was unable to achieve a resolution of the situation. See id. ¶ 10-11. According to the complaint, Ms.
Webb's "tenant sent her father to the Residence on January 28, 2011 to ensure no one entered the Residence and stole
her furniture and personal effects or locked her out of the Residence by changing the locks." Id. ¶ 11.
Webb spoke with Wood on January 28, 2011, and Wood "repeatedly stated he had every right to secure the Residence as
it 'had been foreclosed upon.'" Id. ¶ 12 (quoting Wood). Wood "kept stating that the house was vacant and had been
foreclosed upon so he had the right to enter and clear it out and secure the location." Id. Although "Mrs. Webb explained
the difference between foreclosure and default," Wood "wouldn't listen or acknowledge any difference . . . ." Id. Webb
"was [*15] able to confirm with Green Tree that Five Brothers had been informed that the Residence should be taken
off the list of bank owned properties in need of securing." Id. ¶ 11. However, Wood "would not provide any assurances
that the he would not again place the Residence on the list to be secured by Five Brothers Mortgage Assistance." Id. ¶
12.
Further, the complaint alleged, id. ¶ 14:
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2013 U.S. Dist. LEXIS 140205, *
On February 28, 2011, after much discussion with the tenant, Mrs. Webb released the tenant from her lease because Mrs. Webb
could no longer promise her quiet enjoyment of the home due to the illegal and harassing actions inflicted upon the tenant by Green
Tree--the tenant was a young female living alone in her first home just out of college who felt threatened and unsafe in her own
home.
According to plaintiff, "[b]y running off Mrs. Webb's tenant, Green Tree turned what was a temporary setback in
finances into a permanent setback from which [Ms. Webb] cannot recover." Id. ¶ 15. "If the tenant had never been run
off, Mrs. Webb would have been able to recover financially and return to making payments on the home." Id. ¶ 16. And,
Ms. Webb "intended to again rent the home and make payments" but, "due to Green [*16] Tree's actions in running off
tenant's from the Residence, she cannot in good conscious [sic] rent to another tenant." Id.
As noted, I previously concluded that five counts of the complaint stated claims upon which relief could be granted.
Specifically, Count I alleged tortious interference with a business relationship largely on the basis of the following
allegation in the complaint, id. ¶ 19:
Green Tree . . . has harassed Mrs. Webb's tenant and interfered with Mrs. Webb's business contract with a tenant who was a bona
fide tenant (having moved in prior to any default or even late payment and not being related to the homeowner in anyway). By
intentional and improper conduct, Green Tree ran the tenant out of the home and harassed the tenant who was rightfully living in
the home. Once the tenant was released from her lease due to homeowner's inability to provide quiet enjoyment (due to threats of
breaking and entry, harassment, and actual trespass), the homeowner was without ability to collect rents to pay the mortgage once
the medical and financial emergency in homeowner's family had resolved.
Counts II and III alleged breach of contract and trespass to real property, respectively, both [*17] based on the alleged
entry of the Five Brothers employee onto the Property on January 27, 2011, without prior notice of inspection as
required by a provision of the Deed of Trust. Plaintiff alleged: "Green Tree gave no notice, never specified any
reasonable cause, and had no reasonable cause to suspect the Property was in any danger of being damaged due to a
renter being in the home." Id. ¶ 29.
In Count VI, plaintiff alleged that Green Tree was a "debt collector" as defined by the FDCPA, 13 and violated the
FDCPA by its telephone contact with the tenant and the entry of the Five Brothers employee onto the Property.
Specifically, the complaint stated, id. ¶¶ 53-54:
[Green Tree] violated [the FDCPA] by engaging in conduct the natural consequence of which is meant to harass, oppress, or abuse
the Plaintiff in connection with collection of a debt by calling Plaintiff's tenant at work repeatedly to "talk to" tenant about
Plaintiff's "default" and sending an agent to go to the home to who told the tenant that the home had been foreclosed and that the
tenant would be locked out and her items removed.
[Green Tree] violated [another provision of the FDCPA] in that Defendants employed false and [*18] deceptive means to collect a
debt by intentionally scaring off any current renter (by being hiring someone who told the tenant that the home had been foreclosed
and calling her at work about the "default") and threatening to run off any future renter.
13 As discussed, infra, Green Tree argued that it does not qualify as a "debt collector" under the FDCPA, but I ruled that this was an
affirmative defense that should be resolved at the summary judgment stage on the basis of evidence outside the pleadings. See Webb II, 2012
U.S. Dist. LEXIS 79451, 2012 WL 2065539, at *5.
Finally, in Count VII, plaintiff alleged negligence by breach of statutory duties imposed by the FDCPA. The complaint
stated that Green Tree owed a duty under the FDCPA "to not harass and/or annoy the tenant in the Residence," id. ¶ 57,
and that "Green Tree breached that duty by calling the tenant at work and sending the Five Brothers Mortgage
Assistance agents to the home to 'inspect and secure' the Residence when [Green Tree] knew the tenant was in the
Residence and the Residence was not foreclosed upon or in danger of destruction/waste/damage." Id. ¶ 58. 14
14 I expressed skepticism that "a negligence claim based on violation of the FDCPA is viable [*19] in Maryland," given that such a claim
would be redundant and merely duplicative of a statutory claim arising "directly under the FDCPA." Webb II, 2012 U.S. Dist. LEXIS 79451,
2012 WL 2065539, at *6. Nevertheless, I ruled that the negligence claim should be resolved after summary judgment, along with the FDCPA
count, because it "would not expand the scope of discovery." Id.
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2013 U.S. Dist. LEXIS 140205, *
Notably, plaintiff's Amended Complaint was verified. Ms. Webb signed the Amended Complaint and "solemnly
affirm[ed] under penalty of perjury that the contents of the foregoing complaint [were] true to the best of [her]
knowledge, information and belief . . . ." Id. at 10. On the strength of the foregoing allegations, the Court permitted
plaintiff to "unlock the doors of discovery." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868
(2009) (articulating standard for dismissal of complaint for failure to state a claim upon which relief can be granted).
B. Undisputed Material Facts15
15 The facts presented in this section are drawn from the exhibits submitted by the parties in connection with the cross-motions for summary
judgment, subject to the Court's rulings as to evidentiary disputes that are discussed, infra. The facts are presented in the light most favorable
[*20] to plaintiff and, unless otherwise noted, the facts contained in this section are undisputed.
Discovery has now concluded. The undisputed material facts disclosed by the record demonstrate unequivocally that
events simply did not occur as alleged in the complaint.
As noted, Christina Klamp became plaintiff's tenant in August 2010. Although the Lease was solely in Ms. Klamp's
name, she was not the only occupant of the Property; Klamp resided there with her boyfriend, Charles "Chuck" Miller.
See Deposition of Christina Klamp at 24 ("Klamp Dep."). 16 Ms. Klamp and Mr. Miller, who were young adults (Mr.
Miller turned twenty in the month that the Lease began), had been dating for a year before they decided to rent a house
together. Id. at 25. They made contact with Ms. Webb because an acquaintance of Mr. Miller had been a previous tenant
of the Property. Id. However, Ms. Klamp was the only signatory to the Lease because Mr. Miller had poor credit. Id. at
26. Ms. Webb was aware of this arrangement and agreed to it. Id. at 27; see also Email from Webb to Klamp and Miller
of Aug. 5, 2010 (ECF 75-7 at 2). Ms. Klamp and Mr. Miller evenly divided the $1,200 monthly rent as well as the cost
of the [*21] utilities. Klamp Dep. at 27.
16 Excerpts from the transcript of Ms. Klamp's deposition are contained in ECF 74-6, ECF 75-4, ECF 77-6, and ECF 80-1.
In late November 2010, Ms. Klamp and Mr. Miller's relationship ended abruptly when Ms. Klamp discovered that Mr.
Miller was involved with someone else. See id. at 30. When the two broke up, both Ms. Klamp and Mr. Miller
immediately ceased residing at the Property. Ms. Klamp last slept at the Property on November 24, 2010, the night
before Thanksgiving; she then moved into her father's house. Id. at 48-49. Mr. Miller moved out of the Property by
Sunday, November 28, 2010. Id. at 35. He initially stayed with a friend, and then moved in with the other woman he
was seeing, whom he later married. Id. at 36. Although neither Ms. Klamp nor Mr. Miller resided at the Property after
the weekend of Thanksgiving 2010, each left some belongings at the Property. Id. at 35.
On or about November 28, 2010, Ms. Klamp contacted Ms. Webb by email and phone to inform her that she and Mr.
Miller had broken up and that, as a result, she "wanted to break the lease," because she "wanted to remove [her]self
from anything that reminded [her] of him or was involved with [*22] him." Klamp Dep. at 30-31; see generally id. at
28-31; Webb Dep. at 86-89. Ms. Klamp and Ms. Webb spoke by phone that day and, according to Ms. Klamp, Ms.
Webb was "extremely understanding" and "was basically trying to think of a solution." Klamp Dep. at 31. On Friday,
December 10, 2010, Ms. Webb emailed Ms. Klamp and Mr. Miller, advising them that she had not yet received their
rent for December, and stating, ECF 74-8 at 3:
As I have been discussing with Christina, I am more than willing to let you look for a qualified replacement tenant to take over the
lease. And once the new lease is signed by your replacement we will end your obligations under the lease. However, I really
discourage using this option because to find a replacement tenant you would have to show people the home and I really don't want
Christina showing the house to strangers and taking the chance she would be alone in the house with an untrustworthy person. An
even bigger problem with finding a replacement tenant is that most people do not move during the winter; renters really do not
reappear on the scene until late March or early April. And if you stick it out looking for a good credit/income replacement, it could
[*23] take you quite a while. So under this option, you all could be on the lease for a while paying rent while you look.
I would suggest a second option that gives you some certainty and me peace of mind that Christina isn't showing the house to
strangers. Option 2 is that if you want out of the lease early, I will accept payment for January rent ($1200) and forfeiture of your
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2013 U.S. Dist. LEXIS 140205, *
security deposit (which I already have, so this is not new out of pocket money from you) as fulfillment of your obligations under
the lease and I will not report any negative activity against Christina to the credit reporting agencies.
Let me know how you want to proceed and we can work on the details of your move out.
On December 14, 2010, Ms. Webb emailed Klamp and Miller again, advising that she had received their $1,200
December rental payment and reiterating: "Just let me know how you want to proceed with the house and terminating
the lease." ECF 74-8 at 2. Ms. Klamp decided that she wanted to attempt to find a replacement tenant. See Webb Dep. at
108-09; Klamp Dep. at 40-41. At her deposition, Ms. Klamp testified that she and Ms. Webb reached an agreement that
Ms. Klamp would attempt to find a replacement tenant [*24] but that, "if that didn't happen, then the lease would be
terminated between [Webb] and [Klamp] in March." Klamp Dep. at 40. In other words, according to Ms. Klamp, Ms.
Webb "agreed for [Klamp] to stay involved in the lease until March of 2011 unless [Klamp] found other renters to rent
the house . . . ." Id. at 40-41; see generally id. at 40-43. Mr. Miller also agreed to pay his half of the rent until a
replacement tenant was found or until March 2011. Id. at 49.
According to Ms. Klamp, she "didn't want to rent the property" and undergo the "miserable process" of "going in and
out of the house that [she] didn't want to go into," in order to show it to potential tenants. Id. at 46. However, she "felt
that was [her] only option to possibly get out of the lease even earlier . . . so [she] didn't have to continue paying until
March." Id. In sum, Ms. Klamp testified that, in December 2010 (and not as late as January or February 2011), she and
Ms. Webb reached a "[f]irm agreement" that if no renter had been found by March 1, 2011, she would be released from
the Lease. Klamp Dep. at 135.
Accordingly, by email on December 16, 2010, Ms. Klamp advised Ms. Webb that she wanted "to go ahead and [*25]
post an ad on craigslist in addition to a sign in the front yard," and that "[b]eing in the house by [her]self" was not "an
issue," because she could "find someone to be there with [her]." ECF 74-8 at 2. Ms. Webb responded by email the same
day, advising Ms. Klamp that she would provide Klamp with a copy of the craigslist ad and pictures she had previously
used to advertise the Property for rent. Id. Ms. Klamp posted a black and orange "For Rent" sign in the front yard of the
Property, containing Ms. Klamp's cell phone number. Klamp Dep. at 44-45. According to Ms. Klamp, she showed the
Property to some potential renters, but none of them ultimately entered into a lease. Id. at 142.
In the meantime, as of January 4, 2011, Ms. Webb was four months behind on her mortgage payments, having failed to
make the payments due for October, November, December, and January. The four-month delinquency triggered an
automatic request, generated by Green Tree's computer system, for a visual site inspection of the Property. See
Declaration of Ernest E. Wood ¶ 2 ("Wood Decl."), Ex.K to Motion (ECF 74-12). The request was transmitted to Five
Brothers, and an employee or contractor of Five Brothers conducted [*26] a visual site inspection of the Property on
January 10, 2011. 17 The inspector submitted an inspection report noting that the Property was "Vacant per visual /
Locked / No personal property visible / For rent by owner @ [Klamp's cell phone number]." Inspection Report 1/10/11
(ECF 75-20 at 4). The Five Brothers inspector also noted that there was no exterior damage to the Property and that "No
Interview [was] Conducted." Id. The inspection report included photographs of the exterior front and what appears to be
the rear or side of the Property, and a picture of the "For Rent" sign in the yard with Ms. Klamp's phone number. See id.
(ECF 75-20 at 6).
17 The Five Brothers employee or contractor who conducted the inspection on January 10, 2011, is not identified in the record.
On January 11, 2011, a notation of the results of the inspection was entered into Green Tree's electronic record for Ms.
Webb's account. It stated, "Site Visit Completed"; provided the inspector's notes that the Property was "Vacant per visual
/ Locked / No personal property visible / For rent by owner @ [Ms. Klamp's cell phone number]"; and stated: "External
inspection ordered." Green Tree Account Notes at 13, Ex.3 [*27] to Cross-Motion (ECF 75-3); see also Wood Decl. ¶
3; Deposition of Ernest Wood at 24 ("Wood Dep."), Ex.15 to Cross-Motion (ECF 75-15).
Ernest Wood, a "collection representative" in Green Tree's mortgage collections department, was assigned to Ms.
Webb's account. Wood Decl. ¶ 1. Green Tree's electronic record for Ms. Webb's account indicates that, after speaking
with Ms. Webb by phone on numerous occasions regarding her delinquent payments in October and November 2010,
see Green Tree Account Notes at 17-24, Mr. Wood had been unable to reach Ms. Webb by phone in December or from
the start of January through January 13, 2011, despite attempts every few days. See id. at 13-17. On some but not all
occasions, Mr. Wood left messages for Ms. Webb asking her to return his calls. See id. 18
Page 36Page 36
2013 U.S. Dist. LEXIS 140205, *
18 Plaintiff alleges that she called Green Tree in January 2010 and left numerous voice messages for Mr. Wood that are not reflected in
Green Tree's records. See Webb Decl. ¶ 17. In considering Green Tree's Motion, the Court must assume the truth of these averments. Plaintiff
has submitted deposition testimony of Mr. Wood that voice messages from a borrower would not necessarily be reflected in the electronic
[*28] record and that it was within his discretion whether to make a note of a voice message. See Wood Dep. at 24-25. Moreover, she has
submitted deposition testimony of Curtis Baker, another employee of Green Tree (apparently in a supervisory position within Wood's
department, although the portion of Baker's deposition in which he presumably described his position is not contained in the record), who
indicated that collection representatives are required to note in the records all messages received from borrowers. See Deposition of Curtis
Baker at 36-37, Ex.14 to Cross-Motion (ECF 75-14). However, plaintiff provides no indication of the content of any of her messages. In
particular, she does not indicate that she ever told Mr. Wood that the Property was occupied. Without any indication of the content of Ms.
Webb's messages, the mere fact that she left them does not generate a dispute of material fact as to what Wood and Green Tree knew or
intended in January 2010.
On January 13, 2011, having seen the report of the January 10 inspection in the electronic record, and being
"[c]oncerned that the Property was vacant," Wood Decl. ¶ 4, Mr. Wood called Ms. Webb but again she did not answer
and [*29] he left a message. Id.; see also Green Tree Account Notes at 13. On January 17, 2011, Mr. Wood called Ms.
Webb again and again got no answer. Wood Decl. ¶ 5; Green Tree Account Notes at 12. He then called the phone
number listed on the "For Rent" sign, as stated in the inspection report, which he "assumed was associated with [Ms.
Webb]." Wood Decl. ¶ 6. In reality, of course, it was Ms. Klamp's phone number.
Mr. Wood's notes for January 17, 2011, entered into the electronic record for Ms. Webb's account, state, Wood Dep. at
23; see also Green Tree Account Notes at 12: 19
Tried home. Left message to call back. Tried [Klamp's cell phone number], contact for rental. Talked to lady. Said app 20 not at that
number. Advised MS 21 this is the number on the sign for rental contact. MS said she will get message to app. Left message to call
back. Home not qualified . . . for hamp 22 as is a rental property. Account needs to be brought current plus legal fees.
19 Mr. Wood's notes as contained in the electronic system are typed in a form of shorthand that omits most vowels from words and uses
frequent acronyms and jargon terms. As such, it is difficult to decipher. The quoted text is actually what [*30] Mr. Wood read (and
interpreted) from his notes at his deposition.
20 The exact connotation of "app" is not clear, but it is a reference used in the notes repeatedly to refer to Ms. Webb. In the electronic notes,
the term is typed "AP."
21 The exact connotation of "MS" is also unclear, although in this context it refers to Ms. Klamp. In the electronic notes, it appears to refer
ordinarily to the person with whom Mr. Wood was speaking in a given phone call (perhaps it stands for "Ms.").
22 The acronym HAMP refers to the Home Affordable Modification Program, a federal initiative authorized by §§ 109 and 110 of the
Emergency Economic Stabilization Act of 2008, Pub. L. 110-343, 122 Stat. 3765 (Oct. 3, 2008), intended to avoid foreclosures by creating
incentives for mortgage lenders and servicers to modify outstanding mortgage loans.
Green Tree's electronic record for Ms. Webb's account reflects another attempt to contact Ms. Webb by telephone (via
Ms. Klamp) on January 20, 2011. Mr. Wood's notation from January 20, 2011 states, Wood Dep. at 23; see also Green
Tree Account Notes at 12:
Tried home. Left message to call back. Tried [Klamp's cell phone number]. Talked to lady. She said she is a previous [*31] tenant.
Said she is trying to get the property rented out for the app as she was breaking the lease. Asked MS [when] . . . the last rent
payment was made. MS said she had made all her payments and is current with app. Advised MS they'll . . . [s]till need to have app
call in. MS said okay. Tried work. No longer in service.
According to Mr. Wood, he made this second call to "the number displayed on the 'for rent' sign, solely in an attempt to
locate Plaintiff," and he "learned, for the first time, that the number on the sign belonged to Ms. Klamp, who described
herself as Plaintiff's 'former tenant.'" Wood Decl. ¶ 9. In his declaration, Wood stated, id.:
Ms. Klamp further informed me that she was "breaking the lease" and was attempting to rent the Property. In an effort to confirm
the status of the Property, I inquired as to when Ms. Klamp made her last rent payment to Plaintiff. Ms. Klamp responded that she
Page 37Page 37
2013 U.S. Dist. LEXIS 140205, *
had made all her rental payments to Plaintiff and I reiterated that I needed Plaintiff to contact me. At no time during this
conversation did I reveal any information to Ms. Klamp regarding Plaintiff's mortgage loan.
Wood did not mention any calls to Klamp other than the ones on January [*32] 17 and 20. Nor are any other phone
conversations with Klamp memorialized in Green Tree's electronic records.
At her deposition, Ms. Klamp's recollection was not inconsistent with Mr. Wood's notes and averments, although Ms.
Klamp repeatedly stated that her memory on these points was not precise, and she needed to review an email she wrote
on January 18, 2011, to refresh her recollection as to some of the details of the call on January 17, 2011. Klamp Dep. at
70-77.
As to January 17, 2011, Klamp recalled that she received a call from "Ernie" on that date, and he "was looking for Ms.
Webb." Id. at 70. According to Klamp, that call was the first one that she ever received from Mr. Wood, id. at 71, and,
"[f]rom the best that [she] can remember, [she] was contacted twice." Id. at 75-76; see also id. at 79.
In the call on January 17, Mr. Wood stated that he was trying to "contact" Ms. Webb, but Ms. Klamp could not recall
whether he said why he was calling. Id. at 70. In any event, Klamp did not give Webb's phone number to Wood because
she "didn't know who Ernie was" and "didn't feel comfortable giving Sandy's personal information to him." Id. Klamp
explained: "As far as I knew, it was just [*33] some random man calling me at work looking for Sandy . . . ." Id. 23 As a
result of the phone call, Ms. Klamp emailed Ms. Webb on January 18, 2011, stating: "A man named Ernie from Green
Tree Servicing called me yesterday looking for your number. I refused to give it to him...I told him I would give you his
instead. I'm not quite sure what it was in reference to, but I just wanted to let you know." ECF 75-13 at 6 (ellipsis in
original).
23 Although Ms. Klamp testified that Mr. Wood called her "at work," his notes reflect that he called her cell phone number, as listed on the
"For Rent" sign, and the evidence in the record does not disclose any plausible way that Mr. Wood could have known Ms. Klamp's work
phone number. See Klamp Dep. at 134. Notably, January 17, 2011, was a Monday, and Mr. Wood's electronic notes reflect that the call was
made at around 3:00 p.m. Thus, Ms. Klamp likely received the call while she was at work, and may simply not recall accurately the phone
on which she received the call. In any event, this minor discrepancy does not create a dispute of material fact.
Ms. Klamp did not recall the exact date of the second call, but she "want[ed] to say it was within the same [*34]
month" as the first call. Klamp Dep. at 77. As to the content of the second call, Ms. Klamp stated: "I just remember he
was looking for Sandy and that it seemed to be that it was in reference to the property. . . ." Id. at 77-78. She could not
recall whether Mr. Wood told her why he was trying to locate Ms. Webb. Id. at 78-79.
Of course, Ms. Klamp and Mr. Wood are the only people with direct knowledge of the number and content of any phone
conversations between them. Ms. Klamp's memory was somewhat vague, especially as to the second call. Arguably, Ms.
Webb's recollection of what Ms. Klamp told her at the time about the content of the call might be admissible under an
exception to the rule against hearsay (or might refresh Ms. Klamp's recollection if it was provided to her). Even
accepting that proposition, however, Ms. Webb's testimony on this point is insufficient to generate a genuine factual
dispute. At her deposition, Ms. Webb stated:
[Mr. Wood] started calling [Ms. Klamp] at work. She was upset. He called her at work on the first day it was no big deal. She took
a message, sent me his number. The second day she took a message, sent me his number. The third day she was getting pissy [*35]
about it. The people at work thought she was getting collection calls because she was behind on bills.
Webb Dep. at 132. Even assuming that there were three calls, as Ms. Webb alleges, nothing in the above-quoted
testimony is indicative of the actual content of anything Mr. Wood supposedly said to Ms. Klamp.
On Friday, January 21, 2011, Ms. Webb sent Ms. Klamp an email stating, in relevant part, ECF 74-9:
I wanted to put what we discussed into writing to make sure we both know what to expect. . . . I will continue to attempt to rent the
unit, but as you have seen the bulk of phone calls are not serious renters . . . . What we have agreed is that you will not be held
responsible for the rent until the end of the lease but instead will pay February rent and forfeit the security deposit. You will move
out by the end of February and turn over the keys. In return, I will forgive whatever rent I am entitled to under the remainder of the
lease that goes through 8/30/11.
Page 38Page 38
2013 U.S. Dist. LEXIS 140205, *
The email does not mention the underlying reason for the early termination of the Lease, or the reason why the email
was sent at that particular juncture. At her deposition, Ms. Webb testified, Webb Dep. at 131-33:
[A]t that point [*36] I had decided that this was the best move. . . . At this point I had gotten pretty behind on my mortgage and I
had been in a pretty heated debate about having a tenant in the home with Ernie from Green Tree, he had made his opinion on this
very known to me that he thought it was horrible that I had a tenant in the home. He hated it . . . . And at that point between what
she was telling me that this guy was calling her at work and the conversations I was having with this guy who had told me his
opinion about having a renter in the house I knew there was no way that this was going to deescalate. So at that point she had been
pushing for it all along, renters weren't coming along and I just told her, hey, let's just, if that's still what you want to do let's do it
because I knew things were going to get worse. . . . So I finally caved in to her, saying, go ahead, just leave.
In contrast, Ms. Klamp testified, as noted, that she and Ms. Webb had had a "[f]irm agreement" since December that, if
no renter had been found by March 1, Ms. Klamp would be released from the Lease. Klamp Dep. at 135.
In the interim, the initial report from the Five Brothers site inspection that the Property was vacant [*37] had
automatically triggered a computer generated request to Five Brothers to conduct a somewhat more thorough "exterior
inspection." An employee or contractor for Five Brothers performed this inspection on January 20, 2011, completing a
report on a more detailed form than the previous inspection. See Inspection Report 1/20/11 (ECF 75-20 at 1). 24 The
inspector again reported that the "Property is vacant" and noted the "For rent sign" with Ms. Klamp's phone number. Id.
The inspector also noted that the vacancy of the property was "Verified By: VISUAL"; that the Property was secure;
that the status of the utilities was unknown; that there was "No personal property prese[nt]"; that there were no visible
exterior damages; and that the inspector did not have an "Interior View." Id. Notably, none of plaintiff's causes of action
arise from either this inspection or the previous inspection that occurred on January 10, 2011.
24 Again, the record does not reveal the identity of the person who conducted the inspection.
The results of the second inspection were received electronically in Green Tree's records on January 25, 2011. See
Green Tree Account Notes at 11. The electronic record stated: Property [*38] is vacant. For rent sign [Klamp's phone
number]." Id. Later that day, Lorna Agravante, a Green Tree employee, emailed Mr. Wood, asking him to "advise of any
account level reason NOT to approve [Ms. Webb's account] for Re-Key/Winterization." ECF 75-15 at 6 (bold and
capitals in original). Mr. Wood replied: "approve." Id. The same day, Ms. Agravante entered into Green Tree's electronic
record for Ms. Webb's account the following directive to Five Brothers: "RE-KEY ORDERED.......Please secure
according to FNMA guidelines and if over the allowable, please bid." Green Tree Account Notes at 11 (ellipsis in
original).
According to Christina Hankey, the Operations Manager for Five Brothers, Five Brothers received an "initial secure
order" for the Property from Green Tree. Deposition of Christina Hankey at 10, 24 ("Hankey Dep."). 25 According to Ms.
Hankey, an "initial secure" entails the following steps, id. at 24:
[I]n accordance with Fannie Mae guidelines . . . complete a lock change, secure the property. If it has a broken window, Fannie
Mae requires that window be boarded. If there is a pool in the yard, . . . the pool must be secured or if there is a fence around the
pool, the fence itself [*39] must be secured. The grass must be cut if it's within Fannie Mae's grass cutting season and/or the
property winterized if it's within Fannie Mae's winterization season. They have to cap any exposed wires or gas lines, . . . remove
any hazards that are in the property, submit a bid for any damages that are required to be cured in accordance with Fannie Mae
regulations.
25 Excerpts from the transcript of Ms. Hankey's deposition are contained in ECF 74-14 and ECF 75-10.
Daniel Van Keuren, an employee of Green Tree, also discussed the process of initially securing a property. See
Deposition of Daniel Van Keuren at 10-11 ("Van Keuren Dep."). 26 At his deposition, he stated, id.: "[Five Brothers]
would first confirm vacancy. Then . . . per Fannie Mae guidelines, they would re-key the property through a secondary
access point, either a rear or side door, leaving the front door available . . . to the homeowner." Mr. Van Keuren stated
that it would not be appropriate to re-key a property if it was discovered that the property was occupied. Id. at 12.
Page 39Page 39
2013 U.S. Dist. LEXIS 140205, *
According to Van Keuren, it is the responsibility of Five Brothers to determine whether a property is occupied or vacant.
Id. at 13-14.
26 Excerpts [*40] from the transcript of Mr. Van Keuren's deposition are contained in ECF 74-13 and ECF 75-17. Neither side submitted the
initial pages of the deposition transcript, in which Mr. Van Keuren presumably described his exact position with Green Tree.
When Five Brothers received the initial secure order for the Property, it contacted one of its independent contractors in
the Grasonville area, Dean O'Donnell, to secure the Property. Hankey Dep. at 24. At the time, Mr. O'Donnell was the
proprietor of a landscaping and lawn care business operating under the name 3D Lawn Care. Deposition of Dean
O'Donnell at 9 ("O'Donnell Dep."). 27 O'Donnell had performed a number of lawn mowing jobs for Five Brothers, id. at
10-11, but had never previously secured a property. Id. at 15. According to O'Donnell, Five Brothers "asked [him] if he
was interested in securing a foreclosed home," i.e., the Property, and he "told them [he] would go look at it and get back
to them." Id.
27 Excerpts from the transcript of Mr. O'Donnell's deposition are contained in ECF 74-16, ECF 75-6, and ECF 77-8.
Coincidentally, Mr. O'Donnell's cousin, Mark Thomas, runs an automotive service shop that is located across the street
from [*41] the Property. Id. at 16; see also Deposition of Mark Thomas at 51 ("Thomas Dep."). 28 Mr. O'Donnell drove
to the Property on January 27, 2011, to determine "whether or not [he] wanted it and/or give [Five Brothers] a price to
do the job." O'Donnell Dep. at 39. He "initially told [Five Brothers] that [he] was interested, but [he] couldn't tell them
anything until [he had] seen what was entailed." Id. So, he went to the Property "with the intention[ ] of giving [Five
Brothers] an estimate on securing the property." Id.; see also Thomas Dep. at 51.
28 Excerpts from the transcript of Mr. Thomas's deposition are contained in ECF 74-7, ECF 75-12, and ECF 77-7.
When O'Donnell arrived on the street, it was unclear to him "which house exactly was the house [he] was supposed to
be looking at," because the mailboxes to several houses on the street were all placed together, away from the houses. Id.
at 16. So, he went across the street to his cousin's service station to "ask [Mr. Thomas] if he knew which house was
which." Id.; see also Thomas Dep. at 51-52. Mr. Thomas knew both Ms. Webb and Ms. Klamp. Indeed, he and Ms.
Klamp worked out at the same gym. Thomas Dep. at 37. 29 When Mr. Thomas realized [*42] that the house Mr.
O'Donnell had been asked to secure was Ms. Webb's, he told his cousin: "I don't think that would be a foreclosure,
knowing Sandy Webb. She's not going to let something go into foreclosure. . . . I think you've got something wrong
here, because I know that's Sandy's house, and I think you got the wrong house." Id. at 52-53.
29 Mr. Thomas testified that he had run into Ms. Klamp at the gym shortly after she and Mr. Miller broke up, and Ms. Klamp informed him
about her situation with regard to the breakup and the Property. Thomas Dep. at 37-38. According to Mr. Thomas, Ms. Klamp informed him
that she was looking to find someone else to rent the Property, id. at 38-39, and that "Christina said that she could get out of her contract . . .
at around March, that she would be let out in March regardless [of] whether she found someone to take over or not, March of 2011." Id. at
39. Mr. Thomas believed that this conversation with Ms. Klamp had taken place in November 2010, before Thanksgiving. Id. at 37-38, 41.
Given Ms. Klamp's testimony regarding the timing of the end of her relationship with Mr. Miller, it is likely that Mr. Thomas did not
accurately recall the date. In any [*43] event, this discrepancy does not create a dispute of material fact.
Nevertheless, O'Donnell looked in the front window of the Property to determine whether it was occupied. According to
O'Donnell, the Property "looked to be vacant." O'Donnell Dep. at 31. Mr. O'Donnell recalled that there were "one or
two small pieces of furniture that [he] could see from one window that [he] looked through," but he "didn't do a lot of
poking." Id. at 17-18. He did not look through any windows other than the front window, enter the home, or take any
pictures. Id. at 34. He did not walk to the back of the Property and did not open any gates. Id. at 32. Moreover,
O'Donnell testified that, to the extent that he had gone on the Property and looked in the window, it was not at Five
Brothers' instruction but of his own volition, as part of his determination of whether he was interested in the job. Id. at
44-45.
Page 40Page 40
2013 U.S. Dist. LEXIS 140205, *
Mr. Thomas and Mr. O'Donnell telephoned Webb from Mr. Thomas's office at the shop. Thomas Dep. at 53. They both
spoke with Ms. Webb. She "was surprised" and told Mr. Thomas, "don't let him touch that house." Id. According to Mr.
O'Donnell, Ms. Webb asked him if he had looked through the windows and he [*44] said that he had, in order to
determine whether the house was occupied. O'Donnell Dep. at 16-17. Ms. Webb also informed the cousins that "there
must be a mistake and . . . that she would look into the matter and get it straight." Thomas Dep. at 54.
Accordingly, Mr. Thomas "didn't let" Mr. O'Donnell secure the Property. Id. at 53. Mr. Thomas testified: "I told Dean
not to do it, don't mess with it," and O'Donnell responded, "whatever you say. He said, I think I'll stay away from it."
Thomas Dep. at 55. O'Donnell "decided [he] didn't want anything to do with the job," O'Donnell Dep. at 16, drove
away, see Thomas Dep. at 55, and did not return to the Property. O'Donnell Dep. at 29. Thereafter, O'Donnell informed
Five Brothers that he "wasn't interested in the job." Id. at 15.
Both Mr. Thomas and Mr. O'Donnell testified unequivocally that Ms. Klamp was not at the Property that day and that
they did not speak with her in person or by telephone. See Thomas Dep. at 53-55; O'Donnell Dep. at 18, 32, 40. Ms.
Klamp also testified that she was not at the Property and "never saw anybody" in person at the Property. Klamp Dep. at
85. In contrast to Mr. Thomas and Mr. O'Donnell, she testified that she [*45] had a "vague memory" that Mr. Thomas
had called her that day, but she also insisted repeatedly that she did not remember this accurately. Id. at 81-84.
Moreover, Ms. Klamp testified that, although her father had helped her show the Property to prospective renters at
various times, she did not "remember him being involved with Green Tree or Five Brothers or any of that component to
it at all." Id. at 140; see id. at 133-34.
The following colloquy from Ms. Klamp's deposition is pertinent, id. at 138-140:
[Counsel for Five Brothers]. . . . Did you have any idea or come to learn as to why Green Tree or Five Brothers was inquiring at
all?
A. No. I didn't really know what was going on.
Q. Did you ever come to find out what was going on?
A. . . . [T]he only thing I was told was there was a mistake made. They were pursuing the house and shouldn't have been pursuing
the house. There was no reason why they should have been pursuing that house. That's . . . the impression I was under.
Q. And who gave you that impression?
A. Sandy. Ms. Webb. . . .
Q. [*46] No one from Green Tree or Five Brothers gave you that information about why they were stopping by the property or
inquiring as to Sandy's contact information?
A. No, I didn't learn that from Green Tree or Five Brothers. No. It was--Sandy informed me about everything.
Q. Were you ever intimidated at all by Green Tree or Five Brothers or any of their employees or agents?
A. Not at all.
Q. Were you ever scared at all?
A. No, I was never scared.
***
Q. . . . Did any of this ordeal with Green Tree or Five Brothers have any bearing at all on your decision to move out of that
residence?
A. No. I would have moved out whether they--no matter what they said. . . . I had chosen before any of their involvement that I
wanted to get out of the house. 30
30 Plaintiff has submitted an unauthenticated copy of what appears to be a page from her cell phone call records, reflecting that she received
an incoming call from Ms. Klamp's cell phone on January 27, 2010, which lasted for seven minutes, after which she exchanged phone calls
with a number that she states is Mr. O'Donnell's. Thus, she suggests that Ms. Klamp, Mr. O'Donnell, and Mr. Thomas are mistaken in their
recollections and that she learned that Mr. [*47] O'Donnell was at the Property from Ms. Klamp. Even assuming that this record can support
plaintiff's claim, there is no dispute that Ms. Klamp was not at the Property on January 27, 2010.
Page 41Page 41
2013 U.S. Dist. LEXIS 140205, *
Green Tree's electronic records reflect that Ms. Webb called Green Tree on January 27, 2011, shortly after 4:00 p.m.,
and spoke with an employee other than Mr. Wood. The notes from that call (as interpreted by Mr. Wood) state, Wood
Dep. at 34; see also Green Tree Account Notes at 10:
Talked to app. MS said someone from Five Brothers had been at home and said they would rekey home even though home is
currently occupied with tenants. Told MS Green Tree could rekey home if home was occupied. Told MS would forward E/ [Wood
did not know what "E/" meant] to [supervisor] to be sure [that] . . . wouldn't happen. Emailed JDP.
The next entry in the electronic record was made later that day by a user with the initials JDP, and stated: "Management
Review . . . Emailed FNMA Prop to make sure home is not rekeyed...renters [live in house]." Green Tree Account Notes
at 10 (capitalization altered). At about 7:00 p.m. that day, the electronic record reflects another call received from Ms.
Webb. The notes state, Wood Dep. [*48] at 33-34; see also Green Tree Account Notes at 10:
Inbound from Sandy wanting to know if this was taken care of. Said renter is freaking out and not wanting to leave her home for
fear she will come back to a cleared-out home. Advised her have requested the rekey to be cancelled. She will follow up tomorrow.
The parties agree that the Property was not re-keyed. On or about February 28, 2011, Ms. Klamp concluded her tenancy
and removed her remaining possessions (and Mr. Miller's) from the Property. See ECF 75-13 at 1. On that date, Ms.
Webb provided Klamp with a letter of reference, which stated, among other things: "While Christina had a year lease
and sought to end the lease early due to an extraordinary personal situation, she left on good terms because she fulfilled
her contractual obligations to terminate early." Ex.I to Motion (ECF 74-10). When asked at her deposition about the
"extraordinary personal situation" to which Ms. Webb referred, Ms. Klamp testified that this phrase referred to her
breakup with Mr. Miller. And, she unequivocally stated that her breakup with Mr. Miller was the only reason that she
sought to end the Lease early. Klamp Dep. at 127.
Additional facts will be [*49] included in the Discussion.
Discussion
A. Summary Judgment Standard

Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is appropriate only "if the movant shows
that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." A fact
is "material" if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).
In resolving a summary judgment motion, the court must view all of the facts, including reasonable inferences to be
drawn from them, in the light most favorable to the non-moving party. See Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986); News and Observer Publishing Co. v. Raleigh-
Durham Airport Auth., 597 F.3d 570, 576 (4th Cir. 2010); Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639,
645 (4th Cir. 2002). "A party opposing a properly supported motion for summary judgment 'may not rest upon the mere
allegations or denials of [its] pleadings,' but rather must 'set forth specific facts'" showing that there is a triable issue.
Bouchat v. Baltimore Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003) [*50] (quoting former Fed. R. Civ.
P. 56(e)), cert. denied, 541 U.S. 1042, 124 S. Ct. 2171, 158 L. Ed. 2d 732 (2004). See Celotex Corp. v. Catrett, 477 U.S.
317, 322-24, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). The "judge's function" in reviewing a motion for summary
judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine
issue for trial." Liberty Lobby, 477 U.S. at 249. If "the evidence is such that a reasonable jury could return a verdict for
the nonmoving party," there is a dispute of material fact that precludes summary judgment. Id. at 248.
When, as here, the parties have filed cross-motions for summary judgment, the court must consider "each motion
separately on its own merits 'to determine whether either of the parties deserves judgment as a matter of law.'"
Rossignol v. Voorhaar, 316 F.3d 516, 523 (4th Cir.) (citation omitted), cert. denied, 540 U.S. 822, 124 S. Ct. 135, 157 L.
Ed. 2d 41 (2003). "Both motions must be denied if the court finds that there is a genuine issue of material fact. But if
there is no genuine issue and one or the other party is entitled to prevail as a matter of law, the court will render
judgment." 10A WRIGHT, MILLER & KANE, FEDERAL PRACTICE & PROCEDURE § 2720, [*51] at 336-37 (3d ed. 1998,
2012 Supp.).
Page 42Page 42
2013 U.S. Dist. LEXIS 140205, *
B. Evidentiary Matters
Before discussing the merits of the parties' arguments, I must resolve some disputes between the parties concerning
what evidence is properly before the Court.
Green Tree maintains that plaintiff must be deemed to have admitted the truth of several contentions that, in its view,
fatally undermine certain of her claims, because she failed to respond timely to Green Tree's "First Set of Request[s] for
Admission of Facts and Genuineness of Documents" ("Request for Admissions"), a copy of which it submitted as
Exhibit 1 to the Green Tree Reply (ECF 79-1). 31 Plaintiff does not agree that the Court should accept as admitted the
contentions in the Request for Admissions. See Webb Reply at 1-3. Green Tree moved for leave to file a Surreply (ECF
85, ECF 85-1) regarding the dispute over the Request for Admissions, and plaintiff filed a Response to Surreply (ECF
86). 32
31 Because the deadline for plaintiff to respond to the Request for Admissions had not elapsed when the Motion and the Cross-Motion were
filed, the issues regarding the Request for Admissions were first raised in the Green Tree Reply.
32 Leave of court is necessary to file [*52] a surreply. See Local Rule 105.2(a). I will grant the motion for leave to file the Surreply (ECF
85). Green Tree moved to strike plaintiff's Response to Surreply (ECF 89). That motion will be denied.
In addition, Green Tree filed a Motion to Strike (ECF 78), asserting that I should not consider several averments in a
declaration filed by Ms. Webb on grounds of lack of relevance and/or hearsay. It also contends that several other
documentary exhibits submitted by plaintiff should be disregarded on the same grounds and/or because they have not
been properly authenticated. Plaintiff filed an opposition to the Motion to Strike, see Strike Opposition (ECF 83); Green
Tree filed a reply, see Strike Reply (ECF 84); plaintiff filed a single-paragraph surreply, see Strike Surreply (ECF 87-1),
accompanied by a motion for leave to file it (ECF 87); and Green Tree filed an opposition, see Strike Surreply
Opposition (ECF 88). 33 I address these matters in sequence.
33 I will grant plaintiff's motion for leave to file the Strike Surreply (ECF 87). However, I have also considered the arguments in the Strike
Surreply Opposition.
1. Request for Admissions

Requests for admissions are a discovery device governed [*53] by Rule 36 of the Federal Rules of Civil Procedure.
Rule 36(a) provides:
A party may serve on any other party a written request to admit, for purposes of the pending action only, the truth of any matters
within the scope of Rule 26(b)(1) 34 relating to:
(A) facts, the application of law to fact, or opinions about either; and
(B) the genuineness of any described documents.34
In response to a request for an admission, the answering party must either admit the matter requested or, "[i]f a matter is
not admitted, . . . specifically deny it or state in detail why the answering party cannot truthfully admit or deny it." Fed.
R. Civ. P. 36(a)(4). Moreover, the rule allows a party to admit a matter in part and deny it in part or plead a lack of
knowledge or information under certain circumstances. See id.
34 Fed. R. Civ. P. 26(b)(1) establishes the scope of civil discovery in a federal action. It provides:
Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any
nonprivileged matter that is relevant to any party's claim or defense--including the existence, description, nature, custody,
condition, and location of any documents or other [*54] tangible things and the identity and location of persons who
know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject
matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably
calculated to lead to the discovery of admissible evidence. All discovery is subject to the limitations imposed by Rule
Page 43Page 43
2013 U.S. Dist. LEXIS 140205, *
26(b)(2)(C) [which authorizes the court to limit discovery on the basis of redundancy, availability from another source or
prior opportunity, or cost/benefit considerations].
The effect of an admission is specified in Fed. R. Civ. P. 36(b):
A matter admitted under this rule is conclusively established unless the court, on motion, permits the admission to be withdrawn or
amended. Subject to Rule 16(e), 35 [*55] the court may permit withdrawal or amendment if it would promote the presentation of
the merits of the action and if the court is not persuaded that it would prejudice the requesting party in maintaining or defending the
action on the merits. An admission under this rule is not an admission for any other purpose and cannot be used against the party in
any other proceeding.
35 Fed. R. Civ. P. 16(e) provides that a court "may modify the [pretrial] order issued after a final pretrial conference only to prevent manifest
injustice."
Of import here, Rule 36(a)(3) establishes the time to respond to a request for admissions and the consequence of an
untimely response:
A matter is admitted unless, within 30 days after being served, the party to whom the request is directed serves on the requesting
party a written answer or objection addressed to the matter and signed by the party or its attorney. A shorter or longer time for
responding may . . . be ordered by the court. 36
36 Rule 36(a)(3) also allows the parties to stipulate among themselves to a shorter or longer time for responding to a request for admission.
That provision is not relevant here.
In its Request for Admissions, Green Tree asked plaintiff [*56] to admit several background facts and the authenticity
of a number of documents. However, it also asked for admissions that go to the heart of the merits of some of plaintiff's
claims. For instance, it asked plaintiff to admit that she made her mortgage payment for October 2009 on October 15,
2009, and that servicing rights for the mortgage were assigned to Green Tree on November 1, 2009. See Request for
Admissions No. 8, 9. If admitted, those contentions would tend to show that plaintiff's mortgage was not in default
when it was assigned to Green Tree, in turn indicating that Green Treen is exempt from liability under the FDCPA as a
"debt collector" with respect to plaintiff's mortgage. Similarly, Green Tree asked plaintiff to admit that her tenant was
neither residing nor present at the Property on January 27, 2011; that the tenant had no communications with Green Tree
or Five Brothers on that date; and that the tenant asked to be released from her lease before January 1, 2011, for
personal reasons unconnected to the "acts of Green Tree or Five Brothers." Request for Admissions No. 16, 18, 19, 21-
25. If admitted, those contentions would undermine plaintiff's claim for tortious interference [*57] with a business
relationship.
According to Green Tree's certificate of service, on November 7, 2012, Green Tree transmitted its Request for
Admissions to plaintiff by first-class mail, addressed to plaintiff's then-current address of record. See Request for
Admissions at 8; see also ECF 79-1 at 37 (cover letter for Request for Admissions, also dated Nov. 7, 2012). In addition
to the certificate of service, one of Green Tree's attorneys, John Y. Lee, has filed a declaration, under penalty of perjury,
asserting that he caused the Request for Admissions to be mailed to plaintiff on November 7, 2012. See Ex.C to
Surreply (ECF 85-1 at 20). The thirtieth day after November 7 was Friday, December 7, 2012. Because the time for a
response under Fed. R. Civ. P. 36(a)(3) is triggered by service on the answering party, and because plaintiff was served
with the Request for Admissions via first-class mail, the time to respond was extended three days by operation of Fed.
R. Civ. P. 6(d). Accordingly, based on the date of service certified by Green Tree's counsel, plaintiff was obligated to
respond to the Request for Admissions no later than Monday, December 10, 2012.
Page 44Page 44
2013 U.S. Dist. LEXIS 140205, *
Plaintiff sent Green Tree a response [*58] to the Request for Admissions, in which she denied some of the substantive
requests for admission discussed above. 37 However, Green Tree contends that plaintiff's response was not timely served
and therefore all of the contentions in Green Tree's Request for Admissions are deemed admitted in their entirety,
pursuant to Fed. R. Civ. P. 36(a)(3).
37 Neither party has filed a signed copy of plaintiff's response to the Request for Admissions. However, Green Tree has submitted an
unsigned copy of the response, which plaintiff emailed to it. See Ex.B to Surreply (ECF 85-1 at 13). Neither party appears to contend that
there is any discrepancy between the unsigned copy and the signed copy.
The certificate of service on plaintiff's response states that the response was mailed to Green Tree on December 7, 2012,
which would have been timely. See Fed. R. Civ. P. 5(b)(2)(C) (providing that, when a paper is served by mail, "service
is complete upon mailing"). However, Green Tree has submitted a copy of the envelope in which the response was
contained, see Ex.2 to Green Tree Reply (ECF 79-2), which contains a postmark dated December 14, 2012, in Portland,
Oregon. 38 Moreover, Green Tree asserts that [*59] it did not receive the response until December 17, 2012, which it
posits is "consistent" with plaintiff having mailed the response on December 14. Green Tree Reply at 7 n.7. In addition,
plaintiff sent Green Tree's counsel an unsigned courtesy copy of her response via email. However, the email was sent on
December 13, 2012, see Ex.B to Surreply (ECF 85-1 at 11), which still would have been untimely. 39
38 The envelope also contains a postage stamp generated by a digital postage meter, which also includes a date. The exact date of the
postage is not clearly legible, but it is a date in November 2012. Because neither side contends that the response was mailed in November
2012, I will disregard this date.
39 Green Tree also notes that the courtesy copy of the response is not valid because it was not signed, and that service by email is effective
only if the recipient "consented in writing" to accept service by email, Fed. R. Civ. P. 5(b)(2)(E), which Green Tree contends it did not do.
See Surreply at 2 n.2.
Plaintiff presents both factual and legal responses to Green Tree's arguments. As a factual matter, plaintiff asserts that
her response was not untimely for two reasons: (1) because the [*60] Request for Admissions was not served on
November 7, 2012, and (2) because she served her response on December 7, 2012.
As to the first reason, plaintiff claims that she did not actually receive the Request for Admissions until November 14,
2012. In an email sent to Green Tree's counsel, Mr. Lee, on the afternoon of November 14, 2012, plaintiff said: "Can
you send the admissions request via email in Word. My husband said they just arrived at the house and since we have
already lost a week, I want to at least get a peak [sic] at them and start responding." Ex.A to Webb Reply (ECF 80-1 at
5). Mr. Lee emailed plaintiff an electronic copy of the Request for Admissions later that day, saying: "As a courtesy, I
will provide them." Id. Plaintiff suggests that the Request for Admissions was "most likely served well after the
[November 7, 2012] deadline for request for admissions in the scheduling order." Webb Reply at 2. 40 She also faults
Green Tree for not providing the Court with a copy of the postmarked envelope in which it sent the Request for
Admissions although, as Green Tree points out, that envelope is in plaintiff's possession, not Green Tree's.
40 Plaintiff states that she did not "protest [*61] the late serving of the Request for Admissions due to Hurricane Sandy [which made
landfall on the eastern seaboard on or about October 29, 2012], assuming that a delay in delivery could have been caused by the electricity
and other logistical nightmares caused on the east coast by the storm." Webb Reply at 2 n.1. She also protests that Green Tree sent the
Request for Admissions to "an address known to be slow," id. at 2. However, the address to which Green Tree sent the Request for
Admissions was plaintiff's address of record.
As to the second reason, plaintiff asserts that she mailed her response to the Request for Admissions on December 7,
2012, by placing it in a mailbox in Washington County, Oregon-- not Multnomah County, where Portland is situated.
Webb Reply at 2 n.1. She hypothesizes that a postal "processing center" in Portland "must have stamped [the postmark
on the response] days later after some sort of delay that was no fault of Plaintiff." Id. She posits, moreover, that "if the
evidence of the cover letter and certification [for the Request for Admissions] from the defendant is enough for their
proof of date sent then it should also be sufficient evidence for plaintiff to [*62] attest in a certification that admissions
were sent on a date certain." Id. at 1. 41
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2013 U.S. Dist. LEXIS 140205, *
41 In light of this argument, it is noteworthy that plaintiff has not actually provided a signed certificate or sworn declaration as to the date on
which her response was sent. It is also notable that, in her email of December 13, 2012, transmitting the unsigned courtesy copy of her
response, she stated: "Just in case the mail is taking as long as it did to get to my house from your office, here is the unsigned answer I sent
last week." Ex.B to Surreply (ECF 85-1 at 11).
Plaintiff's factual argument is less than convincing, especially in light of the cavalier approach that it appears she has
taken to accurate portrayal of the facts underlying her substantive claims. I need not resolve the factual dispute as to
when the Request for Admissions and its response were served, however, because I am persuaded by plaintiff's legal
argument: even if the response was served four days late, Green Tree suffered no prejudice.
Although Fed. R. Civ. P. 36(a)(3) provides that requests for admissions are deemed admitted if not timely answered, the
Fourth Circuit has clearly stated that a district court is nevertheless [*63] vested with discretion "not to deem the
requests for admission as admitted." Nguyen v. CNA Corp., 44 F.3d 234, 242 (4th Cir. 1995). In Nguyen, the Court held
that "the district court did not abuse its discretion in refusing to consider the requests for admission as admitted," where
the response was "filed one day late," because "the late response was so minimal in time and work on the date for
responding was slowed by [a] snow storm." Id. at 243.
Here, no cognizable prejudice inured to Green Tree from plaintiff's late filing. As noted, the response to the Request for
Admissions was not due until after Green Tree filed its summary judgment Motion, and so even if the response was
timely, Green Tree could not have addressed it in the Motion. Moreover, Green Tree's reply to plaintiff's Cross-Motion
was not due until December 20, 2013, 42 nearly a week after plaintiff's response was served and a full week after Green
Tree had received the courtesy copy by email.
42 The Cross-Motion was filed on Monday, December 3, 2012, and by operation of Local Rule 105.2(a) and Fed. R. Civ. P. 6(d), Green
Tree's reply was due seventeen days later, on Thursday, December 20, 2012. It was filed on that date.
The [*64] "'failure to respond in a timely fashion'" to a request for admissions "'does not require the court automatically
to deem all matters admitted,'" United States v. Petroff-Kline, 557 F.3d 285, 293 (6th Cir. 2009) (citation omitted), and a
district court may "accept 'the filing of an answer that would otherwise be untimely.'" Id. (citation omitted). "The court
may permit . . . withdrawal or amendment [of deemed admissions] 'when [1] the presentation of the merits of the action
will be subserved thereby and [2] the party who obtained the admission fails to satisfy the court that withdrawal or
amendment will prejudice that party in maintaining the action or defense on the merits.'" Raiser v. Utah County, 409
F.3d 1243, 1246 (10th Cir. 2005)) (citation omitted) (brackets in original). Indeed, Fed. R. Civ. P. 36(b) expressly
permits withdrawal of admissions on the basis discussed in Raiser.
Green Tree protests that Rule 36(b) permits admissions to be withdrawn "on motion," and that plaintiff has not filed
such a motion. However, "a formal motion is not always required. Instead, a withdrawal 'may be imputed from a party's
actions' . . . ." Petroff-Kline, 557 F.3d at 293 (internal citations [*65] omitted). Plaintiff has timely and unequivocally
made clear that she does not intend to admit wholesale the contentions in Green Tree's Request for Admissions. In light
of the Fourth Circuit's "strong policy that cases be decided on their merits," United States v. Shaffer Equip. Co., 11 F.3d
450, 453 (4th Cir. 1993), I exercise my discretion not to rely on plaintiff's deemed admissions to the contentions in
Green Tree's Request for Admissions in resolving the pending motions.
2. Hearsay, Relevance, and Authentication

As noted, Green Tree challenges the admissibility of several of plaintiff's evidentiary submissions. In the context of
summary judgment motions, Fed. R. Civ. P. 56(c) provides that each side must support its factual assertions with
citation to "particular parts of materials in the record," Fed. R. Civ. P. 56(c)(1)(A), and that a party may object that
material cited by the other side cannot be presented in a form that would be admissible in evidence." Fed. R. Civ. P.
56(c)(2). Thus, although at the summary judgment stage a party does not necessarily need to "produce evidence in a
form that would be admissible at trial," Celotex, supra, 477 U.S. at 324, when the opposing party [*66] objects on
admissibility grounds, "[t]he burden is on the proponent to show that the material is admissible as presented or to
explain the admissible form that is anticipated." Fed. R. Civ. P. 56, Adv. Cmte. Notes, 2010 Amendments. Green Tree's
evidentiary challenges pertain to relevance, hearsay, and authentication.
Page 46Page 46
2013 U.S. Dist. LEXIS 140205, *
Under Rule 402 of the Federal Rules of Evidence, "[r]elevant evidence is admissible" unless rendered inadmissible
pursuant to some other particular legal provision, and "[i]rrelevant evidence is not admissible." "Evidence is relevant if:
(a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of
consequence in determining the action." Fed. R. Evid. 401. These evidentiary relevance "principles apply to summary
judgment motions." Ziskie v. Mineta, 547 F.3d 220, 225 (4th Cir. 2008).
Hearsay is defined by Rule 801(c) of the Federal Rules of Evidence. It is "a statement, other than one made by the
declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Id.
Hearsay is "not admissible," absent a rule of evidence or other statute or rule that renders it admissible. [*67] Fed. R.
Evid. 802. However, out of court statements are "not hearsay" if they are "not offered 'to prove the truth of the matter
asserted.'" United States v. Vidacak, 553 F.3d 344, 352 (4th Cir. 2009) (quoting Fed. R. Evid. 801(c)). Moreover, there
are several exceptions to the rule against hearsay, whereby an out of court statement may be offered to prove the truth of
the matter asserted. See Fed. R. Evid. 801(d), 803, 804. But, it is well settled that "hearsay evidence, which is
inadmissible at trial, cannot be considered on a motion for summary judgment." Md. Highways Contractors Ass'n v.
Maryland, 933 F.2d 1246, 1251 (4th Cir. 1991); accord Barnes v. Montgomery County, 798 F. Supp. 2d 688, 691 (D.
Md. 2011) ("[H]earsay statements . . . cannot support or defeat a motion for summary judgment.").
Fed. R. Evid. 901 governs authentication of documentary or tangible evidence. It provides that the proponent of an
"item of evidence" must "produce evidence sufficient to support a finding that the item is what the proponent claims it
is," Fed. R. Evid. 901(a)--for instance, competent "[t]estimony that an item is what it is claimed to be," Fed. R. Evid.
901(b)(1), or the "appearance, contents, [*68] substance, internal patterns, or other distinctive characteristics of the
item, taken together with all the circumstances." Fed. R. Evid. 901(b)(4). "It is well established that . . . unauthenticated
documents cannot be considered on a motion for summary judgment." Orsi v. Kirkwood, 999 F.2d 86, 92 (4th Cir.
1993).
Both authentication and hearsay are related to the concept of testimonial competence. Under Fed. R. Evid. 602, a
witness who is not offering expert opinion testimony "may testify to a matter only if evidence is introduced sufficient to
support a finding that the witness has personal knowledge of the matter." An "affidavit or declaration used to support or
oppose a motion [for summary judgment] must be made on personal knowledge, set out facts that would be admissible
in evidence, and show that the affiant or declarant is competent to testify on the matters stated." Fed. R. Civ. P. 56(c)(4).
See In re French, 499 F.3d 345, 358 (4th Cir. 2007) (describing requirements of former Rule 56(e), now codified
without substantive change in Rule 56(c)(4), as "mandatory"). It "is a failure of substance, not merely one of form, for a
party to file a summary judgment affidavit which is [*69] based on anything other than personal knowledge." Malina v.
Baltimore Gas & Elec. Co., 18 F. Supp. 2d 596, 604 n.4 (D. Md. 1998).
Notably, although Rule 56(c)(2) permits a party to object to the presentation of inadmissible evidence at the summary
judgment stage, "[t]here is no need to make a separate motion to strike." Fed. R. Civ. P. 56, Adv. Cmte. Notes, 2010
Amendments. In response to a well founded objection, a court will simply disregard the challenged evidence.
Accordingly, Green Tree's Strike Motion will be denied, as unnecessary. Nevertheless, I have carefully considered all of
Green Tree's evidentiary challenges and plaintiff's arguments in response. Many (although not all) of Green Tree's
challenges are meritorious. However, I have assumed, arguendo, that all of the documentary evidence submitted by
plaintiff is admissible and I have considered it. Admissible or not, none of the evidence submitted by plaintiff is
sufficient to generate a genuine dispute of material fact or demonstrate that she is entitled to judgment in her favor as a
matter of law.
C. Tortious Interference with Business Relationships

The tort of intentional interference with contractual or business relations [*70] is "well-established in Maryland."
Macklin v. Robert Logan Assocs., 334 Md. 287, 296, 639 A.2d 112, 116 (1994). It "arises only out of the relationships
between three parties, the parties to a contract or other economic relationship (P and T) and the interferer (D)." K & K
Mgmt., Inc. v. Lee, 316 Md. 137, 154, 557 A.2d 965, 973 (1989). The tort has "two general manifestations." Macklin,
334 Md. at 297, 639 A.2d at 117. In Macklin, the Maryland Court of Appeals explained: "While the two manifestations
of the tort share an underlying rationale, i.e., 'under certain circumstances, a party is liable if he interferes with and
damages another in his business or occupation,' they differ in their tolerance of interference." Id. at 298, 639 A.2d at 117
(citation omitted).
Under the first scenario, "where a contract between two parties exists, the circumstances in which a third party has a
right to interfere with the performance of that contract are more narrowly restricted." Natural Design, Inc. v. Rouse Co.,
Page 47Page 47
2013 U.S. Dist. LEXIS 140205, *
302 Md. 47, 69, 485 A.2d 663, 674 (1984). Where there is an existing contract that is not terminable at will, "inducing
its breach, even for competitive purposes, is itself improper and, [*71] consequently, not 'just cause' for damaging
another in his or her business." Macklin, 334 Md. at 303, 639 A.2d at 120.
A "broader right to interfere with economic relations exists" under the second scenario, "where no contract or a contract
terminable at will is involved." Natural Design, 302 Md. at 69-70, 485 A.2d at 674. Where there is no existing contract,
or the existing contract is "terminable at will by the party who refuses to continue performance," Macklin, 334 Md. at
304, 639 A.2d at 120, "there is no legal assurance of future performance; thus a competitor who intentionally causes a
third person not to continue an existing contract terminable at will does not improperly interfere with the contractual
relation if no wrongful means are employed." Id. at 305, 639 A.2d at 121. The Maryland Court of Appeals has provided
an illustrative list of "types of wrongful or unlawful acts that could form the basis" for the second manifestation of the
tort, including "'violence or intimidation, defamation, injurious falsehood or other fraud, violation of criminal law, and
the institution or threat of groundless civil suits or criminal prosecutions in bad faith.'" Berry & Gould, P.A. v. Berry,
360 Md. 142, 153, 757 A.2d 108, 113 (2000).
In [*72] this case, Ms. Webb and Ms. Klamp had a contract (i.e., the Lease). See Circuit City Stores, Inc. v. Rockville
Pike Joint Venture Ltd. P'shp, 376 Md. 331, 355, 829 A.2d 976, 989 (2003) ("[A] lease is both a contract and a
conveyance of a leasehold estate in land."). The Lease was not terminable at will. See Lease. Thus, this case involves
the first manifestation of the tort.
The first manifestation of the tort has five elements: (1) the existence of a contract between the plaintiff and a third
party; (2) the defendant's knowledge of that contract; (3) the defendant's intentional interference with the contract; (4)
breach or termination of the contract by the third party, as a result of the defendant's interference; and (5) damages
resulting from the breach or termination of the contract. See Macklin, 334 Md. at 301-02, 639 A.2d at 119; Wilmington
Trust Co. v. Clark, 289 Md. 313, 329, 424 A.2d 744 (1981); Goldman v. Harford Road Building Ass'n, 150 Md. 677,
681-82, 133 A. 843 (1926); Fowler v. Printers II, Inc., 89 Md. App. 448, 466, 598 A.2d 794, 802 (1991), cert. denied,
325 Md. 619, 602 A.2d 710 (1992); Lake Shore Investors v. Rite Aid Corp., 67 Md. App. 743, 748-49, 509 A.2d 727,
729-30 (1986); [*73] see also Webb I, 2011 U.S. Dist. LEXIS 141806, 2011 WL 6141464, at *4-8. Intent can be proven
"by showing that the defendant intentionally induced the breach or termination of the contract in order to harm the
plaintiff or to benefit the defendant at the expense of the plaintiff." Macklin, 334 Md. at 301, 639 A.2d at 119.
Green Tree correctly argues that plaintiff's claim fails for three reasons, which I have reordered. In the first place, the
tortious conduct that Webb alleged never actually occurred. Plaintiff alleged in her complaint that her tenant was at the
Property and discovered a Five Brothers employee peering in the windows and threatening to change the locks and
remove her possessions. In the complaint, Webb claimed that Green Tree "harassed" her tenant and "ran the tenant out
of the home" with "threats of breaking and entry . . . and actual trespass." Amended Complaint ¶ 19. But, the undisputed
material facts show that this never happened. Instead, Ms. Klamp received two (or, at most, three) phone calls from Mr.
Wood, none of which Ms. Klamp perceived as harassment. No agent of Green Tree or Five Brothers ever threatened Ms.
Klamp, over the phone or in person, with breaking and entry or eviction; indeed, [*74] aside from the handful of non-
harassing calls from Mr. Wood, Ms. Klamp had no dealings at all with representatives of Green Tree or Five Brothers.
Ms. Klamp was not even present at the Property when Mr. O'Donnell was there; while Ms. Klamp continued to have a
possessory interest in the Property through February 2011, she had actually vacated the Property in late November
2010. Even if Klamp had been present, O'Donnell was not there to threaten eviction.
Second, plaintiff cannot show that Green Tree intended to interfere with the Lease. The undisputed evidence makes
abundantly clear that Green Tree did not know, at the time that it directed Five Brothers to secure the Property, that there
was a tenant at the Property. Indeed, Green Tree directed Five Brothers to secure the Property because it appeared to be
vacant on two successive exterior inspections. And, it appeared to be vacant because it was vacant; no one was residing
at the Property. Mr. Wood obtained Ms. Klamp's phone number from the "For Rent" sign and then contacted her. In that
conversation, Klamp described herself to Wood as a former tenant.
In response to these claims, plaintiff has cited communications she had with Mr. [*75] Wood in which she notified him
that she had tenants at the Property. But, all of these communications were made in November 2010 at the latest.
Plaintiff has provided no evidence that could support a determination that Green Tree was on notice that Webb still had
a tenant residing at the Property in January 2011. To the contrary, every objective indication disclosed in the record that
was available to Green Tree at that time pointed in the other direction: the Property appeared vacant; it had a "For Rent"
sign in front of it; and, when contacted by Green Tree, Ms. Klamp described herself as plaintiff's "former tenant."
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2013 U.S. Dist. LEXIS 140205, *
Last and perhaps most important, it is abundantly clear that Green Tree's conduct did not cause the termination of the
Lease. Ms. Klamp testified repeatedly and unequivocally that the sole reason she sought to terminate the Lease was her
breakup with Mr. Miller, and that the conduct of Green Tree and Five Brothers played no role whatsoever in her
decision.
In the Cross-Motion and in Ms. Webb's deposition testimony, plaintiff articulated a response to this argument: even
though Green Tree's conduct did not affect Ms. Klamp's decision to break the Lease, Green Tree's conduct [*76]
affected Ms. Webb's decision to release the tenant. Plaintiff encapsulated this contention at her deposition in the
following colloquy with Green Tree's counsel, Webb Dep. at 283-84:
Q Ms. Klamp testified that her request and her decision to get out of the lease had nothing to do with the actions of Green Tree
and/or Five Brothers. Do you recall that?
A I agree 100 percent. Her actions didn't. Mine were different. When she first wanted out it was because her boyfriend had cheated
on her. I only eventually caved in to her wanting to leave because I knew that at a certain point it was going to get worse and I
couldn't sustain what was going on.
Q But . . . Ms. Klamp's request to get out of the lease had nothing to do with Five Brothers and Green Tree. You would agree with
that?
A It [*77] only had to do with my reaction, it did not have to do with her request. Her request started November 28th after she
found out her boyfriend was cheating on her. I worked with her but was never going to let her out of the lease without fulfilling her
obligations until I knew I couldn't followup [sic] on my part. As a lawyer I knew I had duties and honestly I couldn't stick her with
something that I couldn't sustain.
Plaintiff's theory is that the "release was forced upon Plaintiff because she could no longer perform under the contract,
without the ability to guarantee or provide quiet enjoyment." Cross-Motion at 8. Plaintiff's argument is creative,
although she cites no case law in support of it. However, I need not determine whether, as a legal matter, a viable claim
for tortious interference can be stated for interference that causes the plaintiff to breach its contract with the third party
(rather than vice versa). As with the rest of her suit, plaintiff's largest problem is that the undisputed facts stubbornly
refuse to support her legal theory.
It was plaintiff who, in an email of December 10, 2010, first suggested to Ms. Klamp that she cut her losses and break
the Lease, paying [*78] Webb the January rent and foregoing the return of her security deposit. Indeed, plaintiff urged
Ms. Klamp to take that option rather than search for a replacement tenant. That offer, which was motivated solely in
response to Ms. Klamp's breakup with her boyfriend (who had also resided at the Property), far predated the allegedly
tortious conduct of which plaintiff complains. Ms. Klamp also testified that she and Ms. Webb arrived at a firm
agreement in December on the terms on which the Lease was ultimately terminated: the tenant would pay rent through
February and forfeit her security deposit in exchange for a release from the Lease, unless she found a replacement
tenant before that time.
To be sure, Ms. Webb disputes that testimony. According to plaintiff, she and Ms. Klamp did not arrive at their final
agreement until January 21, 2011, when plaintiff sent Ms. Klamp an email memorializing the agreement. But, even
assuming that the agreement was not finalized until January 21, that email was still sent before Green Tree ordered Five
Brothers to secure the Property. The only conduct that Green Tree had undertaken vis-à-vis plaintiff's tenant at that time
was, at most, three phone calls [*79] to Ms. Klamp that Ms. Klamp did not perceive as harassing and that merely
sought contact information for Ms. Webb. As a matter of law, that conduct could not have amounted to tortious
interference with the Lease.
Accordingly, for all three reasons (each of which is independently sufficient), Green Tree is entitled to judgment as a
matter of law as to Count I.
D. Breach of Contract and Trespass to Land

Count II and Count III can be considered together, because the gravamen of both counts is that the entry onto the
Property, without notice to plaintiff, violated Covenant 7 of the Deed of Trust, which provides in pertinent part:
Lender or its agent may make reasonable entries upon and inspections of the Property. If it has reasonable cause, Lender may
inspect the interior of the improvements on the Property. Lender shall give Borrower notice at the time of or prior to such an
interior inspection specifying such reasonable cause.
Page 49Page 49
2013 U.S. Dist. LEXIS 140205, *
Plaintiff claims that the alleged entry on to the Property by Green Tree's agent on January 27, 2011, was unreasonable,
due to the agent's alleged threats of eviction, and was an interior inspection without prior notice, because the agent
allegedly peered into windows. [*80] Accordingly, the entry on to the Property breached Covenant 7 of the Deed of
Trust and, by the same token, constituted a trespass.
"'In order to prevail on a cause of action for trespass, the plaintiff must establish: (1) an interference with a possessory
interest in his property; (2) through the defendant's physical act or force against that property; (3) which was executed
without his consent.'" Royal Investment Gp., LLC v. Wang, 183 Md. App. 406, 445, 961 A.2d 665, 688 (2008) (citation
omitted), cert. granted, 408 Md. 149, 968 A.2d 1064, appeal dismissed before argument, 409 Md. 413, 975 A.2d 875
(2009). Plaintiff's theory is that, by causing its agent to enter onto the Property without complying with Covenant 7,
Green Tree exceeded the scope of consent contained in the Deed of Trust, thereby satisfying the third element of a
trespass claim.
Green Tree responds that Covenant 9, not Covenant 7, of the Deed of Trust controls in this circumstance. Covenant 9
provides, in pertinent part:
If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument . . . or (c) Borrower has
abandoned the Property, then Lender may do and pay for whatever is reasonable [*81] and appropriate to protect Lender's interest
in the Property, and rights under this Security Agreement, including protecting and/or assessing the value of the Property, and
securing and/or repairing the Property. . . . Securing the Property includes, but is not limited to, entering the Property to make
repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building and other code violations
or dangerous conditions, and have utilities turned on and off .
In Green Tree's view, plaintiff had breached her duties under the Deed of Trust by failing to make her payments,
satisfying condition "(a)" for application of Covenant 9. And, it also appeared to Green Tree that the Property had been
abandoned, so as to satisfy condition "(c)." Therefore, Green Tree reasons, Covenant 9 gave it express authority to
secure the Property. Green Tree relies on Paatalo v. J.P. Morgan Chase Bank, N.A., Civ. No. 10-119-BLG-CSO, 2012
U.S. Dist. LEXIS 90101, 2012 WL 2505742 (D. Mont. June 28, 2012), in which the court held that an identical
provision in a deed of trust authorized a mortgage servicer to enter on the property at issue because the homeowner
"had failed to perform his agreement to make [*82] the periodic payments required by the Note and Deed of Trust."
2012 U.S. Dist. LEXIS 90101, [WL] at *10. Moreover, regardless of whether Covenant 7 or Covenant 9 controls, Green
Tree argues that it breached neither provision because the alleged entries on the Property were "reasonable" as a matter
of law. 43
43 Green Tree also argues that, under Covenant 7, "Green Tree had ample 'reasonable cause' to enter the Property as a result of Plaintiff's
default of her monthly payment obligations and abandonment of the Property." Motion at 22. Although I otherwise largely agree with Green
Tree's arguments, this one falls flat. The "reasonable cause" provision of Covenant 7 only applies to interior inspections. And, in order to
undertake an interior inspection, the mortgage servicer must both (a) have "reasonable cause," and (b) give notice of the interior inspection
to the borrower, specifying its reasonable cause. Unless there is an interior inspection and unless the servicer gives notice to the borrower of
the interior inspection, "reasonable cause" is not relevant to whether the servicer's actions are authorized by the Deed of Trust.
Clearly, a good faith belief that a property has been abandoned triggers a mortgage servicer's [*83] right under
Covenant 9 to secure the property. 44 Plaintiff has presented some evidence from the deposition testimony of Ms.
Hankey of Five Brothers and several Green Tree employees suggesting that the methods used by Green Tree and Five
Brothers to determine whether a property is vacant are error-prone and involve little training, oversight, or
accountability. But, I decline plaintiff's invitation to turn this suit into a referendum on the broader business methods of
Green Tree and Five Brothers. Even if defendant's business methods could, in some hypothetical case, lead Green Tree
wrongfully to cause an occupied property to be secured and re-keyed, that did not occur in this case.
44 Notably, the mortgage servicer in Paatalo argued that it was "authorized [under Covenant 9] to enter the property 'if it suspects it has
been abandoned.'" Paatalo, 2012 U.S. Dist. LEXIS 90101, 2012 WL 2505742, at *10. Although the mortgage servicer pointed to several
indicia of abandonment ("no one had been living at the property since January 2010, Plaintiff was behind on his mortgage payments, and an
inspector found shutoff notices from the electric company at the property," id.), the plaintiff disputed that the property had been [*84]
abandoned. The Paatalo Court concluded that abandonment was immaterial because, as noted, the servicer's entry was authorized by
Covenant 9 based solely on the homeowner's failure to make monthly payments. I am not confident that failure to make payments alone
would render any and all entries onto the Property--including entry to secure the Property--"reasonable" within the meaning of Covenant 9.
However, I need not decide that question in Order to resolve the Motion.
Page 50Page 50
2013 U.S. Dist. LEXIS 140205, *
In this case, as discussed, several indicators would objectively have suggested to Green Tree that the Property was
vacant. Moreover, even if Green Tree's order to secure the Property should not have been issued, the order was never
carried out. The Property was never secured or re-keyed, nor was any actual attempt made to do so. The order did not
result in a trespass on plaintiff's Property by Green Tree or any arguable breach of any provision of the Deed of Trust.
The most that Mr. O'Donnell did was to enter onto the Property and look into the front window of an empty house. This
is no less reasonable than other de minimis entries that have been found reasonable under the case law. See, e.g., Beatty
v. BAC Loans Servicing, LP, Civ. No. RDB-10-2229, 2011 U.S. Dist. LEXIS 66909, 2011 WL 2516394, at *3 (D. Md.
June 21, 2011) [*85] (holding that "two drive-by inspections" of the plaintiff's property by a mortgage creditor,
conducted without notice to plaintiff, were "reasonable" and did not violate identical Covenant 7 in deed of trust);
Moseley v. CitiMortgage, Inc., No. C11-5349RJB, 2011 U.S. Dist. LEXIS 125805, 2011 WL 5175598, at *10 (W.D.
Wash. Oct. 31, 2011), (holding that servicer's agents did not unreasonably enter property in violation of identical
Covenant 7 of deed of trust by "plac[ing] a notice on a doorknob, requesting the [homeowner] to contact [the
servicer]").
But, even if O'Donnell's entry was unreasonable, he did not enter onto the Property as Green Tree's agent. Rather, he
testified unequivocally that he entered the Property on his own initiative, in order to determine whether he wanted to
take the job. 45
45 Count II and Count III are focused entirely on the alleged entry onto the Property on January 27, 2011. Plaintiff does not appear to argue
that the two previous inspections, on January 10 and 20, 2011, violated any provision of the Deed of Trust. Even if she were to do so now, it
is well established that "a plaintiff may not amend her complaint through [*86] argument in a brief opposing summary judgment."
Sensormatic Sec. Corp. v. Sensormatic Elecs. Corp., 455 F. Supp. 2d 399, 436 (D. Md. 2006).
In sum, the undisputed material facts do not disclose an entry onto plaintiff's Property by Green Tree or its agents on
January 27, 2011. Even if such an entry had occurred, however, it was clearly authorized under the covenants of the
Deed of Trust (regardless of whether Covenant 7 or Covenant 9 governs). Therefore, Green Tree is entitled to judgment
as a matter of law as to Count II and Count III.
E. FDCPA
The FDCPA imposes a variety of obligations and potential liabilities on "debt collectors," who are generally defined as
entities that "use[ ] any instrumentality of interstate commerce or the mails in any business the principal purpose of
which is the collection of any debts, or [that] regularly collect[ ] or attempt[ ] to collect, directly or indirectly, debts
owed or due or asserted to be owed or due to another." 15 U.S.C. § 1692a(6). In other words, the FDCPA is concerned
with "rights for consumers whose debts are placed in the hands of professional debt collectors for collection." DeSantis
v. Computer Credit, Inc., 269 F.3d 159, 161 (2d Cir. 2001) [*87] (emphasis added).
An entity to which a debt is owed falls outside the definition of "creditor" and qualifies as a "debt collector" only if the
entity "receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such
debt for another," 15 U.S.C. § 1692a(4), or if the "principal purpose" of the entity's business is debt collection. Id. §
1692a(6). So, the FDCPA does not "'apply to creditors collecting debts in their own names and whose primary business
is not debt collection,' or to the individual employees of such creditors." Betskoff v. Enterprise Rent A Car Co., Civ. No.
ELH-11-2333, 2012 U.S. Dist. LEXIS 1260, 2012 WL 32575, at *5 (D. Md. Jan. 4, 2012) (quoting Kennedy v.
Lendmark Fin. Servs., Civ. No. RDB-10-02667, 2011 U.S. Dist. LEXIS 104326, 2011 WL 4351534, at *3 (D. Md. Sept.
15, 2011)); see also Akpan v. First Premier Bank, Civ. No. DKC-09-1120, 2010 U.S. Dist. LEXIS 20371, 2010 WL
917886, at *4 (D. Md. Mar. 8, 2010). Put another way, "[a]n entity that tries to collect money owed to itself is outside
the FDCPA." Carter v. AMC, LLC, 645 F.3d 840, 842 (7th Cir. 2011).
Moreover, the definition of "debt collector" contains an exemption for an entity, such as a mortgage servicer, that
collects debts that were "not in [*88] default at the time [they were] obtained" by the entity. 15 U.S.C. § 1692a(6)(F)
(iii). Thus, it "is well-settled . . . that . . . mortgage servicing companies are not debt collectors and are statutorily
exempt from liability under the FDCPA," to the extent that they take action to collect debts that were not in default at
the time they acquired the debts. Scott v. Wells Fargo Home Mortgage, Inc., 326 F. Supp. 2d 709, 718 (E.D. Va.)
(emphasis omitted), aff'd, 67 Fed. Appx. 238 (4th Cir. 2003); accord Adam v. Wells Fargo Bank, N.A., Civ. No. ELH-09-
2387, 2011 U.S. Dist. LEXIS 96604, 2011 WL 3841547, at *20 (D. Md. Aug. 26, 2011); Flores v. Deutsche Bank Nat'l
Page 51Page 51
2013 U.S. Dist. LEXIS 140205, *
Trust Co., Civ. No. DKC-10-0217, 2010 U.S. Dist. LEXIS 67255, 2010 WL 2719849, at *6 (D. Md. July 7, 2010);
Sparrow v. SLM Corp., Civ. No. RWT-08-00012, 2009 U.S. Dist. LEXIS 1432, 2009 WL 77462, at *2 (D. Md. Jan. 7,
2009); see also De Dios v. Int'l Realty & Investments, 641 F.3d 1071, 1075 n.3 (9th Cir. 2011) (citing legislative history
of the FDCPA indicating that the exception in § 1692a(6)(F)(iii) was intended to provide that "'mortgage service
companies and others who service outstanding debts for others, so long as the debts were not in default when taken for
servicing,'" are not debt collectors).
Green Tree claims [*89] that it is not a "debt collector" with respect to plaintiff's mortgage because it comes within the
FDCPA's exception for mortgage servicers. Plaintiff contends that Green Tree does not qualify for the mortgage servicer
exception because her mortgage was in default when Green Tree acquired it from PNC Bank. In Webb II, I reserved
ruling on this dispute until the summary judgment stage.
Plaintiff's argument is dependent on two propositions. First, although the Assignment of the Deed of Trust from PNC
Bank to Green Tree states that it is "[e]ffective" as of November 1, 2009, the Assignment was not actually executed until
February 18, 2010. According to plaintiff, for purposes of the FDCPA's mortgage servicer exception, the date of actual
execution is what counts. Second, in February 2010, plaintiff made her mortgage payment late and thus she argues that
her mortgage was in default when the assignment was made. The Note states that the monthly mortgage payments are
due "on the 1st day of each month." Note ¶ 3. Moreover, with respect to late payments and default, the Note provides,
Note ¶ 6 (emphasis added):
(A) Late Charge for Overdue Payments

If the Note Holder has not received the full [*90] amount of any monthly payment by the end of 15 calendar days after the date it
is due, [Borrower] will pay a late charge to the Note Holder. The amount of the charge will be 5.00% of [the] overdue payment of
principal and interest. [Borrower] will pay this late charge promptly but only once each late payment.
(B) Default
If [Borrower does] not pay the full amount of each monthly payment on the date it is due, [Borrower] will be in default.
(C) Notice of Default

If [Borrower is] in default, the Note Holder may send [Borrower] a written notice telling [Borrower] that if [Borrower does] not
pay the overdue amount by a certain date, the Note Holder may require [Borrower] to pay immediately the full amount of Principal
which has not been paid and all the interest that [Borrower] owe[s] on that amount. . . .
Green Tree argues that the date it "obtained" plaintiff's mortgage, within the meaning of the FDCPA, was November 1,
2009, the effective date of the Assignment, and that plaintiff's mortgage was not in default on that date. In contrast, as
noted, plaintiff insists that the date Green Tree "obtained" the mortgage was February 18, 2010, the date the Assignment
was executed.
Defendant cites Crone v. Bank of Am., N.A., No. 4:11-cv-733, 2012 U.S. Dist. LEXIS 143202, 2012 WL 4754434, at *3
(E.D. Tex. Sep. 6, 2012), [*91] for the proposition that an assignment of a mortgage may validly be backdated.
However, Crone did not address whether a mortgage assigned via a backdated assignment is "obtained" by the assignee
on the date of the assignment's execution or on the backdated effective date. Plaintiff cites Md. Code (2010 Repl. Vol.,
2013 Supp.), § 2-103 of the Real Property Article, which provides: "Every valid assignment of a mortgage is sufficient
to grant to the assignee every right which the assignor possessed under the mortgage at the time of the assignment."
(Emphasis added.) However, that Maryland statute does not address whether the "time of the assignment" is the date the
assignment is executed or that date that the assignment says that it is effective. The "FDCPA does not define the term
'obtained,'" Brown v. Morris, 243 F. App'x 31, 34 (5th Cir. 2007), and I have not found case law directly addressing
whether a mortgage is obtained by assignment on the assignment's execution date or its effective date. However, there is
no need to resolve this issue because, regardless of which date the mortgage in this [*92] case was obtained, I conclude
that the mortgage was not in default.
To be sure, courts considering FDCPA claims involving mortgages that contain the same provision, expressly stating
that a loan is in default if the monthly payment is not made on the first of the month, have endorsed the proposition that,
if a mortgage is assigned at a time in the month when the borrower has not made his or her monthly payment, the
mortgage is in default and the assignee is not entitled to the mortgage servicer exception. See, e.g., Kapsis v. Am. Home
Mortg. Serv'g, Inc., 923 F. Supp. 2d 430, 442 (E.D.N.Y. 2013); Castellanos v. Deutsche Bank, No. 1:11-cv-815, 2012
Page 52Page 52
2013 U.S. Dist. LEXIS 140205, *
U.S. Dist. LEXIS 93455, 2012 WL 2684968, at *6-8 (S.D. Ohio July 6, 2012); see also Glenn v. FNF Serv'g, Inc., No.
5:12-CV-703-D, 2013 U.S. Dist. LEXIS 114138, 2013 WL 4095524, at *4-5 (E.D.N.C. Aug. 13, 2013) (holding that
borrower plausibly alleged that mortgage was in default when assigned to servicer "as of December 1, 2009, when the
second payment was due and unpaid, or as of December 16, 2009, when the fifteen-day late payment grace period
ended") (emphasis added). However, in this case, the mortgage was assigned on February 18, 2010, and plaintiff asserts
that she had already made her monthly [*93] mortgage payment (albeit late) by that date, i.e., on February 15, 2010.
See Cross-Motion at 15. 46 Even if plaintiff's mortgage was technically in default from February 2 through February 14,
2010, during which time her monthly payment was due and unpaid, that default was cured by plaintiff's alleged payment
on February 15, before the mortgage was assigned on February 18. Accordingly, even if Green Tree obtained plaintiff's
mortgage on February 18, 2010, the mortgage was not in default at that time and Green Tree is exempt from liability as
a "debt collector" under the FDCPA.
46 Notably, plaintiff has not actually submitted any documentary evidence, or even her own sworn statement, regarding the date on which
she made her February 2010 payment. She merely asserts, in the Cross-Motion, that she paid on February 15, 2010. This unsworn assertion
in a legal brief is insufficient to establish a material fact for summary judgment purposes. See, e.g., EEOC v. CTI Global Sols., Inc., 815 F.
Supp. 2d 897, 914 (D. Md. 2011) (To avoid summary judgment in the movant's favor, the non-moving party 'must present evidentiary matter
showing that there is a genuine issue of material fact that is worth [*94] bringing to trial.' Defendant fails to present such evidence here,
instead only presenting conclusory statements in its brief to support these assertions.") (emphasis in original) (internal citations omitted).
Even if Green Tree were subject to the FDCPA, however, plaintiff's FDCPA claims also fail on the merits because the
undisputed material facts evince no conduct by Green Tree that would have violated the FDCPA. In her complaint,
plaintiff alleged that Green Tree violated two provisions of the FDCPA. First, she asserted that, by "calling Plaintff's
tenant at work repeatedly to 'talk to' tenant about Plaintiff's 'default' and sending an agent to go to the home . . . who told
the tenant that the home had been foreclosed and that the tenant would be locked out and her items removed," Amended
Complaint ¶ 53, Green Tree violated 15 U.S.C. § 1692d, which provides that a debt collector may not "engage in any
conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of
a debt." Such unlawful conduct includes, but is not limited to, "[c]ausing a telephone to ring or engaging any person in
telephone conversation repeatedly or continuously [*95] with intent to annoy, abuse, or harass any person at the called
number." Id. § 1692d(5). Second, by "intentionally scaring off any current renter (by . . . hiring someone who told the
tenant that the home had been foreclosed and calling her at work about the 'default') and threatening to run off any
future renter," plaintiff alleged that Green Tree violated 15 U.S.C. § 1692e(10), which prohibits the "use of any false
representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a
consumer."
But, as discussed, the undisputed material facts simply do not reflect that any such conduct actually occurred. Mr. Wood
of Green Tree made two (or, at most, three) calls to plaintiff's tenant, none of which were perceived by Ms. Klamp as
harassment. Moreover, the calls were made with the stated intention of getting in touch with Ms. Webb, not annoying or
harassing Ms. Klamp. In those calls, according to the sworn statements of both Mr. Wood and Ms. Klamp, Wood did not
discuss the reason that he needed to speak with Ms. Webb or mention that Ms. Webb's mortgage was in default. The
conversation between Ms. Klamp and Green Tree's agent alleged in the [*96] complaint, in which the agent supposedly
threatened Ms. Klamp that her possessions would be removed and that she would be locked out of the Property, never
took place. When Mr. O'Donnell came to the Property, he did not do so as anyone's agent and he never made such
threats. Further, Ms. Klamp was not at the Property when Mr. O'Donnell came, and she and Mr. O'Donnell never spoke,
either in person or on the phone.
For all of the foregoing reasons, Green Tree is entitled to judgment as a matter of law as to Count VI, alleging violations
of the FDCPA. For the same reason, Green Tree is also entitled to judgment as to the negligence count, Count VII,
which is predicated on the same conduct giving rise to the alleged FDCPA violations.
In her Cross-Motion, plaintiff newly argues that Green Tree was negligent in hiring Five Brothers because Five Brothers
fails propertly to train its independent contractors to perform home inspections, and that Green Tree was negligent in
failing to train Mr. Wood about various aspects of foreclosure law or the need to document all contact with a borrower.
See Cross-Motion at 18-19. These allegations do not appear in Count VII as presented in the complaint. [*97] But, even
if I were inclined to permit plaintiff to "amend her complaint through argument in a brief opposing summary judgment,"
Sensormatic Sec. Corp. v. Sensormatic Elecs. Corp., 455 F. Supp. 2d 399, 436 (D. Md. 2006), plaintiff's negligence
claims fail because the undisputed material facts do not disclose that she suffered any damages as a result of this alleged
Page 53Page 53
2013 U.S. Dist. LEXIS 140205, *
negligence. And, "actual damages are a prerequisite for liability in negligence cases . . . ." Peroti v. Williams, 258 Md.
663, 671, 267 A.2d 114, 119 (1970); see MacCubbin v. Wallace, 42 Md. App. 325, 327, 400 A.2d 461, 463 (1979) ("[A]
finding of 'no damages' in a negligence case is not compatible with a 'plaintiff's verdict.' Damage (or injury) is an
essential element of actionable negligence just as are 'duty' and 'breach' essential elements of a negligence plaintiff's
proof."); accord Capital Centre, LLC v. Wilkinson, 2006 U.S. Dist. LEXIS 13121, 2006 WL 827375, at *12 (D. Md.
Mar. 27, 2006) ("Damages is an essential element of any negligence claim under Maryland law . . . ."). Accordingly,
Green Tree is entitled to judgment as to Count VII.
F. Sanctions
In light of the serious variance between the allegations of plaintiff's complaint and the undisputed [*98] facts gleaned
from discovery, Green Tree has moved for imposition of sanctions on plaintiff pursuant to Rule 11 of the Federal Rules
of Civil Procedure.
Rule 11(b) provides, in pertinent part:
By presenting to the court a pleading, written motion, or other paper--whether by signing, filing, submitting, or later advocating it--
an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an
inquiry reasonable under the circumstances:
(1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly
increase the cost of litigation;
***
(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary
support after a reasonable opportunity for further investigation or discovery; and
"The primary purpose of Rule 11 is to punish violators and deter parties and their counsel from pursuing unnecessary or
unmeritorious litigation." Moody v. Arc of Howard Cnty., Inc., 474 F. App'x 947, 950 (4th Cir. 2012). "[A] complaint
containing allegations unsupported by any information obtained prior to filing, or allegations based on information
[*99] which minimal factual inquiry would disprove, will subject the author to [Rule 11] sanctions." In re Kunstler, 914
F.2d 505, 516 (4th Cir. 1990). In Morris v. Wachovia Securities, Inc., 448 F.3d 268, 277 (4th Cir. 2006), the Fourth
Circuit said plainly: "Factual allegations fail to satisfy Rule 11(b)(3) when they are 'unsupported by any information
obtained prior to filing.'" (Citation omitted).
Fed. R. Civ. P. 11(c)(2) permits a party to file a motion for sanctions against another party for violation of Rule 11(b),
provided that, before filing the motion with the court, the moving party must serve it on the opposing party and give the
opposing party 21 days to withdraw "the challenged paper, claim, defense, contention, or denial." Green Tree served a
draft of its Sanctions Motion on plaintiff in advance of filing it with the Court, as required. See Sanctions Motion at 4.
Moreover, in May 2012, a week after Ms. Klamp's deposition was taken, Green Tree wrote to plaintiff demanding that
she voluntarily dismiss her claims in light of Ms. Klamp's deposition testimony, which directly contradicted the
allegations of plaintiff's complaint in multiple material respects. See ECF 77-3. Plaintiff [*100] rebuffed the demand,
arguing that Ms. Klamp's recollection was mistaken and that the allegations of her complaint were an accurate reflection
of her notes, made contemporaneously with the events. See ECF 77-4.
As noted, Local Rule 105.8(b) provides that a party need not respond to a motion for sanctions under Rule 11 unless
ordered to respond by the court. Under Local Rule 105.8 and Rule 11(c)(1), a court must give a party notice and an
opportunity to respond before imposing sanctions. In my view, the state of the record raises a serious question regarding
plaintiff's compliance with Rule 11(b) in the prosecution of this action. In comparison to the summary judgment record,
discussed at length above, it is difficult to view plaintiff's complaint as anything but an exercise in speculative fiction: a
narrative of events that might have happened, not a statement of events that did happen. Although I do not foreclose the
possibility that plaintiff will be able to demonstrate that she pursued her complaint "to the best of [her] knowledge,
information, and belief, formed after an inquiry reasonable under the circumstances," Fed. R. Civ. P. 11(b), the state of
the record makes it imperative [*101] that plaintiff explain her litigation conduct by responding to defendant's
Sanctions Motion. Therefore, I will direct her to do so.
In the meantime, the Court will enter judgment in favor of Green Tree as to all substantive counts, thereby rendering
final judgment on the merits. Accordingly, I will direct the Clerk to close this case for statistical purposes. If, upon
Page 54Page 54
2013 U.S. Dist. LEXIS 140205, *
receipt of Webb's response to the Sanctions Motion, Green Tree wishes to litigate the Sanctions Motion, it may renew its
Sanctions Motion and reply to plaintiff's response. 47 In the interim, I will deny the Sanctions Motion, without prejudice
to Green Tree's right to renew it.
47 The parties are reminded that whether "to impose Rule 11 sanctions, and the quality and amount of the sanctions imposed," are all matters
within the discretion of the district court. Miltier v. Downes, 935 F.2d 660, 663 (4th Cir. 1991). See Fed. R. Civ. P. 11(c)(1) ("If . . . the court
determines that Rule 11(b) has been violated, the court may impose an appropriate sanction . . . .") (emphasis added). In making a
determination as to the amount of a monetary sanction, a court must consider the Kunstler factors, which include the "'severity of the [*102]
Rule 11 violation,'" the "'reasonableness of the opposing party's attorney's fees,'" the "'minimum to deter,'" and the "'ability to pay.'"
Brubaker v. City of Richmond, 943 F.2d 1363, 1374 (4th Cir. 1991) (quoting In re Kunstler, 914 F.2d 505, 523 (1990), cert. denied sub nom.
Kunstler v. Britt, 499 U.S. 969, 111 S. Ct. 1607, 113 L. Ed. 2d 669 (1991)). Moreover, the "amount of a monetary sanction . . . should always
reflect the primary purpose of Rule 11--deterrence of future litigation abuse." Brubaker, 943 F.2d at 1374.
An Order implementing my rulings follows.

Date: September 30, 2013
/s/ Ellen Lipton Hollander
United States District Judge
Page 56Page 56
2013 Bankr. LEXIS 4045, *
53 of 430 DOCUMENTS
In Re: DAVID TODD LEONARD and MICHELLE LEIGH LEONARD,

DEBTORS. JANICE POSL-BENDSEN, by John R. Kurth, guardian and
conservator; and JOHN R. KURTH, Trustee of the Janice Posl-Bendsen Revocable
Living Trust, PLAINTIFFS v. DAVID TODD LEONARD and MICHELLE LEIGH
LEONARD, DEFENDANTS.
CASE NO. 09-20190, CHAPTER 7, ADV. NO. 09-6043
UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS
2013 Bankr. LEXIS 4045
September 26, 2013, Decided
NOTICE: FOR ELECTRONIC PUBLICATION ONLY
SUBSEQUENT HISTORY: Motion denied by Posl-Bendsen v. Leonard (In re Leonard), 2014 Bankr. LEXIS 461
(Bankr. D. Kan., Feb. 3, 2014)
Exception to discharge denied by, Findings of fact/conclusions of law at In re Leonard, 2014 Bankr. LEXIS 2613
(Bankr. D. Kan., June 12, 2014)
CASE SUMMARY:
OVERVIEW: HOLDINGS: [1]-Summary judgment could not be granted on denial of discharge under 11 U.S.C.S. §
523(a)(2)(A), as there was no evidence of false pretences, false representations, or actual fraud; [2]-For purposes of §
523(a)(4), the creditors failed to show a fiduciary relationship; [3]-Allegations that the debtors withdrew and wrote
checks from a creditor's trust account for their personal use did not support denial of discharge under 11 U.S.C.S. §
727(a)(3), as that provision did not apply to their alleged failure to maintain complete records as to the trust's financial
conditions and transactions; [4]-Although there were inaccuracies on, and omissions from, the debtors' schedules, the
uncontroverted facts did not evidence the elements necessary for denial of discharge under § 727(a)(4), as the
materiality of the omissions was not established.
OUTCOME: The court denied the creditors' motion for summary judgment on their complaint objecting to the
discharge of their claim against the Chapter 7 debtors and seeking an order denying their discharge.
CORE TERMS: summary judgment, uncontroverted facts, fiduciary relationship, revocable, deposition, fiduciary,
fitness, financial condition, fiduciary duties, com, materiality, omission, uncontroverted, defalcation, reckless, stock,
express trust, expenditures, bicycles, dollars, business transactions, false pretenses, false representation, false oath,
actual fraud, malicious injury, dischargeability, documentation, fraudulently, ascertained
Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > General Overview
Evidence > Procedural Considerations > Burdens of Proof > Preponderance of Evidence
[HN1] Exceptions to discharge under 11 U.S.C.S. § 523(a) are construed liberally in favor of a debtor. To prevail on an
objection to discharge, a creditor has the burden to prove its case by a preponderance of the evidence.
Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Embezzlement & Fraud
Page 57Page 57
[HN2] 11 U.S.C.S. § 523(a)(2)(A) excepts from discharge debts for money or property to the extent obtained by false
pretenses, a false representation, or actual fraud, other than a statement respecting a debtor's or insider's financial
condition.
[HN3] 11 U.S.C.S. § 523(a)(4) excepts from discharge a debt for fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny.
Civil Procedure > Federal & State Interrelationships > Erie Doctrine
[HN4] The existence of a fiduciary relationship under 11 U.S.C.S. § 523(a)(4) is determined under federal law;
however, state law is relevant to this inquiry. For purposes of § 523(a)(4), the definition of "fiduciary" is narrowly
construed, meaning that the applicable nonbankruptcy law that creates a fiduciary relationship must clearly outline the
fiduciary duties and identify the trust property. An express or technical trust must be present for a fiduciary
relationship to exist under § 523(a)(4). Therefore, not all fiduciary relationships which exist under common law or state
law rise to the level actionable under § 523(a)(4).
Estate, Gift & Trust Law > Trusts > Creation

[HN5] Under Kansas law, the elements necessary to create an express trust are: (1) an explicit declaration and intention
to create a trust; (2) the transfer of lawful and definite property by a person capable of making transfer thereof; and (3)
a requirement to hold the property as trustee for the benefit of a cestui que trust with directions as to the manner in
which the trust funds are to be applied.
[HN6] Neither a general fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality between the
parties' knowledge or bargaining power is sufficient to establish a fiduciary relationship for purposes of dischargeability
under 11 U.S.C.S. § 523(a)(4).
Estate, Gift & Trust Law > Trusts > Creation

[HN7] A technical trust differs from an express trust in that the intention of the parties is not relevant, and the parties'
fiduciary obligations are imposed by law, not implied by law.
[HN8] A denial of discharge requires that the debt excepted from discharge for either fraud or defalcation while acting
as a fiduciary. Fraud, for purposes of 11 U.S.C.S. § 523(a)(4), has generally been interpreted as involving intentional
deceit, rather than implied or constructive fraud. The United States Supreme Court has held that defalcation for
purposes of the exception to discharge requires an intentional wrong. It stated that where the conduct at issue does not
involve bad faith, moral turpitude, or other immoral conduct, the term requires an intentional wrong. The Court included
as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the
criminal law often treats as the equivalent.
Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Malicious & Reckless
Behavior
[HN9] 11 U.S.C.S. § 523(a)(6) excepts from discharge debts for a willful and malicious injury by a debtor to another or
to the property of another. An injury is malicious within this exception if it was wrongful and without just cause or
excuse. Malicious conduct is more culpable than recklessness. Willfulness refers to a deliberate and intentional act that
necessarily leads to injury.
Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > General Overview
[HN10] Grounds for denial of a debtor's discharge are limited to those clearly expressed in the Bankruptcy Code. The
burden of proof for an objection to discharge is on the objector.
Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > Records
Page 58Page 58
[HN11] 11 U.S.C.S. § 727(a)(3) provides that a debtor shall be granted a discharge unless the debtor has concealed,
destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents,
records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless
such act or failure to act was justified under all of the circumstances of the case. The purpose of the objection is to
ensure documentation to permit an objective determination of the debtor's true financial status. A prima facie case under
§ 727(a)(3) may be made upon showing that (1) the debtor failed to maintain and preserve adequate records; and (2)
such failure makes it impossible to ascertain the debtor's financial condition and material business transactions.
Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > False Accounts & Oaths
[HN12] 11 U.S.C.S. § 727(a)(4)(A) provides that a debtor shall be granted a discharge unless the debtor knowingly and
fraudulently, in or in connection with the case made a false oath or statement. A false statement or omission in a debtor's
schedules may be sufficient for denial of discharge.
Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > False Accounts & Oaths
[HN13] Under the Official Bankruptcy Forms, a debtor is required to verify the completeness and accuracy of any
schedule of assets, debts, or affairs filed in a case. However, since the failure to list an asset must be both knowing and
fraudulent, mere inadvertence is not sufficient to establish an objection. Where there is a knowing failure to list a
substantial asset, an inference of fraudulent intent may be drawn in the absence of mitigating circumstances. The failure
to amend schedules to include omitted information concerning assets is a reckless indifference to the truth, which is
equivalent to fraud. The false oath or account must relate to a material matter. The failure to list a significant asset is the
most frequently established basis for denying discharge under this section, and certainly satisfies the materiality
element. Materiality under 11 U.S.C.S. § 727(a)(4)(A) means that the statement must bear a relationship to the debtor's
financial transactions or to the bankruptcy estate, concern the disclosure of assets, or relate to the disposition of assets.
If there is a failure to list a valuable asset, materiality is established.
Bankruptcy Law > Discharge & Dischargeability > Liquidations > Denial of Discharge > Insolvency & Loss of
Assets
[HN14] 11 U.S.C.S. § 727(a)(5) provides that a court shall grant a debtor a discharge, unless the debtor has failed to
explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency
of assets to meet the debtor's liabilities.
COUNSEL: [*1] For David Todd Leonard, Debtor (09-20190): Jeffrey A Koons, Leawood, KS.
For Michelle Leigh Leonard, fka Michelle Leigh Slattery, Joint Debtor (09-20190): Jeffrey A Koons, Leawood, KS.
Trustee (09-20190): Christopher J. Redmond, Kansas City, MO.
For Janice Posl-Bendsen, John Robert Kurth, Plaintiffs (09-06043): Patrick E. Henderson, Henderson Law Office,
Atchison, KS.
David Todd Leonard, Defendant (09-06043), Pro se.
Michelle Leigh Leonard, Defendant (09-06043), Pro se.
JUDGES: Dale L. Somers, United States Bankruptcy Judge.
OPINION BY: Dale L. Somers
OPINION
MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY

JUDGMENT
In this adversary proceeding creditors Janice Posl-Bendsen, by John R. Kurth, guardian and conservator, and the Trustee
of the Janice Posl-Bendsen Revocable Living Trust object to the discharge of their claim against Debtors David Todd
Page 59Page 59
Leonard and Michelle Leigh Leonard under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6) and also seek an order denying
discharge under 11 U.S.C. §§ 727(a)(3), (a)(4), and (a)(5). Plaintiffs, who appear by Patrick E. Henderson, move for
summary judgment. Debtors, who appear pro se, oppose the motion. The Court has jurisdiction.1 For the reasons
discussed below, [*2] the Court denies the motion.
1 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the Standing
Order of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's
bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under
the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding
pursuant to 28 U.S.C. §§ 157(b)(2)(I) and (J). There is no objection to venue or jurisdiction over the parties.
UNCONTROVERTED FACTS.
In support of the motion for summary judgment, Plaintiffs rely upon the bankruptcy pleadings, the depositions of the
Debtors which are included in the record,2 and the exhibits to those depositions. Debtors deposition testimony is
uncontroverted.3 No deposition and no statement has been provided by Plaintiff, Janice Posl-Bendsen (Janice). She is
alleged to be a 65 year old woman whose health has been deteriorating over the last several years. John R. Kurth,
Janice's son, has been [*3] appointed guardian and conservator of Janice by order of the District Court of Atchison
County, Kansas.4 Apparently the appointment was in 2008, after the events which are issue in this proceeding.5
2 Dkts. 115 and 116.
3 The Court observes that if this matter proceeds to trial, it is very unlikely that Plaintiffs will prevail on their § 523 claims if they continue
to rely almost exclusively on Debtors' testimony.
4 Dkt. 1 at ¶¶ 8-11.
5 See Dkt. 1 at ¶ 11, stating that the Atchison County District Court case number is 08 PR 55.
Plaintiffs are entitled to summary judgment only if Debtors' uncontroverted testimony show that judgment should be
entered in Plaintiffs' favor as a matter of law. The following is a summary of the events which give rise to this
proceeding as testified to by the Debtors.
Debtor David Todd Leonard (David) is referred to by Janice as Todd Leonard. He was born in 1968. After working as a
fitness trainer, he began employment in the financial industry in 2002. He continued in that employment at various
businesses, including Countrywide Financial, until May 2007, when he began managing Janice's assets on a full time
basis. David and his wife Michelle Leigh Leonard (Michelle) [*4] have four children. Michelle was not employed
outside the home, but she assisted with the administration of David's investment operations.
Janice is David Leonard's second cousin. They had occasional contact while children. In 2000, the relationship was
reestablished, and Janice began visiting Debtors and spending time with Debtors and their children. Janice started
joining in traditional family functions, such as Thanksgiving, Christmas, and birthdays. Janice was very generous,
giving the Leonard family gifts initially worth hundred of dollars and then increasing to gifts worth thousands of
dollars. For example, for Easter 2004, she gave the family members Easter eggs with $10,000 checks in them. She gave
a sapphire bracelet to Michelle Leonard and loaned her other jewelry and a fur coat.
In 2003, Janice inherited stock worth approximately 6 million dollars from her mother, but David did not know of the
inheritance until 2005, when he started to become actively involved in managing Janice's assets. From 2005 through
2007, several entities were formed and accounts were set up to manage both Janice's and Debtors' assets.
In September 2005, Leonard & Bendsen, LLC, which was owned by Janice, [*5] was formed to invest a small portion
of her assets. In November 2005, a MasterTrader.com account was set up for day trading of the Leonard & Bendsen
property. David managed the account. Initially it had a balance of over a hundred thousand dollars. By September 30,
2006, the balance was $32.91.6
Page 60Page 60
6 Dkt. 116 (Michelle Leonard depo.) at 14.
On May 31, 2006, Janice executed a Revocable Living Trust prepared by an attorney. Janice is the sole trustee. The
trust provides that upon Janice's death, the balance of the trust assets remaining after payment of trust obligations and
taxes shall be distributed to "Todd Leonard and Michelle Leonard, or the survivor of the two of them if one of them dies
before" Janice. Apparently at this time, the majority of Janice's assets were held in an account at Merrill Lynch. Also on
May 31, 2006, Janice executed a General Durable Power of Attorney naming Todd Leonard as her attorney-in-fact.
David denies that any of the actions which are the subject of this proceeding were taken by him under the powers
granted to him by the power of attorney.
Starting in 2005 and continuing until August 2008, checks signed by David on accounts holding Janice's property were
written [*6] to Fitness Quest, LLC, a fitness business owned in part by David. By these investments, Janice was not
purchasing an interest in the business. Rather, she directed that the checks be written so David could invest in the
business, which Janice wanted to succeed. Fitness Quest eventually filed for bankruptcy.7
7 Id. at 13.
In late 2006, Janice had a irreconcilable conflict with her advisors at Merrill Lynch, who had been attempting to restrain
Janice's reckless spending. On December 14, 2006, an account was established at MasterTrader.com in the name of
Janice Posl-Bendsen, Janice Posl-Bendsen Revocable Living Trust. David Leonard is shown as a joint customer on the
account documentation.8 Account statements were addressed as follows:
Janice Posl-Bendsen
Janice Posl-Bendsen Rev. Living Trust
d/t/d 05/31/2005
Janice Posl-Bendsen & Todd Leonard TTEES.9
On January 31, 2007, the balance of the trust MasterTrader.com account was $2,941,248.76, which was the value on
that date of the assets which had been held in the Merrill Lynch account. By November 30, 2007, the value of the
account was $655,464.22. David attributes the majority of the loss in value of investments to Janice's decisions
regarding [*7] the holding of the stock of CROCS, but details as to the investment activities and withdrawals from the
account are not provided.
8 Dkt. 168.
9 E.g., Dkt. 140.
David also established Fit Trade, LLC for the purpose of trading stocks. David was the only member. Debtor testified
that the funds in the account were gifts from Janice. Ultimately, the investments were a total loss, and the account was
closed.
The Complaint alleges the following transfers to Debtors of Janice's assets by checks signed by David or by wire
transfers: Checks to David and Michelle totaling at least $227,000; transfers of at least $60,000 to Fitness Quest; checks
totaling $195,000 and a wire transfer of $55,000 to Fit Trade, LLC; transfers of $48,000 to Debtors' four children;
payment of $500 to Lynda Leonard; payment of $2,500 to Anthony Wilson, and payment of $36,754.82 to Lori Larson,
and payment of $18,039.92 to various vendors. These transfers total $642,794.74.
Debtors admit that these transfers were made with the direct permission and or direct instruction of Janice. As to
transfers to Debtors, when the Merrill Lynch account was closed, David agreed to manage Janice's assets in exchange
for Janice providing $10,000 [*8] per month living expenses and a bonus based upon performance. Michelle also was
significantly involved by providing personal support and companionship to Janice. Payments to Lori Larson were for
her work in organizing Janice's financial records and providing the information necessary for the preparation of three
years worth of past due tax returns.
Page 61Page 61
Debtors' relationship with Janice was terminated by Janice in November 2007 or earlier, and Debtors have not seen her
since that time. On August 8, 2008, Janice filed suit against the Debtors in the District Court of Johnson County,
Kansas. She alleged that pursuant to the Power of Attorney, David took control of plaintiff's funds for the alleged
purpose of investing and reinvesting the funds for Janice's benefit, but breached his fiduciary duties, by among other
things, misappropriating $582,377.00 of Janice's funds. Causes of action for breach of fiduciary duty, gross negligence,
civil conspiracy, and conversion were alleged. Debtors did not respond to the Petition. An Order of Default Judgment
was entered on October 10, 2008. Debtors were held jointly and severally liable for $582,377, plus interest and costs. In
addition, judgment was [*9] entered in favor of Janice against David for $550.00 plus interest, and David was ordered
to provide an account of all of his transaction regarding Janice's accounts from January 1, 2007 to the date of the
judgment. In this action, Plaintiffs do not rely upon any collateral estoppel effect of the prior judgment.
Debtors filed for relief under Chapter 7 on January 29, 2009. Debtors filled out an information sheet at the request of
their counsel, Jeff Koons, and met with him four times. Mr. Koons completed the schedules. Copies were given to
Debtors when they signed them, but Debtors did not carefully review them. In response to question 1 of the Statement
of Financial Affairs (SOF), income from employment, trade, or business, Debtors listed $361,191 for 2007 and
approximately $300,000 for 2008. David testified that the 2007 income was the amount Debtors received from Janice. 10
For the same year, Debtors federal tax return show income from wages of $36,191 and plus other income totaling less
than $100,000. There was no income reported in response to SOF question 2, income from other sources. SOF question
18 requests information about the nature, location and name of businesses. Debtors' [*10] SOF lists Fitness Quest and
states that David holds a 48% interest and two other individuals own 51% and 1% respectively. The SOF does not
mention Leonard & Bendsen, LLC, which David contends was owned 100% by Janice. Fit Trade, LLC, which Debtor
contends was his business, the assets of which were given to him by Janice, was not listed under question 11, closed
financial accounts, or question 18, businesses. Although there was testimony that Janice's funds had been used to buy
computer equipment, it was not included under SOF 14, property held for another person, or on Schedule B, personal
property. In addition, although there was testimony the funds provided by Janice were used to buy two bicycles and that
Debtor owned two additional bicycles, the bicycles were not included in Schedule B, personal property. In general,
Debtors declined to testify regarding the particulars of the schedules, stating that they wanted to review the issues with
the attorney who prepared the schedules.
10 Dkt. 115 (David Todd Leonard depo.) at 136.
THE ADVERSARY COMPLAINT.

Plaintiffs seek to except their claim, in an unspecified amount, against Debtors from discharge under various
subsections of § 523 and to [*11] deny Debtors a discharge under various subsections of § 727. The Complaint alleges
that in 2007, David undertook to serve as Trustee of the Janice Posl-Bendsen Revocable Living Trust. Debtors admit
this allegation, but state that Debtor was appointed by Janice. The Complaint then alleges the transfers from the trust in
the total amount of $642,794.74 as enumerated above. Debtors admit to all of the alleged transfers, but respond that they
were made with the direct permission or direct instruction of Janice. Plaintiffs also allege that David engaged in a
pattern of reckless stock trading where he lost significant funds from the revocable trust (an allegation which Debtors
deny), but no amount is specified. In Count 1, Plaintiffs allege that David breached his fiduciary duty to Janice by
writing checks to himself, his family, and his friends and seek judgment for at least $585,294.74. The Complaint in
Counts II thorough IV then alleges that Debtors' debt to Plaintiffs, in an amount not specified, is nondischargeable under
§§ 523(a)(2)(money and property obtained by false pretenses, false representation, or actual fraud); (a)(4) (fraud while
acting in a fiduciary capacity, embezzlement, [*12] or larceny); and (a)(6) ( willful and malicious injury to the property
of another). In counts V through VII, Plaintiffs allege that Debtors should be denied a discharge under §§ 727(a)(3)
(concealment, destruction, mutilation, falsification, or failure to keep or preserve recorded information from which
Debtor's financial condition or business transactions might be ascertained); (a)(4) (making a false oath or account
knowingly and fraudulently in or in connection with the bankruptcy case); and (a)(5) (failure to satisfactorily explain the
loss of assets).
DISCUSSION.
Page 62Page 62
A. If Plaintiffs seek summary judgment on their contention of a claim against Debtors under Count I, judgment
is denied.
Plaintiffs' motion is for summary judgment, not partial summary judgment, so the Court must address all counts,
including Count I, even though it is not discussed in Plaintiffs' brief. Count I alleges a right to recover $585,294.74 from
David for breach of fiduciary duty through writing checks on Janice's trust account without authority payable to
himself, his family, his fiends, or his creditors. Although it is uncontroverted that David wrote the checks as alleged, it is
also uncontroverted for purposes [*13] of summary judgment that Janice directed or authorized the transfers. Plaintiffs
are not entitled to judgment on Count I.
B. Plaintiffs' motion for summary judgment on the objections to discharge of Plaintiffs' claim against debtors is
denied.
[HN1] Exceptions to discharge are construed liberally in favor of the debtor.11 To prevail on an objection to discharge, a
creditor has the burden to prove its case by a preponderance of the evidence.12
11 4 Collier on Bankruptcy, ¶ 523.05 at 523-21 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 16th ed. rev. 2013).
12 Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991).
1. The uncontroverted facts do not prove the elements required for exception to discharge under § 523(a)(2)(A).
[HN2] Section 523(a)(2)(A) excepts for discharge debts for money or property to the extent obtained by "false
pretenses, a false representation, or actual fraud, other than a statement respecting a debtor's or insider's financial
condition." In this case, there is no evidence of any false pretenses, false representations, or actual fraud. Summary
judgment cannot be granted on denial of discharge under § 523(a)(2)(A).
2. The uncontroverted facts do not prove the elements required for exception to discharge [*14] under § 523(a)
(4).
[HN3] Section 523(a)(4) excepts from discharge a debt for "fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny." Plaintiffs rely upon the fiduciary relationship portion of the exception. [HN4] "The
existence of a fiduciary relationship under § 523(a)(4) is determined under federal law, ... [h]owever, state law is
relevant to this inquiry."13 "For purposes of section 523(a)(4), the definition of 'fiduciary' is narrowly construed, meaning
that the applicable nonbankruptcy law that creates a fiduciary relationship must clearly outline the fiduciary duties and
identify the trust property."14 "[A]n express or technical trust must be present for a fiduciary relationship to exist under
§ 523(a)(4)."15 Therefore, not all fiduciary relationships which exist under common law or state law rise to the level
actionable under § 523(a)(4).
13 Fowler Brothers v. Young (In re Young), 91 F.3d 1367,1371 (10th Cir. 1996).
14 4 Collier on Bankruptcy, ¶ 523.10[1][d] at 523-73.
15 In re Young, 91 F.3d at 1371.
[HN5] "Under Kansas law, the elements necessary to create an express trust are: (1) an explicit declaration and
intention to create a trust; (2) the transfer of lawful and [*15] definite property by a person capable of making transfer
thereof; and (3) a requirement to hold the property as trustee for the benefit of a cestui que trust with directions as to the
manner in which the trust funds are to be applied."16 [HN6] "Neither a general fiduciary duty of confidence, trust,
loyalty, and good faith, nor an inequality between the parties' knowledge or bargaining power is sufficient to establish a
fiduciary relationship for purposes of dischargeability."17 [HN7] "A technical trust differs from an express trust in that
the intention of the parties is not relevant, and the parties' fiduciary obligations are imposed by law, not implied by
law."18
Page 63Page 63
16 Jenkins v. IBD, Inc., 489 B.R. 587, 598 (D. Kan. 2013), quoting In re Foy, 2010 Bankr. LEXIS 2055, 2010 WL 2584193, *3 (Bankr. D.
Kan. June 21, 2010).
17 In re Young, 91 F.3d at 1372 (citiaitons omitted).
18 Jenkins v. IBD, Inc., 489 B.R. at 598.
The Court finds that Plaintiffs have not sustained their burden of proof to show a fiduciary relationship. When moving
for summary judgment, Plaintiffs appear to be relying primarily upon the admissions of Debtors in their depositions that
they were acting as fiduciaries, or trusted advisors and confidants, for Janice. [*16] But, as examined above, for
purposes of dischargeability, the bankruptcy law requires an express or technical trust - more than a position of trust
and confidence.
The Complaint alleges that in 2007 David "undertook to serve as Trustee of the Janice Posl-Bendsen Revocable Living
Trust,"19 thereby apparently intending to allege the creation of an express trust. The uncontroverted facts establish that
the transfers which are alleged to be the basis of the claim by Plaintiffs against Debtors were, at least for the most part,
made from the account which was established on December 14, 2006 at MasterTrader.com in the name of Janice Posl-
Bendsen, Janice Posl-Bendsen Revocable Living Trust. David and Janice are named as joint customers on the account
documentation,20 and the account statements name both Janice and David as trustees.
19 Dkt. 1 at ¶ 13. Plaintiffs do not rely upon the relationship created by the May 31, 2006 General Durable Power of Attorney naming David
as Janice's attorney in fact and David denies having acted under the authority granted to him by that instrument. General powers of attorney
have been held to create fiduciary relationships for purposes of dischargeability. E.g., [*17] Collier v. Goepp (In re Goepp), 455 B.R. 388
(Bankr. D.N.J. 2011).
20 Dkt. 168.
These facts do not satisfy the criteria for an express trust under Kansas law. First, the creation of the MasterTrader.com
account does not evidence an explicit declaration and intention to create a trust. Second, the assets of the revocable
trust were transferred to a MasterTrader.com account titled in the name of the trust; the assets were not transferred to
David, the alleged trustee. Third, there is no evidence that Janice provided directions to David regarding the
investments. Janice, as well as David, was a customer for the account, with the ability to direct investments. In addition,
there is no basis in the record to find a technical trust.
Further, assuming a fiduciary relationship between Janice and one or both Debtors, [HN8] denial of discharge requires
that the debt excepted from discharge for either fraud or defalcation while acting as a fiduciary. Fraud, for purposes of §
523(a)(6) "has generally been interpreted as involving intentional deceit, rather than implied or constructive fraud." 21
Plaintiffs provide no evidence of intentional deceit. The United States Supreme Court, in Bullock v. BankChampaign,
[*18] N.A.,22 recently held that defalcation for purposes of the exception to discharge requires an intentional wrong. It
stated:
Thus, where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term requires an
intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the
kind that the criminal law often treats as the equivalent.23
Plaintiffs have provided no uncontroverted facts evidencing defalcation.
21 4 Collier on Bankruptcy, ¶ 523.10[1][a] at 523-71.
22 Bullock v. BankChampaign, N.A., U.S. , 133 S.Ct. 1754, 185 L. Ed. 2d 922 (2013).
23 Id. at 1759.
3. The uncontroverted facts do not prove the elements required for exception to discharge under § 523(a)(6).
Page 64Page 64
[HN9] Section 523(a)(6) excepts from discharge debts "for a willful and malicious injury by the debtor to another or to
the property of another." An injury is malicious within this exception "if it was wrongful and without just cause or
excuse."24 Malicious conduct is more culpable than recklessness.25 Willfulness refers to a deliberate and intentional act
that necessarily leads to injury.26 Plaintiffs have provided no evidence of willful and malicious [*19] injury to Janice's
property.
24 4 Collier on Bankruptcy, ¶523.12[2] at 523-92.
25 Id. at 523-93, citing In re Long, 774 F.2d 875, 881 (8th Cir. 1985).
26 Id., citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 365 (1977).
C. Plaintiffs' motion for summary judgment on the denial of discharge claims is denied.
[HN10] Grounds for denial of discharge are limited to those clearly expressed in the Code.27 "The burden of proof for
an objection to discharge is on the objector."28
27 6 Collier on Bankruptcy, ¶ 727.01[1] at 727-7.
28 Id., ¶ 727.01[2] at 727-8.
1. The uncontroverted facts do not prove the elements required for denial of discharge under § 727(a)(3).
[HN11] Section 727(a)(3) provides that a debtor shall be granted a discharge unless "the debtor has concealed,
destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents,
records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless
such act or failure to act was justified under all of the circumstances of the case." "The purpose of the objection is to
ensure documentation to permit an objective determination of the debtor's true financial status." 29 [*20] "[A] prima facie
case under Code § 727(a)(3) may be made upon showing that (1) the debtor failed to maintain and preserve adequate
records, and (2) such failure makes it impossible to ascertain the debtor's financial condition and material business
transactions."30
29 4 William L. Norton, Jr., and William L. Norton III, Bankruptcy Law & Practice 3d, § 86:9 at 86-29 to 86-30 (Thomson Reuters/West
2013).
30 Id. at 86-29.
In the Complaint, Plaintiffs allege that Debtors withdrew and wrote checks for at least $585,294.74 from Plaintiff's
trust account for their personal use or the benefit of their family, friends, and creditors but have failed to provide an
accounting of these "expenditures."31 The Court understands "expenditures" to be referring to the expenditures of the
trust, not the expenditures of the Debtors. The predicate for denial of discharge is a debtor's failure to keep books from
which the debtor's financial condition can be ascertained. It does not apply to these Debtors' alleged failure to maintain
complete records as to the trust's financial condition and transactions.
31 Dkt. 1 at ¶ 33.
2. The uncontroverted facts do not prove the elements required for denial of discharge under [*21] § 727(a)(4).
[HN12] Section 727(a)(4)(A) provides that a debtor shall be granted a discharge unless "the debtor knowingly and
fraudulently, in or in connection with the case made a false oath or statement." A false statement or omission in a
Page 65Page 65
debtor's schedules may be sufficient for denial of discharge.32 One commentator summarizes the applicable law as
follows:
[HN13] Under current Official Bankruptcy Forms, the debtor is required to verify the completeness and accuracy of any schedule
of assets, debts, or affairs filed in a case. However, since the failure to list an asset must be both knowing and fraudulent, mere
inadvertence is not sufficient to establish an objection. Where there is a knowing failure to list a substantial asset, an inference of
fraudulent intent may be drawn in the absence of mitigating circumstances. The failure to amend schedules to include omitted
information concerning assets is a reckless indifference to the truth, which is equivalent to fraud.
The false oath or account must relate to a material matter. The failure to list a significant asset is the most frequently established
basis for denying discharge under this section, and certainly satisfies the materiality element. [*22] Materiality under Code §
727(a)(4)(A) means that the statement must bear a relationship to the debtor's financial transactions or to the bankruptcy estate,
concern the disclosure of assets, or relate to the disposition of assets. If there is a failure to list a valuable asset, materiality is
established.33
32 6 Collier on Bankruptcy, ¶727.04[c] at 727-38.
33 4 Norton Bankruptcy Law & Practice, ¶ 86:11at 86-33 to 86-34.
Although the record evidences inaccuracies and omissions from Debtors' schedules, particularly their SOF, which were
signed the Debtors under oath of completeness and accuracy, the uncontroverted facts do not evidence the elements
necessary for denial of discharge. As alleged in Count VI of the Compliant, Debtors did not disclose funds transferred to
them from the Plaintiff's trust in response to SOF question 2,34 but Debtors in response to question 1 did disclose
income from Plaintiffs. The amount is consistent with Debtors' testimony admitting to the receipt of the transfers
alleged in Count I of the Complaint. The discrepancy between the income from Plaintiffs disclosed in the SOF and the
lesser amount reported in Debtors' 2007 federal income tax return raises questions [*23] of accuracy of the disclosures,
but does not prove falsity. Debtor's interest in Fitness Quest, LLC was disclosed. Although Leonard and Bendsen, LLC
was not mentioned in the SOF, Debtor testified that it was owned solely by Janice. Fit Trade, LLC also was not
mentioned in the SOF, but Debtor testified that it, as well as Leonard and Bendsen, LLC had no value. The materiality
of the omissions from the SOF is not established. Likewise, the materiality of the omissions from Schedule B of
computer equipment and bicycles purchased with trust assets is not established.
34 Dkt. 1 at ¶ 37.
In addition, Plaintiffs have not shown by uncontroverted facts that the inaccuracies and omissions were knowing and
fraudulent. Debtors were represented by counsel when the schedules were prepared, but are presently pro se. When
questioned about the schedules during their depositions, Debtors' responses did not establish that they acted either
knowingly or fraudulently. Rather, Debtors recognized the need to consult with their former counsel before responding
to detailed questioning as to the reasons for the manner in which the schedules were completed.
3. The uncontroverted facts do not prove the elements required [*24] for denial of discharge under § 727(a)(5).
[HN14] Section 727(a)(5) provides that the court shall grant the debtor a discharge, unless "the debtor has failed to
explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency
of assets to meet the debtor's liabilities." The uncontroverted facts do not include any evidence to support Plaintiffs'
allegation in Count VII of the Complaint for denial of discharge under this section. The Debtors' deposition testimony,
the only evidence relied upon by Plaintiffs, did not address the Debtors' loss of assets.
CONCLUSION.
For the foregoing reasons, Plaintiffs' motion for summary judgment is denied as to all counts alleged in the Complaint.
IT IS SO ORDERED.
SO ORDERED.
Page 66Page 66
SIGNED this 26th day of September, 2013.

/s/ Dale L. Somers
Dale L. Somers
United States Bankruptcy Judge
Page 68Page 68
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
54 of 430 DOCUMENTS
MUSE MOORE JAMES, individually; as Executrix of the Estate of Walton Burton

James, Sr.; as Co-Trustee of the Trust of Walton Burton James, Sr.; and WALTON
BURTON JAMES, JR., individually and on behalf of unknown and unborn issue of
Muse Moore James, Plaintiffs, v. SUE ANNE SCHOONDERWOERD, PATRICK
JAMES HENDERSON, individually; and as Co-Trustee of the Trust of Walton
Burton James, Jr., and MICHAEL HAMPTON HENDERSON, Defendants.
NO. COA 12-1457
COURT OF APPEALS OF NORTH CAROLINA
750 S.E.2d 920; 2013 N.C. App. LEXIS 943
April 23, 2013, Heard in the Court of Appeals

September 17, 2013, Filed
NOTICE: THIS IS AN UNPUBLISHED OPINION. PLEASE REFER TO THE NORTH CAROLINA RULES OF
APPELLATE PROCEDURE FOR CITATION OF UNPUBLISHED OPINIONS.
PUBLISHED IN TABLE FORMAT IN THE SOUTH EASTERN REPORTER.
SUBSEQUENT HISTORY: Review denied by James v. Schoonderwoerd, 2013 N.C. LEXIS 1375 (N.C., Dec. 18,
2013)
PRIOR HISTORY: [*1]

Wake County. No. 10-CVS-3120.
DISPOSITION: AFFIRMED.
CORE TERMS: caveat, statute of limitations, fraud claim, constructive, constructive fraud, summary judgment,
citation omitted, modification, termination, beach, special warranty deed, powers of attorney, fiduciary duty, fiduciary
relationship, attorney-in-fact, co-trustee, deposition, codicil, confidence, spouse, issue of material fact, counterclaim,
genuine, deed, beneficiaries, matter of law, quotation marks, quotation marks, inter vivos, tenancies-in-common
COUNSEL: Ward and Smith, P.A., by Joseph A. Schouten and Gary J. Rickner, for plaintiff-appellants.
Boxley, Bolton, Garber & Haywood, L.L.P., by Ronald H. Garber, and John Hemphill Law, P.C., by John R. Hemphill,
for defendant-appellees.
JUDGES: Robert N. HUNTER JR., Judge. Judges McGEE and STEPHENS concur.
OPINION BY: Robert N. HUNTER JR.
OPINION
Appeal by plaintiffs from order entered 14 August 2012 by Judge Robert H. Hobgood in Wake County Superior Court.
Heard in the Court of Appeals 23 April 2013.
HUNTER JR., Robert N., Judge.
Muse Moore James ("Muse") and Walton Burton James, Jr. ("Walton Jr.") (collectively, "Plaintiffs"), appeal from a trial
court order granting summary judgment in favor of defendants. On appeal, Plaintiffs argue the trial court erred by: (i)
Page 69Page 69
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
applying a 3-year statute of limitations to Plaintiffs' constructive fraud claim; (ii) applying a 3-year statute of limitations
to Plaintiffs' termination and modification of trust claims; and (iii) finding there was no genuine issue of material fact
as to when Muse knew or should have known about the alleged fraud. Upon review, we affirm.
I. Facts & Procedural History

Muse and Walton Burton James, Sr. ("Walton Sr.") were married [*2] for more than 63 years until Walton Sr.'s death on
27 July 2003. During their marriage, Muse and Walton Sr. had two children: (i) Sue Anne Schoonderwoerd ("Sue
Anne"), born on 25 August 1942; and (ii) Walton Jr., born on 8 January 1951. Sue Anne, in turn, had two children: (i)
Patrick James Henderson ("Patrick"); and (ii) Michael Hampton Henderson ("Michael"). Walton Jr. does not have any
children.
While married, Muse and Walton Sr. purchased four tracts of real property: (i) a home on Wildwood Street in Raleigh
(the "Wildwood Home"); (ii) a beach condominium in Atlantic Beach (the "Atlantic Beach Condo"); (iii) a commercial
property on Glenwood Avenue in Raleigh (the "Glenwood Property"); and (iv) a lot in Harnett County (the "Harnett
Lot"). They owned all four properties as tenants by the entirety. In 1999, Muse and Walton Sr. executed separate wills
(the "1999 Wills"). Each will provided that upon the death of one spouse, all four properties would pass to the other
spouse in fee simple.
Subsequently, Muse was diagnosed with non-Hodgkin's lymphoma. In early June 2001, Muse received inpatient
treatment at UNC Hospital. Additionally, Walton Sr. was diabetic and had suffered strokes. [*3] Given their medical
problems, Muse and Walton Sr. decided to move into Sunrise Assisted Living ("Sunrise") in Raleigh.
On 31 May 2001, Sue Anne contacted attorney Terry Carlton ("Carlton") to draft powers of attorney for her parents. On
5 June 2001, immediately before their move to Sunrise, Muse and Walton Sr. each signed powers of attorney naming
Sue Anne as their general attorney-in-fact. Muse and Walton Sr. then moved to Sunrise in June 2001. At Sunrise, Sue
Anne assisted them with various day-to-day tasks like stocking their refrigerator and filling their medical prescriptions.
Sue Anne also gave her parents financial advice and wrote their checks for them.
Sue Anne continued meeting independently with Carlton. On 12 June 2001, Sue Anne met with Carlton to discuss the
"potential completion of estate planning documents for [her] parents." The following day, Carlton met with Muse and
Walton Sr. to discuss "issues and options regarding potential completion of credit shelter wills." In explaining how
credit shelter wills worked, Carlton indicated Muse and Walton Sr. would have to place their real estate in a trust.
Carlton further explained that this plan would require dissolution of [*4] the tenancies by the entirety in favor of
tenancies-in-common.
On 15 June 2001, Muse called Carlton to tell him: (i) she wanted to leave the Atlantic Beach Condo to Patrick and
Michael in equal shares; (ii) she wanted Walton Sr. to be her primary executor and trustee; and (iii) she wanted Patrick
to be her alternate executor and trustee.
On 18 June 2001, Sue Anne called Carlton to "discuss . . . [the] proposed wills for [her] parents." Later that day, Muse
called Carlton "to review [the] issues/terms of [their] proposed last will and testament." During that conversation, Muse
told Carlton she and Walton Sr. already conveyed the Wildwood Home to Walton Jr. as a gift on 20 March 2001.
However, Muse and Walton Sr. retained a life estate in the Wildwood Home. Muse instructed Carlton not to tell Sue
Anne they had given the Wildwood Home to Walton Jr. When Carlton inquired further, Muse told him to "butt out."
Carlton and Muse spoke again on 19 June 2001. Carlton again suggested telling Sue Anne about giving the Wildwood
Home to Walton Jr., but Muse refused.
On 25 June 2001, Muse and Walton Sr. executed new wills (the "2001 Wills") replacing the 1999 Wills. The 2001 Wills
created a testamentary [*5] trust (the "Trust") upon the death of either spouse. Under the terms of the 2001 Wills, the
deceased spouse's half-interest in the Atlantic Beach Condo, Glenwood Property, and Harnett Lot would become Trust
assets. The surviving spouse would retain his or her half-interest as a tenant-in-common. The surviving spouse and
Patrick would be co-trustees of the Trust assets. The record does not indicate why the final 2001 Wills listed Patrick as
co-trustee rather than alternate trustee. The 2001 Wills listed Sue Anne, Walton Jr., Patrick, and Michael as the Trust's
beneficiaries.
On 25 June 2001, Muse and Walton Sr. executed a special warranty deed for the Glenwood Property creating a tenancy-
in-common. On 10 July 2001, Muse and Walton Sr. executed similar special warranty deeds for the Atlantic Beach
Page 70Page 70
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
Condo and the Harnett Lot. Muse testified she does not remember signing her 2001 Will or these special warranty
deeds. The 2001 Wills were notarized and signed by two witnesses, and all three special warranty deeds were notarized.
Around 13 July 2001, Patrick became attorney-in-fact for Muse and Walton Sr., rather than Sue Anne. The record does
not indicate why Muse and Walton Sr. chose Patrick [*6] to become their attorney-in-fact.
On 15 August 2002, Muse told Carlton she and Walton Sr. wanted to amend the 2001 Wills by codicil. Specifically, they
wanted to reduce the trust's beneficiaries from four (their children and grandchildren), to two (their children). Muse
said she did not want to change anything else in the 2001 Wills. Carlton prepared the codicils. Muse and Walton Sr.
executed the codicils on 20 August 2002. Muse testified she does not remember signing her codicil. Both codicils were
notarized and signed by three witnesses.
On 27 July 2003, Walton Sr. died. On 24 September 2003, Muse went to Carlton's office to probate Walton Sr.'s estate.
On 18 December 2003, Muse filed a final account of Walton Sr.'s estate, and presumably the estate account was closed.
On 25 September 2003, Muse sold the Atlantic Beach Condo for $169,000. Muse received half this amount based on
her one-half interest as a tenant-in-common. She signed the deed of sale three times: (i) individually; (ii) as Executrix of
the Estate of Walton Sr.; and (iii) as co-trustee of the Trust. Patrick did not sign the deed of sale. 1
1 Although nothing in the record indicates Patrick consented to this sale as co-trustee, [*7] Defendants do not raise any counterclaims
regarding this sale.
In summer 2004, Muse met with attorney Daniel Brady ("Brady") to gain a better understanding of her 2001 Will. Muse
testified she first learned she could not sell the Glenwood Property without Patrick's consent at this meeting.
Specifically, Muse elaborated that:
[Brady] explained to me this trust thing and that's why I went to see him, and he wanted to make up a will at the time for me. I was
flabbergasted when [Brady] explained the trust to me. I had no powers whatsoever. . . . When he told me what was the results of
the trust, well, then I said I don't want to leave Sue Anne anything.
As a result, Muse asked Brady to prepare a new will. On 12 August 2004, Muse executed a new will (the "2004 Will")
leaving all her property to Walton Jr. While the 2004 Will does not address the Trust, it purports to "revoke all Wills
and Codicils heretofore made by me."
Subsequently, Muse tried to gain fee simple in the Trust assets. For instance, on 26 May 2005 Muse drafted, signed and
recorded a deed professing to transfer the Trust's one-half interest in the Glenwood Property to herself. She signed the
deed as co-trustee. Furthermore, in [*8] January 2008 Muse tried to sell the entire Harnett Lot to a contractor. When
Patrick did not consent to the sale, Muse asked him to resign as co-trustee. However, he refused. On 31 March 2008,
Muse conveyed her one-half individual interest in the Glenwood Property to Walton Jr. She retained a life estate.
On 22 February 2010, Muse and Walton Jr. filed a complaint against Sue Anne, Patrick, and Michael 2 (collectively,
"Defendants") in Wake County Superior Court. The complaint alleged: (i) constructive fraud; (ii) fraud; (iii) termination
of trust; (iv) modification of trust; and (v) bad faith/punitive damages. On 15 September 2010, Defendants filed seven
counterclaims: (i) continuing breach of fiduciary duty; (ii) constructive fraud; (iii) conversion; (iv) self-dealing and
breach of duty of loyalty; (v) breach of N.C. Gen. Stat. § 36C-7-703; 3 (vi) action to quiet title/set aside deeds; and (vii)
declaratory judgment. Defendants based these claims on Muse's attempts to unilaterally exercise ownership over the
Trust's assets.
2 Plaintiffs included Patrick and Michael in their complaint because they were remainder beneficiaries of the Trust.
3 N.C. Gen. Stat. § 36C-7-703 prohibits co-trustees [*9] from taking unilateral actions with trust assets.
From 2011 to 2012, Muse, Sue Anne, and Carlton gave depositions. During her deposition, Muse testified that in 2001
she was terminally ill and taking seventeen different medications. She further testified:
A: So I don't know anything that happened between those times.

Page 71Page 71
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
Q: Between what times?

A: Well, 2000 until about 2004.
Q: You mean you don't remember anything for those four years?
A: That's right, until I came home and got off of some of that medication. But I was appalled when I read the records that I was
taking 17 daily.
Q: Okay. So you don't have any memory of events between 2000 to 2004? Is that what you're saying?
A: 2001.
Q: 2001 to 2004?
A: Yes.
Muse testified she did not remember ever meeting Carlton in 2001 and stated she "didn't even know him when [she]
saw him" at the deposition.
Walton Sr.'s neurologist Dr. Michael Bowman ("Dr. Bowman") also gave a deposition. During his deposition, Dr.
Bowman testified that Walton Sr. suffered from vascular dementia at the end of his life. Dr. Bowman testified he
expected Walton Sr. "to have significant cognitive impairment" that would not permit him to execute legal documents.
Given their alleged [*10] mental incapacity, Muse claims she and Walton Sr. were not able to understand the 2001
Wills and special warranty deeds they executed.
During Carlton's deposition, he testified Sue Anne told him in 2001 that her parents were "very competent." Carlton also
testified that he "found Muse to be very competent" when she signed the 2001 Will.
On 4 May 2012, Defendants filed a motion for summary judgment for all of Plaintiffs' claims and their counterclaim
that Muse breached N.C. Gen. Stat. § 36C-7-703. On 14 August 2012, the trial court entered an order granting
Defendants' motion as to Plaintiffs' claims. The order does not address Defendants' counterclaim. On 14 August 2012,
Plaintiffs filed timely notice of appeal.
II. Jurisdiction & Standard of Review

This Court has jurisdiction to hear the instant case pursuant to N.C. Gen. Stat. § 7A-27(d) (2011). Since Defendants'
counterclaims remain outstanding, this appeal is interlocutory. However, according to N.C. R. Civ. P. 54(b):
When more than one claim for relief is presented in an action . . . the court may enter a final judgment as to one or more but fewer
than all of the claims or parties only if there is no just reason for delay and it is [*11] so determined in the judgment. Such
judgment shall then be subject to review by appeal or as otherwise provided by these rules or other statutes.
N.C. R. Civ. P. 54(b). Here, the trial court issued a Rule 54(b) certification. See id. Upon review, we determine we have
jurisdiction to hear the instant case.
This Court's "standard of review of an appeal from summary judgment is de novo." In re Will of Jones, 362 N.C. 569,
573, 669 S.E.2d 572, 576 (2008). "Under a de novo review, the court considers the matter anew and freely substitutes its
own judgment for that of the lower tribunal." State v. Williams, 362 N.C. 628, 632-33, 669 S.E.2d 290, 294 (2008)
(quotation marks and citation omitted).
On de novo review of a trial court order granting summary judgment, we must determine whether "the trial court
properly concluded that the moving party showed, through pleadings and affidavits, that there was no genuine issue of
material fact and that the moving party was entitled to judgment as a matter of law." Daniel v. Wray, 158 N.C. App. 161,
168, 580 S.E.2d 711, 716 (2003). We must "view all evidence in the light most favorable to the non-movant and draw
all reasonable inferences in his favor." [*12] Campbell v. Anderson, 156 N.C. App. 371, 374, 576 S.E.2d 726, 729
(2003).
III. Analysis
On appeal, Plaintiffs argue the trial court erred by: (i) applying a 3-year statute of limitations to their constructive fraud
claim; (ii) applying a 3-year statute of limitations to their termination and modification of trust claims; and (iii)
determining there was no genuine issue of material fact as to when Muse knew or should have known about the alleged
fraud. Upon review, we affirm.
Page 72Page 72
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
A. Constructive Fraud
Plaintiffs first argue the trial court erred by granting summary judgment in favor of Defendants for their constructive
fraud claim. We disagree.
In North Carolina, the applicable statute of limitations depends on whether plaintiffs bring: (i) a breach of fiduciary duty
claim; or (ii) a constructive fraud claim based on breach of fiduciary duty.
Allegations of breach of fiduciary duty that do not rise to the level of constructive fraud are governed by the three-year statute of
limitations applicable to contract actions contained in N.C. Gen. Stat. § 1-52(1) (2003). However, a claim of constructive fraud
based upon a breach of fiduciary duty falls under the ten-year statute of limitations contained [*13] in N.C. Gen. Stat. § 1-56
(2003).
Babb v. Graham, 190 N.C. App. 463, 480, 660 S.E.2d 626, 637 (2008) (quotation marks and citations omitted).
To survive summary judgment, "a cause of action for constructive fraud must allege (1) a relationship of trust and
confidence, (2) that the defendant took advantage of that position of trust in order to benefit himself, and (3) that
plaintiff was, as a result, injured." White v. Consolidated Planning, Inc., 166 N.C. App. 283, 294, 603 S.E.2d 147, 156
(2004) (citation omitted); see also Fakhoury v. Fakhoury, 171 N.C. App. 104, 110, 613 S.E.2d 729, 733 (2005); Orr v.
Calvert, N.C. App. , , 713 S.E.2d 39, 49 (Hunter, Jr., J., dissenting), rev'd for reasons stated in dissent, 365 N.C.
320, 720 S.E.2d 387 (2011) (citation and quotation marks omitted).
Certain legal relationships create a rebuttable presumption that the relationship is one in which the plaintiff put trust
and confidence in the defendant as a matter of law. 4 If plaintiffs establish the existence of a presumptive fiduciary
relationship, the burden then shifts to the defendant to show he or she "act[ed] openly, fairly and honestly in bringing
about [the transaction]." [*14] N.C.P.I.--Civ. 800.06 (2011); see also Collier v. Bryant, N.C. App. , , 719 S.E.2d
70, 81 (2011). "This means that the defendant must prove, by the greater weight of the evidence, that, with regard to
[the transaction], the defendant made a full, open disclosure of material facts, that [s]he dealt with the plaintiff fairly,
without oppression, imposition or fraud, and that [s]he acted honestly." N.C.P.I.--Civ. 800.06 (2011).
4 These presumptive fiduciary relationships include, but are not limited to, the following: "(1) trustee and cestui que trust dealing in
reference to the trust fund, (2) attorney and client, in respect of the matter wherein the relationship exists, (3) mortgagor and mortgagee in
transactions affecting the mortgaged property, (4) guardian and ward, just after the ward arrives of age, and (5) principal and agent, where
the agent has entire management so as to be, in effect, as much the guardian of his principal as the regularly appointed guardian of an infant."
McNeill v. McNeill, 223 N.C. 178, 181, 25 S.E.2d 615, 617 (1943) (citation omitted).
A fiduciary relationship can also arise based on the facts. In this circumstance, plaintiffs must allege facts showing "a
relationship [*15] of trust and confidence." Fakhoury, 171 N.C. App. at 110, 613 S.E.2d at 733 (citation omitted). Our
Supreme Court has explained:
The relation may exist under a variety of circumstances; it exists in all cases where there has been a special confidence reposed in
one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing
confidence. It . . . extends to any possible case in which a fiduciary relation exists in fact, and in which there is confidence reposed
on one side, and resulting domination and influence on the other.
Hinton v. West, 207 N.C. 708, 716, 178 S.E. 356, 360 (1935) (quotation marks and citation omitted). A fiduciary
relationship based on the facts "need not be legal; it may be moral, social, domestic or merely personal." Id. (quotation
marks and citation omitted).
In 1997, our Supreme Court distinguished constructive fraud claims from breach of fiduciary duty claims by adding the
additional requirement that constructive fraud claims contain an allegation that the defendant benefitted himself. See
Barger v. McCoy Hillard & Parks, 346 N.C. 650, 666, 488 S.E.2d 215, 224 (1997) ("Implicit in the requirement that
[*16] a defendant [take] advantage of his position of trust to the hurt of plaintiff is the notion that the defendant must
seek his own advantage in the transaction; that is, the defendant must seek to benefit himself." (alteration in original)
(citation and quotation marks omitted)); see also White, 166 N.C. App. at 294, 603 S.E.2d at 156 ("The primary
difference between pleading a claim for constructive fraud and one for breach of fiduciary duty is the constructive fraud
requirement that the defendant benefit himself.").
Page 73Page 73
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
In the present case, Plaintiffs argue the trial court erred by failing to apply a 10-year statute of limitations to their
constructive fraud claim. We disagree.
Here, Plaintiffs issued a summons on 22 February 2010. Therefore, this Court examines transactions in which
Defendants participated during the ten-year period prior to this date. See N.C. Gen. Stat. § 1-56 (2011). Upon
examination of the record, it appears that three relevant transactions are in question involving any of Defendants: (i) Sue
Anne's power of attorney executed on 5 June 2001; (ii) the power of attorney naming Patrick as attorney-in-fact rather
than Sue Anne, executed on 13 July 2001; and (iii) the special [*17] warranty deeds destroying the tenancies by the
entirety for the Atlantic Beach Condo, the Glenwood Property, and the Harnett Lot.
To the extent that Plaintiffs' constructive fraud claim challenges Walton Sr.'s 2001 Will, it is clear that his Will cannot be
the subject of a constructive fraud claim because this type of action may only be brought by caveat. See N.C. Gen. Stat.
§ 31-32 (2011). Caveat actions must be brought within three years of the decedent's death. See id. Because of the unique
nature of caveat proceedings, since Walton Sr.'s 2001 Will was not challenged within this time, the final probate report
terminates any claims by any party or executrix of the Will who takes under the Will.
With regard to the powers of attorney, in no instance does it appear that either Patrick or Sue Ann signed any
instruments transferring property of their principal. It is difficult to comprehend how these powers of attorney can be the
subject of Plaintiffs' constructive fraud claim. A power of attorney does presumptively establish a fiduciary relationship
but it is not, standing alone, a transaction in which the agent of the principal benefits.
Therefore, the only remaining challenge is that [*18] the execution of the special warranty deeds destroying the
tenancies by the entirety and creating tenancies-in-common may have been subject to constructive fraud. If this
transaction had been the subject of constructive fraud, the trial court would apply the above traditional three-part test for
constructive fraud claims.
First, the trial court must consider whether Plaintiffs allege facts indicating a fiduciary relationship between Muse and
either Sue Anne or Patrick. Here, Plaintiffs allege a presumptive fiduciary relationship based on their role as attorneys-
in-fact. See Albert v. Cowart, N.C. App. , , 727 S.E.2d 564, 570 (2012) ("The relationship created by a power of
attorney between the principal and the attorney-in-fact is fiduciary in nature. . . . [A]n attorney-in-fact is presumed to act
in the best interests of the principal." (quotation marks and citation omitted)).
Second, the trial court must consider whether "the defendant took advantage of that position of trust in order to benefit
himself." White, 166 N.C. App. at 294, 603 S.E.2d at 156 (citation omitted). Here, Plaintiffs did not allege "specific
facts creating a triable issue that defendants participated in [*19] a transaction through which they sought to benefit
themselves." Carcano v. JBSS, LLC, 200 N.C. App. 162, 178, 684 S.E.2d 41, 54 (2009). Specifically, we do not see any
evidence indicating how the conversion of the Atlantic Beach Condo, Glenwood Property, and Harnett Lot to tenancies-
in-common benefits either Sue Anne or Patrick. Thus, the only remaining challenged transaction (the execution of the
special warranty deeds) does not state a claim for relief based on constructive fraud.
It is clear that decedent Walton Sr. intended to benefit both of his children by creating the Trust. Although Muse may
alter her Will as she wishes, she may not alter the intentions behind her deceased husband's Will. To transfer Trust
assets to only some of the beneficiaries in unequal shares is not in compliance with the Trust. To do so would be to the
detriment of all the beneficiaries of Patrick's grandfather's Trust. This action is not a transaction which under these facts
can be the subject of the tort of constructive fraud.
Consequently, Plaintiffs fail to allege facts supporting a constructive fraud claim. Even if the 10-year statute of
limitations for constructive fraud claims were used, no claim [*20] has been stated.
B. Termination/Modification of Trust
Plaintiffs next contend that the trial court erred by applying a 3-year statute of limitations to their termination and
modification of trust claims. We disagree.
N.C. Gen. Stat. §§ 36C-4-411 and 36C-4-412 address termination and modification of trusts, respectively. Specifically,
these two statutes allow for: (i) "[m]odification or termination of noncharitable irrevocable trust by consent;" and (ii)
"[m]odification or termination because of unanticipated circumstances or inability to administer trust effectively." See
N.C. Gen. Stat. § 36C-4-411 (2011); N.C. Gen. Stat. § 36C-4-412 (2011). Since neither statute contains a statute of
limitations, they are governed by the ten-year statute of limitations in N.C. Gen. Stat. § 1-56. See id.; see also N.C. Gen.
Stat. § 1-56 (2011).
Page 74Page 74
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
Caveat actions, on the other hand, are governed by N.C. Gen. Stat. § 31-32.
In general, the purpose of a caveat is to determine whether the paperwriting purporting to be a will is in fact the last will and
testament of the person for whom it is propounded. The filing of a caveat is the customary and statutory procedure for an attack
upon the testamentary value of [*21] a paperwriting which has been admitted by the clerk of superior court to probate in common
form. An attack upon a will offered for probate must be direct and by caveat; a collateral attack is not permitted.
Baars v. Campbell Univ., Inc., 148 N.C. App. 408, 419, 558 S.E.2d 871, 878 (2002) (quotation marks and citation
omitted) (emphasis added). Overall, "a caveat is a proceeding in rem to attack the validity of a will." Casstevens v.
Wagoner, 99 N.C. App. 337, 338, 392 S.E.2d 776, 777 (1990).
Our case law clearly prohibits collateral attacks on wills outside of caveat proceedings. See Baars, 148 N.C. App. 408,
558 S.E.2d 871; Casstevens, 99 N.C. App. 337, 392 S.E.2d 776. For instance, in Baars we held the trial court did not
have subject matter jurisdiction to hear the plaintiff's action challenging both an inter vivos property transfer and a will.
Baars, 148 N.C. App. at 417, 558 S.E.2d at 877. There, the plaintiffs' aunt originally executed a will leaving the
majority of her assets to the plaintiffs, but later executed codicils and inter vivos transfers giving her assets to the
defendant. Id. at 410-11, 558 S.E.2d at 872-73. Following the aunt's death, the plaintiffs initiated: (i) [*22] a caveat
action for the will; and (ii) a civil complaint challenging the inter vivos transfers. Id. at 411, 558 S.E.2d at 873.
There, since the civil complaint regarding the inter vivos transfers addressed the same issues as the caveat action, we
determined the plaintiffs should have only filed a caveat action because the civil complaint was an impermissible
collateral attack on the will's validity. Id. at 419, 558 S.E.2d at 878. Consequently, we affirmed the trial court's dismissal
of the civil complaint based on lack of subject matter jurisdiction. Id. at 414, 417, 558 S.E.2d at 874, 877.
In the present case, Plaintiffs contend their termination and modification of trust claims are not caveat actions and
should be governed by a 10-year statute of limitations rather than the 3-year statute of limitations for caveat actions. We
disagree.
Like the plaintiffs in Baars, Plaintiffs here use § 36C-4-411 and § 36C-4-412 to collaterally attack the 2001 Wills. In the
instant case, the Trust encompasses the bulk of the 2001 Will. Thus, termination or modification of the Trust would
also terminate or modify the bulk of the 2001 Will. Like in Baars, Plaintiffs should have raised their claim in a [*23]
caveat action because "such relief is predicated upon the provisions of [the decedent's] will." Id. at 419, 558 S.E.2d at
878.
Since North Carolina precedent prohibits collateral attacks on wills outside of caveat actions, we affirm the lower
court's application of the 3-year statute of limitations for caveat actions.
C. Fraud
Lastly, Plaintiffs argue the trial court erred by finding there was no genuine issue of material fact as to when Muse knew
or should have known of the alleged fraud. Upon review, we affirm.
In North Carolina, fraud claims have a 3-year statute of limitations. N.C. Gen. Stat. § 1-52(9) (2011). The statute further
clarifies that "the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the
facts constituting the fraud or mistake." N.C. Gen. Stat. § 1-52(9) (2011).
"'[D]iscovery' means either actual discovery or when the fraud should have been discovered in the exercise of
reasonable diligence." State Farm Fire & Cas. Co. v. Darsie, 161 N.C. App. 542, 547, 589 S.E.2d 391, 396 (2003).
Circumstances dictate whether this determination falls to the trial court or jury. Specifically, the decision "is ordinarily
for the jury [to [*24] decide] when the evidence is not conclusive or is conflicting." Huss v. Huss, 31 N.C. App. 463,
468, 230 S.E.2d 159, 163 (1976). However, the trial court may grant summary judgment "as a matter of law where it
was clear that there was both capacity and opportunity to discover the mistake." Id.; see also Grubb Properties, Inc. v.
Simms Inv. Co., 101 N.C. App. 498, 501, 400 S.E.2d 85, 88 (1991) ("[W]here the evidence is clear and shows without
conflict that the claimant had both the capacity and opportunity to discover the mistake or discrepancy but failed to do
so the absence of reasonable diligence is established as a matter of law.").
In the present case, Plaintiffs argue the trial court erred by granting summary judgment for their fraud claim when there
was a genuine issue of material fact as to when Muse discovered or should have discovered Sue Anne's alleged fraud.
We disagree.
Page 75Page 75
750 S.E.2d 920; 2013 N.C. App. LEXIS 943, *
After reviewing the evidence in the light most favorable to Plaintiffs, we conclude the latest point at which Muse knew
or should have known about the alleged fraud was after her 2004 meeting with Dan Brady. During her deposition, Muse
testified about that meeting as follows:
A: [Brady] explained to me this [*25] trust thing and that's why I went to see him, and he wanted to make up a will at the time for
me. I was flabbergasted when he explained the trust to me. I had no powers whatsoever. Everything had been taken away from me
and I would have had to have been on welfare or somewhere because that was my income, everything.
The following exchange later occurred:

I thought, well, I need somebody to -- when I found the trust, I need somebody to explain it to me. So I called [Brady] and he saw
me. When he told me what was the results of the trust, well, and I said I don't want to leave Sue Anne anything. That's the way I
felt at that time. But, you know, you change. Your mind changes through the years. But I did. I went to see him.
Q: Okay. So you said you took the trust to him.
A: Yes, he explained it to me and he said, "You don't have any powers at all. Everything is taken away from you." He said Patrick
was the one that had it all. I didn't have any.
Q: And that was the trust that was created by the will --
A: Yes.
These statements demonstrate Muse knew or should have known about the alleged fraud after her 2004 meeting with
Dan Brady. However, Plaintiffs did not file a complaint until 22 February [*26] 2010, after the three-year statute of
limitations for fraud had run. Since Muse either knew or "had both the capacity and opportunity to discover" the alleged
fraud after her 2004 meeting with Brady, we determine the trial court did not err in granting summary judgment based
on the 3-year statute of limitations for fraud. Grubb Properties, Inc., 101 N.C. App. at 501, 400 S.E.2d at 88.
IV. Conclusion
For the forgoing reasons, we conclude the trial court did not err in granting summary judgment for Plaintiffs' claims.
Consequently, the trial court's summary judgment order is
AFFIRMED.
Judges McGEE and STEPHENS concur.
Report per Rule 30(e).
Page 77Page 77
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
55 of 430 DOCUMENTS
MICHAEL KEISTER, Individually, and SUSAN LEWIS-KEISTER, Individually,

and on Behalf of All Others Similarly Situated, Plaintiffs v. NATIONAL COUNCIL
OF THE YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE UNITED STATES
OF AMERICA d/b/a YMCA OF THE USA, YMCA OF WESTERN NORTH
CAROLINA, INC., ASHEVILLE YMCA, CORPENING MEMORIAL YMCA,
HENDERSON COUNTY FAMILY YMCA, REUTER FAMILY YMCA and
NEIGHBORHOOD YMCA AT WOODFIN, Defendants
12 CVS 1137
NORTH CAROLINA SUPERIOR COURT, BUNCOMBE COUNTY
2013 NCBC 36; 2013 NCBC LEXIS 32
July 18, 2013, Decided
CASE SUMMARY:
OVERVIEW: HOLDINGS: [1]-Claims by organization members, arising from their witnessing or suffering an assault
on the premises, that the organization deceptively marketed its facilities as providing safe and healthy environments in
violation of N.C. Gen. Stat. § 75-1.1 did not survive challenge by motions to dismiss because the marketing efforts did
not have a tendency to deceive consumers and they were not unfair; [2]-Claims alleging breach of fiduciary duty also
did not survive challenge because there was no fiduciary relationship formed between the parties merely based on the
organization's marketing of its facilities in a certain manner; [3]-A breach of implied-in-fact contract claim failed
because the members' passive receipt of the organization's marketing materials did not form a contract of any type.
OUTCOME: Motions to dismiss granted.
CORE TERMS: cruising, unfair, fiduciary relationship, deceptive, marketing, safe, fiduciary duty, nationwide, civil
action, membership, trade practice, implied-in-fact, misleading, healthy, deceive, consumers, factual allegations, locker
room, misrepresentation, advertising, confidence, undertook, illicit, assaulted, sexual activity, arm's length, mutual
assent, promotional, unsupported, superiority
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Failures to State Claims
Civil Procedure > Pleading & Practice > Pleadings > Rule Application & Interpretation
[HN1] When ruling on a motion to dismiss pursuant to N.C. R. Civ. P. 12(b)(6), a court must determine whether, as a
matter of law, the allegations of the complaint are sufficient to state a claim upon which relief may be granted. To make
this determination, courts are to take the well-pleaded allegations of the complaint as true and admitted, but conclusions
of law or unwarranted deductions are not admitted. Consistent with the system of notice pleading, a court, when
considering a motion to dismiss pursuant to Rule 12(b)(6), should afford the complaint a liberal construction.
[HN2] Following the standard set by N.C. R. Civ. P. 12(b)(6), a complaint may be properly dismissed if: (a) the
complaint on its face reveals that no law supports plaintiff's claim; (b) the complaint on its face reveals the absence of
facts sufficient to make a good claim; or (c) any fact disclosed in the complaint necessarily defeats plaintiff's claim.
Antitrust & Trade Law > Consumer Protection > Deceptive Acts & Practices > State Regulation
Page 78Page 78
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **

[HN3] To recover under N.C. Gen. Stat. Chapter 75, a plaintiff must show that: (a) the defendant engaged in an unfair or
deceptive practice or act; (b) in or affecting commerce; and (c) such act proximately caused actual injury to the plaintiff.
An act or practice qualifies as "deceptive" under Chapter 75 if it "has a tendency to deceive."
[HN4] Fraud or misrepresentation occurring during a commercial transaction is not a per se violation of N.C. Gen. Stat.
Chapter 75, but such conduct can be the basis of a claim under Chapter 75. Moreover, when a Chapter 75 claim is
predicated on an alleged misrepresentation by the alleged wrongdoer, the plaintiff must show actual reliance on the
alleged misrepresentation in order to establish that the alleged misrepresentation proximately caused the complained of
injury.
[HN5] The question of whether a particular practice constitutes an unfair or deceptive trade practice is a question of law
for a court. The existence of unfair acts and practices must be determined from the circumstances of each case. A
practice is deceptive if it has a tendency to deceive.
Antitrust & Trade Law > Consumer Protection > False Advertising > State Regulation
[HN6] Unfair competition has been referred to in terms of conduct "which a court of equity would consider unfair." The
fairness or unfairness of a particular conduct is not an abstraction to be derived by logic. Rather, the fair or unfair nature
of particular conduct is to be judged by viewing it against the background of actual human experience and by
determining its intended and actual effects upon others. Advertising which is neither false nor misleading is not an
unfair method of competition or an unfair or deceptive act or practice within the meaning of N.C. Gen. Stat. § 75-1.1.
[HN7] A practice is considered unfair where it offends established public policy as well as when the practice is immoral,
unethical, oppressive, unscrupulous, or substantially injurious.
Business & Corporate Law > Agency Relationships > Agents Distinguished > Fiduciary Relationships > Formation
[HN8] North Carolina law recognizes two general categories of fiduciary relationships, with one category arising from
the legal relationship that exists between the parties and the other arising out of fact. Well-established examples of the
first category of relationships are attorney and client, broker and principal, executor or administrator and heir, legatee or
devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui que trust. The legal
relations that give rise to a fiduciary relationship are often referred to as de jure fiduciary relationships and those arising
out of fact are often referred to as de facto fiduciary relationships.
Business & Corporate Law > Agency Relationships > Agents Distinguished > Fiduciary Relationships > Definitions
Business & Corporate Law > Agency Relationships > Agents Distinguished > Fiduciary Relationships > Formation
[HN9] One of the two categories of fiduciary relationships includes those that exist as fact. The North Carolina Supreme
Court stated that a fiduciary relationship, in addition to arising as a matter of law with certain relationships, can exist in
fact where there is confidence reposed on one side, and resulting domination and influence on the other. Generally,
consumer-type relationships where the parties deal with each other in an arm's length relationship are not fiduciary
relationships. One necessary requirement for a fiduciary relationship to arise out of fact is that one party must exhibit
"resulting superiority and influence" over the other party. Typically, in an arm's length relationship, such as a consumer-
type relationship where the parties have equal bargaining power, resulting superiority and influence does not exist.
Therefore, neither party becomes the fiduciary of the other.
Contracts Law > Contract Interpretation > Intent

Contracts Law > Formation > Meeting of Minds
Contracts Law > Types of Contracts > Implied-in-Fact Contracts
[HN10] To be valid, any contract, express or implied, must be the product of a "meeting of the minds" between the
parties. In determining the terms or existence of any agreement, a court should not consider what either one of the
parties thought the contract was, but by what both agreed it should be. North Carolina recognizes that a contract may be
Page 79Page 79
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
implied in fact where the intention of the parties is not expressed, but an agreement in fact, creating an obligation, is
implied or presumed from their acts. To determine the terms contained in a contract implied in fact, one looks not to
some express agreement, but to the actions of the parties showing an implied offer and acceptance. A contract implied in
fact is enforceable as though it were express, but still requires the existence of mutual assent to the terms of the
agreement.
Civil Procedure > Pleading & Practice > Pleadings > Rule Application & Interpretation
[HN11] N.C. R. Civ. P. 12(b)(6) allows dismissal of certain claims or an entire complaint if the allegations fail "to state
a claim upon which relief can be granted." Implicit in the Rule 12(b)(6) standard is the requirement that a claim must
actually be asserted against a defendant before the sufficiency of the claim may be examined.
COUNSEL: [**1] Capua Law Firm, P.A., by Paul A. Capua, Esq. and Michael J. Volpe, Esq. for Plaintiffs.
Ogletree, Deakins, Nash, Smoak & Stewart, P.C., by H. Bernard Tisdale III, Esq., Michael L. Wade, Jr., Esq. and
Gregory P. McGuire, Esq. for Defendant National Council of the Young Men's Christian Association of the United
States of America d/b/a YMCA of the USA.
McGuire Woods L.L.P. by H. Landis Wade, Esq., for Defendants YMCA of Western North Carolina, Inc., Asheville
YMCA, Corpening Memorial YMCA, Henderson County Family YMCA, Reuter Family YMCA and Neighborhood
YMCA at Woodfin.
JUDGES: Jolly, Judge.
OPINION BY: Jolly
OPINION
OPINION AND ORDER ON MOTIONS TO DISMISS

THIS MATTER comes before the court upon Defendant National Council of the Young Men's Christian Association of
the United States of America d/b/a YMCA of the USA's Motion to Dismiss ("Y-USA Motion") and Defendants YMCA
of Western North Carolina, Inc., Asheville YMCA, Corpening Memorial YMCA, Henderson County Family YMCA,
Reuter Family YMCA and Neighborhood YMCA at Woodfin's Motion to Dismiss ("Y-WNC Motion") (collectively,
"Motions"); and
THE COURT, having reviewed the Motions, briefs in support of and in opposition to the Motions, arguments of counsel
and other appropriate [**2] matters of record, FINDS and CONCLUDES that the Motions should be GRANTED for
the reasons stated herein.
Jolly, Judge.
PROCEDURAL HISTORY
[*1] On May 7, 2012, Plaintiffs Michael Keister ("Keister") and Susan Lewis-Keister, individually and behalf of all
others similarly situated, filed an Amended Complaint 1 against Defendants National Council of the Young Men's
Christian Association of the United States of America d/b/a YMCA of the USA ("Y-USA"), YMCA of Western North
Carolina, Inc. ("Y-WNC"), Asheville YMCA, Corpening Memorial YMCA, Henderson County Family YMCA, Reuter
Family YMCA and Neighborhood YMCA at Woodfin (collectively, "Y-WNC Facilities").
1 On April 30, 2012, the court, sua sponte, struck Plaintiffs' original Complaint and ordered the Complaint to be sealed due to unnecessary,
extremely offensive, outrageous and explicit allegations contained in the Complaint. In response to the court striking the original Complaint,
Plaintiffs' filed the Amended Complaint, deleting the offensive allegations.
[*2] The Amended Complaint alleges three claims for relief ("Claim(s)") against Y-USA: Count I - Violations of N.C.
Gen. Stat. § 75-1.1 ("First Claim"), Count II - Breach of Fiduciary Duty ("Second [**3] Claim") and Count III - Breach
Page 80Page 80
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
of Implied-in-Fact Contract ("Third Claim"). The Amended Complaint also alleges three Claims against all Defendants:
Count IV - Violations of N.C. Gen. Stat. § 75-1.1 ("Fourth Claim"), Count V - Breach of Fiduciary Duty ("Fifth Claim")
and Count VI - Breach of Implied-in-Fact Contract ("Sixth Claim"). All of Plaintiffs' Claims have been alleged as
purported class claims.
[*3] On July 11, 2012, Y-USA filed the Y-USA Motion, seeking dismissal of all Claims against it, pursuant to Rule
12(b)(6) of the North Carolina Rules of Civil Procedure ("Rule(s)"). On the same day, Y-WNC and Y-WNC Facilities
filed the Y-WNC Motion, also seeking dismissal of all Claims against them pursuant to Rule 12(b)(6).
[*4] On October 4, 2012, the court entered an Order on Motions to Dismiss and Compelling Mediation and Staying
Action, dismissing Y-WNC Facilities from this civil action. 2
2 In that Order, the court stated that "[a]n appropriate Opinion and Order with regard to dismissal of [Y-WNC Facilities] will be published in
due course." This Opinion and Order is entered to rule upon the remaining Motions and to explain the court's rationale in dismissing Y-WNC
Facilities from this civil [**4] action.
[*5] On April 12, 2013, the court entered an Order on Joint Motion for Approval of Pre-Certification Voluntary
Dismissal with Prejudice of all Claims against Y-WNC, approving a settlement entered into between Plaintiffs and Y-
WNC. 3
3 As a result of the settlement, all Claims alleged against Y-WNC have been dismissed. Accordingly, that part of the Y-WNC Motion seeking
dismissal of those Claims is MOOT and requires no further action by this court.
[*6] Accordingly, except for Y-USA, all other Defendants have either been dismissed from this civil action or settled
with Plaintiffs.
[*7] The Y-USA Motion has been fully briefed and argued and is ripe for determination.
FACTUAL BACKGROUND
Among other things, the Amended Complaint alleges the following:
[*8] Y-WNC operates a number of YMCA facilities in western North Carolina, including the five Y-WNC Facilities
named as Defendants. 4
4 Am. Compl. ¶ 4.
[*9] Y-USA governs the operation of YMCA facilities through its by-laws, constitutions, policies and procedures. 5 Y-
WNC and Y-USA advertise their facilities as a safe place for members and their guests. 6 Because of these
advertisements and representations, consumers join the YMCA on the premise that the YMCA provides [**5] a healthy
and safe environment for families. 7 Plaintiffs allege that these representations made by the YMCA are misleading and
deceptive. 8 Additionally, Plaintiffs allege that by virtue of their making such representations, Y-USA and Y-WNC stand
in a fiduciary relationship with their members. 9
5 Id. ¶ 5.
6 Id. ¶¶ 11.
7 Id. 12-14, 39.
8 Id. ¶ 40.
9 Id. ¶¶ 60-61, 81-82.

Page 81Page 81
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
[*10] At times material, Plaintiffs and their family were members of the Asheville YMCA. 10 Sometime in 2009,
Plaintiff Keister witnessed illicit sexual activity in the men's locker room showers at the Asheville YMCA and reported
the activity to an employee at the facility. 11 After this incident, Plaintiff Keister returned to the same facility and was
himself sexually assaulted by a fellow YMCA member. 12 Following this incident, Plaintiff Keister returned to the same
facility and was again sexually assaulted, for the second time, by a fellow YMCA member. 13
10 Id. ¶ 12.
11 Id. ¶¶ 16-18.
12 Id. 19-25.
13 Id. ¶¶ 23-25.
[*11] Each time Plaintiff Keister either witnessed illicit sexual activity or was personally assaulted, he reported the
conduct to a YMCA employee at the facility who assured him the conduct would be addressed. 14 Plaintiffs allege [**6]
that Y-USA and Y-WNC have been aware of similar illicit conduct for decades. 15 Despite knowledge of this type of
activity occurring at various YMCA facilities, Y-USA and Y-WNC continue to advertise their facilities as safe and
family-oriented. 16 Plaintiffs allege that instead of being safe, the YMCA facilities present members with an
unreasonable risk of being sexually assaulted. 17
14 Id. ¶¶ 17-27.
15 Id. ¶ 35. Plaintiff refers to this conduct as "cruising," which he describes as the act of men seeking out other men for sex and other sexual
relations in public places. Id. ¶ 30.
16 Id. ¶ 77.
17 Id. ¶ 43.
[*12] Plaintiffs have not made any specific allegations against Y-WNC Facilities and have alleged no claims for relief
against Y-WNC Facilities.
DISCUSSION
[*13] [HN1] When ruling on a motion to dismiss pursuant to Rule 12(b)(6), the court must determine "whether, as a
matter of law, the allegations of the complaint . . . are sufficient to state a claim upon which relief may be granted."
Harris v. NCNB Nat'l Bank, 85 N.C. App. 669, 670, 355 S.E.2d 838 (1987). To make this determination, courts are to
take the well-pleaded allegations of the complaint as true and admitted, but conclusions of law or unwarranted
deductions are [**7] not admitted. Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d 161 (1970). Consistent with the system
of notice pleading, a court, when considering a motion to dismiss pursuant to Rule 12(b)(6), should afford the complaint
a liberal construction. Zenobile v. McKecuen, 144 N.C. App. 104, 110, 548 S.E.2d 756 (2001).
[*14] [HN2] Following the standard set by Rule 12(b)(6), a complaint may be properly dismissed if: (a) the complaint
on its face reveals that no law supports plaintiff's claim; (b) the complaint on its face reveals the absence of facts
sufficient to make a good claim; or (c) any fact disclosed in the complaint necessarily defeats plaintiff's claim. Jackson
v. Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743 (1986). This Opinion and Order will address Plaintiffs' Claims in
turn.
Plaintiffs' Claims against Y-USA
First Claim
[*15] Plaintiffs' First Claim alleges that Y-USA violated N.C. Gen. Stat § 75-1.1 ("Chapter 75") (hereinafter, references
to the North Carolina General Statutes will be to "G.S.") by engaging in promotional activity that deceptively marketed
Page 82Page 82
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
YMCA facilities nationwide as being, among other things, safe and healthy environments, despite having full
knowledge of illicit sexual activities occurring at YMCA facilities. Y-USA contends [**8] that this Claim should be
dismissed because the alleged representations were neither unfair nor deceptive. Further, Y-USA contends that Plaintiffs
have not alleged actual reliance upon any representation purportedly made by Y-USA.
[*16] [HN3] To recover under Chapter 75, a plaintiff must show that (a) the defendant engaged in an unfair or
deceptive practice or act, (b) in or affecting commerce and (c) such act proximately caused actual injury to the plaintiff.
Governor's Club, Inc. v. Governors Club Ltd. P'ship, 152 N.C. App. 240, 250, 567 S.E.2d 781 (2002) (citing Pleasant
Valley Promenade v. Lechmere, Inc., 120 N.C. App. 650, 664, 464 S.E.2d 47 (1995)). An act or practice qualifies as
"deceptive" under Chapter 75 if it "has a tendency to deceive." Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704
(2001).
[*17] [HN4] Fraud or misrepresentation occurring during a commercial transaction is not a per se violation of Chapter
75, but such conduct can be the basis of a claim under Chapter 75. See, e.g., Morris v. Bailey, 86 N.C. App. 378, 358
S.E.2d 120 (1987) (affirming Chapter 75 violation where defendant made false representations concerning the condition
of a used vehicle and plaintiff relied on such representations). Moreover, when a Chapter 75 claim is predicated on
[**9] an alleged misrepresentation by the alleged wrongdoer, "the plaintiff must show actual reliance on the alleged
misrepresentation in order to establish that the alleged misrepresentation proximately caused" the complained of injury.
Sunset Beach Dev., LLC v. AMEC, Inc., 196 N.C. App. 202, 211, 675 S.E.2d 46 (2009).
[*18] [HN5] The question of whether a particular practice constitutes an unfair or deceptive trade practice is a
question of law for the court. United Lab., Inc. v. Kuykendall, 322 N.C. 643, 664, 370 S.E.2d 375 (1988). The existence
of unfair acts and practices must be determined from the circumstances of each case. Goodrich v. Rice, 75 N.C. App.
530, 331 S.E.2d 195 (1985). A practice is deceptive if it has a tendency to deceive. Marshall v. Miller, 302 N.C. 539,
548, 276 S.E.2d 397 (1981).
[*19] [HN6] Unfair competition has been referred to in terms of conduct "which a court of equity would consider
unfair." Extract Co. v. Ray, 221 N.C. 269, 273, 20 S.E.2d 59 (1942). "[T]he fairness or unfairness of a particular conduct
is not an abstraction to be derived by logic. Rather, the fair or unfair nature of particular conduct is to be judged by
viewing it against the background of actual human experience and by determining its intended and actual effects upon
others." Harrington Mfg. Co. v. Powell Mfg. Co., 38 N.C. App. 393, 400, 248 S.E.2d 739 (1978). [**10] Advertising
"which is neither false nor misleading is not an unfair method of competition or [an] unfair or deceptive act or practice
within the meaning of G.S. 75-1.1." Id.
[*20] As discussed above, Plaintiffs' Unfair and Deceptive Trade Practice Claim is directed toward the marketing and
advertising efforts of Y-USA. Specifically, Plaintiffs argue that the efforts of Y-USA to market YMCAs nationwide as
safe, family friendly and Christian-oriented environments, viewed in light of its alleged knowledge of the practice of
"cruising" at some of its facilities, amounts to an unfair and deceptive trade practice. Specifically, Plaintiffs allege that
the efforts of Y-USA in this regard are deceptive.
[*21] Notably, the Amended Complaint alleges that Y-USA is a "National Resource Office of YMCAs nationwide."
Thus, the marketing and advertising efforts of which Plaintiffs complain appear to be the national marketing efforts of
Y-USA. The question before the court is whether Y-USA's efforts to market YMCAs nationwide as safe, friendly and
Christian-oriented environments amount to an unfair or deceptive trade practice where the Y-USA was aware of
instances of "cruising" within certain discrete YMCA facilities.
[*22] [**11] The material factual allegations of the Amended Complaint are that: (a) Keister witnessed homosexual
activity in a men's YMCA locker room; 18 (b) Keister became the subject of an incident involving sexual misconduct
aimed at Keister; 19 (c) Keister was "molested" in the sauna of a YMCA; 20 (d) Keister's landscaper experienced similar
behavior at the same YMCA 21 and (e) management of the YMCA Keister attended was aware of instances of "cruising"
and sexual activity within certain YMCAs. 22 The Amended Complaint alleges, upon information and belief, that (a) Y-
USA has known about "cruising" at its facilities for decades and has turned a permissive eye toward such behavior 23 and
(b) Y-USA does little to prevent or eliminate "cruising" and does not warn the public about it. 24 The actual extent of
"cruising" at YMCA facilities nationwide is not disclosed by the Amended Complaint. Plaintiffs allege, upon belief
alone, that "cruising" at YMCAs is "becoming more prevalent," 25 and that "cruising" generally "occurs at YMCA
facilities around the country and at North Carolina facilities in particular." 26
18 Id. ¶ 17.
Page 83Page 83
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
19 Id. ¶ 19.
20 Id. ¶ 25.
21 Id. ¶ 28.
22 Id. ¶ 27.
23 Id. ¶ 30.
24 Id. ¶ 33.
25 Id. [**12] ¶ 34.
26 Id. ¶ 38.
[*23] The general allegations that the YMCA takes a permissive stance on "cruising" and otherwise does little to
prevent or eliminate "cruising" is unsupported by factual allegations. On the contrary, the Amended Complaint contains
specific allegations of fact that contradict these general allegations. In this regard, the Amended Complaint alleges that:
(a) the YMCA representative to whom Keister reported his observation of homosexual activity assured Keister she
would take immediate steps to address the issue; 27 (b) in the 1960s the YMCA attempted to curtail cruising; 28 (c) the
YMCA's National Council appointed a committee to study and find positive ways to deal with "cruising" 29 and (d) the
YMCA has taken actions such as the creation of family changing rooms as an alternative to single-sex locker rooms. 30
In light of the specific contradictory factual allegations put forth by Plaintiffs, and pursuant to the standards of 12(b)(6),
as expressed in Sutton and elsewhere, the court is not required to accept as true the general and unsupported deductions
by Plaintiffs that Y-USA permits "cruising" to occur at its facilities and that Y-USA does little to discourage or prevent
[**13] "cruising" at its facilities. The remainder of Plaintiffs' allegations are accepted as true for present purposes and
deemed to be admitted.
27 Id. ¶ 21.
28 Id. ¶ 36.
29 Id. ¶ 37.
30 Id. ¶ 42.
[*24] The court concludes that those factual allegations of the Amended Complaint that are deemed to be admitted are
insufficient to support a finding or conclusion that Y-USA's marketing efforts amount to an unfair or deceptive trade
practice. The fact that Plaintiff, and others, may have been subjected to "cruising" behavior at one or more YMCAs,
coupled with Y-USA's alleged awareness of such behavior, does not render Y-USA's representations that YMCAs are
generally safe, family-friendly and Christian-oriented environments unfair or deceptive. The unilateral decision by some
YMCA members and patrons to use facility locker rooms for "cruising" activities does not render YMCA facilities
inherently unsafe so as to make Y-USA's assertions false, misleading or otherwise deceptive. Further, such unilateral
decisions of personal behavior by some YMCA members and patrons do not somehow make Y-USA's representations
that its facilities are Christian-oriented and family-friendly false, misleading or otherwise deceptive [**14] to an extent
that would support a Chapter 75 claim.
[*25] The court does not read the Y-USA's marketing statements to constitute representations that consumers, as
YMCA members, would never be subjected to behavior they might find unacceptable within the walls of a YMCA.
Rather, YMCA facilities are largely public facilities with numerous members and the YMCA cannot entirely control the
behavior of individuals who elect to make use of those facilities. Joining or using a YMCA is no guarantee of avoiding
behavior that some consumers might find objectionable. Accordingly, the representations of Y-USA do not have a
tendency to deceive consumers.
Page 84Page 84
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
[*26] Viewed against the background of actual human experience, the court concludes that the Y-USA's marketing
efforts are not unfair for the same reason. [HN7] A practice is considered unfair where it "offends established public
policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious. . . ."
Johnson v. Insurance Co., 300 N.C. 247, 263, 266 S.E. 2d 610, 621 (1980). The court finds nothing in the marketing
efforts of the Y-USA that rises to the level of an unfair practice under this standard.
[*27] Words and phrases [**15] such as "safe," a "healthy and safe environment for families" and putting "Christian
principles into practice through programs that build healthy spirit, mind and body for all" are troublesome in the context
of the present action. Such words and phrases defy precise definition and are not capable of objective verification based
on the facts as alleged in the Amended Complaint, if at all. To serve as the basis of Plaintiffs' Chapter 75 Claim,
Plaintiffs would have to show that these representations had, at least, a tendency to deceive or mislead consumers. The
tendency of such representations to deceive YMCA members nationwide, however, cannot be demonstrated solely by
reference to Plaintiff's personal experiences at a specific YMCA. Nor can such a tendency be demonstrated by the
unsupported inference that other YMCA members have experienced incidents similar to those experienced by Plaintiff.
[*28] [**16] Based on the facts of the Amended Complaint, the marketing efforts of Y-USA amount to advertising
that is neither false nor misleading on its face and therefore cannot serve as the basis of Plaintiffs' Chapter 75 Claim.
Accordingly, with respect to the First Claim, the Motion should be GRANTED.
Second Claim
[*29] By way of this Claim, Plaintiffs allege that Y-USA breached a fiduciary duty owed to Plaintiffs in a number of
ways, including failing to uphold the promised safety standards of the YMCA. 31 Y-USA contends that no fiduciary
relationship existed between it and Plaintiffs, and therefore, the Second Claim should be dismissed.
31 Id. ¶ 63.
[*30] [HN8] North Carolina law recognizes two general categories of fiduciary relationships, with one category
arising from the legal relationship that exists between the parties and the other arising out of fact. 32 Well-established
examples of the first category of relationships are "attorney and client, broker and principal, executor or administrator
and heir, legatee or devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui
que trust." BDM Invs. v. Lenhil, Inc., 2012 NCBC 7, ¶ 89 (N.C. Super. Ct. Jan. 18, 2012) (quoting [**17] Abbitt v.
Gregory, 201 N.C. 577, 598, 160 S.E. 896 (1931)) (internal quotations omitted). The relationship that existed between
Plaintiffs and Y-USA is not one of the legal relationships recognized by North Carolina law that gives rise to a fiduciary
relationship. Accordingly, the court must examine the second category of fiduciary relationships.
32 The legal relations that give rise to a fiduciary relationship are often referred to as de jure fiduciary relationships and those arising out of
fact are often referred to as de facto fiduciary relationships.
[*31] [HN9] The second category includes those that exist as fact. In Abbitt, the North Carolina Supreme Court stated
that a fiduciary relationship, in addition to arising as a matter of law with certain relationships, can exist in fact where
"there is confidence reposed on one side, and resulting domination and influence on the other." Abbitt, 201 N.C. at 598.
Generally, consumer-type relationships where the parties deal with each other in an arm's length relationship are not
fiduciary relationships. See Tin Originals, Inc. v. Colonial Tin Works, Inc., 98 N.C. App. 663, 666, 391 S.E.2d 831
(1990). One necessary requirement for a fiduciary relationship to arise out of fact is [**18] that one party must exhibit
"resulting superiority and influence" over the other party. Id. Typically, in an arm's length relationship, such as a
consumer-type relationship where the party's have equal bargaining power, resulting superiority and influence does not
exist. Therefore, neither party becomes the fiduciary of the other.
[*32] As previously discussed, Plaintiffs allege that Y-USA engaged in a marketing and promotional campaign to
establish YMCA facilities as being safe and healthy environments. As a result of that marketing, Plaintiffs allege that
they placed a special confidence in the YMCA to provide such an environment for the members of YMCAs. 33
33 Id. ¶ 60.
Page 85Page 85
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
[*33] The court observes that Plaintiffs have not actually alleged in what manner a special confidence was placed in Y-
USA, other than alleging that Plaintiffs joined one of the YMCAs. Entering into an arm's length contract does not
satisfy the special confidence requirement necessary to allege a fiduciary relationship between the contracting parties.
Additionally, Plaintiffs do not allege that Y-USA was in any superior bargaining position when Plaintiffs decided to
purchase their YMCA membership. Furthermore, Plaintiffs do not [**19] allege that, once Plaintiffs were members of a
YMCA, Y-USA had any superiority or influence over Plaintiffs. In short, Plaintiffs allege nothing more than a
traditional business-consumer relationship between Plaintiffs and Y-USA.
[*34] Plaintiffs assert that a fiduciary relationship can arise in North Carolina with the presence of special
circumstances, chiefly, "where one party undertakes to protect or act for the interests of another." 34 Plaintiffs then cite a
bevy of cases in which special circumstances created a fiduciary relationship. These cases found fiduciary relationships
where a son undertook to provide for the care and comfort of his ailing mother, Holloway v. Holloway, N.C. App. ,
726 S.E.2d 198 (2012), where an individual was listed as a joint account holder on the checking account of a close,
personal friend in order to provide for the friend's daily care, Dixon v. Gist, N.C. App. , 724 S.E.2d 639 (2012),
where a divorced husband undertook to provide support for his ex-wife (also his cohabitant) for the remainder of her
life, Rhue v. Rhue, 189 N.C. App. 299, 658 S.E.2d 52 (2008) and where one cotenant undertook to manage the common
property of all cotenants, Moore v. Bryson, 11 N.C. App. 260, 181 S.E.2d 113 (1971). [**20] In each of those cases, it
was alleged that one party clearly undertook to control or direct the interests of the other party. No such undertaking is
alleged between Y-USA and Plaintiffs. At bottom, all Plaintiffs allege is that Y-USA marketed YMCA facilities in a
certain manner. Such allegations are insufficient to allege the existence, much less the breach, of any recognized
fiduciary duty in North Carolina.
34 Plaintiff's Reply at 14.
[*35] As a result of the foregoing, the court CONCLUDES that Plaintiffs have failed to state a claim for breach of
fiduciary duty against Y-USA. Accordingly, with respect to the Second Claim, the Motion should be GRANTED.
Third Claim
[*36] Plaintiffs also assert a claim for breach of an implied-in-fact contract. Plaintiffs allege that Y-USA's promotional
statements became the basis of the bargain for Plaintiffs' membership agreements. 35 Plaintiffs contend that Y-USA
breached the contract by failing to provide safe facilities, 36 causing damages to Plaintiffs. 37
35 Am. Compl. ¶ 67.
36 Id. ¶ 68.
37 Id. ¶ 70.
[*37] [HN10] To be valid, any contract, express or implied, must be the product of a "meeting of the minds" between
the parties. Mach. Co. v. Chalkley, 143 N.C. 181, 183, 55 S.E. 524 (1906). [**21] In determining the terms or existence
of any agreement, the court should not consider "what either one of the parties thought [the contract] was, but by what
both agreed it should be." Id. North Carolina recognizes that a contract may be implied in fact where "the intention of
the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts."
Snyder v. Freeman, 300 N.C. 204, 217, 266 S.E.2d 593 (1980). To determine the terms contained in "a contract implied
in fact, one looks not to some express agreement, but to the actions of the parties showing an implied offer and
acceptance." Id. at 218. A contract implied in fact is enforceable as though it were express, but still requires the
existence of mutual assent to the terms of the agreement. Miles v. Carolina Forest Ass'n, 167 N.C. App. 28, 36, 604
S.E.2d 327 (2004).
[*38] Here, Plaintiffs have failed to allege any valid contract, express or implied, between Plaintiffs and Y-USA.
Plaintiffs only allege an express contract (i.e., the membership agreement) directly with Y-WNC. Plaintiffs then allege
that "Y-USA breached these contracts," 38 referring to the membership agreement to which Y-USA was not a party. All
Page 86Page 86
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
that has [**22] been alleged is that Y-USA marketed YMCA facilities and Plaintiffs interpreted the marketing
statements as the basis of the bargain between Plaintiffs and Y-WNC.
38 Id. ¶ 68.
[*39] Assuming that the express membership agreement with Y-WNC would not bar the finding of an implied contract
with Y-USA under Snyder, Plaintiffs have still failed to allege any "meeting of the minds," or mutual assent, between
Plaintiffs and Y-USA. An implied in fact contract requires an offer and acceptance. Plaintiffs do not allege any facts to
the effect that Y-USA's marketing campaign was an implied offer to contract directly with Plaintiffs. Even if this court
were to read Y-USA's marketing materials as an offer, Plaintiffs have alleged no acceptance or consideration for Y-
USA's offer sufficient to imply mutual assent to the terms of any alleged agreement between Plaintiffs and Y-USA.
Plaintiffs simply allege that they passively received Y-USA's marketing materials and, on that basis alone, a contract
was formed as to the terms of the marketing campaign.
[*40] The court CONCLUDES that Plaintiffs have failed to state a claim for breach of an implied-in-fact contract with
Y-USA. Accordingly, with respect to the Third [**23] Claim, the Motion should be GRANTED.
Fourth, Fifth and Sixth Claims

[*41] Lastly, the Fourth Claim (Violation of G.S. 75.1-1), Fifth Claim (Breach of Fiduciary Duty) and Sixth Claim
(Breach of Implied-in-Fact Contract) are the same Claims Plaintiffs alleged against Y-USA in Claims One, Two and
Three. The only difference seems to be that the First, Second and Third Claims are alleged against Y-USA directly,
whereas the Fourth, Fifth and Sixth Claims are alleged against all Defendants. Accordingly, for the same substantive
reasons stated above, the court CONCLUDES that Y-USA's Motion should be GRANTED with respect to the Fourth,
Fifth and Sixth Claims.
Plaintiffs' Claims against Y-WNC Facilities39
39 As discussed supra note 2, on October 4, 2012, the court entered an Order on Motions to Dismiss and Compelling Mediation and Staying
Action, dismissing Y-WNC Facilities from this civil action. This portion of this Opinion and Order explains the court's reasoning for
dismissing Y-WNC Facilities.
[*42] Taking the well-pleaded allegations of the Amended Complaint as true, it cannot be said that Plaintiffs
sufficiently have alleged that the enumerated Y-WNC Facilities are independent entities. Plaintiffs state [**24] that Y-
WNC does business as a number of YMCA facilities in western North Carolina. 40 The Amended Complaint merely lists
as Defendants these facilities only "[t]o the extent Y-WNC does not own or control these entities . . . ." 41
40 Am. Compl. ¶ 4.
41 Id.
[*43] Nowhere in the Amended Complaint do Plaintiffs actually allege that Y-WNC Facilities are not owned or
controlled by Y-WNC. Furthermore, Plaintiffs do not allege that they directly entered into any contractual relationship
with any of the Y-WNC Facilities. Even under the most liberal construction of the Amended Complaint, it is clear that
Plaintiffs do not assert any legal claim against any of the enumerated Y-WNC Facilities individually.
[*44] [HN11] Rule 12(b)(6) allows dismissal of certain claims or an entire complaint if the allegations fail "to state a
claim upon which relief can be granted." Implicit in the Rule 12(b)(6) standard is the requirement that a claim must
actually be asserted against a defendant before the sufficiency of the claim may be examined. Here, Plaintiffs scarcely
make reference to Y-WNC Facilities, and those references that do exist in the Amended Complaint do not state a claim
but exist to serve another purpose altogether. [**25] 42 Throughout the Amended Complaint and their memorandum in
opposition to the Motions, Plaintiffs make reference to the allegations against Y-USA, Y-WNC and the "YMCA," which
Page 87Page 87
2013 NCBC 36, *; 2013 NCBC LEXIS 32, **
Plaintiffs define as Y-USA and Y-WNC, excluding the individual Y-WNC Facilities. 43 Plaintiffs do not assert that Y-
WNC Facilities are jointly, severally or alternatively liable on any of the theories of liability asserted against the
"YMCA" or that Y-WNC Facilities are liable to Plaintiffs under any other theory of liability.
42 See id. ¶ 44 (using "Y-WNC Facilities" to define the Class); see id. ¶ 74 (noting only that "Y-WNC operates multiple YMCA facilities . . .
."); see id. ¶¶ 81, 87 (alleging that Y-USA and Y-WNC stand in a fiduciary relationship and entered into membership contracts "at Y-WNC
facilities").
43 Id. ¶ 5, n.1.
[*45] Accordingly, even if Plaintiffs sufficiently alleged that Y-WNC Facilities are separate entities, the addition of Y-
WNC Facilities as Defendants, without asserting any claim against them, cannot withstand a motion to dismiss pursuant
to Rule 12(b)(6).
[*46] For these reasons, the Y-WNC Motion should be GRANTED with regard to the Y-WNC Facilities.
NOW THEREFORE, based upon the foregoing FINDINGS [**26] and CONCLUSIONS, it hereby is ORDERED that:
[*47] Defendant National Council of the Young Men's Christian Association of the United States of America d/b/a
YMCA of the USA's Motion to Dismiss is GRANTED with respect to the Plaintiffs' First, Second, Third, Fourth, Fifth
and Sixth Claims, and said Claims are DISMISSED.
[*48] Defendants YMCA of Western North Carolina, Inc., Asheville YMCA, Corpening Memorial YMCA, Henderson
County Family YMCA, Reuter Family YMCA and Neighborhood YMCA at Woodfin's Motion to Dismiss is
GRANTED with respect to any and all Claims alleged in this civil action against these Defendants, and any Claims
alleged against said Defendants are DISMISSED.
[*49] There remaining no viable Claims in this civil action, this matter hereby is DISMISSED.
[*50] Taxable costs in this matter are charged to Plaintiffs.
This the 18th day of July, 2013.
Page 89Page 89
N.C. Business Court Case Summaries: May 3, 2013 North Carolina Lawyers Weekly May 3, 2013 Friday
56 of 430 DOCUMENTS
North Carolina Lawyers Weekly
May 3, 2013 Friday
N.C. Business Court Case Summaries: May 3, 2013

BYLINE: NCLW Staff
SECTION: NEWS
LENGTH: 1959 words
Arbitration Oral Agreement - Unsigned Draft - Attorneys - Partnership Morton v. Ivey, McClellan, Gatton & Talcott,
LLP (Lawyers Weekly No. 13-15-0411, 9 pp.) (James L. Gale, J.) 2013 NCBC 23 Holding: Even though the parties
never signed their partnership agreement, there was a meeting of the minds as to its arbitration provision. The draft
partnership agreement is a sufficient "record" to satisfy G.S. § 1-569.6(a). Defendant's motion to compel arbitration is
granted. The parties orally agreed to a partnership agreement and acted in accordance with it. Plaintiffs were aware of
and consented to the arbitration terms in the unsigned written partnership agreement. Defendant did not waive the right
to arbitrate by threatening litigation. Each of the claims in the complaint arises out of the duties imposed by the
partnership agreement and clearly falls under the broad scope of the agreement's arbitration provision.
Civil Practice Statute of Limitations - Tort/Negligence - Fraud - Discovery - Breach of Fiduciary Duty Deyton v. Estate
of Waters (Lawyers Weekly No. 13-15-0413, 22 pp.) (James L. Gale, J.) 2013 NCBC 25 Holding: Although there is
some evidence that plaintiffs timely received documents which showed improper transfers had been made from their
investment accounts, the evidence would also allow a jury to believe plaintiffs did not know about their son-in-law's
improper transfers until after his suicide. Defendant Multi-Financial Securities Corp. 's (MFSC's) motion for summary
judgment is granted as to plaintiffs' direct claims of breach of fiduciary duty and constructive fraud against MFSC.
Otherwise, the motion is denied. Plaintiffs' son-in-law worked for MFSC and invested plaintiffs' money in several
accounts. The son-in-law embezzled hundreds of thousands of dollars from plaintiffs between 1996 and 2000. He
committed suicide in 2009. Plaintiffs allege they did not learn of the embezzlement until after their son-in-law's suicide.
Plaintiffs would be time barred as to all claims if they were on notice of their claims earlier than June 1, 2007 for any
claims governed by a three-year statute of limitations or before June 1, 2000 for claims governed by a 10-year statute of
limitations. Plaintiffs have forecast evidence adequate to avoid summary judgment on some claims because the court
cannot conclude that the record is sufficiently clear and unequivocal that plaintiffs received Pershing Monthly
Statements (Pershing, LLC served as the clearing agency for plaintiffs' accounts and provided monthly account
statements) or other documents that disclose the improper transfers which began in August 1996. There is a dispute as to
the material issue of whether plaintiffs received documents adequate to put them on notice of their loss prior to June 1,
2007. Plaintiffs have also raised fact issues as to whether MFSC's knowledge justifies estoppel against the use of a
statute of limitations defense. There are questions whether plaintiffs' son-in-law was acting as an agent within the scope
of his authority when he provided account statements to plaintiffs. On balance, the court concludes that the final
resolution of the limitations issue, including whether plaintiffs have an adequate basis to assert estoppel, should await
trial. MFSC's laches defense revolves around the same facts implicated by the statute of limitations issues and therefore
should also be deferred to trial. When a breach of fiduciary duty claim is based on a contract, the claim accrues when
the cause of action arose. In their arguments on whether a fiduciary relationship existed directly between plaintiffs and
MFSC, the parties directed significant attention to whether the accounts were discretionary or included a "wrap fee,"
which plaintiffs contend would then establish a fiduciary duty. There has been no forecast of evidence adequate to
classify plaintiff's personal accounts as discretionary or to indicate that a fee was paid for investment advice regarding
those accounts. As to the personal accounts (from which the improper transfers were made), the only charges were
commissions. Plaintiff Robert Deyton's bare assertion that he trusted his son-in-law's advice is not adequate to
characterize the personal accounts as discretionary. Federal courts have recognized a fiduciary relationship when a
Page 90Page 90
broker/dealer has de facto control of the account. There is no similar N.C. case. The evidence is not adequate to
conclude that plaintiffs placed special trust or confidence in MFSC. Even assuming a relationship of trust and
confidence, plaintiffs have shown no personal benefit to MFSC. Plaintiffs contend that they facilitated a prompt
completion of wire transfers to protect their own reputation, which would be adversely impacted by any delay in
facilitating the transactions. Secondly, they contend they received commissions or interest charges, to which MFSC
correctly counters that under N.C. law, payment for work actually performed and cannot constitute a sufficient benefit to
state a claim for constructive fraud. The court does not find adequate evidence to support a special relationship of trust
and confidence as between plaintiffs and MFSC, and even if such a relationship did exist, that MFSC misused the
relationship for their own personal benefit. Accordingly, plaintiffs are not entitled to proceed against MFSC directly on
a claim for breach of fiduciary duty or constructive fraud. With regard to MFSC's potential vicarious liability, a mere
finding that an employee or an agent stole monies is not by itself adequate to compel a finding that he acted outside the
scope of his authority. The dividing line for finding whether an agent can be said to be within or outside his authority is
not clear, and the cases seemingly allow for a factual inquiry into whether the principal knew of some improper conduct
by its agent then left the agent in a place from which the wrong could continue. Here, drawing that line requires a trial
determination. Motion granted in part, denied in part.
Tort/Negligence Attorneys - Legal Malpractice Claim - Prior Lawsuits - Settlement - Fraud - Breach of Fiduciary Duty
SilverDeer, LLC v. Berton (Lawyers Weekly No. 13-15-0412, 27 pp.) (John R. Jolly Jr., Ch.J.) 2013 NCBC 24 Holding:
Where plaintiffs allege that the defendant-attorney - who represented one of plaintiff SilverDeer, LLC's member
managers -- reviewed and revised drafts of settlement agreements on behalf of SilverDeer in two previous lawsuits, and
where plaintiffs also allege that, before facilitating the settlement of the previous lawsuits, the attorney (1) failed to
investigate the facts of the previous actions, (2) failed to consult with SilverDeer's retained counsel, and (3) failed to
consider SilverDeer's ability to satisfy the payment obligations set forth in the settlement agreements, plaintiffs have
adequately alleged that the attorney failed to exercise reasonable care in performing legal services. Defendants' motions
to dismiss are granted in part and denied in part. Since the complaint fails to allege special damages and, at best, alleges
that plaintiffs suffered harm to reputation and were economically injured in an amount to be proved at trial, plaintiff's
allegations are insufficient under Stikeleather v. Willard, 83 N.C. App. 50 (1986), to state a claim for malicious
prosecution. The complaint alleges that defendants defamed plaintiffs from 2008 and at least through the filing of the
previous actions. The previous actions were filed in May 2009, and the complaint in this matter was filed on March 2,
2011. Plaintiffs' defamation claim is barred by the one-year statute of limitations. Plaintiffs' first fraud claims alleges
that defendants entered into settlement agreements, which affected SilverDeer's rights, with SilverDeer managing
member Richard Deckelbaum and then fraudulently concealed those negotiations from plaintiff Jacobson (SilverDeer's
other managing member). Although this claim is viable against the defendants it names, the VisionQuest defendants are
not mentioned in the claim. The VisionQuest defendants' motion to dismiss is granted as to this fraud claim. Plaintiff's
declaratory judgment claim seeks a declaration that the settlement agreements are void. This is outside the scope of the
Declaratory Judgment Act. Although plaintiffs alleged breach of contract against the VisionQuest defendants, plaintiffs
failed to attach the contracts in question to the complaint. The VisionQuest defendants attached those documents. Upon
reading the plain language of the contracts, the court finds that the acts alleged by plaintiffs do not constitute breaches
of the contracts. Plaintiffs' second fraud claim alleges that the VisionQuest defendants defrauded them by making the
representations embodied in a 2007 contract, never intending to perform, and by failing to fulfill those representations.
Plaintiffs do not identify how or why any particular statement is thought to have been false. Aside from a conclusory
allegation of fraudulent intent, plaintiffs only assert the nonperformance of a promissory representation, which is
insufficient to establish intent. Plaintiffs have not satisfied the heightened pleading requirement for fraud under N.C. R.
Civ. P. 9. Plaintiffs allege breach of fiduciary duty against VisionQuest defendant Steven Peters. Plaintiffs have not
alleged or argued that a de facto fiduciary relationship existed. Instead, plaintiffs seem to argue that a de jure fiduciary
relationship existed by virtue of an investment advisor-client relationship between Peters and plaintiffs. The parties cite
no N.C. case law, nor has the court found any, holding that a relationship of an investment advisor-client or consultant-
client creates a de jure fiduciary relationship. Instead, Plaintiffs merely cite G.S. 78C et seq. for the proposition that an
investment advisor owes a duty of disclosure to his clients, which they argue in turn creates a de jure fiduciary
relationship. "North Carolina recognizes certain de jure fiduciary relationships which arise as a matter of law because of
the nature of the relationship, such as attorney and client, broker and principal, executor or administrator and heir,
legatee or devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui que trust. "
BDM Invs. v. Lenhil, Inc., 2012 NCBC 7, ¶ 89 (N.C. Super. Ct. Jan. 18, 2012) (quoting Abbitt v. Gregory, 201 N.C.
577, 598 (1931)). Harrold v. Dowd, 149 N.C. App. 777 (2002), held that an accountant-client relationship is not an
inherently fiduciary one and the mere allegations of the accountant's failure to properly advise his client were
Page 91Page 91
insufficient to support a claim for breach of fiduciary duty. The court of appeals upheld the trial court's Rule 12(b)(6)
dismissal of the breach of fiduciary duty claim in that case. Similar to Harrold, plaintiffs here allege that Peters and the
VisionQuest defendants failed to properly advise plaintiffs by "ignoring the best interests of Lakebound" and "putting
the interests of [VisionQuest] ahead of the interests of [Lakebound]. " In the absence of any N.C. appellate authority
holding that an investment advisor-client relationship is a de jure fiduciary one, the court finds Harrold instructive and
concludes that no fiduciary relationship existed between Peters and Plaintiffs. The mere assertion of an investment
advisor-client relationship or reliance upon G.S. 78C et seq. does not give rise to a de jure fiduciary relationship. The
motions to dismiss are granted in part and denied in part.
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98 Cornell L. Rev. 845, *
57 of 430 DOCUMENTS
Copyright (c) 2013 Cornell Law Review

Cornell Law Review
May, 2013
Cornell Law Review
98 Cornell L. Rev. 845
LENGTH: 35725 words
ARTICLE: THE LAST TEMPTATION OF CONGRESS: LEGISLATOR INSIDER TRADING AND THE
FIDUCIARY NORM AGAINST CORRUPTION
NAME: Sung Hui Kim+
BIO: + Assistant Professor of Law, UCLA School of Law. I am grateful for the advice of many generous colleagues and
for the valuable comments on prior drafts from the following: Norm Abrams, Iman Anabtawi, Steve Bainbridge, Sam
Bray, Ingrid Eagly, Laura Gomez, Stephen Galoob, Mitu Gulati, Thomas Hazen, Allison Hoffman, Jerry Kang, Don
Langevoort, Jon Michaels, Hiroshi Motomura, Charles O'Kelley, Robert Prentice, Ronald Rotunda, Joanna Schwartz,
Michael Small, Alexander Stremitzer, Steve Yeazell, Noah Zatz, and participants at the U.C. Berkeley School of Law
and the U.N.C. School of Law faculty workshops. Excellent research assistance was provided by Evan Lee, Grace Lo,
Robert Smith, Jihee Yoo, Sepehr Zangeneh, and the research librarians of the Hugh & Hazel Darling Library at the
UCLA School of Law.
LEXISNEXIS SUMMARY:
... Therefore, if a legislator happens to be advising a corporation in a manner that would imply a duty to keep
confidences, then the fiduciary duty to disclose (prior to trading) would uncontroversially apply to that legislator, who
would be regarded as a fiduciary vis-a-vis the corporation's shareholders. ... However, when legislators trade on
material, nonpublic information, some of those trading counterparties will be citizens. ... In those cases, courts have
recognized a governor, mayors, an elected county clerk, elected county officials, and state legislators as fiduciaries of
citizens. ... Peters, a federal district court found that a partner potentially violated federal insider trading laws under the
misappropriation theory by trading on confidential information entrusted to him by his partner. ... Moreover, courts
have found liability based on the public fiduciary's use of entrusted information for personal gain, without requiring that
harm be demonstrated. * * I have argued that the majority view - that judges could not recognize legislators as
fiduciaries under federal insider trading law - is wrong and continues to be wrong. ... By analyzing congressional ethics
rules, citing relevant cases, and analogizing to trustees, partners, and directors, courts could classify legislators as
fiduciaries and impose the requisite fiduciary duties under federal insider trading law. ... Instead, judges can justify the
analogies on the ground that extending the category of fiduciary to encompass legislators promotes an underlying policy
of fiduciary law, which is to combat corruption. ... In employing traditional analogical reasoning to find legislators to
be fiduciaries for purposes of federal insider trading law, judges can rest assured that they are not stretching fiduciary
law unrecognizably or arbitrarily to pursue some objective that is alien to the doctrine. ... One might object that
applying the federal securities laws to target the public corruption of state legislators (even if it is in the form of
legislator insider trading) represents an unconstitutional exercise of federal power - an invalid federal "incursion on
traditional state power" (i.e., the power to police the conduct of its own officials). ... In sum, the Speech or Debate
Clause creates no substantive liability immunity because insider trading is not a legitimate legislative activity.
HIGHLIGHT:
On April 4, 2012, Congress passed the STOCK Act, which officially banned the practice of insider trading by
members of Congress and formally declared them to be fiduciaries for purposes of federal insider trading law. The
Page 94Page 94
impetus for the legislation was the perception, held by a majority of commentators, that insider trading by members of
Congress did not violate federal securities law because they were not fiduciaries to anyone. In this Article, I make the
case that the majority view was and continues to be wrong, and why that matters. Specifically, I argue that even if the
STOCK Act had not passed and even if it were to be repealed, judges could build on existing precedents and employ
unextraordinary judicial reasoning to impose the requisite fiduciary duties on legislators. In Part I, I provide a succinct
summary of federal insider trading law, focusing on the controversial element as applied to legislators - the existence
and breach of fiduciary duty. I then explore the standard approach taken by courts in resolving novel instances of
potentially fiduciary relationships: traditional analogical reasoning to well-established cases. In Part II, I employ this
standard approach to make the case that judges could find legislators to be fiduciaries under federal insider trading law.
In Part III, I more deeply justify the analogical reasoning employed in Part II. Specifically, I show that one core purpose
of fiduciary law has been to fight public corruption and that legislator insider trading could be classified as a form of
public corruption. This analysis helps reveal an organic alignment between recognizing legislator insider trading as a
breach of fiduciary duty and an important goal of the common law of fiduciaries - that of deterring corruption. Part IV
addresses various objections.
TEXT:
[*846]
Introduction
On September 18, 2008, at 7 p.m., Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben
Bernanke met with members of Congress in a closed-door briefing that was so secretive even cell phones were banned.
n1
Among those attending was Representative Spencer Bachus, the ranking Republican on the House Financial Services
Committee. n2 As Paulson recounts:
Ben [Bernanke] emphasized how the financial crisis could spill into the real economy. As stocks dropped perhaps a
further twenty percent, General Motors would go bankrupt, and unemployment [*847] would rise ... if we did
nothing... . It [was] a matter of days, [Bernanke] said, before there [would be] a meltdown in the global financial
system. n3
According to Paulson, these dire predictions left members of Congress "ashen-faced." n4 The very next day,
Representative Bachus invested in option funds designed to rise in value when markets fall. n5 Just four days later, he
sold, making more than $ 5,000 in profit, nearly doubling his investment. n6 As a 60 Minutes television report put it:
"While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it
would ... ." n7
Did Representative Bachus engage in what I refer to as "legislator insider trading" - the trading by members of
federal or state legislatures on the basis of material nonpublic information acquired through their positions? Did he trade
on information learned in the closed-door briefing? Or was the timing of his trade mere coincidence? Although he was
cleared of ethical wrongdoing by the Office of Congressional Ethics, n8 we may never know the truth behind Bachus's
suspicious trades.
Publicity surrounding Bachus's trades, however, did focus public attention to what was widely perceived as a
gaping loophole in the federal securities laws. That loophole, according to a majority of commentators opining on the
issue, n9 was that federal insider trading laws generally did not reach members of Congress. n10 For example, as former
[*848] Chairman of the Securities and Exchange Commission (SEC) Arthur Levitt maintained, members of Congress
"benefit from an exemption that the average investor doesn't benefit from. They're immune from insider trading laws."
n11
To be clear, Levitt was not referring to an explicit statutory exemption like the one that was drafted in Title VII. n12
Rather, this so-called immunity flowed from the difficulty of establishing the breach of a fiduciary (or fiduciary-like) n13
duty, a required element of an insider [*849] trading violation. According to this majority view, unlike employees of
the three branches of federal government, who are agents and thus unquestionably subject to federal insider trading
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laws, n14 members of Congress are fiduciaries to no one. n15 Members are "neither employees nor agents of any larger
entity." n16
Because of this majority understanding, President Obama called for a new law banning insider trading by members
of Congress in his 2012 State of the Union address. n17 And Congress, after dragging its feet for years, n18 responded to
public pressure and finally enacted the [*850] Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act),
n19
which affirmed Congress's nonexemption from federal insider trading laws n20 and declared that members owe the
requisite fiduciary duties to Congress, the federal government, and US citizens. n21 In other words, members and
employees of Congress are fiduciaries for purposes of insider trading law, and trading on material nonpublic
information acquired in the course of official duties is deemed a breach of fiduciary duty.
Given this legislative intervention, one might think that nothing interesting remains to be said about legislator
insider trading or the fiduciary status of legislators. But we should not overread the Act's significance and scope. First,
the STOCK Act did not address the fiduciary status of elected officials at the state or local level. There are 7,382
members of state legislatures n22 who are not covered by the STOCK Act and may be trading on inside information right
now. If the majority view remains intact for state legislators, n23 then they are not violating federal securities law because
they are not breaching any fiduciary duty. Indeed, a Minnesota state legislator recently blogged: "It is, in fact,
completely legal for a state lawmaker to use confidential information gained at the [state] Capitol for personal gain." n24
Although members of Congress may have more access to juicier nonpublic information than "mere" state
legislators, we should not [*851] discount the opportunities that legislators of states with influential economies and
important corporate domiciliaries might exploit. For example, consider a California state legislator who hears that a new
state bill forcing internet retailers (such as Amazon.com and Over-stock.com) to collect sales taxes will soon be
introduced. n25 Or consider a Minnesota state legislator who learns about a bill that would authorize the operation of
gaming machines by Canterbury Park Holding Corporation, a publicly traded gaming corporation based in Minnesota.
n26
Might a legislator trade on such nonpublic information? Given the great number of state legislators, it would be
foolish to dismiss the risk of their trading.
Second, the relevant provisions of the STOCK Act only addressed federal insider trading laws. As a result, the
majority view, if left uncorrected, could influence the judicial interpretations of other federal or state laws that are
similarly premised on the breach of fiduciary obligation. For example, the majority of circuits currently require that the
defendant must have breached a fiduciary obligation n27 to the defrauded person or entity in order to be found guilty
under the honest services mail fraud statutes: 18 U.S.C.§§1341 and 1346. n28 If the logic of the majority view is correct,
then elected officials in those circuits cannot be prosecuted for honest services mail fraud. By contrast, if the logic of the
majority view is wrong, then elected officials would be subject to prosecution, which result would be more consistent
with precedents that do not sharply distinguish between elected and appointed officials. n29
[*852] In sum, the STOCK Act makes an important statutory clarification that members of Congress are
fiduciaries who owe the requisite duties under federal insider trading law. However, we should not misread the STOCK
Act as contradicting the majority view or rendering it entirely moot. Indeed, the Act could be cited as support for the
correctness of the majority view - that legislators are not fiduciaries and thus not covered by the federal ban on insider
trading, absent some statutory override. After all, if the majority view were not seen as correct, why would it have been
necessary for Congress to enact the STOCK Act at all? If, however, the majority view is wrong, it remains important not
to canonize a mistaken understanding of the law.
To that end, I argue that the majority view - that judges could not recognize legislators as fiduciaries under federal
insider trading law - has been and continues to be wrong. n30 Even if the STOCK Act had not passed and even if it were
to be repealed, judges could build on existing precedents and employ unextraordinary judicial reasoning to impose the
relevant fiduciary duties on both state and federal legislators as required under federal insider trading law.
In Part I, I provide a clean distillation of federal insider trading law that focuses on the critical element of the
violation: the breach of fiduciary duty. I then explore courts' standard approach in resolving novel instances of
potentially fiduciary relationships: applying traditional analogical reasoning to well-established cases. For centuries,
courts have invoked - either explicitly or implicitly - analogies to more established fiduciaries as the primary means of
deciding hard cases.
[*853] In Part II, I employ analogical reasoning to make the case that a fiduciary duty could be found to apply to
both federal and state legislators. This would have been true for members of Congress prior to the passage of the
STOCK Act, but more importantly, it remains true for state legislators who are not now covered by the STOCK Act. My
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target audience is the judiciary who may be confronted with just such a question in a lawsuit. In addition to analogical
reasoning, I summon an impressive body of judicial precedent which has recognized public officials, including state and
federal legislators, as fiduciaries outside of the insider trading context. n31
Deeper thinkers, whether they be judges or academic commentators, may find the analysis in Part II to be
unsatisfyingly thin. They will likely object that the problem with analogical reasoning is that it is often conclusory and
indeterminate. For example, there is no widely accepted rule that tells us which of the myriad attributes of a person,
object, or concept are relevant for comparison and how much weight should be given them. n32 Even a zebra and a barber
pole are analogous if we are focused on being "striped." n33 To make analogies not merely rhetorically persuasive but
also well reasoned, there must be some appeal, explicit or implicit, to the underlying purpose of the analogical
reasoning.
Part III provides a thicker rationale for recognizing legislators as fiduciaries for purposes of insider trading law. It
more deeply justifies the analogies made in Part II by identifying a core purpose of fiduciary duty law. Although wildly
heterogeneous, fiduciary law holds, as one of its central principles, an anti-corruption norm, with corruption (in the
public sector) defined as the "use of public office for private gain." n34 After explaining why legislator insider trading
should be classified as a form of public corruption, I demonstrate the existence of this anti-corruption norm in fiduciary
law by exploring judicial opinions which have proscribed public fiduciaries from using their public office for private
gain. In the end, this analysis reveals an organic alignment between recognizing legislator insider trading as a breach of
fiduciary duty and one core purpose of the common law of fiduciaries - deterring corruption.
[*854] In Part IV, I answer objections that the judicial extension of a federal securities cause of action against
legislators would be unwise or unconstitutional. Specifically, I discuss whether doing so would amount to judicial
activism, violate principles of federalism (with respect to state legislators), or violate the Speech or Debate Clause. n35
To clarify, this Article's primary purpose is to determine whether judges can rely on ordinary judicial reasoning to
impose the relevant fiduciary duties on state and federal legislators under federal insider trading law and how this might
be done. It is not to inquire, on some blank slate, whether legislator insider trading should be banned on policy grounds,
which is a matter considered in a separate piece. n36 For curious readers, I can share that I believe that legislator insider
trading is normatively problematic on consequentialist grounds. But these policy views are not logically germane to the
arguments I make here. n37
I
Federal Insider Trading Law
A. Federal Insider Trading Doctrine
Section 10(b) of the Securities Exchange Act of 1934 (Section 10(b)) n38 and SEC Rule 10b-5 (Rule 10b-5) n39
promulgated thereunder by the SEC proscribe fraud "in connection with the purchase or sale of any security." n40
Although neither the text of Section 10(b) nor that [*855] of Rule 10b-5 specifically mentions "insider trading," courts
and administrative agencies have, for decades, interpreted these provisions to ban the practice. n41 In rough terms, n42 the
elements of an insider trading cause of action include: (1) trading on (or tipping) (2) material, (3) nonpublic information
(4) in breach of a fiduciary (or fiduciary-like) duty. n43 These elements, including the fiduciary requirement, appear
nowhere in a statute or administrative regulation. They have [*856] been almost entirely judicially manufactured,
albeit with considerable congressional endorsement, if not ratification. n44
What follows is a simplified review of the elements of an insider trading cause of action under Section 10(b) and
Rule 10b-5. n45 The first three elements pose no special hurdle if the defendant happens to be a legislator. It is the fourth
element that is controversial.
1. Trading on (or Tipping) Material Nonpublic Information
The first element - that the defendant "traded on the information" in question - requires a showing that the defendant
possessed the material nonpublic information at the time he or she made the securities trade. n46 Possession at the time of
trading is often difficult to establish, but, once proven, there is usually no further question that the defendant traded in
order to exploit the informational advantage vis-a-vis other marketplace traders. n47
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In the typical case, the required mens rea for liability - scienter n48 - is not difficult to establish. n49 To prove scienter,
the complainant must show that the "defendant knew that the information was material and nonpublic or recklessly
disregarded facts that would indicate that the information in his possession was material and nonpublic." n50 For criminal
prosecutions, which are brought by the Department of Justice, the defendant must have "willfully" committed the
offense. n51 Courts have construed "willfully" to refer to violations that occur with some "realization on the defendant's
part that he was [*857] doing a wrongful act ... and that the knowingly wrongful act involved a significant risk of
effecting the violation that occurred." n52
The defendant can, of course, argue that the trade in question was made for reasons unrelated to the information in
question. For example, the defendant might insist that the trade would have happened regardless of the information
because it was necessary to liquidate assets to pay upcoming bills. If the defendant makes such a showing, courts may
not find liability, especially in those jurisdictions requiring that the defendant use (and not merely possess) the
information. n53
The prohibition covers not only trading but also the practice of tipping, as well as trading on the tip, as detailed
below. For the most part, how this element gets resolved is substantively no different because the defendant happens to
bear the title of Senator or Representative. n54
The second element - that the confidential information be "material" - also presents no new legal issues.
Information is deemed "material" if there is a substantial likelihood that a reasonable investor would consider it
important in making an investment decision. n55 In effect, any information the disclosure of which would likely change
an issuer's securities prices will generally be regarded as material.
With respect to contingent or forward-looking information, materiality is judged by "a balancing of both the
indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the
company activity." n56 Accordingly, if a legislator trades to profit from an anticipated legislative development, the
factfinder must assess the likelihood (at the time of the trade) that the legislative event would come to pass and the
importance of that event to an issuer's business (at the time of the trade).
In theory, this would be a difficult task because most legislative developments (such as the sudden passage of the
STOCK Act bill in 2012) are tough to predict, given the dynamics and vicissitudes of lawmaking. In practice, however,
assessing "materiality" is often not so arduous. The very fact of trading by the defendant may support a finding of
materiality. If the factfinder is persuaded that the defendant traded in the hopes of profiting from the information in
question and that the defendant resembles a "reasonable investor," then [*858] the test of materiality is effectively
satisfied. n57 Finally, the defendant will generally have a hard time convincing the factfinder that the information in
question is not material in the face of the actual occurrence of the legislative event and its resulting impact on the
issuer's securities prices. n58 If securities prices change dramatically following the public release of the information in
question, the element of materiality is presumptively satisfied. n59
The third element - that the information in question must be "nonpublic" - also poses no novel issues. Information
is considered nonpublic if it is not generally available to the investing public - that is, it has not been broadly
disseminated. n60 This element is rarely seriously contested in insider trading cases. With respect to the securities of an
issuer with a large analyst following, once the information in question gets into the hands of a large number of investors
(or a smaller number of institutional investors who direct a large volume of trades), the security's market price will
rapidly reflect the significance of that information, thereby extinguishing the opportunity to profit from insider trading.
As a result, it is difficult to generate quick profits by trading in such a security unless one holds information that the
general investing public does not know. n61
To avoid any confusion, it is important to understand that the requisite nonpublic information is not narrowly
circumscribed to "inside information" - information that emanates directly from within the corporation and specifically
relates to the plans, operations, or assets of the issuer whose securities are being traded. n62 Nonpublic information also
encompasses "market information," which emanates from a source outside the issuer of the traded securities and tends
to be about the supply of and demand for the company's securities. n63 Market [*859] information may be information
that impacts the prices of the specific security that is being traded (e.g., "information that an investment adviser will
shortly issue a 'buy' recommendation or that a large stockholder is seeking to unload his shares or that a tender offer will
soon be made for the company's stock"). n64 But market information may also include more generalized information that
impacts the share prices of an entire industry or the stock market as a whole (e.g., Ben Bernanke's prediction that the
entire economy will tank).
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Of course, legislators have access to both types of nonpublic information. Through legislators' subpoena power,
they may gain access to inside information during the course of a legislative investigation into the matters of a particular
publicly traded company. Even more easily, they can gain access to market information in the form of proposed
legislation, anticipated criminal investigation, or anticipated governmental action, all of which may impact the securities
prices of a single issuer or an entire industry.
Finally, it is important to emphasize that not all persons coming into contact with material, nonpublic information
are potentially liable. For example, if, during my morning jog, I happen to stumble across some random trash containing
a juicy stock tip and then proceeded to trade on the tip, I would not be liable for insider trading. Why? It is because of
the fourth element, which requires a breach of fiduciary duty. n65 In my hypothetical, I have not violated any fiduciary
duty by trading on a random stock tip. n66
So, what about legislators? Do they owe a fiduciary duty and, if so, to whom?
2. In Breach of a Fiduciary (or Fiduciary-Like) Duty
To decide whether a fiduciary duty exists and has been breached requires us to distinguish between two accepted
theories of insider trading liability - classical and misappropriation.
[*860]
a. Classical Theory
Under the classical theory, affirmed in 1980 by the Supreme Court in Chiarella v. United States, n67 a person violates
Rule 10b-5 and Section 10(b) by trading on material, nonpublic information if that person owes a fiduciary duty (of
disclosure) to the counterparty of the trade (later redefined by statute to extend to one or more contemporaneous traders
in the marketplace). n68 This fiduciary duty of disclosure (articulated as a "fiduciary duty to disclose or abstain") n69 does
not arise simply because the trader holds an informational advantage over the counterparty. After all, the Chiarella Court
noted that "Section 10(b) is aptly described as a catchall provision, but what it catches must be fraud. When an
allegation of fraud is based upon nondisclosure [as would be the case with insider trading], there can be no fraud absent
a duty to speak." n70 Therefore, drawing from the common law tort of misrepresentation, the Court maintained that a duty
to disclose material, nonpublic information prior to trading "arises when one party has information 'that the other [party]
is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.'" n71
The Court did not elaborate on what constitutes a "similar relation of trust and confidence." However, courts have
long used that and similar phrases to describe relationships that were not strictly fiduciary as a matter of law but
nonetheless shared some of the characteristics of a fiduciary relationship (such as one party's reposing of confidences in
another) n72 and thus warranted some of the protections [*861] generally applicable to fiduciary relationships. n73 In an
influential opinion, United States v. Chestman, n74 the Second Circuit held that a "relationship of trust and confidence"
must be the "functional equivalent of a fiduciary relationship" and must "share the essential characteristics of a fiduciary
association." n75 Because there is much overlap between fiduciary relationships and such other fiduciary-like
relationships, and the distinction is relevant mostly for allocating burdens of proof, n76 whenever I refer to "fiduciary
duty," I mean to include analogous duties imposed due to a relation of trust and confidence.
Who owes a fiduciary duty to contemporaneous traders in the marketplace? The Chiarella Court suggested that
those under a duty to place shareholder welfare before their own are covered by this fiduciary duty. n77 As a consequence,
the duty applies uncontroversially to traditional corporate insiders (i.e., an issuer's officers, directors, and controlling
shareholders), as the Court specifically acknowledged. n78 The duty also applies uncontroversially to employees and to
the corporate issuer itself. n79 Hence, courts and commentators commonly assumed that the classical theory espoused in
Chiarella only concerned the trading by corporate insiders.
However, the Court never stated that only corporate insiders could be held liable. n80 Indeed, the Chiarella Court
approvingly cited [*862] Affiliated Ute Citizens of Utah v. United States, n81 an earlier Supreme Court opinion which
imposed Rule 10b-5 liability on defendants who were not corporate insiders of the issuer of the traded securities.
Moreover, as Chief Justice Burger pointed out in his dissent in Chiarella, Section 10(b) and Rule 10b-5 literally reach
"any person" who engages "in any fraudulent scheme" n82 in connection with a securities transaction. Accordingly, no
one - not even a member of Congress - is categorically exempt from liability under these provisions.
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In 1983, the Supreme Court in Dirks v. SEC made two important extensions. First, it announced that this fiduciary
duty may apply to certain confidential advisers of the issuer, such as underwriters, attorneys, accountants, or
consultants, who are classified as "temporary" or "constructive" insiders. n83 "The basis for recognizing this fiduciary
duty," the Court clarified, "is not simply that such persons acquired nonpublic corporate information, but rather that they
have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access
to information solely for corporate purposes." n84 The Court further clarified that "for such a duty to be imposed ... the
corporation must expect the outsider to keep the disclosed[,] nonpublic information confidential, and the relationship at
least must imply such a duty." n85 Therefore, if a legislator happens to be advising a corporation in a manner that would
imply a duty to keep confidences, then the fiduciary duty to disclose (prior to trading) would uncontroversially apply to
that legislator, who would be regarded as a fiduciary vis-a-vis the corporation's shareholders.
Second, Dirks extended insider trading liability to cover the practice of tipping and trading on the tip. n86 But it did
so by predicating the tipper's and tippee's liability on the tipper's breach of the fiduciary duty of loyalty, which includes
the duty not to use entrusted information for personal gain. n87 Specifically, if the tipper breaches the fiduciary duty of
loyalty by passing on information to the tippee in anticipation of a personal benefit (broadly defined) n88 and the tippee
[*863] knows or has reason to know of the tipper's breach, n89 then the tippee inherits the duty owed by the tipper. As the
Court explained, "the tippee's obligation has been viewed as arising from his role as a participant after the fact in the
[tipper's] breach of a fiduciary duty." n90 As a result, any subsequent trading by the tippee will subject both the tippee and
the tipper to liability.
To be clear, there is no liability for either the tipper or tippee unless the tipper is already in a fiduciary relationship
with the corporation's shareholders and thus owes the requisite fiduciary duty. Hence, the tipper's duty uncontroversially
applies to corporate insiders and temporary insiders (as Dirks expressly contemplated). In addition, any person to whom
the insider improperly passes information inherits that duty. Therefore, if a legislator knowingly receives an improper
tip from a corporate insider, then the legislator inherits the fiduciary duty owed by the corporate insider. Consequently,
the legislator may not then trade on the tip or tip the information to someone else.
As in Chiarella, the Dirks Court did not foreclose the possibility of classifying legislators as fiduciaries. It noted:
We were explicit in Chiarella in saying that there can be no duty to disclose where the person who has traded on inside
information "was not [the corporation's] agent, ... was not a fiduciary, [or] was not a person in whom the sellers [of the
securities] had placed their trust and confidence." n91
In this passage, the Court separately catalogues the corporation's agent, fiduciary, and the person in whom trust and
confidence had been placed. This separately itemized list clarifies that "agents" and "fiduciaries" are not redundant or
coextensive categories under the classical theory. Therefore, legislators, who are neither the corporation's nor its
shareholders' agents, are not categorically excluded.
b. Misappropriation Theory
Under the alternative "misappropriation theory," which the Supreme Court endorsed in 1997 in United States v.
O'Hagan, n92 a person may not trade on material, nonpublic information entrusted to that person by the source of that
information without disclosing to that source the person's intention to trade on that information. n93 Drawing on the
common law of agency, n94 the Court held that "a fiduciary's [*864] undisclosed, self-serving use of a principal's
information to purchase or sell securities, in breach of a duty of loyalty and confidentiality," constitutes deception under
Section 10(b) and Rule 10b-5 because such trading "defrauds the principal of the exclusive use of that information." n95
Thus, liability under the misappropriation theory is premised on a preexisting fiduciary relationship between the trader
and the source "who entrusted him with access to confidential information," n96 regardless of whether the source bought
or sold securities or was even a market participant at all.
In addition, lower courts have extended insider trading liability to ban the practice of tipping and trading on the tip
under the misappropriation theory, although the law is not entirely settled in this area. n97 Therefore, if a corporate lawyer
improperly tips to a legislator confidential client information that impacts the securities of the client's competitor, then
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the legislator inherits the fiduciary duty owed by the lawyer to his firm's client. As a result, the legislator may not then
trade (in the competitor's securities) n98 on the tip or tip the information to someone else.
Now that I have introduced both classical and misappropriation theories, notice the critical difference between them
as to whom the requisite duty is owed. Under classical theory, the defendant (as buyer or seller) owes the requisite
fiduciary duty to the counterparty to the trade (as seller or buyer). By contrast, under the misappropriation theory, the
defendant owes the requisite fiduciary duty to the source - the person or entity who entrusted the defendant with access
to the confidential information.
There is also an important difference in the nature of the duty implicated. Under Chiarella's classical theory, the
relevant duty is the duty to disclose, n99 which courts have routinely and widely imposed on all fiduciaries. By contrast,
in both tipping n100 and misappropriation [*865] theory cases, n101 the relevant obligation is the duty not to use entrusted
information for personal gain, n102 the precise scope of which has varied among different courts and different fiduciary
contexts. n103
Also, I should clarify the positive law source of the requisite fiduciary duty. Although there was once much debate
and uncertainty about this issue, n104 it is now clear that the federal insider trading prohibition, which may be "classified
within the genus of federal common law," n105 has a federal source. n106 That said, as with other questions arising under the
federal laws, state common law is relevant to and has informed the task of identifying the requisite federal fiduciary
duty under federal insider trading law. n107
Finally, it is worth noting the implications of tying federal insider trading law to the fiduciary principle. By
choosing to condition liability [*866] on the breach of fiduciary duty, the Chiarella Court selected "an evolving,
dynamic concept which [by its nature] ... cannot be rigidly categorized." n108 In 1982, Donald Langevoort presciently
observed: "Within the broad outlines of the [Chiarella] Court's rationale, there is room for creative interpretation,
permitting the law to continue to develop in accord with perceptions about fairness in the securities marketplace. The
flexibility of the fiduciary principle should not be underestimated." n109 With these clarifications, the fundamental
question becomes: is a legislator in a fiduciary relationship to either the counterparties of the trade (as under classical
theory) or to the person who entrusted the nonpublic information to him (as under the misappropriation theory)? To
make this case, we must first understand how courts have determined who is a fiduciary.
B. The Modus Operandi of Courts
Whether a particular defendant falls into the category "fiduciary" will often be an easy question, given clear precedent
on point. For example, under the classical theory, courts regard officers, directors, controlling shareholders, employees,
and the corporation itself as fiduciaries vis-a-vis shareholders based on well-established precedents. n110 Under the
misappropriation theory, courts treat defendants involved in "hornbook fiduciary relations," n111 such as employer-
employee, principal-agent, or client-attorney, as fiduciaries. But what about harder, novel cases?
Recall that in Chiarella, the Court predicated insider trading liability under the classical theory on the finding of a
duty to disclose, which arises out of a "fiduciary or other similar relation of trust and confidence" between the parties to
a transaction. n112 While the phrase "trust and confidence" signaled the Court's intention to recognize a broader class of
relationships than strictly fiduciary ones, it regrettably told us little more.
Three years later, in Dirks, the Supreme Court extended the fiduciary category to cover certain recipients of
confidential information as temporary insiders. But the Court did so not by identifying key attributes of fiduciaries
generally. Instead, it emphasized that there must be an implicit understanding on the part of the issuer of the traded
securities that the recipient of the information will use that [*867] information solely for the issuer's benefit and will
keep it confidential. n113
Finally, fourteen years later, in O'Hagan, the Supreme Court embraced the misappropriation theory but did so
without any further elaboration of how to identify the existence of a fiduciary relationship. n114 Although it "referenced
the term 'fiduciary' seventeen times," n115 it did little more than point out that the misappropriation theory "is limited to
those who breach a recognized duty." n116
Given minimal guidance from the Supreme Court, lower federal courts have produced decisions that run the gamut.
Some courts have examined the "reasonable and legitimate" expectations of the parties and have inquired as to whether
those parties had "a history or practice of sharing business confidences, and [whether] those confidences generally were
maintained." n117 Some courts have recognized a relationship of trust and confidence where the trader has "expressly
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agreed" to keep the information in question confidential; n118 others have concluded that such an agreement of
confidentiality, standing alone, is not enough. n119
Some courts have highlighted factors emphasizing imbalance in the relationship, such as "dominance" and
"superior influence," n120 or [*868] "de facto control and dominance." n121 Still others have focused more broadly on the
granting of some form of "discretionary authority" and a resulting "dependency" or reliance, n122 and so on. With such
vagueness and variance in working definitions, it should not be surprising to find that federal courts have recognized a
strikingly diverse array of persons as fiduciaries, including an electrician who traded on information overheard on the
job, n123 a member of a business round table who traded on information learned from a fellow member, n124 and a
government affairs consultant who tipped information learned from a Treasury Department briefing. n125 In sum, in
deciding whether to impose a fiduciary duty for purposes of federal insider trading law, federal courts tend to invoke an
ad hoc list of imprecise factors with no clear weightings and no clear explanation as to why the posited factors are
relevant.
This approach is largely consistent with how state courts have for centuries determined new fiduciaries. Instead of
deploying a widely accepted, precise, and rule-like definition, state courts also invoke an ad hoc list of vague factors.
Not surprisingly, the universe of fiduciaries has gradually expanded to include such strange bedfellows as marriage
brokerage agencies, n126 commercial developers of inventions, n127 psychiatrists, n128 life tenants of property, n129 and private
hospitals. n130 As a consequence, experts have described fiduciary law as [*869] "amorphous," n131 "intrinsically non-
rational," n132 "ill-defined," n133 "messy," n134 "atomistic," n135 "slippery," n136 "protean," n137 "confused," n138 "problematic," n139
"result-oriented," n140 and "elusive." n141
In highlighting the indeterminacy of the judicial task of identifying fiduciaries, I am not suggesting that courts are
reaching conclusions without reasoning. In fact, courts often rely on forms of analogical reasoning and compare - either
implicitly n142 or explicitly - the defendant's situation to instances where fiduciary status is well established. For example,
when courts originally encountered members of a corporation's board of directors, they explicitly analogized the
directors to private trustees, n143 agents, n144 or partners n145 - familiar instances of fiduciaries. Of course, over time, courts
came to regard directors themselves as uncontroversial fiduciaries. n146 As fiduciary law [*870] scholars have observed,
analogies have played an especially crucial role in the development of fiduciary law. n147 Indeed, the most cited case in
fiduciary law, Meinhard v. Salmon, involved an explicit analogy to partners. n148 As Deborah DeMott has noted, the
"pervasiveness and persistence" of the use of analogies in the fiduciary context "suggest that it is an inevitable aspect of
fiduciary analysis." n149
So, if a judge is presented with the question, "Are legislators fiduciaries?," how might that judge approach it? One
way is to invoke plausible analogies.
II
Legislators as Fiduciaries
A. Theoretical Outlines
The question of whether a legislator is a "fiduciary" always embeds an ancillary question: fiduciary to whom? Consider
the following potential beneficiaries: citizens, the legislature (and fellow legislators), and the government that the
legislator serves. n150 Depending on the beneficiary, a particular theory of liability applies. For example, suppose that the
beneficiaries are the citizens whom the legislator represents but with whom the legislator has no personal contact. As a
general matter, it is unlikely that legislators are receiving juicy stock tips from ordinary citizens. However, when
legislators trade on material, nonpublic information, some of those trading counterparties will be citizens. This suggests
that for citizens, the classical theory of liability is relevant. One can then analogize the legislator-citizen relationship to
more established fiduciary relationships, for example, the relationship between a trustee and beneficiaries of the trust.
The following schematic summarizes the potential fiduciary relationships and potential analogies that judges could
employ:
[*871]
Table 1: Potential Fiduciary Relationships
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[SEE TABLE IN ORIGINAL]
B. Fiduciary to Citizens
Are legislators fiduciaries to citizens under classical theory? If so, then a legislator who trades on material, nonpublic
information may be breaching a duty to disclose to those "citizen-investors" on the other side of the trade. n151
Alternatively, under Dirks, a legislator who [*872] tips such information to friends or relatives may be breaching the
duty not to use information entrusted to that legislator to benefit citizens for personal gain. n152
1. Analogy: Private Trustee
We can analogize the relationship between the legislator and citizens to the relationship between the trustee and
beneficiaries of a private trust. n153 In the prototypical Anglo-American trust, the settlor contracts with the trustee to
manage a portfolio of assets in the best interests of the beneficiaries, subject to ex ante conditions imposed by the settlor
in the deed of trust. n154 Accordingly, three important features of a trust are (1) its creation through a manifestation of
consent by the settlor, n155 (2) the delegation of broad managerial authority to the trustee over entrusted property, n156 and
(3) the imposition of limitations on the trustee's authority through the instrument that created the trust. n157
We see analogous features in the context of the legislator-citizen relationship. First, just as the trustee-beneficiary
relationship is established through an act of consent, the legislator-citizen relationship arises from an act of consent by
the electorate. Conventional democratic theory posits that the legitimacy of our republic is based on the consent of the
governed. n158 Of course, as Ethan Leib and his colleagues have argued, the "citizenry of even the most liberal and
democratic of states rarely consent meaningfully to the state's authority. Simply casting a ballot - or not voting-with-
one's-feet-through-emigration - is hardly a conferral of consent to those individuals or institutions ruling over citizens'
daily lives." n159 While consent in the electoral context may not be as robust as a settlor's consent in the private trust
context, both sets of relationships (legislator-citizen and trustee-beneficiary) can nonetheless be characterized as
involving a [*873] voluntary expression of willingness by a person or group of persons to entrust responsibility to
another person. n160
Second, just as the private trustee is delegated broad authority to manage the trust assets to benefit the
beneficiaries, legislators have been delegated broad legislative authority over the assets of their government, including
the public fisc, to benefit citizens. At the federal level, this delegation is signified by the first provision of the
Constitution, Article I, Section 1, which established the U.S. Congress and refers to the "legislative Powers herein
granted." n161
Third, just as the deed of trust defines the constraints of a trustee's authority, the federal or state constitutions
define the constraints of legislative authority, either directly through express substantive provisions or indirectly by
setting up procedures and institutions empowered to establish them. Of course, these constraints on the fiduciary are not
all encompassing. Although the purpose of the deed of trust is to protect the interests of the beneficiaries in accordance
with the settlor's intention, the beneficiaries actually remain quite vulnerable to a trustee's predation. Unlike in principal-
agent relationships where the principal can ordinarily intervene freely and dismiss agents at will, the trust beneficiaries
ordinarily must request judicial intervention in order to dismiss a trustee for malfeasance. n162 Similarly, citizens have
limited means of redress against legislators and exercise no meaningful control over them.
If this analogy to the trustee strikes one as odd, consider that a growing body of scholarship recognizes not only
that the Framers intended to impose fiduciary standards on government officials, n163 including [*874] legislators, n164 but
also that the fiduciary concept most commonly invoked during the revolutionary era was trusteeship and "public trust."
n165
For example, the Federalist Papers repeatedly characterizes public officials, including legislators, as trustees, n166 and
the U.S. Constitution refers to "public Trust" n167 and describes public offices as being of "Trust." n168 In invoking the
analogy to the trustee, the Framers were merely continuing a tradition dating back to Cicero, who famously opined that
"the guardianship of the state is a kind of trusteeship." n169 Most of the English colonies were expressly founded on the
basis of trust - that the King had granted a charter for the benefit of the settlers residing in the colonies. n170
Moreover, these references to public trust were not just empty metaphor. Recent legal-historical work supports the
view that the Framers intended even noncriminal breaches of trust by public officials [*875] to be remediable by
impeachment and removal. n171 Also, the tradition of analogizing public officials to trustees continues on in modern
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judicial opinions. For example, the Sixth Circuit Court of Appeals stated in a case affirming the conviction of a public
official under the federal mail fraud statute: "[A] public official acts as 'trustee for the citizens and the State ... and thus
owes the normal fiduciary duties of a trustee, e.g., honesty and loyalty' to the citizens and the State." n172 Even the
Senate's Standing Orders employ the trustee analogy to define senators' duties:
The ideal concept of public office, expressed by the words, 'A public office is a public trust', signifies that the officer
has been entrusted with public power by the people; that the officer holds this power in trust to be used only for their
benefit and never for the benefit of himself or of a few ... . n173
In short, in deciding whether legislators are fiduciaries, judges can find a plausible analogy to the private trust. Just as
trustees owe fiduciary duties to beneficiaries, legislators owe fiduciary duties to citizens, some of whom will be
counterparties to their trades.
2. Analogy: Director (to Shareholders)
Besides the analogy to the private trust, might there be an analogy to the corporation? It is axiomatic that directors of a
corporation are fiduciaries of its shareholders under federal insider trading law, n174 even though directors are neither
trustees n175 nor agents of the corporation or its shareholders. n176 Might we analogize the legislator to a director and the
citizens whom the legislator represents to the corporation's shareholders? n177 For purposes of this analogy, I focus on
paradigmatic public corporations held by numerous and dispersed shareholders.
[*876] An important feature of a widely held public corporation is the separation of ownership from control. n178
Shareholders are traditionally regarded as owners of the corporation, and they do possess a residual claim on the
corporation's assets and earnings. n179 But, unlike other common forms of ownership, shareholders do not exercise any
meaningful control over how corporate assets are managed. The law in most states severely restricts shareholder power
and accords broad discretion over corporate affairs to a collective decision-making body of specialists - the board of
directors, which either alone or through its delegatees makes the vast majority of corporate decisions. n180 While directors
are charged with exercising their authority in the best interests of shareholders, n181 shareholders have limited means of
holding directors accountable. Shareholders ordinarily cannot compel directors to undertake corporate actions or even to
terminate underperforming directors. They can cast a ballot at director elections, but in most cases this will be
ineffective. Shareholders have no direct access to corporate information, relying almost entirely on mandatory
disclosures filed with the SEC. Shareholders are diffuse, dispersed, and face collective action problems in monitoring
director actions. As a result, many shareholders are rationally ignorant about corporate affairs. n182
Our government also features separation of ownership from control. As Richard Painter has observed, "[a]
republican form of government [*877] departs from direct democracy by separating citizen ownership of government
from the politician's control of the process of governing." n183 Similar to directors, legislators are, in essence, a collective
decision-making body of law-making specialists who have been accorded broad discretion to use government power
and assets. Although legislators are charged with exercising their authority in the best interests of citizens, citizens (like
shareholders) have limited means of holding their representatives accountable. Citizens cannot compel their
representatives to adhere to their platforms and cannot revoke their cast votes. n184 Their primary means of residual
control is to vote their representatives out of office in periodic elections. Like shareholders, citizens are also diffuse,
dispersed, and face collective action problems in monitoring their representatives. They can only judge the performance
of their representatives at a distance and only with the imperfect assistance of the media. As a result, many choose to
remain rationally ignorant about their representatives' performance. n185
In sum, directors are to shareholders as legislators are to citizens. If there is a fiduciary relationship recognized in
the former, it is reasonable to recognize a fiduciary relationship in the latter.
3. Cases
Analogies to trustees or directors are nice, but if a judge wants to recognize legislators as fiduciaries, he or she will feel
more comfortable citing to cases, at least as persuasive authority. It is not difficult to locate cases in which government
officials, defined broadly, are rhetorically called public trustees or held to be entrusted with public responsibilities. n186
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And there are many cases in which courts hold government officials to be fiduciaries of citizens. n187 Not surprisingly,
[*878] there are fewer cases in which the government officials at issue are elected and held to owe fiduciary duties to
citizens who elected them, as required under classical theory. In those cases, courts have recognized a governor, n188
mayors, n189 an elected county clerk, n190 elected county officials, n191 and state legislators n192 as fiduciaries of citizens.
For example, in Driscoll v. Burlington-Bristol Bridge Co., n193 a unanimous Supreme Court of New Jersey
announced that a cause of action could lie against elected county officials for "abuse of discretion and breach of trust"
n194
in rubber-stamping a $ 12 million transaction "under the influence of prominent persons seeking to further their
private interests." n195 Although the remedy granted did not depend on a specific finding of a breach of duty, the court
nevertheless trumpeted the fiduciary obligations of both elected and appointed officials: "[Elected and appointed
officials] stand in a fiduciary relationship to the people whom they have been elected or appointed to serve. As
fiduciaries and trustees of the public weal they are under an inescapable obligation to serve the public with the highest
fidelity." n196
The basis for enforcing these obligations, according to the court, rested on the sovereign power of the people of the
State of New Jersey:
These obligations are not mere theoretical concepts or idealistic abstractions of no practical force and effect; they are
obligations imposed by the common law on public officers and assumed by them as a matter of law upon their entering
public office. The enforcement [*879] of these obligations is essential to the soundness and efficiency of our
government, which exists for the benefit of the people who are its sovereign. n197
Just as important, the court clarified that the governor, the attorney general, and even private citizens all had standing to
sue public officials for breaching their obligations. n198
In Fuchs v. Bidwill, n199 the Illinois Appellate Court upheld a complaint alleging that Illinois state legislators violated
their fiduciary duty to use their public office solely in the best interest of the people of Illinois and not for private gain.
n200
The plaintiffs alleged that state legislators secretly profited from unique investment opportunities offered by a
racetrack tycoon in an attempt to influence legislation relating to the licensing, regulating, and taxing of horse racing. n201
The Court noted that "it has long been agreed that public officials occupy positions of public trust" and that they
"cannot use [their office] directly or indirectly for personal profit." n202 Moreover, "they stand in a fiduciary relationship
to the people [by] whom they have been elected or appointed to serve." n203 Finally, the Court held that private plaintiffs
had standing to sue for their breach. n204 It explained:
If the "public trust" doctrine is to have any meaning or vitality at all, the members of the public, at least taxpayers who
are the beneficiaries of that trust, must have the right and standing to enforce it. To tell them that they must wait upon
governmental action is often effectual denial of the right for all time. n205
On appeal, in a deeply divided four-to-three decision, the Illinois Supreme Court reversed on the issue of private rights
of action. n206 However, the majority did not dispute the notion that state legislators were fiduciaries of the citizens of
Illinois. Indeed, notwithstanding [*880] the holding, the majority declared that the Attorney General was entitled to
prosecute a breach of fiduciary duty action on behalf of the State. n207
To be sure, strictly speaking, it is not enough that the courts recognize elected officials as fiduciaries. After all,
one's status as a fiduciary does not mean that one is a fiduciary for all purposes. n208 To create a cognizable claim, courts
must also find that such a relationship implies the requisite fiduciary duty under federal insider trading law. Since
Chiarella, courts have held that a defendant's failure to disclose material, nonpublic information satisfies the necessary
fraud element of Rule 10b-5. n209 Thus, the requisite duty is the duty to disclose. Once fiduciary status is found, imposing
the duty to disclose in this context should not be controversial because courts routinely and widely place the duty to
disclose on all fiduciaries. Judges can cite to cases like United States v. Mandel, in which the Fourth Circuit Court of
Page 105Page 105
Appeals held that the Governor of the State of Maryland breached his fiduciary duty to disclose his financial interest in
a legislative matter and that such failure "defrauded the public and pertinent public bodies of their intangible right to
honest, loyal, faithful and disinterested government" under the federal mail fraud statute. n210
As I have argued, judges can find legislators to be fiduciaries to the citizens who elected them. Support can be
found in suggestive case law as well as two analogies: to private trustees and to corporate directors. And this is precisely
what is needed under the classical theory: the finding of a breach of fiduciary duty between defendant trader (a
legislator) and the counterparty of the trade (a citizen on the other side of the trade).
C. Fiduciary to Legislature
Now let's switch beneficiaries from citizens to the legislature (and fellow legislators). This switch in beneficiaries
requires a switch in theories of liability, away from classical to misappropriation. Under the misappropriation theory, the
fiduciary relationship runs not to the trading counterparties but to the source of nonpublic information. If [*881] a
fiduciary relationship exists between the legislator and that source, there is a strong basis for imposing the duty not to
use confidential information for personal gain. n211
1. Rule 10b5-2(b) Analysis
In 2000, in an attempt to clarify and perhaps to expand the scope of the misappropriation theory, the SEC promulgated
Rule 10b5-2. Subsection (b) established three nonexclusive categories of relationships that give rise to a fiduciary-like
duty for purposes of the misappropriation theory. It provides that a duty of "trust or confidence" exists where (1) there
is an agreement to maintain confidentiality; (2) parties sharing material, nonpublic information have a "history, pattern,
or practice of sharing confidences" that leads to an actual or reasonable expectation of nondisclosure; or (3) a person
receives confidential information from a close family member (i.e., one's "spouse, parent, child or sibling") unless the
recipient shows that there was no actual or reasonable expectation of nondisclosure. n212
It is not clear the SEC achieved the clarification that it sought because not all courts have deferred to the SEC's
rule. For example, in SEC v. Cuban, a federal district court rejected Rule 10b5-2(b)(1) as going beyond the scope of
Section 10(b). n213 Also, in United States v. Kim, another federal district court raised questions about the validity of Rule
10b5-2(b)(2), although it did not directly rule on the issue. n214 But other courts have responded more positively. For
example, in SEC v. Yun, n215 the Eleventh Circuit Court of Appeals approved in dicta of both Rule 10b5-2(b)(1) and (2),
although it signaled skepticism about the reach of (3). n216 Given this mixed judicial track record, Rule 10b5-2(b) should
not be given talismanic significance in deciding whether a fiduciary-like duty exists. That said, the rule provides some
guidance on factors possibly relevant to the fiduciary question.
[*882] What, then, does a straightforward application of Rule 10b5-2(b) say about legislators? Recall that SEC
Rule 10b5-2(b)(1) emphasizes the existence of an agreement of confidentiality. For Congress, one can find such an
agreement in the Code of Ethics for Government Service, n217 which provides, inter alia, that "any person in Government
Service should ... never use any information coming to him confidentially in the performance of governmental duties as
a means for making private profit." n218 For state legislators, similar obligations may appear in state government ethics
codes.
That said, basing a relationship of trust and confidence on a mere confidentiality agreement remains deeply
controversial n219 and thus may be the least likely of Rule 10b5-2(b)'s three categories to survive further judicial scrutiny.
As various commentators have noted, an agreement to maintain the information's confidentiality is simply not the same
as a duty not to use such information for personal gain, n220 which is the relevant duty under misappropriation theory.
Moreover, nondisclosure agreements are often concluded by parties that are negotiating at arms' length and clearly are
not in any relation of trust and confidence. n221 Such concerns explain the district court's holding in SEC v. Cuban. n222
However, legislators are not merely bound by an agreement of confidentiality. Indeed, it seems highly probable that
they have an actual or reasonable expectation of nondisclosure arising out of a history or pattern of sharing confidences,
in accordance with Rule 10b5-2(b)(2). How do we know whether such an expectation exists? Aside from informal,
[*883] anecdotal evidence, n223 written internal procedures suggest that legislators observe a norm of confidentiality at
least with respect to certain sensitive information.
For example, for Congress, the Senate's Standing Rules strongly suggest a pattern of sharing confidences and an
internally enforceable norm of confidentiality. Rule 29.5 provides:
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Any Senator, officer or employee of the Senate who shall disclose the secret or confidential business or proceedings of
the Senate, including the business and proceedings of the committees, subcommittees[,] and offices of the Senate shall
be liable, if a Senator, to suffer expulsion from the body; and if an officer or employee, to dismissal from the service of
the Senate, and to punishment for contempt. n224
When the Senate was debating the 1992 Amendment to Rule 29.5, one senator referred to norms of both trust and
confidentiality among senators:
Candid discussions among Members depend upon a trust that is based, in part, on a willingness of all Members to
abide by the practices of the Senate... . The unilateral decision by a Member or employee to release confidential
committee information is inconsistent with the Senate's practice of making such decisions openly and collectively.
Arrogation of this responsibility by individuals can destroy mutual trust among Members and be harmful to this
institution. n225
The Standing Rules also provide that committee proceedings may be closed to the public if the matters to be discussed
fall under one of several listed categories where the need for preserving confidentiality is great. n226 One of those
enumerated categories covers trade secrets and other highly confidential financial information, n227 suggesting that
[*884] senators do have ready access to inside information and not just market information.
Turning to the House of Representatives, various House rules suggest that representatives observe a norm of
confidentiality with respect to certain communications. n228 Although official committee and subcommittee meetings "for
the transaction of business" are generally open to the public, n229 other communications may remain hidden from public
view. These other communications are governed by Jefferson's Manual of Parliamentary Procedure, n230 which provides
that "it is entirely within rule and usage for a committee to conduct its proceedings in secret, and the House itself may
not abrogate the secrecy of a committee's proceedings except by suspending the rule" governing secrecy. n231
Also, the House has an internal set of guidelines on what information is confidential. n232 According to these
guidelines, confidential information includes: information, the "inappropriate disclosure of" which would "adversely
reflect on the credibility of the House or office"; information relating to "specific legislative action taken or considered
by the office"; information "provided to the House in confidence or with restrictions on its use (i.e., trade secrets,
commercial or financial information) from an individual, private entity, or state or federal entity"; and "intra-House"
communications. n233
The above evidence suggests that federal legislators observe a norm of secrecy with respect to certain information,
including financial or commercial information, obtained on a confidential basis. State legislative procedures might also
provide evidence of confidentiality norms among state legislators. To the extent that a court agrees [*885] with the
SEC about the relevance of the factors listed in Rule 10b5-2(b)(1) and (2), those factors cut in favor of finding a duty of
trust and confidence between legislators and fellow legislators on the one hand, and between legislators and the
legislature on the other.
2. Analogy: Partner
Regardless of Rule 10b5-2(b), a court could recognize legislators as fiduciaries by analogizing to the relationships
among fellow partners to one another and to the partnership itself. Of course, there are different types of partnerships
with different attributes to be compared. For purposes of this analogy, I am concerned only with the oldest form of
partnership - the general partnership. Under the Revised Uniform Partnership Act (RUPA), which thirty-seven states
have adopted, n234 partners are both agents and principals of the partnership and thereby owe fiduciary duties of care and
loyalty to one another and to the partnership itself, whether or not they are acting as managers or agents. n235
Accordingly, in SEC v. Peters, n236 a federal district court found that a partner potentially violated federal insider
trading laws under the misappropriation theory by trading on confidential information entrusted to him by his partner.
n237
And in O'Hagan, the federal insider trading case in which the Supreme Court affirmed the misappropriation theory
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itself, the Court held that the defendant, a partner of the law firm of Dorsey & Whitney, breached his fiduciary duty
owed to the partnership. n238 The fiduciary nature of the partner-partner/partner-partnership relationship is so well
established that courts often refer to it as the touchstone of comparison in resolving novel cases. For example, in an
insider trading case, SEC v. Sargent, the First Circuit Court of Appeals declared that the two sole shareholders of a
closely held corporation were fiduciaries of each other because their mutual duties "mirrored those owed between
partners in a partnership." n239
[*886] What are the important partnership characteristics? Under RUPA, a partnership is an "association of two or
more persons to carry on as co-owners a business for profit ... whether or not the persons intend to form a partnership."
n240
In most jurisdictions, co-ownership requires a mutual undertaking of the parties to share in the profits and control of
the business. n241 In some jurisdictions, the parties must also agree to share losses. n242
Can we analogize the legislature to a partnership? Let us take Congress as the example, although the analysis is
similar for state legislatures. At first glance, we notice that Congress is not (at least not ostensibly) a profit-making
enterprise, so the requirement that partners agree to share in the profits or losses of the business seems not to be met.
But if we look beyond the technical expression of the rule, we see that the broader purpose of an agreement to share
profits or losses is for the parties to link their economic fates (and thus their future livelihoods) with the fate of the
enterprise as a whole and to one another. If we relax the profit-making assumption, we see that members of Congress,
too, have undertaken a common venture - that of legislating for our nation. Members have left their districts and
voluntarily tied their careers to those of other members and that of Congress as a whole. Legislation that is passed by
both chambers of Congress and not vetoed by the President is binding on individual members, Congress itself, and the
federal government. Also, the general reputation of Congress will impact the fate of the individual legislator come
reelection. In this sense, the fates of members are linked together in the common enterprise of lawmaking.
Further, members of Congress share in the control of the legislature just as partners share in the control of the
business. As a result, in both cases, a division of labor necessarily arises, as no single member or partner can perform all
the tasks required of their common undertaking. For partnerships, some partners will contribute the capital while others
contribute their labor. The default rule for partnerships, however, is that they all vote on partnership matters. n243 [*887]
Similarly, for Congress, members are assigned to and spend much of their time deliberating in various congressional
committees or subcommittees. n244 But all members participate in floor debates and vote on legislation.
None of the above is to say that members of Congress are as a factual matter cordial and collegial to one another.
Just as a partnership can be discordant and dysfunctional, Congress can be and has been discordant and dysfunctional.
But harmony in fact has never been a required element for imposing fiduciary duties. For example, courts have imposed
fiduciary duties on partners already in strained relations n245 and on couples on the brink of divorce. n246 Indeed, a major
purpose of fiduciary law is to protect against abuses arising in such antagonistic contexts. Also, despite popular
perceptions to the contrary, members of Congress are in a nontrivial sense engaged in a joint undertaking and must
come together in order to discuss and pass legislation. Moreover, as the evidence of norms summoned in Part II.C.1
above suggests, members actually do cooperate with one another in keeping certain information confidential.
Under the misappropriation theory, judges can classify legislators as fiduciaries to fellow legislators and to the
legislature itself. The SEC's Rules 10b5-2(b)(1) and (2) provide some support. More importantly, for purposes of this
Article, judges can draw an analogy to a paradigm example of a fiduciary relationship: fellow partners and the
partnership. n247
D. Fiduciary to Government
Let's switch beneficiaries one final time. Under the misappropriation theory, are legislators fiduciaries to the
government they serve?
1. Analogy: Director (to Corporation)
Recall that I've already analogized legislators to directors for purposes of the classical theory. In that discussion, I
argued that just as [*888] directors are fiduciaries to their shareholders, legislators can be seen as fiduciaries to the
citizenry. Here, under the misappropriation theory, I argue that legislators are fiduciaries to the government they serve,
from which they receive material, nonpublic information. The corporate analogy is that directors are fiduciaries to the
corporation. Accordingly, in SEC v. Talbot, n248 the Ninth Circuit Court of Appeals held that a director could violate
federal insider trading laws under the misappropriation theory by trading on confidential information relating to another
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company in breach of a fiduciary duty owed to the corporation, which was the "immediate source and rightful owner of
the information." n249
Because it is well established that directors have a fiduciary obligation to the corporation, the task here is to explain
why we should compare legislators with directors. Under the theory of director primacy, n250 directors reign supreme over
corporate actions. To be sure, on a daily basis, officers make the operational decisions. But, as a formal legal matter,
directors have the ultimate power to make decisions on behalf of the corporation. Legislators arguably stand in a similar
position vis-a-vis the government they serve. Especially relevant is the fact that legislatures tend to have broad
jurisdiction to legislate in the public interest. n251 Moreover, they typically enjoy the power of the purse and control the
funding of government projects. n252
The strongest objection comes from the fact that both federal and state governments separate powers among three
coequal branches of government - not only the legislative but also the judicial and executive. To take Congress as an
example, it is hard to say that Congress reigns supreme over the actions of the federal government when the judiciary
can strike down statutes as unconstitutional. Also, the executive branch in various domains enjoys de jure and de facto
power that rivals Congress's.
That said, it is difficult to suggest that judges and executive officials are more like directors than legislators are.
Judges, even the judges of the highest court, do not fit the mold. Their power is too sharply delimited in terms of
jurisdiction, while their decision-making process is too narrowly cabined by precedent and stare decisis. The President
and high-level executive branch officials also behave more [*889] like corporate officers than directors. On the other
hand, executive branch officials often do not and need not answer to Congress in the way that a corporate officer must
(at least formally) answer to the board. In the end, I can defend only a weaker position - that no other body (including
the other two coequal branches of government) stands in a clearly superior position to the legislature with respect to its
claim to "direct" the nation or the state. If judges are persuaded, then they can analogize a legislator's duty to the
government to a director's duty to the corporation. n253
2. Cases
In addition to this analogy, there are some relevant precedents. Myriad opinions find public officials to be fiduciaries of
their federal, state, or municipal government, or, in some cases, the government agency that employed them. For
example, at the federal level, courts have imposed fiduciary obligations on an army engineer, n254 an employee of the
Department of Agriculture, n255 a foreign service officer, n256 a civilian employee of the United States Engineers, n257 a real
estate appraiser for the Federal Housing Administration, n258 a president and vice president of Export-Import Bank of the
United States, n259 a CIA agent, n260 and an Interior Secretary. n261 At the state and local level, courts have imposed fiduciary
obligations on an attorney and director of the state lottery, n262 a state alcoholic beverage commissioner, n263 [*890] a
state land commissioner, n264 a fire department chief, n265 a city treasurer, n266 a city press secretary and director of public
relations, n267 and a city attorney. n268
Moreover, courts have not reserved the fiduciary status solely for appointed officials. Elected officials, such as a
mayor, n269 a governor, n270 and a city councilman, n271 have also been recognized as fiduciaries of their state or
municipality.
If we focus on Congress, the case of United States v. Podell n272 - which has never been cited in the scholarly
commentary on insider trading n273 - provides clear authority for the proposition that members of Congress are fiduciaries
of the United States. In this case, Congressman Podell pled guilty to federal bribery charges under 18 U.S.C. § 203, n274
after which the federal government filed a civil action to recover the improper payments he had received. n275
In granting the government's summary judgment motion, the federal district court carefully clarified that this civil
action was not grounded in Podell's criminal violation but rather was based on a breach of fiduciary duty "as evidenced
by [the criminal violation]" n276 and "not on any federal statutory authority." n277 The court declared that Podell was a
fiduciary of the US government and, interestingly, did so by invoking an analogy to the master-servant relationship:
A public official stands in a fiduciary relationship with the United States, through those by whom he is appointed or
elected. If he secretly advances interests adverse to those of the government which he serves, it is a breach of
confidence and he must account to his [*891] "master" for the benefits received as a result, irrespective of
consideration of fraud or damage. n278
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In sum, under the misappropriation theory, judges can classify legislators as fiduciaries of the government that they
serve. Support can be found in numerous judicial opinions recognizing public officials, including elected officials, as
fiduciaries. As for members of Congress, Podell provides direct precedent for classifying members as fiduciaries of the
US government. More importantly, judges can draw an analogy to the fiduciary relationship between a director and the
corporation that he serves.
Now that I've marshaled support for finding legislators to be fiduciaries of their legislature, of fellow legislators,
and of their government under the misappropriation theory, the task is to justify imposing the specific duty not to use
entrusted confidential information for personal gain, which is the relevant duty for the misappropriation theory and
tipping cases. Unlike the fiduciary duty to disclose, which is routinely applied to all fiduciaries, the scope of the duty
not to use entrusted information for personal gain may vary from one fiduciary context to another. While it is
uncontroversial to proscribe the exploitation of information that harms or injures the beneficiary, it is slightly more
controversial to proscribe the exploitation of information regardless of whether injury can be demonstrated. n279 The
question about harms is relevant because whether insider trading harms anyone has been the subject of intense scholarly
debate. n280 That debate will not be settled here, although I have discussed the harms of insider trading elsewhere. n281 For
purposes of this Article, suffice it to say that courts have regularly imposed duties on public fiduciaries without
requiring any showing of harm. n282 Moreover, [*892] courts have found liability based on the public fiduciary's use of
entrusted information for personal gain, without requiring that harm be demonstrated. n283
***
I have argued that the majority view - that judges could not recognize legislators as fiduciaries under federal insider
trading law - is wrong and continues to be wrong. Legislators can be deemed fiduciaries to citizens, the legislature (and
fellow legislators), and the government that they serve. By analyzing congressional ethics rules, citing relevant cases,
and analogizing to trustees, partners, and directors, courts could classify legislators as fiduciaries and impose the
requisite fiduciary duties under federal insider trading law. Courts could do so regardless of and in addition to the
STOCK Act. They could do so through ordinary legal reasoning.
III
Against Corruption
A. Deepening Analogies
Part II was mostly an extended exercise in analogical reasoning. The question presented was whether legislators could
be deemed "fiduciaries" under pre-STOCK Act federal insider trading law and how this might be done. The way that I
answered that question was to cite relevant cases - such as Driscoll, Fuchs, and Podell - and also to elaborate point-by-
point analogies to private trustees, corporate directors, and partners. This sort of analogical reasoning is what judges and
lawyers do every day. Its persuasiveness is often intuitive and aesthetic: is there some flash of recognition between
legislators and, say, corporate directors?
But the fact that analogies somehow "click" does not necessarily mean that they are well reasoned. For example,
Tamar Frankel has criticized fiduciary law's reliance on analogies as "uninstructive, because [*893] the courts do not
explain why some similarities ... are relevant and others not." n284 In recent legal academic discussion, various schools of
thought have surfaced on the nature of analogical reasoning. n285 I concur with Judge Richard Posner, who understands
analogies as ultimately rhetorical acts that can be justified only by looking to some underlying policy or purpose of the
law that is to be applied and extended. n286 Accordingly, in order to provide a deeper justification for the analogies
offered above, I need to unpack the underlying policy or purpose that animates fiduciary law.
In this Part, my basic claim is that it is entirely appropriate and consistent with the law of fiduciary obligation to
recognize legislators as fiduciaries and to impose on them the requisite duties. To support this claim, I defend a
plausible definition of (public) corruption as the "use of public office for private gain," and I show how legislator insider
trading fits that definition. I then demonstrate that one core purpose behind the common law of fiduciaries is to deter
corruption. Although prior commentary has casually observed some link between fiduciary principles and preventing
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corruption, n287 this is the first systematic demonstration of that connection. To make this showing, I explore one strand
of cases in fiduciary law targeting corruption in the public sector. These cases forbid the public fiduciaries in question
from using their public positions for private gain. In the end, I show an organic alignment between recognizing
legislator insider trading as a breach of fiduciary duty and one core purpose of the common law of fiduciaries. This
alignment provides a deeper justification for the analogies offered above. n288
In discussing the purposes and policies undergirding fiduciary law and in classifying legislator insider trading as a
form of corruption, [*894] readers may jump to the conclusion that I am making some global, untethered evaluation
that legislator insider trading is bad and thus should be banned. Although I believe this to be true and have argued the
point elsewhere, n289 that is not my task here. As noted in the Introduction, my ultimate task is to ask whether judges, if
confronted with a case of legislator insider trading, could find legislators to be fiduciaries within the meaning of federal
insider trading law using ordinary judicial reasoning. Above, I answered that question in the affirmative. Below, I make
an even stronger case by showing that the analogies invoked did not trade on trivial, coincidental, or arbitrary
similarities like the fact that zebras and barber poles both have stripes. Instead, judges can justify the analogies on the
ground that extending the category of fiduciary to encompass legislators promotes an underlying policy of fiduciary law,
which is to combat corruption. n290
B. Corruption
As Justice Potter Stewart said of obscenity, people seem to know public corruption when they see it, but it is hard to
define. n291 One source of difficulty lies in the fact that what counts as corruption is historically contingent. For example,
today it is uncontroversial to say that a legislator accepting a bribe is corrupt. But in the nineteenth century, members of
Congress openly accepted payments from companies lobbying to obstruct or advance particular legislation. For
instance, [*895] Daniel Webster was on retainer from the Bank of the United States to represent the bank's interests,
and he unabashedly sent written reminders to replenish his bank account. n292 Indeed, it was not until 1853 that
congressional bribery was formally banned. n293 And even after the ban, bribed members went undisciplined until public
outrage erupted over the Credit Mobilier bribery scandal in the 1870s, which impelled Congress to begin censuring
them. n294 Not until more than a century later, in 1980, did the House finally expel a member for bribery. n295
Also, what counts as corruption is culturally contingent. n296 Societies maintain different political systems with
differing notions of accountability, cultivate different institutions of power with varying degrees of maturity and
legitimacy, negotiate different boundaries between public and private domains, and draw on diverse relationships
between power and wealth. Accordingly, societies necessarily experience corruption in diverse ways, making it difficult
to define both precisely and universally. As John Kleinig and William C. Heffernan have concluded: "Both historically
and cross-culturally, instantiations of corruption have been contested, not only with respect to their identity but also, in
certain instances, with respect to their undesirability." n297
[*896] And even within a single society at a particular moment in time, there will be disagreement about what
counts as corruption. For example, elites differ from the general public in what they regard as corrupt. n298 Also, factors
such as race, education, and income affect the likelihood of perceiving the government to be corrupt. n299
Given such contingencies and controversies, my goal is not to proffer and defend some best definition of public
corruption, which would attempt to specify a strict set of necessary and sufficient conditions that capture all instances of
what people regard as corruption with no over-or under-inclusiveness. Indeed, the cognitive science of categorization
casts serious doubt on the success of any such project. n300 Instead, I offer something more modest: a definition that
draws on rough consensus in the political science and political economy literatures, incorporates less contested cultural
understandings, and performs useful analytic work in the narrow context of insider trading.
I start with the "classical" understanding of public corruption in political science. As Dennis Thompson explains:
In the tradition of political theory, corruption is a disease of the body politic. Like a virus invading the physical body,
hostile forces spread through the political body, enfeebling the spirit of the laws and undermining the principles of the
regime. The form the virus takes depends on the form of government it attacks. In regimes of a more popular cast, such
as republics and democracies, the virus shows itself as private interests. Its agents are greedy individuals, contentious
factions, and mass movements that seek to control collective authority for their own purposes. The essence of corruption
in this conception is the pollution of the public by the private. n301
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[*897] Thus, the classical understanding of public corruption is grounded in the notion that private interests somehow
taint the public good. More modern definitions of corruption build on this understanding but tend to drop the organic
metaphors of disease, degeneration, or decay. n302 They also tend to replace substance with procedure - the notion of
substantive public good is replaced by the democratic process, which purifies private interests into legitimate public
purposes. n303 Under most modern definitions, corruption involves an abuse of trust occasioned by an improper
commingling of one's public role and private gain in derogation of predetermined democratic processes - essentially, an
act that disrespects the sacred border between public and private. At minimum, there seems to be an academic
consensus that public corruption entails an "abuse of public roles or resources for private benefit." n304 In short, public
corruption is the use of public office for private gain. n305 Reflecting this [*898] simple core understanding, the very
first page of the House Ethics Manual commands that members, officers, and employees of the House "should not in
any way use their office for private gain." n306
Private gain. Since at least the time of Cicero, it has been "beyond debate that officials of the government are relied
upon to act for the public interest not their own enrichment." n307 But not all forms of personal enrichment are dubious.
After all, members are not required to make a vow of poverty before holding office. n308 Indeed, the Framers endorsed
the idea that members of Congress should be paid salaries on the view that being independently wealthy should not be a
qualification for elected office. n309 Therefore, the notion of private gain must recognize that some forms of personal gain
n310
are necessary or incidental, and thus appropriate, to performing one's political role.
As proposed by Andrew Stark, "private gain" signifies that the public officials are enjoying the gain in question
outside of their official roles. "The modifier private suggests a kind of gain - a trip on a corporate jet, attending an
association meeting at a resort, an all-expense paid trip to a charity event - that does not, or ought not, or need not,
redound to the official as part of his or her job." n311 Thus, [*899] private gain is a form of personal gain that is
supererogatory - neither part of the explicit compensation allocated to the public official nor culturally viewed as an
acceptable or unavoidable perquisite of the role. n312 In other words, only if the personal gain in question is neither
necessary nor incidental to one's official role can the gain qualify as private gain. n313 Conversely, "if the official's
responsibilities required the official to board the corporate aircraft, or be present at the association meeting, or attend the
charity event, then there would be no 'private' gain, just the exercise of office." n314
From Public Office. It is not enough, however, that the gain be private in order for the underlying act to constitute
an abuse of public office. The gain must also somehow flow from the official's public office. In other words, there must
be a proximate causal nexus between the public role and the private enrichment. At minimum, it must be shown that the
official would never have received the invitation to ride the corporate jet, attend the association meeting at the resort, or
participate in the all-expenses paid charity event but for her public role. If the causal nexus is absent, the official's
conduct is not improper because the opportunity did not flow from the public role. For example, if the official can
demonstrate that prior to becoming a public official she had routinely received the same invitation to attend the all-
expenses paid charity event, the causal link would arguably be severed and the alleged private gain would not be viewed
as improper. n315 In addition, the official must have somehow intended n316 to receive the gain in question in order for her
conduct to be deemed improper. n317 [*900] This is merely to acknowledge that inadvertent or accidental accruals of
alleged private gain can hardly be regarded as "corrupt." n318
Even if this "private gain from public office" definition seems plausible, some readers might object that it remains
formalistic without some deeper justification. After all, what is so wrong about using one's public office for private gain
such that it deserves the pejorative label of "corruption"? Why should a public official respect the border between public
and private? What is the harm that is captured by the phrase, "the pollution of the public by the private"? n319
In some cases, the harm to the government or to the general public will not be so clear. Take, for example, bribery
in the public procurement context - the classic case of private gain from public office. One common argument that
bribed officials assert is that there is no victim. n320 After all, it is certainly plausible that the bribed official would have
awarded the contract to the briber anyway, even without the bribe. n321 However, as has been extensively documented in
the corruption literature, private gain from public office generates certain important but sometimes indirect harms. A full
explication of the kinds of harms is beyond the scope of this Article, but I have discussed them elsewhere. n322 For
purposes of this Article, I will briefly summarize one important set of harms - the "temptation costs" incurred by the use
of public office for private gain.
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When public officials - whether elected or appointed - pursue private gain from public office, they are invariably
tempted to make decisions to advance their own financial interests without regard to the interests of the public. This
distortion of incentives risks a serious [*901] misallocation of government financial resources. n323 For example,
empirical work has found high levels of corruption to be associated with underinvestment in education and
overinvestment in public infrastructure. n324 This stems from the fact that education provides fewer opportunities for
bribes. As a result, public officials in responsible positions tend to channel their energies toward public infrastructure
projects, where the opportunities for self enrichment are greater. n325 Gradually and incrementally, the pursuit of private
gain from public office facilitates the pollution of the public by the private.
Having justified this basic definition of corruption, we can now apply it to legislator insider trading. First, any gain
arising out of trading on material, nonpublic information acquired through one's legislative position clearly constitutes
supererogatory financial gain - private gain. Profits earned from insider trading are not part of the explicit compensation
allocated to members. Nor is there anything in the job description of legislators or in the nature of their legislative tasks
that requires them to use their own personal funds to trade in any stocks, let alone based on information gleaned through
their work in the legislature. Further, overwhelming public opinion against legislator insider trading suggests that such
trading is not culturally viewed as one of the acceptable perquisites of legislators' jobs. n326 Moreover, no federal or state
legislator has publicly defended this practice. In fact, when members of Congress were directly confronted by the press
with allegations of insider trading, they reacted defensively and evasively. n327 Second, such trading opportunities flow
from their public office (i.e., they would not have such lucrative trading opportunities but for the information gained by
virtue of their office). Thus, legislator insider trading fits squarely within the definition of public corruption - the use of
public office for private gain.
[*902] Moreover, this definitional fit is neither accidental nor merely formal. The temptation costs that justify the
basic definition clearly apply in this domain. For example, suppose that the Chair of the House Appropriations
Committee believes that a particular military vehicle, manufactured by a small publicly traded corporation, is ultimately
unsuitable for the Defense Department's purposes. But suppose that he thinks it is a close call because there is no
obviously better alternative in the marketplace. Suppose further that his four children, who are each one year apart in
age, will soon be attending college. If he advocates strongly in favor of the military vehicle, there is a good chance that
the expenditure will be approved. And if he also purchases stock in advance, he stands to gain a hefty profit, which
could help pay for college tuition. Because of his personal financial situation, he will be sorely tempted to advocate in
favor of the military expenditure, notwithstanding his understanding of the merits.
The above hypothetical makes clear that legislator insider trading risks distorting the legislator's incentives and
misallocating government financial resources. And it is not just that legislators will be tempted to cast a bad vote.
Temptations, unchecked by law, are likely to pervade all forms of legislative activity, such as making phone calls,
setting agendas, giving speeches, subpoenaing witnesses, asking questions in hearings, and so on. Indeed,
entrepreneurial legislators might more proactively n328 try to hustle up trading opportunities by redirecting research
resources, reorganizing their offices, and rewriting the rules of legislative ethics. n329
In sum, public corruption can plausibly be defined as the use of public office for private gain. This definition makes
sense in light of the temptation costs incurred because of private gain from public office. And legislator insider trading
not only fits the definition but also generates these same costs. As a result, we can view and classify legislator insider
trading as a form of public corruption. Now that I've defended a plausible definition of (public) corruption and shown
that legislator insider trading falls within that definition, the task is to demonstrate that one core purpose of the common
law of fiduciaries is to deter corruption.
[*903]
C. Fiduciary Law's Norm Against Corruption
Fiduciary law encompasses myriad contexts. As I've pointed out, its ad hoc development and resulting fuzzy
boundaries have frustrated the legal scholars who study it. In response, scholars have earnestly searched for unifying
principles that coherently explain why certain relationships are subject to fiduciary obligations n330 - to partial success.
Like others, n331 I doubt that a single set of principles could successfully rationalize the various species of fiduciaries n332
without resorting to extreme imprecision and risking overinclusiveness. n333 As Deborah DeMott has explained: "The
evolution of fiduciary obligation ... owed much to the situation-specificity and flexibility that were Equity's
hallmarks... . As Equity developed to correct and supplement the common law, the interstitial nature of Equity's
doctrines and functions made these doctrines and functions resistant to precise definition." n334 Cognizant of these
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difficulties, my goal is not to propose any grand theory of fiduciary law. All that I seek to demonstrate is that one core
purpose of fiduciary law is anti-corruption.
Although numerous doctrines within fiduciary law appear to target corruption in the private sector, n335 one particular
doctrine best illustrates an anti-corruption norm for the public context (although certainly not limited to the public
sector). In several cases, only a few [*904] of which are discussed below, courts have proscribed the use of public
office for private gain. They have done so by applying the so-called rule against secret profits, n336 which forbids
fiduciaries from accepting bribes or secret commissions. n337
The rule against secret profits (or the rule against bribes and secret commissions) emanates from the "exclusive
benefit principle," n338 which generally requires the fiduciary "not to use her discretionary power to arrogate to herself
personal benefits from her position - even if such benefits do not directly harm the beneficiary." n339 To assure this
fidelity, the law provides that it is appropriate to structure the fiduciary's compensation to promote the proper alignment
of the fiduciary's incentives with the beneficiary's interest. n340 Since a fiduciary's overt compensation represents the
amount thought to be sufficient to induce the desired performance, there would be "no need to permit an indeterminate
amount of additional, covert compensation." n341 And not only are covert rewards viewed as unnecessary, they are also
risky to the beneficiary's interests. Therefore, it is important "to deter those fiduciaries from even approaching the
borders of self-aggrandizing behavior." n342
The following three cases nicely illustrate the anti-corruption norm for the public context. First, consider a
paradigmatic bribe in which there is "an explicit exchange of a specific benefit for a specific official action (or
inaction)." n343 Attorney-General v. Goddard, for instance, [*905] involved the case of an English police sergeant who
was convicted of accepting bribes to ignore crimes that he was responsible for monitoring. n344 In the civil case, the
Crown sued to recover the payments, and the sergeant demurred. n345
According to the court, the question presented was whether the rule against secret profits in agency law applied to
this case, even though the sergeant was not entrusted with a pecuniary interest - i.e., the sergeant was not employed in a
commercial or financial capacity - and there was no pecuniary harm to the Crown. n346 The court concluded that the rule
applied "because it is contrary to equity that the agent or servant should retain money so received without the
knowledge of his master." n347 After all, "this officer was employed at this time as an agent to make inquiries and got this
money in the course of those inquiries." n348 In other words, the officer received the bribe (private gain) by reason of his
position (public office). According to the court, it did not matter whether there was "any injury in fact" or, more
specifically, whether the principal's "pecuniary interest is damaged in fact or not." n349
In overruling the demurrer, the court emphasized that the sergeant's position was a fiduciary one. Specifically, the
court noted that there was a fiduciary relationship "not because he received into his hands any property of his employers
or did not, but because he was under an obligation to use the information which he got for the purpose of his employer,
certainly not to use it for his own profit." n350 In other words, there was an expectation that the sergeant would use his
public office for the exclusive benefit of the Crown and not for private gain.
Goddard involved a case of payment (private gain) in exchange for an official action or, more accurately, official
police inaction (from public office). But courts have extended liability to payment in exchange not for any official
action but simply the use of one's official status. The frequently cited case of Reading v. Attorney-General n351 is
illustrative. In Reading, a smuggling ring paid a British army sergeant in the Royal Army Medical Corps (stationed in
Egypt) to escort contraband around the city of Cairo. By sitting - in full military uniform - on the front seat of a civilian
lorry loaded with the illicit cargo, the [*906] sergeant enabled the smugglers to pass Egyptian police lines and avoid
arrest. n352 The sergeant was subsequently apprehended, court-martialed, and imprisoned for two years. n353 After his
release from prison, he brazenly brought a petition to recover the money that the Crown seized from his apartment. n354
On appeal, the court held that the Crown was entitled to retain the sums confiscated. n355
In granting the Crown's requested remedy, the court pointed to a pattern of cases that had employed the rule against
secret profits to recover an agent's or servant's sums, regardless of whether the master had suffered any detriment in
fact. n356 This was important because "the Crown in this case ... has lost no profits [and] suffered no damage." n357
The court went on to apply the rule to the particular facts presented. Addressing the issue of whether the nexus to
the sergeant's position was sufficient to warrant the remedy, the court noted that it did not matter that the sergeant was
acting outside the scope of his employment and thus outside his official capacity when he earned the money. Rather,
what mattered was that the sergeant used his official position to earn it:
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He nevertheless was using his position as sergeant in His Majesty's Army and the uniform to which his rank entitled
him to obtain the money which he received. In my opinion any official position, whether marked by a uniform or not,
which enables the holder to earn money by its use gives his master a right to receive the money so earned even though it
was earned by a criminal act. n358
In sum, the plurality of the court premised its holding on the sergeant's official status, which enabled him to accept the
bribe. n359 Interestingly, the plurality stopped just short of expressly requiring a fiduciary relationship to justify the
remedy granted. However, it acknowledged that the relationship in question was a fiduciary one in "a wide and loose
sense" n360 and, on that basis, the Crown was alternatively entitled to the money. n361 The concurrence was less equivocal
on this issue. It expressed agreement with the lower court that the sergeant "owes to the Crown a duty as fully fiduciary
as the duty of a servant to his master or of an agent to his principal," n362 despite the [*907] fact that the sergeant was
technically neither an agent nor a servant under the law. n363
Recall that the first case I described, Goddard, was an example of money in exchange for an official's inaction. The
second case, Reading, was an example of money (private gain) in exchange for an unofficial action that nevertheless
exploited some official status (from public office), as signaled by the uniform. Finally, consider, United States v.
Drumm, n364 a case in which a breach of fiduciary duty was found when the fiduciary neither took official action nor
exploited his official status. In Drumm, a United States Department of Agriculture (USDA) poultry inspector
surreptitiously moonlighted by doing part-time consulting for a private poultry processing plant in violation of USDA
policy. n365 The federal government sued for breach of fiduciary duty. The district court directed a verdict in favor of the
defendant, but the appellate court vacated the district court's judgment and remanded the case. n366
In explaining its holding, the appellate court complained that "the defendant had secretly placed himself in a
position of conflicting interests and loyalties. This he had no right to do." n367 The court then went on to highlight the
potential harms that might arise from this conflict of interest: by secretly accepting this second employment "involving
duties adverse to those he owed the government," the defendant "compromised to a great extent his position as an
impartial poultry inspector and his usefulness to the government." n368
Although the court claimed that the defendant's outside private employment carried duties adverse to those owed to
the government, there was no evidence of adverseness. Indeed, the reported facts strongly suggest that the private
company was genuinely interested in improving the quality of its poultry and hired the USDA employee to further that
purpose. n369 Nothing in the factual record suggested that the defendant was discouraged from discharging his main
responsibility as a government poultry inspector - to ensure that federal standards of sanitation and wholesomeness were
met by all companies who voluntarily enrolled in the USDA's inspection program. n370 The defendant had simply earned
some secret money "on the side."
[*908] Nevertheless, according to the court, "the fact that there is no evidence that defendant passed bad poultry
or that the reputation of the government's inspection program was damaged by defendant's conduct would not bar
recovery." n371 After all, the court went on, the "agent has the power to conceal his fraud and hide the injury done his
principal." n372 Accordingly, it would be unwise to require a showing of actual harm where an agent acquired a "secret
benefit ... out of his agency" n373 (that is, a private gain from his public office). The court then noted the crucial
importance of holding public officials to account:
The larger interests of public justice will not tolerate, under any circumstances, that a public official shall retain any
profit or advantage which he may realize through the acquirement of an interest in conflict with his fidelity as an agent.
If he takes any gift, gratuity or benefit in violation of his duty, or acquires any interest adverse to his principal, without a
full disclosure, it is a betrayal of his trust and a breach of confidence, and he must account to his principal for all he has
received. n374
As the above three cases demonstrate - along a single, consistent doctrinal strand - fiduciary law prohibits public
fiduciaries from taking secret profits. It does so prophylactically, regardless of whether any actual harm to the
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beneficiary can be shown, so long as there is a nexus to the fiduciary's position. The underlying policy is anti-
corruption, preventing private gain from public office.
If we join this insight (that fiduciary law contains an anti-corruption norm) with the prior analysis (concluding that
legislator insider trading counts as corruption), we see the appropriateness of interpreting fiduciary law in a way that
reaches legislators, without regard to whether actual harm to the relevant beneficiaries can be shown. This appeal to
anti-corruption deepens the justification for analogizing legislators to private trustees, directors, and partners. Moreover,
this analysis helps us see that Fuchs and Podell, two cases that have recognized legislators - state and federal - as
fiduciaries, were also targeting corruption. In employing traditional analogical reasoning to find legislators to be
fiduciaries for purposes of federal insider trading law, judges can rest assured that they are not stretching fiduciary law
unrecognizably or arbitrarily to pursue some objective that is alien to the doctrine.
[*909]
IV
Objections
I have argued that courts could find that legislators owe fiduciary duties to certain beneficiaries for purposes of federal
insider trading law. If courts impose such duties, then legislators who trade on material, nonpublic information could be
held liable under classical and misappropriation theories. Now I will answer some objections to my argument. n375
A. Judicial Activism
Some readers may worry that this common-law-like extension of who counts as a "fiduciary" amounts to unwarranted
judicial activism. For example, it's one thing to say that corporate insiders are fiduciaries of their own shareholders who
happen to be on the other side of their trades. It's quite another thing to say (as the objection goes) that state legislators
are fiduciaries of citizen-investors on the other side of their trades. The latter seems to be a far more radical extension of
fiduciary law than the former.
This concern, although understandable, loses much force when one takes a historical view of insider trading law,
examines its evolution, and appreciates how equally radical prior judicial extensions have been. Put another way,
including legislators under a "fiduciary" label is no more activist than various other extensions that courts made long
ago and now view as uncontroversial, black-letter insider trading law.
Consider, for example, the Supreme Court's original affirmation of the classical theory of insider trading in
Chiarella in 1980. At the time, the common law tort of misrepresentation - the basis for Justice Powell's opinion in
Chiarella - provided meager support for the proposition that a corporate insider owes a fiduciary duty to the [*910]
counterparty in an open-market transaction. n376 Prior to Chiarella, the weight of authority found no such duty to
investors trading in the impersonal securities markets. n377 Indeed, the majority rule at the time found no liability for
insider trading executed over an anonymous exchange. n378 At the time, courts opining on this issue distinguished
between face-to-face transactions where, they thought, investors were justified in relying on an insider's duty to disclose
n379
and open-market transactions where, they thought, no such justification existed because it was impossible to know
whether an insider was on the other side of the trade. On an anonymous exchange like the New York Stock Exchange,
there is no bargaining, and the decision to buy and the decision to sell are completely independent. As a result, in such a
transaction, it is impossible to show any reliance or injury stemming from the insider's nondisclosure. n380
Moreover, if we go further back in time, say, to 1951, we see that the majority rule at the time did not even impose
fiduciary obligations in many face-to-face transactions. As Richard Painter and his colleagues have pointed out, the so-
called "majority" rule at the time held that "officers and directors [were] subject to a fiduciary duty to the corporation
and its shareholders only in dealings with or on behalf of the corporation." n381 Hence, in most jurisdictions, officers and
directors could "trade freely in the stock of their own corporation in [*911] an individual capacity without any
affirmative disclosure obligation, so long as they did not engage in active misrepresentations or half-truths." n382
Therefore, as long as they traded stock in their own account and not in their representative capacities, officers and
directors did not owe fiduciary duties of disclosure to the shareholders of their corporation. n383
Even if we accept as uncontroversial the proposition that corporate insiders owe fiduciary duties to individual
shareholders when trading on an exchange, there was almost no common law support for the proposition that a
corporate insider owed a special duty to purchasers and not just sellers of the company's shares. n384 Unless purchasing
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investors already own company shares, they are not current but prospective shareholders of the company. Therefore, it
is the consummation of the particular transaction with the insider that brings the investor into a fiduciary relation with
the insider. Accordingly, before that transaction is completed, purchasers are mere strangers to the corporate insider.
The Supreme Court's only response to the problem presented by the common law was to quote Judge Learned
Hand:
The director or officer assumed a fiduciary relation to the buyer by the very sale; for it would be a sorry distinction to
allow him to use the advantage of his position to induce the buyer into the position of a beneficiary although he was
forbidden to do so once the buyer had become one. n385
Judge Hand's statement, although characteristically eloquent, is not an argument. After all, the "sorry distinction" is
grounded in corporate law, which has historically treated shareholders and nonshareholders differently. Moreover, this
"sorry distinction" was the prevailing law of the day. n386
There are more examples of judicial extensions that we currently view to be normal, indeed banal, but that at one
time may have been controversial. For example, for centuries, courts did not regard ordinary employees as fiduciaries
because they exercised very little discretionary authority and did not ordinarily occupy positions of trust and [*912]
confidence toward their employer. n387 This changed somewhat in the twentieth century when a number of cases began
extending the fiduciary status to mere employees, n388 although even today not all states hold that employees are
presumptively fiduciaries. n389 However, it is now clear that courts deem administrative employees to be fiduciaries for
purposes of federal insider trading law. n390 Indeed, courts have held a secretary, n391 a copyholder for a financial printer,
n392
and an aide in the audio-visual department n393 to be fiduciaries under insider trading law.
Of course, one could flip this evidence around to lament that we are on a slippery slope towards ever-expanding
insider trading liability and that we must draw the proverbial line in the sand here and now, with legislators. But such a
plea presumes that the expansions in the past and the expansion at issue here have been bad ones. Until that substantive
case has been made, suffice it to say that, for purposes of this objection, legislator insider trading is normatively
problematic for [*913] the same reasons that public corruption is problematic, as I have argued more extensively
elsewhere. n394 As for general anxiety about judicial activism, I explained in Part III.C that we can justify extending the
category of "fiduciary" to include legislators by reference to a policy that is central to fiduciary law. n395
In sum, the extension that I am calling for is no more radical than prior extensions made under Rule 10b-5, which
the Supreme Court once referred to as a "judicial oak which has grown from little more than a legislative acorn." n396 It is
certainly no more radical than the judicially implied private cause of action under Rule 10b-5 or the judicial creation of
the insider trading causes of actions under the classical and misappropriation theories. I am not asking for the creation
of a brand new cause of action against legislators. I am merely advocating that, should a court find itself in the position
to so hold, legislators could be recognized as fiduciaries under the already existing insider trading cause of action.
B. Federalism
Nevertheless, is there something especially problematic - perhaps constitutionally - with applying federal insider
trading law to state legislators? One might object that applying the federal securities laws to target the public corruption
of state legislators (even if it is in the form of legislator insider trading) represents an unconstitutional exercise of
federal power - an invalid federal "incursion on traditional state power" n397 (i.e., the power to police the conduct of its
own officials). But, as a doctrinal matter, this objection is not tenable given the fact that since the 1980s, the federal
government has successfully prosecuted thousands of state and local officials for acts of corruption. n398 Further, many
such prosecutions were based on federal statutes that have not only survived constitutional scrutiny n399 but also were
jurisdictionally rooted in the Commerce Clause n400 - the same constitutional [*914] grounding for the federal securities
laws, including the insider trading prohibition.
And there should be little doubt that the federal insider trading prohibition rests on constitutionally secure footing.
First, unlike the few federal statutes that have been invalidated on federalism grounds, n401 Section 10(b) and Rule 10b-5
(as does the whole of federal securities laws) n402 regulate what is clearly economic activity involving "instrumentalities
of interstate commerce" n403 and thus substantially relates to interstate commerce. n404 Hence, the relevant statute
Page 117Page 117
indisputably falls within the federal commerce power. Second, Section 10(b) and Rule 10b-5 both contain express
jurisdictional elements that require the trier of fact to find a nexus with interstate commerce. n405 This ensures, through a
case-by-case inquiry, that the activity in question is connected to interstate commerce. n406 Third, the insider trading
prohibition does not commandeer state resources, which would be intrusive to state power; "it neither requires the states
to do anything nor imposes any financial burden on them." n407 Fourth, as my arguments have suggested, the federal ban
on insider trading is nondiscriminatory and generally applicable; the same legislation applies equally to public officials
and private parties. n408 Therefore, the use of federal securities laws to target legislator insider [*915] trading at the
subnational level should survive federalism-based challenges.
C. Speech or Debate Clause
The final major objection, which applies only to members of Congress and is relevant notwithstanding the STOCK Act,
concerns the Speech or Debate Clause, which reads in part: "for any Speech or Debate in either House, [members of
Congress] shall not be questioned in any other Place." n409 This Clause immunizes members of Congress from civil or
criminal liability for "conduct necessary to perform their duties within the sphere of legitimate legislative activity." n410
Such activity includes, for example, speech or debate in either House, voting, drafting committee reports, and conduct at
legislative committee hearings. n411 This Clause was designed to foster legislative independence and to avoid coercion or
intimidation from the executive or judicial branches of government. n412 In addition to securing the independence of the
legislature, the Clause "serves the additional function of reinforcing the separation of powers so deliberately established
by the Founders." n413
The scope of the liability immunity is, however, not all encompassing. And the Speech or Debate Clause was not
intended "simply for the personal or private benefit of Members of Congress, but to protect the integrity of the
legislative process." n414 As such, the immunity only "protects Members against prosecutions that directly impinge upon
or threaten the legislative process." n415 Thus, the actions that are protected "must be an integral part of the deliberative
and communicative processes by which Members participate in committee and House proceedings with respect to the
consideration and passage [*916] or rejection of proposed legislation or with respect to other matters which the
Constitution places within the jurisdiction of either House." n416
To be clear, the Speech or Debate Clause does not grant blanket immunity to members of Congress and does not
convert them into "super-citizens" above the law. n417 As the Supreme Court explained:
Article I, § 6, cl. 1, as we have emphasized, does not purport to confer a general exemption upon Members of Congress
from liability or process in criminal cases. Quite the contrary is true. While the Speech or Debate Clause recognizes
speech, voting, and other legislative acts as exempt from liability that might otherwise attach, it does not privilege either
Senator or aide to violate an otherwise valid criminal law in preparing for or implementing legislative acts. n418
Accordingly, notwithstanding the Clause, members of Congress have been prosecuted for fraud, n419 bribery, n420
extortion, n421 violation of honorarium laws, n422 and embezzlement. n423
There is no reason to treat the trading of securities (in violation of federal law) any differently. Such trades are not
integral to the legislative process and thus do not constitute any part of "legitimate legislative activity" that warrants
protection under the Speech or Debate Clause. In most cases, legislator insider trading will not involve the making of
any speech in Congress, the casting of any vote, or the writing of any report - core legislative actions that the
Constitution shields from prosecutorial scrutiny. Instead, insider trading will involve a market trade made privately,
intentionally without fanfare, and on the basis of material, nonpublic information. The fact that such [*917]
information is obtained through some connection to Congress does not mean that trading on such information suddenly
becomes a legitimate or official act of Congress. n424
United States v. Brewster n425 provides a useful precedent. n426 Brewster, a former Senator, was prosecuted for
violating various federal anti-bribery laws. The Supreme Court wrote:
Page 118Page 118
Taking a bribe is, obviously, no part of the legislative process or function; it is not a legislative act. It is not, by any
conceivable interpretation, an act performed as a part of or even incidental to the role of a legislator. It is not an act
resulting from the nature, and in the execution, of the office. Nor is it a thing said or done by him, as a representative, in
the exercise of the functions of that office ... . n427
Just as a bribe is not a legislative act, neither is insider trading. The Court also wisely observed that if the goal of the
Speech or Debate Clause is legislative independence, then allowing bribes would threaten independence far more than
permitting criminal prosecutions. n428
In addition to providing liability immunity for legislative acts, however, the Speech or Debate Clause provides a
testimonial and an evidentiary privilege. n429 So, even if liability immunity is not available to a member, a member could
decline to testify n430 based on the privilege, and evidence regarding legislative acts or their underlying motivation
[*918] could be excluded from grand and petit juries or at trial. n431 This could impede prosecutorial efforts because
proof of a breach of fiduciary duty would ordinarily require some showing that the member somehow obtained the
nonpublic information in question by reason of the member's connection to Congress. That, in turn, could require
tracing the provenance of the information to the member's performance of a legislative act, n432 e.g., the member's
attendance at a subcommittee briefing in which the information in question was conveyed. Thus, a court could exclude
evidence establishing the member's presence at a critical briefing (e.g., a transcript of the briefing) on the grounds that
such evidence refers to a legislative act that is protected by the Speech or Debate Clause. n433 Indeed, in United States v.
Swindall, the Eleventh Circuit Court of Appeals dismissed certain indictments against a congressman where the
evidence solicited by the prosecution attempted to establish the congressman's membership in certain congressional
committees. n434
That said, there will be many occasions in which the relevant information will not have been obtained in the course
of a member's performance of a legislative act. For example, the member may acquire the information while the
member was engaged in so-called political activities, which do not fall within the core conduct protected by the Speech
or Debate Clause. These activities include a "wide range of legitimate 'errands' performed for constituents, the making
of appointments with Government agencies, assistance in securing Government [*919] contracts, preparing
[newsletters] to constituents, news releases, and speeches delivered outside the Congress." n435
To take a concrete example, imagine that a member meets with a Food and Drug Administration (FDA) official on
behalf of a constituent to discuss the agency's dealings with the constituent. During the meeting, the FDA official tells
the member in confidence that the FDA intends to approve a potential blockbuster drug, manufactured by a particular
publicly held pharmaceutical company. If the member trades on such information, the Speech or Debate Clause should
pose no obstacle for the prosecution's case. Of course, the resolution of any particular case will turn on the specific
facts. Suffice it to say that there will be many cases in which the member obtained the information via a sufficiently
close nexus to the member's official position to justify imposing the insider trading prohibition.
Finally, it should be noted that the Speech or Debate Clause does not immunize members of Congress from
ordinary criminal process, including properly issued search warrants, even of congressional offices. n436 In sum, the
Speech or Debate Clause creates no substantive liability immunity because insider trading is not a legitimate legislative
activity. It may, however, create some evidentiary difficulties, depending on the type of evidence sought. n437
Conclusion
Legislators, federal and state, are not statutorily exempted from federal insider trading law. Instead, the reason why
federal insider trading law is thought not to apply to them is because legislators are thought not to be fiduciaries to
anyone. But as I have argued, that majority view is mistaken. Judges could have and still can find legislators to be
fiduciaries to the people, the legislature (and fellow legislators), and the government that they serve. In support, I have
provided relevant cases and also plausible analogies to the private trustee, the director, and the partner. Even more, I
have explained that those analogies are justified because they further an underlying policy of fiduciary law: stopping
corruption. Finally, I have demonstrated that there are no overwhelming objections, although prosecutors may [*920]
face evidentiary obstacles in making their case, as posed by the Speech or Debate Clause.
It is tempting to think that all of this is academic given the passage of the STOCK Act. But that Act addresses the
majority view only for members of Congress. The conventional wisdom that legislators are not fiduciaries remains
Page 119Page 119
intact for the more than seven thousand state legislators in service. Worse, the Act's passage may solidify and canonize
this mistaken understanding of fiduciary law and thereby of federal insider trading law, with unintended consequences.
Thus, it still matters that judges get federal insider trading law right.
Legal Topics:
For related research and practice materials, see the following legal topics:
GovernmentsFiduciary ResponsibilitiesGovernmentsLocal GovernmentsEmployees & OfficialsLabor & Employment
LawEmployment RelationshipsFiduciary Responsibilities
FOOTNOTES:
n1. 60 Minutes: Congress: Trading Stock on Inside Information? (CBS television broadcast Nov. 13, 2011), available at
http://www.cbsnews.com/video/watch/?id=7388130n.
n2. Bachus became Committee Chairman following the Republican congressional victories of 2010. Peter Schweizer, Throw Them All Out
24 (2011).
n3. Henry M. Paulson, Jr., On the Brink 259 (2010) (internal quotation marks omitted).
n4. Id.
n5. Schweizer, supra note 2, at 28.
n6. Id.
n7. Congress: Trading Stock on Inside Information?, supra note 1.
n8. Mary Orndorff, U.S. Rep. Spencer Bachus Cleared in Ethics Investigation, AL.com (Apr. 30, 2012, 6:42 PM),
http://blog.al.com/sweethome/2012/04/us rep spencer bachus cleared.html. Although Bachus defended his trade by noting that information
about the dire state of the economy was generally known to the public, in my view, that is surely not the relevant market-moving information
in question. The relevant market-moving information was the fact that both the Treasury Secretary and Chair of the Federal Reserve Board
convened a secret emergency meeting proposing unprecedented governmental intervention to avert economic disaster.
n9. See Stephen M. Bainbridge, Insider Trading Inside the Beltway, 36 J. Corp. L. 281, 295-96 (2011)[hereinafter Bainbridge, Inside the
Beltway] (describing the "predominant view"); Andrew George, Note, Public (Self)-Service: Illegal Trading on Confidential Congressional
Information, 2 Harv. L. & Pol'y Rev. 161, 163 (2008) (describing the "conventional wisdom"); infra note 10.
n10. For examples of the majority view, see Richard W. Painter, Getting the Government America Deserves: How Ethics Reform Can Make
a Difference 163 (2009) ("Insider trading law ... may not be sufficiently rigorous to prevent abuses by government officials."); Bainbridge,
Inside the Beltway, supra note 9, at 285 ("The quirks of the relevant laws almost certainly would prevent members of Congress from being
successfully prosecuted."); Insider Trading and Congressional Accountability: Hearing Before the S. Comm. on Homeland Sec. & Gov't
Affairs, 112th Cong. 4 (2011) (statement of John C. Coffee, Jr., Professor of Law, Columbia Univ.) [hereinafter Coffee Testimony] (agreeing
with Professor Bainbridge); Matthew Barbabella et al., Insider Trading in Congress: The Need for Regulation, 9 J. Bus. & Sec. L. 199, 200
(2009) (noting that legislator insider trading that looks the same as corporate insider trading is nonetheless legal); Bud W. Jerke, Comment,
Page 120Page 120
Cashing in on Capitol Hill: Insider Trading and the Use of Political Intelligence for Profit, 158 U. Pa. L. Rev. 1451, 1483 (2010) (concluding
that "current law does not support holding government insiders ... liable for insider trading without substantially manipulating current
doctrine"); Alan J. Ziobrowski et al., Abnormal Returns from the Common Stock Investments of the U.S. Senate, 39 J. Fin. & Quantitative
Analysis 661, 676 (2004) ("Current law does not prohibit Senators from trading stock on the basis of information acquired in the course of
performing their normal Senatorial functions.").
For examples of the minority view, see Insider Trading and Congressional Accountability: Hearing Before the S. Comm. on Homeland
Sec. & Gov't Affairs, 112th Cong. 4 (2011) (statement of Donald C. Langevoort, Professor of Law, Georgetown Univ. Law Ctr.) (arguing
that federal insider trading law does not exempt legislators or anyone else); Jonathan R. Macey & Maureen O'Hara, Essay, Regulation and
Scholarship: Constant Companions or Occasional Bedfellows?, 26 Yale J. on Reg. 89, 107 (2009) (arguing that a prohibition on legislator
insider trading is legally plausible and intuitively appealing); Donna M. Nagy, Insider Trading, Congressional Officials, and Duties of
Entrustment, 91 B.U. L. Rev. 1105, 1138 (2011) (arguing that the majority view is rooted in "twin misconceptions") [hereinafter Nagy,
Congressional Officials]; George, supra note 9, at 163 (arguing that congressional insider trading is illegal under misappropriation theory).
To be sure, there is earlier scholarship that concludes that government officials are covered by federal insider trading laws. However,
those articles did not focus on the distinction between elected and appointed officials, which distinction is critical to the majority view. See,
e.g., Herbert T. Krimmel, The Government Insider and Rule 10b-5: A New Application for an Expanding Doctrine, 47 S. Cal. L. Rev. 1491,
1492, 1503-04 (1974); Donald C. Langevoort, Insider Trading and the Fiduciary Principle: A Post-Chiarella Restatement, 70 Calif. L. Rev. 1,
34-35 (1982) [hereinafter Langevoort, A Post-Chiarella Restatement].
n11. Bloomberg Surveillance: Arthur Levitt, Board Member, Bloomberg LP (Bloomberg Radio broadcast Oct. 13, 2010) (transcript
available through Analyst Wire, 2010 WLNR 20471195).
n12. Originally, Title VII exempted Congress from anti-discrimination and other workforce protection laws. See 42 U.S.C. § 2000e(b)
(2006) (excluding the "United States" from the definition of "employer"). Subsequent statutes have closed this loophole. See 42 U.S.C. §
2000e-16 ("Employment by Federal Government").
In addition, Section 3(c) of the Exchange Act, which grants immunity from the federal securities laws to certain government entities,
only applies to an employee or official when such employee or official is "acting in the course of his official duty." See Krimmel, supra note
10, at 1492. As such, legislator insider trading, which is clearly not an exercise of office, is not covered by the immunity. Id.
n13. As explained in Part I.A.2.a. below, the breach of a fiduciary or other duty arising out of a similar relation of trust and confidence, the
latter of which I refer to as a "fiduciary-like duty," will satisfy this element. Throughout this Article, when referring to "fiduciary duty," I also
include analogous duties imposed due to a relation of trust and confidence.
n14. There is almost no disagreement that employees of the three branches of federal government are fiduciaries and thus subject to federal
insider trading laws. See, e.g., Painter, supra note 10, at 166 (discussing the application of insider trading laws to Executive Branch
employees); Bainbridge, Inside the Beltway, supra note 9, at 297 ("Under current law, no serious doctrinal obstacle precludes applying
misappropriation theory to employees of Congress, the Executive Branch, and other governmental agencies.").
n15. See Coffee Testimony, supra note 10, at 4 ("Members of Congress do not clearly owe a fiduciary duty (or any similar duty requiring
them to be loyal and hold information in confidence) either to their trading partners in a securities (or commodities) transaction or to the
source of the material, nonpublic information."); Painter, supra note 10, at 175 ("Today, federal securities law prohibits securities trading on
information misappropriated from most other workplaces, including government workplaces, yet Congress has apparently managed to create
sufficient ambiguity around fiduciary obligations of members and their employees that the rules may not apply to them."); Bainbridge, Inside
the Beltway, supra note 9, at 295 (ultimately rejecting the suggestion that "the electorate" is the beneficiary of a fiduciary obligation by
members of Congress because "what is needed under insider trading law is either a duty to the person with whom one trades or to the source
of the information, not some generalized duty to members of the public in the abstract"); Barbabella et al., supra note 10, at 215, 217 ("In the
case of Congressional insider trading, ... it is not clear that congressmen or their aides owe any party such a duty in more than a vague
sense... . One imagines that this lack of a concrete duty, rather than the vague sense that congressional representatives ought to place public
interests first, might control if a congressional representative were sued for trading on material nonpublic legislative information under the
current legal regime."); Jerke, supra note 10, at 1483-88 (arguing that government insiders lack the requisite fiduciary duty under classical
theory and noting the lack of consensus about whether members of Congress are employees of the federal government for purposes of
misappropriation theory).
The same "non-fiduciary" argument could be made about any elected official - e.g., president, vice president, governors, elected city
officials, elected judges - as well as certain appointed officials - e.g., state and federal judges. This Article, however, focuses on federal and
state legislators, although it cites to precedent establishing the fiduciary status of other elected officials. See infra Part II.D.2. As a general
matter, presidents and vice presidents tend to voluntarily comply with the financial conflicts of interest statutes, which require divestment of
holdings in certain situations. See Painter, supra note 10, at 61-62. For an argument that judges are fiduciaries, see Ethan J. Leib, David L.
Page 121Page 121
Ponet & Michael Serota, A Fiduciary Theory of Judging, 101 Calif. L. Rev. (forthcoming 2013) (manuscript at 15) [hereinafter Leib et. al,
Fiduciary Theory of Judging], available at http://ssrn.com/abstract=2029001.
n16. Coffee Testimony, supra note 10, at 5.
n17. See President Barack Obama's State of the Union Address, N.Y. Times, Jan. 24, 2012, at 9,
http://www.nytimes.com/2012/01/25/us/politics/state-of-the-union-2012-transcript.html ?ref=stateoftheunionmessageus ("Send me a bill that
bans insider trading by members of Congress; I will sign it tomorrow.").
n18. Representatives Brian Baird (Democrat, Washington) and Louise Slaughter (Democrat, New York) previously introduced versions of
the Stop Trading On Congressional Knowledge Act in the 109th, see H.R. 5015, 109th Cong. (2d Sess. 2006); 110th, see H.R. 2341, 110th
Cong. (1st Sess. 2007); and 111th Congresses, see H.R. 682, 111th Cong. (1st Sess. 2009).
n19. STOCK Act, Pub. L. No. 112-105, 126 Stat. 291 (2012) (to be codified in scattered sections of 5 U.S.C. app.). The STOCK Act passed
in the Senate on a 96-to-3 vote on Feb. 2, 2012. Scott Wong, STOCK Act Passes Senate by Vote of 96-3, POLITICO (Feb. 3, 2012, 3:31
PM), http://www.politico.com/news/stories/0212/72391.html. The House passed their version of the STOCK Act by a 417-to-2 vote on Feb.
9, 2012. Seung Min Kim, STOCK Act Passed by House by Vote of 417-2, POLITICO (Feb. 9, 2012, 3:39 PM),
http://www.politico.com/news/stories/0212/72670.html. On April 4, 2012, President Obama signed the STOCK Act into law. Matt Compton,
President Obama Signs the STOCK Act, The White House Blog (Apr. 4, 2012, 5:16 PM),
http://www.whitehouse.gov/blog/2012/04/04/president-obama-signs-stock-act.
n20. STOCK Act § 4(a).
n21. See id. § 4(g)(1); see also id. § 4(b)(1) (stating the purpose of the amendment); id. § 4(b)(2) (codifying a duty of "trust and
confidence" for members and employees of Congress by amending 15 U.S.C. § 78u-1). Corresponding provisions cover executive and
judicial branch officers and employees. For simplicity, I use the term "fiduciary duty" to include similar duties arising out of a relationship of
trust and confidence.
n22. See Number of State Legislators and Length of Terms (in Years), National Conference of State Legislatures,
http://www.ncsl.org/legislatures-elections/legislators-legislative-staff-data/number-of-legislators-and-length-of-terms.aspx (last visited Mar.
16, 2013).
n23. Not only did the STOCK Act fail to address state legislators, but the Act itself makes clear that it shall not "impair or limit the
construction of" the existing securities antifraud provisions. STOCK Act§§4(g)(3), 10.
n24. Joe Atkins, Insider Trading: It's Time to Close a Surprising Loophole, InverGroveHeightsPatch (Dec. 16, 2011, 12:30 PM),
http://invergroveheights.patch.com/blog posts/insider-trading-its-time-to-close-a-surprising-loophole.
n25. Cf. Marc Lifsher, Internet Sales Tax Bill Advances in California Legislature, Los Angeles Times (May 31, 2011, 4:41 PM),
http://latimesblogs.latimes.com/money co/2011/05/internet-sales-tax-bill-advances-in-california-legislature.html (reporting the advancement
of just such a bill).
n26. Cf. Atkins, supra note 24 (noting that Canterbury Park Holding Company "has seen its stock suddenly soar and swoon based on action
at the State Capitol").
Page 122Page 122
n27. See Samantha Hunter, Honest Services Fraud and the Fiduciary Relationship Requirement: How the Ninth Circuit Got It Wrong in
United States v. Milovanovic, 2012 BYU L. Rev. 509, 514-15 (2012) ("The Third, Fourth, Fifth, Sixth, and Eleventh Circuits have all held
that honest services fraud requires the defendant to have breached a fiduciary duty to the victim, while the Second and Eighth Circuits have
rejected such a requirement. The Ninth Circuit [also rejects the requirement] ... ." (citations omitted)).
n28. Honest services fraud refers to "any scheme or artifice to defraud" by "depriving another of the intangible right of honest services"
through the use of the mails. 18 U.S.C. §§1341, 1346 (2006).
n29. For examples of these precedents, see United States v. Weyhrauch, 548 F.3d 1237, 1248 (9th Cir. 2008) (reversing the district court's
exclusion of evidence against a member of the Alaska House of Representatives and holding that the honest services mail fraud statute
"establishes a uniform standard for 'honest services' that governs every public official"), vacated 130 S. Ct. 2971 (2010); United States v.
Lopez-Lukis, 102 F.3d 1164, 1169 (11th Cir. 1997) (reversing the district court's exclusion of evidence against an elected member of the
Board of County Commissioners and noting that "elected officials generally owe a fiduciary duty to the electorate"); United States v. Isaacs,
493 F.2d 1124 (7th Cir. 1974) (per curiam) (upholding conviction of former Governor of Illinois); Shushan v. United States, 117 F.2d 110,
115 (5th Cir. 1941) (upholding mail fraud prosecution of a member of a Louisiana parish levee board for receiving kickbacks and noting that
"no trustee has more sacred duties than a public official").
n30. When I refer to the "majority view," I am referring to the opinion or implication that judges must take extraordinary measures (e.g.,
ignore or overrule existing judicial precedent, or use novel or unusual judicial methods) in order to find legislators actionable under pre-
STOCK Act federal insider trading law. Stated another way, the majority view that I am challenging is one that suggests that there are greater
obstacles to holding legislators liable under federal insider trading law than the mere lack of direct "on point" precedent - the fact that no
other court has yet found a legislator to be a fiduciary in an insider trading case. At the same time, I acknowledge that any attempt to ascribe
a "majority view" label to any cluster of commentators whose characterizations and conclusions are diverse will be vulnerable to a "straw-
man" criticism. No doubt some commentators, which I have categorized as falling under the "majority view," did not address the precise
issue as I have framed it and were instead asking and answering a slightly different question (e.g., whether members of Congress were
"clear" or "established" fiduciaries). Regardless of the how the issue has been framed by various commentators, my Article emphasizes two
important points that can't be ignored in the debate. First, the fiduciary category has never been a fixed one with precise boundaries. Second,
the Supreme Court has long referred to analogous duties imposed due to a relation of trust and confidence. This recognition of fiduciary-like
relationships signals flexibility in defining the reach of the insider trading prohibition.
n31. Also, I perform an analysis of SEC Rule 10b5-2(b). See infra Part II.C.1.
n32. See Gregory L. Murphy & Douglas L. Medin, The Role of Theories in Conceptual Coherence, 92 Psychol. Rev. 289, 292 (1985) ("The
point is that any two entities can be arbitrarily similar or dissimilar by changing the criterion of what counts as a relevant attribute. Unless
one can specify such criteria, then the claim that categorization is based on attribute matching is almost entirely vacuous ... .").
n33. Id.
n34. Part III.B duplicates Part II of Sung Hui Kim, What Governmental Insider Trading Teaches Us About Corporate Insider Trading, in
Research Handbook on Insider Trading (Stephen M. Bainbridge ed., forthcoming 2013) (manuscript at 1, 14-27) [hereinafter Kim,
Governmental Insider Trading] (on file with author).
n35. Due to the space constraints of this Article, the objections sounding in separation of powers or the First Amendment are explored in a
separate appendix, which is available online at the Social Science Research Network. See Sung Hui Kim, Appendix to The Last Temptation
of Congress: Legislator Insider Trading and the Fiduciary Norm Against Corruption (Nov. 5, 2012), available at
http://ssrn.com/abstract=2171336.
Page 123Page 123
n36. See generally Kim, Governmental Insider Trading, supra note 34, at 61 (arguing that governmental insider trading - including such
trading by legislators - inflicts temptation, distraction, and legitimacy costs, thereby militating in favor of its banning).
n37. To clarify this point with an analogy, suppose that I am a chef who wants to publish a recipe to show how home cooks can make a
decadent Southern Chicken Fried Steak. It is entirely possible for me to write a clear, concise, and delicious recipe, regardless of my
personal views about whether or not people should eat steak prepared in this manner. Indeed, I can be perfectly agnostic about whether any
individual - for health or other reasons - should cook or eat steak without necessarily undermining the quality of the recipe. In fact, I can rule
out steak in my own diet and still write a useful recipe. In short, my personal normative views about whether anyone should consume steak
are not logically germane to the usefulness of my recipe. Further, I can answer objections to the recipe (e.g., Why did you include safflower
oil in the recipe when coconut oil has a better smoking point?) with reasons based on policies widely accepted by most chefs, regardless of
my own normative views. For readers curious about my normative views on steak, I can share that I am a "pescetarian," which is neither
here nor there.
n38. 15 U.S.C. § 78j(b) (2006).
n39. 17 C.F.R. § 240.10b-5 (2012).
n40. Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) makes it unlawful for any person purchasing or selling securities
"to use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance." 15 U.S.C.
§ 78j(b). Similarly, Rule 10b-5, which was promulgated by the SEC under its regulatory authority granted by Congress under the Exchange
Act, provides, inter alia, that no person may "employ any device, scheme, or artifice to defraud...or...engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." 17
C.F.R. § 240.10b-5.
n41. See, e.g., United States v. O'Hagan, 521 U.S. 642, 651-56 (1997) (discussing theories of insider trading liability under Section 10(b)
and the case law surrounding them).
n42. There are, of course, exceptions. The Supreme Court has not strictly adhered to the idea that the defendant must already be in a
fiduciary or fiduciary-like relationship in order to state a violation. See Langevoort, A Post-Chiarella Restatement, supra note 10, at 28
("Unlike the trading or tipping insider, the tippee bears no pre-existing fiduciary relationship to the person with whom he trades. The
Supreme Court's apparent endorsement of some tippee liability is an indication that it will not adhere strictly to the idea that only fiduciaries
are obligated to make disclosures when trading."); see also infra text accompanying notes 383-85 (describing corporate insiders' duty to
purchasers of the corporation's stock). Also, although the Supreme Court has yet to signify its agreement, recent case law has created a small
number of exceptions to the fiduciary duty requirement where the deception element of Rule 10b-5 is otherwise satisfied. See, e.g., SEC v.
Dorozhko, 574 F.3d 42, 43 (2d Cir. 2009) (holding that breach of fiduciary duty is not necessary in a Section 10(b) enforcement action for
computer hacking); Thomas Lee Hazen, Identifying the Duty Prohibiting Outsider Trading on Material Nonpublic Information, 61 Hastings
L.J. 881, 885-87 (2010) (discussing "outsider trading" cases where the fiduciary duty requirement has been relaxed); Donna M. Nagy,
Insider Trading and the Gradual Demise of Fiduciary Principles, 94 Iowa L. Rev. 1315, 1336-52 (2009) [hereinafter Nagy, Gradual Demise]
(discussing the "casting aside" of fiduciary duty principles); see also Donald C. Langevoort, Insider Trading: Regulation, Enforcement &
Prevention § 6:14, at 6-50 to -52 (2012) (summarizing exceptions in the case law).
n43. Under misappropriation theory, there is an additional element for establishing a violation - that the defendant failed to disclose to the
source the defendant's intention to trade on the nonpublic information. See O'Hagan, 521 U.S. at 655. To be sure, pretrading disclosure also
precludes liability under the classical theory, but the fact of nondisclosure under classical theory is redundant to the other elements. Under
classical theory, pretrading disclosure to counterparties automatically negates the "breach of fiduciary duty" and "nonpublic" elements of the
cause of action. Under misappropriation theory, pretrading disclosure to the source does not negate those other elements. Compare Richard
W. Painter, Kimberly D. Krawiec & Cynthia A. Williams, Don't Ask, Just Tell: Insider Trading After United States v. O'Hagan, 84 Va. L.
Rev. 153, 180 (1998) (arguing that disclosure of one's plan to trade on material, nonpublic information might be enough to negate liability
under classical theory but suggesting that disclosure must include the content of nonpublic information in order to do so), with Saikrishna
Prakash, Our Dysfunctional Insider Trading Regime, 99 Colum. L. Rev. 1491, 1491 (1999) (arguing that mere disclosure of one's plan to
trade on material, nonpublic information negates liability under the classical theory by negating the deception element).
Page 124Page 124
n44. Legislative histories of the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of
1988 suggest that Congress had endorsed (if not ratified) the multiple bases of liability pursued by the SEC and approved by the courts. See
Donald C. Langevoort, Commentary, The Insider Trading Sanctions Act of 1984 and Its Effect on Existing Law, 37 Vand. L. Rev. 1273, 1274
(1984); Steve Thel, Statutory Findings and Insider Trading Regulation, 50 Vand. L. Rev. 1091, 1118-21 (1997).
n45. This Article does not cover two areas of regulation commonly associated with the goal of deterring insider trading: section 16(b) (the
"short swing" profits rule) and SEC Rule 14e-3 of the Exchange Act (relating to tender offers).
n46. See, e.g., SEC v. Adler, 137 F.3d 1325, 1340 (11th Cir. 1998) ("Scienter necessarily requires that the insider have possession of
material nonpublic information at the time the insider trades.").
n47. Langevoort, supra note 42, § 3:13, at 3-32.
n48. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976) (defining "scienter" as "a mental state embracing intent to deceive,
manipulate, or defraud").
n49. Langevoort, supra note 42, § 3:13, at 3-32. In 2000, in order to resolve confusion in the case law about motivation and state of mind,
the SEC adopted Rule 10b5-1, which clarified that trading on material, nonpublic information was unlawful where the defendant trades "on
the basis of" material, nonpublic information, defined as trading "when the person in question was aware of the material nonpublic
information when the person made the purchase or sale." Id. § 3:14, at 3-38 (quotations omitted). That said, some courts have not deferred
much to the Rule. Id. § 3:14, at 3-39.
n50. Id. § 5:5, at 5-25.
n51. Id. § 8:13, at 8-42 to -43.
n52. Id. § 8:13, at 8-43.
n53. See id. § 3:13, at 3-34 to -35, for a discussion of those jurisdictions which adhere to the "use" and not the "possession" standard.
n54. That said, there may be some evidentiary difficulties that arise from the Speech or Debate Clause. See infra Part IV.C.
n55. See TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976).
n56. Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988) (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc)).
n57. See Langevoort, supra note 42, at § 5:2, 5-3 to -4.

Page 125Page 125
n58. Naturally, judges and juries will have a tough time concluding that an event was improbable at the time of trading if they know that the
event has in fact occurred. See Mitu Gulati, Jeffrey J. Rachlinski & Donald C. Langevoort, Fraud by Hindsight, 98 Nw. U. L. Rev. 773, 774
(2004) ("Even in the absence of any misconduct, a bad outcome alone might lead people to believe that corporate managers committed
securities fraud.").
n59. Cf. Langevoort, supra note 42, § 5:2, at 511 to -12 ("If a major market movement promptly follows the formal release to the public of
the information in question, the materiality test is presumptively satisfied.").
n60. Id. at § 5:4, at 5-19.
n61. Id.
n62. See Victor Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 Harv. L. Rev. 322, 329
(1979) (discussing how "corporate" and "market" information both fall under the insider trading laws).
n63. Id. (defining "market information" as concerning outside "transactions in a corporation's securities that will have an impact on their
future price quite apart from expected changes in the corporation's earnings or assets"). See Roberta S. Karmel, Book Review, The
Relationship Between Mandatory Disclosure and Prohibitions Against Insider Trading: Why a Property Rights Theory of Inside Information
Is Untenable, 59 Brook. L. Rev. 149, 154 (1993), for the distinction between "inside" and "market" information.
n64. United States v. Chiarella, 588 F.2d 1358, 1365 n.8 (2d Cir. 1978), rev'd on other grounds, 445 U.S. 222 (1980); see SEC v. Seibald,
No. 95 Civ. 2081(LLS), 1997 WL 605114, at 4-6 (S.D.N.Y. Sept. 30, 1997) (denying defendants' motion for summary judgment in an insider
trading enforcement action concerning trades made based on an analyst's report).
n65. See Chiarella v. United States, 445 U.S. 222, 232 (1980) (reversing defendant's Section 10(b) conviction because no duty to disclose
existed and noting that defendant was not an "agent [of the target company in a proposed transaction], he was not a fiduciary, he was not a
person in whom the sellers had placed their trust and confidence").
n66. If, however, the tip relates to an anticipated tender offer and I purchase shares in the target company, there is potential liability under
Rule 14e-3.
n67. 445 U.S. at 235.
n68. By passing section 20A of the Exchange Act, Congress granted an express private right of action to those investors trading
contemporaneously with the insider trader. As a result, contemporaneous traders who bought or sold stock in the opposite position of the
defendant trader may sue the insider trader for damages. Insider Trading and Securities Fraud Enforcement Act of 1988, 15 U.S.C. § 78t-1
(2006). On Section 20A, see Langevoort, supra note 42, § 9.3, at 9-9.
n69. The fiduciary duty of disclosure under classical theory has long been articulated as a duty to "disclose or abstain" - either to disclose
the material nonpublic information to the investing public before trading or to abstain from trading while such nonpublic information
remains undisclosed. See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968). But because most defendants do not have a right
to disclose confidential information, it is most often "the failure to abstain from trading, rather than the nondisclosure, which is the basis for
imposing liability." Stephen M. Bainbridge, Insider Trading Regulation: The Path Dependent Choice Between Property Rights and Securities
Fraud, 52 SMU L. Rev. 1589, 1616 (1999) [hereinafter Bainbridge, Path Dependent Choice].
Page 126Page 126
n70. Chiarella, 445 U.S. at 234-35.
n71. Id. at 228 (emphasis added); see id. at 230 (noting that silence in connection with the sale of securities is only actionable as fraud if
there is already a duty to disclose).
n72. See, e.g., Vai v. Bank of Am. Nat'l Trust & Sav. Ass'n, 364 P.2d 247, 252 (Cal. 1961) ("The prerequisite of a confidential relationship is
the reposing of trust and confidence by one person in another who is cognizant of this fact.").
n73. See Eileen A. Scallen, Promises Broken vs. Promises Betrayed: Metaphor, Analogy, and the New Fiduciary Principle, 1993 U. Ill. L.
Rev. 897, 906-07 (1993) (discussing the distinction between "fiduciary" relationships and nonfiduciary but confidential ones).
n74. 947 F.2d 551 (2d Cir. 1991).
n75. Id. at 568.
n76. See Scallen, supra note 73, at 907 ("[A] key distinction between confidential and fiduciary relationships appears to center on whether a
party seeking redress must prove reliance on the other party.").
n77. See Chiarella v. United States, 445 U.S. 222, 230 (1980) ("Application of a duty to disclose prior to trading guarantees that corporate
insiders, who have an obligation to place the shareholder's welfare before their own, will not benefit personally through fraudulent use of
material, nonpublic information.").
n78. Id. at 227 (noting that the duty "has been traditionally imposed on corporate 'insiders,' particularly officers, directors, or controlling
stockholders" (quoting In re Cady, Roberts & Co., 40 S.E.C. 907, 911 (1961))).
n79. Therefore, if a legislator happens to be moonlighting as a corporate insider, then the duty would uncontroversially apply to him in his
capacity as a corporate insider. Because many state legislative positions are part time, one would expect to find at least a few such cases.
With respect to members of Congress, however, such situations would be rare because members of Congress are statutorily prohibited from
"serving for compensation as an officer or member of the board of any association, corporation, or other entity." 5 U.S.C. § 502 (2006);
Bainbridge, Inside the Beltway, supra note 9, at 290.
n80. See Chiarella, 445 U.S. at 228 (stating only that there is "a relationship of trust and confidence between the shareholders of a
corporation and those insiders who have obtained confidential information by reason of their position with that corporation").
n81. 406 U.S. 128 (1972) (holding that two bank managers violated Rule 10b-5 for buying and re-selling stock in their individual capacities
and based on the implicit undertaking to act in the best interest of the selling shareholders). Affiliated Ute Citizens is cited in Chiarella. See
Chiarella, 445 U.S. at 229-30.
n82. Chiarella, 445 U.S. at 240.

Page 127Page 127
n83. See Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983).
n84. Id.
n85. Id.
n86. Id. at 659.
n87. Id. at 659-60.
n88. The type of personal benefit that may satisfy the Dirks test includes pecuniary benefit, reputational benefit, and the benefit that accrues
to oneself when making a gift. See Langevoort, supra note 42, § 4:3, at 4-5 to -6.
n89. Dirks, 463 U.S. at 659-61.
n90. Id. at 659 (quoting Chiarella v. United States, 445 U.S. 222, 230 n.12 (1980)).
n91. Dirks, 463 U.S. at 654 (alterations in original) (quoting Chiarella, 445 U.S. at 222).
n92. 521 U.S. 642, 665 (1997).
n93. Id. at 652.
n94. See id. at 654-55 (referring to the Restatement (Second) of Agency§§390, 395 (1958), on an "agent's disclosure obligation regarding
use of confidential information").
n95. Id. at 652.
n96. Id. For the source to "entrust" a person with access to confidential information does not strictly require that the source place the
information in the fiduciary's hands or even authorize access to the confidential information. Langevoort, supra note 42, § 6:4, at 6-13 n.1.
n97. Courts have differed on whether all of the Dirks elements (relating to tipping and trading on the tip) apply in the misappropriation
context. Compare SEC v. Yun, 327 F.3d 1263, 1276 (11th Cir. 2003) (insisting that standards for tipper-tippee liability are the same under
misappropriation theory as under classical theory), with SEC v. Musella, 748 F. Supp. 1028, 1038 n.4 (1989) ("The misappropriation theory
of liability does not require a showing of a benefit to the tipper ... .").
Page 128Page 128
n98. To be sure, the legislator is also proscribed from trading in the law firm's client's securities, but that issue is easily handled by the
classical theory (as extended by Dirks).
n99. See supra text accompanying notes 67-71.
n100. Bainbridge, Path Dependent Choice, supra note 69, at 1615 ("The duty at issue in tipping cases is not a duty to disclose, but rather a
duty to refrain from self-dealing in confidential information owed by the tipper to the source of the information.").
n101. See Nagy, Gradual Demise, supra note 42, at 1360-61 ("O'Hagan, however, made clear that it is the insider trader's undisclosed breach
of trust and loyalty - and not merely his breach of confidentiality - that constitutes the fraud under Rule 10b-5.").
n102. This duty has different articulations and can be found in the penumbrae of other explicit duties. See Restatement (Third) of
Agency§§8.01, 8.02 & cmts. c, d, 8.04, 8.05 (2006); Restatement (Third) of Trusts § 5 cmt. a, illus. g (2003); Restatement (Third) of the
Law Governing Lawyers § 60(2) & cmt. j (1998); Am. Law Institute, Principles of Corporate Governance: Analysis and Recommendations §
5.04 (1992); Restatement (Second) of Agency§§387, 388 & cmt. c, 393, 395 (1958); 1 Floyd R. Mechem, Law of Agency§§1189, 1191,
1209, 1224 (2d ed. 1914).
n103. See, e.g., Freeman v. Decio, 584 F.2d 186, 188-96 (7th Cir. 1978) (discussing the jurisdictions' differing holdings before ultimately
holding that there is no recovery unless the corporation can show injury from insider trading); Schein v. Chasen, 313 So. 2d 739, 741-46
(Fla. 1975) (same); Diamond v. Oreamuno, 248 N.E.2d 910, 912 (N.Y. 1969) (stating that a corporate fiduciary entrusted with valuable
information may not appropriate that information for the fiduciary's own use even when doing so causes no injury to the corporation);
Brophy v. Cities Serv. Co., 70 A.2d 5, 7-8 (Del. Ch. 1948) (noting that loss to the employer need not be alleged where the employee
breached fiduciary duty for trading on confidential information about employer corporation).
n104. See generally Stephen M. Bainbridge, Incorporating State Law Fiduciary Duties into the Federal Insider Trading Prohibition, 52
Wash. & Lee L. Rev. 1189, 1192 (1995); Theresa A. Gabaldon, State Answers to Federal Questions: The Common Law of Federal Securities
Regulation, 20 J. Corp. L. 155, 212-13 (1994).
n105. Stephen M. Bainbridge, Corporation Law and Economics 556 (2002).
n106. Cf. Iman Anabtawi, Secret Compensation, 82 N.C. L. Rev. 835, 863-64 (2004) (observing that the Supreme Court suggested a federal
fiduciary law source underlying the federal insider trading prohibition).
n107. See Bainbridge, supra note 105, at 556 (reviewing cases in which courts relied upon state law to resolve questions arising under
federal securities laws and concluding that "the question is not whether state law is relevant to the task of defining insider trading, but rather
the extent to which it should be incorporated into the federal prohibition").
For insider trading cases where federal courts expressly consulted state law on the fiduciary issue, see, for example, SEC v. Talbot, 530
F.3d 1085, 1095 (9th Cir. 2008) (looking to Delaware state law to support the proposition that a director owes a fiduciary duty to the
director's corporation); SEC v. Sargent, 229 F.3d 68, 76 (1st Cir. 2000) (looking to Massachusetts state law to support the proposition that
sole shareholders of a closely held corporation owe fiduciary duties to each other); United States v. Chestman, 947 F.2d 551, 571 (2d Cir.
1991) (holding that marriage does not create a per se fiduciary relationship in New York).
n108. See Scallen, supra note 73, at 902.
n109. Langevoort, A Post-Chiarella Restatement, supra note 10, at 53.

Page 129Page 129
n110. See, e.g., Chiarella v. United States, 445 U.S. 222, 227-30 (1980) (summarizing precedents).
n111. Chestman, 947 F.2d at 568.
n112. Chiarella, 445 U.S. at 228.
n113. See supra text accompanying notes 84-85. Subsequent lower courts interpreting Dirks have clarified that the recipient must have
expressly or impliedly assented to such duties. See, e.g., SEC v. Talbot, 430 F. Supp. 2d 1029, 1050-51 (C.D. Cal. 2006) (noting that mere
receipt of nonpublic information is not enough to establish insider trading liability if the recipient is not in a fiduciary relationship), rev'd and
remanded, 530 F.3d 1085 (9th Cir. 2008); SEC v. Ingram, 694 F. Supp. 1437, 1440 n.3 (C.D. Cal. 1988) (interpreting Dirks as requiring that
the recipient "must have expressly or impliedly entered into a fiduciary relationship with the issuer"). But see SEC v. Lund, 570 F. Supp.
1397, 1403 (C.D. Cal. 1983) (suggesting - more liberally - that a fiduciary relationship vis-a-vis the issuer's shareholders is created when the
recipient of confidential information "knew or should have known that the information he received was confidential and that it had been
disclosed to him solely for legitimate corporate purposes").
n114. See United States v. O'Hagan, 521 U.S. 642, 650, 652 (1997).
n115. Nagy, Gradual Demise, supra note 42, at 1332.
n116. O'Hagan, 521 U.S. at 666.
n117. SEC. v. Yun, 327 F.3d 1263, 1272-73 (11th Cir. 2003).
n118. See, e.g., SEC v. Nothern, 598 F. Supp. 2d 167, 175 (D. Mass. 2009); SEC v. Lyon, 529 F. Supp. 2d, 444, 452 (S.D.N.Y. 2008); SEC
v. Kirch, 263 F. Supp. 2d 1144, 1147 (N.D. Ill. 2003).
n119. See, e.g., SEC v. Cuban, 634 F. Supp. 2d 713, 725 (N.D. Tex. 2009) (stating that "an express or implied promise merely to keep
information confidential" is not enough to create a relationship of trust and confidence; rather, the agreement should also "impose on the
party who receives the information the legal duty to refrain from trading on or otherwise using the information for personal gain"), vacated
and remanded, 620 F.3d 551 (5th Cir. 2010); United States v. Kim, 184 F. Supp. 2d 1006, 1013 (N.D. Cal. 2002).
n120. Kim, 184 F. Supp. 2d at 1011 (citing United States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991)) (rejecting the finding of a
fiduciary-like relationship for relationships among equals); see United States v. Cassese, 273 F. Supp. 2d 481, 486 (S.D.N.Y. 2003).
n121. Chestman, 947 F.2d at 568 (quoting United States v. Margiotta, 688 F.2d 108, 125 (2d Cir. 1982)).
n122. See, e.g., SEC v. Falbo, 14 F. Supp. 2d 508, 523 (S.D.N.Y. 1998) (citing Chestman, 947 F. 2d at 569); United States v. Victor Teicher
& Co., L.P., 785 F. Supp. 1137, 1148 (S.D.N.Y. 1992) (citing Chestman, 947 F. 2d at 567).
Page 130Page 130
n123. Falbo, 14 F. Supp. 2d at 513.
n124. SEC v. Kirch, 263 F. Supp. 2d 1144, 1147 (N.D. Ill. 2003).
n125. SEC v. Nothern, 598 F. Supp. 2d 167, 170 (D. Mass. 2009).
n126. Fox v. Encounters Int'l, No. 05-1139, No. 05-1404, 2006 WL 952317, at 5-6 (4th Cir. Apr. 13, 2006) (upholding a jury finding that a
marriage brokerage agency who recommended a physically abusive husband was a fiduciary of the woman).
n127. Roberts v. Sears, Roebuck & Co., 573 F.3d 976, 983-84 (7th Cir. 1978) (recognizing sufficient evidence of a confidential relationship
between the commercial developer/employer and the inventor/employee); Stevens v. Marco, 305 P.2d 669, 678-79 (Cal Dist. Ct. App. 1956)
(recognizing a fiduciary relationship between the inventor and commercial developer of the invention). But see City of Hope Nat. Med. Ctr.
v. Genentech, Inc., 181 P.3d 142, 150 (Cal. 2008) (finding no fiduciary relationship between a medical research center and a biotechnology
company despite the parties having entered a contract); Wolf v. Superior Court, 130 Cal. Rptr. 2d 860, 865 (Cal. Ct. App. 2003) (finding no
fiduciary relationship between a movie studio and a novelist despite the parties having entered a contract).
n128. MacDonald v. Clinger, 84 A.D. 2d 482, 482 (N.Y. App. Div. 1982) (holding psychiatrists to be fiduciaries in regards to confidential
information).
n129. Leonard S. Sealy, Fiduciary Relationships, 1962 Cambridge L.J. 69, 77-78 (1962).
n130. Greisman v. Newcomb Hosp., 192 A.2d 817, 823 (N.J. 1963) (holding that a hospital's power to exclude a physician from user-
privileges was to "be viewed judicially as a fiduciary power to be exercised in reasonable and lawful manner for the advancement of the
interests of the medical profession and the public generally" (quoting Falcone v. Middlesex Cnty. Med. Serv., 170 A.2d 791, 799 (N.J.
1961))).
n131. Scallen, supra note 73, at 902.
n132. J. C. Shepherd, The Law of Fiduciaries 3 (1981)
n133. P. D. Finn, Fiduciary Obligations 1 (1977).
n134. D. Gordon Smith, The Critical Resource Theory of Fiduciary Duty, 55 Vand. L. Rev. 1399, 1400 (2002).
n135. Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary Obligation, 1988 Duke L.J. 879, 915 [hereinafter DeMott, Beyond
Metaphor].
n136. Peter J. Hammer, Pegram v. Herdrich: On Peritonitis, Preemption, and the Elusive Goal of Managed Care Accountability, 26 J. Health
Pol. Pol'y & L. 767, 771 n.6 (2001).
Page 131Page 131
n137. Leonard I. Rotman, Fiduciary Law 2 (2005).
n138. Leonard I. Rotman, Fiduciary Law's "Holy Grail": Reconciling Theory and Practice in Fiduciary Jurisprudence, 91 B.U. L. Rev. 921,
922 (2011).
n139. Id.
n140. Id. at 924.
n141. DeMott, Beyond Metaphor, supra note 135, at 879.
n142. Courts implicitly invoke analogies when referring to an ad hoc list of factors or attributes deemed to be relevant for determining
whether the defendant is a fiduciary.
n143. See, e.g., Jill E. Fisch, Start Making Sense: An Analysis and Proposal for Insider Trading Regulation, 26 Ga. L. Rev. 179, 193 (1991)
(noting that "in older cases, the position of a corporate insider has been analogized to that of a trustee" and citing cases); see also Farwell v.
Pyle-Nat'l Electric Headlight Co., 124 N.E. 449, 452 (Ill. 1919) (holding that the director was not entitled to retain profits from a self-dealing
transaction because directors "occupy the position of trustees for the collective body of stockholders"); People ex rel. Manice v. Powell, 94
N.E. 634, 637 (N.Y. 1911) ("The relation of the directors to the stockholders is essentially that of trustee and cestui que trust.").
n144. See Automatic Self-Cleansing Filter Syndicate Co. v. Cuninghame, [1906] 2 A. 34 (Ch.) at 42-43 (discussing how directors are agents
for certain purposes).
n145. See Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928) (noting that stockholders and directors in a close corporation owe each other
a duty of loyalty as rigorous as that of partners).
n146. See, e.g., Boyer v. Wilmington Materials, Inc., 754 A.2d 881, 907 (Del. Ch. 1999) ("Directors of corporations organized under
Delaware law owe a fiduciary duty to the corporations upon whose boards they serve and to the stockholders of those corporations."
(quoting 1 David A. Drexler et al., Delaware Corporation Law and Practice § 15.02 (1997) (alteration in original))); Guth v. Loft, Inc., 5
A.2d 503, 510 (Del. 1939) ("Corporate officers and directors ... stand in a fiduciary relation to the corporation and its stockholders.");
Schaffhauser v. Arnholt & Schaefer Brewing Co., 67 A. 417, 417 (Pa. 1907) ("There can be no doubt [that the director] does occupy such a
fiduciary relation...that he shall manage the business of the company in such a manner as to promote...the common interests of all the
shareholders.").
n147. See Evan J. Criddle, Fiduciary Foundations of Administrative Law, 54 UCLA L. Rev. 117, 125 (2006) ("Courts have eschewed
formalistic criteria for identifying fiduciary relations and instead reason by analogy to paradigmatic relations ... ."); DeMott, Beyond
Metaphor, supra note 135, at 879, 891 ("The evolution of the law of fiduciary obligation illustrates, perhaps more powerfully than most
bodies of law, the power of analogy in legal argumentation."); Tamar Frankel, Fiduciary Law, 71 Calif. L. Rev. 795, 804 (1983) (discussing
courts' practice of analogizing new fiduciary relations to existing prototypes); Scallen, supra note 73, at 905 ("The use of analogy is the
means by which most innovations in fiduciary law 'traditionally' have been created.").
n148. Meinhard, 164 N.E. at 546 ("Joint adventurers, like copartners, owe to one another...the duty of the finest loyalty.").
Page 132Page 132
n149. DeMott, Beyond Metaphor, supra note 135, at 891.
n150. Notice that the STOCK Act explicitly states that members of Congress owe a fiduciary duty "to the Congress, the United States
Government, and the citizens of the United States." 15 U.S.C. § 78u-1(g)(1) (2011).
n151. Some counterparties will be citizens of the nation (for members of Congress) or domiciled in a particular state (for that state's
legislators). Of course, not every counterparty will have a special relationship to the legislator. For example, the counterparties of federal
legislators could be foreign investors to whom no fiduciary duty is owed or the counterparties of state legislators could be investors
domiciled in other states. However, at least some counterparties will be fellow citizens of the legislator. The notion that government officials
are fiduciaries to citizens in the context of insider trading has been suggested by other scholars. See Langevoort, supra note 42, § 3:9, 3-20 to
-22; Krimmel, supra note 10, at 1503-04; Nagy, Congressional Officials, supra note 10, at 1140-47.
Nagy proposes two theories by which members of Congress could be deemed fiduciaries under classical theory: constructive insiders
and public fiduciaries to "citizen-investors." In my view, the first theory is limited and unpersuasive, which Nagy partially concedes. Recall
that in Dirks, the Supreme Court extended who counts as a fiduciary beyond traditional insiders to "constructive insiders," such as lawyers,
accountants, or underwriters. Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983). Pointing to legislative history of the Insider Trading Sanctions
Act of 1984, Nagy suggests that Congress happily acknowledged the Dirks extension and listed "government officials" as a potential
category that could be pursued, in addition to the "underwriter, accountant, lawyer or consultant." Nagy, Congressional Officials, supra note
10, at 1140. Nagy concludes that adding members of Congress to this list "fits well within the classical framework" and that it would "be
quite reasonable to impute a disclosure obligation" to members of Congress. Id.
This "constructive insider" theory suffers from two weaknesses. First, as Nagy acknowledges, id. at 1142, this theory cannot apply to
various instances of legislator insider trading. For example, if a member of Congress trades based on his nonpublic knowledge of imminent
tax code changes, it would be folly to suggest that somehow that member has become a constructive insider of all those firms whose stock
price is thereby affected. Second - and this is a point not made by Nagy - all the temporary or constructive insiders identified in Dirks were
in clear principal-agent relationships, often of a textbook nature: hired lawyers, investment bankers, and accountants. Put another way, these
constructive insiders were paid to give advice to the issuer. One cannot suggest that legislators are literally hired in this manner or
figuratively stand in some similar consulting relationship. Regardless of how generously one weights verbiage in Committee Reports, a
casual insertion of the term "government officials" cannot counter this fundamental difference. For these reasons, legislators cannot be
considered to be constructive insiders on the authority of Dirks.
By contrast, Nagy's second theory regarding "citizen-investors" holds promise, although my defense is based on different grounds.
n152. Nagy, Congressional Officials, supra note 10, at 1147.
n153. Cf. Deborah A. DeMott, Agency by Analogy: A Comment on Odious Debt, 70 L. & Contemp. Probs. 157, 166-67 (2007) (comparing
government officers to private trustees in the odious debt context).
n154. See Restatement (Third) of Trusts § 2 (2003); Robert H. Sitkoff, An Agency Costs Theory of Trust Law, 89 Cornell L. Rev. 621, 624
(2004); Henry Hansmann & Ugo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis, 73 N.Y.U. L. Rev. 434,
438 (1998).
n155. Restatement (Third) of Trusts § 13 (2003) ("A trust is created only if the settlor properly manifests an intention to create a trust
relationship.").
n156. Id. § 2.
n157. Cf. id. (defining a trust as arising from the parties' intentions with respect to certain property).
n158. See Leib et al., Fiduciary Theory of Judging, supra note 15, at 14.
Page 133Page 133
n159. Id.
n160. In the alternative, one could refer to the theory of popular sovereignty to argue that the consent of "the people" of the thirteen
revolutionary states, as expressed through popular ratification in accordance with Article VII of the Constitution, constitutes the relevant
consent on which the federal legislator-citizen relationship rests. For discussions of the relationship between popular sovereignty and the
legitimacy of our republic, see, for example, Larry D. Kramer, The People Themselves: Popular Constitutionalism and Judicial Review 5
(2004); Christian G. Fritz, Alternative Visions of American Constitutionalism: Popular Sovereignty and the Early American Constitutional
Debate, 24 Hastings Const. L.Q. 287, 306-08 (1997); James A. Gardner, Consent, Legitimacy and Elections: Implementing Popular
Sovereignty Under the Lockean Constitution, 52 U . Pitt. L. Rev. 189, 192 (1990); Sung Hui Kim, "We the (Supermajority of) the People":
The Development of a Rationale for Written Higher Law in North American Constitutions, 137 Proc. Am. Phil. Soc'y 364, 388-89 (1993).
n161. U.S. Const. art. 1, § 1.
n162. Leib et. al, Fiduciary Theory of Judging, supra note 15, at 9.
n163. See, e.g., Robert G. Natelson, Judicial Review of Special Interest Spending: The General Welfare Clause and the Fiduciary Law of the
Founders, 11 Tex. Rev. L. & Pol. 239, 244 (2007) ("The 'general Welfare' limitation [in the Taxing and Spending Clause] was one of a
number of provisions inserted to impose fiduciary-style rules on the new federal government...."); Robert G. Natelson, The Agency Law
Origins of the Necessary and Proper Clause, 55 Case W. Res. L. Rev. 243, 248 (2004) (arguing that the Necessary and Proper Clause was
intended to incorporate "the limitations of fiduciary duty"); Robert G. Natelson, The Constitution and the Public Trust, 52 Buff. L. Rev.
1077, 1087 (2004) [hereinafter Natelson, The Constitution and the Public Trust] ("It really was the 'general purpose' of the founders to
impose fiduciary standards on the federal government."); Robert G. Natelson, The General Welfare Clause and the Public Trust: An Essay in
Original Understanding, 52 U. Kan. L. Rev. 1, 50 (2003) ("Public officials were seen as the people's agents and trustees, and bound by
something akin to private trust standards."); E. Mabry Rogers & Stephen B. Young, Public Office as a Public Trust: A Suggestion that
Impeachment for High Crimes and Misdemeanors Implies a Fiduciary Standard, 63 Geo. L.J. 1025, 1026 (1975).
An impressive and growing body of scholarship calls for imposing fiduciary standards on government. See, e.g., Evan Fox-Decent,
Sovereignty's Promise: The State as Fiduciary 4 (2011) (the state itself as a fiduciary); Kathleen Clark, Do We Have Enough Ethics in
Government Yet?: An Answer from Fiduciary Theory, 1996 U. Ill. L. Rev. 57, 63 (1996) (congressmen need stricter fiduciary duties); Evan J.
Criddle, Fiduciary Administration: Rethinking Popular Representation in Agency Rulemaking, 88 Tex. L. Rev. 441, 448 (2010)
(administrative agencies as fiduciaries); Evan Fox-Decent, The Fiduciary Nature of State Legal Authority, 31 Queen's L.J. 259, 260-61
(2005) (same as Fox-Decent, supra); Ethan J. Leib & David L. Ponet, Fiduciary Representation and Deliberative Engagement with Children,
20 J. Polit. Phil. 178, 179 (2012) [hereinafter, Leib & Ponet, Fiduciary Representation] (discussing recent work on government actors as
fiduciaries); D. Theodore Rave, Politicians as Fiduciaries, 126 Harv. L. Rev. 671, 677 (2013) ("political representatives" as fiduciaries).
n164. See Leib et al., Fiduciary Theory of Judging, supra note 15, at 17 (observing that John Locke, "whose writings heavily influenced the
U.S. founders," viewed legislators as fiduciary trustees); supra note 163.
n165. Natelson, The Constitution and the Public Trust, supra note 163, at 1086-87.
n166. See, e.g., The Federalist No. 46, at 294 (James Madison) (Clinton Rossiter ed., 1961) ("The federal and state governments are in fact
but different agents and trustees of the people ... ."); id. at 316 ("The nature of [legislators'] public trust implies a personal influence among
the people, and that they are more immediately the confidential guardians of the rights and liberties of the people."); id. at 344 ("solemn
trust"); id. at 350 (describing elected officials as holding the people's "public trust"); The Federalist No. 59, at 366 (Alexander Hamilton)
("guardianship" and "trust"); id. at 396 (describing impeachable offenses as "those offenses which proceed from the misconduct of public
men, or, in other words, from the abuse or violation of some public trust").
n167. U.S. Const. art. VI, cl. 3.

Page 134Page 134
n168. U.S. Const. art. I, § 3, cl. 7; id. art. I, § 9, cl. 8; id. art. II, § 1, cl. 2.
n169. Marcus Tillius Cicero, On Moral Obligation 69 (John Higginbotham trans., University of California Press 1967).
n170. See Natelson, The Constitution and the Public Trust, supra note 163, at 1134-36.
n171. See id. at 1170-71; Leib et. al, Fiduciary Theory of Judging, supra note 15, at 17-18.
n172. United States v. Gray, 790 F.2d 1290, 1294 (6th Cir. 1986) (quoting in part United States v. Mandel, 591 F.2d 1347, 1363 (4th Cir.
1979)), rev'd, McNally v. United States, superseded by statute, 18 U.S.C. § 1346 (2006); see infra Part II.B.3.
n173. Standing Orders of the Senate Manual, 87 S. Doc. 107-1, at 118-19 (2002).
n174. See, e.g., SEC v. Blackwell, 291 F. Supp. 2d 673, 687 (S.D. Ohio 2003) (noting that a director may be liable for insider trading
violations for breaching the fiduciary duty to the corporation and its shareholders); SEC v. Lenfest, 949 F. Supp. 341, 345 (E.D. Pa. 1996)
(noting that a director has a fiduciary duty to shareholders).
n175. See Restatement (Third) of Trusts § 5(g) cmt. g (2003) ("Corporate ... directors ... do not hold title to the property of the corporation
and therefore are not trustees ... .").
n176. See Restatement (Third) of Agency § 1.01 cmt. f(2) (2006) ("[Corporate] directors are neither the shareholders' nor the corporation's
agents ... .").
n177. Cf. Langevoort, supra note 42, § 6:6, at 6-21 n.5 ("An intriguing question is whether elected officials can properly be treated as
fiduciaries. Certainly, they are not employees; there is no identifiable principal to whom they are responsible... . In this sense, the analogy to
a corporation's board of directors is apt.").
n178. See Adolf A. Berle, Jr. & Gardiner C. Means, The Modern Corporation and Private Property 5-6 (1933). For an illuminating
examination of Berle and Means's contribution, see generally William W. Bratton, Berle and Means Reconsidered at the Century's Turn, 26 J.
Corp. L. 737, 754-56 (2001) (noting that Berle and Means were influential in that they "hit the issue" of separation in entrepreneurial
functioning).
n179. See William W. Bratton & Michael L. Wachter, The Case Against Shareholder Empowerment, 158 U. Pa. L. Rev. 653, 662-65 (2010)
(discussing the shareholders' traditional role and critiques of that role).
n180. See, e.g., Del. Code Ann. tit. 8, § 141(a) (2011) (stating that the corporation's business and affairs are "managed by or under the
direction of a board of directors"). As the leading state of incorporation for large corporations, Delaware's law on this issue is the most
important.
Page 135Page 135
n181. I do not revisit the age-old debate over the proper purpose of the corporation because resolution of that debate is not critical to the
purposes of this Article. For simplicity, this Article assumes the conventional, shareholder-value view of corporate purpose. For a recent
exposition of this debate and a critique of the shareholder value model, see generally Lynn Stout, The Shareholder Value Myth: How Putting
Shareholders First Harms Investors, Corporations, and the Public (2012). For my take on the law of corporate purposes as applied to
corporate diversity, see Sung Hui Kim, The Diversity Double Standard, 89 N.C. L. Rev. 945, 977-88 (2011).
n182. See Frank H. Easterbrook & Daniel R. Fischel, Voting in Corporate Law, 26 J.L. & Econ. 395, 420 (1983) ("There is no reason why
shareholders ... should have any interest or expertise in managing the firm's affairs. Because of the easy availability of the exit option
through the stock market, the rational strategy for dissatisfied shareholders in most cases, given the collective action problem, is to disinvest
rather than incur costs in attempting to bring about change through the voting process.").
n183. Painter, supra note 10, at 2.
n184. See Leib & Ponet, Fiduciary Representation, supra note 163, at 187.
n185. Cf. Donald Green & Ian Shapiro, Pathologies of Rational Choice Theory 94-95 (1994) (discussing the literature on the "rational
ignorance hypothesis").
n186. See, e.g., Trist v. Child, 88 U.S. 441, 450 (1874) ("The theory of our government is, that all public stations are trusts, and that those
clothed with them are to be animated in the discharge of their duties solely by considerations of right, justice, and the public good.");
Providence Tool Co. v. Norris, 69 U.S. 45, 55 (1864) ("These offices are trusts, held solely for the public good, and should be conferred
from considerations of the ability, integrity, fidelity, and fitness for the position of the appointee."); Nuesse v. Camp, 385 F.2d 694, 706 (D.C.
Cir. 1967) ("It is a living tenet of our society and not mere rhetoric that a public office is a public trust.").
n187. See, e.g., United States v. Bryan, 58 F.3d 933, 942, 961 (4th Cir. 1995) (affirming mail and wire fraud convictions of state lottery
director and noting that state officials owe a "fiduciary duty ... to the state and its citizens" (quoting United States v. Barber, 668 F.2d 778,
784 n.4 (4th Cir. 1982) (affirming mail fraud conviction and noting that the Alcoholic Beverage Control commissioner breached a fiduciary
duty "owed to the state and its citizens"))); United States v. Rebrook, 842 F. Supp. 891, 893-94 (S.D.W. Va. 1994) (holding that attorney for
West Virginia Lottery breached fiduciary duty owed to Lottery (a public entity) and citizens of West Virginia by trading on material,
nonpublic information relating to contracts with third party vendors), rev'd, 58 F.3d 961 (4th Cir. 1995).
n188. See, e.g., United States v. Mandel, 591 F.2d 1347, 1363 (4th Cir. 1979) (holding that the governor of Maryland owes fiduciary duties
to Maryland citizens and the State of Maryland). After a series of vacations and rehearings, the Mandel decision was superseded by 18
U.S.C. § 1346 (2006).
n189. See, e.g., Jersey City v. Hague, 115 A.2d 8, 11 (N.J. 1955) (recognizing two mayors and one deputy mayor as fiduciaries of the people
whom they have been elected or appointed to serve).
n190. See Cnty. of Cook v. Barrett, 344 N.E.2d 540, 545 (Ill. App. Ct. 1975) (holding that the county clerk, as "an elected public official,"
was the fiduciary of the people of Cook County).
n191. See Driscoll v. Burlington-Bristol Bridge Co., 86 A.2d 201, 221 (N.J. 1952) ("The members of the board ... are public officers holding
positions of public trust. They stand in a fiduciary relationship to the people whom they have been elected ... to serve.").
Page 136Page 136
n192. See Fuchs v. Bidwill, 334 N.E.2d 117, 119-20 (Ill. App. Ct. 1975) (discussing cases treating state officials as trustees of the people),
rev'd on other grounds, 359 N.E.2d 158 (Ill. 1977).
n193. 86 A.2d 201 (N.J. 1952).
n194. Id. at 222-23. The court also noted that an official was not deserving "of the trust imposed upon him by the people of Burlington
County when they elected him as a member of their board of chosen freeholders." Id. at 212.
n195. Id. at 207.
n196. Id. at 221 (citations omitted).
n197. Id. at 222.
n198. Id. at 222 ("The citizen is not at the mercy of his servants holding positions of public trust nor is he helpless to secure relief from
their machinations except through the medium of the ballot, the pressure of public opinion or criminal prosecution. He may secure relief in
the civil courts either through an action brought in his own name, or through proceedings instituted on his behalf by the Governor ... or by
the Attorney General ... ." (citations omitted)).
n199. 334 N.E.2d 117 (Ill. App. Ct. 1975).
n200. The Illinois Supreme Court, in reversing the appellate court, quoted the complaint, which specifically mentions the fiduciary duty. See
Fuchs v. Bidwill, 359 N.E.2d 158, 160 (Ill. 1976).
n201. Fuchs, 334 N.E.2d at 118-19.
n202. Id. at 119.
n203. Id. at 120 (quoting Jersey City v. Hague, 115 A.2d 8, 11 (N.J. 1955)).
n204. Id. at 122.
n205. Id. (quoting Paepcke v. Pub. Bldg. Comm'n of Chicago, 263 N.E.2d 11, 18 (1970)).
n206. Fuchs v. Bidwill, 359 N.E.2d 158, 162 (Ill. 1976) ("The public interest will not be served in permitting persons, without limitation, to
institute actions of this nature against public officials when the Attorney General has declined to act.").
Page 137Page 137
n207. See id. (noting the Attorney General's ability to prosecute state officials' ethics violations and to "seek an accounting or the imposition
of a constructive trust").
n208. See, e.g., Agasha Mugasha, Evolving Standards of Conduct (Fiduciary Duty, Good Faith and Reasonableness) and Commercial
Certainty in Multi-Lender Contracts, 45 Wayne L. Rev. 1789, 1795-96 (2000) ("In any particular analysis concerning the fiduciary principle,
one has to ascertain the subject matter over which fiduciary obligations extend. A fiduciary for certain purposes need not be a fiduciary for
all purposes; equally, a person who is generally not a fiduciary can be a fiduciary for certain limited purposes." (footnote omitted)).
n209. See supra section 1.A.2.a.
n210. United States v. Mandel, 591 F.2d 1347, 1363-64 (4th Cir. 1979). For direct history of this case, see supra note 172.
n211. There is no requirement that those owed a fiduciary obligation expressly proscribe the exploitation of confidential information.
Langevoort, supra note 42, § 6:6, at 6-20.
n212. SEC Rule 10b5-2, 17 C.F.R. § 240.10b5-2(b) (2011).
n213. 634 F. Supp. 2d 713, 730-31 (N.D. Tex. 2009) (holding that Rule 10b5-2(b)(1) exceeds the SEC's statutory authority). On appeal, the
judgment was vacated on other grounds, with the Fifth Circuit clarifying that it was not reaching the validity of Rule 10b5-2(b)(1). SEC v.
Cuban, 620 F.3d 551, 558 n.40 (5th Cir. 2010).
n214. 184 F. Supp. 2d 1006, 1014-15 (N.D. Cal. 2002).
n215. 327 F.3d 1263 (11th Cir. 2003).
n216. Id. at 1273 n.23 (noting that "the SEC's new rule goes farther than we do in finding a relationship of trust and confidence (e.g., the
new rule creates a presumption of a relationship of trust and confidentiality in the case of close family members)" and finding that prior case
law did not go that far). It should be noted that the case was technically not governed by Rule 10b5-2. See id. at 1281-82 (vacating the
district court's judgment on the basis of a prejudicial error in the jury instructions).
n217. Code of Ethics for Government Service, 72 Stat. B12 (1958), H. Cong. Res. 175, 85th Cong., 104 Cong. Rec. 13556-57 (1958)
[hereinafter Code of Ethics]. The Code of Ethics, which applies to "all Government employees, including officeholders," id. at B12, has been
incorporated into the House Ethics Manual. H. Comm. on Standards of Official Conduct, 110th Cong., House Ethics Manual 20, 355 (2008)
[hereinafter House Ethics Manual], http://ethics.house.gov/Media/PDF/2008 House Ethics Manual.pdf. The Senate Ethics Manual lists the
Code of Ethics as a source of jurisdiction for the Senate Ethics Committee. S. Select Comm'n on Ethics, 108th Cong., Senate Ethics Manual
7-8 (2003), available at http://ethics.senate.gov/downloads/pdffiles/manual.pdf.
n218. Code of Ethics, supra note 217, at B12, P 8; see George, supra note 9, at 167 (recounting the reprimand (based on Code of Ethics
paragraph 8) of Representative Robert Sikes "on charges including the purchase of stock in the privately-held First Navy Bank, whose
establishment he was also actively promoting at a Naval Air Station").
Page 138Page 138
n219. For example, some commentators have argued that congressional ethics rules prescribing confidentiality are distinguishable from
ethics rules commonly found in employee policy manuals. See Bainbridge, Inside the Beltway, supra note 9, at 296. The implication is that
congressional ethics rules may not be enforceable contractual provisions.
n220. See, e.g., Nagy, Gradual Demise, supra note 42, at 1362.
n221. Id.
n222. SEC v. Cuban, 634 F. Supp. 2d 713, 724, 730-31 (N.D. Tex. 2009) (holding that misappropriation theory required that the trader agree
both to keep the information confidential and to not use the information for personal gain). On Cuban, see supra note 213 and accompanying
text.
n223. See Barbabella et al., supra note 10, at 221-22 (reporting evidence that "legislators may feel that trading on information obtained
through their positions is inappropriate, even if they do not believe it is illegal").
n224. Standing Rules of the Senate, S. Doc. No. 106-15, 106th Cong., 1st Sess., Rule XXIX, cl. 5 (2000) [hereinafter Senate Standing
Rules]; see George, supra note 9, at 167-68 (interpreting this Rule).
n225. 138 Cong. Rec. S17835, S17836 (daily ed. Oct. 8, 1992) (statement of Sen. Mitchell). This testimony is also recounted in George,
supra note 9, at 168-69.
n226. The categories include "matters necessary to be kept secret in the interests of national defense or the confidential conduct of the
foreign relations of the United States," Senate Standing Rules, Rule XXVI, cl. 5(b)(1) (2000), matters which "will represent a clearly
unwarranted invasion of the privacy of an individual," id. at cl. 5(b)(3), matters which "will disclose the identity of any informer or law
enforcement agent or will disclose any information relating to the investigation or prosecution of a criminal offense that is required to be
kept secret in the interests of effective law enforcement," id. at cl. 5(b)(4), and "matters required to be kept confidential under other
provisions of law or Government regulations," id. at cl. 5(b)(6).
n227. Id. at cl. 5(b)(5).
n228. See, e.g., Rules of the House of Representatives, H.R. Doc. No. 108-241, 108th Cong. 2d Sess., Rule XVII, cl. 9 (2005) ("When the
Speaker or a Member ... informs the House that he has communications that he believes ought to be kept secret for the present, the House
shall be cleared of all persons except the Members ... for the reading of such communications, and debates and proceedings thereon ... .").
n229. Id. at Rule XI, cl. 2(g)(1) (open meetings and hearings). Closed door meetings are allowed for meetings of the Committee on Ethics
or its subcommittees and where disclosure of information would, among other things, (i) "endanger national security," (ii) "compromise
sensitive law enforcement information," or (iii) "violate a law or rule of the House." Id.
n230. Thomas Jefferson, A Manual of Parliamentary Practice (1801), reprinted in H.R. Doc. No. 107-284, 107th Cong., 2d Sess. (2003),
available at http://www.gpoaccess.gov/hrm/browse 108.html [hereinafter Jefferson, Manual]; see also Orrin G. Hatch, Judicial Nomination
Filibuster Cause and Cure, 2005 Utah L. Rev. 803, 827-28 n.128 (2005) (noting that the Manual still governs the House today).
n231. Jefferson, Manual, supra note 230, at sec. XI (annotation) (citation omitted).
Page 139Page 139
n232. See United States House of Representatives Information Security Publication, Guidelines for Determining Information Sensitivity,
available at http://web.archive. org/web/20061215031815/http:/www.house.gov/cao-opp/PDFSolicitations/HISPUB008. pdf [hereinafter
House Information Sensitivity Guidelines].
n233. George supra note 9, at 169 (quoting House Information Sensitivity Guidelines).
n234. Partnership Act, Uniform Law Commission, available at http://www.uniformlaws. org/Act.aspx?title=Partnership+Act (last visited
Feb. 16, 2013) (showing a map of states that have adopted RUPA).
n235. See RUPA § 404(a) (2006). But cf. Larry E. Ribstein, Are Partners Fiduciaries?, 2005 U. Ill. L. Rev. 209, 251 (2005) (arguing that
partners should be subject to fiduciary duties "only as agents or as managers of centrally managed firms").
n236. 735 F. Supp. 1505 (D. Kan. 1990).
n237. Id. at 1521 (finding enough evidence of a violation to withstand summary judgment, although relevant information did not relate to
the partnership business but to a side business of the partner who confided information); see SEC v. Michel, 521 F. Supp. 2d 795, 826 (N.D.
Ill. 2007) (finding that a partner-partner relationship constituted the relevant relationship of trust and confidence under misappropriation
theory).
n238. United States v. O'Hagan, 521 U.S. 642, 655 & n.7 (1997).
n239. SEC v. Sargent, 229 F.3d 68, 76 (1st Cir. 2000) (citing Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 512 (Mass. 1975)).
n240. RUPA § 202(a).
n241. For an example of the traditional approach, see Ziegler v. Dahl, 691 N.W.2d 271, 275-77 (N.D. 2005); Daniel S. Kleinberger, Agency,
Partnerships, and LLCs: Examples and Explanations 220-21 (3d ed. 2008) (describing the "key characteristics" of a partnership in most
jurisdictions).
n242. See, e.g., Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 403-04 (S.D.N.Y. 2010) (requiring a showing of "the parties'
sharing of profits and losses"); Ingram v. Deere, 288 S.W.3d 886, 894 (Tex. 2009) (requiring an agreement to share losses); Gates v.
Houston, 897 N.E.2d 532 (Ind. Ct. App. 2008) (requiring a voluntary contract of association for the purpose of sharing "profits and losses").
n243. See, e.g., Larry E. Ribstein, The Evolving Partnership 24 (Univ. of Ill. Law & Econ. Working Paper No. LE06-025, 2006), available
at http://papers.ssrn.com/sol3/papers.cfm? abstract id=940653 (summarizing the default rules).
n244. For example, in trial testimony, Congressman Barney Frank once testified that "members of the House of Representatives tend to
specialize and often trust the judgment of colleagues about the contents of noncontroversial bills" and that "a typical Representative might
know the contents of less than ten percent of the bills considered by the House." United States v. Swindall, 971 F.2d 1531, 1541 (11th Cir.
1992).
Page 140Page 140
n245. See, e.g., Johnson v. Peckham, 120 S.W.2d 786, 788 (Tex. 1938).
n246. Vai v. Bank of Am. Nat'l Trust & Sav. Ass'n, 364 P.2d 247, 252 (Cal. 1961) ("But the husband's fiduciary duties in respect to his
wife's interest in the community property continue as long as his control of that property continues, notwithstanding the complete absence of
confidence and trust, and the consequent termination of the confidential relationship.").
n247. Even if one rejects this line of argument as being too facile, the analogy to partners serves as an important reminder that oft-cited
factors - such as "superiority" and "domination" - are not essential to all fiduciary relationships.
n248. 530 F.3d 1085 (9th Cir. 2008).
n249. Id. at 1094.
n250. See Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U. L. Rev. 547, 550-51 (2003)
(describing the director-primacy model).
n251. Congress has wide-ranging authority under the Commerce Clause. U.S. Const. art. I, § 8. State legislatures generally enjoy a wide-
ranging police power to legislate in the public interest. See U.S. Const. amend. X.
n252. Congress's power here stems from the Taxing and Spending Clause, U.S. Const. art. I, § 8, cl. 1.
n253. One can also argue that members are fiduciaries to the government by virtue of being employees of their government. Nagy makes
just this argument, although she concedes that members of Congress are not quite like the employees working on their staffs, a point with
which I agree. See Nagy, Congressional Officials, supra note 10, at 1156-57. I would add that there are many other reasons to think that
legislators are not mere employees and, in fact, look much more like employers. As I have already argued, there is more than a passing
resemblance between legislators and corporate directors, and directors are not generally treated as employees, for example under Title VII.
See, e.g., Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440, 450-51 (2003) (holding that physicians who were both directors
and shareholders of a corporation should not be counted as employees). More generally, "directors are traditionally employer rather than
employee positions." Chavero v. Local 241, Div. of the Amalgamated Transit Union, 787 F.2d 1154, 1157 (7th Cir. 1986).
n254. United States v. Carter, 217 U.S. 286, 305 (1910).
n255. United States v. Drisko, 303 F. Supp. 858, 860 (E.D. Va. 1969).
n256. United States v. King, 469 F. Supp. 167, 167 (D.S.C. 1979).
n257. United States v. Bowen, 290 F.2d 40, 42 (5th Cir. 1961).
Page 141Page 141
n258. United States v. Kenealy, 487 F. Supp. 1379, 1379 (D. Mass. 1980), aff'd, 646 F.2d 699 (1st Cir. 1981).
n259. United States v. Kearns, 595 F.2d 729, 729 (D.C. Cir. 1978).
n260. Snepp v. United States, 444 U.S. 507, 510 (1980).
n261. United States v. Pan-Am. Petroleum Co., 55 F.2d 753, 756, 782-83 (9th Cir. 1932).
n262. United States v. Bryan, 58 F.3d 933, 936 (4th Cir. 1995) (director of state lottery); United States v. Rebrook, 842 F. Supp. 891, 893-94
(S.D.W. Va. 1994) (attorney of state lottery).
n263. United States v. Barber, 668 F.2d 778, 780, 784 n.4 (4th Cir. 1982).
n264. Williams v. State ex rel. Morrison, 315 P.2d 981, 981 (Ariz. 1957).
n265. City of Minneapolis v. Canterbury, 142 N.W. 812, 813-14 (Minn. 1913).
n266. City of Boston v. Dolan, 10 N.E.2d 275, 278, 281 (Mass. 1937).
n267. United States v. Bush, 522 F.2d 641, 641, 643 (1975).
n268. City of Hastings v. Jerry Spady Pontiac-Cadillac, Inc., 322 N.W.2d 369, 369 (Neb. 1982).
n269. City of Boston v. Santosuosso, 30 N.E.2d 278, 306 (Mass. 1940).
n270. United States v. Mandel, 591 F.2d 1347, 1362-63 (4th Cir. 1979); Agnew v. State, 446 A.2d 425, 440-41 (Md. Ct. Spec. App. 1982).
n271. United States v. Keane, 522 F.2d 534, 538, 545 (7th Cir. 1975).
n272. 436 F. Supp. 1039 (S.D.N.Y. 1977).
n273. While not cited in the scholarly literature, this case was mentioned in congressional testimony. See Stop Trading on Congressional
Knowledge Act: Hearing on H.R. 1148 Before the H. Comm. on Fin. Servs., 112th Cong. 2 (2011) (statement of Jack Maskell, Legislative
Att'y, Cong. Research Serv.).
Page 142Page 142
n274. The statute prohibits members of Congress from accepting compensation for "any representational services ... in relation to any ...
matter in which the United States is a party." 18 U.S.C. § 203(a)(1) (2006).
n275. See Podell, 436 F. Supp. at 1040.
n276. Id. at 1042.
n277. Id.
n278. Id. (emphasis added) (citation omitted).
n279. That said, under federal insider trading law, a demonstration of potential injury should be enough. Langevoort, supra note 42, § 6:8, at
6-34.1. Also, the O'Hagan Court's lack of significant discussion about harms - apart from the harms to the integrity of the securities markets -
might be read to suggest that harmfulness of this type of breach of the duty of loyalty is presumed. See id. § 6:8, at 6-34.1 to -35.
n280. See, e.g., Stephen M. Bainbridge, The Insider Trading Prohibition: A Legal and Economic Enigma, 38 U. Fla. L. Rev. 35, 36-37
(1986) (summarizing the debate on whether the insider trading prohibition has a "rational basis" at all); William K.S. Wang, Trading on
Material Nonpublic Information on Impersonal Stock Markets: Who Is Harmed, and Who Can Sue Whom Under SEC Rule 10b-5?, 54 S.
Calif. L. Rev. 1217, 1225-29 (1981) (summarizing the respective cases for and against regulating insider trading).
n281. See supra note 36 and accompanying text.
n282. See, e.g., United States v. Carter, 217 U.S. 286, 305 (1910) ("It is immaterial...whether the complainant was able to show that it had
suffered any actual loss ... ."); Cnty. of Cook v. Barrett, 344 N.E.2d 540, 548 (Ill. App. 1975) ("The absence of an allegation of damage is
immaterial."); Jersey City v. Hague, 115 A.2d 8, 12 (N.J. 1955) ("It would be a dangerous precedent to lay down as law that unless some
affirmative fraud or loss can be shown, the agent may hold on to any secret benefit ... out of his agency." (quoting Carter, 217 U.S. at 306));
see also cases discussed infra Part III.C.
n283. See, e.g., United States v. Keane, 522 F.2d 534, 545 (7th Cir. 1975) (finding that use of governmental information by city councilman
for personal gain amounts to a breach of fiduciary duty which is actionable under mail fraud statute); United States v. Rebrook, 842 F. Supp.
891, 893-94 (S.D.W. Va. 1994) (rejecting defendant's argument that loss must be alleged in order to state a claim under the wire fraud statute
and finding liability under such statute for misuse of confidential information gained by virtue of one's position); Williams v. State ex rel.
Morrison, 315 P.2d 981, 984-85 (Ariz. 1957) (noting that the commissioner "used the information obtained from such examination for his
personal profit" and thus "did not truly and faithfully perform all of his official duties and consequently breached the conditions of his bond,
and the surety is liable"); City of Minneapolis v. Canterbury, 142 N.W. 812, 814 (Minn. 1913) (holding that the fire department chief, as
agent of the city, must disgorge profits accrued from sale of land to the city when he purchased such land based on information gleaned by
virtue of his position, regardless of whether the principal is or is not benefited thereby).
n284. Frankel, supra note 147, at 805.
n285. See, e.g., Scott Brewer, Exemplary Reasoning: Semantics, Pragmatics, and the Rational Force of Legal Argument by Analogy, 109
Harv. L. Rev. 923, 962-66 (1996) (discussing different forms of analogical reasoning); Richard A. Posner, Reasoning by Analogy, 91 Cornell
L. Rev. 761, 761-65 (2006) (reviewing Lloyd L. Weinreb, Legal Reason: The Use of Analogy and Legal Argument (2005)) (concluding that
reasoning by analogy is just a form of judicial and lawyerly rhetoric rather than a substantive statement of law); Cass R. Sunstein,
Page 143Page 143
Commentary, On Analogical Reasoning, 106 Harv. L. Rev. 741, 742 (1993) (defending analogical reasoning over various other methods of
legal thought).
n286. As Judge Posner puts it:
There is no such thing as an "analogical argument" in any but a rhetorical sense; you need reasons to determine whether one case should be
thought relevantly similar to another. Analogies are not reasons; reasons are what is necessary to determine whether a similarity shall be
treated as a ground for action, an analogy guiding decision.
Posner, supra note 285, at 768.
n287. See, e.g., Finn, supra note 133, at 214 (observing that fiduciary law's objection to bribes and secret commissions "lies in their
corrupting tendency").
n288. Part III is severable from Part II. If the reader needs nothing more to be convinced to find the fiduciary duty, the reader should skip to
Part IV, where I address objections.
n289. See Kim, Governmental Insider Trading, supra note 34.
n290. Careful readers might object that I have lost track of what is really important, that the relevant policy consideration is not of fiduciary
law generally but of insider trading law, which happens to bar such trading only when it breaches a fiduciary-like duty. But such an objection
implicitly assumes that insider trading law and fiduciary law have substantially different goals. To the contrary, as I have argued below, one
of the important goals of fiduciary law is to stop corruption. And, as I argue in a companion piece, insider trading law can best be
theoretically rationalized as an attempt to stop one form of private corruption. See Sung Hui Kim, Insider Trading as Private Corruption
(Mar. 22, 2013) (unpublished manuscript) (on file with author). Accordingly, extending the fiduciary category to include legislators in a
manner consistent with a core purpose of fiduciary law (anti-corruption) will be consistent with the purpose of federal insider trading law
(also anti-corruption). Finally, it is my view that when the Supreme Court in Chiarella expressly predicated insider trading liability on a
breach of fiduciary duty, it intended to incorporate the purposes of fiduciary law.
n291. See, e.g., Michael A. Genovese, Presidential Corruption: A Longitudinal Analysis, in Corruption and American Politics 135, 136
(Michael A. Genovese & Victoria Farrar-Myers eds., 2010) [hereinafter Corruption and American Politics] ("There is no commonly accepted
definition of what constitutes corruption."); Michael Johnston, The Definitions Debate: Old Conflicts in New Guises, in The Political
Economy of Corruption 11, 12 (Arvind K. Jain ed., 2001) ("No one has ever devised a universally satisfying 'one-line definition' of
corruption."); Nathaniel Persily & Kelli Lammie, Perceptions of Corruption and Campaign Finance: When Public Opinion Determines
Constitutional Law, 153 U. Pa. L. Rev. 119, 126-27 (2004) (noting that corruption means different things to the different Supreme Court
Justices).
n292. Daniel Webster, who served in the House and Senate and as Secretary of State, once reminded the President of the Bank of the United
States: "If it be wished that my relation to the Bank should be continued, it may be well to send me the usual retainers." The Correspondence
of Nicholas Biddle 218 (Reginald C. McGrane ed., 1919) (Webster to Biddle, Dec. 21, 1833).
n293. See Dennis F. Thompson, Ethics in Congress: From Individual to Institutional Corruption 2 (1995).
n294. See id.

Page 144Page 144
n295. The House voted unanimously to expel Michael J. "Ozzie" Myers, a Pennsylvania Democrat who accepted bribes in an undercover
ABSCAM investigation. This was the House's first expulsion for corruption. Id. Four years earlier, the House failed to expel Andrew J.
Hinshaw, a California Republican who had been convicted of accepting a bribe. Id.
n296. See Jens Chr. Andvig & Odd-Helge Fjeldstad with Inge Amundsen, Tone Sissener & Tina Soreide, Corruption: A Review of
Contemporary Research 46 (2001) ("What is seen as corruption varies from one country to another."). That said, as Robert Klitgaard notes,
"over a wide range of 'corrupt' activities, there is little argument that they are wrong and socially harmful," even across societies. Robert
Klitgaard, Controlling Corruption 4 (1988).
n297. John Kleinig & William C. Heffernan, The Corruptibility of Corruption, in Private and Public Corruption 3, 3 (William C. Heffernan
& John Kleinig eds., 2004). The authors note:
Even if we confine ourselves to what we now familiarly speak of as public corruption, it soon becomes clear that what "we" consider to be
corrupt is often contentiously so. One group's perquisite is another's corruption; one group's tradition of patronage is another's nepotism; one
group's campaign contribution is another's bribery; one group's just rectification is another's misappropriation.
Id.
n298. See Matthew J. Streb & April K. Clark, The Public and Political Corruption, in Corruption and American Politics, supra note 291, at
278, 281 (discussing the perception gap in the views of the elites versus the public on corruption).
n299. These factors, however, are less predictive than a respondent's political attitudes. See Persily & Lammie, supra note 291, at 153-67.
n300. Since the 1970s, advances in the fields of cognitive psychology, cognitive linguistics, artificial intelligence, and anthropology have
provided a persuasive account of how humans categorize people, things, and abstract concepts. Such an account discounts the role of
deductive reasoning from abstracted principles. See generally George Lakoff, Women, Fire, and Dangerous Things: What Categories Reveal
About the Mind (1987) (discussing the importance of categorization and describing the variety of ways in which humans categorize). Daniel
Hays Lowenstein, Campaign Contributions and Corruption: Comments on Strauss and Cain, 1995 U. Chi. Legal F. 163, 164 ("Concepts such
as corruption cannot be applied satisfactorily to political life by deduction from general theoretical propositions."). For a specific exploration
of these insights onto the legal profession, see Sung Hui Kim, Lawyer Exceptionalism in the Gatekeeping Wars, 63 SMU L. Rev. 73, 95-111
(2010).
n301. Thompson, supra note 293, at 28 (emphasis added) (footnote omitted). For explorations of alternative, more intuitive understandings
of corruption, including those definitions that emphasize the underlying psychological condition rather than the outward behavior, see
generally Kleinig & Heffernan, supra note 297; Laura S. Underkuffler, Captured by Evil: The Idea of Corruption in Law (2011) (unpublished
manuscript) (on file with the author).
n302. On the modern definitions of corruption, see Thompson, supra note 293, at 29.
n303. See Thompson, supra note 293, at 28 (noting that the modern conception of corruption retains the notion of the "pollution of the
public by the private" but replaces the "consensus on the public good" with the "democratic process").
n304. Michael Johnston, Democracy Without Politics? Hidden Costs of Corruption and Reform in America, in Corruption and American
Politics, supra note 291, at 13, 16 (emphasis omitted).
Page 145Page 145
n305. See, e.g., Susan Rose-Ackerman, Corruption and Government: Causes, Consequences, and Reform 91 (1999) (defining corruption as
the "misuse of public power for private gain"); Kleinig & Heffernan, supra note 297, at 3 ("If there is an orthodox account of corruption, it is
that it consists in the improper use of public office for private gain."); Mark E. Warren, Political Corruption as Duplicitous Exclusion, 37 Pol.
Sci. & Pol. 803, 803 (2006) (noting the "received conception of political corruption" as "the abuse of public office for private gain"); World
Bank Institute, Control of Corruption Index, http://info.worldbank.org/governance/wgi/pdf/cc.pdf (last visited Oct. 22, 2012) ("Control of
corruption captures perceptions of the extent to which public power is exercised for private gain ... .").
Three definitional issues are worth noting at the outset. First, many definitions of corruption emphasize the "misuse" (or "abuse") of
public office for private gain. That, of course, raises the question of what counts as "misuse" versus acceptable "use." The same concern can
be alternatively reframed as involving the distinction between "improper personal gain" (which I call "private gain") and "proper personal
gain," e.g., one's standard salary and approved perquisites. For simplicity's sake, I would rather locate the disapprobation inherent in the term
"misuse" in the term "private gain" and the critical nexus to "public office." Hence, I define corruption simply as the use of public office for
private gain.
Second, the definition of corruption adopted here is in certain respects a narrow one - what political scientists would categorize as
individual corruption. But academics also refer to a broader institutional (or "systemic" form of) corruption. See, e.g., Thompson, supra note
293, at 25 (distinguishing individual and institutional corruption); Michael A. Genovese, The Politics of Corruption and the Corruption of
Politics, in Corruption and American Politics, supra note 291, at 1, 3 (distinguishing individual and systemic corruption, in which public
office is used not for private gain, such as lining one's own pockets, but political gain, such as furthering one's ideological causes, political
party's fate, or even personal political ambitions). The notion of institutional (or systemic) corruption certainly resonates with much of the
electorate (e.g., the popular rhetoric on "corrupting" but lawful campaign contributions). However, there is much less consensus about what
constitutes institutional corruption and whether anything should be done about it. Compare Bruce E. Cain, Moralism and Realism in
Campaign Finance Reform, 1995 U. Chi. Legal F. 111, 112 (criticizing the notion of institutional corruption), and David A. Strauss, What Is
the Goal of Campaign Finance Reform?, 1995 U. Chi. Legal. F. 141, 142, with Lawrence Lessig, Republic, Lost: How Money Corrupts
Congress - and a Plan to Stop It 226-47 (2011) (highlighting the importance of focusing on more systemic forms of corruption, referred to as
"dependence corruption"). Consequently, trying to draw a bright line between institutional corruption and hardball politics is difficult.
Thankfully, legislator insider trading falls squarely in the more easily defined category of individual corruption. For purposes of my analysis,
I mean to emphasize private gain (as defined here) and not political gain, which raises another set of complex questions about what
constitutes the proper (and improper) pursuit of political gain. See infra text accompanying notes 310-18.
Third, the definition of corruption advanced here is not coextensive with illegality. Indeed, there may be conduct falling under my
definition that is not currently illegal but nonetheless arguably corrupt. This makes sense in light of the fact that there is almost always a gap
between prevailing cultural understandings and what the law contemporaneously proscribes.
n306. House Ethics Manual, supra note 217, at 1; see id. at 185 (citing Rule 23, cl. 3 for the proposition that the House Code of Official
Conduct prohibits a House member or other employee "from using his or her official position for personal gain").
n307. John T. Noonan, Jr., Bribes 704 (1984).
n308. Cf. Thompson, supra note 293, at 50 (noting that a governor convicted of political corruption was nevertheless "right in assuming
public office is not like entering a monastery").
n309. Id.
n310. By "personal gain," I mean to include gain that not only directly benefits the official in question but also inures to the official's family
or friends.
n311. Andrew Stark, Conflict of Interest in American Public Life 76 (2000) (defining the term "private gain from public office").
n312. Two clarifications are in order. First, by referring to private gain as being "superogatory," I do not suggest that private gain is in any
sense virtuous, which is a common connotation of that term. Second, the definition of "private gain" that I adopt would generally exclude
longstanding explicit perquisites of congressional office because they ordinarily serve an important political function. For example, the
proper purpose of the franking privilege is to aid communication with constituents. However, if the franking privilege is misused by
members to for personal purposes in contravention of rules, it would amount to "private gain" under this definition. For discussion of the
franking privilege, see Thompson, supra note 293, at 73. Also, my definition of "private gain" would exclude certain noneconomic forms of
Page 146Page 146
personal gain, such as enhanced prestige or increased name recognition, because they are unavoidable consequences of, and thus incidental
to, holding office and for those reasons deemed unobjectionable.
n313. For simplicity, I have chosen to locate the disapprobation that attaches to "corruption" within the definition of "private gain" and the
nexus to "public office." For a further explanation, see supra note 305.
n314. Cf. Stark, supra note 311, at 76 ("To then say that such private gain flows from public office implies that the official enjoys such gain
only because she happens to occupy that official role." (emphasis added)).
n315. Id. at 76.
n316. Cf. Underkuffler, supra note 301, at 9 (arguing that corruption requires "intentional misconduct" (emphasis omitted)).
n317. A de minimis level of intention is implied by the intentionality-laden word "use" in the phrase "use of one's public office for private
gain."
n318. Because my definition of corruption is not coextensive with civil or criminal illegality, I do not wish to further specify any mens rea
conditions attaching to the intentionality of conduct, as those conditions will differ depending on whether the case is civil or criminal.
Moreover, it is possible that conduct can be regarded as corrupt but not unlawful.
n319. The phrase comes from Thompson, supra note 293, at 28. This is not to say that private gain from public office is normatively
problematic for consequentialist reasons only. There may also be deontological objections to private gain from public office, which may not
be well captured by terms such as "costs" or "harms."
n320. Omar Azfar et al., The Causes and Consequences of Corruption, 573 Annals Am. Acad. Pol. & Soc. Sci. 42, 47 (2001).
n321. Under federal law, acceptance of a bribe is illegal, regardless of whether the bribe actually influenced the official's conduct. See, e.g.,
United States v. Valle, 538 F.3d 341, 346 (2008); United States v. Quinn, 359 F.3d 666, 675 (2004); see also United States v. Muhammad,
120 F.3d 688, 693 (1997) ("[A] defendant violates [the federal antibribery statute] by merely seeking or demanding a bribe, regardless of
whether he accepts or even agrees to accept it.").
n322. See Kim, Governmental Insider Trading, supra note 34, at 60-61 (discussing the "temptation, distraction and legitimacy costs" of
public corruption in the form of governmental insider trading and drawing linkages with findings in the political science and economic
literatures).
n323. See, e.g., Klitgaard, supra note 296, at 38 (summarizing studies of harms of public corruption); Tanja Rabl, Private Corruption and Its
Actors: Insights into the Subjective Decision Making Processes 62-64 (2008) (discussing studies on the harms of corrupt procurements).
n324. See Rose-Ackerman, supra note 305, at 2-3 (summarizing findings).
n325. See id.

Page 147Page 147
n326. A recent public opinion poll reports that the "vast majority of Americans (86%) believe insider trading laws should be enforced
against members of Congress." New Judicial Watch-Harris Interactive Poll Sends Warning to Washington Politicians, Judicial Watch (Jan.
20, 2012), http://www.judicialwatch.org/press-room/weekly-updates/new-poll-and-stealing-democracy/.
n327. See, e.g., Confronting Pelosi on Insider Trading, CBSNews (June 17, 2012, 3:55 PM), http://www.cbsnews.com/8301-504803 162-
57323518-10391709/confronting-pelosi-on-insider-trading/?tag=segementExtraScroller;housing (discussing how no congressmen were
willing to meet with 60 Minutes reporters to discuss insider-motivated investments and showing Representatives John Boehner and Nancy
Pelosi actively avoiding questions on the issue).
n328. For example, with respect to bribery, economic research indicates that once bribery becomes pervasive in a society, government
officials do not remain passive recipients of cash but rather become active extortionists of fees. Klitgaard, supra note 296, at 41-42. Citizens,
too, increasingly "invest their energies in the pursuit of illicit favors." Id. at 44.
n329. Cf. Susan Rose-Ackerman, Corruption: Greed, Culture, and the State, 120 Yale L.J. Online 125, 135 (2010) (describing the potential
effects of unchecked corruption).
n330. See, e.g., Fox-Decent, supra note 163, at 4; Tamar Frankel, Fiduciary Law 4-6 (2011); Frank H. Easterbrook & Daniel R. Fischel,
Contract and Fiduciary Duty, 36 J.L. & Econ. 425, 427 (1993); Leib & Ponet, Fiduciary Representation, supra note 163, at 183; Lawrence E.
Mitchell, The Death of Fiduciary Duty in Close Corporations, 138 U. Pa. L. Rev. 1675, 1684 (1990).
n331. See, e.g., Finn, supra note 133, at 1 (arguing that use of the term "fiduciary" merely provides "a veil behind which individual rules and
principles have been developed" and that it is "meaningless to talk of fiduciary relationships as such"); DeMott, Beyond Metaphor, supra
note 135, at 915 ("Described instrumentally, the fiduciary obligation is a device that enables the law to respond to a range of situations in
which, for a variety of reasons, one person's discretion ought to be controlled because of characteristics of that person's relationship with
another. This instrumental description is the only general assertion about fiduciary obligation that can be sustained."); Sealy, supra note 129,
at 73 (noting that "we cannot proceed any further in our search for a general definition of fiduciary relationships," suggesting that fiduciary
relationships must be defined "class by class," and positing four categories of fiduciary relationships).
n332. See Sealy, supra note 129, at 74-79, for a description of four categories of fiduciary relationships.
n333. See Frankel, supra note 147, at 797 ("The differences among fiduciaries may be so great that treating them as a group would require a
very high level of generality, rendering a unified examination of little use.").
n334. DeMott, Beyond Metaphor, supra note 135, at 881 (footnote omitted).
n335. An anti-corruption norm (as applied to the private sector) is apparent in cases which illustrate a judicial impulse against pursuing
selfish gain through one's fiduciary position. For cases restricting the fiduciary's ability to obtain or use lease renewals and reversions,
opportunities, and confidential information for selfish gain, see, for example, Irving Trust Co. v. Deutsch, 73 F.2d 121 (2d Cir. 1934);
Zeiden v. Oliphant, 54 N.Y.S.2d 27 (N.Y. Sup. Ct. 1945); Keech v. Sanford, (1726) 25 Eng. Rep. 223 (Ch.) 223. For a definition of private
corruption, see Kim, Governmental Insider Trading, supra note 34, at 46-48.
n336. See Robert C. Clark, Agency Costs Versus Fiduciary Duties, in Principals and Agents: The Structure of Business 55, 73-74 (John W.
Pratt & Richard J. Zeckhauser eds., 1985) (noting that in older case law on corporate managers, courts expressed this rule as a duty not to
Page 148Page 148
take "secret profits," i.e., compensation that is not "expressly provided to the manager in the governing statutes, charter and bylaws, and
employment contracts (if any)").
n337. See, e.g., Restatement (Third) of Agency § 8.02 (2006) (prohibiting an agent from acquiring "a material benefit from a third party in
connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's
position").
n338. Victor Brudney, Contract and Fiduciary Duty in Corporate Law, 38 B.C. L. Rev. 595, 601 (1997) [hereinafter Brudney, Fiduciary
Duty] (defining the "exclusive benefit principle" as the notion "that the fiduciary's duty of loyalty requires the trustee or agent to act as the
beneficiary's (or principal's) alter ego and act only as the latter would act for himself"); see Restatement (Third) of Agency § 8.01, (2006)
("An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship"); Restatement
(First) of Trusts § 170 (1935) (noting that the duty of a trustee is "to administer the trust solely in the interest of the beneficiary").
n339. Leib & Ponet, Fiduciary Representation, supra note 163, at 188-89.
n340. See Restatement (Third) of Agency § 8.01, cmt. b (2006) ("A principal may choose to structure the basis on which an agent will be
compensated so that the agent's interests are concurrent with those of the principal.").
n341. Victor Brudney & Robert Charles Clark, A New Look at Corporate Opportunities, 94 Harv. L. Rev. 997, 999 (1981) (emphasis
added).
n342. Brudney, Fiduciary Duty, supra note 338, at 602.
n343. Daniel H. Lowenstein, Political Bribery and the Intermediate Theory of Politics, 32 UCLA L. Rev. 784, 787 (1985).
n344. Attorney-General v. Goddard, [1929] 98 L.J.K.B. 743 at 744 (Eng.).
n345. Id.
n346. Id. at 745.
n347. Id. at 746.
n348. Id.
n349. Id. at 745.
n350. Id.
Page 149Page 149
n351. [1951] A.C. 507 (Eng.); see Reading v. The King, [1948] 2 K.B. 268 (Eng.) (prior history).
n352. Reading v. The King, [1948] 2 K.B. 268 at 268.
n353. Id. at 269.
n354. Reading v. Attorney General, [1951] A.C. 507 at 508.
n355. Id.
n356. Id. at 515.
n357. Id. at 516.
n358. Id. at 514.
n359. Id. at 508.
n360. Id. at 516.
n361. Id. at 508.
n362. Id. at 517.
n363. Id. at 517 (Lord Normand, concurring).
n364. 329 F.2d 109 (1st Cir. 1964).
n365. Id. at 109.
n366. Id.
n367. Id. at 112.

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n368. Id.
n369. For example, the employee advised the company on how to handle chickens after delivery so as to reduce contamination. "He assisted
[the company] in tracking down and eliminating the source of discoloration of ducks received by producers ... ." Id. at 111.
n370. See id. at 110-11 (describing the voluntary nature of program).
n371. Id. at 113.
n372. Id. (quoting United States v. Carter, 217 U.S. 286, 305 (1910)).
n373. Id. (quoting Carter, 217 U.S. at 305).
n374. Id. (quoting Carter, 217 U.S. at 305).
n375. Some of the following objections are constitutional in nature. In answering them, I remain focused on the doctrine because the
relevant constitutional objections appear not to be overwhelming. In this type of discussion, one can always "go deeper," for example, by
interrogating competing constitutional values and policies that undergird the doctrine. However, exploring such arguments may mislead
readers into thinking that judges will rely on policy considerations untethered to doctrine when evaluating these constitutional objections,
which is unlikely to be the case. Moreover, exploring constitutional policy arguments in depth goes far beyond the scope (and strict space
constraints) of this already lengthy Article. Suffice it to say that, for purposes of this Part, if one were inclined to explore the underlying
constitutional policies, one must take into account the perspective that the Constitution may also contain strong anti-corruption principles.
For just such an argument, see Zephyr Teachout, The Anti-Corruption Principle, 94 Cornell L. Rev. 341 (2009). For a critique of that
argument, see Seth Barrett Tillman, Citizens United and the Scope of Professor Teachout's Anti-Corruption Principle, 107 Nw. U. L. Rev. 1
(2012).
n376. See A.C. Pritchard, United States v. O'Hagan: Agency Law and Justice Powell's Legacy for the Law of Insider Trading, 78 B.U. L.
Rev. 13, 22 (1998) (noting that "the common law of deceit provides scant support for [the position in Chiarella] that a corporate insider
defrauds a shareholder" when the insider simply trades on the open market); see also Goodwin v. Agassiz, 186 N.E. 659, 660 (Mass. 1933)
(holding that directors do not "occupy the position of trustee toward individual stockholders" and that there was "no fiduciary relation
between them and the plaintiff in the matter of the sale of his stock" (quoting Blabon v. Hay, 169 N.E. 268, 271 (Mass. 1929))).
n377. See Pritchard, supra note 376, at 23.
n378. To be sure, a minority of courts eventually came to adopt the "special facts" doctrine, in which special circumstances can render an
insider's silence in a face-to-face transaction unconscionable and thus warrant the imposition of a duty of full disclosure. That said, cases
adopting this doctrine are easily distinguishable from transactions over impersonal exchanges. See id. at 25 (distinguishing special facts
doctrine from other cases); see also Strong v. Repide, 213 U.S. 419, 434 (1909) (creating the special facts doctrine). While there were a few
states which required disclosure of nonpublic information to shareholders even in the absence of special circumstances, they did so only for
face-to-face transactions, which are thus distinguishable from stock market transactions. See Anabtawi, supra note 106, at 865 (citing Oliver
v. Oliver, 45 S.E. 232 (Ga. 1903)).
Page 151Page 151
n379. See Alison Grey Anderson, Fraud, Fiduciaries, and Insider Trading, 10 Hofstra L. Rev. 341, 366-67 (1982) ("Silence by a fiduciary is
fraudulent primarily because the beneficiary is likely to interpret that silence in a face-to-face transaction as meaning that the fiduciary is
aware of no additional material information.").
n380. Langevoort, supra note 42, § 2:3, at 2-6 ("Given the essential independence of buyer and seller decisions, causation and injury
flowing from any nondisclosure are difficult to trace.").
n381. Painter, Krawiec & Williams, supra note 43, at 162 n.34 (citing Louis Loss, Securities Regulation 824 (1st ed. 1951)).
n382. Id. (emphasis added).
n383. Of course, even at the time, this majority rule was slowly giving way to the minority view that "corporate insiders are subject to a
fiduciary duty when dealing with shareholders of their corporation and thus must make full disclosure of all material facts." Id. Also,
according to Louis Loss, the majority rule had merged into the "special facts" doctrine. Id.
n384. See Pritchard, supra note 376, at 26.
n385. Chiarella v. United States, 445 U.S. 222, 227 n.8 (quoting Gratz v. Claughton, 187 F.2d 46, 49 (2d Cir. 1951)).
n386. As Adam Pritchard notes, "although this distinction may be 'sorry,' it is the common law rule." Pritchard, supra note 376, at 26.
n387. See, e.g., Irving Trust Co. v. Deutsch, 73 F.2d 121, 125 (2d Cir. 1934) ("A mere employee of a corporation does not ordinarily occupy
a position of trust or confidence toward his employer unless he is also an agent in respect to the matter under consideration."); Palmer v.
Cypress Hill Cemetery, 25 N.E. 983, 985 (N.Y. 1890) ("The plaintiff was not a trustee at the time the contract with him was made, and his
relation ... was not fiduciary, but was that of an employee ... .").
n388. See, e.g., Brophy v. Cities Serv. Co., 70 A.2d 5, 7 (Del. Ch. 1949) (holding that when an employee obtains secret information, the
employee assumes a position of trust within the company); Essex Trust Co. v. Enwright, 102 N.E. 441, 443 (Mass. 1913) (compelling
employee to assign a lease to detriment of his employer).
n389. See, e.g., ATC Distrib. Grp. v. Whatever It Takes Transmissions & Parts, Inc., 402 F.3d 700, 715 (6th Cir. 2004) ("Unlike 'mere'
employees, officers of a company may be presumed to have a fiduciary relationship to the company on that basis alone ... ."); TalentBurst,
Inc. v. Collabera, Inc., 567 F. Supp. 2d 261, 265-66 (D. Mass. 2008) (noting that in Massachusetts, an employee must occupy a position of
trust and confidence in order to warrant fiduciary duties); Atlanta Mkt. Ctr. Mgmt. Co. v. McLane, 503 S.E.2d 278, 281 (Ga. 1998) ("The
employee-employer relationship is not one from which the law will necessarily imply fiduciary obligations ... ."). Some states require that an
employee be a "key employee" in order to be fiduciary. See, e.g., Burbank Grease Servs. v. Sokolowski, 717 N.W.2d 781, 796 (Wis. 2005)
("If the employee is a 'key employee,' then a fiduciary duty of loyalty will exist.").
n390. See, e.g., United States v. Larrabee, 240 F.3d 18, 19 (1st Cir. 2001) (affirming liability of law firm's director of fiduciary services
under misappropriation theory); SEC v. Musella, 578 F. Supp. 425, 438-39 (S.D.N.Y. 1984) (finding law firm's office-services manager to be
a fiduciary for purposes of tipping liability).
Page 152Page 152
n391. See SEC v. Falbo, 14 F. Supp. 2d 508, 522-23 (S.D.N.Y. 1998) (finding an executive's secretary to be a fiduciary under
misappropriation theory); Brophy, 70 A.2d at 7 (holding that a secretary occupies "a position of trust and confidence toward the corporation,
with respect to the information so acquired, and the purchase of its stock for his own account was a breach of the duty he owed to" the
corporation).
n392. SEC v. Materia, No. 82 Civ. 6225, 1983 WL 1396, at 2-3 (S.D.N.Y. 1983), aff'd, 745 F.2d 197 (2d Cir. 1984).
n393. SEC v. Trikilis, No. CV 92-1336-RSWL(EEX), 1992 WL 301398, at 3 (C.D. Cal. July 28, 1992), vacated, Civ. A. No. 92 1336-
RSWL(EEX), 1993 WL 43571 (C.D. Cal. Jan. 22, 1993).
n394. See Kim, Governmental Insider Trading, supra note 34, at 61.
n396. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (1975).
n397. George D. Brown, Should Federalism Shield Corruption? - Mail Fraud, State Law and Post-Lopez Analysis, 82 Cornell L. Rev. 225,
250 (1997) (discussing the United States v. Lopez Court's concern with protecting traditional state police power).
n398. See George D. Brown, New Federalism's Unanswered Question: Who Should Prosecute State and Local Officials for Political
Corruption?, 60 Wash. & Lee. L. Rev. 417, 421 (2003).
n399. See Adam H. Kurland, The Guarantee Clause as a Basis for Federal Prosecutions of State and Local Officials, 62 S. Cal. L. Rev. 367,
370 (1989) (stating that the constitutionality of statutes prosecuting state and local officials for corruption is well established).
n400. See id. (noting that Racketeer Influenced and Corrupt Organizations statute, the Travel Act, and the Hobbs Act were all grounded in
the Commerce Clause and survived constitutional challenge). Public officials are also prosecuted under the federal mail fraud statutes, which
are grounded in the postal power.
n401. See, e.g., United States v. Morrison, 529 U.S. 598 (2000) (civil damages provision of the Violence Against Women Act); United
States v. Lopez, 514 U.S. 549 (1995) (Gun-Free School Zones Act).
n402. See Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 Vand. L. Rev. 1573, 1585 n.29
(2005), for a discussion on the constitutionality of a hypothetical complete federal displacement of state corporate law. It goes without saying
that if Congress has the power to displace state corporate law in its entirety, Congress certainly has the power to regulate insider trading in its
entirety.
n403. Ryan K. Stumphauzer, Note, Electronic Impulses, Digital Signals, and Federal Jurisdiction: Congress's Commerce Clause Power in
the Twenty-First Century, 56 Vand. L. Rev. 277, 289 (2003). For a discussion of some lower courts' broad readings of the phrase
"instrumentality of interstate commerce," see id. at 312-13.
Page 153Page 153
n404. Lopez, 514 U.S. at 558-59 ("Congress' commerce authority includes the power to regulate those activities having a substantial
relationship to interstate commerce ... .").
n405. Section 10(b)'s prohibitions apply when a defendant uses "any means or instrumentality of interstate commerce or of the mails, or of
any facility of any national securities exchange." 15 U.S.C. § 78j. Likewise, Rule 10b-5 provides that it is unlawful "for any person, directly
or indirectly, by the use of any means or instrumentality of interstate commerce ... ." 17 C.F.R. § 240.10b5.
n406. Cf. Lopez, 514 U.S. at 561 (striking down part of the statute because "it contains no jurisdictional element which would ensure" that
the prohibited activity affects interstate commerce).
n407. John C. Coffee, Jr., Modern Mail Fraud: The Restoration of the Public/Private Distinction, 35 Am. Crim. L. Rev. 427, 454-55 (1998)
(observing that federal anti-corruption legislation does not easily offend the anti-commandeering principle of New York v. United States).
n408. See id. at 455 (suggesting that Justice O'Connor created an exception to the federalism limits imposed in New York v. United States
for legislation that "subjected a state to the same legislation applicable to private parties").
n409. U.S. Const. art. I, § 6, cl. 1; see John E. Nowak & Ronald D. Rotunda, Treatise on Constitutional Law 305-12 (8th ed. 2010)
(explaining the history of the Speech or Debate Clause and the cases interpreting it). Of course, if a state constitution has a similar clause,
some of this analysis may cross-apply. Cf., e.g., Wilkins v. Gagliardi, 556 N.W.2d 171, 176-77 (Mich. App. 1996) ("The Speech or Debate
Clause of the Michigan Constitution is substantially similar to that of the United States Constitution ... .").
n410. Davis v. Passman, 442 U.S. 228, 235 n.11 (1979) (quoting Eastland v. United States Servicemen's Fund, 421 U.S. 491, 501 (1975))
(internal quotation marks omitted).
n411. Gravel v. United States, 408 U.S. 606, 624-25 (1972).
n412. See, e.g., United States v. Brewster, 408 U.S. 501, 508 (1972) (noting that the Founders designed the Clause to foster legislative
independence); Gravel, 408 U.S. at 616 ("The Speech or Debate Clause was designed to assure a co-equal branch of the government wide
freedom of speech, debate, and deliberation without intimidation or threats from the Executive Branch."); United States v. Johnson, 383 U.S.
169, 180-81 (1966) ("[The Clause] prevents intimidation by the executive ... .").
n413. Johnson, 383 U.S. at 178. For separate exploration of general separation of powers principles, see supra note 35.
n414. Brewster, 408 U.S. at 507.
n415. Gravel, 408 U.S. at 616.
n416. Id. at 625.
n417. Brewster, 408 U.S. at 516; see id. at 520 (rejecting "sweeping claims [that] would render Members of Congress virtually immune
from a wide range of crimes simply because the acts in question were peripherally related to their holding office").
Page 154Page 154
n418. Gravel, 408 U.S. at 626.
n419. United States v. Johnson, 383 U.S. 169, 172 (1966) ("No argument is made, nor do we think that it could be successfully contended,
that the Speech or Debate Clause reaches conduct, such as was involved in the attempt to [illegally] influence the Department of Justice [and
thereby defraud the United States], that is in no wise related to the due functioning of the legislative process."). The Court did hold, however,
that with respect to a conspiracy charge that turned on dissecting both the text and motivation for a speech that Johnson made during the
legislative process, the Speech or Debate Clause would prevent prosecution. Id. at 173-77. The Court was careful to guard against
overreading. It explained, "our decision does not touch a prosecution which, though as here founded on a criminal statute of general
application, does not draw in question the legislative acts of the defendant member of Congress or his motives for performing them." Id. at
185.
n420. Brewster, 408 U.S. at 501 (prosecution under 18 U.S.C.§§201(c)(1), (g)); United States v. McDade, 28 F.3d 283, 283 (3d Cir. 1994).
n421. United States v. Renzi, 651 F.3d 1012, 1012 (9th Cir. 2011).
n422. Fed. Election Comm'n v. Wright, 777 F. Supp. 525, 527 (N.D. Tex. 1991).
n423. United States v. Rostenkowski, 59 F.3d 1291, 1302-04 (D.C. Cir. 1995).
n424. Cf. Brewster, 408 U.S. at 528 ("The Speech or Debate Clause does not prohibit inquiry into illegal conduct simply because it has
some nexus to legislative functions.")
n425. 408 U.S. 501 (1972).
n426. Cf. Bainbridge, Inside the Beltway, supra note 9, at 303 n.153 (comparing legislator insider trading to legislator bribery under
Brewster and stressing that both fall outside the scope of legislative activity).
n427. Brewster, 408 U.S. at 526 (internal quotation marks omitted); see id. at 512 ("A legislative act has consistently been defined as an act
generally done in Congress in relation to the business before it.").
n428. See id. at 524-25 ("But financial abuses by way of bribes, perhaps even more than Executive power, would gravely undermine
legislative integrity and defeat the right of the public to honest representation."); Bainbridge, Inside the Beltway, supra note 9, at 303 ("By
removing the perverse incentives such trading opportunities create, the legislative process would be enhanced.").
n429. United States v. Renzi, 651 F.3d 1012, 1031 (9th Cir. 2011) (holding that certain exhibits and emails that discussed status of actual
legislation should have been excluded from the grand jury based on these privileges). For the justification of this holding, see generally id. at
1020, 1035 n.27 (describing three distinct protections - liability immunity, testimonial privilege, and evidentiary privilege). Whether the
Clause creates also a nondisclosure privilege applicable against the Executive Branch is in dispute. Compare United States v. Rayburn
House, 497 F.3d 654, 663 (D.C. Cir. 2007) (finding the privilege), with Renzi, 651 F.3d at 1034 (rejecting the privilege).
Page 155Page 155
n430. See Gravel v. United States, 408 U.S. 606, 616 (1972) (recognizing testimonial privilege).
n431. See United States v. Helstoski, 442 U.S. 477, 487-88 (1979) (holding that evidence that refers to a member's legislative act or
inquiries into the motivation behind a legislative act may not be introduced in a government prosecution). It is not entirely clear whether a
member can waive the Speech or Debate Clause. See id. at 490-91 (holding that if waiver is possible, it "can be found only after explicit and
unequivocal renunciation of the protection," but not deciding the question of its possibility).
n432. See United States. v. Renzi, 686 F. Supp. 2d 956, 971 (D. Ariz. 2010) (referring to the definition of "legislative act" as "an act
generally done in Congress in relation to the business before it ... or things said or done ... as a representative, in the exercise of the functions
of that office" (quoting Brewster, 408 U.S. at 512) (internal quotation marks omitted)).
n433. Although neither pure speech nor debate, a member's attendance at congressional hearings, briefings, or debates nonetheless is
necessary to performing all other legislative functions that are clearly protected by the Clause, such as voting or preparing committee reports.
Accordingly, the Supreme Court has acknowledged that "congressional efforts to inform itself through committee hearings are part of the
legislative function." Hutchinson v. Proxmire, 443 U.S. 111, 132-133 (1979).
n434. United States v. Swindall, 971 F.2d 1531, 1543 (11th Cir. 1992). The prosecution presented the evidence relating to the
Congressman's membership status in certain committees for the purpose of supporting an inference that the Congressman had "unique and
specific knowledge" of certain statutory provisions. The establishment of such knowledge was critical to the prosecution's case of perjury.
See id. at 1542. It should be noted, however, that the Court declined to dismiss the other indictments, where the prosecution established the
requisite evidence with reference to a legislative act. See id. (declining to dismiss Count Five).
n435. Brewster, 408 U.S. at 512. Also, in Gravel, the Court held that the lobbying of executive branch officials, though generally done, was
not protected by the Speech or Debate Clause because such activity was "beyond the legislative sphere." 408 U.S. at 625-26. In addition,
promises to perform a legislative act are not protected by the Clause. See Helstoski, 442 U.S. at 489.
n436. See Nowak & Rotunda, supra note 409, at 312-13.
n437. In addition, the Privilege from Arrest Clause, U.S. Const. art. I, § 6, is inapplicable because the privilege is limited to protection from
civil arrest, which is now an obsolete practice. See Nowak & Rotunda, supra note 409, at 312; Bainbridge, Inside the Beltway, supra note 9,
at 302.
Page 157Page 157
46 Cornell Int'l L.J. 219, *
58 of 430 DOCUMENTS
Copyright (c) 2013 Cornell University

Cornell International Law Journal
Spring, 2013
Cornell International Law Journal
46 Cornell Int'l L.J. 219
LENGTH: 30320 words
ARTICLE: The Word Commons and Foreign Laws
NAME: Thomas O. Main+
BIO: + William S. Boyd Professor of Law, William S. Boyd School of Law, University of Nevada, Las Vegas. The
author thanks Anupam Chander, Martha Minow, Scott Dodson, Elizabeth Burch, Tom Rowe, Dan Markel, Alexandra
Lahav, Kevin Stack, Greg Pingree, Jay Tidmarsh, Collin Wedel, Stephen Subrin, Matt Hall, Gregory Schneider, Emily
Navasca, and others who generously shared their expertise and offered their insights. This Article also benefited from
comments made by friends and colleagues at the University of Nevada-Las Vegas William S. Boyd School of Law and
the University of the Pacific McGeorge School of Law, and by colleagues during presentations at Temple University
Beasley School of Law, University of San Francisco Law School, St. Mary's University School of Law, and the
Northern California International Law Scholars Program.
LEXISNEXIS SUMMARY:
... The difficulty of ascertaining foreign law is somewhat peculiar since many legal systems throughout the world use
thousands of the same Latin, French, and English words in their codes and discourse. ... Like the farmers who bring
additional cattle to graze on the commons, national systems, acting independently and rationally, will introduce variant
meanings that progressively consume the common meaning of a word not only in the system that introduces the
variation, but everywhere else as well. ... Although some of these countries might precisely replicate the original
meaning, countries can - and should - tailor the device for their desired purpose. ... Accordingly, the discovery of
something new costs more, by way of measurement, than the confirmation of something familiar. ... The expense of
measuring foreign law is avoided when a case is dismissed on a forum non conveniens motion, but at what cost? ...
These efforts are qualitatively different from Incoterms, however, because effective harmonization requires two steps:
first, the laws must be harmonized; second, the meanings of the words in the shared text must be harmonized. ... Such a
resource could lead to the more frequent appointment of neutral experts and special masters.
HIGHLIGHT:
Dual trends are colliding in U.S. courts. The first trend is a tidal wave of cases requiring courts to engage the
domestic laws of foreign legal systems; globalization is the principal driver of this escalation. The second trend is a
profound and ever-increasing skepticism of our ability to understand foreign law; the literature of pluralism and
postmodernism has illuminated the uniquely local, language-dependent, and culturally embedded nature of law. Courts
cope with this dissonance by finding some way to avoid the application of foreign law. However, these outcomes are
problematic because parties are denied access to court or have their rights and responsibilities determined pursuant to
the incorrect law.
This Article offers an exposition of lexical meaning to explain the source of these oppositional trends and to
illuminate possible solutions. Legal words and ideas transcend geographic, social, and cultural boundaries. For this
reason, the words of another legal system look familiar and, thus, appear knowable to an outsider. Yet autonomous
national legal systems tend to tailor the meanings of these shared words for idiosyncratic purposes. Thus, ironically -
Page 158Page 158
even paradoxically - the more commonly a word is used, the less predictable is its meaning. This differentiation of
meanings makes actual knowledge of the foreign law difficult to achieve.
As a framework for examining this phenomenon, this Article demonstrates that the common meaning of a word is a
limited resource. The common meaning of a word erodes when legal systems assign a new meaning to a shared word.
Idiosyncratic meanings are useful and generative, but they also introduce an important negative externality because the
common meaning of a word is essentially the starting point for measuring the meaning of that word in a foreign system.
The more robust the common meaning, the lower the measurement costs. The prototypical solutions to common-pool
problems - privatization and regulation - are infeasible here. Moreover, ubiquitous efforts to unify, approximate, or
harmonize laws tend to exacerbate the problem rather than help solve it.
We could drop the pretense that we are able to understand foreign law and eliminate the demand for it.
Alternatively, if the doctrines are going to presume familiarity with foreign law, we must address the supply side and
ensure that courts are, in fact, better able to understand the idiosyncracies of foreign law.
TEXT:
[*220]
Introduction
In the article that popularized the tragedy of the commons, Professor Garrett Hardin suggested that a common-pool
resource might remain usable for a substantial period before it ultimately collapses. n1 Providing an open pasture for
farmers to graze their cattle, for example, worked satisfactorily for a long time because wars, theft, and disease
prevented the population of farmers and cattle from rising significantly and, thus, limited pressures on the land. But
there arrives a moment in time when conditions demand that this approach be abandoned as unsustainable. The "day of
reckoning" inevitably comes, when the "inherent logic of the commons...generates tragedy." n2
Globalization is leading to a similar tipping point regarding the ascertainment of foreign law. There are an ever-
increasing number of disputes with multi-national contacts. These cases implicate constellations of doctrines and
statutes that, in turn, require courts to engage foreign laws. "As you read these words, there are half a dozen U.S. courts
that are assiduously citing foreign law ... ." n3 Courts confront matters involving Korean contract law, n4 Egyptian
corporate law, n5 Peruvian civil procedure, n6 Russian [*221] criminal process, n7 and so on. And this spectacle is just
getting underway. n8
Yet rather than actually applying the foreign law that they cite, courts usually avoid it. n9 The artful dodge comes in
many forms, and the consequences of evasion can be serious. Courts frequently dismiss cases that would otherwise
require them to apply foreign law. n10 In other instances, litigants may have their rights and responsibilities determined
pursuant to the wrong law. n11
The salient reason for the avoidance of foreign law is the mismatch between what the courts are able to do and what
the doctrines and statutes require. Ascertaining foreign law presents a formidable challenge. The inherent complexity of
a legal system poses a tremendous burden for someone not trained in that system to navigate and decipher. The legal
pluralism literature warns of nuance in layers of ordering: a mandate considered out of context can be incomplete or
misleading. n12 Furthermore, scholars of different orientations have sharply illuminated the vagaries of cultural and
language translations. n13
Moreover, the content of foreign law cannot be buried as a question of fact in the black box of jury decision-
making. Rather, it is a question of law. n14 Accordingly, this shines a spotlight on judicial resolution of the question for
both trial and appellate judges. Unfortunately, the adversarial system tends to magnify the problem. n15
The difficulty of ascertaining foreign law is somewhat peculiar since many legal systems throughout the world use
thousands of the same Latin, n16 French, n17 and English n18 words in their codes and discourse. The [*222] translation of
words between languages creates another large corpus of words that are shared between and among legal systems. For
example, purchase and sale in English resembles compra y venta in Spanish, compravendita in Italian, achat et vente in
French, einkauf und verkauf in German, and so on.
However, shared words do not necessarily have shared meaning. Legal systems tailor the meanings of words to
reflect the unique priorities, preferences, and goals of a judicial, political, or social system. n19 The meaning of the word
Page 159Page 159
class action, for example, will vary among countries for good, but idiosyncratic, reasons. In one country, the word can
refer to a joinder device that only a government actor can initiate; in another, it can refer to a joinder device permissible
only for consumer cases. Difference in word meaning can range from subtle to dramatic.
Because words have more than one meaning, we can discern from those variant meanings what we might call a
common meaning - defined here as that which is common to all of the variant meanings. For example, if the term class
action has different meanings in the systems of the United States, Finland, and Norway, the common meaning of that
term is the common ground among the various extant meanings.
The most novel contribution of this Article is the characterization of a word's common meaning as a limited
resource. Common meaning is a limited resource because the introduction of variant meanings can diminish, [*223]
but will never enhance, the content or scope of a word's common meaning. By using the word class action, for example,
each system's variant meaning may progressively erode the common ground. The more disciplined and uniform the
meanings assigned to a word, the more robust its common meaning. At the other extreme, promiscuous use of the word
could deplete its common meaning rather quickly.
Characterizing the common meaning of a word as a limited resource invites consideration of this language
phenomenon as a common-pool problem. In the classic scenario, the tragedy of the commons is a product of the fact
that the farmers enjoy all the benefits of their actions yet bear only part of the expense of those actions. The part of the
expense borne by the others is a negative externality. n20 Here, a legal system that introduces an idiosyncratic meaning to
a shared word likewise enjoys all the benefits from that customization. Yet that system bears only a fraction of the
expense it creates. Idiosyncratic meanings create a negative externality because they diminish the content or scope of a
word's common meaning. Like the farmers who bring additional cattle to graze on the commons, national systems,
acting independently and rationally, will introduce variant meanings that progressively consume the common meaning
of a word not only in the system that introduces the variation, but everywhere else as well. n21
While it may be easy to see why a common grazing land is valuable to cattle farmers, the utility of a word's
common meaning is less obvious. To understand why the dilution of a word's common meaning is, in fact, a tragedy,
one must appreciate how often participants in a legal system ascertain or "measure" the meanings of words. Participants
measure the meaning of words in their own legal system; however, they also measure the meaning of words in other
legal systems. This measurement is undertaken to ascertain the tailored meaning of the word in the foreign system, not
the word's common meaning, but the common meaning of the word can play an important role in this exercise.
Specifically, the cost of measuring the tailored meaning rises as content in the common meaning falls. Common
meaning is like the starting point, and the closer that the starting point is to the finish line (that of understanding foreign
law), the shorter the distance traveled. Because idiosyncratic meanings erode common meaning, idiosyncrasy in one
system can increase the information processing costs of all other systems interacting with any other system. n22
The erosion of a word's common meaning helps explain why courts may be ill-equipped to reliably and confidently
measure the meaning of foreign words. For courts navigating these waters, a robust common meaning could operate as
something of an anchor of familiarity. The absence of that anchor leaves them adrift. Avoidance of foreign law is a
predictable [*224] consequence. Unfortunately, avoidance converts an information problem into a justice problem.
This Article brings into sharper relief a problem that is inchoately understood but poorly addressed. Ubiquitous
reform efforts to draft model legislation, to promote the harmonization of laws, or to advance multilateral protocols are
premised, explicitly or implicitly, on the notion that difference among national laws is expensive, problematic, archaic,
or unnecessary. n23 I refer to these reforms as demand-side efforts because they would reduce the demand for
customization (which, in turn, consumes common meaning). There is no foreign law to measure, the thinking goes,
when the foreign and forum laws are the same. But I argue that this is not a text problem, and, therefore, there is no
textual solution. Demand-side efforts cannot solve the problem because the common meaning of a word is a limited
resource that will inevitably (or "tragically") degrade. Harmonization efforts, in fact, exacerbate the information
problem. n24
To solve the problem, attention must turn to supply-side efforts: obtaining better information about the content of
foreign law. I survey several supply-side techniques that are already available to courts but are comparatively under-
utilized, such as appointing special masters and using court-appointed experts. n25 I also identify a role for new foreign
law institutes. n26 Yet, more important than these particular suggestions is the argument for supply-side reforms (and
against demand-side reforms) more generally.
I. Common Words
Page 160Page 160
Countries can design their own legal systems with whatever components and words they desire. Although most national
systems have some distinctive and unique features, there is also commonality between and among many legal systems.
Some of this overlap is a product of countries' shared histories and common traditions. n27 Another primary source of
overlap is the transplantation of practices and concepts from one system into another. n28 Especially (although not
exclusively) in these many areas of overlap, legal systems throughout the world draw from a common well of [*225]
words. n29
Legal words and ideas move from one system into another for a variety of reasons. Such movement can be
characterized as diffusion, transplantation, approximation, harmonization, evolution, hegemony, reception, unification,
or something else. n30 These labels suggest subtly different levels of intent and intensity, but each conveys the notion of
the movement of laws and words across national borders. The importation of a word from another legal system may be
deliberate, voluntary, and wise - or it might be none of these. n31 This migration of words is not a new phenomenon -
quite the contrary. n32 However, technology and globalization can introduce network effects that create new incentives or
pressures to transplant, and these might affect the pace of a word's movement. n33
Shared words need not have shared meanings. Indeed, legal systems can ascribe whatever meaning(s) they desire to
the words that they borrow, inherit, or invent. n34 And of course, difference in meaning can range from subtle to obvious.
Common examples of faux amis (false friends) n35 include the following words: brief, contempt, demand, doctrine,
domicile, fact, jurisprudence, law, magistrate, notary, process, res judicata, and trial. n36 [*226] The French word contrat
includes agreements that Americans would instead regard as gifts, conveyances, or trusts, and excludes various
documents that Americans would label contracts. n37 Marriage is a contrat in France but it is not a contratto in Italy. n38
Administrative law means very different things in civil law and common law countries. n39 What the Japanese call
discovery does not resemble its supposed American forbearer. n40 And American corporate lawyers might not recognize
as directors of Japanese companies individuals who are also employees. n41
The complete list of shared words with different meanings may be almost as long as the list of shared words itself.
n42
In support of this basic proposition, anthropologists emphasize that legal language develops characteristics that
conform to the unique history and culture of the system in [*227] which it operates. n43 Put another way, there is "no
transportation [between systems] without transformation." n44 Philosophers reach a similar conclusion by focusing on the
fact that legal words have meaning and meaningfulness only within the context of a specific legal system and particular
rules of law. n45 Finally, linguists and semioticians emphasize that the legal language of any system is an autonomous
technical language. n46 These literatures confirm what experience and common sense suggest about geographic variance
and the differentiation of a word's meaning.
Part I demonstrates two basic facts: that legal systems share words and that the meanings of those words can differ.
Both of these observations should be obvious and uncontroversial. Yet, notice that a paradox is already taking shape. On
one hand, words are shared between and among legal systems. In this respect, legal language, like many other
professional [*228] languages, n47 transcends geographic, social, and cultural boundaries. But on the other hand, legal
systems are also autonomous and unique. Each national law constitutes an independent legal system with its own
vocabulary, structure, and methodology. n48 Thus, the shared words may have different uses, purposes, and meanings.
Accordingly, the more popular a word is internationally, the less predictable its meaning is.
II. Word Meanings
This Part focuses more deliberately on what I intend by reference to the meaning of a word. For the purposes of this
Article, meaning refers to a word's "purpose, or intent, or function or aim or effect ... ." n49 The goal here is not to provide
a philosophical theory of meaning; this Article does not focus on why or how a word has the meaning it does, nor even
what meaning it has. n50 Indeed, everything that follows in this Article can stand while remaining agnostic about a
particular conception of meaning, provided one accepts the premise that legal words have meaning.
Most importantly, this Part defines three terms: original meaning, local meaning, and common meaning. These
terms are defined so that we can use them in later parts to explore the overlap and interaction of meanings that result
when different legal systems use the same words.
A. The Meaning of Lay Words and Legal Words
Page 161Page 161
The meaning of a word, whether it be lay or legal, is not a function of that word itself (nor the letters that constitute that
word), but rather the use to which that word is put. n51 A word is a symbol for something else - often a [*229] thing,
idea, or concept. n52 The word cat, for example, is a symbol that means something. It may be useful to think of that word
written on the exterior of a box; inside that box is the meaning or meanings of the word (i.e., what the symbol
represents). When one sees or hears the word cat, the brain invokes a meaning or meanings akin to something within the
content of the box that corresponds to that word-symbol. Of course this is no ordinary "box": it must contain cats of
different breeds and sizes, both tame and wild, cartoon and real, young and old, metaphoric and literal, and so forth.
Exactly which of these various cats our brain invokes when the word is read or heard is a function of the word's use and
context. n53
Words also symbolize ideas and concepts, not just things (like cats) that one places inside a box. Still, a word like
catch or catatonic has an associated box of meaning(s), even if that box includes only metaphysical entities or abstract
propositions. n54 The words cat, catch, and catatonic are symbols that evoke something because of the association
between these words and certain things, ideas, and concepts. n55 There is an infinite loop because a word symbolizes
something that can be described with words that, in turn, symbolize more concepts and more words, and so on. n56 But
[*230] the essential learning here is very simple: it is our associations with a word-symbol that suggest the meanings of
words, not anything that is intrinsic to the words themselves. After all, these letters and words could just as easily
symbolize anything else.
The association between a word symbol and its meaning(s) is the product of dynamic inter-subjective social
construction. n57 The meanings of lay words like cat, catch, and catatonic are neither officially announced nor formally
policed. n58 Instead, the box that informs a word's meaning contains something contingent upon the social discourse
within the applicable community. n59 Words mean what we construct them to mean. n60 Of course, what one speaker
envisions as a word's meaning may or may not match what the listener assigns to that symbol. From the perspective of a
discourse community, then, the meaning of a word may be contained in a "black box" (or at least an opaque one), rather
than a transparent container. What some members think is inside the box, others may not, and neither group is
necessarily right or wrong. n61
Language is famously indeterminate. n62 Even within a single discourse community, one word can have multiple
meanings. n63 Multiple words can share one meaning. n64 The meaning of words can change over [*231] time. n65 New
ideas and concepts spawn new words. n66 And ambiguity, n67 vagueness, n68 and generality n69 are de rigueur. n70
Accordingly, the study of meaning can be the study of something ephemeral, elusive, and enigmatic.
Our discussion so far has focused on the meaning of words. Yet meaning is a function not only of words, but also of
sentences, punctuation, paragraphs, and more. Most of the contemporary philosophy and linguistics literature focuses on
the construction of meaning in the sentential context (sentence-level), rather than at the word-level. n71 Indeed, the
sentential context is critical because the words and punctuation marks of a sentence can be rearranged to convey very
different things. However, it is important to appreciate that "words are ... atomic in an account of meaning." n72 We can
break down the meaning of an essay into paragraphs, divide the meaning of a paragraph into sentences, and divide the
meaning of a sentence into words. Yet we must stop there because, as we have already seen, the meaning of a word does
not depend systematically on the letters that comprise that word. n73 To focus on the meaning of words, then, is to focus
on [*232] the building blocks of meaning. n74 One might analogize the study of word-meaning to playing chess, and the
study of sentential-meaning to playing three-dimensional chess. n75
Lexical meaning is a more focused - and less complicated and controversial - inquiry than studying sentence-
meaning. But more importantly, it is also the core of legal discourse. n76 Researchers of language distinguish between
nomothetic sciences (which focus on universal rules) and idiographic sciences (which describe the unique and non-
recurrent cases). n77 The nomothetic sciences, which include the law, formulate generalizations and thus have a greater
need for terminology than the idiographic sciences, which focus on individual phenomena. n78 This emphasis on
terminology in legal discourse suggests that words are important not only for their role as building blocks in the
constitution of sentences, but often as the focus of the legal inquiry itself. n79 Indeed, many judicial opinions announce
something along the lines of: "This case turns on the meaning of the word x." n80
Meaning is also far less abstract in legal discourse as compared with [*233] other discourse communities. n81 For
practical reasons, as opposed to epistemological considerations, legal words and legal sentences must have meaning and
authority in a way that the words in a poem need not. A judge or a statute, for example, can definitively resolve the
scope of a word's meaning in a particular context. n82 This is an unusual condition compared to other language discourse,
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which is more open-textured and unregulated, sometimes even anarchic. n83 The meaning of a word in a William Blake
poem, for example, may be discussed for centuries without definitive resolution. n84
In the legal context, legislators and judges actualize the semantic potential of words and utterances in particular
speech acts. n85 Social conventions recognize and accept judicial authority to declare the meaning of words, albeit for a
limited purpose and for a particular discourse community. n86 [*234] Thus, a statute or judicial opinion may definitively
resolve whether cat includes cougars, which of two baseball fans caught a foul ball, or whether an individual is in a
catatonic state. The performative nature of language is indispensable for a legal system to execute its mandate to define
the rights and responsibilities of its citizenry. n87
To be sure, linguistic indeterminacy is neither avoidable nor avoided in legal discourse. n88 Even when the meaning
of a word or concept is judicially determined to include or exclude a situation presented, other indeterminacies can
persist - polysemy, n89 synonymy, n90 evolution, n91 neologisms, n92 ambiguity, n93 vagueness, n94 and generality n95 are
endemic. However, unlike other discourse communities, as there is a judicial infrastructure with the recognized
authority to interpret or construct that meaning, we can confidently refer to legal words as having meaning within that
community. The interpretive infrastructure can determine the content of any box that contains the meaning of any legal
word. Thus, the meaning of a legal word unquestionably exists even if it is deliberately protean or hopelessly unclear
prior to (or even after) it is interpreted.
Because there is an arbiter of meaning, legal language is fundamentally different from ordinary discourse. When
analyzing the interaction of meanings in such legal language, the existence of a meaning or meanings is much more
important than either the content of any particular word's [*235] meaning or the philosophical methodology by which
a word's meaning is derived.
B. Original Meaning, Local Meaning, and Common Meaning
Legal words begin with what I call an original meaning. The first legal system to introduce a word determines the
original meaning of that word. n96 This Article uses the word class action as an example of a word-symbol. But, of
course, the word could just as easily be alimony, bond, consideration, or something else. When the word-symbol (or
word) class action was introduced, its original meaning embodied all that the legal discourse and the associated
conventions embedded in that word. The box of original meaning for that word-symbol included the text of the new rule
and all of its attendant features. n97 The original meaning of the word class action could include a trans-substantive
joinder device with four prerequisites, a provision for opt-outs, limits on compromising suits without court approval, a
protocol for the appointment of class counsel, and so forth. n98 For expository purposes, let us refer to this original
meaning of class action as M<1>, and its originator legal system as First Country.
The original meaning of a word, as defined here, is broad. Why isn't the original meaning of class action instead
defined as something narrow, such as "litigation by a representative on behalf of a group," and nothing more than that?
The answer is that we are trying to describe the meaning assigned to the word by the system that introduced it. If First
Country introduced the word class action with a rule that has prescribed objectives, prerequisites that must be satisfied,
and a number of accompanying technicalities that must be met, there is no basis for including some of these and
subordinating others in an original meaning. In the same way that a statute might introduce the word disability with a
definition that includes a detailed list of specific medical conditions, the original meaning of a word should include all,
not just some, of those enumerated conditions. If we are trying to ascertain the meaning that is in the original "box," the
best evidence of the original meaning of M<1> is what First Country has said (or would say) that it is. The inclination to
suggest a narrower characterization of original meaning would often lead to a meaning that would reflect hindsight bias
n99
- invoking more of the word's legacy or essence based [*236] upon the subsequent uses of the word. A word's legacy
or essence tells us something important about a word's meaning, but not about its original meaning.
Once one country introduces a word and its associated concept, we might expect some other countries to find the
new idea useful. And, of course, some of these countries may even wish to use the same word-symbol. n100 Although
some of these countries might precisely replicate the original meaning, n101 countries can - and should - tailor the device
for their desired purpose. n102 Because the meaning of a word in any legal system is a product of the legal discourse in
that system, each legal system can assign whatever meaning it desires to the words it uses. n103 Put another way, the
system can fill the box of meaning with any mixture of borrowed and unique content. n104
Thus we might imagine another legal system, called Second Country, that replicates the original meaning of class
action except for a new provision that limits the scope of the subject matter of class actions to certain substantive areas
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(e.g., available only in consumer cases). Because M<1> has a trans-substantive scope in this scenario, meaning no
restriction as to subject matter, Second Country has introduced a slightly unique meaning of the word class action,
which we shall label M<2>. Third Country might then replicate the original (M<1>), but change only the requirements
for appointment of class counsel, introducing M<3>. At this stage in the hypothetical we have three different countries -
each with a meaning of the word class action that is tailored to its respective system. This Article refers to these tailored
meanings of the word as local meanings. Thus, for example, the local meaning of the word class action in Third Country
happens to be the third iteration, M<3>.
A local meaning is not necessarily a unique meaning. Continuing with our hypothetical, Fourth Country might
replicate the original, M<1>, and Fifth Country might replicate M<2>. Finally, Sixth Country might replicate M<3>, but
also require members of the class to opt-in (as opposed to opting out of the class, as in the other five countries),
introducing the fourth variant meaning, M<4>. A tailored local meaning can replicate another system's [*237] meaning
or it can be subtly (or dramatically) distinctive. From a global perspective, each distinctive meaning adds another,
variant meaning to the word. In the hypothetical, we have six countries using the word and thus six local meanings; we
also have four variant meanings of the word, including the original meaning.
This Article is principally about the common meaning of a word. Common meaning is defined here as that which is
common among all of the local (or variant) meanings. n105 Drawing from the above example, the common meaning of the
word class action would be the content that M<1>, M<2>, M<3>, and M<4> have in common. The following Venn
diagram illustrates the common meaning (CM) of the word class action in light of the four variant local meanings:
Figure 1
Put another way, the common meaning of the word is the content of the original meaning, M<1>, less the provisions
regarding subject matter (removed by M<2>), less the provisions regarding class counsel (removed by M<3>), and less
the provisions regarding opt-in/opt-out procedures (removed [*238] by M<4>). The mathematical symbols and
suggested calculation provide more precision than is intended or necessary, but they can be conceptually useful. n106
Thus, within any particular legal system, a word has both a local meaning and, as a subset thereof, a common
meaning. The common meaning includes those components of the local meaning that are also manifest in all other legal
systems. In the class action example, the word's common meaning after M<1>, M<2>, M<3>, and M<4> might include
such components as adequate representatives, notice requirements, numerosity, and whatever else of the original
meaning is incorporated within and unaltered by M<2>, M<3>, and M<4>.
Common meaning has an empirical quality that might reveal the essence of the word. For the word class action, for
example, the common meaning, after forty or fifty variant meanings, could be reduced to "litigation by a representative
on behalf of a group," and nothing more than that. n107 The common meaning could also resemble - or even be - what
logicians would label as necessary and/or sufficient conditions to define the word. n108 But, as defined here, common
meaning could be more or less than these alternative characterizations. Instead, the term identifies an empirical core of
common meaning that includes a word's shared characteristics.
[*239]
C. Common Meaning as a Limited Resource
The common meaning of a word is a limited resource. In contrast to words and meanings generally - which are shared
but not limited resources n109 - common meaning is a global, shared, limited resource, much like water or a species of
fish. The common meaning of a word is a limited resource because it erodes progressively as legal systems assign new
meanings to the shared word. Viewing lexical meaning through a lens of analysis reserved for limited resources offers a
unique perspective. Importantly, it allows us to consider a word's common meaning as a common-pool problem. n110
The prototypical common-pool resource is a plot of public grazing land that all cattle farmers can use to graze
cattle. n111 The grass on the commons is a sustainable resource so long as it consumed no faster than its natural rate of
replenishment. As soon as consumption exceeds that rate, the resource will provide diminishing aggregate returns. The
optimal strategy for the society as a whole, then, is to consume the resource at a sustainable rate. n112
Unfortunately, individual farmers will usually harvest for themselves at a rate higher than their share of the
sustainable aggregate rate. Indeed, each farmer, acting independently and rationally, will bring more than their share of
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cattle to the commons. n113 The economic explanation is that each farmer receives all of the benefit of each additional
cow they graze on the commons (because their cattle are fed), but bears only part of the expense of each additional cow
(since the effects of overgrazing are shared [*240] by all the farmers). The part of the expense that the other farmers
bear is the externality. n114 Predictably, the grass is consumed faster than it grows, and the independent rational actors in a
community create losses for everyone. As a result, "freedom in a commons brings ruin to all" - even though it is clear
that it is not in anyone's long-term interest for this to happen. n115 Such is the tragedy of the commons.
The common meaning of a word is likewise a shared limited resource that is vulnerable to this tragedy. I emphasize
that this is dramatic tragedy - a tragedy not in the sense of unhappiness, but rather in the sense that it is something that
the actors bring upon themselves because of the "solemnity of the remorseless working of things." n116 I explore the
normative consequences of preserving or losing this particular common-pool resource separately later. n117 However,
before considering those issues, let us confirm the inevitability of the devolution of a word's common meaning.
The marginal benefit of introducing a new meaning to a shared word is largely internal. Legal systems have
different preferences, priorities, and goals, n118 and these legitimate differences are manifest in slightly (or dramatically)
unique versions of, say, the class action device. Second Country may have legitimate reasons to limit the scope of its
device to consumer cases, regardless of the approach of other countries. Yet, this customization has very little, or no,
positive externality; in other words, no other country directly benefits from Second Country's innovation. Rather, like
the farmer who alone benefits from maintaining a larger herd of cattle, any particular legal system will receive all of the
benefit of its idiosyncrasy. n119
[*241] However, a system bears only a fraction of the costs it creates when it introduces a new meaning to a
shared word. The common meaning of a word operates as a commons. Like the depletion of the commons by the
farmers, national legal systems, acting independently and rationally, will introduce variant meanings that progressively
erode the common meaning of a word. Differences in the variant meanings of a word may range from subtle to
dramatic, with the latter presenting the bigger threat to a thick common meaning.
While the social value of a commons for grazing cattle is surely obvious, the value of a word's common meaning is
probably less so. In other words, so what if a word's common meaning is thick or thin? The answer to this question must
be addressed in two stages. To appreciate the significance of losing this global, shared, limited resource we must first
comprehend why, and how often, understanding the local meaning of foreign words is important. Thereafter, we can
explore the relationship between common meaning and local meaning.
III. The Relevance of Foreign Laws
Knowing the local meaning of a word - whether in one's own or another system - may be necessary or useful for
myriad reasons. For example, individuals or institutions may want such information to ensure compliance with a law, so
as to avoid penalties for noncompliance. Alternatively, they may want information about some law in order to enjoy its
incentives or protections, or to avoid, win, or delay litigation. Further, if the matter comes before a court, judges will
review all of the available information to determine the meaning of a particular word or provision.
Participants routinely study the meaning of words in their own legal system, but they occasionally must also
ascertain the meaning of words in other legal systems. The need to have information on foreign law n120 can [*242] arise
in many contexts and affect almost anyone involved in the legal process. In the course of everyday business - in drafting
contracts or considering trade with foreign countries, in dealing with foreign nationals or companies, or merely in
buying or selling foreign goods at home - the need to consider the laws of a foreign nation arises. n121 "Even people's
personal lives are increasingly affected by contacts with foreign countries." n122 Vacationers, potential immigrants,
expatriates, retirees, investors, and persons contemplating marriage to or adoption of foreigners "all may wish at one
time or another to inform themselves as to the operation and effect of foreign laws on their activities." n123
When a transnational transaction or occurrence leads to litigation, courts often need to consider foreign laws. A
casual glance of very recent opinions from U.S. courts reveals dozens of such cases - implicating the laws of Argentina,
Australia, the Bahamas, Canada, the Cayman Islands, Costa Rica, the Dominican Republic, Ecuador, England, Finland,
French Polynesia, Germany, India, Indonesia, Iraq, Israel, Kuwait, Malaysia, Mexico, the Netherlands, Nigeria, Saudi
Arabia, Switzerland, Taiwan, and Venezuela, for example. n124 As seen in these cases, there is also a vast [*243]
geographic spread of courts that encounter questions of foreign law.
Foreign law is invoked for many reasons. The most frequently used conflict of laws doctrine requires the
application of foreign substantive law when a foreign jurisdiction has the "most significant relationship" with the
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underlying event. n125 In a tort action, the foreign country may have been the place of injury or wrongful conduct; in a
contract action, the foreign country may have been the place of contracting or of performance. n126
Choice of law clauses may also direct a court to apply foreign law. n127 Because respect for party autonomy is an
important norm in conflict of law theory surrounding contracts, n128 choice of law clauses are especially popular in
commercial and contract law. n129 Even matters without a transnational component may be subject to a determination of
foreign law if a robust "law market" emerges. n130
Policies such as the internal affairs doctrine in corporate law disputes [*244] may also compel the application of
foreign law. n131 Tax, n132 intellectual property, n133 and immigration n134 matters routinely implicate foreign laws. Domestic
laws such as the Foreign Corrupt Practices Act, n135 Title VII, n136 the Age Discrimination in Employment Act, n137 and
many other statutes n138 [*245] incorporate foreign law by reference. n139
In addition to those situations where courts are expected to apply foreign law, n140 many doctrines require courts to
consider or evaluate foreign law as part of the decisional calculus. On every motion to dismiss on grounds of forum non
conveniens, for example, the court must evaluate the adequacy of the alternative forum. n141 Similarly, every recognition
and enforcement of a foreign judgment is premised on the notion that the judgment is "final and conclusive and
enforceable where rendered," and is not the product of procedures incompatible with due process of law. n142 Further,
whenever there is concurrent parallel litigation in a foreign forum, the local court must assess the nature, content, and
significance of the foreign proceedings. n143
[*246] The list of situations in which foreign law can arise is as diverse as it is lengthy. In sentencing a criminal
defendant, prior foreign convictions can raise foreign law issues. n144 Criminal or tort defendants may raise a "cultural
defense." n145 In contract cases, foreign law may serve as a de facto excuse for nonperformance of a contract. n146 When a
witness invokes the privilege against self-incrimination, the issue can be the risk of prosecution under the law of a
foreign country. n147 A foreign forum selection clause may be unenforceable after review of the foreign jurisdiction's
substantive or procedural law. n148 A class action that includes foreign plaintiffs usually leads the court to consider, as part
of the certification process, whether a foreign court is likely to give res judicata effect to any dismissal, judgment, or
settlement. n149 Finally, foreign laws are also routinely implicated when there is service n150 or discovery n151 abroad.
[*247] Courts may also be obliged to consider foreign law when enforcing treaty obligations, applying uniform
laws, or advancing multinational harmonization efforts. n152 In these contexts, courts may need to consider foreign
interpretations of the shared mandate as part of the decisional calculus. n153 Litigation under the United Nations
Convention on Contracts for the International Sale of Goods (CISG) is one prominent example. n154 The CISG is
domestic law by virtue of a self-executing treaty, but the purpose of the multilateral treaty is to achieve uniformity in its
application. n155 Accordingly, courts must look to foreign case law for guidance in interpreting the relevant provisions of
the CISG. n156
A similar situation arises when domestic statutes or common law doctrines require knowledge of customary
international law or the law of nations. This is similar because international law is "foreign law" not only [*248] in the
sense that it is not state or federal law, but also because the substantive content of international law can require a review
of foreign domestic laws to determine whether there is a broad international consensus on a particular point of law. n157
Further, all federal laws are to be construed so as to avoid "violating the law of nations if any other possible
construction remains." n158
The foreign law inquiry can also require combinations of international and foreign domestic laws. The Foreign
Sovereign Immunities Act, for example, allows suits against foreign sovereigns when property is taken in violation of
international law. n159 Yet, whether international law has been violated will sometimes require a threshold determination
under foreign domestic law - e.g., who owned the property in question? n160
In a standard functionalist account of lawmaking, n161 the incorporation and consideration of foreign law in all of
these statutes and doctrines is neither casual nor accidental. The application, consideration, or evaluation of foreign law
may be central to a fair and just result in a particular case. The many situations where courts must apply or evaluate
foreign law constitute efforts to calibrate a balance among competing interests, to achieve the right levels of deterrence
and compensation, to ensure respect for the interests of foreign nations, or to encourage reciprocal treatment from such
foreign nations. n162
The above examples regarding the application of foreign law should not be confused with the controversy regarding
when and how foreign law should be used as persuasive or moral authority in interpreting the U.S. Constitution. n163 For
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example, the U.S. Supreme Court has cited foreign authority in deciding when the death penalty constitutes "cruel and
unusual [*249] punishment" under the Eighth Amendment n164 and in determining whether particular rights are
protected under a substantive due process analysis. n165 These opinions have generated several arguments against the use
of foreign legal authority in domestic constitutional interpretation. These include concerns that selective invocation of
foreign precedent gives judges too much discretion in their interpretive process, n166 that reliance on foreign law
undermines democratic accountability, n167 and that foreign law reflects local conditions and values incompatible with
unique aspects of American history, culture, and government. n168 This controversy raises a [*250] fundamentally
different issue, however, because in this narrow category of constitutional interpretation, the relevance of the foreign
law is often genuinely debatable. Indeed, even the advocates of using foreign law in the context of constitutional
adjudication acknowledge that, in the above examples, the foreign laws are merely useful rather than necessary. n169 By
contrast, this Article regards situations where foreign laws are unquestionably relevant and, in many circumstances,
even binding. n170 So let us put the contentious debate about constitutional interpretation aside and focus instead on those
matters of foreign law that are not, in this sense, controversial.
Whatever the total number of cases and situations where courts encounter, evaluate, or apply foreign law, it is
reasonable to speculate that that number will likely increase. n171 In a world where global travel is commonplace and
daily transactions routinely involve multiple countries, the number of disputes with transnational and international
components will surely grow. n172 Citizens of all countries will find themselves connected [*251] through the electronic
global information system. n173 Nations chasing prosperity will further integrate into a global development system. n174
Necessity - "practical commercial necessity" - will make issues of foreign law even more common and ever more
urgent. n175
IV. Measuring Foreign Meaning
When individuals, courts, or other institutions want or need information such as the tailored local meaning of a foreign
word, they face what economists call a measurement problem. n176 Humans can process and understand familiar things
relatively quickly: we "know what to look for, [*252] whom to ask, which issues to trouble over, and which to ignore
safely." n177 Conversely, to understand unfamiliar things, we must invest more time and resources - asking questions,
conducting research, and consulting experts, for example - until we can relate that which is unfamiliar to something that
is familiar and understandable. n178
Imagine, for example, that you are invited to join in a card game of "poker." You have played games of poker
before, but you are reluctant to part with your money without knowledge of this particular game, so you watch a couple
of hands before joining in. You will quickly process those parts of the game that are already familiar to you: you may
notice a deck of fifty-two cards; suits of clubs, diamonds, hearts, and spades; a hierarchy of winning hands involving
sets and runs; betting chips; and so forth. Although you measure these familiar parts through your observation, this
process of confirmation is swift and almost automatic because of the familiarity of what you observe.
Before, during, and/or after that process of confirmation, you will undertake something much more complicated:
discovering and measuring those parts of this game of poker that are unfamiliar. These differences - whether major or
minor - will occupy the bulk of your attention. Why didn't the bidding proceed in a clockwise fashion around the table?
Why didn't that straight flush beat a full house? Why do these players make such a point of articulating the amount of
each of their bids twice? The answers to each of these questions would likely lead you to ask follow-up questions,
leading to more answers, and perhaps still more questions. This process of discovery is a measurement expense.
These categories of confirmation of the familiar on one hand, and discovery of the unfamiliar on the other, differ in
degree rather than kind. Although the unfamiliar components of a word or concept will require discovery, the process of
discovery and measurement will involve relating unfamiliar components to something familiar and digestible. n179 The
difference between confirmation and discovery, then, is simply the number of steps taken before knowledge is achieved.
However, additional steps require additional investment, whether of time or money. Accordingly, the [*253] discovery
of something new costs more, by way of measurement, than the confirmation of something familiar.
A. The Unique Challenge of Ascertaining Foreign Law
Measuring foreign law is notoriously difficult. n180 As a threshold matter, simply accessing foreign law can be
challenging. n181 To be sure, enthusiasm for globalization has led to a proliferation of materials about foreigners, foreign
legal systems, and foreign laws. n182 However, this information is still difficult to digest, explain, adapt, and "make
usable" elsewhere. n183 Unfortunately, "databases do not furnish comprehensive access to foreign law; there are no
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convenient Restatements; [and] American legal education does not systematically equip judges or lawyers to carry out
research in a foreign legal system." n184 "Globalization not only renders legal information more readily available, but
often also considerably more [*254] opaque." n185 Information, however, is not the same thing as knowledge.
First of all, understanding foreign law is difficult because it incorporates all the challenges inherent in
understanding domestic law. For example, the inherently inconstant character of laws aggravates the interpretation of
the laws of a foreign system, as the effect of any law may differ from time to time. n186 The measurer must also consider
questions of constitutional validity and other threshold matters. n187 The law may vary depending upon whether one
adopts the interpretive lens of intentionalism, purposivism, textualism, or something else. n188 The foreign law may be
unsettled and controversial. n189 As the instruments of lawmaking are as malleable as words and laws themselves, one
may also encounter such phenomena as deliberately ambiguous laws. n190
Further, to apply or evaluate foreign law begs the jurisprudential question: What is law? Trawling the depths of that
question, legal pluralism literature explores the characteristics and consequences of the relationship between and among
the overlapping, semiautonomous layers of formal law and informal law. n191 The uninitiated often presume the
applicable foreign law to be some state code n192 but there may be other formal codifications [*255] that amplify or
qualify that code provision. n193 Some legal systems are formally pluralistic, recognizing various other family, religious,
business, or customary legal systems. n194 Further, various influential, if nonbinding, forms of "soft law" complicate the
foreign law inquiry. n195 A comprehensive application of foreign law requires the measurer to unpack the normative
heterogeneity discussed above and then to apply the relevant mandates faithfully.
For a number of overlapping reasons, knowledge of foreign law is especially and inherently difficult to achieve. n196
"There are very few [*256] points [of foreign law] which lend themselves to ... simple treatment." n197 "'Applying'
foreign law requires more than mere reference to that law; it demands that foreign law be considered on its own terms."
n198
But words are embedded within a legal system, and that system "employs a certain vocabulary, corresponding to
certain legal concepts; it uses certain methods to interpret them," and these methods, in turn, incorporate certain notions
of social order and the capacity and functions of law. n199
"One of the most problematic features of legal discourse is that it is 'invisible' ... 'the most serious obstacles to
comprehensibility are not the vocabulary and sentence structure employed in law, but the unstated conventions by which
language operates.'" n200 Part of this extraordinary challenge can be explained as a matter of cognitive science. "Speakers
produce the minimum linguistic information sufficient to achieve the speaker's communicational needs." n201 The
discourse community contemplated for a national law, for example, is a domestic audience. n202 Effective communication
with an outsider is not the purpose of such a text. Thus, the foreign law will not express all of the cues, assumptions,
presumptions, exceptions, canons, common sense, and peripheral knowledge essential to a comprehensive
understanding. n203 An apt analogy to the task of understanding foreign law is that of trying to learn the law on a
complex, unfamiliar, [*257] specialized subject solely from bar review outlines. n204
Inevitable cultural differences between the legal systems at issue may produce much of the difficulty in
understanding foreign law. n205 Legal words are immersed in a cultural context and are modulated by "systems," n206
"substructural forces," n207 "invisible patterns," n208 and "legal formants" n209 that inform and explain each word. n210 Laws do
not exist in the abstract; n211 they constitute a cultural understanding "which presupposes a cooperative community of
interpreters." n212 Legal language is a social practice, and the box of meaning for each legal word "necessarily bears the
imprint" of distinctive discursive practices. n213 "Law ... is local knowledge." n214
[*258] For all these reasons, to understand foreign law and all of these unique factors upon which it depends is a
remarkably ambitious undertaking. According to some, one can understand another legal system only through
immersion within that system and its values. n215 Absent intimate contact, the forum will examine unfamiliar laws as a
foreigner, interpreting a foreign law in light of its own values. n216 Proper examination "requires some degree of empathy
for the values peculiar to that system." n217 Yet this empathy extends to a long list of influences and factors, including the
foreign country's "political arrangements, social relations, interpersonal interactional practices, economic processes,
cultural categorizations, normative beliefs, psychological habits, philosophical perspectives, and ideological values." n218
It includes understanding a society's "religion, history, geography, morals, custom, philosophy, or ideology." n219 (It may
even include watching their movies! n220) To navigate such an inquiry meaningfully, one should have the "skills of a
scientist" and the "skills of an anthropologist." n221 Some insist that it is outright "impossible to avoid distortion in one's
analysis of another legal tradition: it is an inescapable fact of life, for the process of comparison can never become
sufficiently objective." n222 [*259] Although most of this literature about how legal rules are embedded in local
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dimensions of the law has emerged from postmodernists, this constituency has an unlikely ally in conservatives who
make a similar point when arguing against the use of foreign law to interpret the United States Constitution. n223
Translation of foreign laws from another language presents a related but additional obstacle. n224 Legal translation is
almost always difficult, and may in fact be impossible to accomplish. n225 Translations can be difficult to comprehend
because the laws are often merely translated into the target [*260] language, "rather than packaged in a manner that
made it useable by the judges and lawyers of the receiving system." n226 Effective packaging would locate the text within
the larger context of all those factors described above. n227 However, even if capturing that entire context were possible,
there are other dangers in "packaging," because when translating, "people tend to find what they seek." n228 Manipulation
can occur because translation necessarily requires a certain amount of creativity and interpretation; n229 there is no sense
of equivalence in the abstract that can guide the practice of translation. n230 Indeed, elementary hermeneutics teaches us
that every interpretation or translation, no matter how conscientious, will involve active participation by the translator.
n231
Even if fidelity to the original language were possible, n232 there are always interlinguistic gaps, as some words may
be untranslatable. n233
[*261]
B. The Significance of a Word's Common Meaning
Sensitivity to the vagaries of translation and the cultural dependence of the law increases the measurement expense.
When measuring a foreign word, the measurer must proceed with extra caution (i.e., more measurement) to avoid error.
As a practical matter, no foreign word may be so familiar that the measurer can confirm its meaning swiftly or
automatically. Still, some parts of the word's meaning will be more familiar than others. Again, we can crudely divide
this measurement process into the relatively familiar (which will require measurement resembling confirmation) and the
relatively unfamiliar (which will require measurement resembling discovery). n234
Building on the hypothetical introduced in Part II, imagine that a judge somewhere outside of Sixth Country is
measuring Sixth Country's class action (M<4>). This judge may be deciding a motion to dismiss on grounds of forum
non conveniens, for example, and upon consideration of the adequacy of Sixth Country as an alternative forum for the
suit, a critical issue may be whether or not the plaintiffs would be able to pursue a class action there. Hence, there is a
need for measurement.
The judge who is measuring the foreign device in Sixth Country, then, would be measuring M<4>, the content of
the circle with the solid boundary in the figure below. If the judge is familiar with one or more of the other five
countries that have a class action (including, perhaps, her own country), she will have a head start in measuring Sixth
Country's M<4>. Exactly how much of a head start depends upon which country or countries she is familiar with.
Figure 2
[*262] This figure demonstrates that the judge need only confirm the common meaning (CM) of the word and will
necessarily need to discover the unique meaning (UM) of the word. Whether the bands that appear in between CM and
UM require confirmation or discovery depends on with which device(s) she is already familiar.
Of course, this measurer is not the only measurer of M<4>. When one considers the aggregate of measurers, some
measurers may know only M<2>, requiring more discovery, and others will also be familiar with M[in'3,'] requiring
less. The more that the measurement process requires only confirmation, the lower the aggregate measurement expense.
As common meaning (CM) requires only confirmation, the more robust a word's common meaning, the lower that
aggregate expense.
Further, a sophisticated or experienced measurer of foreign laws could have familiarity with several different
variant meanings of a particular word, rather than just one. n235 For example, imagine that the judge who is measuring the
meaning of Sixth Country's M<4> was already familiar with M<1>, M<2>, and M<3>. In this situation, almost all of
M<4> would be familiar to her because of the slight difference between M<3> and M<4>. Yet, keenly aware of the
difficulty in interpreting foreign law generally, and conscious of the variations in the meaning of the word "class action"
in particular, one might expect her to "double-check" the meaning of those parts of M<4> that, although similar to
M<3>, are unlike M<1> and M<2>. This suggests a three-tiered measurement process: (i) confirmation of that which is
familiar to all meanings of the word; (ii) double-check of that which looks familiar (and, in fact, is familiar) but is
known to the measurer to vary elsewhere; and (iii) discovery of that which is unfamiliar.
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This three-tiered process, even if a rather crude model, resonates with our experience. If you were joining the game
of poker described earlier, n236 you would survey and confirm the familiar parts and focus your attention on the
unfamiliar parts. But if you had played different versions of poker in the past - say, occasionally with "wild" cards - you
would also double-check whether those particular variations were applicable even when they do not appear to be present
(and, in fact, are not). A similar situation is present when a driver considers making a U-turn while driving outside of
their home state: the other state might have the same rule, yet there is hesitation because of awareness of potential
variation on this point. There would be no hesitation, however, regarding the legality of entering an intersection on a
green light. In both instances the law could be familiar as a matter of fact - but the known variation elsewhere leads one
to double-check (or have second thoughts about) the familiar law regarding U-turns. In contrast, the common meaning
of a green light streamlines the measurement process.
[*263] The common meaning of a word, then, plays an important role in the measurement process. Specifically,
the more robust a word's common meaning, the lower the measurement cost. If the term class action had only one
meaning worldwide, the cost of measuring any particular class action device would be modest. If the measurer had (or
obtained) familiarity with any class action device, they would know the meaning of any other class action device.
Measurement would be a swift and virtually automatic process of confirmation.
If only sixty percent of a word's meaning were common worldwide, the measurer would need to canvass the
remaining forty percent. Only sixty percent of the measurement would necessarily be a swift and virtually automatic
process of confirmation. The other forty percent would be a process of confirmation, double-checking, or discovery,
depending upon circumstances unique to the measurer and the device being measured. This example demonstrates how
measurement costs rise as the content in a word's common meaning falls.
Introducing a variant meaning that consumes even part of a word's common meaning affects not only those who are
measuring that system's word meaning; the idiosyncrasy in just one system n237 can increase the information processing
costs of all other systems that are interacting with any other unfamiliar system. Another illustration may solidify this
point. Assume that all legal systems use the word day in the articulation of certain timing requirements and other
obligations - e.g., a response is due in ten days. Although we would expect slight variations of meaning in different legal
systems with respect to holidays, weekends, and such, the common meaning would surely include that a day is a
twenty-four-hour period. Then suppose that one rogue country redefines the word day for its own system to mean a
twelve-hour period. Naturally, this changes the measurement expense for outsiders who will be measuring the meaning
of the word in the rogue country, one dimension of the externality. However, awareness that a word has a different
meaning in any one system can also change the measurement expense for all persons interacting with any other foreign
system. This is true even if neither the measuring country nor the measured country is the rogue country. Knowledge of
the variation can convert a measurement from the category of mere confirmation to the category that requires a double-
check. Accordingly, there are other externalities in this rogue country's decision-making process - they enjoy all the
benefits of the decision to adopt this idiosyncratic meaning, but will not suffer all of the social costs that their conduct
precipitates. When terms such as class action or day lose common meaning, the loss of information increases the
measurement costs incurred by others.
[*264]
V. The Costs and Benefits of Measurement
An individual or institution will measure until the marginal costs of additional measurement equal the marginal benefits
- or until the marginal benefit in reduced error costs exceeds the marginal cost of measurement. n238 Because "our law is a
law of words," n239 the creation, modification, and vindication of all legal rights, responsibilities, and obligations
ultimately rely on the interpretation of words. n240 Accordingly, ascertaining the correct meaning of a word is important
for the planning, behavior, and success of individuals and institutions - and it may be essential for the integrity and
legitimacy of courts. The interpretation of a word in a foreign law can be as important as the situation or case in which
that issue arises. n241 Thus, the marginal benefit of obtaining additional information about the meaning of words is often
very high. n242
Although the marginal benefit of additional measurement can be significant, the cost of measuring is also
substantial. As already described, foreign law is complex, nuanced, and layered - and ascertaining meaning in any
particular context is fraught with perilous traps for the unwary and wary alike. n243 Ordinary cost-benefit analysis
recognizes some point at which a risk of error becomes preferable to the return on any additional measurement. n244
Accordingly, an individual who is contemplating action in another country may stop measuring laws in the target
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country as soon as she is willing to assume the risk of interpretive mistakes and overlooked laws. A corporation that is
contemplating investment in another country may make a similar decision - or, at the margins, might reject the foreign
investment opportunity because of the cost of measuring the applicable foreign laws. n245
[*265] Courts, however, are in a very different position than these individuals and corporations. Prevailing
doctrines and laws compel courts to engage with foreign laws, n246 and our judiciary typically has a very low tolerance
for error - especially with regard to questions of law. Errors in ascertaining foreign law can happen, of course, but the
legitimacy of courts depends upon the faithful execution of their responsibility to identify, interpret, and apply foreign
or domestic law, whatever the burden. n247
A. The Process of Measurement
Ascertaining foreign law suggests great expectations of the judiciary. n248 Importantly, judges must decide the content of
foreign law as a matter of law. n249 In 1966, Rule 44.1 of the Federal Rules of Civil Procedure was promulgated "to make
the process of determining alien law identical with the method of ascertaining domestic law to the extent possible to do
so." n250 In other words, the content of foreign law cannot be buried as a question of fact in the black box of jury
decision-making. n251 Judges must resolve these questions of law on the record, with an explanation of the ruling.
Moreover, the high expectation of and attention forced upon the judiciary resurfaces anew on appeal since the content of
foreign law must be decided by appellate judges de novo. n252
[*266] In determining the content of foreign law, courts "may consider any relevant material or source, including
testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence." n253 It behooves the
litigating parties to present expert testimony to assist the court on issues regarding the content of foreign law, and this is
the ordinary course. n254 Although the absence of a qualified expert witness can be a problem for courts, n255 the problem is
more commonly the opposite. In many cases, each party will have a foreign law expert who contradicts the other. n256
A battle-of-the-experts can become an "ignominious and unseemly spectacle." n257 The problems and dangers
generally associated with a system of party-controlled experts are likely quite familiar: the process can be expensive and
inefficient, n258 experts can become partisans, n259 and substance [*267] can be perverted. n260 Some of the most qualified
experts may refuse to testify due to the tainted nature of the process. n261 When the well-qualified are less willing to
serve, the pool of experts becomes less reliable. n262
Hosting a battle-of-the-experts can be a source of great embarrassment to the judge who has to determine between
the two adversaries. n263 Learned Hand's query is an abiding articulation of the problem facing judges: "[How should one
choose] between two statements each founded upon an experience confessedly foreign in kind to their own? It is just
because they are incompetent for such a task that the expert is necessary at all." n264
Unfortunately, the cross-examination of experts is not the best tool to obtain the truth on foreign law. n265 Judge
Pollack argued in this regard that the classic instruments of assuring veracity - the oath and cross-examination - are not
appropriate to the problems of determining foreign law. n266 It is less frequently a question of whether the expert is
credible or reliable. n267 Indeed, it is possible that legal experts arrive at different conclusions on the law of a foreign
legal system in the best of faith; such is certainly the case when reasonable minds disagree about the applicability or
meaning of some domestic law. n268 To resolve conflicting expert testimony, then, the court may "be forced either to turn
to the qualifications of the experts or to find an answer wholly independent of reliance on the experts." n269 Let us
consider each of those two options in turn.
[*268] The first option can be unattractive because "judging the messenger rather than the message is an
unsatisfactory mode of evaluating expert information." n270 Indeed, "credentials ... are an imperfect proxy for knowledge
under the best of circumstances, and far worse in court where they become yet another factor for lawyers to
manipulate." n271 Moreover, there is randomness and unpredictability since it is not clear exactly what qualifications are
preferred. Occasionally judges prefer an expert who practices in the foreign legal system; n272 others suggest that an
American lawyer who is learned in the law of a foreign country may be better situated to locate the foreign law within
the context of the pending litigation. n273 Even within this latter mind-set, questions abound. For example, which expert is
more qualified: the mid-career practitioner from a U.S. office of an international law firm who has considerable first-
hand experience in the foreign country or the senior comparative law professor from the University of Texas who has
studied that foreign system in depth? Experience and expertise can be difficult to compare; for the same reason, these
measures can be inadequate criteria for finding one foreign law expert more credible than another.
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The Federal Rule, which empowers the court to ascertain the foreign law itself, encourages the second option. n274 In
fact, Rule 44.1's invitation to consider "any relevant material" suggests that the court can (or perhaps even should) play
an active role in the process of ascertaining foreign law. n275 After all, the court has the ultimate responsibility for arriving
at a correct decision on the content of foreign law. n276 Yet an independent investigation into the content of foreign law -
and all of that law's attendant context n277 - is unappealing to "most judges [who] do not have the time, the knowledge, or
scholarly predilection to undertake their own research." n278 As one judge expressed: "We have quite a few things to do
besides decoding the Codigo Civil." n279 There is no mystery, then, as to why American "courts are not at all inclined to
engage in independent research of foreign law." n280
[*269] Judges thus find refuge in a third option: avoiding most applications of foreign law. n281 Data empirically
supports this perception. For example, Professor Jose Vargas surveyed American state court opinions that relied on
Mexican law during the years 2000 through 2007. n282 From 2003 to 2005, Californian courts cited Mexican law twice as
often as Canadian law, the next most frequently cited foreign law. n283 Yet Professor Vargas found only "two [cases] in
California, two [cases] in Texas, and five in other states" - over the course of eight years - where the court actually
based its decision on Mexican law. n284 The author's "disappointment" with the paucity of applications may have been
tempered, however, by the quality of those applications. n285 Delicately put, in those rare instances when foreign law is
applied, mistakes can be made. n286 Indeed, this is primarily why courts try to avoid foreign law in the first place. n287
[*270]
B. The Avoidance of Measurement
The artful dodge of foreign law comes in many forms. The most popular is the forum non conveniens dismissal. In
federal courts and in most state courts, judges have the authority to dismiss a case on grounds of forum non conveniens.
n288
In Professor Vargas's survey, over ninety percent of the hundreds of American state and federal court cases that cited
Mexican law were dismissed on forum non conveniens motions. n289 Several other recent studies demonstrate: (i) an
increasing number of filings of forum non conveniens motions, n290 (ii) high percentages of dismissals pursuant to such
motions, n291 and (iii) avoidance of foreign law as the most frequent explanation for those dismissals. n292
Although the large number of dismissals on this basis might surprise some, the difficulty in applying foreign law is
one of more than a dozen factors that courts are instructed to consider when deciding forum non conveniens [*271]
motions. n293 Ironically, however, a threshold determination that courts are instructed to address on forum non conveniens
motions is the adequacy of the foreign forum - an inquiry that requires some engagement with the foreign law and the
foreign legal system. n294
The expense of measuring foreign law is avoided when a case is dismissed on a forum non conveniens motion, but
at what cost? When a court dismisses such a case, the plaintiff is denied access to a court that had subject matter
jurisdiction over the case, personal jurisdiction over the defendant, proper venue, and the authority to vindicate the
plaintiff's rights and the defendant's liabilities. n295 Most plaintiffs "who suffer forum non conveniens dismissals" are
either unable or justifiably unwilling "to go forward in the hypothesized foreign forum." n296 Indeed, as an empirical
matter, only a disposition on the merits is more dispositive than a forum non conveniens dismissal. n297 Although there
undoubtedly are many instances where forum non conveniens dismissals are appropriate, this Article is concerned with
those dismissals that are occasioned solely or principally by the difficulty of applying foreign law. n298 In these cases, the
difficulty of applying foreign law leads to a denial of access to a United States court and, often as a practical matter, to a
denial of any legal redress at all. These unfortunate outcomes constitute error costs that are attributable to avoidance of
the foreign law question.
A second reason that courts cite but do not apply foreign law is that conflict of laws methodologies give a
tremendous amount of discretion to judges. When deciding what substantive law to apply, the Restatement (Second) of
Conflicts, for example, provides judges with a list of many factors [*272] to evaluate in deciding which jurisdiction
has the most significant relationship to the case. n299 Because none of these factors is essential and none is dispositive,
there is "total flexibility" in choosing the law that governs n300 - and courts usually find some way to apply forum law. n301
In fact, "ease in the determination and application of the law to be applied" is one of the many factors that courts must
consider. n302
Further, the escape devices of conflict-of-laws doctrine are legendary: characterization, renvoi, the distinction
between substance and procedure, and the public policy reservation can each facilitate the application of forum law
even when foreign law otherwise applies. n303 Further still, on [*273] occasions where judges purport to be applying
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foreign law, a host of implausible presumptions and remarkable fictions invade the judicial process. n304 A presumption of
similarity, for example, enables courts to conclude that, absent compelling evidence to the contrary, foreign law is the
same as forum law. n305 And, of course, the more difficult it is to ascertain foreign law, n306 the more difficult it is to
overcome this presumption. Hence, a court may presume that Mexico and Arizona have the same common property law,
n307
or that Illinois and Germany have the same commercial law. n308 For decades courts presumed that absent contrary
proof, all civilized countries had essentially the same laws. n309
The expense of measuring foreign law can be avoided by manipulating the conflict of laws inquiry to require the
application of forum law instead, [*274] but again: at what other cost? Naturally, a legally accurate outcome requires
invocation of the proper law. n310 Applying some other system's law is "inconsistent with our most fundamental intuition
about law - that its function is to regulate human action and its consequences. One would think that the applicable law
ought normally to have something to do with the real world events that gave rise to a dispute." n311 Although there
undoubtedly are many instances where forum law should be applied to cases with transnational contacts, this Article is
concerned only with those applications of forum law that are occasioned solely or principally by the difficulty of the
task of applying foreign law. n312 In these cases, the difficulty of applying foreign law leads to the application of forum
law to determine the rights and responsibilities of the parties, even though that is the incorrect law. Although this avoids
measurement costs, error costs are introduced.
A third technique for avoiding applications of foreign law is to assign a burden to prove foreign law. Most judges
"simply refuse to consider foreign law if the parties have not raised it or have not assisted the court in ascertaining its
content." n313 Prior to 1966, in federal court, the content of foreign law was a question of fact that the parties had to
prove. n314 Accordingly, if the issue of foreign law was not raised or if the content of foreign law was not proven to the
satisfaction of the judge, the party's failure of proof would lead either to the application of forum law or to dismissal of
the case. n315 Yet, with the application of foreign law now regarded as a question of law, it is less clear whether this
relieves the parties of the task [*275] of proving the law of a foreign country. On one hand, Rule 44.1 authorizes but
does not require the judge to do independent research. n316 On the other hand, because foreign law is a question of law, it
may be incumbent upon the court to find and apply foreign law once it becomes apparent that it governs. n317
Contemporary practice follows the former interpretation, n318 offering sufficient opportunity for courts to avoid the
question of foreign law by blaming the parties for failure of proof. n319 The more difficult it is to ascertain foreign law, n320
the more readily available this particular mode of avoidance.
Here again, the cost of measuring foreign law is avoided but an error cost is introduced. The concerns about
accuracy of legal outcomes already expressed are equally applicable here: the wrong law is used to determine the
parties' rights and responsibilities. n321 Yet there is also an interesting twist in this context - the party charged with the
burden of proving something about foreign law can be a plaintiff or a defendant. Consider, for example, an action
seeking to enforce a foreign judgment; the defendant may be resisting recognition and enforcement on the grounds that
the foreign judgment was procured by fraud. n322 Here, the inability of the defendant to satisfy the burden of proof with
regard to some aspect of foreign [*276] law might lead to enforcement of the foreign judgment (and, by extension, the
mandate of foreign law) rather than to rejection of it. n323 Interestingly then, the courts, while anti-measurement, are not
necessarily isolationist or provincial. Indeed, the United States is probably the most likely jurisdiction in the world to
recognize and enforce a foreign judgment. n324
Therefore, the consequences of avoiding foreign law can lead in several directions. First, pursuant to a forum non
conveniens dismissal, for example, a party can be denied access to a forum which it may be entitled, and is relegated to
a foreign forum (or left without a remedy). Second, pursuant to conflicts analysis, a party can be denied the rights or
protections of foreign law, to which, in some sense, it may be entitled, and is subject to forum law instead. Finally,
pursuant to the enforcement of a foreign judgment, a party can be denied the rights or protections of forum law, to
which, in some sense, it may be entitled, and is subject to foreign law instead.
The purpose of this Part was three-fold: to demonstrate that courts try to avoid applying foreign law; that they may
do so because of the difficulty of that task; and that avoidance is consequential.
VI. Solutions to the Common-Pool Problem
A common grazing pasture faces an impending crisis when the limited resource is consumed at an aggregate rate that
exceeds its rate of replenishment. The standard response to avert the tragedy of the commons is to reduce the demand on
the common-pool resource so that it does not exceed the available supply. For example, regulation or strict cooperation
reduces demand by restricting the number of cattle that farmers will graze on the commons. n325 Alternatively,
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privatization of the commons eliminates each [*277] farmer's incentive to introduce more cattle than the commons can
naturally sustain. n326 Solutions that address the supply of the resource are seldom considered or are presumed exhausted
- the premise of a common-pool resource, after all, is that it is limited. Yet supply-side solutions may be available: a
faster-growing grass or a different combination of vegetation in the commons could enhance the ability of the limited
resource to accommodate the existing demand.
Word commons face a crisis when idiosyncratic local meanings progressively consume the content of a word's
common meaning, another common-pool resource. The paradigmatic response is to minimize the demand for
idiosyncratic meanings. However, unlike a common grazing pasture, supranational regulation cannot effectively manage
the meaning of words. n327 Furthermore, because words cannot be converted from common goods into private property,
privatization is also not an option.
Reformers thus turn, perhaps instinctively, to another demand-side solution: harmonization. Harmonization reduces
the demand for idiosyncratic meanings because the local is universal, and vice versa. Further, harmonization taps into
the root of uniformity, which is so deeply embedded in our thought that many find it difficult or unnecessary even to
explain why uniformity is seen as good. n328 When there is fragmentation or lack of uniformity, scholars see this as "the
problematic issue of consistency." n329 Difference is often viewed as an unfortunate interim measure, and as a [*278]
target for reform. n330 Indeed, much of the entire discipline of comparative law has an implicit drive toward
harmonization. n331
Because all countries are measuring foreign laws, all could benefit directly from some sort of coordination. In fact,
because of standard network effects, we should expect a certain amount of standardization and uniformity. n332 Further,
most countries and legal systems want acceptance in the international community - or at least want foreign investment
and tourists. n333 One example of effective harmonization is the worldwide acceptance of the standard definitions of
eleven terms of trade (the Incoterms) promulgated by the International Chamber of Commerce. n334 A second example is
communications between and among airplane pilots and air traffic controllers; governments require communication in
one language, usually English. n335 In both of these examples, the desire to preserve the common meaning of shared
words reduces the demand for idiosyncrasy.
Additionally, efforts to harmonize or unify laws have found traction in [*279] particular spheres of interest, n336 and
other substantive areas are likely targets for future action. n337 These efforts are qualitatively different from Incoterms,
however, because effective harmonization requires two steps: first, the laws must be harmonized; second, the meanings
of the words in the shared text must be harmonized. The first step is ambitious; the second step may be naive.
"'The actual harmonization of divergent national laws and legal traditions seems to be meagre' and at times
'drastically overstated ...'" n338 While globalization intensifies the migration of words and concepts across national
boundaries, it does not lead inexorably to the harmonization of laws. n339 Even the concentrated effort to achieve
harmonization undertaken in Europe over the last half century has been slow and difficult. n340 [*280] Furthermore, that
context is unusually suited for harmonization since there is a supranational central authority that can issue binding
regulations, order uniformity, and trump national courts. n341
Yet, more fundamentally, even where there is harmonization of words, there is not necessarily harmonization of
word meanings. Indeed, absent disciplined and universal cooperation by all who share the word, common meaning will
inevitably erode. n342 Even substantial cooperation will not suffice, because similar to the few cattle farmers who can
overgraze the common ground while other farmers exercise restraint, the common meaning of a word can be consumed
by a few to the others' detriment.
Consider, for example, the United Nations Convention on Contracts for the International Sale of Goods ("CISG"),
which is generally recognized as the most successful multilateral harmonization effort. n343 Although obliged to consider
foreign case law when deciding cases under the CISG, n344 American courts tend to look exclusively at domestic cases
instead. n345 Because of limited access, language barriers, and cultural differences, "decisions handed down by foreign
courts are 'usually ignored' even when they concern uniform law." n346 Accordingly, "the unifying effect of the CISG
must thus be taken with a strong pinch of salt." n347 A comprehensive solution would require some sort of effective
regulatory enforcement mechanism.
Even if regulating the meaning of words were possible, frustration costs could outweigh the savings in
measurement costs. n348 Legitimate goals and objectives could be frustrated if the meaning of words could not be
customized for a particular jurisdiction's conditions and demands. The tailoring of a class action device, for example,
can be a useful and productive exercise. Idiosyncrasy can reflect the unique priorities, preferences [*281] and goals of
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a judicial, political, or social system. n349 The dynamic nature of word meaning also permits adaptation to changed and
unforeseen circumstances. n350 Forced uniformity would thwart this progress and would squelch useful entrepreneurship.
n351
Harmonization is premised on the conviction that there exists a single answer to a particular problem, or a best
meaning for a particular word. Yet, in fact, there is much to suggest that while the world may be ontologically unitary, it
can only be "understood through epistemological diversity." n352 Further, the pursuit of uniformity can be an imperialistic
threat to the profound diversity of legal experience within and across jurisdictions. n353
Because of the inevitable differentiation in word meaning, harmonization of laws can exacerbate the problems
associated with ascertaining foreign law. When words are shared but the meanings are different, these faux amis become
terms that the measurer is most likely to overlook or, even if noticed, find the "most difficult to understand." n354 In the
former, [*282] the measurement expense is traded for an error cost; n355 in the latter, the measurement expense is not
avoided (and may even be increased). n356
The challenge presented is not a textual problem that requires a textual solution. Rather, it is a foreign law problem
that requires a foreign law solution. The problem is that judges must often consider, evaluate, and apply foreign law, but
are simply unwilling or unable to do so. Some of that reticence may be traceable to the work of a generation of scholars
who have described the task of understanding foreign law as "impossible" n357 - impossible because of "the
impenetrability of the otherness of the other." n358 This message deters courts from performing a task that doctrine and
statutes require n359 - and when courts avoid foreign law questions, litigants suffer. n360
If it is impossible for courts to adequately understand foreign law, we should revise all of the relevant statutes and
doctrines so that courts need not, or may not, n361 apply, consider, or evaluate foreign law. Of course, this [*283]
approach resembles the status quo somewhat, since the doctrines that require engagement with foreign law also tolerate
avoiding it, n362 and since courts rarely genuinely engage foreign law. n363 Although this solution would resolve the
measurement problem, the error costs associated with avoiding foreign law would then be entrenched: cases would still
be dismissed, and the "wrong" law would still be applied. Prohibiting the consideration or application of foreign law
would merely shift responsibility for these costs to those who are setting the new policy.
One benefit of such a reform, however, is that it would improve transparency. n364 Such reform would clarify that
courts do not, as a practical matter, engage with foreign law. Greater transparency could thus precipitate legal reforms to
account for the fact that foreign law is not applied. Doctrines and statutes that assume foreign law is being evaluated
may have different complementary provisions if they were (re)constructed under the assumption that foreign law would
not be applied. For example, because the forum non conveniens framework assumes that foreign law will be fully
evaluated to ensure the adequacy of the alternative forum prior to a dismissal, removing the assumption by prohibiting
consideration of foreign law may lead reformers to revisit that framework. Specifically, that framework might be
adjusted to make it harder for defendants to win a forum non conveniens motion. Yet, how or whether such reforms
would compensate for the loss of consideration of foreign law is, of course, speculative.
Yet instead of retrenchment, which is yet another demand-side solution, a better approach may exist on the supply-
side. In the same way that a faster-growing grass or a different combination of vegetation might increase the supply of
the common pasture to accommodate the extant demand, a complement to common meaning could enhance the supply
of information about foreign law.
For example, courts should take advantage of two devices that are already available to them, yet are hardly ever
used. First, judges could more frequently appoint a neutral expert to assist the court in ascertaining foreign law. n365
Court-appointed experts function essentially as third-party [*284] expert witnesses, but avoid the consequences of
partisan choice, compensation, and preparation - all of which can bias the evidence. n366 In some cases, court-appointed
experts might alleviate the need for party-controlled experts. n367 In other cases, the neutral expert might help the judge
resolve conflicting testimony presented by the parties' experts. n368 In any event, the court may split the expense of a
neutral expert between the parties or, as part of court costs, charge them to the losing party. n369
Second, judges could more frequently appoint a special master to manage the inquiry into the particulars of foreign
law. n370 The parties' experts would present their research before the master, and would be subject to cross-examination.
n371
The master could invest more time in the endeavor than a judge, and could draw upon his or her expertise in
comparative methodology, if not also the laws of the specific country in question. The master would then prepare a
report analyzing the foreign law issues, n372 which the court could allow the parties to object to; the court would also
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review the master's conclusions de novo. n373 Again, the court could split the expense between the parties or, as part of
court costs, charge them to the losing party. n374
Yet courts very rarely use these useful and economical resources. n375 [*285] Although focusing on the issue of
expert testimony generally rather than expert testimony about foreign law in particular, Professor Samuel Gross
laments:
Judges simply do not [appoint neutral experts] ... . Attempts to change that fact have been uniformly ineffective.
Demonstrating the logic of the procedure has not worked. Enacting rules that codify the courts' authority ... has changed
nothing. Exhorting judges to do so has had no effect. n376
Indeed, while several surveys of federal and state judges have confirmed that these devices would be helpful in certain
types of cases - including those involving foreign law - the majority of these judges have never actually used any of
them. n377
There are two principal reasons that judges may be reluctant to use these devices. One reason is a general hostility
to any deviation from the adversarial system. n378 To be sure, neutral experts and special masters are a deviation from the
traditional model of party control. Accordingly, there is a risk, real or perceived, that an expert or master may have too
much power [*286] or may lack the incentive to do a good job. n379 A second reason that judges may not use their
authority to appoint a neutral expert or a special master is that judges may be unaware of an appropriate individual for
the task. n380 How many judges could readily find an appropriate expert on the finer points of Slovakian contract law?
Yet each of these hurdles is surmountable. Regarding the innate resistance to inquisitorial techniques, it is critical to
appreciate how foreign law differs both legally and practically from other matters that call for expert testimony. The
content of foreign law is a question of law for the judge, not a question of fact. n381 Because there is no question for a
jury, nor even any rules of evidence to apply, n382 the usual resistance should find less traction in this context. Moreover,
testimony on foreign law does not usually lend itself to the usual alignments; unlike experts on, say, medical testimony,
there are not separate camps of experts on foreign law that are sympathetic to plaintiffs or defendants. n383
Although it is undoubtedly true that litigators prefer control over every aspect of their case (including the
appointment of experts), this is a generalized preference; there is no specific constituency of the bar for whom party-
control of witnesses is critical. n384 To the extent that expert testimony about foreign law is different from other types of
expert testimony, philosophical opposition may not explain judicial behavior as much as inertia; the parties are unlikely
to suggest the appointment of a neutral expert or special master. n385 Yet judges could do so on their own initiative - and
to their benefit - with or without the parties' blessing. n386
Second, a judge may be more likely to appoint a neutral expert or special master if an appropriate specialist were
readily available. To address this concern, some have suggested creating and maintaining a roster of experts. n387
However, because quality control is a problem with such [*287] lists, these efforts have consistently failed. n388
Accordingly, there is need for a resource upon which judges could confidently rely for assistance on matters of foreign
law. Ideally, the resource would provide assistance no matter the country or subject matter in question. Such a resource
could lead to the more frequent appointment of neutral experts and special masters.
Consider, then, an academic institute that aims to provide assistance to courts on inquiries regarding foreign law.
Although the United States has no tradition of foreign law institutes, n389 there are many European foundations and
academic institutes that could provide inspiration. n390 Some European courts in particular have benefited from research
conducted by comparative law centers. n391 In some countries, the burden of researching foreign law is placed entirely on
the court, resulting in considerable use of such institutes. n392 In fact, "the availability of this form of research assistance
has relieved the burden to a considerable extent, obviating in most cases the need, for example, for expert witnesses."
n393
Quite fittingly, the issue presented here is the transplantability and tailoring of the foreign law institute. As
Professor Merryman recognized long ago, in the United States, with its much greater emphasis on party autonomy and
adversary proceedings, an expert from a research institute enters into an entirely different litigation context. Whereas
Germans are likely to accept such an opinion, American lawyers may be inclined to sabotage any efficiency gains and to
Page 176Page 176
undermine the expert's authority. n394 Yet if the problem is the lack of a reliable unbiased source of information on
matters of foreign law, an institute associated with a law school could be part of a viable solution.
Any number of law schools could establish institutes scaled to a size commensurate with the group of comparative
law experts qualified and willing to engage in such activity. The venture could leverage a source of talent that leading
educators have recognized as a largely untapped [*288] resource: a school's foreign LL.M. students. n395 As fellows (or
with some other designation), these graduate students could share their interests, foreign contacts, and expertise with the
institute.
Such a foreign law institute situated within a law school could be the resource to which judges would confidently
turn for assistance on matters of foreign law. The institute would develop and maintain contacts in foreign countries
who could provide assistance in solving difficult questions of the law of these nations. n396 Although an institute would
not always have in-house expertise on the particular foreign law at issue, the institute could always provide the court
with expertise to ascertain any particular foreign law at issue. The institute could also provide the court with an
individual who would serve as a neutral expert or as a special master.
Institutes could offer unbiased, authoritative, and credible expertise. Academic institutions are also generally held
in high esteem. n397 Concern for the reputation of both the law school and the institute would create incentive to perform
this service for the judiciary proficiently and efficiently. The tradition of academic freedom also offers a stark contrast to
the partisan expert, who is a hired gun. n398 Finally, the ascertainment of foreign law on a particular subject requires the
sort of rigorous scholarly inquiry that is familiar to academics.
The establishment of an organization to perform any public function raises concerns about capture by industry or
special interests. n399 Yet that phenomenon is unlikely here. First, courts retain ultimate responsibility for declaring the
content of foreign law; neutral experts merely offer testimony, and special masters make recommendations. The judge
would always have the benefit of the parties' input. Second, it is difficult to imagine what industry or group would
commandeer the institute to benefit themselves. There is no view of foreign law that is systematically pro-plaintiff,
[*289] pro-business, or anti-big-government, for example. Finally, no single foreign law institute would have a
monopoly on this outsourcing opportunity. Any number of law schools could provide this service - especially since the
institutes should be largely self-funding. n400
These are but some examples of ways that the supply of information regarding foreign law could compensate for
lack of common meaning. More important than these specific suggestions, however, is the argument for supply-side
reforms more generally. The urgent need is a practical approach to foreign law that could better meet the needs of a
judiciary that confronts a docket transformed by globalization.
Conclusion
The costs of measuring foreign law are inversely related to the amount of content in a word's common meaning. Yet
common meaning is a limited resource that is inevitably consumed by national legal systems acting independently and
rationally. The loss of common meaning, in turn, is a loss of information that leads courts to avoid the applications of
foreign law due to the difficulty of applying it. The information deficit thus becomes a justice deficit because the
avoidance of foreign law leads unnecessarily to, depending upon the specific circumstances, a denial of access to court
or the application of the wrong law. Efforts to harmonize laws are an instinctive response to this phenomenon - but these
efforts are misdirected. The solution to the tragedy is instead an improved supply of information about foreign law.
Legal Topics:
Civil ProcedureVenueForum Non ConveniensEvidenceTestimonyExpertsCourt-Appointed
ExpertsCompensationTortsStrict LiabilityHarm Caused by AnimalsGeneral Overview
FOOTNOTES:
n1. Garrett Hardin, The Tragedy of the Commons, 162 Sci. 1243, 1244 (1968).
Page 177Page 177
n2. Id.
n3. Stephen Yeazell, When and How U.S. Courts Should Cite Foreign Law, 26 Const. Comment. 59, 61 (2009).
n4. See, e.g., LG Elecs., Inc. v. ASKO Appliances, Inc., No. 08-828- RGA, 2012 WL 2365901 (D. Del. June 21, 2012).
n5. See, e.g., Bigio v. Coca-Cola Co., 675 F.3d 163 (2d Cir. 2012).
n6. See, e.g., In re Consorcio Minero, S.A. v. Renco Grp., Inc., No. 11 Mc. 354., 2012 WL 1059916 (S.D.N.Y. Mar. 29, 2012).
n7. See, e.g., Starski v. Kirzhnev, 682 F.3d 51 (1st Cir. 2012).
n8. See infra notes 171-75, and accompanying text.
n9. See infra notes 281-87 and accompanying text.
n14. See Fed. R. Civ. P. 44.1.
n16. Popular Latin words include: certiorari, coram nobis, ex parte, in rem, mandamus, pro rata, quantum meruit, res ipsa loquitur, and
respondeat superior. For a longer list, see David Mellinkoff, The Language of the Law 14-15 (1963). Latin has a well-documented place in
the history of the development of the law. Id. All major sources of our knowledge of Roman law are written in Latin, including the Corpus
Iuris Civilis, arguably "the most influential [set of] law books ever written." Justinian, Justinian's Institutes 9, 18 (Peter Birks & Grant
McLeod trans., Cornell Univ. Press 1987) (c. 535 B.C.E.). Legal Latin is especially durable as a technical language for the legal profession.
See 3 William Blackstone, Commentaries 319-21 ("Law-latin is ... a mere technical language, calculated for eternal duration, and easy to be
apprehended both in present and future times; and on those accounts best suited to preserve those memorials which are intended for
perpetual rules of action.").
Page 178Page 178
n17. Popular French words include: cestui que, cy pres, demurrer, mortgage, and voir dire. See L. Susan Carter, Oyez, Oyez, "O Yes":
American Legal Language and the Influence of the French, Mich. B.J., Oct. 2004, at 39. "It would be hardly too much to say that at the
present day almost all our words that have a definite legal import are in a certain sense French words." 1 Frederick Pollock & Frederic
William Maitland, The History of English Law 80 (2d ed. Cambridge 1968) (1895). Other examples include:
Contract, agreement, covenant, obligation, debt, condition, bill, note, master, servant, partner, guarantee, tort, trespass, assault, battery,
slander, damage, crime, treason, felony, misdemeanor, arson, robbery, burglary, larceny, property, possession, pledge, lien, payment, money,
grant, purchase, devise, descent, heir, easement, marriage, guardian, infant, ward ... . We enter a court of justice: court, justices, judges,
jurors, counsel, attorneys, clerks, parties, plaintiff, defendant, action, suit, claim, demand, indictment, count, declaration, pleading, evidence,
verdict, conviction, judgment, sentence, appeal, reprieve, pardon, execution, every one and every thing, save the witnesses, writs and oaths,
have French names.
Id. at 81; see also Peter M. Tiersma, Legal Language 28-33 (1999).
n18. Popular English words include: class action, due diligence, franchise, lease, and whistleblower, for example. Eversheds, Legal Drafting
in English: The Big Picture on Small Print 10 (2011), available at http://www.eversheds.de/files/en/Legaldraftingin English
%28updatedSept2011%29.pdf. For more on the increasing use of legal English worldwide, see Heikki E.S. Mattila, Comparative Legal
Linguistics 240-41 (2006); Celia Wasserstein Fassberg, Language and Style in a Mixed System, 78 Tul. L. Rev. 151, 164 (2004) (discussing
Hebrew as a modern legal language and the incorporation of English loanwords therein).
n19. See, e.g., William P. Alford, On the Limits of "Grand Theory" in Comparative Law, 61 Wash. L. Rev. 945, 954-56 (1986) (discussing
the Chinese criminal justice system); George P. Fletcher, Constitutional Identity, 14 Cardozo L. Rev. 737 passim (1993) (comparing U.S. and
European legal cultures); Frederick Schauer, Free Speech and the Cultural Contingency of Constitutional Categories, 14 Cardozo L. Rev.
865, 868-72 (1993) (exploring different countries' treatment of speech and expression rights); Arthur Taylor von Mehren, Special Substantive
Rules for Multistate Problems: Their Role and Significance in Contemporary Choice of Law Methodology, 88 Harv. L. Rev. 347, 350-56
(1975) (explaining that differing expectations complicate multistate litigation).
n20. See Hardin, supra note 1, at 1244; see also Richard Cornes & Todd Sandler, The Theory of Externalities, Public Goods, and Club
Goods 39-43 (2d ed. 1996) (expanding on different types of externalities).
n26. See infra notes 395-400, and accompanying text.

Page 179Page 179
n27. See H. Patrick Glenn, Comparative Legal Families and Comparative Legal Traditions, in The Oxford Handbook of Comparative Law
421, 432-34 (Mathias Reimann & Reinhard Zimmerman eds., 2006). See generally Konrad Zweigert & Hein Kotz, An Introduction to
Comparative Law (Tony Weir trans., 3d ed. 1998).
n28. See Alan Watson, Legal Transplants: An Approach to Comparative Law 95 (2d ed. 1993) ("Most changes in most systems are the result
of borrowing."). For arguments suggesting that Watson's thesis should be limited to the spread of Roman private law in Western Europe, see
William Ewald, Comparative Jurisprudence (II): The Logic of Legal Transplants, 43 Am. J. Comp. L. 489, 500-04 (1995); Eric Stein, Uses,
Misuses - And Nonuses of Comparative Law, 72 Nw. U. L. Rev. 198, 203-04 (1978).
n29. See, e.g., Paolo G. Carozza, "My Friend is a Stranger": The Death Penalty and the Global Ius Commune of Human Rights, 81 Tex. L.
Rev. 1031, 1045 (2003) (describing how, in virtually all foreign nations, courts "borrow[] from, respond[] to, or otherwise interact[]
substantially with external sources of law, including foreign sources").
n30. See Nuno Garoupa & Anthony Ogus, A Strategic Interpretation of Legal Transplants, 35 J. Legal Stud. 339, 343 (2006); Pierre
Legrand, On the Unbearable Localness of the Law: Academic Fallacies and Unseasonable Observations, 10 Eur. Rev. Private L. 61, 68
(2002); David Nelken, Towards a Sociology of Legal Adaptation, in Adapting Legal Cultures 7, 15-20 (David Nelken & Johannes Feest eds.,
2001); William Twining, Diffusion and Globalization Discourse, 47 Harv. Int'l L.J. 507, 510-12 (2006).
n31. This Part explores normative implications of the diffusion of laws and language only peripherally. For a full discussion, see infra notes
328-356 and accompanying text.
n32. See Watson, supra note 28, at 22.
n33. For a discussion of network effects, see infra note 332 and accompanying text.
n34. See Basil Markesinis & Jorg Fedtke, Engaging with Foreign Law 337 (2009); see also James Gordley, When Is the Use of Foreign Law
Possible? A Hard Case: The Protection of Privacy in Europe and the United States, 67 La. L. Rev. 1073, 1075 (2007) (discussing, in general,
the inherent uniqueness and idiosyncrasy of each country's legal system).
n35. See W.E. Weisflog, Problems of Legal Translation, in Swiss Reports Presented at the XIIth International Congress of Comparative Law
179, 213-15 (1987).
n36. For more examples, see Gregory S. Alexander, The Application and Avoidance of Foreign Law in the Law of Conflicts, 70 Nw. U. L.
Rev. 602, 629 n.121 (1976) ("The French contrat, domicile, tribunal administratif, notaire, prescription and juge de paix, are not the English
'contract', 'domicile', 'administrative tribunal', 'notary public', 'prescription' and 'justice of the peace.'" (quoting Alan Watson, Legal
Transplants: An Approach to Comparative Law 11 (1974)); H.C. Gutteridge, The Comparative Aspects of Legal Terminology, 12 Tul. L.
Rev. 401, 402 (1938) (discussing, among other examples, the difficulty of translating the American concept of a "trust" into foreign
languages); Rodolfo Sacco, Legal Formants: A Dynamic Approach to Comparative Law (Installment I of II), 39 Am. J. Comp. L. 1, 20
(1991) (discussing different meanings of trespass); Gloria M. Sanchez, A Paradigm Shift in Legal Education: Preparing Law Students for the
Twenty-First Century: Teaching Foreign Law, Culture, and Legal Language of the Major U.S. American Trading Partners, 34 San Diego L.
Rev. 635, 662 (1997) (considering the word investment which, in Spanish, is inversion; in English the term means "long-term benefits,"
while in Mexico it means "short-term profit"); id. at 663 (discussing how different meanings of the word chicken led to litigation). The
phenomenon is not limited to translations across languages. See Deborah Cao, Translating Law 68-69 (2007) (discussing the changing
meaning of words even within one language, using the term warranty in England and the United States as an example). "The word 'law' in
Western languages has four different interpretations in Chinese as in li [order], li [rites, rules of propriety], fa [human-made laws] and zhi
[control]." Id. at 1. Cao also distinguishes demand in English from demands in French; domicile in English, from domicile in French and
domizil in German; la doctrine in French, which means legal writing or legal scholarship, from the English notion of doctrine; notaire in
French and notary in English; common law in English and droit commun in French; the Haute Cour de justice of French and the English
notion of the High Court of Justice. Id. at 58-59.
Page 180Page 180
n37. See Sacco, supra note 36, at 12-15; see also Lawrence Lessig, Fidelity in Translation, 71 Tex. L. Rev. 1165, 1200-07 (1993).
n38. " In France, for example, these contracts are called contrat de marriage." Peter M. Walzer, A World of Agreements Enforcing and
Attacking Foreign Prenups in the United States, Fam. Advoc., Winter 2011, at 30.
n39. See, e.g., Susan Rose-Ackerman, American Administrative Law Under Siege: Is Germany a Model?, 107 Harv. L. Rev. 1279, 1289-96
(1994); see also John H. Langbein, The German Advantage in Civil Procedure, 52 U. Chi. L. Rev. 823, 851 (1985). See generally
Comparative Administrative Law (Susan Rose-Ackerman & Peter L. Lindseth eds., 2010).
n40. See Richard Marcus, Exceptionalism and Convergence: Form Versus Content and Categorical Views of Procedure, in Common Law,
Civil Law and the Future of Categories 521, 538 (Janet Walker & Oscar G. Chase eds., 2010) ("Discovery in Japan or Germany ... [is] so
different in content from the American version that [it is] insignificant as evidence of meaningful convergence.").
n41. See generally Kenichi Osugi, What is Converging? Rules on Hostile Takeovers in Japan and the Convergence Debate, 9 Asian-Pac. L.
& Pol'y J. 143, 154 (2007).
n42. For contours of the debate regarding the transplantability vel non of words, compare Otto Kahn-Freund, On Uses and Misuses of
Comparative Law, 37 Mod. L. Rev. 1, 5-6 (1974) (suggesting translatability is generally possible, though dependent on the content of the
legal concept or provision at issue), with Pierre Legrand, On the Singularity of Law, 47 Harv. Int'l L.J. 517, 527 (2006) ("Each manifestation
of law is an event, that is, it occurs or deploys itself as 'something' that is never the repetition of anything else and that will never be repeated
either - it occurs as something operating within a specific historical situation ... which, because time is what it is, is inevitably specific."). For
more background on the transferability debate, see Nicholas Foster, Transmigration and Transferability of Commercial Law in a Globalized
World, in 4 Comparative Law in the 21st Century 55, 58-60 (Andrew Harding & Esin Orucu eds., 2002).
n43. See Peter Goodrich, Legal Discourse: Studies in Linguistics, Rhetoric and Legal Analysis 2 (1987); Susan [#x8A]arçevic, Translation
of Culture-Bound Terms in Laws, in 4 Multilingua 127, 127 (1985); see also infra notes 200-23 and accompanying text.
n44. William Twining, General Jurisprudence: Understanding Law from a Global Perspective 284 (2009). Twining elaborates on this point:
No serious student of diffusion can assume that what is borrowed, imposed or imported remains the same. This is not just a matter of the
interpretation and application of received law, but also of its use or neglect, impact, and local political, economic and social significance... .
How and to what extent any particular 'import' retains its identity or is accepted, ignored, used, assimilated, adapted, rooted, resisted,
rejected, interpreted, enforced selectively, and so on depends largely on local conditions.
Id.; see also Richard L. Abel, Law as Lag: Inertia as a Social Theory of Law, 80 Mich. L. Rev. 785 (1982) (reviewing Alan Watson, Society
and Legal Change (1977)); Anna Lise Kjaer, A Common Legal Language in Europe?, in Epistemology and Methodology of Comparative
Law 377, 377-79 (Mark Van Hoecke ed., 2004); Ugo Mattei, A Theory of Imperial Law: A Study on U.S. Hegemony and the Latin
Resistance, 10 Ind. J. Global Legal Stud. 383, 408 (2003) ("Legal reception is a highly creative activity.").
For examples of how transplanted law often operates quite differently in the target country than in the source country, see Daniel
Berkowitz, Katharina Pistor & Jean-Francois Richard, Economic Development, Legality, and the Transplant Effect, 47 Eur. Econ. Rev. 165,
165-68 (2003); Daniel Berkowitz, Katharina Pistor & Jean-Francois Richard, The Transplant Effect, 51 Am. J. Comp. L. 163, 163-65 (2003);
Bernard Black, Reinier Kraakman & Anna Tarassova, Russian Privatization and Corporate Governance: What Went Wrong?, 52 Stan. L.
Rev. 1731, 1754-57 (2000); Mark D. West, The Puzzling Divergence of Corporate Law: Evidence and Explanations from Japan and the
United States, 150 U. Pa. L. Rev. 527 (2001).
Page 181Page 181
n45. H. L. A. Hart, The Concept of Law 167-84 (2d ed. 1994); see also Mary Jane Morrison, Excursions into the Nature of Legal Language,
37 Clev. St. L. Rev. 271, 271-72 (1989). "Legal language ... describes a metaphysical phenomenon. Law does not exist in the physical world.
Since it is entirely created by humans, law is always linked to the culture of any particular society: it therefore constitutes a social
phenomenon." Mattila, supra note 18, at 105.
n46. See Cao supra note 36, at 24 ("Law is culturally and jurisdictionally specific."); Bernard S. Jackson, Semiotics and Legal Theory 46-50
(1985); Ferdinand de Saussure, Course in General Linguistics 114-15 (Charles Bally, Albert Sechehaye, & Albert Riedlinger eds., Wade
Baskin trans., 1966) ("Language is a system of interdependent terms in which the value of each term results solely from the simultaneous
presence of the others ... . All values are apparently governed by the same paradoxical principle.").
n47. See, e.g., Gutteridge, supra note 36, at 401 ("The physician, the theologian, the mathematician, the chemist and the economist employ
technical terms which are well understood throughout the scientific world ... .").
n48. See Frederick Charles von Savigny, Of the Vocation of Our Age for Legislation and Jurisprudence 27 (Legal Classics Library 1986)
(1831) (noting the "organic connection of law with the being and character of the people," and analogizing a people's law to their language);
Sarah K. Harding, Comparative Reasoning and Judicial Review, 28 Yale J. Int'l L. 409, 411 (2003) ("Legal systems reflect the cultures
within which they are situated and thus have unique and highly contingent identities... . Given this close connection between law and local
culture, foreign law seems to have very little place in judicial reasoning."); Susan [#x8A]arçevic, Legal Translation and Translation Theory:
A Receiver-Oriented Approach, in Legal Translation: History, Theory/ies and Practice 329, 336-37 (2000); see also infra notes 196-204 and
accompanying text.
n49. Lessig, supra note 37, at 1177 n.46.
n50. C.K. Ogden and I.A. Richards collected sixteen definitions of meaning - the "arch-ambiguity." C.K. Ogden & I.A. Richards, The
Meaning of Meaning 186-87, 104 n.1 (8th ed. 1946); see also Lessig, supra note 37, at 1181; infra note 71.
n51. The notion that words are not intrinsically meaningful is built largely upon the assumption of modern analytic thought that the function
of language is to communicate. See, e.g., Richard Larson & Gabriel Segal, Knowledge of Meaning: An Introduction to Semantic Theory 45-
47 (1995) (noting that, for example, the difference between a "bank" of a river and a financial "bank" indicates that words lack inherent
meaning; meaning must be supplied by the larger context of the communication). For a general introduction to Locke's theory of language,
see E. J. Lowe, Locke on Human Understanding 143-65 (Tim Crane & Jonathan Wolff eds., 1995) (dealing with Locke's account of
language); E.J. Ashworth, Locke on Language, 14 Can. J. Phil. 45, 46-52 (1984). See generally H. P. Grice, Meaning, 66 Phil. Rev. 377
(1957) (investigating the meaning of the word "meaning").
n52. See Ogden & Richards, supra note 50, at 186-89.
n53. Wittgenstein is credited for emphasizing the connection between a word's use and its meaning in the "language-game." See generally
Ludwig Wittgenstein, Philosophical Investigations 4 (G.E.M. Anscombe trans., 3d ed. 2001).
When a word is read or heard without any corresponding context, prototype theorists suggest that our brains are inclined to evoke
prototypes for the word. Upon seeing or hearing the word cat, for example, we are more inclined to consider a specific prototype of cat (from
the box of meaning) rather than to survey all of the different cats in the "box." The locus classicus for prototype theory is Eleanor H. Rosch,
Natural Categories, 4 Cognitive Psychol. 328, 328-30 (1973).
n54. Words that push the box metaphor toward its breaking point are words like behalf or is. But the simplicity of the box metaphor will
suffice here.
Page 182Page 182
n55. See Gerald Graff, "Keep off the Grass," "Drop Dead," and Other Indeterminacies: A Response to Sanford Levinson, 60 Tex. L. Rev.
405, 408 (1982). Graff stated:
Meaning is not a substance but an activity and has the determinacy of an activity rather than of a physical object... . The question of what any
text means, then, is neither more nor less open to "determinate" inference than the question of ... whether a historical event occurred or didn't
occur. Just as we have reason to believe that we know a lot about some historical occurrences [and] less about others, ... so it is with texts:
the degree to which we can be confident about our inferences depends on the amount of evidence available, evidence which itself is open to
criticism and may well be fallible.
Id. This is deconstruction at work. See generally Christopher Norris, Deconstruction: Theory and Practice 31 (1982) ("Deconstruction is ...
an activity of reading which remains closely tied to the texts it interrogates."); Christopher Norris, The Deconstructive Turn: Essays in the
Rhetoric of Philosophy 6 (1983) ("Deconstruction is first and last a textual activity ... .").
n56. For a discussion of this infinite regress, see F. H. Bradley, Appearance and Reality: A Metaphysical Essay 17-18 (Clarendon Press,
1930) (1893). The same sort of regress occurs when one considers looking at the dictionary for the meaning of a word, because dictionaries
use words to define words. See Cliff Goddard, Can Linguists Help Judges Know What They Mean? Linguistic Semantics in the Court-
Room, 3 Forensic Linguistics 250, 252-53 (1996).
n57. See William G. Lycan, Philosophy of Language 66-68 (Paul K. Moser ed., 2000) (describing a thought experiment to demonstrate the
impact of social interaction with the environment on the construction of a word-symbol and its meaning).
n58. Dictionaries are private, non-binding, and, in any event, descriptive rather than prescriptive. "A dictionary definition is, after all, just a
meaning postulate." Brian G. Slocum, Linguistics and "Ordinary Meaning" Determinations, 33 Statute L. Rev. 39, 41 (2012). But see
Academie Francaise, http://www.academie-francaise.fr (last visited May 26, 2013) (acting as an official authority on the French language).
n59. See Lawrence Venuti, The Translator's Invisibility: A History of Translation 18 (Susan Bassnett & Andre Lefevere eds., 1995); Dennis
M. Patterson, Realist Semantics and Legal Theory, 2 Can. J. L. & Jurisprudence 175, 177 (1989).
A "discourse community" refers to the social context in which speaking or writing takes place. See Stanley Fish, Doing What Comes
Naturally 87-140, 372-98 (Stanley Fish & Frederic Jameson eds., 1989). Individuals may be members of various discourse communities
simultaneously - at one's church, workplace, home, gym, and so forth. Linguists also use the term register when referring to a discourse
community's use of the language and instruments of communication. Register incorporates the lexicon or specialized terms created by the
community. See John M. Swales, Genre Analysis: English in Academic and Research Settings 40 (1990).
n60. Lycan, supra note 57, at 67 ("Meaning 'ain't in the head.'").
n61. See Glanville L. Williams, Language and the Law-IV, 61 Law Q. Rev. 384 (1946), reprinted in Law and Language 97, 141-42
(Frederick Schauer ed., 1993).
n62. Contemporary discussion of the "indeterminacy of meaning" is rooted in Willard Van Orman Quine's Word and Object and challenges
to his thesis. See generally William Van Orman Quine, Word and Object 113-37 (2d ed. 2013). Notwithstanding decades of criticism, an
irreducible indeterminacy persists. See Jan G. Kooij, Ambiguity in Natural Language: An Investigation of Certain Problems in its Linguistic
Description 3 (S. C. Dik & J. G. Kooij eds., 1971) (suggesting that ambiguity is an unavoidable part of any natural language) (citing Otto
Jespersen, Language: Its Nature, Development, and Origin (1964)).
n63. See Geoffrey Nunberg, The Non-Uniqueness of Semantic Solutions: Polysemy, 3 Linguistics & Phil. 143, 144-45 (1979).
Page 183Page 183
n64. Larson & Segal, supra note 51, at 45-47. See generally Klaas Willems, Logical Polysemy and Variable Verb Valency, 28 Language Sci.
580 (2006).
n65. See Andreas Blank, Why Do New Meanings Occur? A Cognitive Typology of the Motivations for Lexical Semantic Change, in
Historical Semantics and Cognition 61 (Andreas Blank & Peter Koch eds., 1999).
n66. See Fifty Years Among the New Words: A Dictionary of Neologisms, 1941-1991 1-17 (John Algeo ed., 1991).
n67. See D. A. Cruse, Lexical Semantics 49 (B. Comrie et al. eds., 1986); Arnold M. Zwicky & Jerrold M. Sadock, Ambiguity Tests and
How to Fail Them, in 4 Syntax and Semantics 1 (John P. Kimball ed., 1975).
n68. See Paul Grice, Studies in the Way of Words 177-78 (1989); Rosanna Keefe, Theories of Vagueness 6 (2000).
n69. See, e.g., Noam Chomsky, Language and Mind 91 (3d ed. 2006).
n70. I do not intend to suggest that this indeterminacy is necessarily pathologic. It may even be virtuous. Contrary to what some authors
have suggested, indeterminacy is not "'the common cold of the pathology of language.'" Kooij, supra note 62, at 1 (quoting Abraham Kaplan,
An Experimental Study of Ambiguity and Context 1 (1950)).
n71. For the traditional theories of meaning, see generally Ogden & Richards, supra note 50. For a discussion of the more contemporary use
theories, psychology theories, verificationism, and truth-condition theories, see Lycan, supra note 57, at 88, 100, 115, 129.
The distinction between lexical meaning and sentential meaning is somewhat artificial since the meaning of words is fundamentally
constitutive: words are involved in the constitution of sentences, and the meaning of words is constituted through sentences. See Gottlob
Frege, On Sense and Meaning, in Collected Papers on Mathematics, Logic, and Philosophy 157 (Brian McGuinness ed., Max Black et al.
trans. 1984) (suggesting that individual words make sense only in the context of sentences); Cruse, supra note 67, at 51 ("The meaning of
any word form is in some sense different in every distinct context in which it occurs.").
n72. Michael Morris, An Introduction to the Philosophy of Language 15 (2007).
n73. Id. Onomatopoeia may be something of an exception that proves this rule. These are words that imitate the sound they convey - e.g.,
moo, meow, pow, hiccup, sizzle. See Hugh Bredin, Onomatopoeia as a Figure and a Linguistic Principle, 27 New Literary Hist. 555, 557
(1996). Even these words are somewhat culture-bound, however. See W. G. Aston, Japanese Onomatopes and the Origin of Language, 23 J.
Anthropological Inst. Gr. Brit. & Ir. 332, 353 (1894) (noting how the Japanese use "nya" to describe the mewing of a cat). In any event, these
are exceptional words with a relatively insignificant role in legal discourse.
n74. Morris, supra note 72, at 15. "The principle of compositionality states that the meaning of a complex linguistic expression is built up
from the meanings of its composite parts in a rule-governed fashion." M. Lynne Murphy & Anu Koskela, Key Terms in Semantics 36 (2010)
(emphasis omitted).
n75. Analogizing language to a game is one of the major contributions of Ludwig Wittgenstein. See generally Wittgenstein, supra note 53.
n76. Note that a reference to a single discourse of law is a shorthand. In fact, legal discourse is not homogenous, but is rather "a set of
related legal discourses." See Yon Maley, The Language of the Law, in Language and the Law 11, 13 (John Gibbons ed., 1994).
Page 184Page 184
n77. See generally James T. Lamiell, 'Nomothetic' and 'Idiographic': Contrasting Windelband's Understanding with Contemporary Usage, 8
Theory & Psychol. 23 (1998); Wilhelm Windelband, Address on Occasion of the Assumption of the Rectorship of Kaiser-Wilhelm
University of Strasburg (1894), in 8 Theory & Psychol. 6 (1998).
n78. See Stefan Ziemski, Two Types of Scientific Research, 10 J. for Gen. Phil. Sci. 338, 338-39 (1979).
n79. See Weisflog, supra note 35, at 207.
n80. See, e.g., Astrue v. Capato ex rel. B.N.C., 132 S. Ct. 2021, 2027 (2012) ("To resolve this case, we must decide whether the Capato
twins rank as 'children' under the Act's definitional provisions." (alteration in original)); Hall v. United States, 132 S. Ct. 1882, 1886 (2012)
("Our resolution of this case turns on the meaning of a phrase in § 503(b) of the Bankruptcy Code: 'incurred by the estate.'"); Mohamad v.
Palestinian Auth., 132 S. Ct. 1702, 1706 (2012) ("The ordinary meaning of the word ["individual"], fortified by its statutory context,
persuades us that the Act authorizes suit against natural persons alone."); Argonaut Great Cent. Ins. Co. v. Mitchell, No. 11-12063, 2012 WL
2947757, at 1 (11th Cir. July 20, 2012) ("The instant case which turns on the meaning of 'getting on' and 'getting off' the insured vehicle.");
Hall v. United States, 677 F.3d 1340, 1344 (Fed. Cir. 2012) ("This case centers on the proper meaning of the word 'summoned' in 5 U.S.C. §
6322(a)."); St. Paul Fire & Marine Ins. Co. v. Schilli Transp. Servs. Inc., 672 F.3d 451, 457 (7th Cir. 2012) ("At the center of the dispute in
this case is the meaning of the word 'you' in this [contract]."); Foothills Texas, Inc. v. MTGLQ Investors, L.P., No. 09-10452, 2012 WL
2974907, at 5 (Bankr. D. Del. July 20, 2012) ("The dispute turns on the meaning of the term 'executory contract' under the Code."); Egan v.
Planning Bd. of Stamford, No. 32371, 2012 WL 2546806, at 6 n.17 (Conn. App. July 10, 2012) ("Our analysis turns on the meaning of the
term 'front lot line.'"). For a classic example that Professor Brian Landsberg brought to my attention, see Gibbons v. Ogden, 22 U.S. 1 (1824)
(tracing the meaning of "regulate," "commerce," and "among").
Remember also Kenneth Starr's account of President Clinton's testimony in his report to Congress: "It depends on what the meaning of
the word 'is' is." Office of the Indep. Counsel, Referral to the United States House of Representatives Pursuant to Title 28, United States
Code, § 595(c) n.1091 (1998), reprinted in The Starr Report: The Findings of Independent Counsel Kenneth W. Starr on President Clinton
and the Lewinsky Affair 325 n.1091 (1998).
n81. To be sure, when a philosopher or semiotician examines laws as a patterned system of meanings, the insubstantiality of legal language
becomes evident, and the inquiry presses on both jurisprudence and epistemology. See Mary Douglas, The Future of Semiotics, 38 Semiotica
197, 199 (1982). Yet in legal practice, laws are treated as though they are substantial - with boundaries and consequences. This Article
focuses on these practical outcomes.
n82. This is not necessarily because they always get the meanings "right"; instead, they get the meanings "right" only in the sense that they
are the final arbiters. And the discourse community recognizes that authority. See id.
n83. For an early discussion of the phrase "open texture," see Friedrich Waismann, Verifiability, in Logic and Language 117, 119 (Antony
Flew ed., 1968). Hart later used the same phrase in the legal context. See Hart, supra note 45, at 123, 272-76 (discussing the indeterminacy
of language in the context of his theory on the proper scope of judicial discretion).
n84. Blake scholars have debated, among other things, the meaning of the titular flowers in The Lily from William Blake, Songs of
Innocence & Experience (1794). Traditional readings cast it as a symbol of purity, innocence, modesty, and humility. See S. Foster Damon, A
Blake Dictionary: The Ideas and Symbols of William Blake 240 (1965); E.D. Hirsch Jr., Innocence and Experience: An Introduction to Blake
256-57 (1964). In contrast, D. G. Gillham offers an ironic interpretation of the lily, as the flower appears white and virginal because it
"knows (or senses) that it is enticing to appear to be so." D. G. Gillham, Blake's Contrary States: The Songs of Innocence and of Experience
as Dramatic Poems 174 (1966). John Grant directly refutes Gillham's "theory of radical irony," championing the more traditional reading of
the flower. See John E. Grant, Two Flowers in the Garden of Experience, in William Blake: Essays for S. Foster Damon 333, 341-45 (Alvin
H. Rosenfeld ed., 1969).
Page 185Page 185
n85. According to the theory of speech acts, originally developed by John L. Austin and John Searle, human language is used to not only
transmit messages or influence people's behavior, but acts are also realized through this language. See J. L. Austin, How to Do Things With
Words 6 (J. O. Urmson & Marina Sbisa eds., 2d ed. 1975); John R. Searle, Speech Acts: An Essay in the Philosophy of Language 16 (1969).
Building on this framework, Brenda Danet classified legal language use into different types of speech acts. See Brenda Danet, Language in
the Legal Process, 14 Law & Soc'y Rev. 445, 457-60 (1980).
n86. " There is a famous passage in Alice Through the Looking-Glass (Chapter VI) where, to Humpty Dumpty's claim to use words in
unusual senses, Alice made what may seem to the ordinary person to be an unanswerable objection. 'The question is,' said Alice, 'whether
you can make words mean different things.' 'The question is,' replied Humpty Dumpty, 'which is to be master - that's all.'" Williams, supra
note 61, at 141.
n87. See Mattila, supra note 18, at 31 ("Speech acts are of fundamental importance from the standpoint of the legal order. Given that the law
is a metaphysical phenomenon that is only 'alive' in language, it is only by language means that it is possible to change legal relationships.
The language of the law is thus an instrument of speech acts: it has a performative function.").
n88. " Few would now deny the indeterminacy side of H.L.A. Hart's repeated claim that language and the rules based on it contain both a
core of settled meaning and a penumbra of uncertainty. The disputes are over whether the core is as comparatively large as Hart and others
maintain, whether the core is as settled as it is supposed, and whether the notion of core (or plain or literal) meaning is coherent at all." Law
and Language, supra note 61, at xiv. See generally Brian Bix, Law, Language, and Legal Determinacy (1993); Timothy A. O. Endicott,
Vagueness in Law 190 (2000); Vagueness in Normative Texts (Vijay K. Bhatia et al. eds., 2005).
n89. See Mattila, supra note 18, at 109-11; Tiersma, supra note 17, at 111-12.
n90. See Tiersma, supra note 17, at 113-14.
n91. See Kooij, supra note 62, at 3; Ferenc Kovacs, Linguistic Structures and Linguistic Laws 354 (B. R. Gruner & Akademiai Kiado eds.,
Sandor Simon trans., 1971).
n92. See Tiersma, supra note 17, at 97-100.
n93. See Ralf Poscher, Ambiguity and Vagueness in Legal Interpretation, in The Oxford Handbook of Language and Law 128, 129 (Peter
M. Tiersma & Lawrence M. Solan eds., 2012).
n94. See generally Endicott, supra note 88; Olafur Pall Jonsson, Vagueness, Interpretation, and the Law, 15 Legal Theory 193 (2009);
Lawrence M. Solan, Vagueness and Ambiguity in Legal Interpretation, in Vagueness in Normative Texts, supra note 88, at 73; Jeremy
Waldron, Vagueness in Law and Language: Some Philosophical Issues, 82 Calif. L. Rev. 509 (1994).
n95. See Poscher, supra note 93, at 128.
n96. For a theoretical discussion of whether meanings are created or discovered, see Patterson, supra note 59, at 177.
Page 186Page 186
n97. Cf. Steven G. Calabresi, Introduction to Originalism: A Quarter-Century of Debate 1-40 (Steven G. Calabresi ed., 2007) (discussing
various meanings of original meaning); Randy E. Barnett, An Originalism for Nonoriginalists, 45 Loy. L. Rev. 611, 613 (1999); John O.
McGinnis & Michael B. Rappaport, A Pragmatic Defense of Originalism, 31 Harv. J.L. & Pub. Pol'y 917, 917-19 (2008).
n98. This history is suggested only for expository purposes. For an historical account of the class action, see generally Stephen C. Yeazell,
From Medieval Group Litigation to the Modern Class Action (1987).
n99. See Christine Jolls & Cass R. Sunstein, Debiasing Through Law, 35 J. Legal Stud. 199, 204, 236 (2006); Jeffrey J. Rachlinski, A
Positive Psychological Theory of Judging in Hindsight, 65 U. Chi. L. Rev. 571, 574 (1998) (describing steps courts take to correct for the
human propensity to view past events with a hindsight bias).
n100. For a discussion of the phenomenon of transplants, see supra notes 27-33 and accompanying text.
n101. In some instances, the enthusiastic nature of the borrowing creates unique problems. See Holger Spamann, Contemporary Legal
Transplants: Legal Families and the Diffusion of (Corporate) Law, 2009 BYU L. Rev. 1813, 1858 (2009) ("Singapore decided to adopt the
new English company law outright before the English had even finished drafting it, and they did not even adjust the numbering in cross-
references of their securities law copied from Australia.").
n102. See Markesinis & Fedtke, supra note 34, at 336-37 ("Borrowing a particular legal idea does not ... mean that the system on the
receiving end needs to follow the model in each and every detail.").
n103. See Patterson, supra note 59, at 177.
n104. See generally Jackson, supra note 46, at 46 (noting that, once constituted as a system, "the language of law represents an entire
universe of legal meanings, the choice of any one of which ... reflects the exclusion or absence of the other available legal meanings").
n105. This defined term is not a synonym of "plain meaning," nor of "ordinary meaning." Unfortunately, the Supreme Court has used the
term as such a synonym. See, e.g., Perrin v. United States, 444 U.S. 37, 42 (1979) (referring to the "ordinary, contemporary, common
meaning" of statutory text). Quite fittingly given the thesis of this Article, however, the Court has also used the term "common meaning" in
essentially the sense that I use it here. See, e.g., United States v. Santos, 553 U.S. 507, 511 (2008) (noting that the term "proceeds" "has not
acquired a common meaning in the provisions of the Federal Criminal Code").
For a general discussion of plain meaning and original meaning, see Ellen P. Aprill, The Law of the Word: Dictionary Shopping in the
Supreme Court, 30 Ariz. St. L.J. 275, 280 (1998); Alani Golanski, Linguistics in Law, 66 Alb. L. Rev. 61, 63 (2003); Lawrence M. Solan,
The New Textualists' New Text, 38 Loy. L.A. L. Rev. 2027, 2036-38 (2005).
n106. Whether mercifully or unfortunately, the Venn diagram does not reflect the infinitely regressive nature of word meaning. See Bradley,
supra note 56, at 17-18. Each of the circles above theoretically circumscribes an infinite number of circles since a word symbolizes
something that can be described with words that, in turn, symbolize more concepts and more words, and so on. The meaning of each word is
theoretically its own circle. For example, if a circle represents the meaning of the word "class action" in First Country, then that includes the
"trans-substantive joinder device with four prerequisites, [and] a provision for opt-outs ... ." Supra text accompanying note 98. But each of
these words ("trans-substantive," for example), in turn, has a meaning, and that meaning is describable by words that have meanings.
The Venn diagram also suggests that the meaning of a word is static, when of course it is dynamic. See James Boyd White, Justice as
Translation: An Essay in Cultural and Legal Criticism 239-41 (1990); Arthur Schopenhauer, On Language and Words, in Theories of
Translation 32-35 (Rainer Schulte & John Biguenet eds., 1992); James Boyd White, Judicial Criticism, in Interpreting Law and Literature: A
Hermeneutic Reader 393 (Sanford Levinson & Steven Mailloux eds., 1988). Because meaning is dynamic, M<1>, M<2>, M<3>, and M<4>
could be the evolution of the meaning of the word within one system.
Page 187Page 187
n107. The Global Class Actions Exchange website, maintained by Deborah Hensler of Stanford Law School, contains reports on
contemporary variations on the class action device. Global Class Actions Exchange, Stan. Univ., http://globalclassactions.stanford. edu/ (last
visited May 26, 2013). The variations among countries include, for example, restricting the subject matter (non-trans-substantive), see Klaus
Viitanen, Finland, 622 Annals Am. Acad. Pol. & Soc. Sci. 209, 213 (2009) (consumer cases only); requiring that the action address a shared
public concern, see Camilla Bernt, Norway, 622 Annals Am. Acad. Pol. & Soc. Sci. 220, 223 (2009); emphasizing the role of a government
official in the initiation of actions, see Viitanen, supra, at 213-14; and requiring class members to opt in, see Elisabetta Silvestri, Italy, 622
Annals Am. Acad. Pol. & Soc. Sci. 138, 146 (2009).
n108. See generally Roger Wertheimer, Conditions, 65 J. Phil. 355 (1968).
n109. Words and meanings are shared resources because multiple users can enjoy the same word. Words and meanings generally are not
limited resources because one person's use of the word does not compromise another's use of that word. Cf. N. Stephan Kinsella, Against
Intellectual Property Rights, 15 J. Libertarian Stud. 1, 22-23 (2001).
n110. The origin of the common-pool line of inquiry is usually traced to Garrett Hardin. See Hardin, supra note 1, at 1244; see also Elinor
Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action 2 (James E. Alt & Douglass C. North eds., 1990)
(deducing that Aristotle was the first person known to identify the tragedy of the commons). For more contemporary analyses of Hardin's
theory, see generally Ronen Avraham & K. A. D. Camara, The Tragedy of the Human Commons, 29 Cardozo L. Rev. 479 (2008) (applying
the theory of the commons to health insurance); Jerry Brito, The Spectrum Commons in Theory and Practice, 2007 Stan. Tech. L. Rev. 1
(2007) (applying the theory of the commons to radio frequencies); Gary D. Libecap, Open-Access Losses and Delay in the Assignment of
Property Rights, 50 Ariz. L. Rev. 379 (2008) (applying the theory of the commons to fishing, gas and oil extraction, and air pollution). For
the articulation of a new generation of commons phenomena, see generally Michael J. Madison, Brett M. Frischmann & Katherine J.
Strandburg, Constructing Commons in the Cultural Environment, 95 Cornell L. Rev. 657 (2010).
n111. Hardin, supra note 1, at 1244.
n112. " Examples of typical common-pool resource systems include lakes, rivers, irrigation systems, groundwater basins, forests, fishery
stocks, and grazing areas. Common-pool resources may also be facilities that are constructed for joint use, such as mainframe computers and
the Internet." Charlotte Hess & Elinor Ostrom, Ideas, Artifacts, and Facilities: Information as a Common-Pool Resource, 66 Law &
Contemp. Probs. 111, 121 (2003).
n113. See Ward Farnsworth, The Legal Analyst: A Toolkit for Thinking About the Law 106-107, 109-16 (2007); Hardin, supra note 1, at
1244.
n114. See Cornes & Sandler, supra note 20, at 39-43 (discussing externalities); see also James E. Meade, The Theory of Economic
Externalities: The Control of Environmental Pollution and Similar Social Costs 15 (1973).
n115. Hardin, supra note 1, at 1244.
n116. Alfred North Whitehead, Science and the Modern World 11 (Pelican Mentor Books 1948) (1925).

Page 188Page 188
n119. To be sure, there could be a positive externality if innovation in one legal system were so enlightened (or so problematic) that other
legal systems adopted it (or avoided it, as the case may be) and would not have done so but for the experience of the former. In this sense,
idiosyncrasy might add to the interpretive stock of a word, and this could be independently useful. The analogue is Justice Brandeis' famous
"laboratories" metaphor about federalism. See New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting) ("It is one
of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel
social and economic experiments without risk to the rest of the country.").
But this is surely a modest externality; although some idiosyncrasies could be transplanted widely, see supra notes 27-33 and
accompanying text, the purpose of customization is to tailor the device to local conditions, which are, almost by definition then, unique, see
supra note 19. Even were the positive externality of a particular innovation substantial and compelling, understand that it would not forestall
or directly offset the loss of the word's common meaning. If, for example, five additional countries introduced a class action device and
followed Sixth Country's lead (codifying the opt-in component), the idiosyncrasy in Sixth Country provided something useful elsewhere (to-
wit, a positive externality), but the word's common meaning is still compromised as a result of Sixth Country's customization. The values of
common meaning, on one hand, and entrepreneurship, on the other, are not equivalents in the sense that one can directly offset the other.
To emphasize this point, consider the following analogue: if the cattle farmers sharing the common grazing land had to purchase more
horses to shepherd their ever-burgeoning cattle herds to and from the commons, the stimulus to the market for horses would be a positive
externality - the more cattle brought to the commons, the more horses and horse equipment purchased by each farmer. But this positive
externality would not forestall or directly offset the consumption of the common-pool resource. Theoretically, the positive externality might
outweigh the negative externality - if, say, the marginal stimulus to the horse market spurred other economic growth worth far more than the
commons - but it would not save the commons. I address the normative consequences of preserving common meaning at infra notes 332-356
and accompanying text.
There is a possibility that if an innovation introduced in one system was adopted by all other systems, the innovation would become
part of the word's common meaning. If, for example, the five countries that followed Sixth Country's lead were instead First, Second, Third,
Fourth, and Fifth Country, the common meaning may ultimately even reset to include Sixth Country's opt-in. But see infra Part IV.B.
n120. In this Article, unless otherwise noted, "foreign law" refers to the national law of foreign countries and to international law. The
challenge of applying unfamiliar law can even be manifest in the application of sister-state law. Alexander, supra note 36, at 620-21. But
these challenges are "usually not as acute as that of applying the rule of another nation. While some material differences do exist among the
laws of the several states, they are not nearly as frequently encountered as differences with foreign national laws. In a similar vein," some
applications of foreign law are more difficult than others. Id. at 603 n.3. "The foreign law 'problem' is not monolithic." Id.; see also Catherine
Valcke, Global Law Teaching, 54 J. Legal Educ. 160, 161 (2004) ("Foreign law typically refers to the internal law of states other than our
own." (emphasis omitted)).
n121. Roger J. Miner, The Reception of Foreign Law in the U.S. Federal Courts, 43 Am. J. Comp. L. 581, 581 (1995) ("Aside from foreign
law issues arising in cases relating to foreign trade, federal courts throughout this nation are faced daily with immigration matters, tort
claims, public law disputes, arbitration enforcement proceedings, domestic relation suits and even criminal cases that call for the
determination and application of foreign law.").
n122. Douglas R. Tueller, Reaching and Applying Foreign Law in West Germany: A Systemic Study, 19 Stan. J. Int'l L. 99, 101 (1983).
International treaties have also extended the domain of international law to include private acts and transactions, such as wills, trusts,
decedents' estates, "the adoption of children, the abduction of children, the commercial sale of goods, electronic funds transfers, bills of
exchange, and promissory notes." Phillip R. Trimble, International Law, World Order, and Critical Legal Studies, 42 Stan. L. Rev. 811, 812
(1990).
n123. Tueller, supra note 122, at 101-02.
n124. The following list provides a number of examples: Argentina (Ubiquiti Networks, Inc. v. Kozumi USA Corp., No. C 12-2582 CW,
2012 WL 2343670 (N.D. Cal. June 20, 2012)); Australia ( Seed Servs., Inc. v. Winsor Grain, Inc., 868 F. Supp. 2d 998 (E.D. Cal. 2012));
Bahamas (Matthews v. Whitewater West Indus., Ltd., No. 11-24424- CIV, 2012 WL 1605184 (S.D. Fla. May 8, 2012)); Canada ( Sonoco
Products Co. v. ACE INA Ins., 877 F. Supp. 2d. 398 (D.S.C. 2012)); Cayman Islands ( Loukianoff v. Galitsky, No. C 12-00296 CRB, 2012
WL 1144289 (N.D. Cal. Apr. 4, 2012)); Costa Rica ( Lucas v. Hertz Corp., 875 F. Supp. 2d 991 (N.D. Cal. 2012)); Dominican Republic
(Font Paulus ex rel. P.F.V. v. Vittini Cordero, No. 3:12-cv-986, 2012 WL 2524772 (M.D. Pa. June 29, 2012)); Ecuador (Tobar v. United
States, No. 07cv817 WQH (WMc), 2012 WL 2190766 (S.D. Cal. June 13, 2012)); England ( Howden N. Am. Inc. v. Ace Property & Cas.
Ins. Co., 875 F. Supp. 2d 478 (W.D. Pa. 2012)); Finland ( Frederiksson v. HR Textron, Inc., 484 F. App'x 610 (2d Cir. 2012)); French
Polynesia ( Putz v. Golden, No. C10-0741JLR, 2012 WL 2565017 (W.D. Wash. July 2, 2012)); Germany (Mageba Textilmaschinen GmbH
Page 189Page 189
& Co. KG v. Archibald, No. 3:12- CV-00126-FDW, 2012 WL 2568075 (W.D.N.C. July 2, 2012)); India (Shire Dev. LLC v. Cadila
Healthcare Ltd., No. 1:10- CV-00581-KAJ, 2012 WL 2564134 (D. Del. June 28, 2012)); Indonesia ( JPMorgan Chase Bank, N.A. v. PT
Indah Kiat Pulp & Paper Corp. Tbk, 854 F. Supp. 2d 528 (N.D. Ill. 2012)); Iraq ( Al Shimari v. CACI Int'l, Inc., 679 F.3d 205 (4th Cir.
2012)); Israel ( Estate of Botvin v. Islamic Rep. Iran, 873 F. Supp. 2d 232 (D.D.C. 2012)); Kuwait (Shah v. Kuwait Airways Corp., No. 08
Civ. 7371(LAP)(JCF), 2012 WL 1631624 (S.D.N.Y. May 7, 2012)); Malaysia (Nestle Waters N. Am., Inc. v. Malaysian Assur. Alliance
Berhad, No. 8:12-cv-180- T-30AEP, 2012 WL 2305940 (M.D. Fla. June 18, 2012)); Mexico ( Gen. Motors Corp. v. Albert Weber GmbH,
No. 08-12671, 2012 WL 2184564 (E.D. Mich. June 14, 2012)); Netherlands ( United States v. Omar, No. 09-242 (MJD/FLN), 2012 WL
2277821 (D. Minn. June 18, 2012)); Nigeria ( Aeons Centro de Administracao de Empresas, Ltd. v. Cent. Bank of Nigeria, No. BEL-11-
3447, 2012 WL 2675259 (D. Md. July 3, 2012)); Saudia Arabia ( Douglas v. Smith Int'l, Inc., 481 F. App'x 917 (5th Cir. 2012)); Switzerland
(Nuvo Research Inc. v. McGrath, No. C 11-4006 SBA, 2012 WL 1965870 (N.D. Cal. May 31, 2012)); Taiwan ( SignalQuest, Inc. v. Tien-
Ming Chou, 284 F.R.D. 45 (D.N.H. 2012)); Venezuela ( Skanga Energy & Marine Ltd v. Arevenca S.A., 875 F. Supp. 2d 264 (S.D.N.Y.
2012)).
Of course, reported cases reveal only part of the picture. See John R. Schmertz, Jr., The Establishment of Foreign and International
Law in American Courts: A Procedural Overview, 18 Va. J. Int'l L. 697, 697 (1978) ("Foreign law, and to a lesser extent international law,
play an ever-increasing role in U.S. federal and state adjudications. In addition to the reported cases, there are many more unreported cases,"
including those where the parties and the court overlooked the foreign law issues.).
n125. Restatement (Second) of Conflict of Laws § 6.2 cmt. (1971). The most significant relationship test of the Restatement (Second) of
Conflicts is the most popular, but is not the only extant conflicts methodology. See generally Symeon C. Symeonides, Choice of Law in the
American Courts in 2010: Twenty-Fourth Annual Survey, 59 Am. J. Comp. L. 303 (2011).
n126. See Restatement (Second) of Conflict of Laws §§145, 188 (1971).
n127. For a discussion of the increasing use of choice of law clauses, see Erin Ann O'Hara, Opting Out of Regulation: A Public Choice
Analysis of Contractual Choice of Law, 53 Vand. L. Rev. 1551, 1556 (2000); see also Jan M. Smits, The Complexity of Transnational Law:
Coherence and Fragmentation of Private Law, 14 Elec. J. Comp. L. (2010), available at http://www.ejcl.org/143/art143-14.pdf.
n128. See Paul R. Dubinsky, Human Rights Law Meets Private Law Harmonization: The Coming Conflict, 30 Yale J. Int'l L. 211, 229
(2005) ("In recent decades, national courts have shown increasing respect for party autonomy ... .").
n129. See Restatement (Second) of Conflict of Laws § 187 (1971).
n130. See generally Erin A. O'Hara & Larry E. Ribstein, The Law Market (2009) (arguing states must, when developing domestic laws,
account for individuals' potential desire to evade that law by, for example, contracting under the law of another state).
n131. See Franklin A. Gevurtz, Global Issues in Corporate Law 6-11 (2006) (discussing McDermott Inc. v. Lewis, 531 A.2d 206 (Del.
1987)).
n132. See Paul N. Iannone, The Critical Role of Foreign Law and Tax Court Rule 146: Determination of Foreign Law by the United States
Tax Court in I.R.C. Section 482 Cases, 16 Q.L.R. 445, 453 (1997) ("Foreign law plays a vital role for corporations that must determine an
allocation of income and expenses among domestic and foreign affiliated businesses for tax purposes."); see also I.R.C. § 901 (concerning
foreign tax credits).
n133. See Graeme W. Austin, Does the Copyright Clause Mandate Isolationism?, 26 Colum. J.L. & Arts 17, 59 (2003); Stephen Breyer,
Assoc. Justice of the Supreme Court of the United States, Keynote Address Before the Ninety-Seventh Annual Meeting of the American
Society of International Law (Apr. 4, 2003), in 97 Am. Soc'y Int'l L. Proc. 265, 265-66 (2003); Edward Lee, The New Canon: Using or
Misusing Foreign Law to Decide Domestic Intellectual Property Claims, 46 Harv. Int'l L.J. 1, 5, 13 (2005). See generally David E. Miller,
Finding a Conflicts Issue in International Copyright Litigation: Did the Second Circuit Misinterpret the Berne Convention in Itar-Tass?, 8
Cardozo J. Int'l & Comp. L. 239 (2000) (describing how the Itar-Tass decision is implicating foreign law issues).
Page 190Page 190
n134. See, e.g., Pazcoguin v. Radcliffe, 292 F.3d 1209, 1216 (9th Cir. 2002) (applying Phillipine law to determine if immigrant was
excludable). Foreign law may also determine the validity of a marriage, see Colbert v. Colbert, 169 P.2d 633, 635 (Cal. 1946), the
effectiveness of an adoption, see In re Adoption of Doe, 923 N.E.2d 1129, 1134 (N.Y. 2010), or the legitimacy of a child, see Perez v.
Gardner, 277 F. Supp. 985, 992 (E.D. Wis. 1967). Amnesty cases may require inquiry into both international and local laws. See generally
Ronald C. Slye, The Legitimacy of Amnesties Under International Law and General Principles of Anglo-American Law: Is a Legitimate
Amnesty Possible?, 43 Va. J. Int'l L. 173 (2002).
n135. See 15 U.S.C.§§78dd-1(c), 78dd-2(a)(1)(A), 78dd-2(c) (2006). See generally Elizabeth Spahn, Discovering Secrets: Act of State
Defenses to Bribery Cases, 38 Hofstra L. Rev. 163, 181-82 (2010).
n136. See 42 U.S.C. § 2000e-1(b) (2006).
n137. See 29 U.S.C. § 623(f)(1) (2006). See generally Andrew P. Walsh, Employment Discrimination - Mahoney v. RFE/RL, Inc.: The
"Foreign Laws" Exception to the ADEA - When a Collective Bargaining Agreement Equals a Law, 19 W. New Eng. L. Rev. 455, 455 (1997).
n138. See, e.g., Registration and Regulation of Brokers and Dealers, 15 U.S.C. § 78o(b)(4)(B), 78c(a)(39)(B), (D) (2006) (granting the SEC
and self-regulatory organizations authority to bar, suspend, or limit securities professionals based upon the findings of a foreign court or
foreign securities authority that such persons committed specified types of violations of foreign law); Tariff Act of 1930, 19 U.S.C. § 1527(a)
(2006) (prohibiting the importation of any wild mammal or bird "if the laws or regulations of any country" forbid it); Marine Mammal
Protection Act of 1972, 16 U.S.C. § 1372(c) (2006) (prohibiting importation of marine mammals taken or possessed in violation of foreign
law); The Lacey Act of 1990, 16 U.S.C. § 3372(a)(2)(A) (2006) (making it unlawful to possess or sell fish or wildlife taken "in violation of
any foreign law"); Death on the High Seas Act, 46 U.S.C. § 30306 (2006) (allowing foreign cause of action for wrongful death on the high
seas to be brought in U.S. courts); National Stolen Property Act, 18 U.S.C. § 2315 (2006) (prohibiting the importation or transportation of
"stolen" goods); United States v. Schultz, 333 F.3d 393, 404 (2d Cir. 2003) (interpreting "stolen" under U.S.C. § 2315 to mean "taken in
violation of a patrimony law.").
Some other statutes include reciprocity rules that allow recovery by citizens or subjects of a foreign state only if that foreign state
would allow an American citizen to recover were the situation reversed. See, e.g., 28 U.S.C. § 2502(a) (2006) ("Citizens or subjects of any
foreign government which accords to citizens of the United States the right to prosecute claims against their government in its courts may
sue the United States in the United States Court of Federal Claims if the subject matter of the suit is otherwise within such court's
jurisdiction."); 46 U.S.C. § 31111 (2006) (applying a similar reciprocity rule in cases in which an alien sues the United States for damages
caused by a public vessel, or for compensation for towage or salvage services).
n139. Similarly, some domestic statutes refer to citizens or subjects of a foreign state. In these instances, foreign law may determine a
party's status thereunder. See, e.g., JPMorgan Chase Bank v. Traffic Stream (BVI) Infrastructure Ltd., 536 U.S. 88, 91 (2002) (testing the
meaning of a "corporation of a foreign state" in the context of diversity subject matter jurisdiction); see also Antonin Scalia, Assoc. Justice of
the Supreme Court of the United States, Keynote Address: Foreign Legal Authority in the Federal Courts (Apr. 3, 2004), in 98 Am. Soc'y
Int'l L. Proc. 305, 305 (2004) ("Much of our [JP Morgan Chase Bank] opinion was devoted to consideration of English law, since whether
the corporation was a citizen or subject of a foreign state depended on its legal status under foreign law.").
n140. To be clear, it is the domestic law that binds, not the foreign mandate. The foreign law is binding in the sense that it is recognized by
or incorporated by reference into the domestic law. See 1 Joseph H. Beale, A Treatise on the Conflict of Laws 53 (1935) ("Since the only law
that can be applicable in a state is the law of that state, no law of a foreign state can have there the force of law."); Joseph Story,
Commentaries on the Conflict of Laws § 7, at 10 (5th ed. 1857).
n141. See Usha (India), Ltd. v. Honeywell Int'l, Inc., 421 F.3d 129, 135 (2d Cir. 2005) (assigning burden to moving party); Piper Aircraft
Co. v. Reyno, 454 U.S. 235, 254 n.22 (1981) (identifying adequacy as a threshold issue).
Page 191Page 191
n142. Uniform Foreign Money-Judgments Recognition Act § 2 (1962), available at http://www.uniformlaws.org/shared/docs/foreign

%20money%20judgments%20recognition/ufmjra%20final%20act.pdf; Restatement (Third) of Foreign Relations Law of the United States §
482 (1987). See generally Walter W. Heiser, The Hague Convention on Choice of Court Agreements: The Impact on Forum Non
Conveniens, Transfer of Venue, Removal, and Recognition of Judgments in United States Courts, 31 U. Pa. J. Int'l L. 1013 (2010)
(discussing the requirements of finality and due process for the enforcement of foreign judgments under the Uniform Foreign Money
Judgments Act and under the Restatement).
n143. See, e.g., Kimberly Hicks, Parallel Litigation in Foreign and Federal Courts: Is Forum Non Conveniens the Answer?, 28 Rev. Litig.
659, 685 (2009) (explaining that international comity, Colorado River abstention, and inherent power theories require the U.S. courts to
examine details of the foreign proceeding); Austen L. Parrish, Duplicative Foreign Litigation, 78 Geo. Wash. L. Rev. 237, 247-51 (2010).
See generally Cortelyou Kenney, Disaster in the Amazon: Dodging "Boomerang Suits" in Transnational Human Rights Litigation, 97 Calif.
L. Rev. 857 (2009); Louise Ellen Teitz, Both Sides of the Coin: A Decade of Parallel Proceedings and Enforcement of Foreign Judgments in
Transnational Litigation, 10 Roger Williams U. L. Rev. 1 (2005).
n144. See Alex Glashausser, The Treatment of Foreign Country Convictions as Predicates for Sentence Enhancement Under Recidivist
Statutes, 44 Duke L.J. 134, 142 (1995) (discussing courts' consideration of foreign convictions in criminal sentencing); A. Kenneth Pye, The
Effect of Foreign Criminal Judgments in the United States, 32 U. Mo. Kan. City L. Rev. 114, 128 (1964) ("A number of states specifically
give effect to foreign criminal convictions by providing that a conviction in any other ... country[] of a crime which ... would be a 'felony' ...
may be used as a basis for imposing increased punishment on the offender.").
n145. See generally Leti Volpp, (Mis)Identifying Culture: Asian Women and the "Cultural Defense," 17 Harv. Women's L.J. 57 (1994).
n146. See, e.g., U.C.C. § 2-615 (1987); see also Perutz v. Bohemian Disc. Bank in Liquidation, 110 N.E.2d 6, 7 (N.Y. 1953) ("A contract
made in a foreign country by citizens thereof and intended by them to be there performed is governed by the law of that country.").
n147. See generally Diane Marie Amann, A Whipsaw Cuts Both Ways: The Privilege Against Self-Incrimination in an International Context,
45 UCLA L. Rev. 1201 (1998) (examining the privilege against self-incrimination where there is a possibility of being prosecuted abroad for
a foreign crime).
n148. See, e.g., McDonnell Douglas Corp. v. Islamic Rep. of Iran, 758 F.2d 341, 345-46 (8th Cir. 1985).
n149. See Hannah L. Buxbaum, Multinational Class Actions Under Federal Securities Law: Managing Jurisdictional Conflict, 46 Colum. J.
Transnat'l L. 14, 33-34 (2007); Stephen J. Choi & Linda J. Silberman, Transnational Litigation and Global Securities Class-Action Lawsuits,
2009 Wis. L. Rev. 465, 480-86 (2009) (discussing the impact of possible non-recognition on class certification).
n150. The forum's procedural rules govern the mechanics for serving process upon foreign defendants. However, some of these rules
incorporate by reference the foreign practice rules. See, e.g., Fed. R. Civ. P. 4(f)(2)(A) ("If there is no internationally agreed means ...
[service can be done] as prescribed by the foreign country's law ... ."). The rules also contemplate use of an international treaty that, in turn,
incorporates by reference foreign practice rules. See Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in
Civil or Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361, 658 U.N.T.S. 163.
n151. See, e.g., Fed. R. Civ. P. 28(b)(1)(C) ("A deposition may be taken in a foreign country ... on notice, before a person authorized to
administer oaths either by federal law or by the law in the place of examination ... ."). Moreover, all of the forum's rules are to be
administered with "special vigilance to protect foreign litigants" from discovery abuse. Societe Nationale Industrielle Aerospatiale v. U.S.
Dist. Court S.D. Iowa, 482 U.S. 522, 546 (1987). Specifically, this includes "due respect ... for any sovereign interest expressed by a foreign
state." Id. Demonstrating such respect may involve evaluating foreign discovery practices - and the history behind and justifications for those
rules. See, e.g., In re Anschuetz & Co., GmbH, 838 F.2d 1362, 1364 (5th Cir. 1988) ("The courts of this circuit, when considering discovery
requests ... will be sensitive to interests expressed in the Hague Convention.").
Page 192Page 192
n152. See Scalia, supra note 139, at 305. The United States is a bilateral, regional, or international party to more than 10,000 treaties and
international agreements. See U.S. Dep't of State, Treaties in Force: A List of Treaties and Other International Agreements of the United
States in Force on January 1, 2011 (2011), available at http://www.state.gov/documents/organization/169274.pdf.
For a discussion of the relevance of foreign law with regard to extradition treaties in Brazil, see Jacob Dolinger, Application, Proof, and
Interpretation of Foreign Law: A Comparative Study in Private International Law, 12 Ariz. J. Int'l & Comp. L. 225, 241-42 (1995).
With regard to the role of foreign law in harmonization efforts, see generally Graeme B. Dinwoodie, The Development and
Incorporation of International Norms in the Formation of Copyright Law, 62 Ohio St. L.J. 733 (2001) (suggesting that domestic courts
should use foreign law as a way to develop international copyright norms in transnational disputes). With regard to harmonization, consider
also the borrowed-statute doctrine in the context of canons of statutory interpretation: "when a legislator copies a statute from a foreign
legislator, it can be presumed that she was aware of the way in which the statute had been construed by the foreign courts." Carlos F.
Rosenkrantz, Against Borrowings and Other Nonauthoritative Uses of Foreign Law, 1 Int'l J. Const. L. 269, 275 (2003); see also infra notes
343-347.
n153. When interpreting the text of a treaty, for example, foreign precedents should not simply be considered but be given "considerable
weight." Olympic Airways v. Husain, 540 U.S. 644, 658 (2004) (Scalia, J., dissenting) (citing Air France v. Saks, 470 U.S. 392, 404 (1985)).
n154. United Nations Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, 1489 U.N.T.S. 3 (codified at 15 U.S.C.A.
app. at 52 (West Supp. 1997)).
n155. See Fritz Enderlein & Dietrich Maskow, International Sales Law: United Nations Convention for the International Sale of Goods,
Convention on the Limitation Period in the International Sale of Goods 8-9 (1992); see also International Sale of Goods: Hearing on Treaty
Doc. No. 98-99 Before the S. Comm. on Foreign Relations, 98th Cong. 1, 13 (1984) (statement of Sen. Christopher J. Dodd) (commenting
that Congress intended the CISG to create a "uniform international legal system to which each party to an international sales contract could
refer").
n156. See United Nations Convention on Contracts for the International Sale of Goods, supra note 154, art. 7(1) ("In the interpretation of
this Convention, regard is to be had to its international character and to the need to promote uniformity in its application."). Further, Article
7(2) implicitly provides that courts should not rely exclusively on domestic law. See id. art. 7(2); John Linarelli, Analytical Jurisprudence
and the Concept of Commercial Law, 114 Penn St. L. Rev. 119, 154 (2010); see also Franco Ferrari, The Relationship Between the UCC and
the CISG and the Construction of Uniform Law, 29 Loy. L.A. L. Rev. 1021, 1024-26 (1996).
n157. See, e.g., Alien Tort Claims Act, 28 U.S.C. § 1350 (2006); Foreign Sovereign Immunities Act, 28 U.S.C. § 1605 (2006); see also
Yeazell, supra note 3, at 62-63. See generally supra note 120.
n158. Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64, 118 (1804) (Marshall, C.J.); see also Lea Brilmayer, International
Law in American Courts: A Modest Proposal, 100 Yale L.J. 2277, 2279-80 (1991) (discussing U.S. courts' tendency to view questions of
foreign law as political questions, thus finding them "unsuited for domestic adjudication").
n159. 28 U.S.C. § 1605(a)(3) (2006).
n160. See Scalia, supra note 139, at 305.
n161. See Lynn M. LoPucki, The Systems Approach to Law, 82 Cornell L. Rev. 479, 484-86 (1997).
Page 193Page 193
n162. See generally Harold Hongju Koh, Internalization Through Socialization, 54 Duke L.J. 975 (2005) (discussing the socialization and
internalization of international law as a vehicle for the coordination of and unity within the international community).
n163. See Daniel A. Farber, The Supreme Court, the Law of Nations, and Citations of Foreign Law: The Lessons of History, 95 Calif. L.
Rev. 1335, 1337 (2007). See generally Steven G. Calabresi & Stephanie Dotson Zimdahl, The Supreme Court and Foreign Sources of Law:
Two Hundred Years of Practice and the Juvenile Death Penalty Decision, 47 Wm. & Mary L. Rev. 743 (2006); M.H. Hoeflich, Translation &
the Reception of Foreign Law in the Antebellum United States, 50 Am. J. Comp. L. 753 (2002); Vicki C. Jackson, Constitutional
Comparisons: Convergence, Resistance, Engagement, 119 Harv. L. Rev. 109 (2006); John O. McGinnis, Foreign to Our Constitution, 100
Nw. U. L. Rev. 303 (2006); Austen L. Parrish, Storm in a Teacup: The U.S. Supreme Court's Use of Foreign Law, 2007 U. Ill. L. Rev. 637
(2007); Rosenkrantz, supra note 152.
n164. See Roper v. Simmons, 543 U.S. 551, 575-78 (2005) (noting that the fact that no other country permits the juvenile death penalty is
not controlling, but confirming the conclusion that the death penalty is disproportionate for killers younger than eighteen); Atkins v. Virginia,
536 U.S. 304, 317 (2002) ("Within the world community, the imposition of the death penalty for crimes committed by mentally retarded
offenders is overwhelmingly disapproved."); Trop v. Dulles, 356 U.S. 86, 102-03 (1958) (plurality opinion) (citing the virtual unaninimity of
"civilized nations" to support the conclusion that the Eighth Amendment bars the imposition of statelessness as a punishment for crime).
n165. See, e.g., Lawrence v. Texas, 539 U.S. 558, 560, 576-77 (2003) (noting that other nations have protected the "right of homosexual
adults to engage in intimate, consensual conduct" and finding "no showing that in this country the governmental interest in circumscribing
personal choice is somehow more legitimate or urgent"); Washington v. Glucksberg, 521 U.S. 702, 734-35 (1997) (finding that the
experience with physician-assisted suicide in the Netherlands supported state claims of potential for abuse).
n166. See, e.g., Scalia, supra note 139, at 309 ("Adding foreign law to the box of available legal tools is enormously attractive to judges
because it vastly increases the scope of their discretion. In that regard it is much like legislative history, which ordinarily contains something
for everybody and can be used or not used, used in one part or in another, deemed controlling or pronounced inconclusive, depending upon
the result the court wishes to reach."); Melissa A. Waters, Treaty Dialogue in Sanchez-Llamas: Is Chief Justice Roberts a Transnationalist,
After All?, 11 Lewis & Clark L. Rev. 89, 91 n.8 (2007) ("Relying on foreign precedent doesn't confine judges. It doesn't limit their discretion
the way relying on domestic precedent does. Domestic precedent can confine and shape the discretion of the judges. Foreign law, you can
find anything you want ... and that actually expands the discretion of the judge." (quoting Confirmation Hearing on the Nomination of John
G. Roberts, Jr. to Be Chief Justice of the United States Before the S. Comm. on the Judiciary, 109th Cong. 200-01 (2005) [hereinafter
Roberts Confirmation Hearing]) (alteration in original)).
n167. See, e.g., Waters, supra note 166, at 91 n.8 ("If we're relying on a decision from a German judge about what our Constitution means,
no president accountable to the people appointed that judge, and no Senate accountable to the people confirmed that judge, and yet he's
playing a role in shaping the law that binds the people in this country. I think that's a concern that has to be addressed." (quoting Roberts
Confirmation Hearing, supra note 166, 200-201 (2005))); J. Harvie Wilkinson III, The Use of International Law in Judicial Decisions, 27
Harv. J.L. & Pub. Pol'y 423, 426 (2004) ("When judges rely on foreign sources, especially for difficult constitutional questions concerning
domestic social issues, they move the bases for judicial decision-making even farther from the realm of both democratic accountability and
popular acceptance.").
n168. See, e.g., Steven G. Calabresi, "A Shining City on a Hill": American Exceptionalism and the Supreme Court's Practice of Relying on
Foreign Law, 86 B.U. L. Rev. 1335, 1337 (2006) ("Americans are more individualistic, more religious, more patriotic, more egalitarian, and
more hostile to unions and Marxism than are the people of any other advanced democracy. This positive account of the ways in which the
United States truly is exceptional will call into question the practicality and wisdom of our Supreme Court imposing foreign ideas about law
on us."); Diarmuid F. O'Scannlain, U.S. Circuit Judge, U.S. Court of Appeals for the Ninth Circuit, What Role Should Foreign Practice and
Precedent Play in the Interpretation of Domestic Law?, Address Before the Institute of Advanced Legal Studies of the University of London
(Oct. 11, 2004), in 80 Notre Dame L. Rev. 1893, 1907 (2005) (noting unique aspects of the United States that may make reliance on foreign
law inappropriate).
n169. See, e.g., Jackson, supra note 163, at 111-12. Likewise, commentators who are suspicious of foreign law in the context of
constitutional adjudication concede its applicability in the sort of contexts examined in this Article. See, e.g., Scalia, supra note 139, at 305-
06 (recognizing "appropriate" uses of foreign laws).
Page 194Page 194
n170. See supra notes 125-48 and accompanying text.
n171. The steady increase in the number of cases implicating foreign law has been acknowledged in each of the last five decades. See, e.g.,
Andrew N. Adler, Translating & Interpreting Foreign Statutes, 19 Mich. J. Int'l L. 37, 38 (1998) ("U.S. courts increasingly must decide
issues involving the laws of foreign nations."); Paul R. Dubinsky, Is Transnational Litigation a Distinct Field? The Persistence of
Exceptionalism in American Procedural Law, 44 Stan. J. Int'l L. 301, 302 (2008) (noting "steady growth in the volume of litigation with an
international dimension"); Arthur R. Miller, Federal Rule 44.1 and the "Fact" Approach to Determining Foreign Law: Death Knell for a Die-
Hard Doctrine, 65 Mich. L. Rev. 613, 615 (1967) (recognizing a "steady increment in the number of lawsuits with international aspects");
Rudolf B. Schlesinger, A Recurrent Problem in Trans-National Litigation: The Effect of Failure to Invoke or Prove the Applicable Foreign
Law, 59 Cornell L. Rev. 1, 1 (1973) (observing that foreign law questions are presented "with considerable frequency"); John G. Sprankling
& George R. Lanyi, Pleading and Proof of Foreign Law in American Courts, 19 Stan. J. Int'l L. 3, 4, 9 (1983) (noting foreign law issues
come before American courts "quite often" and "no doubt will appear more frequently"); see also Harold Hongju Koh, Transnational
Litigation in United States Courts v (2008) (noting "the last thirty years have seen a growing torrent of cases" filed in the United States with
foreign and international issues); Marcus S. Quintanilla & Christopher A. Whytock, The New Multipolarity in Transnational Litigation:
Foreign Courts, Foreign Judgments, and Foreign Law, 18 Sw. J. Int'l L. 31, 48 (2011) ("Our overarching conjecture is that, as we move
toward 2021, transnational litigation will be increasingly multipolar.").
n172. See generally Thomas O. Main, Global Issues in Civil Procedure 1 (2005); Ronan E. Degnan & Mary Kay Kane, The Exercise of
Jurisdiction Over and Enforcement of Judgments Against Alien Defendants, 39 Hastings L.J. 799, 799 (1988) ("It is trite but true to observe
that disputes between United States nationals and people from other lands have been increasing steadily and doubtless will continue to do
so.").
For a discussion of the pressures on territorial boundaries generally, see Jack Goldsmith & Tim Wu, Who Controls the Internet?
Illusions of a Borderless World 179-83 (2006) (describing and responding to the perception that notions of sovereignty are eroding in a
borderless world); Parrish, supra note 143, at 238 n.4.
n173. See Andrew S. Bell, Forum Shopping and Venue in Transnational Litigation 3 (James Fawcett ed., 2003) (describing how the growth
of transnational litigation is fueled by "great technological advances, particularly in the fields of transportation and telecommunications and,
more generally, through the internet's facilitation of international commerce"); Sanchez, supra note 36, at 636 ("The U.S. American
practitioner, now more than ever before, operates in a world society and economy constituted not only of an international society and
economy but also of interdependent nations' societies and economies. The globalization process has given rise to the development of
transnational law practice." (footnotes omitted)); Tueller, supra note 122, at 101-02 ("The need to have information on foreign law can arise
in many contexts and affect almost anyone involved in the legal process. Thus, in the course of everyday business - in drafting contracts or
considering trade with foreign countries, in dealing with foreign nationals or companies, or merely in buying or selling foreign goods at
home - the need to consider the laws of a foreign nation arises with increasing frequency.").
n174. See Harold J. Berman, World Law, 18 Fordham Int'l L.J. 1617, 1617 (1995); Martti Koskenniemi & Paivi Leino, Fragmentation of
International Law? Postmodern Anxieties, 15 Leiden J. Int'l L. 553, 557-58 (2002) ("Without attempting yet another sociology of
globalisation, it may be accepted that political communities have become more heterogeneous, their boundaries much more porous, than
assumed by the received images of sovereignty and the international order, and that the norms they express are fragmentary, discontinuous,
often ad hoc and without definite hierarchical relationship - that we now live in a 'global Bukowina.'" (citing B. de Sousa Santos, Toward a
New Common Sense: Law, Science and Politics in the Paradigmatic Transition (1995))); Gunther Teubner, "Global Bukowina": Legal
Pluralism in the World Society, in Global Law Without a State 3 (Gunther Teubner ed., 1997). The world has "shrunk." See Robert A.
Jefferies, Jr., Recognition of Foreign Law by American Courts, 35 U. Cin. L. Rev. 578, 578 (1966) ("This 'shrinkage' has produced a
manyfold increase in the personal and commercial relations between nationals of different countries. As a result, today's attorney is likely to
be faced with claims and disputes that are dependent upon foreign law for their solution."); Basil Markesinis, Ways and Means of Teaching
Foreign Law: A Review of James Gordley & Arthur Taylor von Mehren's An Introduction to the Comparative Study of Private Law:
Readings, Cases, Materials, 23 Tul. Eur. & Civ. L.F. 175, 205 (2008) (referring to "a shrinking world which is getting closer and closer
together through economic, political, scientific, and environmental concerns which are shared by nations"). For a popular narrative of these
events, see generally Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century (2005).
n175. Markesinis & Fedtke, supra note 34, at 75.
n176. Measurement costs are the costs required to obtain necessary information. Measurement costs and information costs are usually
interchangeable concepts. See Yoram Barzel, Measurement Cost and the Organization of Markets, 25 J.L. & Econ. 27, 28 n.3 (1982);
Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 Yale L.J. 1, 26
(2001).
Page 195Page 195
n177. Jason Scott Johnston, Communication and Courtship: Cheap Talk Economics and the Law of Contract Formation, 85 Va. L. Rev. 385,
428 (1999). See generally Michael P. Van Alstine, The Costs of Legal Change, 49 UCLA L. Rev. 789 (2002).
n178. I draw upon the constructivist viewpoint on learning theory. This literature emphasizes the active role of the learner in building
understanding and making sense of new information. See generally Jean Piaget, Biology and Knowledge (1971); Jean Piaget, Studies in
Reflecting Abstraction (Robert L. Campbell ed., trans., 2001). People construct new knowledge by using their perceptions (prior conceptual
knowledge) to determine the initial path or foundation from which to build. See Piaget, Biology and Knowledge, supra, at 147-85. "People
adapt their thinking to include new ideas, as new experiences provide additional information. This adaptation occurs in two ways, through
assimilation and accommodation. In the former process, new information is simply added to the cognitive organization already there. In the
latter, the intellectual organization has to change somewhat to adjust to the new idea." Kathleen S. Berger, The Developing Person: Through
Childhood and Adolescence 55 (1978).
n179. See supra note 178.
n180. Applying foreign law is "exceedingly difficult." Alexander, supra note 36, at 637; see also Schmertz, supra note 124, at 699
(describing why applying foreign law poses "a major intellectual challenge").
n181. Justice Breyer, for example, has admitted (and lamented) that neither he nor his clerks can easily find relevant foreign material
(despite their close physical proximity to one of the world's top legal libraries). See Breyer, supra note 133, at 267-68 (suggesting inability to
find foreign material); see also Adler, supra note 171, at 63 n.110 ("Commentators typically worry that judges 'may do a half-baked job of
research in totally unfamiliar materials and come to a conclusion without basis in foreign or domestic law." (quoting Thomas F. Bridgman,
Proof of Foreign Law & Facts, 45 J. Air L. & Com. 845, 854 n.38 (1980))); Iannone, supra note 132, at 445-46 ("Merely identifying the law
of a foreign country may be a difficult and perplexing problem ... .").
n182. See Shirley S. Abrahamson & Michael J. Fischer, All the World's a Courtroom: Judging in the New Millennium, 26 Hofstra L. Rev.
273, 291 (1998) (describing how advances in technology have led to the growing internationalization of the judiciary); Ruth Bader Ginsburg,
Assoc. Justice of the Supreme Court of the United States, Looking Beyond Our Borders: The Value of a Comparative Perspective in
Constitutional Adjudication, Address Before the University of Idaho (Sept. 8, 2003) in, 40 Idaho L. Rev. 1, 3 (2003) ("The Internet affords
access to foreign judicial decisions, law journals contain all manner of commentary, course materials are well packaged."); Claire
L'Heureux-Dube, The Importance of Dialogue: Globalization and the International Impact of the Rehnquist Court, 34 Tulsa L.J. 15, 25
(1999) (describing how the internet and other advances in communication technology allow judges to more easily access decisions from
foreign jurisdictions); Richard A. Posner, Foreword: A Political Court, 119 Harv. L. Rev. 32, 80 (2006) (noting "the growing literature on
constitutional courts in other countries - a literature that is growing in part because the number and activity of such courts are growing");
Mathias Reimann, The Progress and Failure of Comparative Law in the Second Half of the Twentieth Century, 50 Am. J. Comp. L. 671, 675
(2002) (acknowledging the role of comparative law in generating "a veritable panoply of books, articles, and reports about foreign law").
n183. Markesinis & Fedtke, supra note 34, at 369-70.
n184. William Ewald, The Complexity of Sources of Trans-National Law: United States Report, 58 Am. J. Comp. L. Supp. 59, 65 (2010)
("Although newly-appointed federal judges receive some basic instruction under the auspices of the United States Judicial Conference in
how to deal with issues of foreign law, and although some federal courts (e.g., the Southern District of New York), because they deal with a
significant number of cases involving multinational corporations, have become familiar with the application of foreign law, still this training
falls short of their training in American law. As for judges in the state court systems, their formal training in the application of foreign legal
materials is minimal.").
n185. David J. Gerber, Globalization and Legal Knowledge: Implications for Comparative Law, 75 Tul. L. Rev. 949, 954 (2001).
Page 196Page 196
n186. See Alexander, supra note 36, at 633; see also Benjamin Busch, Recent Developments in the Proof of Foreign Law, 1959 A.B.A. Sec.
Int'l & Comp. L. Proc. 28, 32 (1959) ("Is the law of Cuba the same after Castro as it was before ... ?").
n187. John R. Brown, 44.1 Ways to Prove Foreign Law, 9 Mar. L. 179, 191 (1984) (discussing courts' use of experts on foreign law in
determining these threshold questions).
n188. For more on lenses of interpretation, particularly in the statutory context, see, for example, William N. Eskridge, Jr., Dynamic
Statutory Interpretation 141-73 (1994) (providing an overview of these legal process theories); Adler, supra note 171, at 51, 72-74.
n189. John Henry Merryman, Foreign Law as a Problem, 19 Stan. J. Int'l L. 151, 164 (1983) ("A related difficulty is that foreign law is often
no less unsettled and controversial than domestic law. The candid expert will so present it: 'The authorities are divided, the opinions go in
different directions, the law is not clear.'").
n190. See Jeffrey W. Barnes, The Odd Couple: Statutes and Literature, in The Happy Couple: Law and Literature 296, 303-04 (J. Neville
Turner & Pamela Williams eds., 1994); Joseph A. Grundfest & A.C. Pritchard, Statutes With Multiple Personality Disorders: The Value of
Ambiguity in Statutory Design and Interpretation, 54 Stan. L. Rev. 627, 637-42 (2002); Victoria F. Nourse & Jane S. Schacter, The Politics
of Legislative Drafting: A Congressional Case Study, 77 N.Y.U. L. Rev. 575, 596-97 (2002); see also Sean Farhang, The Litigation State 47
(2010) (recounting how scholars have identified a number of factors that can result in ambiguous Congressional mandates); Ernst-Ulrich
Petersmann, WTO Negotiators Meet Academics: The Negotiations on Improvements of the WTO Dispute Settlement System, 6 J. Int'l Econ.
L. 237 (2003) (discussing the role of constructive ambiguity in treaty language).
n191. For an overview of the legal pluralism literature, see generally John Griffiths, What is Legal Pluralism?, 24 J. Legal Pluralism &
Unofficial L. 1 (1986); Brian Z. Tamanaha, A Non-Essentialist Version of Legal Pluralism, 27 J. L. & Soc'y 296 (2000); Gordon R.
Woodman, Ideological Combat and Social Observation: Recent Debate About Legal Pluralism, 42 J. Legal Pluralism & Unofficial L. 21
(1998); Gordon R. Woodman, The Idea of Legal Pluralism, in Legal Pluralism in the Arab World 3 (Baudouin Dupret et al. eds., 1999).
n192. Ralf Michaels, The Re-State-ment of Non-State Law: The State, Choice of Law, and the Challenge from Global Legal Pluralism, 51
Wayne L. Rev. 1209, 1215 (2005).
n193. See, e.g., Thomas O. Main, The Procedural Foundation of Substantive Law, 87 Wash. U. L. Rev. 801 (2010) (suggesting that
substantive law should not be applied without its presumed procedural platform).
n194. See, e.g., Angela M. Banks, CEDAW, Compliance, and Custom: Human Rights Enforcement in Sub-Saharan Africa, 32 Fordham Int'l
L.J. 781, 784 (2008) (describing legal reform and the customary legal system in Rwanda). For more on legal pluralism and culture, see M. B.
Hooker, Legal Pluralism: An Introduction to Colonial and Neo-Colonial Laws 1 (1975) ("Legal systems typically combine in themselves
ideas, principles, rules, and procedures originating from a variety of sources. Both in the contemporary world and historically the law
manifests itself in a variety of forms and at a variety of levels."); see also Masaji Chiba, Legal Cultures in Human Society: A Collection of
Articles and Essays v (2002); John Flood, Globalisation and Law, in An Introduction to Law and Social Theory 312 (Reza Banakar & Max
Travers eds., 2002); Anne Griffiths, Legal Pluralism, in An Introduction to Law and Social Theory, supra, at 289, 290-92.
n195. Twining, supra note 44, at 362; Sanchez, supra note 36, at 656-57.
n196. See, e.g., Wash. v. Glucksberg, 521 U.S. 702, 787 (1997) (Souter, J., concurring). See generally Richard Fentiman, Foreign Law in
English Courts: Pleading, Proof and Choice of Law (1998) (discussing the difficulty of applying foreign law); Richard Fentiman, Foreign
Law and the Forum Conveniens, in Law and Justice in a Multistate World: Essays in Honor of Arthur T. von Mehren 276 (James A.R.
Nafziger & Symeon C. Symeonides eds., 2002) (discussing the difficulty of applying foreign law as a factor in identifying the forum
conveniens); Ernesto J. Sanchez, A Case Against Judicial Internationalism, 38 Conn. L. Rev. 185 (2006) (arguing that judges with expertise
in U.S. law lack access to adequate resources to research, interpret, and apply foreign law).
Page 197Page 197
Some judges are much more sanguine about applying foreign law. See, e.g., Bodum USA, Inc. v. La Cafetiere, Inc., 621 F.3d 624, 628-
29, 633 (7th Cir. 2010) (Judges Posner and Easterbrook both write that applying foreign law is not especially difficult); First Am. Corp. v.
Price Waterhouse LLP, 154 F.3d 16, 22 (2d Cir. 1998) ("We think that there is no risk that an American court will commit an error in
interpreting foreign law ... ."). Judge Milton Pollack of the U.S. District Court for the Southern District of New York expressed his thoughts
on the subject this way:
In any event, though we view another country's law but through a glass darkly, I am less pessimistic than Justice Holmes as to our ability to
handle foreign legal authorities. Of course, arguing foreign law is more complex than when the law is domestic. More of the steps must be
spelled out, more assumptions made explicit, less taken for granted. Yet, if what is relied on is law, and not some primitive religion or the
whim of a tyrant, the form of reasoning will be familiar. In civil law countries, the express language of statutes may be entitled to more
weight than we give it, and judicial decision to less - but the law is still proved by pronouncements of suitably constituted authorities. I am
told that in Mexico a single decision construing a statute has no precedential effect, but that a line of consistent decisions has. That's not our
rule, but the notions of precedent and construction are familiar, and an American court can understand and apply the Mexican rule if it is
called to the court's attention.
Milton Pollack, Proof of Foreign Law, 26 Am. J. Comp. L. 470, 474 (1978). Judge Pollack's viewpoint is not without contention. See Adler,
supra note 171, at 78 (noting that decisionmakers "are likely to overassess their own competency") (citing Frederick Schauer, The Practice
and Problems of Plain Meaning: A Response to Aleinikoff and Shaw, 45 Vand. L. Rev. 715, 732 (1992)).
n197. William B. Stern, Foreign Law in the Courts: Judicial Notice and Proof, 45 Calif. L. Rev. 23, 40 (1957).
n198. Dolinger, supra note 152, at 266 (quoting Gregory S. Alexander, The Application and Avoidance of Foreign Law in the Law of
Conflicts, 70 Nw. U. L. Rev. 602, 628-29 (1976)) (emphasis added).
n199. Gordley, supra note 34, at 1075; see also John C. Reitz, How to Do Comparative Law, 46 Am. J. Comp. L. 617, 631-32 (1998) (noting
that a high degree of fluency is needed to fully appreciate the legal terminology and concepts of a foreign country).
n200. Cao, supra note 36, at 28 (quoting James Boyd White, Law as Language: Reading Law and Reading Literature, 60 Tex. L. Rev. 415,
423 (1982)); see also Vijay K. Bhatia, Translating Legal Genres, in Text, Typology, and Translation 203, 208 (Anna Trosburg ed., 1997).
n201. Slocum, supra note 58, at 47 (emphasis added) (citing John A. Hawkins, Efficiency and Complexity in Grammars 38 (2004)). The
canon of construction that statutes ought to be construed so that no sentence or word will be rendered superfluous, void, or insignificant also
supports this principle. See, e.g., Duncan v. Walker, 533 U.S. 167, 174 (2001) (stating that it is "a cardinal principle of statutory
construction" that "a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be
superfluous, void, or insignificant." (citations omitted)). This canon discourages over-drafting.
n202. See Brainerd Currie, Married Women's Contracts: A Study in Conflict of Laws Methods, in Selected Essays on the Conflict of Laws
77, 82 (1963) (noting that legislators draft with a domestic audience in mind).
n203. See Diaz v. Gonzalez, 261 U.S. 102, 106 (1923) (Holmes, J.) ("When we contemplate such a system from the outside it seems a wall
of stone ... ."); Wood & Selick, Inc. v. Compagnie Generale Transatlantique, 43 F.2d 941, 943 (2d Cir. 1930) (Hand, J.) ("The embarrassment
is ... that we have to interpret another system of law according to notions wholly foreign to it.").
n204. Cf. Adler, supra note 171, at 77-78. Others have said that when judges apply their own legal systems they act as architects; but when
dealing with foreign law, judges act merely as photographers. See 1 Albert A. Ehrenzweig, Private International Law 193 (1967); Friedrich
K. Juenger, Choice of Law and Multistate Justice 85-86 (1993).
Page 198Page 198
n205. See Cao, supra note 36, at 31; see also James Clifford, The Predicament of Culture 336-37, 344 (1988) (discussing this concept in the
domestic context, particularly the difficulties presented in court by cultural differences between non-native U.S. judges and Native
Americans).
n206. Alexander, supra note 36, at 636.
n207. Edward J. Eberle, The Method and Role of Comparative Law, 8 Wash. U. Global Stud. L. Rev. 451, 452 (2009).
n208. Bernhard Grossfeld & Edward J. Eberle, Patterns of Order in Comparative Law: Discovering and Decoding Invisible Powers, 38 Tex.
Int'l L.J. 291, 315 (2003).
n209. Sacco, supra note 36, at 22.
n210. Pierre Legrand, Comparative Legal Studies and Commitment to Theory, 58 Mod. L. Rev. 262, 263 (1995) (reviewing Peter de Crux,
A Modern Approach to Comparative Law (1993)); see also Esin Orucu, An Exercise on the Internal Logic of Legal Systems, 7 Legal Stud.
310, 311 (1987).
n211. William Ewald, Comparative Jurisprudence (I): What Was it Like to Try a Rat?, 143 U. Pa. L. Rev. 1889, 1940 (1995) ("We must ...
conceive of law as a cognitive phenomenon, seeing in it not just a set of rules or a mechanism for the resolution of disputes, but a style of
thought, a deliberate attempt, by people in their waking hours, to interpret and organize the social world: not an abstract structure, but a
conscious, ratiocinative activity."). See also Mattila, supra note 18, at 105 (describing how law is inseparable from the context of the society
that created it).
n212. Adler, supra note 171, at 82; see also Veronica M. Dougherty, Absurdity and the Limits of Literalism: Defining the Absurd Result
Principle in Statutory Interpretation, 44 Am. U. L. Rev. 127, 164 (1994) (asserting equilibrium among rule of law and democratic values in
other countries' systems) (citing D. Neil MacCormick & Robert S. Summers, Interpretation and Justification, in Interpreting Statutes: A
Comparative Study 535 (D. Neil MacCormick & Robert S. Summers eds., 1991)); William N. Eskridge, Jr. & Philip P. Frickey, Foreword:
Law as Equilibrium, 108 Harv. L. Rev. 26, 26-30 (1994); Philip P. Frickey, Faithful Interpretation, 73 Wash U. L.Q. 1085, 1090-91 (1995)
("The faithful interpreter, then, is not merely a literal reader, but faithful to the many broader concerns wrapped up in the established
practices of the legal interpretive community."); Allan Hutchinson & Derek Morgan, The Semiology of Statutes, 21 Harv. J. on Legis. 583,
594 (1984) (reviewing David R. Miers & Alan C. Pope, Legislation (1982)) ("Communities of interpretation have their own bonding
mechanisms, a mixture of moral values and social customs. Interpretation is inextricably bound up with values ... .").
n213. Goodrich, supra note 43, at 2.
n214. Clifford Geertz, Local Knowledge: Fact and Law in Comparative Perspective, in Local Knowledge: Further Essays in Interpretive
Anthropology 167, 215 (1983).
n215. Eberle, supra note 207, at 458 ("Law really cannot be understood without understanding the culture on which it sits. And to
understand the culture, we need to employ acute observation, linguistic skill, and immersion in the milieu and social setting."); Ewald, supra
note 211, at 1973-74 (suggesting that we need to compare law from an interior point of view); see also Pierre Legrand, Fragments on Law-
as-Culture 27-31 (1999); Ugo A. Mattei et al., Schlesinger's Comparative Law 125 (7th ed. 2009); Oliver Brand, Conceptual Comparisons:
Towards a Coherent Methodology of Comparative Legal Studies, 32 Brook. J. Int'l L. 405, 414 (2007) (suggesting that, absent cultural
immersion,"the comparatist will always remain bound by his or her preconceptions and cultural disposition; the comparatist will stay 'one of
his [or her] own people.'"); Vivian Grosswald Curran, Cultural Immersion, Difference and Categories in U.S. Comparative Law, 46 Am. J.
Comp. L. 43, 43, 51 (1998).
Page 199Page 199
n216. Mattei et al., supra note 215, at 125-26.
n218. Janet E. Ainsworth, Categories and Culture: On the "Rectification of Names" in Comparative Law, 82 Cornell L. Rev. 19, 28 (1996)
(citing Sally Engle Merry, Disputing Without Culture, 100 Harv. L. Rev. 2057, 2063 (1987)); see also Adler, supra note 171, at 56 ("One
must dive into philosophy, history, and the social sciences in order to gain pragmatic familiarity with foreign law.").
n219. Eberle, supra note 207, at 452; see also Charles de Montesquieu, The Spirit of the Laws at 231-45 ("On the laws in their relation to
the nature of the climate."), 285-307 ("On the laws in their relation with the nature of the terrain."), and 308-33 ("On the laws in their
relation with the principles forming the general spirit, the mores, and the manners of a nation.") (Anne M. Cohler et al. eds., Cambridge
Univ. Press 1989) (1748).
n220. But see Markesinis & Fedtke, supra note 34, at 354-55.
n221. Eberle, supra note 207, at 453. We need to understand the examined country's history and "philosophical and religious traditions" and
comparativists need "strong linguistic skills and maybe even the skills of anthropological field study in order to collect information about
foreign legal systems at first hand." Reitz, supra note 199, at 631-32; see also Giovanni Sartori, Compare Why and How: Comparing
Miscomparing and the Comparative Method, in Comparing Nations: Concepts, Strategies, Substance 14, 27 (Mattei Dogan & Ali Kazancigil
eds., 1994); Jerome Kirk & Marc L. Miller, Reliability and Validity in Qualitative Research 12-14 (1986).
n222. Legrand, supra note 210, at 266-67 (citing Hans-Georg Gadamer, Text and Interpretation, in Dialogue and Deconstruction: The
Gadamer-Derrida Encounter 21, 27 (Diane P. Michelfelder & Richard E. Palmer eds., 1989)); see also Douglas R. Hofstadter, Godel, Escher,
Bach: An Eternal Golden Braid 698 (1980) ("Though you may imagine that you have jumped out of yourself, you never can actually do so ...
."); Legrand, supra note 42, at 526 ("The singularity of law is that it necessarily exceeds being understandable in universal (or
universalizable) terms.").
n223. Compare Anne Peters & Heiner Schwenke, Comparative Law Beyond Post-Modernism, 49 Int'l & Comp. L.Q. 800, 801-802 (2000)
with McGinnis, supra note 163, at 311-12; Rosenkrantz, supra note 152, at 293-94. See also Roper v. Simmons, 543 U.S. 551, 626-27 (2005)
(Scalia, J., dissenting).
n224. On the overlap between culture and translation, see Alasdair MacIntyre, Whose Justice? Which Rationality? 372-73 (1988) (observing
that a translator must realize that linguistic expression is the product of "beliefs, institutions, and practices" at a "particular time and place");
Reuben A. Brower, Seven Agamemnons, 8 J. Hist. Ideas 383, 383 (1947) (depicting the translator of poetry as attempting to make "the
poetry of the past into poetry of his particular present"); David Couzens Hoy, Interpreting the Law: Hermeneutical and Poststructuralist
Perspectives, 58 S. Cal. L. Rev. 135, 138 (1985) ("To understand is to grasp the relevant context that determines the possible parameters of
the sentence or expression."); Burton Raffel, Translating Medieval European Poetry, in The Craft of Translation 28, 53 (John Biguenet &
Rainer Schulte eds., 1989) ("If then there is any overarching lesson to be learned from my remarks, it is ... that the literary translator is
necessarily engaged with far more than words, far more than techniques, far more than stories or characters or scenes. He is ... engaged with
worldviews and with the passionately held inner convictions of men and women long dead and vanished from the earth. A large part of his
task, and perhaps the most interesting ..., is the mining out and reconstruction of those worldviews, those passionately held and beautifully
embodied inner convictions.").
n225. See Susan [#x8A]arçevic, New Approaches to Legal Translation 272 (1997); see also Olivier Cachard, Translating the French Civil
Code: Politics, Linguistics and Legislation, 21 Conn. J. Int'l L. 41, 56 (2005) ("'Ninety percent, no doubt, of all translation since Babel is
inadequate and will continue to be so.' Although all translation is inadequate in the eyes of a linguist, only some of them must be regarded as
faulty from the perspective of a lawyer. For lawyers, a faulty translation is an erroneous translation that so deforms the text of origin that it
injures those who trust the translation. Mistranslation leads a judge to decide a case differently." (quoting George Steiner, After Babel:
Page 200Page 200
Aspects of Language and Translation 417 (2d ed. 1992) (1975))); Gutteridge, supra note 36, at 402 ("It would ... almost be impossible from
the standpoint of comparative studies to exaggerate the perils which lie hidden in terminology of this description."); Legrand, supra note 42,
at 530 ("How much longer can interpreters continue to practice vacuous interpretations of law-texts, whether deliberately or through
ignorance, to satisfy themselves with atomism (law re-presented as units) or reductionism (law re-presented as 'thin' or disarchivized), to
'purchase a sense of universality in law but only at the price of the ideas and arguments that make the law a worthy creation of the human
intellect?'" (quoting George P. Fletcher, Comparative Law as a Subversive Discipline, 46 Am. J. Comp. L. 683, 694 (1998))); John E. Joseph,
Indeterminacy, Translation and the Law, in Translation and the Law 13, 14 (Marshall Morris ed., 1995) ("translation always falls short").
For an historical overview of translation theories, see Hugo Friedrich, On the Art of Translation, in Theories of Translation, supra note
106, at 11-16.
n226. Sir Basil Markesinis & Dr. Jorg Fedtke, Judicial Recourse to Foreign Law: A New Source of Inspiration? 145 (2006).
n227. See Cao, supra note 36, at 31.
n228. Adler, supra note 171, at 54. "The courts' inquiries ... very often (implicitly or explicitly) conclude that alien and forum rules correlate
quite closely." Id. at 63. Maybe this is because they are more comparable than they appear - a benign explanation. "The general
methodological problem of 'wish-fulfillment' mars the universality thesis. Put simply, interpreters tend to spot false similarities.
Notwithstanding their flattering self-appraisal, jurists who do not contemplate this problem display a troubling lack of knowledge." Id.
n229. See Ainsworth, supra note 218, at 27 ("The ethnographer is caught in a ... paradox ... . He must render the foreign familiar and
preserve its very foreignness at one and the same time." (quoting Vincent Crapanzano, Hermes' Dilemma: The Masking of Subversion in
Ethnographic Description, in Writing Culture, The Poetics and Politics of Ethnography 51, 52 (James Clifford & George E. Marcus eds.,
1986))).
n230. Lessig, supra note 37, at 1201 ("'Equivalence' is endogenous to a practice of translation, and ... the practices themselves determine
what will be considered equivalent. Practices will differ, and if practices differ, 'equivalence' will differ.").
n231. See Adler, supra note 171, at 45 (noting that notwithstanding the challenges and inherent instability of language translations,
surprisingly "few in the U.S. legal profession appreciate or discuss the translation process"); Sacco, supra note 36, at 20 ("The complexity of
the problems involved in legal translation makes the carelessness with which they are approached seem incredible."); Peter W. Schroth,
Legal Translation, 34 Am. J. Comp. L. Supp. 47, 47 (1986) ("Despite its great practical importance, legal translation is little discussed;
despite its difficulty, it is frequently assigned to translators without legal training. Plainly both the importance and the difficulty are
commonly underestimated.").
n232. Lessig, supra note 37, at 1265 ("Fidelity is not binary. There will be more and less faithful, not faithful and unfaithful, readings.").
n233. MacIntyre, supra note 224, at 375 ("The characteristic mark of someone who has ... acquired two first languages is to be able to
recognize where and in what respects utterances in the one are untranslatable into the other."); see also Adler, supra note 171, at 46-47 ; Cao,
supra note 36, at 32; [#x8A]arçevic, supra note 225, at 233; King-Kui Sin & Derek Roebuck, Language Engineering for Legal
Transplantation: Conceptual Problems in Creating Common Law Chinese, 16 Language & Comm. 235, 244-45 (1996); Schopenhauer, supra
note 106, at 32 ("Not every word in one language has an exact equivalent in another. Thus, not all concepts that are expressed through the
words of one language are exactly the same as the ones that are expressed through the words of another.").
n234. On the terms confirmation and discovery, see supra notes 176-79 and accompanying text.
n235. The globalization of the judiciary makes such knowledge more likely. See generally Anne-Marie Slaughter, Judicial Globalization, 40
Va. J. Int'l L. 1103 (2000).
Page 201Page 201
n237. Because the model this Article proposes is merely conceptual, it is possible that the idiosyncrasies of some national systems may not
register elsewhere, or that there would be only a regional effect of the sort of phenomenon described here. It seems that the trigger would be
the extent to which knowledge of a particular system is relevant, or known, elsewhere.
n238. Merrill & Smith, supra note 176, at 26.
n239. Tiersma, supra note 17, at 1 ("Morality or custom may be embedded in human behavior, but law - virtually by definition - comes into
being through language. Thus, the legal profession focuses intensely on the words that constitute the law, whether in the form of statutes,
regulations, or judicial opinions. Words are ... a lawyer's most essential tools... . Few professions are as dependent upon language.").
n241. The importance of properly understanding and applying foreign law cannot be overstated. See Alexander, supra note 36, at 632
("Justice is achieved when the forum judge applies the rules of the legal system most 'concerned' in the dispute, thereby disposing of the
matter in a manner consistent with that followed in other jurisdictions."); id. at 638 ("Our sense of justice demands that the attempt be made
to accommodate foreign elements ... ."); Benjamin Busch, Recent Developments in the Proof of Foreign Law, 1959 A.B.A. Sec. Int'l &
Comp. L. Proc. 28, 28 (1959) (noting that tools for pleading and proof of foreign law are "the bulwarks for the protection of rights and the
enforcement of obligations.").
n242. James McComish, Pleading and Proving Foreign Law in Australia, 31 Melb. U. L. Rev. 400, 402 (2007) (regarding proof of foreign
law, "its importance can hardly be overstated" (quoting Edward I. Sykes & Michael C. Pryles, Australian Private International Law 278 (3d
ed. 1991))); see also Tueller, supra note 122, at 108 ("Difficulty of application cannot excuse failure to adhere to norms of law.").
n243. See supra Part IV.A.
n244. For an introduction to cost-benefit analysis, see E.J. Mishan & Euston Quah, Cost-Benefit Analysis (5th ed. 2007).
n245. For an introduction to margins, see Farnsworth, supra note 113, at 24-36.
n247. See Marc Galanter, The Radiating Effects of Courts, in Empirical Theories About Courts 117, 123, 135-36, 138 (Keith O. Boyum &
Lynn Mather eds., 1983) (on the role of courts generally).
For a somewhat contrary view, see Pollack, supra note 196, at 471-72 ("A general concern that people should satisfy their obligations,
wherever incurred, opens the courthouse doors to parties asserting rights under foreign law, but that concern is not so pressing as the interest
in enforcing domestic law. Certainly it is not so great as to justify devoting more judicial time to cases involving foreign law than to those
presenting only domestic law issues."). See also Budget Rent-A-Car Corp. of Am. v. Fein, 342 F.2d 509, 514 n.9 (5th Cir. 1965) ("The
traditional function of conflicts-of-laws rules in contracts is to afford a degree of certainty and symmetry as controversies stray to localities
which are strangers. They need not, therefore, necessarily make sense.").
Page 202Page 202
n248. Ascertaining the law even of another state within the United States can be difficult; to the extent that that statement is true, much of
what I discuss in this Article applies to situations involving the application of non-forum but otherwise "domestic" law. This challenge is
evidenced in part by the extant solution: "More than thirty states authorize certification of the disputed question to an appropriate court of the
other state in such a case, most of them on the basis of the Uniform Certification of Questions Law, 12 U.L.A. 49 (1975)." David P. Currie et
al., Conflict of Laws 88 (8th ed. 2010) (citing John B. Corr & Ira P. Robbins, Interjurisdictional Certification and Choice of Law, 41 Vand. L.
Rev. 411 (1988)).
n249. Fed. R. Civ. P. 44.1. Many states have replicated Rule 44.1 for their state courts. A small number of states have adopted the Uniform
Interstate and International Procedure Act of 1962, which has substantially the same content. For more on state practice, see Sofie Geeroms,
Foreign Law in Civil Litigation 123-25 (2004).
n250. 9 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2444 (1971).
n251. Common law courts treated foreign law as a matter of fact to be pleaded and proved by the party relying upon it. See 3 Joseph H.
Beale, A Treatise on the Conflict of Laws § 621.2 (1935). For history and background, see Miller, supra note 171, at 624.
n252. See Miner, supra note 121, at 586 ("Both trial and appellate courts must research and analyze the law independently."); see also
Louise Ellen Teitz, From the Courthouse in Tobago to the Internet: The Increasing Need to Prove Foreign Law in US Courts, 34 J. Mar. L. &
Com. 97, 110 (2003) ("Determination of a foreign country's law is an issue of law ... . Even though the District Court heard live testimony
from experts from both sides, that Court's opportunity to assess the witness's demeanor provides no basis for a reviewing court to defer to the
trier's ruling on the content of foreign law. In cases of this sort, it is not the credibility of the experts that is at issue, it is the persuasive force
of the opinions they expressed." (quoting Itar-Tass Russian News Agency v. Russian Kurier, Inc., 153 F.3d 82, 92 (2d Cir. 1998))).
n253. Fed. R. Civ. P. 44.1.
n254. See Brown, supra note 187, at 191 ("Although expert testimony is no longer a rigid requirement under 44.1, it is rare for most
American judges to admit documents or apply foreign law without some form of expert input."); Merryman, supra note 189, at 170 ("As a
practical matter, access to foreign law is available only through the use of experts.").
n255. See Geeroms, supra note 249, at 143 (referring to the "geographical vastness of the country[,] ... the absence of any academic tradition
in comparative or foreign law and the fact that the [United States] has not created its own colonies").
n256. See Samuel R. Gross, Expert Evidence, 1991 Wis. L. Rev. 1113, 1218 (1991) ("In civil trials ... experts on one side are generally
opposed by similar experts on the other side."); Merryman, supra note 189, at 154 ("The experts may - indeed very probably will -
disagree."); Miner, supra note 121, at 582 (suggesting that conflicting experts is the norm); Teitz, supra note 252, at 109-10.
n257. See Merryman, supra note 189, at 158; see also Julius Hirschfeld, Proof of Foreign Law, 11 L.Q. Rev. 241, 241-42 (1895).
n258. See Gross, supra note 256, at 1126 (noting the process "is inefficient because it produces duplicate investigations"); Merryman, supra
note 189, at 156 ("Experts in foreign law, like other experts, are expensive... . The wealthier party can more easily afford to 'buy' the better
expert," which leads to an "imbalance in litigative power."); Arthur Nussbaum, The Problem of Proving Foreign Law, 50 Yale L.J. 1081,
1029 (1941) (noting that the "the cost of acquiring an expert may become extremely burdensome...."); Sprankling & Lanyi, supra note 171,
at 47 (finding a qualified expert "frequently is an immensely difficult and expensive task... . Cost may become astronomical ... .").
Page 203Page 203
n259. Hans W. Baade, Proving Foreign and International Law in Domestic Tribunals, 18 Va. J. Int'l L. 619, 641-42 (1978) ("Professor
Cardozo and others who disfavor expert testimony are concerned primarily with what has been called the 'venality' of expert witnesses; that
is, their willingness to testify in favor of any proposition for a fee ... . [They] place more value on 'principal' than 'principle.'") (internal
quotation marks omitted); Gross, supra note 256, at 1139; Sprankling & Lanyi, supra note 171, at 52 ("[A party expert] may be biased -
either knowingly or innocently - in favor of the party retaining him."); see also Bodum USA, Inc. v. La Cafetiere, Inc., 621 F.3d 624, 629
(7th Cir. 2010) (Easterbrook, J.) (expert testimony "adds an adversary's spin, which the court then must discount"); id. at 633 (Posner, J.,
concurring) (noting that experts are "paid for their testimony" and are "selected on the basis of the convergence of their views with the
litigating position of the client, or their willingness to fall in with the views urged upon them by the client," and that such problems "are the
banes of expert testimony").
n260. See Robert A. Jefferies, Jr., Recognition of Foreign Law by American Courts, 35 U. Cin. L. Rev. 578, 602-03 (1966) ("Skillful
advocates may succeed 'in developing confusing divergencies between experts on purely verbal matters' in situations where no substantive
differences exist.") (citing Nussbaum, supra note 258, at 1029); Tahirih V. Lee, Court-Appointed Experts and Judicial Reluctance: A
Proposal to Amend Rule 706 of the Federal Rules of Evidence, 6 Yale L. & Pol'y Rev. 480, 482 (1988) (asserting a system of party-
controlled experts favors the "side that has the most money to hire experts").
n261. See Albert A. Ehrenzweig, Foreign Rules as Sources of Law, in Legal Thought in the United States of America Under Contemporary
Pressures 71, 77 (John N. Hazard & Wenceslas J. Wagner eds., 1970) ("When I was still willing to engage in this less than dignified game of
legal craftsmanship, I was repeatedly employed to 'testify' in American courts on foreign laws ... .").
n262. See Lee, supra note 260, at 483. For the classic explanation of the spiraling nature of this phenomenon, see George A. Akerlof, The
Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488 (1970) (examining pathology in the market for
used cars).
n263. See Merryman, supra note 189, at 158; see also Hirschfeld, supra note 257, at 241-42.
n264. Learned Hand, Historical and Practical Considerations Regarding Expert Testimony, 15 Harv. L. Rev. 40, 54 (1902).
n265. Sprankling & Lanyi, supra note 171, at 50.
n266. Pollack, supra note 196, at 474.
n267. See id. at 473-75.
n269. Sprankling & Lanyi, supra note 171, at 54.
n270. Gross, supra note 256, at 1187.
n271. Id. at 1182-83.

Page 204Page 204
n272. See Teitz, supra note 252, at 109 (citing In re Union Carbide Corp. Gas Plant Disaster, 634 F. Supp. 842, 847 (S.D.N.Y. 1986), aff'd in
part and modified in part, 809 F.2d 195 (2d Cir. 1987)).
n273. See Merryman, supra note 189, at 155-56; Sprankling & Lanyi, supra note 171, at 47.
n274. See Fed. R. Civ. P. 44.1; see also supra note 249 (regarding similar state procedural rules).
n275. Fed. R. Civ. P. 44.1; see Wright & Miller, supra note 250, at § 2444; Miller, supra note 171, at 728 ("Rule 44.1 expresses a philosophy
that federal courts should ascertain foreign law accurately whenever possible.").
n276. See Miner, supra note 121, at 581.
n277. See supra Part IV.A.
n278. Symeonides, supra note 125 at 393.
n279. Pollack, supra note 196, at 471 (accent added); see also Fletcher, supra note 225, at 690 ("One can understand why lawyers and
judges pay little attention to foreign law. They have a job to do.").
n280. Geeroms, supra note 249, at 121.
n281. Adler, supra note 171, at 38 ("Most judges strive mightily to avoid even having to glance at foreign laws."); Miller, supra note 171, at
618-19 ("American adherence to the common-law conception of foreign law cannot be rationalized in the same terms as have been offered
for the English experience because foreign causes of action never have been viewed as anathema in this country and our jury institution
never has been concerned with the jurors' testimonial qualifications or tied to notions of fact-venue; most probably our incorporation of the
common-law view of foreign law simply represents blind obedience to entrenched attitudes."); Miner, supra note 121, at 581 ("The tendency
of the federal courts is to duck and run when presented with issues of foreign law."); see also Dolinger, supra note 152, at 266 ("In actuality,
U.S. courts rarely decide legal actions based on a foreign country's law."); Sprankling & Lanyi, supra note 171, at 9 ("Judges will often go to
great lengths to avoid questions of foreign law because they feel uncomfortable dealing with non-U.S. legal systems."); Teitz, supra note
252, at 97-98 ("Federal judges have been slow to apply foreign law often opting to employ the more familiar law of the forum. This
reluctance to address the content of foreign law has unfortunately not diminished with the increasing accessibility to courts and parties of
foreign sources, especially in the age of the Internet.").
n282. Jorge A. Vargas, Mexican Law in California and Texas Courts and the (Lack of) Application of Foreign Law in Mexican Courts, 2
Mex. L. Rev. 45, 48 (2009).
n283. Jorge A. Vargas, The Emerging Presence of Mexican Law in California Courts, 7 San Diego Int'l L.J. 215, 217-18 (2005); see also
Vargas, supra note 282, at 53.
n284. Vargas, supra note 282, at 48. The suggestion that these are cases where the court engaged foreign law is generous. See infra note 286.
Page 205Page 205
n285. Vargas, supra note 282, at 48 (finding the small number of cases "disappointing").
n286. Professor Vargas addresses each of the nine cases in his article. In at least one case, the court may have applied the law incorrectly. In
a second, the court simply referred to a Fifth Circuit case and stated only that it agreed with their colleagues' reasoning. In a third, the court
did not cite any Mexican codes or cases on the premise that the concepts of contributory negligence were the same in Mexico and in the U.S.
In a fourth, an appeals court was reviewing the judgment of a district court that had applied New York law; the appeals court affirmed, but
said that Mexican law should have been applied (with same result). In several cases, Professor Vargas modestly suggests that the court
"would have benefited" from more expertise of Mexican law. Id. at 54-59.
n287. For a discussion of the close connection between the difficulty of applying foreign law and the unwillingness to apply foreign law, see
Adler, supra note 171, at 95 ("The judge's extreme uneasiness might cause her to evade the responsibility with such tools as forum non
conveniens ... ."); Dolinger, supra note 152, at 266-67 ("It appears that any excuse is good enough to apply lex fori."); Merryman, supra note
189, at 152 ("Foreign contacts, conflict issues, and foreign-law questions are, in an undetermined but probably significant number of cases,
ignored or finessed by counsel and judge in litigation before state and federal courts in the United States."); Miner, supra note 121, at 581
(judges avoid applying foreign law out of "fear of the unknown"); Stephen L. Sass, Foreign Law in Federal Courts, 29 Am. J. Comp. L. 97,
118 (1981) ("The difficulty of ascertainment is one of the main reasons for not applying foreign law unless it is invoked and proved by the
parties."); Tueller, supra note 122, at 101 ("This belief ... stems from the assumption that the actual application (or avoidance) of foreign law
by domestic courts and practitioners depends, to a large extent, on the ready availability of reliable and reasonably-affordable sources of
information on the applicable foreign law."); id. at 109 ("Difficulties faced in attempting to reach foreign law have a direct effect on the
actual resort to such law."); George T. Yates, III, Foreign Law Before Domestic Tribunals, 18 Va. J. Int'l L. 725, 727 (1978) ("A major factor
impeding or at least often complicating the application of foreign law has been the difficulty of knowing it. A judge must know the law of his
own jurisdiction, but generally is not held to know foreign law.").
n288. See Piper Aircraft Co. v. Reyno, 454 U.S. 235, 251-52 (1981); Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947); Restatement (Second)
of Conflict of Laws § 84 (1971); Uniform Interstate and International Procedure Act, 11 Am. J. Comp. L. 418, 422 (1962). See generally
Edward L. Barrett, Jr., The Doctrine of Forum Non Conveniens, 35 Calif. L. Rev. 380 (1947).
For a discussion of the broadly discretionary nature of the forum non conveniens inquiry, see Cassandra Burke Robertson,
Transnational Litigation and Institutional Choice, 51 B.C. L. Rev. 1081, 1106 (2010); Allan R. Stein, Forum Non Conveniens and the
Redundancy of Court-Access Doctrine, 133 U. Pa. L. Rev. 781, 785 (1985); see also Am. Dredging Co. v. Miller, 510 U.S. 443, 455 (1994)
(Scalia, J.) (noting that the great discretion that district judges have in deciding whether to dismiss, combined with the "multifariousness of
the factors relevant to its application ... make uniformity and predictability of outcome almost impossible").
n289. Vargas, supra note 282, at 62.
n290. See, e.g., Robertson, supra note 288, at 1092-93 (describing the increase in forum non conveniens decisions).
n291. See, e.g., Christopher A. Whytock, Politics and the Rule of Law in Transnational Judicial Governance: The Case of Forum Non
Conveniens 16 (Feb. 28, 2007) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract id=96 9033 (finding
dismissal rates of roughly 50% on forum non conveniens motions for the period from 1990 to 2005); Donald Earl Childress III, When Erie
Goes International, 105 Nw. U. L. Rev. 1531, 1562 (2011) (updating Whytock's survey and finding dismissal rates of 63%).
n292. Childress, supra note 291, at 1562-66. See generally Christopher A. Whytock, The Evolving Forum Shopping System, 96 Cornell L.
Rev. 481 (2011).
n293. See Gulf Oil Corp. v. Gilbert, 330 U.S. at 508-09 (including among the "public factors" a court is to consider "the avoidance of
unnecessary problems in conflict of laws, or in the application of foreign law").
Page 206Page 206
n294. See supra note 141. Occasionally, the foreign forum is unavailable because the plaintiff intentionally foreclosed that option. In other
instances, the foreign forum may be unavailable because the foreign system has enacted a blocking statute to thwart dismissals by U.S.
courts. For a discussion of these issues, see Robertson, supra note 288, at 1101-05.
n295. See Stein, supra note 288, at 782 (stating that forum non conveniens dismissal is predicated on jurisdiction and venue being properly
established).
n296. David W. Robertson, The Federal Doctrine of Forum Non Conveniens: "An Object Lesson in Uncontrolled Discretion," 29 Tex. Int'l
L.J. 353, 371 (1994). But see Robertson, supra note 288, at 1082, 1130 (suggesting that an increasing number of cases are filed in foreign
fora after forum non conveniens dismissals).
n297. See David W. Robertson, Forum Non Conveniens in America and England: "A Rather Fantastic Fiction," 103 Law Q. Rev. 398, 417-
21 (1987). The survey found that, after dismissal in the U.S. courts, none of the plaintiffs in the eighty-five cases in the sample prevailed at
trial. In almost fifty percent of the personal injury cases and twenty-seven percent of the commercial cases, plaintiffs gave up their claim or
settled for less than ten percent of the potential value. Id. at 419-20; see also Martin Davies, Time to Change the Federal Forum Non
Conveniens Analysis, 77 Tul. L. Rev. 309, 351 (2002) (recognizing that suit in the alternative forum is usually a "bluff ... unlikely to be
called"); Beth Stephens, Translating Filartiga: A Comparative and International Law Analysis of Domestic Remedies for International
Human Rights Violations, 27 Yale J. Int'l L. 1, 31 (2002) (noting that when cases are re-filed in the alternative forum, damage awards tend to
be significantly lower).
n299. For the list of factors that one should take into account in the judicial fashioning of an ad hoc solution, see Restatement (Second) of
Conflict of Laws § 6 (1971); see also supra notes 125-30 and accompanying text.
n300. Professor Symeon C. Symeonides uses the words total flexibility and anarchy to describe the open-ended, individualized, and ad hoc
choice-of-law decisionmaking under the Second Restatement. Symeon C. Symeonides, The American Choice-of-Law Revolution: Past,
Present and Future 91-98 (2006); see also Michael H. Gottesman, Adrift on the Sea of Indeterminacy, 75 Ind. L.J. 527, 527 (2000)
(characterizing the Second Restatement as "a cacophonous formula of formulae, a blend of interdeterminate indeterminacy."); Patrick J.
Borchers, The Choice-of-Law Revolution: An Empirical Study, 49 Wash. & Lee L. Rev. 357, 379-80 (1992) ("In practice none of [the
conflicts methodologies] is much of a check on judicial discretion.").
n301. See Erin Ann O'Hara & Larry E. Ribstein, Conflict of Laws and Choice of Law, in 5 Encyclopedia of Law and Economics 631, 639
(Boudewijn Bouckaert & Gerrit De Geest eds., 2000) ("Judges are always tempted ... to apply more easily ascertained local laws."); Joseph
William Singer, Real Conflicts, 69 B.U. L. Rev. 1, 59 (1989) ("In practice, it is quite clear that what courts ordinarily do in conflicts cases is
to apply forum law."); Ralph U. Whitten, U.S. Conflict-of-Laws Doctrine and Forum Shopping, International and Domestic (Revisited), 37
Tex. Int'l L.J. 559, 560 (2002) ("Both the empirical evidence and the existing scholarly consensus ... indicate that there is a strong tendency
under all modern conflicts systems to apply forum law."); see also Andrew T. Guzman, Choice of Law: New Foundations, 90 Geo. L.J. 883,
893 (2002) ("Judges tend to be biased in favor of local law ... ."); Louise Weinberg, Theory Wars in the Conflict of Laws, 103 Mich. L. Rev.
1631, 1652 (2005) ("Historically, forum law has been the overwhelming judicial choice.").
Several empirical studies have confirmed the prevalence of this so-called "homeward trend." See generally Patrick J. Borchers, The
Choice-of-Law Revolution: An Empirical Study, 49 Wash. & Lee L. Rev. 357 (1992); Michael E. Solimine, An Economic and Empirical
Analysis of Choice of Law, 24 Ga. L. Rev. 49 (1989); Stuart E. Thiel, Choice of Law and the Home-Court Advantage: Evidence, 2 Am. L. &
Econ. Rev. 291 (2000). A recent study by Christopher Whytock suggests that the homeward trend may be somewhat exaggerated. From a
sample of 213 published opinions in transnational tort cases from 1990-2005, eighty-five of the choice-of-law inquiries arose in the forum
non conveniens context. In only 55.5% of the remaining 128 cases, did the court conclude that domestic law applied. See Christopher A.
Whytock, Myth of Mess? International Choice of Law in Action, 84 N.Y.U. L. Rev. 719, 740-41, 764-77 (2009) (providing overview of all
three processes).
The Constitution permits a court to apply forum law, provided that the forum state has some significant interest in the application of its
law to the facts of a case. It need not be the only state with an interest, nor the state with the most significant interest. See Allstate Ins. Co. v.
Hague, 449 U.S. 302, 303, 315 (1981).
Page 207Page 207
n302. Restatement (Second) of Conflict of Laws § 6(2)(g).
n303. See David F. Cavers, A Critique of the Choice-of-Law Problem, 47 Harv. L. Rev. 173, 201-02 (1933); Currie, supra note 202, at 180-
81; Lea Brilmayer & Jack L. Goldsmith, Conflict of Laws 114-72 (5th ed. 2002) (providing cases and background discussing these
methods).
n304. See Alexander, supra note 36, at 610, 613 (discussing the "sophistry of presumptions," which are "little more than a thin disguise for
the application of the forum's law ... ."); Adrian Briggs, The Meaning and Proof of Foreign Law, 2006 Lloyd's Mar. & Com. L.Q. 1, 4 (a
"truly grotesque proposition"); Brainerd Currie, On the Displacement of the Law of the Forum, 58 Colum. L. Rev. 964, 983 (1958)
(discussing "artificial" presumptions); McComish, supra note 242, at 432 (labeling presumptions "highly implausible," "unrealistic" and
"incredible" - a "regrettable solution"); Miller, supra note 171, at 635, 637 (noting many commentators have referred to these presumptions
as "naive" and "unrealistic" evasive procedures); Miner, supra note 121, at 582-85 (noting courts "consciously apply the wrong law" by
applying forum law pursuant to "fictitious presumptions" and dubious fictions); Nussbaum, supra note 258, at 1037 ("The alleged
presumption is an obvious non sequitur and nothing but a crude fiction disguising the substitution of the law of the forum for the unproved
or unascertainable foreign law."); id. at 1038 ("so unrealistic that it offends common sense"); Sprankling & Lanyi, supra note 171, at 87
(commenting that the presumption that common law prevails is a "fantasy").
n305. Albert A. Ehrenzweig, Private International Law 187 (1967) (suggesting that the presumption is "nothing but a crude fiction" and
manifestamente priva di senso). For explanation and criticism of presumptio similitudinis, see Dolinger, supra note 152, at 260; Miller, supra
note 171, at 694; Sass, supra note 287, at 107; Konrad Zweigert, Some Reflections on the Sociological Dimensions of Private International
Law or What is Justice in Conflict of Laws?, 44 U. Colo. L. Rev. 283, 293-94 (1973).
Some states have codified this principle. See, e.g., Disputable Presumption no. 39, N.D. Cent. Code § 31-11-03 (2012).
n307. See Butler v. IMA Regiomontana S.A. de C.V., 210 F.3d 381 (9th Cir. 2000); see also Miner, supra note 121, at 582-83 (offering an
example involving Vietnamese law).
n308. See, e.g., In re Griffin Trading Co., 399 B.R. 862, 865 (Bankr. N.D. Ill. 2009) (presuming similarity of Illinois UCC to English and
German laws); see also Tidewater Oil Co. v. Waller, 302 F.2d 638 (10th Cir. 1962) (regarding Turkish and Oklahoma tort and worker's
compensation laws); Commercializadora Portimex, S.A. de CV v. Zen-Noh Grain Corp., 373 F. Supp. 2d 645 (E.D. La. 2005) (presuming
similarity of Louisiana and Mexican law); United States v. Hing Shair Chan, 680 F. Supp. 521, 525 (E.D.N.Y. 1988) (assuming similarity of
U.S. and Hong Kong laws and finding "this assumption is bolstered by the fact that Hong Kong, like the United States, is a common law
state."); Faegre & Benson, LLP v. Lee, No. 27- CV-09-13602, 2010 WL 5293453 at 2 (Minn. Ct. App., Dec. 28, 2010) ("Because appellant
failed to show that German law differs from Minnesota law ..., we conclude that no choice-of-law issue was presented and the district court
did not err by determining that Minnesota law applies ... ."); see also Zweigert & Kotz, supra note 27, at 40 (defending presumption of
similarity).
n309. See Edwin P. Carpenter, Presumptions as to Foreign Law: How They Are Affected by Federal Rule of Civil Procedure 44.1, 10
Washburn L.J. 296, 299 (1971); Mattei et al., supra note 215, at 95-125.
n310. See Tom R. Tyler, Procedural Justice and the Courts, 44 Ct. Rev. 26 (2007); see also Tom R. Tyler, Procedural Justice, Legitimacy,
and the Effective Rule of Law, 30 Crime & Just. 283, 284 (2003) (discussing values needed to foster compliance with the law).
n311. Larry Kramer, More Notes on Methods and Objectives in the Conflict of Laws, 24 Cornell Int'l L.J. 245, 255 (1991); see also Brian Z.
Tamanaha, On the Rule of Law: History, Politics, Theory 119 (2004) (rule of law requires that judges make decisions based on "public,
prospective laws, with the qualities of generality, equality of application, and certainty"); Ralf Michaels, Two Economists, Three Opinions?
Page 208Page 208
Economic Models for Private International Law - Cross-Border Torts as Example, in An Economic Analysis of Private International Law
143, 146 (Jurgen Basedow & Toshiyuki Kono eds., 2006).
Focal point, reputational, and normative theories of compliance suggest that a choice-of-law system that applies the "wrong" law will
undermine transnational rule of law. See Andrew T. Guzman, How International Law Works: A Rational Choice Theory 33-41 (2008)
(setting forth reputational theory of legal compliance); James G. March & Johan P. Olsen, The Institutional Dynamics of International
Political Orders, in Exploration and Contestation in the Study of World Politics 303, 309-11 (Peter J. Katzenstein et al. eds., 1999)
(distinguishing normative process of compliance from instrumental processes driven by "logic of expected consequences"); Richard H.
McAdams, A Focal Point Theory of Expressive Law, 86 Va. L. Rev. 1649 (2000) (describing focal point theory of legal compliance);
Whytock, supra note 301, at 740-41 (providing an overview of all three processes).
n313. Symeonides, supra note 125, at 393.
n314. See Miller, supra note 171, at 684-88; see also Stern, supra note 197, at 27 (discussing foreign law and juries).
n315. The harshness of a dismissal is what led to many of the presumptions and fictions described in the preceding paragraph. See Currie,
supra note 304 at 981; Miller, supra note 171, at 635.
n316. See Brown, supra note 187, at 185 ("Rule 44.1 has freed the hands of judges, but has not freed the parties of their responsibility of
informing the court of the foreign law issue and of the content of the pertinent provisions."); Schlesinger, supra note 171, at 3 ("The
ascertainment and interpretation of foreign law requires skills which the court simply does not possess, the procedural treatment of a foreign
law question cannot be quite the same as that of a question of domestic law."); id. at 16 ("These judicial notice statutes, it should be
emphasized at the outset, have not displaced the common-law doctrines discussed above. The statutes are merely superimposed on the
common-law doctrines, which thus retain their vitality in the many situations in which the statutory provisions do not lead to actual notice
being taken of the foreign law.").
n317. Consider the principle iura novit curia (the court knows the law). See Sass, supra note 287, at 116; see also Schlesinger, supra note
171, at 25-26 (noting that expecting more of the court "does not place too heavy a burden on the court ... . When dealing with foreign law
issues - that is, issues no longer covered by the ancient principle of purely adversary litigation - a judicial duty to seek clarification must go
along with the power.").
The application of foreign law ex officio is the approach of some civil law nations. See Geeroms, supra note 249, at 103.
n318. See Pollack, supra note 196, at 471 ("Rule 44.1 expressly authorizes the Court to do independent research into the foreign law. Yes, it
does - but it doesn't require it to. Trial judges usually can't. Indeed, they usually shouldn't. And they probably won't."); Sass, supra note 287,
at 117-18 ("The principle of iura novit curia cannot be applied to the law of foreign countries... . However, the court should also apply the
relevant foreign law on its own volition whenever such application appears to be necessary to protect the justifiable interests of the
litigants."); see also Fed. R. Civ. P. 44.1, 1966 advisory committee's note ("The court is free to insist on a complete presentation by
counsel.").
n319. See, e.g., Faegre & Benson, LLP v. Lee, No. 27- CV-09-13602, 2010 WL 5293453, at 2 (Minn. Ct. App., Dec. 28, 2010) ("Because
appellant has failed to show that German law differs from Minnesota law ... we conclude that no choice-of-law issue was presented and the
district court did not err by determining that Minnesota law applies ... .").

Page 209Page 209
n322. See Restatement (Third) of Foreign Relations Law § 482(2)(c) (1987).
n323. The United States embraces a policy that presumes that foreign judgments will be recognized and enforced. The presumption is
rebuttable on a showing of certain enumerated grounds why the foreign judgment should not be enforced. See id. § 481.
n324. See, e.g., Stephen C. McCaffrey & Thomas O. Main, Transnational Litigation in Comparative Perspective 613 (2010); Matthew H.
Adler, If We Build It, Will They Come? - The Need For a Multilateral Convention on the Recognition and Enforcement of Civil Monetary
Judgments, 26 Law & Pol'y Int'l Bus. 79, 109 (1994); Sean D. Murphy, Contemporary Practice of the United States Relating to International
Law, 95 Am. J. Int'l L. 387, 420 (2001); Linda J. Silberman & Andreas F. Lowenfeld, A Different Challenge for the ALI: Herein of Foreign
Country Judgments, an International Treaty, and an American Statute, 75 Ind. L.J. 635, 638-39 (2000); Russell J. Weintraub, How
Substantial Is Our Need For a Judgments-Recognition Convention And What Should We Bargain Away to Get It?, 24 Brook. J. Int'l L. 167,
168 (1998).
For computations and collections of cases, see also Brandon B. Danford, Note, The Enforcement of Foreign Money Judgments in the
United States and Europe: How Can We Achieve a Comprehensive Treaty?, 23 Rev. Litig. 381, 417 (2004); J. Noelle Hicks, Note,
Facilitating International Trade: The U.S. Needs Federal Legislation Governing the Enforcement of Foreign Judgments, 28 Brook. J. Int'l L.
155, 176 (2002).
n325. For literature on the use of regulation to avert the tragedy of the commons, see C. Edwin Baker, Keynote Address: Three Cheers for
Red Lion, 60 Admin. L. Rev. 861, 866 (2008); Lili Levi, The Four Eras of FCC Public Interest Regulation, 60 Admin. L. Rev. 813, 819
(2008); Richard J. Pierce, Jr., State Regulation of Natural Gas in a Federally Deregulated Market: The Tragedy of the Commons Revisited,
73 Cornell L. Rev. 15, 22 (1987). For literature on the use of self-governing forms of class action to avert the tragedy of the commons, see
Ostrom, supra note 110, at 25. See generally Carol M. Rose, Expanding the Choices for the Global Commons: Comparing Newfangled
Tradable Allowance Schemes to Old-Fashioned Common Property Regimes, 10 Duke Envtl. L. & Pol'y F. 45 (1999).
n326. See Carol M. Rose, Rethinking Environmental Controls: Management Strategies for Common Resources, 1991 Duke L.J. 1, 9-10
(1991); James Salzman & J.B. Ruhl, Currencies and the Commodification of Environmental Law, 53 Stan. L. Rev. 607, 609 n.2 (2000); Amy
Sinden, The Tragedy of the Commons and the Myth of a Private Property Solution, 78 U. Colo. L. Rev. 533, 556 (2007).
n327. If it were possible to regulate the meaning of words, the costs of the administrative infrastructure would surely overwhelm the
benefits of supranational regulation. See Eugene Kontorovich, The Constitution in Two Dimensions: A Transaction Cost Analysis of
Constitutional Remedies, 91 Va. L. Rev. 1135, 1147 (2005) (listing administrative costs "such as judicial salaries, legal fees, and discovery");
Howard A. Shelanski & J. Gregory Sidak, Antitrust Divestiture in Network Industries, 68 U. Chi. L. Rev. 1, 19 (2001) (identifying, in the
antitrust context, "administrative costs, monitoring costs, and the misallocation of resources associated with rent-seeking activity.").
There would also be substantial frustration costs. See infra notes 348-51 and accompanying text.
n328. Thomas O. Main, Procedural Uniformity and the Exaggerated Role of Rules: A Survey of Intra-State Uniformity in Three States That
Have Not Adopted the Federal Rules of Civil Procedure, 46 Vill. L. Rev. 311, 311-12 (2001) ("Whether because of the lure of simplicity, the
appearance of neutrality, the likeness to science, the feel of efficiency, the imprimatur of professionalism or some combination of these, the
norm of ... uniformity enjoys virtually universal approval. Thus, it should come as no surprise that the rhetoric of uniformity is both
pervasive and predominant ... ."). See generally Amanda Frost, Overvaluing Uniformity, 94 Va. L. Rev. 1567 (2008).
n329. Legrand, supra note 42, at 521-22 (quoting Andreas Fischer-Lescano & Gunther Teubner, Regime-Collisions: The Vain Search for
Legal Unity in the Fragmentation of Global Law, 25 Mich. J. Int'l L. 999, 1003 n.17 (2004)).
n330. See John Finnis, Natural Law and Natural Rights 279 (1980) ("The lawyer is likely to become impatient when he hears that social
arrangements can be more or less legal, that legal systems and the rule of law exist as a matter of degree ... and so on."); Werner Menski,
Page 210Page 210
Comparative Law in a Global Context: The Legal Systems of Asia and Africa 29 (2d ed. 2006) ("From a conventional perspective, difference
becomes an invitation for lawyers to unify, streamline and harmonise."); Martti Koskenniemi & Paivi Leino, Fragmentation of International
Law? Postmodern Anxieties, 15 Leiden J. Int'l L. 553, 559 (2002) ("Systemic thinking has always been a preserve of academics.").
n331. Ewald, supra note 211, at 1979, 1981; see also Menski, supra note 330, at 5 (" Yet, mainstream legal science continues to behave as
though globalisation simply means uniformisation, resisting evidence, from everywhere in the world, that global harmony and understanding
will only be achieved by greater tolerance of diversity, not by enforced uniformity."); Zweigert & Kotz, supra note 27, at 61 (describing the
lodestar of some comparative law inquiry as the science of a droit commun legislatif).
n332. For a definition of network effects see Mark A. Lemley & David McGowan, Legal Implications of Network Economic Effects, 86
Calif. L. Rev. 479, 483 (1998). For a general discussion of standardization resulting from network effects see id. at 488. See also Clayton P.
Gillette, Lock-In Effects in Law and Norms, 78 B.U. L. Rev. 813, 813-15 (1998); Marcel Kahan & Michael Klausner, Path Dependence in
Corporate Contracting: Increasing Returns, Herd Behavior and Cognitive Biases, 74 Wash. U. L.Q. 347, 348 (1996); Michael Klausner,
Corporations, Corporate Law, and Networks of Contracts, 81 Va. L. Rev. 757, 759 (1995).
n333. See generally Merrill & Smith, supra note 176 (discussing measurement costs of maintaining different rules; these costs would
logically drive investors and others to places with lower cost, i.e. where rules are similar).
n334. See Incoterms 2010, Int'l Chamber of Commerce (2010), available at http://
www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/the-inco
terms-rules/ (the terms are EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, and CIF); see also Franklin A. Gevurtz et al., Report
Regarding the Pacific McGeorge Workshop on Globalizing the Law School Curriculum, 19 Pac. McGeorge Global Bus. & Dev. L.J. 267,
294 (2006).
n335. See Steven Cushing, Fatal Words: Communication Clashes and Aircraft Crashes 2 (1994); Robert Baron, Barriers to Effective
Communication: Implications for the Cockpit, AirlineSafety.com, http://airlinesafety.com/editorials/?BarriersToCommunica tion.htm (last
visited Jan. 7, 2013).
n336. See Ulrich Drobnig, General Principles of European Contract Law, in International Sale of Goods: Dubrovnik Lectures 305, 305-08
(Petar [#x8A]arçevic & Paul Volken eds., 1986).
International private commercial actors such as the International Chamber of Commerce or the International Institute for the
Unification of Private Law (UNIDROIT), have adopted certain standardized rules, definitions, and terms that are used uniformly (or nearly
so). The standard trade definitions, known as the International Commercial Terms (INCOTERMS), are one such example. See Incoterms
2010, supra note 334; see also Gevurtz et al., supra note 334, at 294 ("Supplementing applicable binding sources of transactional law are
standard agreement forms developed by the International Chamber of Commerce, now called 'Incoterms.'"). Another example is the banking
terms enumerated in the Uniform Customs and Practice for Documentary Credits (UCP), which constitute the operative legal rules for many
letter of credit transactions. See JH Dalhuisen, Legal Orders and Their Manifestation: The Operation of the International Commercial and
Financial Legal Order and Its Lex Mercatoria, 24 Berkeley J. Int'l L. 129, 167 (2006). Further, "the International Chamber of Commerce has
a role in creating international rules in such diverse areas as E-business, telecoms, financial services, insurance, taxation, trade and
investment, international transportation, anti-corruption rules, arbitration, and customs, to name just a few." James D. Wilets, A Unified
Theory of International Law, the State, and the Individual: Transnational Legal Harmonization in the Context of Economic and Legal
Globalization, 31 U. Pa. J. Int'l L. 753, 759 (2010).
For a general discussion of global networks see generally Anne-Marie Slaughter, A New World Order (2004).
n337. See Jeremy Waldron, Foreign Law and the Modern Ius Gentium, 119 Harv. L. Rev. 129, 135 (2005) ("A quick survey of modern
scholarship reveals that experts believe that ius gentium affords a useful framework for thinking about such topics as data protection,
antitrust, and copyright."); Markesinis & Fedtke, supra note 34, at 335 ("Possible candidates for the development of such sub-systems [of
transnational law] include maritime practice, the international oil industry, information technology, the construction industry, the insurance
sector, and international finance and securitisation.").
Page 211Page 211
n338. Legrand, supra note 42, at 519-20 (quoting Harald Halbhuber, National Doctrinal Structures and European Company Law, 38
Common Mkt. L. Rev. 1385, 1406-08 (2001)). For a specific example of a comparative law scholar exaggerating the degree of
harmonization among divergent national laws, see id. at 522 (discussing how "[a] 750-page book aiming to promote the view that there is to
be found a meta-law of good faith within the European Community chose to overlook a sophisticated argument showing otherwise.").
n339. Menski, supra note 331, at 10.
n340. Markesinis & Fedtke, supra note 34, at 333-34 (explaining how various factors "render the concept of 'uniform' European law a
relative one"). See also Legrand, supra note 42, at 519 ("'European businesses are not relying on the company law directives.'" (quoting
Halbhuber, supra note 338)); Christian Joerges, The Challenges of Europeanization in the Realm of Private Law: A Plea for a New Legal
Discipline, 14 Duke J. Comp. & Int'l L. 149, 160 (2004) ("There are as many European laws as there are relatively autonomous legal
discourses, organized mainly along national, linguistic and cultural lines.").
n341. See generally Paul Craig & Grainne de Burca, EU Law: Text, Cases, and Materials 1-36 (4th ed. 2008).
n343. Peter Huber, Some Introductory Remarks on the CISG, CISG Database (Dec. 2006), http://www.cisg.law.pace.edu/cisg/biblio/?
huber.html.
n344. United Nations Convention on Contracts for the International Sale of Goods, supra note 154, art. 7; see also supra note 156 and
accompanying text.
n345. See Francesco G. Mazzotta, Why Do Some American Courts Fail to Get It Right?, 3 Loy. U. Chi. Int'l L. Rev. 85, 85, 90 (2005); see
also Ingeborg Schwenzer & Pascal Hachem, The CISG - Successes and Pitfalls, 57 Am. J. Comp. L. 457, 464 (2009); Larry A. DiMatteo, et
al., International Sales Law: A Critical Analysis of CISG Jurisprudence 177 (2005).
n346. Markesinis & Fedtke, supra note 34, at 333 (quoting Thomas Simons, European and International Uniform Law, 2007 Eur. Legal F. 1,
1-4) (emphasis in original); see also Huber, supra note 343, at 228.
n347. Markesinis & Fedtke, supra note 34, at 333.
n348. Frustration costs are the costs that result from the systems' inability to tailor words as desired. It is essentially the inefficiency created
by the difference between the standardized mandate and the desired idiosyncrasy. For a discussion of frustration costs, see Merrill & Smith,
supra note 176, at 35. See also supra note 327 (regarding administrative costs).
n350. For more on the evolving nature of word meaning see supra notes 65, 91 & 106 .
Page 212Page 212
n351. See Jeffrey S. Parker, Comparative Civil Procedure and Transnational "Harmonization": A Law-and-Economics Perspective 3
(George Mason Univ. Law & Econ. Research Papers Series, Working Paper No. 09-03, 2008), available at http://ssrn.com/abstract
id=1325013; Katharina Pistor, The Standardization of Law and Its Effect on Developing Economies, 50 Am. J. Comp. L. 97, 98 (2002);
Spamann, supra note 101, at 1858.
n352. Pierre Legrand, Codification and the Politics of Exclusion: A Challenge for Comparativists, 31 U.C. Davis L. Rev. 799, 806 (1998).
n353. Id. at 807; James Tully, Strange Multiplicity: Constitutionalism in an Age of Diversity 197 (1995) ("The suppression of cultural
difference in the name of uniformity and unity is one of the leading causes of civil strife, disunity and dissolution today.").
For debates about the relative merits of uniformity and harmonization as opposed to difference and fragmentation, see Legrand, supra
note 210, at 271-72 ("Is it justifiable ... to fail to appreciate that the convergence thesis effectively represents an attack on pluralism, a desire
to suppress antinomy, an attempt at the diminution of particularity? Is difference not positive? Is it not the case that 'whatever conclusions
[the comparative study of law] comes to must relate to the management of difference not to the abolition of it?'" (citing Geertz, supra note
214, at 215-16) (alteration in original)); Menski, supra note 330, at 11 ("Much of the current debate on globalisation seems still inspired by
the theme of 'civilizing mission,' now in the name of universalism and human rights. For, in common parlance today, globalisation seems to
mean economic and political domination of a Western-focused, even eurocentric process of development in linear fashion, moving more or
less inevitably towards global uniformity.").
n354. See Gutteridge, supra note 36, at 409 ("The English legal terms which are derived from French or, perhaps, more properly from
Anglo-Norman sources, are precisely those which a continental lawyer finds it most difficult to understand."). Janet Ainsworth described the
problem this way:
'The wise man is careful to ... regulate names so that they will apply correctly to the realities they designate. In this way he ... discriminates
properly between things that are the same and those that are different.'
... .
... Adopting Western legal terminology to discuss Chinese law would inevitably lead to misinterpretation of Chinese legal discourse
and misperception of Chinese legal practice ... .
... .
Some, including Paul Bohannan, insisted on using native words for legal concepts as much as possible, because they believed that
Western terminology was inescapably misleading in its connotations.
... .
... . [Using familiar terms to describe unfamiliar terms] obscures the normative framework ... .
... .
No matter how neutral and objective descriptive legal categories may appear, they are themselves creatures of a historically and
culturally contingent social world, bearing the normative patina of the context from which they were derived.
Ainsworth, supra note 218, at 19, 20, 27, 31 (quoting Hsun Tzu, Basic Writings 142 (Burton Watson trans., 1963) (citing Paul Bohannan,
Ethnography and Comparison in Legal Anthropology, in Law in Culture and Society 401 (Laura Nader ed., 1969))); Pierre Schlag,
Normativity and the Politics of Form, 139 U. Pa. L. Rev. 801, 811-14 (1991).
n355. For the significance of errors in the application of law, see supra notes 295-98, 310-12, 321-24 and accompanying text.
n357. See supra notes 222, 225 and accompanying text.

Page 213Page 213
n358. Legrand, supra note 210, at 267 (citing Hans-Georg Gadamer, Text and Interpretation, in Dialogue and Deconstruction: The Gadamer-
Derrida Encounter 21, 27 (Diane P. Michelfelder & Richard E. Palmer eds., 1989)) (internal quotation marks omitted).
n360. See supra notes 295-98, 310-12, 321-24 and accompanying text.
n361. See, e.g., Save Our State Amendment, H.R.J. Res. 1056, 52d Leg., 2d Sess. (Okla. 2010), available at
https://www.sos.ok.gov/documents/questions/755.pdf, invalidated by Awad v. Ziriax, 754 F. Supp. 2d 1298, 1302, 1308 (W.D. Okla. 2010)
(The text of the amendment read: "The Courts ... when exercising their judicial authority, shall uphold and adhere to the law as provided in
the United States Constitution, the Oklahoma Constitution, the United States Code, federal regulations promulgated pursuant thereto,
established common law, the Oklahoma Statutes and rules promulgated pursuant thereto, and if necessary the law of another state of the
United States provided the law of the other state does not include Sharia Law, in making judicial decisions. The courts shall not look to the
legal precepts of other nations or cultures. Specifically, the courts shall not consider international law or Sharia Law."). The voter initiative
passed with a majority of nearly 70%. John T. Parry, Oklahoma's Save Our State Amendment: Two Issues For the Appeal, 64 Okla. L. Rev.
161, 161 (2012).
n362. See supra notes 293, 302 and accompanying text.
n363. See supra notes 289-92, 301, 316-20 and accompanying text.
n364. On the importance of transparency in judicial decisionmaking, see Lon L. Fuller, The Forms and Limits of Adjudication, 92 Harv. L.
Rev. 353, 365-72, 388 (1978) (noting that "by and large ... the fairness and effectiveness of adjudication are promoted by reasoned opinions,"
and arguing that reasoned response to reasoned argument is an essential component of the judicial process); David L. Shapiro, In Defense of
Judicial Candor, 100 Harv. L. Rev. 731, 736-50 (1987) (arguing that honesty and candor in judicial decisions are essential attributes of the
judicial process).
n365. See Fed. R. Evid. 706 (explaining how the authority may appoint a neutral expert); see also Geeroms, supra note 249, at 145.
For the virtues of court-appointed experts, see Miner, supra note 121, at 589 ("[A] highly desirable tool for ascertaining the governing
foreign law ... ."); see also Theodore I. Botter, The Court-Appointed Impartial Expert, in Using Experts in Civil Cases 57 (Melvin D. Kraft
ed., 1977); Gross, supra note 256, at 1187-208 (1991); Lee, supra note 260, at 500. Many states have analogous statutory provisions and
common law authority. See generally Stephanie Domitrovich et al., State Trial Judge Use of Court Appointed Experts: Survey Results and
Comparisons, 50 Jurimetrics J. 371 (2010).
n367. See Gross, supra note 256, at 1193 n.259 ("Any significant use of neutral experts will ultimately reduce the total bill for experts by
reducing the number and the complexity of litigated disputes on expert issues."); Miner, supra note 121, at 589 ("persuasive advice submitted
to the court may prompt a stipulation that settles the foreign law question") (alteration in original) (quoting Schmertz, supra note 124, at 713)
(internal quotation marks omitted)).
n368. See Sprankling & Lanyi, supra note 171, at 47 ("[A] court often has no way to evaluate the expert, except perhaps by comparison with
other experts."); Teitz, supra note 252, at 108.
Page 214Page 214
n369. See 28 U.S.C. § 1920(6) (2006); Sprankling & Lanyi, supra note 171, at 56.
n370. See Fed. R. Civ. P. 53 (explaining how the authority may appoint a special master). For the virtues of special masters, see Carpenter,
supra note 309, at 305 ("Special masters could be appointed to determine foreign law issues."); Merryman, supra note 189, at 168 (noting
that, with masters, counsel has "two occasions on which to deal with the special master: in the hearing and after submission of the report.
With the court-appointed expert, he has only the opportunity to cross-examine after the expert submits his opinion."); Sprankling & Lanyi,
supra note 171, at 73 ("Probably the most underused method of determining foreign law - yet potentially the most valuable - is reference to a
special master... . Their potential applicability in the foreign-law arena appears to have gone without notice.").
n371. Fed. R. Civ. P. 53(c).
n372. Fed. R. Civ. P. 53(e).
n373. Fed. R. Civ. P. 53(f).
n374. Fed. R. Civ. P. 53(g). See, e.g., Sukumar v. Direct Focus, Inc., No. 00 CV0304-LAB (AJB), 2008 WL 1860677, at 11 (S.D. Cal. Apr.
24, 2008) (applying Rule 53(g)).
n375. See Geeroms, supra note 249, at 145 (pertaining to the appointment of experts: "Courts rarely use this opportunity."); Edward K.
Cheng, Scientific Evidence as Foreign Law, 75 Brook. L. Rev. 1095, 1106 (2010) ("The reality on the ground is that court-appointed experts
are rarely used." (citing David H. Kaye, et al., The New Wigmore: A Treatise on Evidence, Scientific Evidence § 10.4.1, at 348 (2d. ed.
2010))); Domitrovich et al., supra note 365, at 375; Merryman, supra note 189, at 164 ("It is a striking fact that courts infrequently appoint
expert witnesses in foreign-law cases ... . It is striking because the authorities heavily favor their use."); Sprankling & Lanyi, supra note 171,
at 55 ("Courts rarely ... appoint their own experts."); see also Joe S. Cecil & Thomas E. Willging, Court-Appointed Experts: Defining The
Role of Experts Appointed Under Federal Rule of Evidence 706 (1993); Gross, supra note 256, at 1190-91 (lamenting that procedures are
"rarely used. Weinstein and Berger, for example, comment on 'the remarkably few cases in which federal judges have appointed experts,' and
add that 'the federal experience is not unique.' This observation was confirmed in two recent studies conducted by the Federal Judicial Center
... ."); Lee, supra note 260, at 495 (noting that "judges rarely appoint experts"); Robert F. Taylor, A Comparative Study of Expert Testimony
in France and the United States: Philosophical Underpinnings, History, Practice, and Procedure, 31 Tex. Int'l L.J. 181, 211 (1996).
n377. See Cecil & Willging, supra note 375, at 7; Louis Harris & Assocs, Judges' Opinions on Procedural Issues: A Survey of State and
Federal Trial Judges Who Spent at Least Half Their Time on General Civil Cases, 69 B.U. L. Rev. 731, 741 (1989); Sprankling & Lanyi,
supra note 171, at 93-95.
n378. Cheng, supra note 375, at 1111 ("The legal system often resists and ignores inquisitorial reforms [such as court appointed experts].");
see also Cecil & Willging, supra note 375, at 4-5 ("Much of the uneasiness with court-appointed experts arises from the difficulty in
accommodating such experts in a court system that values, and generally anticipates, adversarial presentation of evidence"); Gross, supra
note 256, at 1197-98 ("The true reasons for the failure to use court-appointed experts are social and structural ... [namely,] the steadfast
hostility of trial lawyers. Opposition by the organized trial bar is strong, and the public statements of prominent lawyers run to alarmism: the
use of court-appointed experts 'would fit well into ... a non-adversary, almost communistic scheme,' but we should 'cling with liberty-loving,
jealous loyalty to our system.' The use of court-appointed experts 'would literally obliterate ... medical malpractice cases,'; 'trial by jury ...
[would] become[] no more than an empty illusion, a shibboleth....'"); Merryman, supra note 189, at 166 (referring to "the relative strangeness
of the idea ... . For the judge to appoint his own expert on his own motion jars the expectation that lawyers move and argue while judges
preside and decide. The court-appointed witness is inconsistent with the model, and this makes those who are totally committed to the model
(most lawyers and judges) uncomfortable. For party counsel it threatens some loss of control over the proceeding. It is a step into unfamiliar
territory."). But see Lee, supra note 260, at 496 ("Legal historians agree that the Anglo-American trial system has, since the late nineteenth
Page 215Page 215
century, been moving closer to the so-called 'inquisitorial' system of countries on the European Continent."); Judith Resnik, Managerial
Judges, 96 Harv. L. Rev. 374, 376 (1982) (recognizing a shift in the judicial role from passive observer to active participant).
n379. Gross, supra note 256, at 1193-94; Lee, supra note 260, at 480 (explaining that judges are reluctant to appoint experts because of the
risk of judicial influence on jury deliberation).
n380. See Geeroms, supra note 249, at 143 ("The search for a qualified expert can be problematic. All American authors dealing with the
issue of expert testimony on foreign law mention this as an important problem. The geographical vastness of the country coupled with the
absence of any academic tradition in comparative or foreign law and the fact that the USA has not created its own colonies all probably have
to do with this lack of qualified experts."); Gross, supra note 256, at 1191 & 1202-04 ("The judge has no reason to worry about the
preparation of a partisan expert; that is the responsibility of the attorney who calls the witness ... . A court-appointed expert, however, is
nobody's responsibility ... . [A] court-appointed expert is a horse with no rider.").
n381. See Fed. R. Civ. P. 44.1.
n382. See id. ("The court may consider any relevant material or source ... whether or not ... admissible under the Federal Rules of
Evidence.").
n383. See Merryman, supra note 189, at 171-72.
n384. Id.
n385. See Cheng, supra note 375, at 1106.
n386. Brown, supra note 187, at 194.
n387. See Otto C. Sommerich & Benjamin Busch, Foreign Law: A Guide to Pleading and Proof 42 n.155, 121 (1959); Jefferies, supra note
260, at 606-07.
n388. See Gross, supra note 256, at 1220 (suggesting that the assembly of panels of experts has made little difference in the short run, and
no difference over the long haul).
n389. Robert A. Riegert, The Max Planck Institute for Foreign and International Private Law, 21 Ala. L. Rev. 475, 476 n.2 (1969)
(recounting how the possibility of establishing a comparative law institute as a joint venture of several American law schools was discussed
by the American Association for the Comparative Study of Law and by the AALS in the 1960).
n390. Consider, for example, in Germany, the Max Planck Institute of Hamburg, the Munich Institute of International and Comparative
Law, and the Munich Institute for East-European Law. In the Netherlands, consider The International Legal Institute and the TMC Asser
Institute for International Law. In Switzerland, consider the Swiss Institute of Comparative Law. Id. at 476.
n391. See generally Geeroms, supra note 249, at 151.

Page 216Page 216
n392. See id.
n394. See Merryman, supra note 189, at 162 (suggesting that institutes may be a "flower that blooms only in German legal soil.").
n395. See Carole Silver, Internationalizing U.S. Legal Education: A Report on the Education of Transnational Lawyers, 14 Cardozo J. Int'l
& Comp. L. 143, 162 (2006) (announcing survey results regarding the content of LLM programs).
n396. Riegert, supra note 389, at 485.
n397. See Baade, supra note 259, at 642; Thomas F. Bridgman, Proof of Foreign Law & Facts, 45 J. Air L. & Com. 845, 859-60 (1980);
Sprankling & Lanyi, supra note 171, at 52 n.306; see also David Hricik & Victoria S. Salzmann, Why there Should Be Fewer Articles Like
This One: Law Professors Should Write More for Legal Decision-Makers and Less for Themselves, 38 Suffolk U. L. Rev. 761, 786 (2005)
("Law professors are ... the best source for unbiased engaged scholarship.").
n398. See Gross, supra note 256, at 1130-35.
n399. For a classic description of capture, see Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups 3 (2d
ed. 1971); Jon Hanson & David Yosifon, The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics,
and Deep Capture, 152 U. Pa. L. Rev. 129, 213-14 (2003) ("If administrative regulators are vulnerable to the forces of capture by certain
interests, as most everyone agrees they are, then the likelihood of a deeper capture seems undeniable. There is nothing special about
administrative regulators - except, perhaps, the general concern that they may be captured. Virtually every other institution in our society
seems just as vulnerable."); George J. Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. & Mgmt. Sci. 3, 3 (1971) (discussing
how the state can be used by an industry or group for its own purposes).
n400. See supra note 374 and accompanying text (discussing a court's ability to split and charge litigation expenses).
Page 218Page 218
2013 U.S. Dist. LEXIS 38387, *
59 of 430 DOCUMENTS
WILLIAM C. STILLWAGON, Plaintiff, v. INNSBROOK GOLF & MARINA, LLC,

et al., Defendants.
Civil Action No. 2:11-cv-1338
UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF

PENNSYLVANIA
2013 U.S. Dist. LEXIS 38387
March 20, 2013, Decided

March 20, 2013, Filed
PRIOR HISTORY: Stillwagon v. Innsbrook Golf & Marina, LLC, 2012 U.S. Dist. LEXIS 18337 (W.D. Pa., Feb. 13,
2012)
CORE TERMS: counterclaim, severance, venue, economic loss, entity, conversion, breach of fiduciary duty,
convenience, civil conspiracy, unfair, contract claim, misrepresentation, fiduciary duty, accountant, fiduciary, weigh,
unjust enrichment, states' laws, choice of law, deceptive, resident, citations omitted, contractual, non-party, joined, oral
contract, subpoena power, certificates, substantive law, business relationships
COUNSEL: [*1] For WILLIAM C. STILLWAGON, Plaintiff, Counter Defendant: Charles J. Dangelo, LEAD
ATTORNEY, Meyer, Darragh, Buckler, Bebenek & Eck, P.L.L.C., Greensburg, PA; Bernard P. Matthews, Jr., Meyer,
Darragh, Buckler, Bebenek & Eck, Greensburg, PA.
For INNSBROOK GOLF & MARINA, LLC, a North Carolina Limited Liability Corporation, also known as
INNSBROOK GOLF & BOAT, LLC, RIAL CORPORATION, a North Carolina Corporation, Defendants: Audrey K.
Kwak, Mark A. Willard, Eckert, Seamans, Cherin & Mellott, Pittsburgh, PA; Brent O. E. Clinkscale, PRO HAC VICE,
Michael S. Cashman, PRO HAC VICE, Womble Carlyle Sandridge & Rice, LLP, Greenville, SC.
For ALOIS RIEDER, an adult individual, RICHARD RIEDER, an adult individual, Defendants: Mark A. Willard,
Eckert, Seamans, Cherin & Mellott, Pittsburgh, PA.
For RIAL CORPORATION, a North Carolina Corporation, INNSBROOK GOLF & MARINA, LLC, a North Carolina
Limited Liability Corporation, Counter Claimants: Audrey K. Kwak, Mark A. Willard, Eckert, Seamans, Cherin &
Mellott, Pittsburgh, PA; Brent O. E. Clinkscale, Michael S. Cashman, Womble Carlyle Sandridge & Rice, LLP,
Greenville, SC.
JUDGES: Mark R. Hornak, United States District Judge.
OPINION BY: Mark R. Hornak
OPINION
Mark R. Hornak, United States [*2] District Judge
This case started as a straightforward breach of contract action. As the litigation process has unfolded, it has expanded
to a multi-national, multi-state, multi-party, multi-claim battle having its foundation in the once mutually lucrative and
now quite stormy relationship between the Plaintiff, William C. Stillwagon, a Pennsylvania lawyer, and the multifaceted
North Carolina property development enterprises controlled by two Austrian businessmen, Alois and Richard Rieder
("Rieders").
Page 219Page 219
2013 U.S. Dist. LEXIS 38387, *
Originally, this case consisted of Stillwagon's claim that the Rieders (and their corporate operations) reneged on their
substantial financial obligations to him under a written severance agreement, entered into when he and they parted ways
after decades of doing business together. Now, the Rieders and their businesses have turned the tables on Stillwagon by
asserting a sweeping array of counterclaims against Stillwagon. They seek to not only invalidate the severance deal, but
to recover damages from Stillwagon for what they say are a multitude of business harms that his malicious stewardship
of their projects inflicted on them. Suffice it to say that there are plenty of sour grapes all [*3] around.
Now, pending before the Court is a second Motion to Transfer Venue of this case from this District to the United States
District Court for the Eastern District of North Carolina filed by the Rieders, ECF No. 59, and Plaintiff's Motion to
Dismiss the Counterclaims of Defendants Rial Corporation ("Rial") and Innsbrook Golf & Marina, LLC ("Innsbrook"). 1
ECF No. 54. Rial and Innsbrook join in the Rieders' Motion to Transfer this action. 2 ECF No. 63. These matters, having
been fully briefed by the parties and oral argument having been presented, are ripe for disposition. For the reasons
which follow, the Motion to Dismiss the Counterclaims is granted in part and denied in part, and the Motion to Transfer
Venue to the Eastern District of North Carolina is granted.
1 Rial and Innsbrook will be referred to cumulatively as the "Corporate Defendants." These facts are taken from the assertions made by
Stillwagon in his Amended Complaint, and by the Corporate Defendants in their Counterclaims.
2 The Court grants the Corporate Defendants' Motion for Joinder. ECF No. 63.
I. FACTS
Plaintiff William C. Stillwagon ("Stillwagon"), a Pennsylvania resident, brings a breach of contract claim against [*4]
the Corporate Defendants as well as Alois and Richard Rieder. According to the Plaintiff, the Rieders are residents of
Austria and the principal owners of two foreign companies: Watersprings Development ("Watersprings") of Switzerland
and Nufin Anstalt of Liechtenstein. These companies are shareholder owners of Rial, a North Carolina corporation. 3
Rial is, in turn, the sole shareholder of Innsbrook, a limited liability company organized under the laws of North
Carolina.
3 According to the Corporate Defendants, Seg Anstalt and Nufin Anstalt transferred their interest in Rial to Watersprings on October 6, 2010.
ECF No. 52 at 11. Also, Watersprings Development is the sole shareholder of Rial, and Rial is the sole member of Innsbrook. ECF No. 51 at
¶ 10.
In 1980, Stillwagon began providing personal services to the Rieders and their companies. He executed real estate deals,
which included the purchase, development, and resale of numerous properties in North Carolina -- including in Hyde,
Dare, and Bertie Counties. He managed and supervised the development of multiple North Carolina properties.
Stillwagon created, operated and managed Innsbrook to own and operate golf courses and other properties. [*5] He also
managed the finances of the various Rieder Enterprises, and served as Rial's president.
Stillwagon asserts that he performed a substantial part of his services from his office in Greensburg, Pennsylvania and
that the Defendants used that location as a satellite corporate office. For instance, Stillwagon had discussions with
Arnold Palmer and his representatives in Pennsylvania to discuss the development of an Innsbrook golf course. On
other occasions, Stillwagon met with either the Rieders or their representatives in Pennsylvania.
Defendants, however, deny that Stillwagon was engaged to perform any services from his business office in Greensburg
and deny that he performed any services from that office. 4 Moreover, Defendants assert that the Rieders' representative
met with him in Pennsylvania at Stillwagon's request and only for his convenience.
4 If this is the case, given the breadth of Stillwagon's work, his physical location in Pennsylvania, and the large severance amount agreed to,
one may wonder whether they were or were not paying attention to what Stillwagon was doing for over three (3) decades.
Stillwagon and the Rieders terminated their employment relationship via a Severance [*6] and Release Agreement
("Severance Agreement") on November 9, 2009. ECF No. 11-1. Stillwagon drafted and signed the Severance
Page 220Page 220
2013 U.S. Dist. LEXIS 38387, *
Agreement in Pennsylvania, Alois Rieder signed it in Austria. Stillwagon and Alois Rieder are the signatories to the
Severance Agreement, with Alois Rieder signing it as the "authorized representative" of Richard Rieder, Rial,
Innsbrook, Seg Anstalt, Nufin Anstalt, Watersprings, and All Seasons Development, Inc. ("All Seasons"). 5 Stillwagon
allegedly was then retained as vice president of Rial until April 2010 so that he would turn over all of the Defendants'
financial documents. The Severance Agreement called for Stillwagon to receive four annual installments of $300,000
each, totaling $1.2 million, beginning on April 1, 2010. Stillwagon received the first payment in April 2010. He claims
that the Defendants breached the Severance Agreement on April 1, 2011, when they refused to pay the second $300,000
payment. He further alleges that the Defendants have committed an anticipatory breach by expressly refusing to make
any future payments under the contract. This equates to a claimed breach stemming from $900,000 in non-payments.
5 The Severance Agreement (ECF No. [*7] 11-1) collectively designates all of these parties as "Owner" and binds Stillwagon and "Owner"
to its terms.
The Corporate Defendants claim to never have directed any activity into the Commonwealth of Pennsylvania in
furtherance of performing the Severance Agreement. The Corporate Defendants claim that Stillwagon's duties related
entirely to properties located in North Carolina and cite to the Severance Agreement's choice of law clause, which
provides:
This Agreement has been negotiated and executed in the State of North Carolina and is to be performed in the State of North
Carolina. This Agreement shall be governed and interpreted in accordance with the laws of the State of North Carolina, including
all matters of construction, validity, performance, and enforcement, without regard to North Carolina's conflict of laws rules.
Severance Agreement at ¶ 10.

Furthermore, in their Answer and Counterclaims, the Corporate Defendants allege that during his employment,
Stillwagon orchestrated an elaborate fraud and embezzlement scheme with various and sundry North Carolina residents
and entities at the expense of, and in order to deceive, Defendants.
The Corporate Defendants allege the following [*8] facts in support of the defenses and counterclaims as set forth in
their Answer ("Defenses" and "Counterclaims"). ECF No. 51. Stillwagon hired Bobby Jean Ware ("Ware") and his
company Bobby Ware Builders ("Ware Builders"), a North Carolina resident and corporation, to perform work for Rial
on land development projects in Dare and Bertie Counties, North Carolina. Id. at ¶ 118. When Stillwagon incorporated
Rial under the laws of North Carolina, he listed its registered office at the same North Carolina address as Ware's. Id. at
¶¶ 116-117. In 2004, Stillwagon also incorporated All Seasons under North Carolina law and listed its mailing address
as the same North Carolina address as Ware Builders' principal place of business. Id. at ¶ 128. Rial was listed as the
incorporator of All Seasons even though Stillwagon supposedly did so without the knowledge or authorization of the
Rial Board of Directors. Id. at ¶¶ 129-30. Stillwagon listed Chris Catron ("Catron"), an employee of Ware and Ware
Builders, as All Season's registered agent. Id. at ¶¶ 132-33. In 2005, Stillwagon incorporated Innsbrook Homeowners'
Association, Inc. ("Homeowners' Association) in North Carolina and listed its principal [*9] office at the office location
of Ware Builders and All Seasons. Id. at ¶¶ 136-38. Stillwagon also maintained at least ten (10) bank accounts in the
name of Rial or other related entities without Board approval. Id. at ¶ 140.
One of Stillwagon's responsibilities was the development of a residential community and accompanying golf course in
Bertie County, North Carolina. Id. at ¶¶ 141-42. Stillwagon hired Ware to act as the project's general contractor without
a written contract and even though Ware did not possess a general contracting license, which the Corporate Defendants
allege was in contravention of North Carolina law. Id. at ¶¶ 148-50. Stillwagon then awarded contracts to Ware under
several fictitious names either without any competitive bids or while manipulating the bidding process so that Ware and
his entities would receive the contracts. Id. at ¶¶ 151-53, 207-17. Stillwagon permitted Ware entities to use Rial
employees and equipment to perform work, and then charge Defendants for the use of these resources -- essentially
double charging Rial. Id. at ¶¶ 154. During this time, Stillwagon allegedly refused to obtain an independent audit of
Rial's finances, insisting that he continue [*10] to perform that accounting work. Id. at ¶ 157.
In 2009, Stillwagon requested a formal termination agreement, and then wrote and executed the Severance Agreement.
Id. at ¶¶ 165-67. Stillwagon failed to advise Defendants to seek independent legal counsel in reviewing the Agreement.
Id. at ¶ 168. During the drafting of the agreement, Stillwagon represented that he was unaware of and was not involved
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2013 U.S. Dist. LEXIS 38387, *
in any wrongful conduct on the projects. Id. at ¶ 169. Generally, the Corporate Defendants seem to suggest that Plaintiff
was trying to in essence "get out of Dodge" before the evidence of his fraudulent scheme came to light.
After signing the Severance Agreement, the Defendants say that they discovered bookkeeping flaws that amounted to
over $4 million and realized that Plaintiff had been cooking the corporate books. Id. at ¶ 158. Also, in 2005 Stillwagon
paid himself and Ware $25,000 and $50,000 respectively for claimed commissions on sales that had never occurred.
Defendants say that they confronted Stillwagon about all of this, and that Stillwagon assured them in October 2008 that
he had returned these funds even though he had not. Id. at ¶¶ 168, 181-86. They then demanded the return of [*11] the
money, and Stillwagon did so in June 2009. Id. However, after signing the Termination Agreement, Defendants
discovered that in the days following the return of those funds, Stillwagon had wired $25,000 to an account he
controlled, along with $50,000 back to Ware, while omitting these wire transfers from the corporate financial
documents. Id.
Stillwagon also allegedly knowingly made numerous other improper payments to Ware and fictitious entities as
embezzlement vehicles -- including Great Atlantic Equipment Leasing, Northeastern Excavating & Underground,
Sunny Days Landscaping, and Kris Gray Construction. Defendants discovered that Stillwagon fraudulently paid these
companies fees in excess of any payments owed, paid amounts for work that had never been performed, paid multiple
entities for the same work or leased equipment, and paid generic invoices without any corroborating documents to Ware
Builders even when the invoices were from third-party vendors. Id. at ¶¶ 187-89, 192-206. Furthermore, Defendants
discovered that Stillwagon improperly authorized lot sales for a fraction of the market price or for no cost at all to his
alleged co-conspirators -- including Ware's son, Ware's [*12] daughter, and Catron, -- along with five lots to himself.
Id. at ¶¶ 190-191.
The Corporate Defendants assert that they are still discovering the extent of Stillwagon's scheme because many
significant financial documents are missing from the information Plaintiff turned over to Defendants. Also, Defendants
claim that they have not been able to access several of the company bank accounts that Stillwagon opened without
permission because only Plaintiff's name was listed on the accounts and they have since been closed. 6
6 Interestingly, at oral argument, Defendants' counsel confirmed that Defendants had not turned any evidence of this plethora of allegedly
fraudulent acts over to state or federal prosecutors in Pennsylvania or North Carolina.
II. PROCEDURAL HISTORY

Stillwagon originally filed this suit in the Court of Common Pleas of Westmoreland County, Pennsylvania on September
27, 2011. ECF No. 1-2. Defendants then removed the action to this Court pursuant to 28 U.S.C. §§ 1332, 1441, and
1446. ECF No. 1. Stillwagon filed an Amended Complaint on November 14, 2011. ECF No. 11.
The Corporate Defendants then filed a Motion to Dismiss the Amended Complaint for Lack of Personal Jurisdiction or,
[*13] in the alternative, Transfer Venue. ECF No. 13. This Court denied that Motion on February 14, 2012. ECF No. 34.
The Court reasoned that, based on the Complaint's breach of contract claim, the only claim then in front of the Court,
transfer was inappropriate because Stillwagon had performed substantial work in Pennsylvania and some portion of the
evidence that may become relevant would likely be located here, that there was "no substantial reason to disturb
Stillwagon's choice of venue." Stillwagon v. Innsbrook Golf & Marina, LLC, No. 2:11-CV-1338, 2012 U.S. Dist. LEXIS
18337, 2012 WL 501685, at *5 (W.D. Pa. Feb. 14, 2012) ("Transfer Opinion I").
Stillwagon then filed a Second Amended Complaint on May 4, 2012. ECF No. 47. The Corporate Defendants filed an
Answer to the Second Amended Complaint along with Counterclaims on June 1, 2012. ECF No. 51. Stillwagon then
filed a Motion to Dismiss Counterclaims pursuant to Rules 12(b)(6) and 12(b)(7). ECF No. 54 (incorporating ECF Nos.
45 and 46). The Corporate Defendants filed a response on July 5, 2012. ECF No. 56 (incorporating ECF No. 52).
On July 27, 2012, the Rieders filed a Motion to Dismiss for Lack of Personal Jurisdiction, Motion for a More Definite
Statement or, [*14] in the alternative, to Transfer Venue. ECF No. 59. On August 15, 2012, the Corporate Defendants
filed a Motion to Join the Reiders' Motion to Transfer Venue and for a More Definite Statement. ECF No. 63.
Stillwagon filed his Response to the Rieders' motion, ECF No. 66, and the Rieders filed a Reply. ECF No. 68. This
Court held oral argument on all of the outstanding motions on November 15, 2012.
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2013 U.S. Dist. LEXIS 38387, *
In his Second Amended Complaint, Stillwagon alleges a breach of a written contract (The Severance Agreement), or
alternatively, in the event that the Severance Agreement is determined to be void or unenforceable, a breach of an oral
contract. Corporate Defendants, in their Answer, assert numerous defenses including, but not limited to, breach of
contract, failure to perform, statute of frauds, unclean hands, fraud in the inducement, and lack of consideration. The
Corporate Defendants then go on to assert numerous counterclaims: breach of fiduciary duty, breach of contract, unjust
enrichment, civil conspiracy, constructive fraud, fraud, misrepresentation, negligent misrepresentation, fraud in the
inducement, negligence, unfair and deceptive trade practices, conversion, RICO, and seek a declaratory [*15]
judgment.
Given the nature of the affirmative defenses and counterclaims, and the new evidentiary issues that they entail, it is
appropriate that this Court again consider the Corporate Defendants' Motion to Transfer Venue, notwithstanding
Transfer Opinion I. 7 However, because this Court out of necessity must focus on the Corporate Defendants'
Counterclaims and their Defenses when deciding the Motion to Transfer Venue, the Court believes that it must first
consider the Plaintiff's arguments seeking to dismiss the Counterclaims before the Court may consider the transfer of
this action to North Carolina, since the transfer issue carries legitimacy only if the Counterclaims have merit. Otherwise,
if they do not, they might be advanced by the Corporate Defendants simply as a tactical smokescreen to shift this case to
what they may believe are the friendlier confines of a North Carolina court. Thus, the Court will consider Plaintiff's
arguments in support of dismissal of the Counterclaims seriatim.
7 In APV N. Am., Inc. v. Trans Indus. Dev. Corp. & Peeples Indus., Inc., the district court denied defendants' motion to transfer venue but
then later granted defendants' renewed motion to transfer [*16] venue after defendants' answer was filed, which included three
counterclaims, had been filed. Case 1:05-cv-02396, Doc. No. 71-2 at 1-2 (N.D. Ill. Aug. 21, 2007). In weighing the private and public
factors, the court noted that the analysis of its first order on the motion to transfer "implicated only the breach of contract claims in the
original complaint" but "[a]s the pleadings now stand, the court must also consider defendants' affirmative defenses and counterclaims." Id.
at 5. Furthermore, the Third Circuit has suggested that it is proper for a court to consider a defendant's counterclaims when deciding a
motion to transfer. In HB Gen. Corp. v. Manchester Partners, L.P., the Third Circuit noted that while a defendant's arguments that the district
court's inability to hear its counterclaims was irrelevant to a joinder motion under Rule 19, the court noted that "[d]efendant's argument
might be relevant to a motion to transfer venue or to forum non conveniens." 95 F.3d 1185, 1198 n.9 (3d Cir. 1996); see also Am. Sensor Rx,
Inc. v. Banner Pharmcaps, Inc., No. 06-1929 FSH, 2006 U.S. Dist. LEXIS 66993, 2006 WL 2583450, at *2 (D.N.J. Sept. 6, 2006) (court
considered defendant's counterclaims when analyzing motion [*17] to transfer, but noted that "this Court's discussion of these counterclaims
does not represent any opinion on whether they belong in the case."). Moreover, the Corporate Defendants' Counterclaims appear to arise
from the same transactions or occurrences as Plaintiff's breach of contract claims and, alternatively, breach of oral contract claims. Thus, the
Counterclaims are likely compulsory. See Fed. R. Civ. P. 13(a).
Nothing about this case is simple, and that analysis is no different -- it requires a consideration of complex choice of law
principles, the substantive law of both Pennsylvania and North Carolina, federal procedural law as developed by our
Court of Appeals and by the Fourth Circuit, and finally, the application of venue transfer principles in a situation where
a transfer in to one of our Nation's busiest federal trial courts is sought.
III. CHOICE OF LAW8
8 The Court recognizes that this case is in the early stages of litigation, and therefore not all issues applicable to such an analysis may yet be
evident. Thus, further choice of law analysis may be necessary as the claims and counterclaims are fleshed out in discovery.
Both parties agree that North Carolina law applies to [*18] Plaintiffs' breach of written contract claim as well as the
Corporate Defendants' defenses to that claim per the choice of law clause in the Severance Agreement. Severance
Agreement at ¶ 10; ECF No. 46 at 4. See Coram Healthcare Corp. v. Aetna U.S. Healthcare, Inc., 94 F. Supp. 2d 589,
593 (E.D. Pa. 1999) (Pennsylvania law "generally honor[s] the intent of the contracting parties and enforce[s] the choice
of law provisions in contracts executed by them.") (citations omitted). 9
9 The Court finds that North Carolina bears a reasonable relationship to that contract, and vice-versa.
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2013 U.S. Dist. LEXIS 38387, *
However, the parties disagree as to which law applies to the breach of oral contract claims and the Corporate
Defendants' other Counterclaims. 10 At oral argument, the Corporate Defendants asserted that North Carolina law applies
to the disposition of all of their Counterclaims. 11 The Rieders also suggest that North Carolina law is proper to analyze
all claims in this action. ECF No. 60 at 15, 17-18. Plaintiff in his brief states that North Carolina law applies to "claims
that fall within the scope of the Termination Agreement and its release provisions." ECF No. 46 at 4. Stillwagon
asserted at oral argument [*19] that Pennsylvania law applied as to all other claims. 12
10 "Contractual choice of law provisions . . . do not govern tort claims between contracting parties unless the fair import of the provision
embraces all aspects of the legal relationship." Jiffy Lube Intern., Inc. v. Jify Lube of Pa., Inc., 848 F.Supp. 569 (E.D. Pa. 1994) (where
provision was limited on its face to "this agreement" the contract did not contemplate to cover tort claims). Here, the Severance Agreement
states that "[t]his Agreement shall be governed and interpreted in accordance with the laws of the State of North Carolina." ECF No. 11-1 at
3. Consequently, this clause cannot be applied to the other claims in this action that do not directly relate to, or flow from, the Severance
Agreement.
11 The Corporate Defendants are the only parties to advance a choice of law analysis in their response to Plaintiff's Motion to Dismiss
Counterclaims. ECF No. 52 at 3-5. After applying Pennsylvania's choice-of-law analysis, the Corporate Defendants contend that North
Carolina substantive law applies in all respects. Id. at 5.
12 Plaintiff, however, applies both North Carolina and Pennsylvania statutory and case law to Corporate Defendants' [*20] constructive
fraud, breach of fiduciary duty, unjust enrichment, civil conspiracy, and unfair and deceptive trade practices claims. ECF No. 46.
Because Stillwagon concedes that all Counterclaims arising from the Severance Agreement are governed by the same
substantive law, the Corporate Defendants' Counterclaim VI -- Fraud in the Inducement -- is also governed by North
Carolina law. 13 Furthermore, the Corporate Defendants clarified in their brief that their Unfair and Deceptive Trade
Practices Act Counterclaim is brought under the North Carolina Unfair and Deceptive Trade Practices Act ("UDTPA"),
N.C. Gen. Stat. § 75-1.1. ECF No. 52 at 27. Thus, the Court will also construe this claim under North Carolina law.
13 See Restatement (Second) Conflict of Laws § 187 which provides:
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular
issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the
particular issue is one which the parties could not [*21] have resolved by an explicit provision in their agreement directed
to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis
for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially
greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would
be the state of the applicable law in the absence of an effective choice of law by the parties.
See also Pa. Dept. of Banking v. NCAS of Del., LLC, 596 Pa. 638, 948 A.2d 752, 758 (Pa. 2008) (adopting § 187). Because North Carolina
has both a substantial relationship with the parties and the involved transactions, and is the state with the materially greater interest, its
substantive law will apply to these claims.
A federal court sitting in diversity must generally apply the choice-of-law rules of the forum state, here Pennsylvania.
Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941). Prior to Griffith v. United
Airlines, Inc., 416 Pa. 1, 203 A.2d 796 (Pa. 1964), Pennsylvania choice-of-law rules were the principles of [*22] lex
loci contractus (place of contract) and lex loci delicti (place of injury). Hammersmith v. TIG Ins. Co., 480 F.3d 220, 227
(3d Cir. 2007). In Griffith, the Pennsylvania Supreme Court abandoned the strict lex loci delicti rule. Griffith, 203 A.2d
at 806. While the Pennsylvania Supreme Court has not yet applied the Griffith standard to a contract action, the majority
of Pennsylvania courts at both the state and federal level have applied the Griffith standard to contract actions.
Hammersmith, 480 F.3d at 227-28.
Currently, Pennsylvania conflicts law combines a "governmental interest analysis" with the Restatement (Second) of
Conflicts theory, thereby adopting a flexible "hybrid" approach. Id. at 230. The Pennsylvania choice-of-law analysis is
thus a two-step process. "First, the Court must consider whether a 'false conflict' or a 'true conflict' exists between the
competing policies and interests of the relevant states. Second, if there is a true conflict, the Court must decide 'which
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2013 U.S. Dist. LEXIS 38387, *
state has the greater interest in the application of its law.'" Sherwin-Williams Co. v. Bei Enters., Inc., No. 2:12-CV-603,
2012 U.S. Dist. LEXIS 169990, 2012 WL 5990313, at *3 (W.D. Pa. Nov. 30, 2012) (citations omitted). 14
14 Our [*23] Court of Appeals has reasoned that Pennsylvania choice of law analysis "employs depecage, the principle whereby different
states' laws may apply to different issues in a single case." Taylor v. Mooney Aircraft Corp., 265 Fed. App'x 87, 91 (3d Cir. 2008); Conley ex
rel. Estate of Kerr v. Ethex Corp., No. 10-1455, 2012 U.S. Dist. LEXIS 1497, 2012 WL 32445 (W.D. Pa. Jan. 5, 2012) (same). Therefore, the
Court must consider this when analyzing the law for various claims.
"A false conflict exists when only one jurisdiction's governmental interests would be impaired by the application of the
other jurisdiction's law. A true conflict exists when the interests of each state would be impaired if the law of the other is
given effect." 15 Id. However, "[i]f two jurisdictions' laws are the same, then there is no conflict at all, and a choice of
law analysis is unnecessary." Hammersmith, 480 F.3d at 230. "Where the different laws do not produce different results,
courts presume that the law of the forum state shall apply." Fin. Software Sys., Inc. v. First Union Nat'l Bank, No. 99-
CV-623, 1999 U.S. Dist. LEXIS 19479, 1999 WL 1241088, *3 (E.D. Pa. Dec. 16, 1999).
15 In other words, a "false conflict is presented where an analysis of the policies or interests [*24] serving as the bases for the competing
state laws results in a conclusion that the application of one state's law would not further the interests or policies of the other state's
competing law and, additionally application of the other state's competing law would not adversely affect the interests or policies of the first
state's law." Wensley v. Scott, 459 F. Supp. 2d 388, 392 (W.D. Pa. 2006). Put another way, "A false conflict occurs when, after examining the
content and objectives of the laws of states A and B relating to the specific issues, it is found that only state A has an interest in the
application of its law and that state B has no interest. It seems clear that the law of state B should not be applied if doing so will not advance
any policy of that state and will defeat the policies of state A. In such a case, there is no reason for applying the law of state B except that
some rule directs it in the (false) hope of achieving certainty." Jagers v. Royal Indent. Co., 276 So. 2d 309, 311 (La. 1973).
When a true conflict exists, the Court must then evaluate the interests of each state in the application of the respective
laws. Hammersmith, 480 F.3d at 231 ("If a true conflict [*25] exists, the Court must then determine which state has the
greater interest in the application of its law."). This analysis involves:
a combination of the approaches of both [the] Restatement II (contacts establishing significant relationships) and interests analysis
(qualitative appraisal of the relevant States' policies with respect to the controversy). This analysis requires more than a mere
counting of contacts. Rather, we must weigh the contacts on a qualitative scale according to their relation to the policies and
interests underlying the [particular] issue.
Id. (citations and quotes omitted). The Restatement (Second) of Conflict of Laws informs the analysis by providing the
factors relevant to the choice of the applicable rule of law:
(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other
interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified
expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application [*26] of the law to be applied.
Restatement (Second) of Conflict of Laws § 6 (1971); see Budget Rent-A-Car Sys., Inc. v. Chappell, 407 F.3d 166, 170
(3d Cir. 2005) (applying § 6).
A. BREACH OF CONTRACT
"The essential elements of a breach of contract claim are the same under Pennsylvania and North Carolina law."
Vurimindi v. Fuqua Sch. of Bus., 435 Fed. App'x 129, 132 (3d Cir. 2011); Transure Servs., Inc. v. Brokerage Prof'ls, Inc.,
No. 06-CV-3306, 2007 U.S. Dist. LEXIS 56616, 2007 WL 2253465, at *2 n.19 (E.D. Pa. Aug. 1, 2007). Thus, the oral
breach of contract claims will be analyzed under the substantive law of the forum -- Pennsylvania law if the action
remains here, North Carolina law if the action is transferred.
B. BREACH OF FIDUCIARY DUTY
1. As an Officer or Director
Under Pennsylvania law, and in accordance with the "internal affairs doctrine", the applicable law that governs the
liability of officers and directors of a company is the law of the jurisdiction of incorporation. Banjo Buddies, Inc. v,
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2013 U.S. Dist. LEXIS 38387, *
Renosky, 399 F.3d 168, 179 (3d Cir. 2005); The Winer Family Trust v. Queen, CFV.A. 03-4318, 2004 U.S. Dist. LEXIS
19244, 2004 WL 2203709, at *24 (E.D. Pa. Sept. 27, 2004). As Rial is incorporated in North Carolina and Innsbrook is
a limited liability [*27] company organized under the laws of North Carolina, North Carolina law applies to the breach
of fiduciary duty Counterclaim related to Stillwagon's status as an officer and director.
2. As an Attorney
With regard to a breach of fiduciary duty as an attorney, the Pennsylvania Rules of Civil Procedure require the filing of
a Certificate of Merit "[i]n any action based upon an allegation that a licensed professional deviated from an acceptable
professional standard." Pa. R. Civ. P. 1042.3(a); Liggon-Redding v. Estate of Sugarman, 659 F.3d 258, 265 (3d Cir.
2011) (holding that Pennsylvania Rule 1042.3 is substantive law and mandates the filing of a Certificate of Merit in
federal court). However, North Carolina does not require the filing of a Certificate of Merit and the Corporate
Defendants concede this. ECF No. 52 at 24. This issue presents a true conflict because Defendants have not filed a
Certificate of Merit. Pennsylvania law would therefore dictate that this Counterclaim be dismissed, but the issue is not
dispositive under North Carolina law. Thus, the Court must determine which forum has a stronger interest in the
application of its laws in this regard.
Plaintiff is a licensed Pennsylvania [*28] attorney and, according to the Corporate Defendants, has never been licensed
to practice law in North Carolina. ECF No. 51 at ¶ 279. Stillwagon also maintains a professional corporation, William
C. Stillwagon, P.C., in Pennsylvania and drafted the Severance Agreement in Pennsylvania. ECF No. 51 at ¶ 108; ECF
No. 47 at ¶ 43. Pennsylvania has a strong interest in regulating the conduct of its attorneys and would subject Plaintiff to
disciplinary action in this state. Consequently, Pennsylvania is the forum with a more "significant relationship," and
therefore its law will apply to the Counterclaim alleging a breach of fiduciary duty by Stillwagon as an attorney.
3. As an Accountant16
16 Because Stillwagon is not a licensed accountant in either state, ECF No. 51 at ¶ 280, Pa. R. Civ. P 1042.3, which requires a Certificate of
Merit, is inapplicable because that Rule applies only to "a licensed professional."
Under Pennsylvania law, "[a]n accountant is not automatically a fiduciary for his client." Stainton v. Tarantino, 637 F.
Supp. 1051, 1066 (E.D. Pa. 1986). However,
[a] fiduciary relationship exists where there is a relationship involving trust and confidence, and the proof must show confidence
[*29] reposed by one side and domination and influence exercised by the other. It is not enough to show that the plaintiff reposed
its trust in the defendant; the latter must also have accepted the fiduciary relationship. In determining whether a fiduciary
relationship exists, the critical question is whether the relationship goes beyond mere reliance on superior skill, and into a
relationship characterized by overmastering influence on one side or weakness, dependence, or trust, justifiably reposed on the
other side. A confidential relationship is marked by such a disparity in position that the inferior party places complete trust in the
superior party's advice and seeks no other counsel, so as to give rise to a potential abuse of power.
Leder v. Shinfeld, 609 F. Supp. 2d 386, 401-02 (E.D. Pa. 2009) (citations and quotations omitted). See also Stainton, 637
F. Supp. at 1066 ("In business relationships, a confidential relationship arises only if parties surrender substantial control
over some portion of their business affairs to another.").
The elements of breach of fiduciary duty are: "(1) that the defendant negligently or intentionally failed to act in good
faith and solely for the benefit [*30] of plaintiff in all matters for which he or she was employed; (2) that the plaintiff
suffered injury; and (3) that the agent's failure to act solely for the plaintiff's benefit . . . was a real factor in bringing
about plaintiff's injuries." Meyers v. Sudfeld, No. 05-CV-2970, 2007 U.S. Dist. LEXIS 7634, 2007 WL 419182, at *10
(E.D. Pa. Feb. 2, 2007) (quoting McDermott v. Party City Corp., 11 F. Supp. 2d 612, 626 n.18 (E.D. Pa. 1998)).
Under North Carolina law, accountants do not automatically owe a fiduciary duty to their clients. Harrold v. Dowd, 149
N.C. App. 777, 561 S.E.2d 914, 919 (N.C. Ct. App. 2002) ("We have found no case stating that the relationship between
accountant and client is per se fiduciary in nature."). 17 To sufficiently plead that a confidential or fiduciary relationship
exists, one must "allege facts and circumstances (1) which created the relation of trust and confidence, and (2) [which]
led up to and surrounded the consummation of the transaction in which defendant is alleged to have taken advantage of
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2013 U.S. Dist. LEXIS 38387, *
his position of trust to the hurt of plaintiff." Terry v. Terry, 302 N.C. 77, 273 S.E.2d 674, 677 (N.C. 1981) (quoting
Rhodes v. Jones, 232 N.C. 547, 61 S.E.2d 725 (N.C. 1950)). 18
17 North Carolina recognizes two types of fiduciary relationships: [*31] "1) those that arise from 'legal relations such as attorney and client,
broker and client . . . partners, principal and agent, trustee and cestui que trust,' and 2) those that exist 'as a fact, in which there is confidence
reposed on one side, and the resulting superiority and influence on the other.'" Frizzell Constr. Co. v. First Citizens Bank & Trust Co., 759 F.
Supp. 286, 290 (E.D.N.C. 1991) (quoting Abbitt v. Gregory, 201 N.C. 577, 160 S.E. 896, 906 (N.C. 1931)); Dalton v. Camp, 353 N.C. 647,
548 S.E.2d 704, 707-08 (N.C. 2001) (same).
18 Similarly, principal-agent is a fiduciary relationship that arises upon two essential elements: "(1) [a]uthority, either express or implied, of
the agent to act for the principal, and (2) the principal's control over the agent." Colony Assocs. v. Fred L. Clapp & Co., 60 N.C. App. 634,
300 S.E.2d 37, 39 (N.C. Ct. App. 1983).
Under North Carolina law, "[t]he elements of a breach of fiduciary duty claim are: (1) the existence of a fiduciary
relationship; (2) a breach of that duty; and (3) the wrongful action or inaction was the proximate cause of injury to the
plaintiff." Alcorn v. Bland, No. COA12-613, 2012 N.C. App. LEXIS 1416, 2012 WL 6591014, at *3 (N.C. Ct. App.
Dec. 18, 2012).
While the words explaining each state's [*32] law may differ, the Court does not find a material conflict between the
substance of Pennsylvania and North Carolina law with regard to the fiduciary duties of non-licensed accountants as
applied to this case. Therefore the law of the forum state will apply to this Counterclaim. 19
19 For purposes of consideration of the Motion to Dismiss, Pennsylvania law will apply as "the law of the forum state" but the Court will
also consider both Pennsylvania and North Carolina law in light of the Motion to Transfer. This same procedure will apply to other issues
where "the law of the forum," as the case may be, applies.
C. GIST OF THE ACTION

Plaintiff argues that several of the Corporate Defendants' Counterclaims -- negligence, constructive fraud, actual fraud,
civil conspiracy, negligent misrepresentation, misrepresentation, and conversion -- are barred by application of the Gist-
of-the-Action doctrine. ECF No. 46 at 8-10. Pennsylvania law recognizes the Gist-of-the-Action doctrine, which
provides that "when a tort claim involves actions arising from a contractual relationship, the plaintiff is generally limited
to an action under the contract." Grant Heilman Photography, Inc. v. John Wiley & Sons, Inc., No. 11-CV-01665, 2012
U.S. Dist. LEXIS 46987, 2012 WL 1138615, at *6 (E.D. Pa. Mar. 30, 2012). [*33] 20
The gist-of-the-action doctrine bars tort claims: (1) arising solely from a contract between the parties; (2) where the duties allegedly
breached were created and grounded in the contract itself; (3) where liability stems from a contract; or (4) where the tort claim
essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of the contract.
Id. On the other hand, North Carolina law does not recognize this doctrine, and Plaintiff does not cite to any case law to
the contrary. See also ECF No. 52 at 5.
20 The Pennsylvania Superior Court has extended the application of this doctrine to include fraud claims relating to the performance of a
contract. Etoll, Inc. v. Elias / Savion Adver., 2002 PA Super 347, 811 A.2d 10, 20-21 (Pa. Super. 2002).
As there are substantive differences with regard to how these matters are resolved under Pennsylvania and North
Carolina law, a true conflict exists. Thus, the Court must consider which state has the greater interest in application of
its law.
The relevant contacts for actions in tort are enumerated in Restatement (Second) of Conflict of Laws § 145(2)(a)-(d),
and include: "(a) the place where the injury occurred, (b) the [*34] place where the conduct causing the injury occurred,
(c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and (d) the place
where the relationship, if any, between the parties is centered." Taylor v. Mooney Aircraft Corp., 265 Fed. App'x 87, 91
(3d Cir. 2008). In fraud or misrepresentation cases, the Court looks to the factors set forth in § 148 of Restatement
(Second) of Conflict of Laws. 21 Under subsection (1) of § 148, when the "plaintiff's action in reliance took place in the
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2013 U.S. Dist. LEXIS 38387, *
state where the false representations were made and received," there is a presumption that the law of that state applies.
Under subsection (2), when the plaintiff's action in reliance takes place in a different state than where the false
representations were made and received, courts weigh the following factors:
(a) the place, or places, where the plaintiff acted in reliance upon the defendant's representations,
(b) the place where the plaintiff received the representations,
(c) the place where the defendant made the representations,
(d) the domicil, residence, nationality, place of incorporation and place of business of the parties,
(e) the place where a tangible [*35] thing which is the subject of the transaction between the parties was situated at the time, and
(f) the place where the plaintiff is to render performance under a contract which he has been induced to enter by the false
representations of the defendant.
§ 148(2). See Coram, 94 F. Supp. 2d at 594; Maniscalco v. Brother Int'l (USA) Corp., No. 11-3032, 709 F.3d 202, 2013
U.S. App. LEXIS 4724, 2013 WL 856379, at *3-6 (3d Cir. Jan. 16, 2013).
21 According to the pleadings, Stillwagon drew up the Severance Agreement in Pennsylvania and Alois Rieder signed it in Austria. ECF No.
47 at ¶¶ 43-46. The Corporate Defendants do not specifically allege where each fraudulent statement and misrepresentation in the years prior
to the Severance Agreement were made or received, but it appears that Plaintiff made representations in both North Carolina and
Pennsylvania, and that those representations were received in either North Carolina or Austria. The Court will therefore consider the §
148(2) factors.
Plaintiff is a resident of Pennsylvania, the Rieders are residents of Austria, and the Corporate Defendants are businesses
established under the laws of and located in North Carolina. While each forum has an interest in protecting its citizens
or [*36] remedying its citizen's injuries, the relationship of the parties here centers on North Carolina. While Plaintiff
may have performed a substantial amount of his work from his office in Pennsylvania, he contracted to perform in
North Carolina. Stillwagon directed his services towards North Carolina, his remuneration depended on business within
that state, and the claims involve business relationships and property sales that occurred within North Carolina. The
Corporate Defendants' plead that Stillwagon acted in North Carolina by conspiring with other North Carolina entities
and people, improperly transferring North Carolina property, manipulating construction bidding processes, and altering
company documents all within North Carolina, which ultimately resulted in injury to the Corporate Defendants' in
North Carolina. Thus, North Carolina has a stronger governmental interest and connection to the tort counterclaims that
the Gist of the Action doctrine is alleged to bar. Accordingly, North Carolina law properly governs disposition of this
issue.
D. ECONOMIC LOSS DOCTRINE

Plaintiff also argues that the Corporate Defendants' tort and unfair trade practice Counterclaims are barred by the
economic [*37] loss doctrine. ECF No. 46 at 10. Under Pennsylvania law, "[t]he Economic Loss Doctrine provides that
no cause of action exists for negligence that results solely in economic damages unaccompanied by physical or property
damage." Sovereign Bank v. BJ's Wholesale Club, Inc., 533 F.3d 162, 175 (3d Cir. 2008) (quoting Adams v. Copper
Beach Townhome Cmtys., L.P., 2003 PA Super 30, 816 A.2d 301, 305 (Pa. Super. 2003)).
The economic loss doctrine "prohibits plaintiffs from recovering in tort economic losses to which their entitlement
flows only from a contract." Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 618 (3d Cir. 1995). The
economic loss doctrine serves to maintain the separation between the law of contract and the law of tort. N. Y. State
Elec. & Gas Corp. v. Westinghouse Elec. Corp., 387 Pa. Super. 537, 564 A.2d 919, 925 (Pa. Super. Ct. 1989); Sun Co.,
Inc. (R & M) v. Badger Design & Constructors, Inc., 939 F. Supp. 365, 372 (E.D. Pa. 1996) (applying economic loss
doctrine to service contracts); Kearney v. JPC Equestrian, Inc., No. 3:11-CV-01419, 2012 U.S. Dist. LEXIS 40662,
2012 WL 1020276 (M.D. Pa. Jan. 4, 2012), report & recommendation adopted No. 3:11-CV-01419, 2012 U.S. Dist.
LEXIS 40640, 2012 WL 1020266 (M.D. Pa. Mar. 26, 2012) (economic loss doctrine appears [*38] to apply to
employment contracts).
While the Pennsylvania Supreme Court has not yet addressed whether the economic loss doctrine applies to claims for
intentional fraud, the Third Circuit has held that the economic loss doctrine applies to claims for negligence, negligent
misrepresentation, and intentional fraud. Werwinski v. Ford Motor Co., 286 F.3d 661 (3d Cir. 2002). 22
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2013 U.S. Dist. LEXIS 38387, *
22 Some courts have refused to apply Werwinski and have held that the economic loss doctrine does not apply to intentional torts. See
O'Keefe v. Mercedes-Benz USA, LLC, 214 F.R.D. 266, 275 (E.D. Pa. 2003) ("We cannot follow the panel's decision when it is not in harmony
with Pennsylvania state law . . . Pennsylvania's economic loss doctrine is inapplicable to intentional torts."); Oppenheimer v. York Int'l, No.
4348 MARCHTERM 2002, 2002 Phila. Ct. Com. Pl. LEXIS 12, 2002 WL 31409949, at *2 (Pa. Com. Pl. Oct. 25, 2002) ("this Court has not
extended the economic loss doctrine to cover intentional torts."); Smith v. Reinhart Ford, 68 Pa. D. & C.4th 432, 437 (Pa. Ct. Com. Pl. 2004)
(citation omitted) ("[I]t does not make sense to extend the doctrine to intentional torts taken by one party to subvert the purpose of a
contract.").
However, while noting this [*39] discord, other federal district courts continue to apply Werwinski., "Neither the Pennsylvania Supreme
Court nor any Superior Court has determined whether the economic loss doctrine applies to intentional fraud or misrepresentation
claims. . . . The lower Pennsylvania courts have, as far as we can tell, unanimously ruled that such claims are not barred by the economic
loss doctrine." Air Products & Chemicals, Inc. v. Eaton Metal Prods. Co., 256 F. Supp. 2d 329, 335 (E.D. Pa. 2003) (bound by Werwinski);
DeFebo v. Andersen Windows, Inc., 654 F. Supp. 2d 285, 294 (E.D. Pa. 2009) (noting controversy, but holding that court is bound by
Werwinski); Heindel v. Pfizer, Inc., 381 F. Supp. 2d 364, 386 (D.N.J. 2004) (applying Werwinski). Until the Pennsylvania Supreme Court
conclusively addresses this issue, or the Third Circuit en banc overrules Werwinski, this Court is bound by that decision.
North Carolina's economic loss rule limits a contracting party's ability to recover in tort and, in general, provides that a
breach of contract claim will not support the assertion of tort claims as well. Silicon Knights, Inc. v. Epic Games, Inc.,
5:07-CV-275-D, 2011 U.S. Dist. LEXIS 31039, 2011 WL 1134453, at *4 (E.D.N.C. Jan. 25, 2011), [*40] report &
recommendation adopted, 5:07-CV-275-D, 2011 U.S. Dist. LEXIS 31036, 2011 WL 1134447 (E.D.N.C. Mar. 24, 2011).
However, under North Carolina law the economic loss doctrine does not apply to situations involving intentional fraud
or willful acts. Kelly v. Georgia-Pacific LLC, 671 F. Supp. 2d 785, 791 n.2 (E.D.N.C. 2009) (quoting N.C. State Ports
Auth. v. Lloyd A. Fry Roofing Co., 294 N.C. 73, 240 S.E.2d 345, 350 (N.C. 1978)) (the economic loss rule is precluded
where "[t]he injury so caused was a willful injury to or a conversion of the property of the promisee" or where "[t]he
injury, proximately caused by the promisor's negligent, or wilful, act or omission in the performance of his contract, was
to property of the promisee other than the property which was the subject of the contract, or was a personal injury to the
promise.").
Because the Corporate Defendants plead that Stillwagon intended to commit these torts, and that his actions were
willful, there are substantive differences with regard to how this matter is resolved under Pennsylvania and North
Carolina law, and a true conflict exists.
The analysis as to the forum with the greatest interest with respect to this issue is identical to the analysis applied as to
the gist [*41] of the action doctrine. Thus, North Carolina is the forum with the greatest interest and its law applies to
the economic loss rule issue.
E. UNJUST ENRICHMENT
Under the law of both Pennsylvania and North Carolina, a claim for unjust enrichment may not be brought in the face of
an express contractual relationship between the parties. See Wilson Area Sch. Dist. v. Skepton, 586 Pa. 513, 895 A.2d
1250, 1254 (Pa. 2006) ("[The doctrine of unjust enrichment] applies only to situations where there is no legal contract.")
(citation omitted); Homziak v. Gen. Elec. Capital Warranty Corp., No. GD2000-1707, 2001 WL 35923945 (Pa. Ct.
Com. Pl. May 21, 2001) (dismissing unjust enrichment claim where Plaintiff failed to adequately plead the absence of a
valid written contract, stating that Plaintiff "[did] not plead facts on which this Court could conclude that the service
contract is [unenforceable as] insurance"). Cf. Se. Shelter Corp. v. BTU, Inc., 154 N.C. App. 321, 572 S.E.2d 200, 206
(N.C. Ct. App. 2002) ("If there is a contract between the parties, the contract governs the claim and the law will not
imply a contract."); Madison River Mgmt. Co. v. Bus. Mgmt. Software Corp., 351 F. Supp. 2d 436, 446 (M.D.N.C. 2005)
(same).
As there [*42] is no conflict between the two states' laws, the unjust enrichment claims will be analyzed under the
substantive law of the forum.
F. CONVERSION
Under Pennsylvania law, the required elements of a conversion claim are: "[(1)] the deprivation of another's right of
property in, or use or possession of, a chattel, or other interference therewith, [(2)] without the owner's consent, and
[(3)] without lawful justification." Vavro v. Albers, No. 2:05CV321, 2006 U.S. Dist. LEXIS 101069, 2006 WL 2547350,
at *13-14 (W.D. Pa. Aug. 31, 2006) (quoting McKeeman v. Corestates Bank, N.A., 2000 PA Super 117, 751 A.2d 655,
659 n.3 (Pa. Super. Ct. 2000)). "As to the type of property that may be the subject of conversion, it is clear in
Page 229Page 229
2013 U.S. Dist. LEXIS 38387, *
Pennsylvania that a cause of action for conversion may be maintained for almost all kinds of personal property,
including money, notes, bonds, certificates of stock, title deeds." 2006 U.S. Dist. LEXIS 101069, [WL] at *14.
Under North Carolina law, the tort of "[c]onversion is defined as: (1) the unauthorized assumption and exercise of the
right of ownership; (2) over the goods or personal property, (3) of another; (4) to the exclusion of the rights of the true
owner." Day v. Rasmussen, 177 N.C. App. 759, 629 S.E.2d 912, 914 (N.C. Ct. App. 2006) (citation omitted). Moreover,
[*43] misappropriated funds may be the subject of a claim for conversion. Gadson v. Toney, 69 N.C. App. 244, 316
S.E.2d 320, 322 (N.C. Ct. App. 1984).
The Court finds that there is no material conflict as to the elements required to sufficiently plead a cause of action for
conversion. Thus, a choice of law analysis is not necessary, and the law of the forum will apply.
G. CIVIL CONSPIRACY
Under Pennsylvania law, the essential elements for a claim of civil conspiracy are: "1) a combination of two or more
persons acting with a common purpose to do an unlawful act or to do a lawful act by unlawful means or for an unlawful
purpose; 2) an overt act done in pursuance of the common purpose; and 3) actual legal damage." Kist v. Fatula, No.
32006-67, 2007 U.S. Dist. LEXIS 60615, 2007 WL 2404721, at *9 (W.D. Pa. Aug. 17, 2007) (citations and quotations
omitted); Cranberry Promenade, Inc. v. Cranberry Twp., CIV. A. 09-1242, 2010 U.S. Dist. LEXIS 15077, 2010 WL
653915, at *6 (W.D. Pa. Feb. 22, 2010) (same).
"Proof of agreement and malicious intent are essential to stating a claim for conspiracy, and the fact that two or more
people are acting to do something at the same time is not by itself an actionable conspiracy. It should also be noted that
in Pennsylvania, a claim for civil [*44] conspiracy cannot be plead without alleging an underlying tort." Kist, 2007 U.S.
Dist. LEXIS 60615, 2007 WL 2404721, at *9 (citations and quotations omitted). See also Pierce v. Allegheny Cnty. Bd.
of Elections, 324 F. Supp. 2d 684, 701 (W.D. Pa. 2003) (citing Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198, 412
A.2d 466, 472 (Pa. 1979)) ("Furthermore, plaintiffs are required to allege and prove malice--that is, an unlawful intent
to injure absent justification."). Finally, "[i]n order for one member of a civil conspiracy to be liable, not all members of
the conspiracy need be named as defendants or joined as defendants." U.S. Investigations Servs., LLC v. Callihan, No.
2:11-CV-00355, 2012 U.S. Dist. LEXIS 36374, 2012 WL 933069, at *2 (W.D. Pa. Mar. 19, 2012).
Under North Carolina law, the elements for a civil conspiracy claim are: "(1) an agreement between two or more
individuals; (2) to do an unlawful act or to do a lawful act in an unlawful way; (3) resulting in injury to plaintiff inflicted
by one or more of the conspirators; and (4) pursuant to a common scheme." Bon Aqua Int'l, Inc. v. Second Earth, Inc.,
No. 1:10CV169, 2013 U.S. Dist. LEXIS 11635, 2013 WL 357469, at *22 (M.D.N.C. Jan. 29, 2013) (quoting Strickland
v. Hedrick, 194 N.C. App. 1, 669 S.E.2d 61, 72 (N.C. Ct. App. 2008)). "Conspiracy [*45] requires an intent to do a
wrongful act, such as an intentional tort." Suntrust Mortg., Inc. v. Busby, 651 F. Supp. 2d 472, 488 (W.D.N.C. 2009).
Furthermore, in North Carolina, a civil conspiracy claim requires a viable underlying predicate claim, as it is not a
separate civil action but is premised on the underlying act. Id. ("a 'naked claim' of civil conspiracy cannot be brought
independent of properly-alleged claims for the underlying wrongdoing, making such claim subject to dismissal if the
underlying claims for wrongful conduct are dismissed."); Outer Banks Beach Club Ass'n, Inc. v. Festiva Resorts
Adventure Club Member's Ass'n, Inc., No. 1:11CV246, 2012 U.S. Dist. LEXIS 134438, 2012 WL 4321324, at *5
(W.D.N.C. June 18, 2012) (recognizing civil conspiracy to commit fraud); Pedwell v. First Union Nat. Bank of N.C., 51
N.C. App. 236, 275 S.E.2d 565, 567 (N.C. Ct. App. 1981) (breach of contract as overt act). Finally, "[a]ll conspirators
may be joined as parties defendant in an action for the damages caused by their wrongful act, although it is not
necessary that all be joined; an action may be maintained against only one." Burns v. Gulf Oil Corp., 246 N.C. 266, 98
S.E.2d 339, 344 (N.C. 1957) (quoting 11 Am. Jur., Conspiracy § 54).
Application [*46] of either state's law would lead to the same end result, and the Court finds that there is not a material
conflict between Pennsylvania and North Carolina law. The law of the forum state will therefore apply to this claim.
IV. MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 12(b)(7)

Plaintiff first argues that Counts IV, VI, IX, and XI of the Counterclaims should be dismissed for a failure to join
necessary and indispensable parties under Federal Rule of Civil Procedure 19. He argues that all parties to a contract are
indispensable in an action to rescind a contract, and therefore the Counterclaims that seek, in intent or effect, to rescind
the Severance Agreement should be dismissed because they fail to do so. ECF No. 46 at 5-7.
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2013 U.S. Dist. LEXIS 38387, *
The following persons and entities were parties to the Severance Agreement: Stillwagon, the Rieders, Rial, Innsbrook,
Seg Anstalt, Nufin Anstalt, Watersprings Development 23, and All Seasons. ECF No. 11-1. The Corporate Defendants
point out that All Seasons has been dissolved, ECF No. 52-1. Stillwagon, the Rieders 24, Rial, and Innsbrook are all
parties to this litigation. Thus, the parties to the Severance Agreement that are not a party to this action are Seg [*47]
Anstalt, Nufin Anstalt, and Watersprings. 25
23 The Severance Agreement lists this entity as "Watersprings Development" but the Corporate Defendants, in their Answer, list the entity as
"Water Springs Development." Because the Severance Agreement's validity is at issue, the Court will refer to the entity as "Watersprings
Development" or "Watersprings."
24 Plaintiff originally argued in his brief that the Rieders had not yet been served, however, this has been remedied as service has since been
accepted by Alois and Richard Rieder. ECF No. 50.
25 Watersprings is purportedly the sole shareholder of Rial, and Rial is the sole member of Innsbrook. ECF No. 51 at ¶ 10.
Federal Rule of Civil Procedure 19 specifies the circumstances in which the joinder of a party is compulsory. To decide
whether joinder of a party is required, a court must first determine whether the absent party is a necessary party. Janney
Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 404 (3d Cir. 1993); see also Gen. Refractories Co. v. First
State Ins. Co., 500 F.3d 306, 312 (3d Cir. 2007) ("we must first determine whether the absent insurers should be joined
as 'necessary' parties under Rule 19(a)"). If the party [*48] should be joined, but their joinder is not feasible, the court
must then decide whether the absent party is indispensable under Rule 19(b). Id. If the absent party is indispensable, the
action cannot go forward. Id. If however, the absent party is not necessary in the first instance, the court need not reach
the question of whether that party is indispensable. Id.
Rule 19(a) defines the parties who are "necessary" in the sense that their joinder is compulsory "if feasible." It states, in
pertinent part:
A person . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those
already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the
action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave
any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by
reason of the claimed interest.
Fed. R. Civ. P. 19(a). Because the Rule is phrased in the disjunctive, if a party's absence results in any of the [*49]
problems identified in either subsections (a)(1) or (a)(2), then the absent party's joinder is compulsory if feasible.
Janney, 11 F.3d at 405.
Thus, the Court first asks whether complete relief can be accorded to the parties to an action when all parties to a
contract at issue have not been joined as defendants. While the Court may be able to afford Plaintiff relief under a joint
and several liability theory on his affirmative breach of contract claims as to some but not all opposing contracting
parties, if Defendants are found liable under the Severance Agreement, id. at 405-406, Defendants seek rescission or to
void the Severance Agreement, which requires that all signatories to the contract be joined. Shields v. Barrow, 58 U.S.
130, 140, 15 L. Ed. 158 (1854) ("For, if only a part of those interested in the contract are before the court, a decree of
rescission must either destroy the rights of those who are absent, or leave the contract in full force as respects them;
while it is set aside, and the contracting parties restored to their former condition, as to the others. We do not say that no
case can arise in which this may be done; but it must be a case in which the rights of those before the [*50] court are
completely separable from the rights of those absent, otherwise the latter are indispensable parties."); Rosenzweig v.
Brunswick Corp., No. 08-807 (SDW), 2008 U.S. Dist. LEXIS 63655, 2008 WL 3895485, at *6 (D.N.J. Aug. 20, 2008)
(court unable to afford complete relief where rescission/reformation of contract sought and signatory of contract was an
absent party); Derry Fin. N. V. v. Christiana Cos., Inc., 102 F.R.D. 892, 895 (D. Del. 1984) ("Courts have long
recognized that all parties to a contract should be before the Court if rescission is sought."); In re Olympic Mills Corp.,
477 F.3d 1, 10 (1st Cir. 2007) ("co-obligors generally are not indispensable parties in contract disputes that do not
involve reformation, cancellation, rescission, or otherwise challenge the validity of the contract.").
Moreover, voiding the Severance Agreement in the context of only the parties in this case would leave Stillwagon with a
substantial risk of inconsistent obligations because he would still be in a contractual relationship with Seg Anstalt, Nufin
Anstalt, and Watersprings, since under the Severance Agreement, Plaintiff agreed to release all of the signatories of any
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2013 U.S. Dist. LEXIS 38387, *
liability once the installment payments are paid. [*51] ECF No. 11-1 at 1-2. See Wheaton v. Diversified Energy, LLC,
215 F.R.D. 487, 491 (E.D. Pa. 2003) (recognizing that a contract's "cancellation or rescission" may lead to inconsistent
obligations).
Consequently, Seg Anstalt, Nufin Anstalt, and Watersprings Development are at least necessary parties and must be
joined if feasible as to these Counterclaims. Fed. R. Civ. P. 19(a)(2). Counterclaim Counts IV, VI, IX, and XI are
therefore dismissed without prejudice to their reassertion once the complete Rule 19 necessary / indispensable party
joinder process plays out.
V. MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 12(b)(6)

The Court must next consider Plaintiff's Motion to Dismiss Counterclaims pursuant to Fed. R. Civ. P. 12(b)(6). The
Court will apply the appropriate substantive law as to each as discussed above in the choice-of-law analysis. For those
claims in which "the law of the forum state" will apply, the Court will consider the law of both Pennsylvania and North
Carolina.
A. LEGAL STANDARD
To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), an answer with counterclaims, as is the case with a
complaint, PPG Indus., Inc. v. Generon IGS, Inc., 760 F. Supp. 2d 520, 524 (W.D. Pa. 2011), [*52] must allege "enough
facts to state a claim for relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct.
1955, 167 L. Ed. 2d 929 (2007).
While a [counterclaim] attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a [counter-
claimant's] obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the
speculative level.
Id. at 555 (internal citations omitted). Courts are not "bound to accept as true a legal conclusion couched as a factual
allegation." Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L. Ed. 2d 209 (1986). Furthermore, "[t]hreadbare
recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal,
556 U.S. 662, 678, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009). The Court must accept as true all allegations in the
complaint (here, the Counterclaims) and all reasonable inferences are drawn in favor of the non-movant. E.I. du Pont de
Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011); Rocks v. Philadelphia, 868 F.2d 644, 645 (3d
Cir. 1989).
Further, [*53] when pleading fraud, special rules come into play. Rule 9(b) of the Federal Rules of Civil Procedure
provides "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with
particularity. Malice, intent, knowledge, and other condition[s] of mind of a person may be averred generally." See also
Ahmed v. Porter, No. 1:09CV101, 2009 U.S. Dist. LEXIS 73650, 2009 WL 2581615, at *7-8 (W.D.N.C. June 23, 2009)
("The specificity required in claiming fraud is an exception to the provisions of notice pleading found in" Rule 8.).
B. DISCUSSION
1. Gist of the Action Doctrine

Plaintiff argues that the Corporate Defendants' tort Counterclaims -- Count III for civil conspiracy, Count IV for
constructive fraud 26, Count V for actual fraud, misrepresentation, and negligent misrepresentation, Count VII for
negligence, and Count X for conversion -- are barred by the Gist of the Action doctrine. As discussed above, North
Carolina law applies to this issue and it does not recognize the Gist of the Action Doctrine. Thus, Plaintiff's argument
here fails and the Motion to Dismiss these Counts of the Counterclaim is denied.
26 Counterclaim Count IV has been dismissed for failure to join a party and [*54] therefore the Court need not address the Gist of the
Action doctrine or Economic Loss rule with respect to this Counterclaim.
2. Economic Loss Rule

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2013 U.S. Dist. LEXIS 38387, *
As discussed above, North Carolina law applies to this issue and it does recognize the economic loss rule. N. C. State
Ports Auth. v. Lloyd A. Fry Roofing Co., 294 N.C. 73, 240 S.E.2d 345, 350 (N.C. 1978) rejected in part on other
grounds by Trs. of Rowan Tech. Coll v. J. Hyatt Hammond Assocs., Inc., 313 N.C. 230, 328 S.E.2d 274 (N.C. 1985)
("Ordinarily, a breach of contract does not give rise to a tort action by the promisee against the promisor."). Thus,
[u]nder the rule, in order to assert a tort and breach of contract claim arising from the same conduct, a plaintiff must allege a duty
owed by the defendant that is separate and distinct from duties owed pursuant to the contract. . . . Not only must the tort constitute
an identifiable, independent tort, . . . but the tort also must have an aggravating element, such as fraud, malice, reckless
indifference, oppression, insult, and willfulness. . . . The policy behind the independent tort exception is to keep open-ended tort
damages from distorting contractual relations in light of the fundamental difference between [*55] tort and contract claims. . . .
Courts only allow tort causes of action if contract theory is insufficient to cover the facts.
Silicon Knights, 2011 U.S. Dist. LEXIS 31039, 2011 WL 1134453, at *5.
However, the economic loss rule does not apply in the absence of a contract between the parties. Lord v. Customized
Consulting Specialty, Inc., 182 N.C. App. 635, 643 S.E.2d 28, 29 (N.C. Ct. App. 2007). Moreover, North Carolina
courts have generally not extended the economic loss rule to claims of fraud and negligent misrepresentation. Silicon
Knights, 2011 U.S. Dist. LEXIS 31039, 2011 WL 1134453, at *5 (listing cases). 27
27 Club Car, Inc. v. Dow Chem. Co., No. 06 CVS 15530, 2007 NCBC 10, 2007 WL 2570088, at *4 (N.C. Super. May 3, 2007) ("The North
Carolina appellate courts have yet to extend the application of the economic loss doctrine to bar claims based on fraud."); Wilson v. Dryvit
Sys., Inc., 206 F. Supp. 2d 749, 754-55 (E.D.N.C. 2002) (holding that economic loss rule did not extend to claims for negligent
misrepresentation).
Furthermore, according to the North Carolina Supreme Court, there are four scenarios in which the application of the
economic loss rule is precluded. Two of these four scenarios include situations in which "[t]he injury so caused was a
wilful injury to or [*56] a conversion of the property of the promise, which was the subject of the contract, by the
promisor . . ." or where "[t]he injury, proximately caused by the promisor's negligent, or wilful, act or omission in the
performance of his contract, was to property of the promisee other than the property which was the subject of the
contract, or was a personal injury to the promise . . ." N.C. State Ports, 240 S.E.2d at 350.
Because the validity of both written and oral contracts are at issue in this litigation (both as to Plaintiff's claims and the
various Counterclaims), dismissing these Counterclaims on the basis that a contractual remedy exists would be
premature. Lord, 643 S.E.2d at 29 ("the economic loss rule does not operate to bar a negligence claim in the absence of
a contract between the parties."); DeBlaker v. MI Windows & Doors, Inc., 3:10CV427, 2011 U.S. Dist. LEXIS 30884,
2011 WL 1135551, at *1 (W.D.N.C. Mar. 24, 2011) (same). Similarly, as to any Counterclaim for fraud in the
inducement, such allegations are grounded in Plaintiff's conduct prior to executing an agreement and therefore do not
arise from a contract.
North Carolina courts have generally not extended the economic loss rule to claims of fraud [*57] and negligent
misrepresentation. Silicon Knights, 2011 U.S. Dist. LEXIS 31039, 2011 WL 1134453, at *5 (listing cases). Thus, the
Motion to Dismiss Counterclaims for fraud and negligent misrepresentation in Count V on the basis of the economic
loss rule must be denied.
Assuming a contract exists, application of the economic loss rule is precluded in those situations in which the "injury so
caused was a willful injury or a conversion of the property," or in which the injury was to property not subject to a
contract and was caused by a negligent or willful act or omission. 2011 U.S. Dist. LEXIS 31039, [WL] at 6, n.7. Not
only was the misconduct of Plaintiff complained of by the Corporate Defendants beyond the scope of the alleged oral
agreements for the development of properties in North Carolina, but also the Corporate Defendants plead that Plaintiff
took these actions with the express purpose and intent to improperly convert funds and property. Thus, the
Counterclaims for conversion, breach of fiduciary duty, civil conspiracy, and unfair trade practice (Counts I, III, VIII,
and X) each fit within at least one of the exceptions to the application of the economic loss rule.
Furthermore, the Corporate Defendants allege that Stillwagon owed to them [*58] a duty "separate and distinct" from
the Severance Agreement and any oral contract for a land development project. For instance, they say that Plaintiff
owed them a fiduciary duty as a company officer and director, and that such a party owes a duty to not provide false
information to induce a contract. Kindred of N. Carolina, Inc. v. Bond, 160 N.C. App. 90, 584 S.E.2d 846, 853 (N.C. Ct.
App. 2003). The Corporate Defendants have also sufficiently plead aggravating elements (fraud, malice, and
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2013 U.S. Dist. LEXIS 38387, *
willfulness) to be an independent tort, taking this outside of the economic loss rule. Silicon Knights, 2011 U.S. Dist.
LEXIS 31039, 2011 WL 1134453, at *5. The Court concludes that these allegations go beyond Plaintiff simply failing to
perform under the contract and, therefore, the economic loss rule does not bar Counts I or V.
This leaves the claim for negligence in Counterclaim Count VII. The Corporate Defendants allege that Plaintiff "was
negligent in advising the Defendants and performing his duties in a manner inconsistent with the Defendants' needs,
objectives, and express wishes, and in making representations about the Project that were false or made with reckless
disregard for the truth of the representations." ECF No. 51 at ¶ 276. [*59] However, these duties necessarily arose (if at
all) from the alleged oral contracts, and therefore cannot be considered "separate and distinct" from duties owed
pursuant to a contract. Thus, if there is no contract, there are no such duties; if there is a contract, the economic loss rule
would bar the Corporate Defendants' Counterclaim for negligence. The Motion to Dismiss Count VII of the
Counterclaim is therefore granted with prejudice.
3. Failure to State a Claim for Breach of Fiduciary Duty

Plaintiff also argues that the Corporate Defendants' non-fraud based breach of fiduciary duty claim must fail because the
Severance Agreement released Stillwagon from "any and all claims." Severance Agreement at ¶ 3. 28 However, the
Corporate Defendants argue that the Severance Agreement (and therefore the release contained in it) is void and/or
unenforceable. Thus, this argument is premature as the validity of the Severance Agreement must first be adjudicated.
28 The referenced clause in the Severance Agreement releases Stillwagon from all claims except for "embezzlement or any other fraudulent
acts." Severance Agreement ¶ 3. Assuming this clause is valid and enforceable, then presumably any theft-like [*60] or fraud-based claims
are still on the table for the Defendants.
Plaintiff continues, however, by arguing that this Counterclaim should nonetheless be dismissed because Stillwagon did
not have a legal duty to conduct competitive bidding for projects, Defendants were not injured by the use of an un-
licensed general contractor, that there is "nothing per se improper" about companies sharing personnel and materials,
Plaintiff never held himself out to Defendants as an attorney or accountant, and finally, that the Corporate Defendants
failed to file a Certificate of Merit. ECF No. 46 at 13-16. These concepts each require closer examination.
a. Fiduciary Duty as an Attorney

Pennsylvania law applies to the claim for breach of fiduciary duty as an attorney. Pennsylvania courts have held that an
attorney owes a fiduciary duty to his client. See Maritrans GP, Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 602
A.2d 1277, 1283 (Pa. 1992) (an attorney owes a fiduciary duty to his client which "demands undivided loyalty and
prohibits the attorney from engaging in conflicts of interest, and breach of such duty is actionable."); Capital Care
Corp. v. Hunt, 2004 PA Super 64, 847 A.2d 75, 84 (Pa. Super. 2004) ("It is axiomatic that [*61] an attorney who
undertakes representation of a client owes that client both a duty of competent representation and the highest duty of
honesty, fidelity, and confidentiality."). However, because the Corporate Defendants have not filed a Certificate of Merit
under Pa. R. Civ. P. 1042.3, Count I with respect to a breach of fiduciary duty as an attorney is dismissed without
prejudice. See Walsh v. Consol. Design & Eng'g, Inc., No. 05-2001, 2007 U.S. Dist. LEXIS 72534, 2007 WL 2844829,
at *8 (E.D. Pa. Sept. 28, 2007) (requiring a Certificate of Merit for attorney breach of fiduciary duty claim).
b. Fiduciary Duty as an Officer or Director

As discussed above, the law of North Carolina applies to a breach of fiduciary duty claim as to Stillwagon's service as
an officer and director. "Under North Carolina law, directors of a corporation generally owe a fiduciary duty to the
corporation . . . ." Green v. Freeman, 733 S.E.2d 542, 550 (N.C. Ct. App. 2012) (citations and quotations omitted). The
North Carolina Supreme Court defined part of that duty:
Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests.
While technically not trustees, they stand [*62] in a fiduciary relation to the corporation and its stockholders. A public policy,
existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule
that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only
affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would
work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to
enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to
the corporation demands that there shall be no conflict between duty and self-interest.
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2013 U.S. Dist. LEXIS 38387, *
Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551, 568 (N.C. 1983) (quoting Guth v. Loft, Inc., 23 Del. Ch. 255, 5
A.2d 503, 510 (Del. 1939)).
Because the Corporate Defendants plead that Stillwagon was president, vice president, and a director of their companies
29
, and Stillwagon admits as much 30, there is a reasonable inference that a corporate fiduciary relationship existed
between the parties. [*63] The Corporate Defendants then go on to allege that Plaintiff intentionally took actions that
were injurious to the corporations in his role as a company officer and director. ECF No. 51 at ¶ 149. Some of the
alleged actions include improper handling of the companies' finances, id. at ¶¶ 157-61, manipulating the bidding
process, id. at ¶¶ 153, 207-17, violating North Carolina law, id. at ¶ 149, allowing entities to double charge Defendants,
id. at ¶¶ 154, 197, paying the same charge to two companies, id. at ¶ 163, paying invoices for incomplete work without
a reasonable investigation or intentionally overpaying subcontractors, id. at ¶¶ 187-88, 198, 202-06, 229, paying himself
and others excessive commissions, id. at ¶¶ 164, 178, and improperly deeding from the companies to himself and others
titles to land. Id. at ¶¶ 190-91. If established, it is more than plausible that these allegations would amount to a breach of
a fiduciary duty. This is particularly true because Defendants plead that Stillwagon took these actions for personal gain
at the expense of the companies of which he served as an officer and director. Furthermore, because the Corporate
Defendants allege that Stillwagon [*64] himself took these actions, there is a reasonable inference that the breach of
Stillwagon's fiduciary duty was a proximate cause of the companies' injury. Therefore, the Motion to Dismiss Count I of
the Counterclaim with regard to Stillwagon's role as an officer or director is denied.
29 ECF No. 51 at ¶¶ 113, 115, 127, 176.
30 ECF No. 46 at 16, 25.
c. Fiduciary Duty as an Accountant

Because neither Pennsylvania nor North Carolina law considers accountants to be fiduciaries per se, the Corporate
Defendants must plead sufficient facts to establish that the relationship between Stillwagon and the companies was one
of a "special trust and confidence." The Corporate Defendants allege that Stillwagon was in part employed as an
accountant in order to render accounting services. ECF No. 51 at ¶¶ 160, 234. They also plead that Stillwagon sought
out and paid himself compensation for his work in providing accounting services. Id. at ¶¶ 144, 146. The Corporate
Defendants assert that Plaintiff had primary control over the companies' financial accounting, that Stillwagon was in
such a high position that he controlled the process for the financial audits (which included hand selecting who worked
on the [*65] company's financial statements), id. at ¶¶ 157, 158, was able to maintain corporate bank accounts for
which he did not obtain approval from the Board of Directors, id. at ¶ 140, and as he was the sole signatory for some of
these accounts Defendants were unable to obtain bank statements for these accounts for their own records. Id. at ¶ 226.
These allegations adequately establish that Stillwagon "occupied positions of trust, confidence, and fiduciary
responsibility", id. at ¶ 234, sought and accepted this position of trust to perform accounting services, and maintained
substantial control of the company finances.
The Corporate Defendants also sufficiently plead that Stillwagon breached this duty by taking advantage of his position
of trust, which resulted in injury to Defendants. For instance, Defendants allege that Stillwagon rebuffed directives to
obtain independent audits, id. at ¶¶ 157, 158, employed staff who lacked any accounting experience to help perform
accounting services, id. at ¶ 160, made improper payments from the companies to himself and others, id. at ¶¶ 161, 178,
187, and manipulated financial statements given to Defendants. Id. at 184. The Corporate Defendants allege [*66] that
this bookkeeping chicanery amounted to a loss to the companies of over $4 million in capital that Plaintiff was unable to
explain. Id. at ¶ 158.
Overall, the Corporate Defendants allege that they relied upon Stillwagon's false representations as to the general and
financial state of affairs of the business provided by Stillwagon in his capacity as an officer, director, and accountant,
that in carrying out his duties while in these positions he improperly paid himself and others, manipulated financial
records and business processes to cover his scheme and, consequently, these breaches of fiduciary duty resulted in
millions of dollars of capital and asset losses to the Corporate Defendants. On the basis of these allegations, the Court
concludes that Count I sufficiently alleges a breach of fiduciary duty as an accountant to withstand the Motion to
Dismiss.
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2013 U.S. Dist. LEXIS 38387, *
4. Failure to State a Claim for Unjust Enrichment

Under the law of both Pennsylvania and North Carolina, as discussed above, a claim for unjust enrichment may not be
brought in the face of an express contractual relationship between the parties. In their Counterclaims, the Corporate
Defendants allege that oral contracts exist and [*67] fail to plead, in the alternative, the absence of any valid written or
oral contract. 31 The Motion to Dismiss Count II of the Counterclaim with regard to a claim for unjust enrichment is
therefore granted.
31 See XL Enter. v. Cendant Mobility Servs. Corp., No. 99-3186, 1999 U.S. Dist. LEXIS 19092, 1999 WL 1157622 (E.D. Pa. Dec. 14, 1999)
(recognizing that when a contractual relationship exists between the parties, including even an oral contract, that there is no basis for an
unjust enrichment claim); Lackner v. Glosser, 2006 PA Super 14, 892 A.2d 21, 34 (Pa. Super. Ct. 2006) ("By its nature, the doctrine of
quasicontract, or unjust enrichment, is inapplicable where a written or express contract exists.").
5. Failure to State a Claim for Civil Conspiracy

Plaintiff goes on to argue that the Corporate Defendants' Counterclaim for civil conspiracy (Count III) should be
dismissed because North Carolina and Pennsylvania courts have held that civil conspiracy is not independently
actionable, Defendants failed to plead malice, and Defendants failed to join the other alleged conspirators. ECF No. 46
at 17-18.
First, North Carolina and Pennsylvania law both recognize a cause of action for civil conspiracy where the claim is
alleged alongside [*68] an underlying tort or predicate claim.
Secondly, Pennsylvania law requires a party to plead malice, or an intent to injure. Thompson Coal Co. v. Pike Coal Co.,
488 Pa. 198, 412 A.2d 466, 472 (Pa. 1979). The Corporate Defendants have alleged that Plaintiffs took actions in order
to benefit himself and the other conspirators through wrongful conduct at the expense of the businesses. The natural
consequence of these actions is to intentionally injure the companies. Third, as discussed above, neither Pennsylvania
nor North Carolina require that a party name or join all co-conspirators in the action.
The Corporate Defendants' Counterclaims sufficiently allege an agreement between two or more individuals to do an
unlawful act or a lawful act in an unlawful way pursuant to a common scheme. These are hallmark allegations of
malice. Moreover, the Counterclaim clearly articulates underlying, overt, acts at the heart of the alleged conspiracy,
pleading conversion, breach of contract, and other fraud-related claims. The Motion to Dismiss Count III of the
Counterclaim is therefore denied.
6. Failure to State a Claim for Unfair and Deceptive Trade Practices

Stillwagon argues that this Counterclaim should be dismissed [*69] because the Corporate Defendants fail to identify
the applicable statute in Count VIII of the Counterclaim, and that in any event the purpose of such an act is to protect
consumers and the general public. As discussed above, the Corporate Defendants clarified this issue in their response
brief, and the Unfair and Deceptive Trade Practices Act ("UDTPA") Counterclaim is brought under the North Carolina
statute, N.C. Gen. Stat. § 75-1.1. ECF No. 52 at 27.
Under North Carolina's UDTPA, a party must plead: "(1) an unfair or deceptive act or practice, or an unfair method of
competition, (2) in or affecting commerce, (3) proximately causing actual injury to plaintiff or plaintiff's business." Bon
Aqua Int'l, Inc. v. Second Earth, Inc., No. 1:10CV169, 2013 U.S. Dist. LEXIS 11635, 2013 WL 357469, at *20
(M.D.N.C. Jan. 29, 2013) (citations omitted); Lawrence v. UMLIC-Five Corp., No. 06 CVS 20643, 2007 NCBC 20,
2007 WL 2570256, at *5 (N.C. Super. Ct., June 18, 2007). "A practice is unfair if it is unethical or unscrupulous, and it
is deceptive if it has a tendency to deceive." Bon Aqua, 2013 U.S. Dist. LEXIS 11635, 2013 WL 357469, at *20
(quoting Polo Fashions, Inc. v. Craftex, Inc., 816 F.2d 145, 148 (4th Cir. 1987)).
The UDTPA defines "commerce" broadly, to include [*70] "all business activities, however denominated", but not
"professional services rendered by a member of a learned profession." N.C. Gen.Stat. § 75-1.1(b). "Courts apply a two-
part test when considering the UDTPA's learned profession exemption. 'First, the person or entity performing the
alleged act must be a member of a learned profession. Second, the conduct in question must be a rendering of
professional services.'" Battleground Veterinary Hosp., P.C. v. McGeough, No. 05 CVS 18918, 2007 NCBC 33, 2007
WL 3071618, at *7 (N.C. Super. Oct. 19, 2007) (quoting Reid v. Ayers, 138 N.C. App. 261, 531 S.E.2d 231, 235 (N.C.
Page 236Page 236
2013 U.S. Dist. LEXIS 38387, *
Ct. App. 2000)). The "crucial inquiry [is] whether the [particular function or conduct is] a necessary part of the
[professional] services provided." Id. (alterations in the original). Thus, Stillwagon's actions taken in his capacity as an
attorney are barred from consideration when analyzing this claim. Moreover, "proof of an independent tort generally is
sufficient to make out make out a separate UDTPA claim." Id.; Sara Lee Corp. v. Carter, 351 N.C. 27, 519 S.E.2d 308,
311-12 (N.C. 1999) (finding that the breach of a fiduciary duty by an employee also gave rise to a UDTPA claim).
Plaintiff argues that this unfair practices [*71] legislation is designed to protect consumers and thus this Counterclaim
should be dismissed as it is alleged here only by businesses. While Pennsylvania's Unfair Trade Practices and Consumer
Protection law is designed to protect unsophisticated consumers and does not list businesses as being able to bring a
private action under the act, 73 Pa. Stat. § 201-9.2, North Carolina law allows for a private UDTPA action to be
maintained by a business. See Fin. Software Sys., Inc. v. First Union Nat. Bank, No. 99-CV-623, 1999 U.S. Dist. LEXIS
19479, 1999 WL 1241088, at *5 (E.D. Pa. Dec. 16, 1999). See N.C. Gen. Stat. § 75-16 (2012) ("If any person shall be
injured or the business of any person, firm or corporation shall be broken up, destroyed or injured by reason of any act
or thing done by any other person, firm or corporation in violation of the provisions of this Chapter, such person, firm
or corporation so injured shall have a right of action on account of such injury done . . .") (emphasis added); Concrete
Serv. Corp. v. Investors Grp., Inc., 79 N.C. App. 678, 340 S.E.2d 755, 760 (N.C. Ct. App. 1986) ("The statutes do not
protect only individual consumers, but serve to protect businesspersons as well.").
The Corporate Defendants sufficiently [*72] allege a UDTPA claim. They allege unfair and deceptive acts under
circumstances that, if true, are reasonably considered "egregious or aggravating." Ellis v. Louisiana-Pacific Corp., 699
F.3d 778, 787 (4th Cir. 2012). Also, because the Corporate Defendants have sufficiently pled that Stillwagon's actions
amounted to fraud, there is a reasonable inference that Plaintiff's actions were "unfair or deceptive." Plaintiff's actions
involved contractors and the purchase and sale of land, and they therefore appear to sufficiently affect commerce.
Finally, the Corporate Defendants have pled that Plaintiff's actions resulted in large capital and asset losses. Plaintiff's
Motion to Dismiss the UDTPA claim in Count VIII of the Counterclaim is denied.
7. Failure to State a Claim for Conversion

Plaintiff argues that the Counterclaim for conversion should be dismissed because it only applies to chattels and that
Corporate Defendants fail to allege that any asserted transfers were involuntary. As discussed above, both Pennsylvania
and North Carolina law permit a claim for conversion with respect to money or monetary funds.
The Corporate Defendants plead that Stillwagon fraudulently took, transferred and misappropriated [*73] capital and
land lots without authority or approval. ECF No. 51 at ¶¶ 137, 158, 166, 178-86, 191, 187, 198, 208-13, 203. Stillwagon
cites to Pennsylvania caselaw for the proposition that the transfer was not involuntary. See Thomas v. Phila. Hous.
Auth., No. 10-6185, 2011 U.S. Dist. LEXIS 64461, 2011 WL 2415157 (E.D. Pa. June 15, 2011). In Thomas, plaintiffs
brought a conversion cause of action against the defendants for improperly requiring them to attend a training session
and charging a $200 admission fee. 2011 U.S. Dist. LEXIS 64461, [WL] at 8. The court found that the payment of the
fee was voluntary because it was "different from an allegation that Plaintiffs' money was taken without their consent."
2011 U.S. Dist. LEXIS 64461, [WL] at 9. Here, however, the Corporate Defendants explicitly allege that Stillwagon
took these actions without the necessary approval or consent.
Furthermore, the North Carolina Court of Appeals has held that a conversion claim was viable where defendant was
listed on a joint bank account with plaintiff, plaintiff had given defendant a power of attorney, and defendant withdrew
plaintiff's money from the account. Gadson v. Toney, 69 N.C. App. 244, 316 S.E.2d 320, 322 (N.C. Ct. App. 1984). The
court held, on a motion for summary judgment, that there was sufficient [*74] evidence that plaintiff was the owner of
the money and that defendant "wrongfully assumed and exercised the right of ownership over that property to the
exclusion of plaintiff's rights as owner." Id. The Corporate Defendants' allegations are sufficient to overcome a Motion
to Dismiss as to Count X of the Counterclaim.
8. Damage Claim is Improper and Excessive

While the Corporate Defendants' various listings of the specific amount of claimed damages appear to exhibit sloppy
comma placement, ECF No. 51 at ¶¶ 251, 257, 282, they are fairly construed to seek damages only in excess of the
jurisdictional amount contained in 28 U.S.C. § 1332. Thus, Plaintiff's Motion to Dismiss is denied in this respect.
C. CONCLUSION AS TO THE MOTION TO DISMISS PURSUANT TO 12(b)(6)

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2013 U.S. Dist. LEXIS 38387, *
Plaintiff's Motion to Dismiss Counterclaims for failure to state a claim is granted as to Counts I (only with respect to the
claim of breach of fiduciary duty as an attorney), II (only as regards the claim for unjust enrichment), and VII. These
dismissals as to Counts I and II are without prejudice. Plaintiff's Motion to Dismiss Counterclaims for a failure to state a
claim is otherwise denied in all respects. Counts IV, VI, IX, and [*75] XI have been dismissed without prejudice under
Fed. R. Civ. P. 12(b)(7). 32 Because the Corporate Defendants' Counterclaims for breach of fiduciary duty as an officer,
director, and accountant (Count I), breach of contract (Count II), civil conspiracy (Count III), misrepresentation (Count
V), unfair and deceptive trade practices (Count VIII), and conversion (Count X) survive the Motions to Dismiss under
both Fed. R. Civ. P. 12(b)(6) and 12(b)(7), the Court must now consider the Motion to Transfer Venue.
32 Because Counterclaims IV and XI are dismissed pursuant to Rule 12(b)(7), it is premature to consider Plaintiff's argument that these
claims should be dismissed under Rule 12(b)(6).
VI. MOTION TO TRANSFER VENUE
A. APPLICABLE LAW
A motion to transfer venue is governed by 28 U.S.C. § 1404(a), which provides: "For the convenience of parties and
witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it
might have been brought." The purpose of transferring venue under § 1404(a) "is [*76] to prevent the waste of time,
energy, and money and to protect litigants, witnesses and the public against unnecessary inconvenience and expense."
Van Dusen v. Barrack, 376 U.S. 612, 616, 84 S. Ct. 805, 11 L. Ed. 2d 945 (1964) (internal quotation omitted). In
determining if transfer of venue is appropriate, "the district court is vested with a wide discretion." Plum Tree, Inc. v.
Stockment, 488 F.2d 754, 756 (3d Cir. 1973); CentiMark Corp. v. Jacobsen, No. 11-1137, 2011 U.S. Dist. LEXIS
138673, 2011 WL 6000719, at *2 (W.D. Pa. Nov. 30, 2011). The movant has the burden of showing that the balance of
private and public factors weighs strongly in favor of transfer. Jumara v. State Farm Ins. Co., 55 F.3d 873, 879 (3d Cir.
1995) ("plaintiff's choice of venue should not be lightly disturbed.") (citations omitted).
A court performs a two-part analysis when considering a motion to transfer venue. CentiMark, 2011 U.S. Dist. LEXIS
138673, 2011 WL 6000719, at *2 (citing Lawrence v. Xerox Corp., 56 F. Supp. 2d 442, 450-51 (D.N.J. 1999)). First, the
court must decide whether the case could have been brought in the transferee district in the first instance, i.e., whether
venue in the transferee district proper. Id. Second, the court applies the Jumara factors, which considers a number of
[*77] public and private factors to determine which forum is most appropriate to consider the case. Id. 33
33 The Third Circuit in Jumara explained the balancing test for a transfer of venue:
In ruling on § 1404(a) motions, courts have not limited their consideration to the three enumerated factors in § 1404(a)
(convenience of parties, convenience of witnesses, or interests of justice), and, indeed, commentators have called on the
courts to consider all relevant factors to determine whether on balance the litigation would more conveniently proceed and
the interests of justice be better served by transfer to a different forum. While there is no definitive formula or list of the
factors to consider, courts have considered many variants of the private and public interests protected by the language of §
1404(a).
55 F.3d at 879 (quotations and citations omitted).
The private interests include:
plaintiff's forum preference as manifested in the original choice; the defendant's preference; whether the claim arose elsewhere; the
convenience of the parties as indicated by their relative physical and financial condition; the convenience of the witnesses-but only
to the extent that the witnesses may actually [*78] be unavailable for trial in one of the fora; and the location of books and records
(similarly limited to the extent that the files could not be produced in the alternative forum).
Jumara, 55 F.3d at 879.

The public interests include:
Page 238Page 238
2013 U.S. Dist. LEXIS 38387, *
the enforceability of the judgment; practical considerations that could make the trial easy, expeditious, or inexpensive; the relative
administrative difficulty in the two fora resulting from court congestion; the local interest in deciding local controversies at home;
the public policies of the fora; and the familiarity of the trial judge with the applicable state law in diversity cases.
Id. at 879-80.
B. THE PARTIES' ARGUMENTS

Stillwagon argues that because he is a resident of Pennsylvania and he performed a substantial amount of work in
Pennsylvania, his choice of venue should not be disturbed. ECF No. 66 at 8. Stillwagon also notes that the Severance
Agreement did not contain a forum selection clause and that Defendants used his office in Pennsylvania as a satellite
business office for their operations. Id. at 8-9. 34
34 In his Response to the Rieders' Motion to Transfer. Plaintiff argues that based on the result of a commercial arbitration previously
conducted [*79] in North Carolina, the "Defendants' counterclaims in this action, as well as all claims that could have been raised in [the
Defendants' arbitration action against Ware], are barred by the doctrine of res judicata and/or collateral estoppel." ECF No. 66 at 8. While
this argument is more properly asserted by way of a Motion for Summary Judgment, his argument nonetheless appears to fall short.
First, the doctrine of res judicata is likely inapplicable because Stillwagon was not a party to the arbitration action, and he does not allege
that he was in privity with a party in the arbitration. See Williams v. Peabody, 217 N.C. App. 1, 719 S.E.2d 88, 94 (N.C. Ct. App. 2011) (both
the party asserting res judicata and the party against whom res judicata is asserted must be either parties, or stand in privity with those
parties, to the original action); Duhaney v. Attorney Gen. of U.S., 621 F.3d 340, 347 (3d Cir. 2010) (same).
Secondly, collateral estoppel bars relitigation of only those factual issues actually litigated and determined in the original action. Williams,
719 S.E.2d at 93; Nationwide Mut. Fire Ins. Co. v. George V. Hamilton, Inc., 571 F.3d 299, 310 (3d Cir. 2009) (same). The issues that the
Corporate [*80] Defendants raise in their Answer and Counterclaims appear to differ from those in that arbitration action against Ware.
Whether or not Ware breached an oral contract or his fiduciary, duty as a general contractor to Defendants is not the same issue as whether
Stillwagon breached an oral contract or his fiduciary duty to Defendants. Moreover, the Corporate Defendants appear to raise claims that did
not arise in the Ware arbitration, such as conversion by Plaintiff. There is also a question as to whether Stillwagon should benefit from the
doctrine of collateral estoppel, and whether Defendants had a "full and fair opportunity" to litigate the key issues in the arbitration, because
Plaintiff allegedly withheld "40 bankers boxes of documents" from Defendants for use in the arbitration. ECF No. 51 at ¶¶ 223-24. For these
reasons, this "defense", if it has legs at all, will have to stretch them in the North Carolina court.
The Rieders assert that an analysis of the Jumara private and public factors show that the Eastern District of North
Carolina is the "substantially more convenient forum." ECF No. 60 at 15-18. They argue that the Severance Agreement
explicitly considers North Carolina law, [*81] the purpose of the relationship and all of Stillwagon's work was aimed at
achieving objectives in North Carolina, potential witnesses 35 and relevant documents are located there, and this
availability will make the litigation more expeditious and less costly. Moreover, they argue, North Carolina courts are
better equipped to handle that state's laws, and that North Carolina has a strong interest in deciding controversies that
affect its businesses.
35 For instance, the Rieders list the following North Carolina individuals and entities as those believed to have participated in or facilitated
Stillwagon's fraud: Bobby Ware, Lynn Berry, Linda Ware, Mark Ware, Chris Catron, Billy Pritchett, Jay Price, Bobby Ware Builders,
William C. Stillwagon, P.C., Great Atlantic Equipment Leasing, Northeastern Excavating and Underground, The Fence Company, Sunny
Days Landscaping, Kris Gray Construction, Coastal Contractors, Albemarle Land Management, and Innsbrook Realty. ECF No. 60 at 17-18.
The Corporate Defendants join the Rieders in these arguments. They also deny that Plaintiff was engaged to perform
services from his office in Pennsylvania and note that "the parties clearly intended that any dispute [*82] arising out of
the subject contract would be governed by North Carolina law." ECF No. 51 at ¶ 11; ECF No. 63 at 2-3.
C. ANALYSIS
1. Venue
The Supreme Court recognized that under § 1404(a), a civil action may be transferred by a district court to another
district court where that action may have originally been brought by the plaintiff. Hoffman v. Blaski, 363 U.S. 335, 343,
80 S. Ct. 1084, 4 L. Ed. 2d 1254 (1960). To determine whether this action could have been brought originally in the
United States District Court for the Eastern District of North Carolina, we must determine whether venue would have
Page 239Page 239
2013 U.S. Dist. LEXIS 38387, *
been proper there in the first instance. The general venue provisions set forth in 28 U.S.C. § 1391 provide, in relevant
part:
(b) Venue in general.--A civil action may be brought in-- (1) a judicial district in which any defendant resides, if all defendants are
residents of the State in which the district is located; (2) a judicial district in which a substantial part of the events or omissions
giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated; or (3) if there is no
district in which an action may otherwise be brought as provided in this section, any judicial [*83] district in which any defendant
is subject to the court's personal jurisdiction with respect to such action.
Venue is proper in the Western District of Pennsylvania where the Plaintiff resides and allegedly performed a substantial
amount of his work. Venue would also have been proper, however, in the Eastern District of North Carolina because a
substantial part of the events or omissions giving rise to the Plaintiff's breach of contract claim, and the fact of the
breach would have also occurred there. Defendants' principal places of business are in North Carolina and Plaintiff
traveled to and directed all of his work to that forum. Presumably, the decisions to stop paying Plaintiff were either
made or implemented, in that state. 36 Consequently, Stillwagon could have initially brought this case in the Eastern
District of North Carolina.
36 Further, Plaintiff asserts that he could have sued the Rieders in any district as foreign nations, pursuant to 28 U.S.C. § 1391(c)(3), and
therefore venue would also be proper under § 1391(b)(1).
Given that this action is transferable to the Eastern District of North Carolina, the Court must now determine whether
transferring the case would in fact [*84] be "[f]or the convenience of parties and witnesses [and] in the interest of
justice." 28 U.S.C. § 1404(a). In doing so, we must look to the factors set forth by the Third Circuit in Jumara.
2. Private Factors
a. Parties' Choice of Forum

The Court first considers the parties' choice of forum. "[I]n ruling on defendants' motion the plaintiffs choice of venue
should not be lightly disturbed." Jumara, 55 F.3d at 879. This is especially true when a plaintiff's choice is his home
forum. Samsung SDI Co. v. Matsushita Elec. Indus. Co., 524 F. Supp. 2d 628, 631 (W.D. Pa. 2006). 37 At the same time,
the Court must also consider the defendants' preferences. Jumara, 55 F.3d at 879. Here, although both the Rieders and
the Corporate Defendants have expressed a preference for a North Carolina forum, on balance, this factor (even in the
context of the Counterclaims) weighs in favor of Plaintiff, as he not only brought suit in this judicial district, but also
resides here.
37 However, when "few of the operative facts underlying [the] claims took place in the [current] District . . . this choice is entitled to less
deference than otherwise." Headon v. Colorado Boys Ranch, No. 204-cv-004847, 2005 U.S. Dist. LEXIS 44141, 2005 WL 1126962, at *4
(E.D. Pa. May 5, 2005).
b. [*85] Physical and financial condition of the parties

All parties appear to have sufficient resources to litigate this case outside of their chosen forum. Neither party argues
that litigating the case in either judicial district would be unduly onerous. At the same time, each party would doubtless
find it more convenient to litigate on its home court. At oral argument, Plaintiff's counsel stated that Stillwagon is still
working and that his health is adequate. The pleadings indicate that Stillwagon and the Rieders travel out of their home
states often enough that it would not be an unreasonable burden for either to litigate elsewhere. Moreover, Stillwagon
entered into and engaged in the business relationships at issue here knowing full well that his work responsibilities
would be directed at North Carolina and would necessarily require intermittent travel to the properties located there.
Conversely, while the pleadings do not indicate the financial position of the Corporate Defendants, they seemingly deal
in large real estate transactions frequently. However, the Court is unaware of any business by the Corporate Defendants
in Pennsylvania. Considering these factors as a whole, this factor [*86] does not pull strongly in either direction.
Page 240Page 240
2013 U.S. Dist. LEXIS 38387, *
c. Locus of Origin of Claims

The Court also considers "whether the claim arose elsewhere." Jumara, 55 F.3d at 879. This consideration focuses on
where the activities relevant to the claims at issue took place. See Van Cauwenberghe v. Biard, 486 U.S. 517, 529, 108
S. Ct. 1945, 100 L. Ed. 2d 517 (1988) (the "locus of the alleged culpable conduct" determines the place where the claim
arose); Leroy v. Great W. United Corp., 443 U.S. 173, 185-86, 99 S. Ct. 2710, 61 L. Ed. 2d 464 (1979) (important factor
in determining where a claim arises is where the conduct occurred that provided the basis for the claim); Days Inn
Worldwide, Inc. v. Inv. Prop. of Brooklyn Ctr., LLC, Civ. No.08-390, 2009 U.S. Dist. LEXIS 88710, 2009 WL 3153277,
at *4 (D.N.J. Sept. 25, 2009) (where "the operative facts occurred."). "In contract actions the simplest and most logical
answer to the question of where the claim arose is place of performance.". J.L. Clark Mfg. Co. v. Gold Bond Corp., 629
F. Supp. 788, 791 (E.D. Pa. 1985). 38
38 Some courts have found that a claim arises where negotiations took place, Strategic Learning Inc. v. Wentz, No. 04-4341, 2005 U.S. Dist.
LEXIS 1609, 2005 WL 241182, at *3 (E.D. Pa. Feb. 1, 2005), and others where payment is to be made. Fin. Am. Credit Corp. v. Kruse
Classic Auction Co., Inc., 428 F. Supp. 135, 137 (E.D. Pa. 1977).
With [*87] regard to the Severance Agreement, according to Plaintiff's Second Amended Complaint, "numerous
discussions [regarding the agreement] . . . took place in North Carolina and in Pennsylvania." ECF No. 47 at ¶ 44. Also,
Stillwagon signed the contract in Pennsylvania before forwarding it on to Austria for Defendants to sign. However, the
situs not "particularly important" where each party signed the contract "in their respective locations and
communications traveled back and forth." Perry v. Markman Capital Mgmt., Inc., No. 02-744, 2002 U.S. Dist. LEXIS
19103, 2002 WL 31248038, at *10 (E.D. Pa. Oct. 4, 2002).
The Severance Agreement served to ultimately settle the issue of remuneration that Defendants owed Stillwagon for his
work in North Carolina and to end their business relationship. Severance Agreement at ¶¶ 1-4. Moreover, without
containing a forum selection clause, the Severance Agreement evidences the parties' intentions in that they agreed that
"[t]his Agreement has been negotiated and executed in the State of North Carolina and is to be performed in the State of
North Carolina." Id. ¶ 10. Although this claim arguably arises out of activities in both North Carolina and Pennsylvania,
the Court considers this [*88] consideration to pull somewhat in favor of transfer.
Both the Plaintiff and the Corporate Defendants allege the breach of oral contracts for work performed on North
Carolina projects. ECF No. 47 at ¶ 57; ECF No. 51 at 47. The pleadings do not state where the negotiations for these
purported contracts took place. While Stillwagon asserts that he completed a substantial amount of work from his office
in Pennsylvania, it is hard to ignore the reality that the business relationship was formed and run with the purpose of
real estate development in North Carolina and that Plaintiff directed all of his work to that forum. Because the most
significant contacts and the operative facts which give rise to the causes of action for breaches of oral contracts took
place in North Carolina, these claims arose within that forum.
Finally, the Corporate Defendants' numerous surviving Counterclaims plainly can be said to arise in North Carolina, as
it was the center of gravity of the alleged unsavory activity. The Counterclaims generally sound in fraud alleging a
scheme designed to improperly take Defendants' capital and assets as well as breach of fiduciary duty, and arise from
Stillwagon's purported mishandling [*89] or looting of the companies and their assets. North Carolina is the forum in
which Stillwagon was charged with managing companies and their projects, where his duties and conduct allegedly fell
short of what was required by his position or where he acted in contradiction to the law, and where the injuries from that
conduct arose.
Because the key events giving rise to the alleged Counterclaims took place in the Eastern District of North Carolina, this
factor strongly favors a transfer of venue to North Carolina. See Hayes v. Transcor Am., LLC, No. 08-293, 2009 U.S.
Dist. LEXIS 53074, 2009 WL 1795309, at *4 (E.D. Pa. June 23, 2009) (when the vast majority of the acts giving rise to
the claims in the action take place in another forum, that weighs heavily in favor of transfer); Cancer Genetics, Inc. v.
Kreatech Biotechnology B.V., No. 07-273, 2007 U.S. Dist. LEXIS 90857, 2007 WL 4365328, at *5 (E.D. Pa. Dec. 11,
2007) ("When the chosen forum has little connection with the operative facts of the lawsuit, such that retaining the
action conflicts with the interests in efficiency and convenience, other private interests are afforded less weight.").
d. Convenience of the witnesses

Page 241Page 241
2013 U.S. Dist. LEXIS 38387, *
The next factor is "the convenience of the witnesses -- but only to the [*90] extent that the witnesses may actually be
unavailable for trial in one of the fora." Jumara, 55 F.3d at 879. 39 "[I]n reviewing a motion to transfer, courts frequently
look to the availability of witnesses as an important factor, as it can be relevant to protecting a defendant's opportunity
to put on its case with witnesses who will appear in person at the trial." ADE Corp. v. KLA-Tencor Corp., 138 F.Supp.2d
565, 569 (D. Del. 2001); see also id. at 574 ("The court does have an interest in seeing that a plaintiff's choice of a
forum does not deprive a defendant of its ability to put on a defense that effectively communicates the matters in issue
to the judge and the jury."); Lehr v. Stryker Corp., No. 09-02989, 2010 U.S. Dist. LEXIS 78642, 2010 WL 3069633, at
*5 (E.D. Pa. Aug. 4, 2010) ("Given the fact that, when possible, live testimony is preferred over other means of
presenting evidence, the convenience of the non-party witnesses weighs most heavily on the Court in deciding on a
motion to transfer venue.") (citation omitted). 40
39 The Court agrees with Chief Judge Sleet that the weight to be accorded to convenience of the witnesses varies depending on the type of
witness at issue:
Party witnesses or witnesses [*91] who are employed by a party carry no weight in the 'balance of convenience' analysis
since each party is able, indeed, obligated to procure the attendance of its own employees for trial. Expert witnesses or
witnesses who are retained by a party to testify carry little weight in determining where the 'balance of convenience' lies
(especially in an action for patent infringement) because they are usually selected [on the basis] of their reputation and
special knowledge without regard to their residences and are presumably well compensated for their attendance, labor and
inconvenience, if any. Fact witnesses who possess first-hand knowledge of the events giving rise to the lawsuit, however,
have traditionally weighed quite heavily in the "balance of convenience" analysis.
Affymetrix, Inc. v. Synteni, Inc., 28 F. Supp. 2d 192, 203 (D. Del. 1998) (internal citations and quotations omitted).
Thus, the consideration of non-party, non-employee, non-expert witnesses weighs heavily in a transfer of venue analysis. Id. See also Hillard
v. Guidant Corp., 76 F. Supp. 2d 566, 570 (M.D. Pa. 1999) ("The law on the transfer of cases distinguishes between party and non-party
witnesses. The party witnesses [*92] are presumed to be willing to testify in either forum despite any inconvenience. The convenience of
non-party witnesses is the main focus.").
40 See also 8 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure, § 3851 (3d ed. 2012) ("Often
cited as the most important factor in passing on a motion to transfer under Section 1404(a)... and the one most frequently mentioned by the
courts, . . . is the convenience of witnesses, most particularly nonparty witnesses who are important to the resolution of the case. According
to the courts, if the forum initially chosen by the plaintiff will be the most convenient for the witnesses, this is a powerful argument against
transferring the case. On the other hand, again in the judgment of countless federal courts, if some other forum will serve the convenience of
the witnesses better, a motion to transfer under Section 1404(a) is significantly more likely to be granted.").
The Rieders and the Corporate Defendants argue that the potential non-party witnesses in this action are located in
North Carolina, not in Pennsylvania. For instance, they reference the following North Carolina individuals and entities
as those [*93] they believe participated in or facilitated Stillwagon's alleged wrongful conduct; Bobby Ware, Lynn
Berry, Linda Ware, Mark Ware, Chris Catron, Billy Pritchett, Jay Price, Bobby Ware Builders, William C. Stillwagon,
P.C., Great Atlantic Equipment Leasing, Northeastern Excavating and Underground, The Fence Company, Sunny Days
Landscaping, Kris Gray Construction, Coastal Contractors, Albemarle Land Management, and Innsbrook Realty. ECF
No. 60 at 17-18 (citing the Corporate Defendants' RICO statement, ECF No. 40 at 2). Stillwagon has not specifically
identified any potential witnesses in either Pennsylvania or North Carolina in his Amended Complaint or Response to
the Motions to Transfer.
Moreover, Ware and his entities are central to the scheme that the Corporate Defendants, in their Counterclaims, allege
that Stillwagon carried out. Ware's involvement with Stillwagon serves as part of the basis of the Corporate Defendants',
and potentially the Rieders', defenses and Counterclaims. Accordingly, Ware, his employees, and his company's
documents will likely play a key role in this litigation. Ware is a North Carolina resident and all of his entities exist
under the laws of North Carolina, [*94] and none have been named as a party. Because Defendants implicate them in a
fraudulent scheme, they are unlikely to voluntarily travel to Pennsylvania to willingly participate in this case. 41
41 Federal Rule of Civil Procedure 45(b) provides that a subpoena may be served within the District of the issuing court, within 100 miles of
the place specified, within the state if the a state statute or court rule allows, or if a federal statutes so provides. Presumably, none of the
above witnesses are located within this district, state, or within a 100 mile radius, and the parties have failed to point to any other subpoena-
empowering rule. To the Court's best knowledge, all of the above witnesses and any of their documents lie outside of this Court's subpoena
power.
Page 242Page 242
2013 U.S. Dist. LEXIS 38387, *
While the risk of a case going to trial with crucial witnesses outside of the Court's subpoena power who refuse to testify
is one faced by all parties to a case, here, where none of the listed potential non-party witnesses are within this Court's
subpoena power, but all are presumably within the proposed transferee Court's subpoena power, this factor weighs
heavily in favor of transfer. Headon v. Colo. Boys Ranch, No. 204CV04847LDD, 2005 U.S. Dist. LEXIS 44141, 2005
WL 1126962, at *7 (E.D. Pa. May 5, 2005) [*95] (granting motion to transfer and noting that convenience of non-party
witnesses is "perhaps the most important factor"); Jahncke Serv., Inc. v. OKC Corp., 301 F. Supp. 866, 868 (D. Del.
1969) (transferring the case because, inter alia, "nearly all the witnesses" were located in Louisiana, Texas, and
Oklahoma).
e. Location of the books and records

The Court, in its previous opinion with regard to the Plaintiff's breach of contract claims, stated that "to the extent it
would become relevant, some portion of the evidence of the parties' dealings, such as meeting minutes and bank
transactions, would likely be located [in Pennsylvania]." Transfer Opinion I, 2012 U.S. Dist. LEXIS 18337, 2012 WL
501685, at *5. However, in light of the Corporate Defendants' Defenses and surviving Counterclaims, the body of
evidence likely required at trial has now substantially broadened. According to those pleadings, corporate bank accounts
were established in both Pennsylvania and North Carolina, and that factor is therefore a wash. ECF No. 47 at ¶¶ 28-29;
ECF No. 51 at ¶¶ 29, 140; ECF No. 66 at 3. In their Counterclaims, the Corporate Defendants point out that Stillwagon
has turned over forty-four [*96] (44) "bankers boxes" of documents to the Corporate Defendants. While "technological
advances would seem to limit the import of this factor" because technologies have lessened the burden of storing and
transmitting data, Samsung SDI Co., Ltd. v. Matsushita Elec. Indus. Co., 524 F. Supp. 2d 628, 633 (W.D. Pa. 2006),
other potential evidence pushes this factor in favor of transfer.
Additional materials may likely now include the registration or corporate existence documents of the involved
companies, property titles (for the allegedly improper sale or transfer of property), and any equipment improperly used
to perpetrate fraud all of which likely remain in North Carolina. As noted above, the Corporate Defendants' Answer
places Ware and his entities squarely in the fray even though they are not parties to this suit. As all are North Carolina
entities, their company documents and bank records are likely maintained in that state, outside of the subpoena power of
this Court. As the bulk of the evidence is to be found in North Carolina, this factor also significantly supports a transfer
to North Carolina.
3. Public Factors
a. Enforceability of the Judgment

The enforceability of any judgment rendered [*97] in this Court does not appear to be an issue. Neither party contends
that a judgment rendered here would be any less enforceable than one obtained in a North Carolina court or vice versa. 42
This factor, therefore, receives little weight in either direction.
42 At oral argument, the Corporate Defendants stated that while they saw no problem with enforcement if the case were litigated in North
Carolina, it was also a risk they were willing to take.
b. Practical Considerations that Could Make the Trial Easy, Expeditious, or Inexpensive
Whether the litigation proceeds in Pennsylvania or in North Carolina, someone is going to have to travel somewhere
(assuming that there is personal jurisdiction in the ultimate forum, the Rieders will have to travel from Austria
regardless of the court). However, practical considerations regarding the efficiency and economy of conducting the trial
weigh in favor of transfer to the Easter District of North Carolina.
The majority of the operative facts giving rise to the litigation as now shaped occurred in North Carolina. Consequently,
the majority of the documents and, so far, all of the potential non-party witnesses reside in that forum. The transfers of
land, [*98] workers hired and entities created, and the business relationship that led to the Severance Agreement, were
all directed towards and within the borders of North Carolina. See Travelodge Hotels, Inc. v. Perry Developers, Inc., No.
11-1464, 2011 U.S. Dist. LEXIS 134478, 2011 WL 5869602, at *7 (D.N.J. Nov. 22, 2011) (noting that it would likely
be less expensive and more efficient for the case to proceed in the locale where the breach occurred).
Page 243Page 243
2013 U.S. Dist. LEXIS 38387, *
One of the most persuasive elements is the practical considerations concerning the scope of this Court's subpoena
power. As previously noted, all of the above referenced non-party entities and individuals are outside of the Court's
subpoena power. Discovery disputes may lead to a lengthier-than-usual litigation process, and either party's inability to
obtain documentary or testimonial evidence threatens achieving a just resolution of these disputes. Accordingly, this
factor weighs in favor of transfer.
c. Relative Administrative Difficulty Resulting from Court Congestion

Another factor to be considered is the relative congestion present in the competing district courts. According to the 2012
Federal Court Management Statistics, the civil docket of the Western District of Pennsylvania [*99] is less congested
than that of the Eastern District of North Carolina. As of September 30, 2012, that North Carolina District had 769 civil
cases pending per judge with a weighted filing "score" of 697, and the average time from filing to trial was 44.8 months.
In this District, there were 278 pending civil cases per judge with a weighted filing "score" of 329. Here, the average
time from filing to trial as of September 30, 2012 was 32.5 months. "[W]hat is relevant to the question of whether to
transfer a case, and undoubtedly what the courts have in mind in writing opinions that give significant weight to this
element is that getting to trial may be speedier in another district because of its less crowded docket." 15 Wright et al.,
Fed. Prac. & Proc. Juris. § 3854 (3d ed.).
These statistics give the Court great pause. This Court is ardently averse to the idea of contributing to the workload of
one of its sister courts, especially one as busy as the Eastern District of North Carolina, but the interests of justice,
fairness, and convenience considered as a whole are strongly in favor of a transfer of venue. Given that all of the
property and the thrust of the operative facts, evidence, [*100] and witnesses potentially involved in this case lie in
North Carolina, it is plain that it is the better, and substantially more appropriate, forum to decide these claims.
Moreover, while, on average, civil cases get to trial somewhat more quickly here, without subpoena power, potential
discovery disputes and the absence of witness participation threatens to generate a lengthier-than-normal process here
that may result in less than a just result if a substantial portion of the testimony and other evidence is unavailable to the
litigation. While only one of many factors, on balance, this factor nonetheless weighs against a transfer of venue.
d. Local Interest in Deciding Local Controversies at Home

In contrast, the "local interest factor" weighs in favor of transfer to North Carolina. Pennsylvania has an obvious interest
in ensuring that contracts are enforced and in protecting its residents. Likewise North Carolina has a strong interest in
protecting the interests of companies formed under its laws and located within its borders. 43 North Carolina also has an
interest in overseeing its corporations and companies to ensure that these entities are not being created for the purpose
of perpetrating [*101] fraud. Moreover, part of the alleged fraudulent scheme here involves the improper sale or
transfer of properties in North Carolina. Any forum has a compelling interest in ensuring that its property titles are legal
and without fraud poisoning the lines of ownership. Finally, and most importantly, the business relationship between
Stillwagon and the Corporate Defendants was created for the purpose of purchasing, selling, and developing properties
within North Carolina. While Stillwagon may have completed a substantial amount of his work from his office in
Pennsylvania, it is hard to overlook the reality that all of his work was directed towards North Carolina and that his
remuneration directly depended on his business success in that forum. This factor therefore favors transfer.
43 The Rieders argue that this is particularly true when the companies are located solely within that forum's borders, ECF No. 60 at 18, as
opposed to national or global companies.
e. Public Policies of the Fora

As to the public policy factor, none of the parties have addressed this issue. As already discussed, both states have an
obvious interest in adjudicating this dispute, however this factor tips in favor of [*102] transfer to North Carolina.
"When both states have an interest in adjudicating the case, this Court has found the balance to tip in favor of the State
that was found to be the center of gravity of the actions giving rise to the litigation." Travelodge Hotels, 2011 U.S. Dist.
LEXIS 134478, 2011 WL 5869602, at *7. The parties entered into a business relationship that was squarely directed
towards North Carolina. Stillwagon's services were employed in order to purchase, develop, and resell properties
located in North Carolina. Moreover, whether or not his actions were fraudulent, Stillwagon created multiple entities
under North Carolina law and enlisted North Carolina residents and entities, which may now be potential witnesses, to
Page 244Page 244
2013 U.S. Dist. LEXIS 38387, *
help carry out his work. Understandably, Stillwagon worked from his office in Pennsylvania and even carried out
related business meetings there, but it is beyond a doubt that the vast majority of the operative facts now at issue were
allegedly carried out in and directed towards North Carolina. This factor also favors transfer.
f. Familiarity of Trial Judge with the Applicable State Law

As discussed above, the law of the forum state applies to claims for breach of oral contract, breach of [*103] fiduciary
duty as an accountant, unjust enrichment, conversion, and civil conspiracy. These Counterclaim Counts are thus non-
factors in this analysis. The only issue in the case as to which Pennsylvania law certainly applies is as to the
counterclaim for breach of fiduciary duty as an attorney (Count I). North Carolina law plainly applies to the following
issues and claims: breach of the Severance Agreement (Count I of the Complaint), unfair and deceptive trade practices
(Count I of the Counterclaim), breach of fiduciary duty as an officer or director (Count VIII of the Counterclaim), Gist
of the Action doctrine, and the economic loss rule.
While this Court does not doubt its ability, generally speaking, to understand and apply North Carolina law, there is no
question that a federal judge sitting in North Carolina is in a better position to apply North Carolina law. See Leroy v.
Great W. United Corp., 443 U.S. 173, 186, 99 S. Ct. 2710, 61 L. Ed. 2d 464 (1979) ("federal judges sitting in Idaho are
better qualified to construe Idaho law, and to assess the character of Idaho's probable enforcement of that law, than are
judges sitting elsewhere."). Therefore, this factor supports a transfer of venue.
VII. CONCLUSION
Unless [*104] the balance is strongly in favor of the defendant, "the plaintiff's choice of venue should not be lightly
disturbed." Jumara, 55 F.3d at 879. While the condition of the parties and the enforceability of a judgment are
essentially non-factors, and the Plaintiff's choice of forum and court congestion weigh in favor of this action remaining
in this District, all of the remaining Jumara factors weigh (and most do so strongly) in favor of a transfer of venue to
North Carolina. In particular, practical considerations concerning the scope of this Court's subpoena power, the location
of non-party witnesses and documents, and the familiarity of a North Carolina federal judge with North Carolina state
law suggest the value of a transfer. Finally, based on all of the pleadings, the Court is unable to overlook the hard fact
that the relationships among these parties and the viable disputes at issue here center on North Carolina. Therefore, after
thoroughly considering the Plaintiff's claims, and the Corporate Defendants' defenses as well their surviving
Counterclaims, all in the context of the Jumara factors, the Court grants Defendants' Motion to Transfer this action to
the Eastern District of [*105] North Carolina pursuant to 28 U.S.C. § 1404(a). 44
44 The Rieders' Motion to Transfer alternatively sought to dismiss for lack of personal jurisdiction and moved for a more definite statement.
ECF No. 59. The Corporate Defendants also joined in the latter motion. ECF No. 63. In light of the Court's decision to transfer this action,
the Court will leave the decision on those alternative Motions to Dismiss for Lack of Personal Jurisdiction and for a More Definite Statement
to the transferee Court, as that Court is far better situated to address these issues (if they even continue to be asserted), particularly if
jurisdictional discovery is needed. Those Motions are therefore dismissed without prejudice, subject to reassertion in the North Carolina
court.
An appropriate Order will enter.

/s/ Mark R. Hornak
Mark R. Hornak
Dated: March 20, 2013
Page 246Page 246
98 Iowa L. Rev. 1233, *
60 of 430 DOCUMENTS
Copyright (c) 2013 The University of Iowa

Iowa Law Review
March, 2013
Iowa Law Review
98 Iowa L. Rev. 1233
LENGTH: 23497 words
ESSAY: Joint Tenancies in Iowa Today+
+ Most of the material in this Essay was first presented at a University of Iowa College of Law CLE Program entitled
"Iowa Real Property Law" on October 21, 2011, in Iowa City.
NAME: N. William Hines*
BIO: * Joseph F. Rosenfield Professor of Law and Dean Emeritus, The University of Iowa College of Law.
LEXISNEXIS SUMMARY:
... Although both types of co-tenants held undivided interests in the land, consistent with the "unity" fiction, joint
tenants were conceived to own their interests in the entire property "by the whole," subject to the correlative interests of
the other joint tenants and the survivorship right of each joint tenant. ... The court emphasized that the parties were
husband and wife and that it was highly probable that the survivorship rights associated with the classic joint tenancy
co-ownership were intended when the term "joint tenancy" was used in the deed. ... Iowa was much slower to abandon
the Four Unities analysis in dealing with severance of joint tenancies than it was with their creation. ... Rights of Third
Parties to Funds Taken by Survivorship Although in Iowa the property rights of survivors in joint-and-survivor bank
accounts and PODs are based on contract analysis, rather than on traditional joint-tenancy principles, creditors and
others claiming an interest in the account proceeds by reason of a claim against the deceased depositor or a special
relationship to the deceased depositor find their claims just as unenforceable against the survivor as do claimants against
surviving joint tenants of land and tangible personal property.
TEXT:
[*1235]
I. Prologue: My Close Personal Association with Iowa Joint Tenancy Law
When I joined the Iowa Law faculty in 1962, one of my first assigned courses was Land Transactions Law, and joint-
tenancy law was one of the topics I covered in that class. I found the law of co-ownerships fascinating and resolved to
learn more about it.
My growing interest in joint tenancies led to my writing a monograph for the Iowa Agricultural Law Center
("ALC") in 1965. The monograph was entitled "Estate Planning Iowa Joint Tenancies." Most likely because this fifty-
page monograph was distributed without cost to any Iowa lawyer requesting it, we soon ran out of copies. We could not
afford a second printing at that time, so like my 1964 ALC monograph, "Iowa Farm Fence Law," the joint-tenancy
monograph became something of a collector's item. Some senior Iowa lawyers may still have these monographs in their
files.
My interest in joint tenancies and how they were being used in Iowa then led me to undertake a modest empirical
research project where I led a team of student researchers in examining the land records and probate files in five Iowa
counties from widely distributed areas of the state. This research resulted in the publication of two major law review
Page 247Page 247
98 Iowa L. Rev. 1233, *
articles; the first describing the prevalence of joint tenancies among co-owners of Iowa land, n1 and the second
describing the prevalence of joint-and-survivor holdings among co-owned personal property inventoried in Iowans'
estates. n2
This research revealed that, among Iowa land titles held by co-owners, joint tenancies were overwhelmingly
predominant, and in all written forms of personal property co-ownerships held by recently deceased Iowans, most
notably in automobiles, stocks, bonds, CDs, and bank accounts, joint-and-survivor ownership forms were the norm.
Documenting the prevalence of the joint-and-survivor ownership form among those choosing co-ownership for either
land or personal property was certainly not a surprise to those who practiced property law in Iowa at the time. The
subsidiary findings were also not shocking: well over ninety percent of these joint-and-survivor ownerships were
between property owners who were husbands and wives, and nearly all the rest involved other intra-family co-
ownerships. Tenancies in common were fairly rare and were usually the result of a shared inheritance, rather than a
planned commercial transaction or planned gift.
While the fact that joint-and-survivor co-ownerships were the predominant form of holding among concurrent
owners was not a surprise, it was something of a revelation, even to practicing Iowa lawyers, that joint tenancy also
dominated all other possible holding forms for Iowa real estate, [*1236] including sole ownership, tenancy in
common, partnership, corporate ownership, and trust ownership. Joint-and-survivor arrangements similarly dominated
personal-property ownerships.
I shared the findings of this empirical research with the Iowa Bar Probate Committee, on which I served at the time,
and offered the modest proposal that we should consider reversing the statutory presumption against joint tenancy in
cases in which a husband and wife had concurrently owned property given the over ninety percent domination of joint
tenancies among married co-owners. The Committee's reaction to my suggested reform was not encouraging. Many
Iowa lawyers then, as now, regarded any form of joint-and-survivor ownership as the antithesis of sound family-estate
planning. Although I have not conducted another empirical project investigating land and personal-property ownership
patterns during the past forty years, I would hazard a guess that the results of this 1960s research would be replicated
today if we repeated this study. If anything, the joint-and-survivor form might be even more dominant in Iowa today
than it was then.
II. Introduction
What I hope to do in this Essay is generally to follow the organizational plan of the joint-tenancy monograph I
published forty-six years ago, updating it with relevant developments in Iowa property law. It is interesting to note that,
although Iowa courts entertained numerous joint-tenancy cases early in statehood, very few joint-tenancy cases have
arisen since the mid-1960s, and most of the modern reported cases involve claims of survivorship rights to various types
of accounts in Iowa banks.
First, I will briefly describe how the common law origins of joint-tenancy law continue to affect our understanding
of how the survivorship right operates half a millennium later. Second, I will update the coverage in my earlier work
detailing how joint tenancies may be created, which has changed very little over time. Third, I will add a new topic I did
not cover in the earlier monograph, which was rather narrowly focused on estate-planning issues. This new topic will
address the legal rights and responsibilities of living co-tenants among themselves. Fourth, I will update the coverage in
my earlier work explaining how joint tenancies may be severed. This is the area in which Iowa law arguably has
undergone the most significant change in recent years. Fifth and finally, I will provide a summary of modern Iowa law
governing joint tenancies in tangible personal property, intangibles such as stocks and bonds, and the treatment of co-
depositors' interests in various types of joint-and-survivor bank accounts.
I will not undertake any coverage of the possible tax consequences of joint tenancies, except to note that both the
Federal Internal Revenue Code under § 2040 and the Iowa inheritance tax law under Iowa Code section 450.3(5) make
express provisions for fully taxing property taken under a [*1237] survivorship right, except to the extent the survivor
can prove a contribution to the acquisition of the property held in co-ownership. Proof by the survivor of a contribution
will prevent taxation of the full value of the property in the estate of the first joint tenant to die, but the full value of the
property will be included in the estate of the survivor upon his or her death. This potential for greater than full taxation
of the value of the property on its transfer within a single generation of owners is perhaps the single greatest
disadvantage of joint-tenancy ownership. It is also worth noting that the surviving joint tenant's basis in the property for
income tax purposes depends on how these estate-tax and inheritance-tax contribution rules apply to property taken by
survivorship. n3
Page 248Page 248
98 Iowa L. Rev. 1233, *
III. Common Law Origins of Joint Tenancy Law

A. Joint Tenancy and "Use" Estates
The rules governing joint tenancies in land were well established in English common law by the fifteenth century, n4 and
they have changed very little in the past six hundred years. n5 Joint-tenancy ownership of the legal title to land was an
essential component to the rise of the "use," a form of passive trust in which legal ownership was separated from
beneficial enjoyment of the land. The holding of legal title by multiple joint tenants for the use of a beneficiary, called
the "cestui que use," was the dominant form of land ownership in England by the start of the sixteenth century. n6 By
periodically replenishing membership in the group of joint tenants, legal title could be kept in abeyance for long periods
of time. The Statute of Uses in 1535 ended the widespread practice of creating use estates by creatively "executing" the
use and converting the beneficial ownership of the "cestui que use" into the legal ownership of the affected land. n7 The
Statute of Uses, however, did not change the underlying law of joint tenancy one whit.
B. Conceptual Ownership "By the Whole"
In the common law conceptualization of joint tenancies, the interest of a joint tenant was different than the interest of a
tenant in common. Although both types of co-tenants held undivided interests in the land, [*1238] consistent with the
"unity" fiction, joint tenants were conceived to own their interests in the entire property "by the whole," subject to the
correlative interests of the other joint tenants and the survivorship right of each joint tenant. n8 This recognition of joint
tenants owning "by the whole" meant that when one joint tenant died, the dying co-tenant's interest simply fell away
from the concurrent ownership, and the surviving joint tenants then held title to the property that was no longer subject
to the deceased joint tenant's competing claim. This somewhat mystical idea that a surviving joint tenant does not
succeed to any interest by reason of another joint tenant's death but, rather, already owned the interest has endured into
modern times, and it explains some seemingly irrational rulings under which creditors, spouses, or heirs of a deceased
joint tenant can lose all claims against the property when the joint tenant dies. As one Iowa Supreme Court opinion
explained:
In a legal sense, his [the deceased joint tenant's] death does not transfer the rights that he possessed in the property to
the surviving tenants. Death does not enlarge or change the estate [of the surviving tenants]. Death terminates his [the
deceased joint tenant's] interest in the estate. It is rather a falling away of the tenant from the estate than the passing of
the estate to others. n9
IV. Creation of Joint Tenancies in Iowa Real Property

A. The "Four Unities" Test
At common law and in early Iowa law, to create a valid joint tenancy through a transfer of land to two or more persons,
it was necessary to meet the "Four Unities" test. The "Four Unities" were:
(1) Time: The interests of the joint tenants all had to vest at the same time.
(2) Title: The titles of the joint tenants all had to be derived from the same conveyance.
(3) Interest: The interests of all the joint tenants had to be identical. Every joint tenant had to hold an estate of the
same type and duration as the other tenants.
(4) Possession: Each joint tenant had to enjoy the same right of possession of the land as every other joint tenant. n10
If any one of the "Four Unities" was missing at the time the conveyance in question took effect, an otherwise valid
transfer to concurrent owners created only a tenancy in common. For example, until fairly recent times, an [*1239]
attempt to create a joint tenancy by a conveyance from sole owner A to "A and B as joint tenants with right of
survivorship" created only a tenancy in common because the unity of time was lacking. If sole owner A wished to
effectively create a joint tenancy between himself and B, A had to convey the land to straw person X and then have X
convey the land back to "A and B as joint tenants with right of survivorship." It seems silly now, but that was the
common law rule for over five hundred years. n11 The fictitious unity of all joint tenants envisioned by the "Four Unities"
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concept "amounts to saying that for some purposes the joint tenants are viewed as a unity but for other purposes they are
recognized as having [an] individual right[] in respect of the property." n12
B. Iowa's Statute Reversing the Common Law
Since before statehood, the Iowa Code has always contained a provision reversing the common law presumption in
favor of joint tenancy when property is conveyed to two or more persons. Section 557.15 of the Iowa Code provides
that "conveyances to two or more in their own right create a tenancy in common, unless a contrary intent is expressed."
n13
Observe that section 557.15, which specifically focuses attention on the grantor's "intent," does not even use the
term "joint tenancy." As noted earlier, at the time this statute was enacted, the existing common law rule was that any
transfer to two or more concurrent owners was presumed to create a joint tenancy. Thus, it is clear that this statute was
enacted specifically to reverse that common law presumption. Most other jurisdictions have similar statutes reversing
the common law presumption in favor of the joint tenancy. n14 In Hoffman v. Stigers, the Iowa Supreme Court expressed
its antipathy toward joint tenancies in the strongest terms. n15 "There is no reason, no necessity, for such an estate [joint
tenancy], except under the most peculiar circumstances... . And as now we in most of the States condemn entailments,
or perpetuities, so we do and should joint tenancies, or at least their common-law incident - the right of survivorship." n16
The straightforwardly worded Iowa statute has remained unchanged since territorial days. What form of concurrent
estate will be created if [*1240] "contrary intent is expressed" is unstated, presumably left to be decided by Iowa
courts. Iowa courts readily accepted this invitation, and the greatest numbers of cases fleshing out Iowa's joint tenancy
law were decided in the latter half of the nineteenth century and the first half of the twentieth century.
Over the years, the Iowa courts have made it clear that the most fundamental characteristic of an Iowa joint tenancy
that distinguishes it from a tenancy in common is the right of survivorship. n17 As one Iowa court stated: "The word
"survivor' or "survivorship' has no equivocal meaning and as here used is not an incident to the creation of a tenancy in
common." n18 Once a joint tenancy is found to exist, the survivor or survivors take the property free of any rights held by
the deceased joint tenant during his or her lifetime, and free of claims against the co-owned property based on the
deceased joint tenant's interest. n19 The classic formulation of the intent to create a joint tenancy has long been
acknowledged by Iowa courts and is routinely found in various form instruments in Iowa. "To B and C and their heirs as
joint tenants with right of survivorship and not as tenants in common" n20 will be certain to create a valid joint tenancy
everywhere the estate is recognized, even where it is presumed against. Some common formulations of this boilerplate
language use the phrase "full rights of survivorship," but this enhancement is unnecessary.
C. No Tenancy by the Entirety?
One common law concurrent estate that the "contrary intent" language in the Iowa statute apparently does not
contemplate with respect to Iowa land is the tenancy by the entirety, which twenty-two other states recognize. n21 In Fay
v. Smiley, the deed to Iowa land originated in New York, which recognizes the tenancy by the entirety, and it granted the
property to husband and wife to hold "as tenants by the entirety and not as tenants in common." n22 The Iowa Supreme
Court ruled that under New York law the deed created a tenancy in common in the Iowa land. A close reading of this
case, however, appears to leave open the possibility of the Iowa Supreme Court recognizing this unique husband and
wife concurrent estate. In ruling that the deed at issue, contrary to its express terms, created only a tenancy in common
in Iowa land, the court indicated that, had the deed spelled out the [*1241] incidents of the intended tenancy by the
entirety estate more specifically (presumably meaning expressly stating the intended survivorship right) and not just
named it, "we would be disposed to recognize the creation of such an estate." n23 No subsequent Iowa case has ever
presented the occasion to follow through on this apparent invitation to recognize a tenancy by the entirety in Iowa land,
where the language in the deed perfectly describes the intended estate. n24
Fay was decided long before the Iowa Supreme Court fully developed the implications of its "intent" theory for
interpreting ambiguous co-ownership language. Assuming the Iowa Supreme Court agrees with the rationale of the
Iowa Court of Appeals set forth in the 1996 case Epstein v. Wintroub (In re Estate of Epstein), there appears to be no
good reason Iowans cannot own property as tenants by the entirety. n25 The relevant statute, Iowa Code section 557.15,
only states a preference for tenancy in common, and the "contrary intent" language does not privilege any particular
form of co-tenancy with survivorship rights. In the Epstein case, a husband and wife were transferred Iowa land "as
Joint Tenants," with no further elaboration about the holding form intended. n26 The Iowa Court of Appeals had little
trouble concluding from the facts of the case, including extrinsic evidence, that the parties intended to hold the co-
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ownership with survivorship rights. n27 The court emphasized that the parties were husband and wife and that it was
highly probable that the survivorship rights associated with the classic joint tenancy co-ownership were intended when
the term "joint tenancy" was used in the deed. n28 Thus, unless there is a policy against tenancies by the entirety implied
from 160 years of Iowa courts never having recognized such co-ownerships, the dicta in Fay, coupled with the Epstein
insistence that the parties' intent must control the interpretation of co-ownership transfers, would appear to make
tenancies by the entirety permissible in Iowa. Arguably, a deed to a husband and wife "as tenants by the entirety, with
survivorship rights as recognized at common law, and not as tenants in common" could operate to create the first
tenancy by the entirety in Iowa land. The protection from creditors that tenancies by the entirety would afford married
couples owning land that is not their homestead might make this form of co-ownership attractive enough to some
couples to justify testing the viability of this ancient estate in modern Iowa law. Iowa's recent constitutional
commitment to equality in marriage rights presumably would [*1242] mean that married same-sex partners would
qualify to be tenants by the entirety, if the estate was recognized.
Perhaps there have been no tenancy by the entirety cases after Fay because Iowa's special combination of joint-
tenancy law and homestead statutes make tenancies by the entirety of little utility to Iowa couples. As noted earlier, a
very high proportion of Iowa joint tenancies are between husbands and wives, and these co-ownerships most often
involve homestead property. The way the Iowa courts have applied Iowa Code section 561.13 to completely bar the
unilateral transfer of homestead property by one joint-tenant spouse, and also to deny access to the homestead by either
spouse's creditors, has created a de facto tenancy by the entirety in an Iowa homestead owned by a husband and wife as
joint tenants. n29 Further, in applying the logic of the Epstein opinion, it would now appear Iowa husbands and wives
should also be able to own real property other than their homestead as tenants by the entirety.
D. One Hundred Years of "Four Unities" Analysis
In several cases before the 1940s in which the Iowa Supreme Court applied the "Four Unities" test for creating a joint
tenancy to ambiguous language in a deed creating concurrent ownerships, the Iowa Supreme Court seemingly
established some interpretative norms for construing the instrument at issue. For example, if the deed expressly used the
terms "survivor" or "survivorship," the court generally found that a joint tenancy was created. n30 In Wood v. Logue, the
court found that a joint tenancy was created by a deed that described the concurrent owners' rights using the term
"inherit." n31 On the other hand, if the deed only conveyed the land to the concurrent transferees "jointly," the court
consistently held that no intent contrary to a tenancy in common had been expressed. n32 It is yet to be determined
whether the formal adoption of the "intent" analysis in 1946 restricted or expanded these interpretive norms, although
based on the Epstein case cited above, presumably it did the latter.
E. Forsaking the "Four Unities"
The Iowa Supreme Court formally abandoned the "Four Unities" test for determining whether a joint tenancy had been
created in 1946. In Switzer v. Pratt, the court embraced an "intent" analysis in holding that a deed directly from
Husband, who was the sole owner, to Husband and Wife as joint tenants with right of survivorship was effective to
create a joint tenancy [*1243] in Iowa. n33 It could be argued that this change was foreshadowed nearly ten years earlier
in Conlee v. Conlee, when the court recognized a joint tenancy between two brothers whose deed to their concurrently
owned land expressly created a tenancy in common, but who later entered into a written agreement calling for a
survivorship right in all the property used in their joint farming operation. n34
In Randolph v. West, the court applied its intent analysis to uphold the survivorship right of a divorced spouse. n35
That spouse purchased land with the decedent, after they were divorced, under a contract that described the former
husband and wife by name followed by the phrase "with full right in survivor." n36 The contract also specified that the
eventual deed was to convey the property to the two "parties as joint tenants with full right to survivor solely." n37
In several cases before 1946, the court looked to evidence of a survivorship agreement outside the instrument of
transfer to help place ambiguous language in the conveyance in its proper perspective. n38 An interesting variation on the
partnership model is found in In re Estate of Allen where land subject to a partnership agreement was held by two sets
of husbands and wives as joint tenants, but as tenants in common between the two couples. n39 When one of the husbands
died, the court upheld the survivorship right of the surviving spouse, against the claim that the partnership agreement
controlled passage of the property ownership. n40
F. Risk of An Unintended Gift to Another Joint Tenant
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Frederick v. Shorman provides a classic cautionary tale about using joint tenancies primarily as a probate-avoidance
technique. n41 The issue in the case was whether the transfer of the family home to a mother and teenage son "as joint
tenants and not as tenants in common, with the full right of the survivor to take the whole title" legally resulted in a joint
tenancy entitling the son to a full fifty percent interest in the property, when he made no contribution to the purchase or
upkeep of the property. n42 The son later [*1244] married, fathered a child, was divorced, and failed to make child
support payments, for which his ex-wife obtained a judgment against him and levied against the son's fifty percent
interest in the property. n43 In a declaratory-judgment suit brought by the mother, the court held that the mother was
unable to rebut the presumption that the original transfer constituted an intra-family gift of a fifty percent interest in the
home to the son, thereby creating a joint tenancy. n44 The court observed that, if there was no valid joint tenancy created,
the guaranteed estate-planning purpose of putting the son's name on the deed would not have succeeded. n45
In the recent case Pollard v. Lovan (In re Estate of Lovan), n46 the court dealt with another mother-son co-tenancy. In
this case, the land was originally transferred to Mother, Father, and Sammy in joint tenancy. n47 Later, all three conveyed
to Mother and Sammy, but they did not include the usual survivorship language. n48 When Mother died and one half of
the property was included in her estate, Sammy attempted to prove that he had paid the entire purchase price and other
expenses and claimed that the property was intended by the parties to be his as the sole owner. n49 He claimed that
Mother's name was added to the deed only so that Sammy could secure financing for the purchase of the home. n50 The
court ruled that Sammy's evidence did not meet the "clear and convincing" standard required to reform a deed. n51
Therefore, only a tenancy in common was created, and one-half of the property was owned by Mother and had to pass
through her estate. n52
G. Transfer on Death Deeds and Joint Tenancy
There is talk in certain quarters about the possibility that Iowa will soon join most of its neighboring states by
authorizing Transfer on Death ("TOD") deeds. It is interesting to note that the Uniform Real Property Transfer on Death
Act, n53 the Uniform Probate Code's ("UPC") version of the TOD, handles survivorship rights differently across different
contexts. The Act specifically provides that TODs creating "concurrent interests are transferred to the beneficiaries in
equal and undivided shares with no right [*1245] of survivorship." n54 It is difficult to understand this language as
anything other than a continuation of the longstanding presumption against joint-and-survivor estates. Survivorship
rights clearly come into play both among joint tenants who are TOD transferors and among multiple TOD transferees
while the transferor is alive. UPC section 6-413(c) provides that if the transferor is a joint tenant and is survived by
other joint tenants, the property belongs to the survivors and not the TOD beneficiary. n55 UPC section 6-413(a)(2) makes
the interests of TOD transferees contingent on surviving the TOD transferor. n56 Thus, when there are two or more
transferees named in the TOD and one of them fails to survive the transferor, that transferee's interest lapses and the
interests of the other concurrent transferees are thereby increased proportionately. n57 Statutory requirements that a
transferee of a contingent property interest survive the transferor are not unheard of in Iowa law. The Iowa Trust Code
specifically imposes such a survivorship requirement on trust beneficiaries, "unless otherwise specifically stated by the
terms of the trust." n58
V. Rights of Living Joint Tenants Inter Se
There have been surprisingly few recent changes in Iowa law regarding the rights and responsibilities among joint
tenants of real property while they are all living. Theoretically, all of the co-tenants hold ownership of the land "by the
whole" and have equal rights to possess and enjoy it. A number of Iowa cases in this area were decided in the nineteenth
and early twentieth centuries, but most of these cases involved tenancies in common and concerned issues of adverse
possession and acquisition of external rights claimed to be superior to the rights of the other co-tenants. The principles
laid out in these old cases are covered below.
A. General Principles
It is black letter law that, among themselves, living concurrent owners enjoy three main rights: contribution -
reimbursement for advancing payments all co-tenants should share, accounting - entitlement to receive relevant
financial information about income and expenses related to the co-owned property, and partition - the classic equitable
remedy available to co-tenants who want to divide the co-owned property physically or economically. Most of the Iowa
cases decided in this area involve none of those basic rights, except indirectly. These cases also make little or no
distinction between co-tenants who are joint tenants and those who are [*1246] tenants in common. This is consistent
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with the views of most scholars, who insist that there should be no distinction between joint tenants and tenants in
common with respect to their rights and duties while all are alive. n59
B. Share Size
The size of each joint tenant's share in the co-ownership is sometimes the focus of a dispute. In both joint tenancies and
tenancies in common, the starting presumption is that the interests of the concurrent tenants are equal. n60 This
presumption, however, is rebuttable, and if it can be proved based on the parties' respective contribution to the
acquisition of the property or on some other basis that the co-tenants' interests were intended to be unequal, the interests
can be adjudicated as unequal and treated accordingly. n61 In this area, it is important to differentiate between intra-
family concurrent ownerships and concurrent ownerships between unrelated persons. In intra-family concurrent
ownerships, the presumption of the intent of one family member to make a gift to another family member when the
contributions are unequal may be difficult to rebut. n62 In the case of unrelated co-tenants, rebutting that presumption is
much easier. n63 The UPC captures all of these presumptions and rules in four short paragraphs. n64 Iowa should consider
adopting a similar statute.
C. Right to Possession; Rent
Because all co-tenants have an equal right to possession of the property, it is not permissible for one co-tenant to seize
possession against the wishes of the other co-tenants and maintain that exclusive possession based solely on his or her
equal right to possess the land. n65 This rule presumably means that co-tenants must agree among themselves who is to
possess the land and on what terms. Problems can arise when one co-tenant takes possession of the land and then
refuses to account to the other co-tenants for the rental value of that possession. Early Iowa cases followed the common
law rule and excused the tenant in possession from any obligation to account to the other co-tenants for the rental value
of the premises. n66 The common law rule was [*1247] changed by statute in 1917. n67 The Iowa Code now clearly
makes a tenant in possession liable to the other co-tenants for the rental value of such an exclusive possession, n68 and the
later Iowa cases so hold. n69 This statutory reversal of the common law rule specifically applies to "tenants in common,"
but it presumably applies equally to joint tenants. Similarly, if one co-tenant leases the concurrently owned estate, she
must account to the other co-tenants for their proportionate shares of the rent received. n70
D. Adverse Possession
There are a number of Iowa cases that all reinforce the view that it is virtually impossible for a joint tenant or tenant in
common to prevail in an adverse-possession claim against the other co-tenants. In most of these cases, it was
determined that the tenant claiming adverse possession did not sufficiently "oust" the other tenants, thereby failing to
meet the hostility requirement of traditional adverse possession. n71 Iowa's relatively recent and unique conversion to
requiring proof of a good faith color of title or claim of right to prevail in an adverse-possession claim obviously makes
the possibility of a concurrent owner succeeding with an adverse-possession claim against other concurrent owners even
more remote. n72
E. Acquisition of a Superior Title Externally
Iowa law recognizes a quasi-fiduciary duty among co-tenants that estops one co-tenant from improving his property
rights vis-a-vis the other co-tenants by acquiring a title externally that would give a better title than that held by the
other co-tenants. n73 Whether the external title is based on a mortgage foreclosure, n74 foreclosure of a judgment lien,
acquisition of a tax title, or some other source, Iowa law appears quite clear that the co-tenant acquiring such an external
title acquires it for "the benefit of all the cotenants" n75 and cannot thereby improve his rights in the property subject to
the co-tenancy. Amazingly, this strict analysis was once applied by an Iowa court even when the tax title "may have
[been] acquired ... before [the party] became [a] tenant in common." n76
[*1248]
F. Contribution
The common law did not allow a co-tenant who paid more than his or her share of the costs of acquiring or maintaining
the jointly owned property to sue the other co-tenants to contribute their fair shares. Adjustments for such differences in
payments were allowed only as part of a later partition action. n77 The Iowa Supreme Court, however, has generally
allowed co-tenants to claim immediate reimbursement for overpayments of this type. n78 This may include situations in
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which a co-tenant pays more than a proportionate share of property taxes, necessary repairs, mortgage payments, or any
other carrying charges. Contribution is most readily granted when the other co-tenants were asked to share in the
necessary payments before they were made, but refused to do so. n79
G. Improvements Made by One Co-Tenant
At common law, improvements to the concurrently owned estate made by one co-tenant were not subject to
contribution from the other co-tenants but were taken into account only at the point of partition. n80 Iowa law is not clear
on this point. One very early Iowa case held that when the improvement was reasonable and made with adequate notice
to all the other co-tenants, the co-tenant making the improvement was at least entitled to interest on the money advanced
to pay for the improvement. n81 This formulation of the remedy suggests that no present action will lie for a contribution
to reimburse one co-tenant who pays for an ordinary improvement the co-tenant wants, but for which the others are
unwilling to share the cost. The availability of contribution may turn on the adequacy of notice to the other co-tenants
and the degree to which the improvement was essential to reasonable use of the property. n82 At common law, waiting
until a partition to reconcile accounts for the cost of an improvement was justified on the theory that not all
improvements actually enhance the value of the estate, and it is not until the value of the estate must be determined in
partition that credit for positive improvements is timely. This rationale has not completely lost force over time and is
probably still valid in Iowa.
[*1249]
H. Eminent Domain
Because each concurrent owner has an undivided interest in the property subject to co-ownership, if some or all of the
property is taken by eminent domain, every co-tenant must be compensated according to his or her interest in the land.
Paying compensation to fewer than all of the co-tenants, therefore, does not discharge the condemning authority's
constitutional duty to provide just compensation for all interests taken. n83 It is worth noting that Iowa courts do not
apply the conventional "undivided fee" approach used by most states to compensate multiple interests in condemned
land, n84 but require every interest to be compensated separately. n85
I. Waste
The co-tenant in possession has a duty to the other co-tenants not to commit voluntary waste. For example, he must
refrain from cutting down valuable timber. n86 It is less clear from the cases whether the co-tenant in possession commits
permissive waste simply by failing to make repairs that are essential to maintain the value of the estate. The Iowa Code
specifically makes joint tenants and tenants in common liable for waste and subject to a treble-damages award. n87 A later
section of the Iowa Code would appear to make a co-tenant in possession who does not take "reasonable and ordinary
care" to prevent waste liable to the other co-tenants for damages. n88 There are no modern Iowa cases to help refine a co-
tenant's duties with respect to permissive waste.
J. Partition
The Iowa Code covers partition of concurrently owned real property in a quite vague and incomplete manner. n89 Long
before Iowa gained statehood, bringing a partition action was well established at common law as the equitable remedy
available to joint tenants who wanted to end the concurrent ownership without transferring away their undivided
interest. n90 Unfortunately, the relatively small number of Iowa cases decided over the last 160 years have not fleshed out
many of the intricacies involved in commencing and litigating partition actions. The roughly thirty Iowa Rules [*1250]
of Civil Procedure dealing with partition actions provide a rough legal blueprint for proceeding through a partition
action. n91 For example, one important civil-procedure rule expressly provides that the partition of land shall be "by sale
and division of the proceeds, unless a party prays for partition in kind by its division into parcels, and shows that such
partition is equitable and practicable." n92
A concurrent owner of land may bring an action for a partition in equity at any time. n93 Unless the parties agree to a
voluntary partition, the court will appoint a referee to investigate the nature of the property and propose a fair and
practicable physical division of it, based on the parties' respective interests and claims. n94 Here, contribution and
accounting principles may come into play, and claims for reimbursement that could not be brought before partition
become relevant for possible adjustments or offsets. n95 If, for some good reason, the property cannot be physically
divided, it is appraised and ordered sold by the court, and the proceeds of the sale are divided equitably. n96 If only a
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portion of the property can be physically divided, the physical division proceeds and the portion of the land that cannot
be physically divided is then appraised and sold, and the proceeds again are divided equitably. n97
VI. Death of a Real Property Joint Tenant: Operation of the Right of Survivorship
As noted earlier, the single most important feature of the joint-tenancy form of concurrent ownership is the right of
survivorship. Under the still dominant "by the whole" theory of joint-tenancy ownership, on the death of one joint
tenant the survivorship right automatically enhances the property interest of the surviving joint tenant or tenants. n98 If
there are multiple joint tenants, all of the survivors' interests in the concurrently owned land are proportionately
increased. n99 If there are only two joint tenants, the survivor succeeds to ownership of the entire tract of land. n100
Survivorship can thus oust many competing claims to the property based on interests created solely by the deceased
joint tenant, whose ownership interest falls away, thereby ending the validity of leases, liens, mortgages, devises,
spousal rights, [*1251] and any other interest created by the deceased joint tenant. n101 The displacement of such
interests may be criticized in some quarters as unfair, but real-property joint tenancies are almost always memorialized
in recorded deeds, the terms of which others ignore at their peril.
In many cases, it may be necessary to document the operation of the survivorship right as to third parties through
the filing of a death certificate or other form of proof. n102 Legally, however, the right to an enhanced interest in the
property exists from the instant of the other joint tenant's death, regardless of the possible need to authenticate the
survivorship right to perfect the survivor's title. n103
A. Disclaimer of the Joint-Tenancy Survivorship Right
Iowa courts have sometimes characterized the rights of joint tenants as partly "proportional" and partly "accretive." n104
A controversial position taken by the Iowa Department of Revenue under an earlier disclaimer statute necessitated this
digression into dividing a survivorship interest into separate parts. n105 The Department ruled that the relevant date for
starting the nine-month period authorized for disclaimers under Iowa inheritance tax law was the date the joint tenancy
was first created, not the date the survivorship right took effect because another joint tenant died. n106 This position was
[*1252] firmly rejected by the Iowa Supreme Court in the 1987 case of Lamoureux v. Department of Revenue (In re
Estate of Lamoureux). n107
Another important holding in the Lamoureux case was that continued occupancy of the property at issue after the
death of the other joint tenant was consistent with the survivor's "proportional" right. n108 Without more, then, this
occupancy did not constitute the acceptance of benefits under the survivor's "accretive" right and, therefore, disclaimer
was not precluded. n109
Since 2005, Iowa has followed the Uniform Disclaimer of Property Interest Act, which contains quite explicit
language covering the disclaimer of the rights of survivorship in jointly held property. n110 Under this Act, if a co-tenant
has not accepted any benefits from the survivorship, a surviving joint tenant may disclaim all or a portion of the
property interest passing to him or her by survivorship by executing a signed writing stating the intent to disclaim. n111
The effect of such a disclaimer is that the disclaiming joint tenant is regarded as predeceasing the other concurrent
property owners. n112 To qualify for favorable federal tax treatment, a disclaimer must be filed within nine months of the
other joint tenant's death, which is clearly stated in the new statute as the point at which the disclaimer would take
effect. n113
VII. Severance of Real-Property Joint Tenancies
A. Importance of the "Four Unities"
At common law, finding a destruction of one of the "Four Unities" was crucial to determining whether a joint tenancy
had been severed by some act of one of the co-tenants. Any act that caused the destruction of one of the Four Unities
was sufficient to sever the joint tenancy and to convert a co-ownership into a tenancy in common. n114 Joint tenants have
always been free to alienate their undivided interest, and thus, by far the most common act of severance is a conveyance
of one joint tenant's undivided interest to a third party. n115
[*1253] Iowa was much slower to abandon the Four Unities analysis in dealing with severance of joint tenancies
than it was with their creation. In a 1961 case, the Iowa Supreme Court summed up this history in this way: "The
common law unities ... necessary for the creation or determination of joint tenancies have lost their importance. There
has been no comparable diminution of importance in questions of termination or severance." n116 In the period of over a
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century during which Iowa applied the Four Unities test to questions of joint-tenancy severance, only one type of case
in which this analysis caused a result that was almost certainly contrary to the intent of the parties stands out. This rare
case was the sale on contract of real property held in joint tenancy, where all the joint tenants join in the sale, intending
to carry forward the joint tenancy in the proceeds of the sale, but making no specific provision for it in the terms of the
contract. The transfer of the equitable interest to the contract buyers was held to break the Four Unities because the
nature of the joint tenants' holding is reduced from an absolute ownership to a bare legal title to secure the buyers'
performance of the contract. n117
In a 1956 case, Baker v. Cobb (In re Baker's Estate), a closely divided Iowa Supreme Court again ruled that a land
contract signed by all the joint tenants severed the joint tenancy because the interests of the parties were legally
changed. n118 The case suggested that for the joint tenancy to continue in the proceeds of the contract, a new step was
required: formally recreating the joint tenancy in the proceeds of the sale. n119 These two cases, which were decided only
three years apart, resulted in the now standard Iowa practice of including a clause in a land contract stating that the
sellers intend to be joint tenants in the proceeds of the contract. n120 The benefit to the contract buyer of such a clause is
that, if one joint tenant dies, the surviving joint tenant may execute and deliver the deed to the buyer using only the
survivor's name once the contract payment is received. An unresolved issue after the Baker case was what would
happen if the joint tenancy was expressly retained in the land-sale contract but then the buyer forfeited the land back to
the original sellers. Is the original joint tenancy revived or, in the absence of a new formal expression of intent to hold as
joint tenants, would the contract sellers be only tenants in common? At common law, by analogy to the case of the
severance of the joint tenancy by one joint tenant mortgaging his or [*1254] her interest in a "title theory" state, where
the joint tenancy is not restored when the mortgage is released, the joint tenancy would not be revived if the contract
was forfeited. n121 The tenants in common result does not seem right, but how could we explain the return to joint
tenancy? Would an Iowa court possibly analogize the contract forfeiture to a revoked will and apply an equitable
remedy similar to dependent relative revocation? As discussed later, the Iowa court's abandonment of the Four Unities
test for severance of a joint tenancy in favor of an intent analysis arguably eliminates this problem. n122
Under the Four Unities test, Iowa courts reached many decisions holding that no severance had occurred where
avoiding severance was clearly the intent of the parties. For example:
(1) A lease of the property by one joint tenant does not sever the joint tenancy. The holder of the lease cannot assert
the lease against the other joint tenants, and the lease ends on the death of the leasing joint tenant. n123
(2) A mortgage or pledge of property subject to joint-tenancy ownership does not work a severance because Iowa is
a "lien" state. n124
(3) Entry and recording of a judgment lien against one joint tenant does not work a severance. Severance will not
occur until the lien is levied against the land and is sold pursuant to the levy. n125
(4) Entry of a divorce or dissolution decree. Lining up the property ownership in a joint tenancy with the intent of
the parties is not always easy. Without more, divorce in a husband-and-wife joint tenancy does not necessarily cause a
severance. n126 A severance is only likely if a property settlement is part of the final divorce decree and that settlement
either specifically allocates the concurrently owned property to one spouse or requires it to be sold. Even then, if the
order is to sell, severance may not occur until the sale is actually completed. n127
(5) Will specifically devising the concurrently owned property. Before the Johnson case, it was well settled in Iowa
that a joint tenancy cannot be severed by a will provision devising the property to a third person or purporting to
terminate or disavow the joint [*1255] tenancy. This policy was derived from the common law concept of ownership
"by the whole." Metaphysically, the survivorship right was said to operate immediately on the death of the joint tenant,
before the will could take effect. n128
(6) Mutual agreement to sever. Although sometimes upholding separate agreements to hold land as joint tenants, the
Iowa Supreme Court has never directly faced a separate agreement executed by joint tenants in which they agree to hold
the property as tenants in common. In dicta, however, the court has twice indicated that it would honor a properly
executed mutual agreement as working a severance, n129 and most property scholars endorse such a result. n130
B. The New Iowa "Intent" Theory for Severances
During the course of a complicated opinion, the Iowa Supreme Court made it clear in In re Estate of Johnson in 2007
that it will now apply the same "intent" analysis to issues of joint tenancy severance that it already applied to issues of
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creation and determination of joint tenancies. n131 It should be noted, however, that Johnson was not a case like Baker,
where application of the Four Unities test would have yielded a result that was contrary to the parties' intent. The same
result would have been reached in Johnson under the Four Unities test because, under the court's analysis of the facts,
there was no abridgment of the Four Unities.
Mr. and Mrs. Johnson owned their homestead in joint tenancy. n132 Mrs. Johnson became seriously ill, and Mr.
Johnson, for some unexplained and seemingly irrational reason, decided it would be better if their homestead was in his
name alone. n133 Acting on that intent, he executed and signed a quitclaim deed transferring the home to himself as sole
owner. n134 By this time, Mrs. Johnson had become incompetent, but she nevertheless executed and signed a power of
attorney authorizing her daughter to transfer her interest in the homestead to Mr. Johnson. n135 The daughter then signed
the deed on behalf of her mother. n136
[*1256] Then, unexpectedly, Mr. Johnson died, and his estate claimed that his quitclaim deed to himself severed
the joint tenancy and that, therefore, half the property should be included in his estate because it was not taken by Mrs.
Johnson under her survivorship right. n137 Invoking two related principles, the court ruled against Mr. Johnson's estate.
Because Mrs. Johnson was ruled incompetent at the time the power of attorney to her daughter was created, the
daughter's signature on the deed was a nullity. n138 Furthermore, this was homestead property, and its effective transfer
requires signatures of both spouses under Iowa Code section 561.13. n139 Therefore, Mr. Johnson's unilateral deed to
himself was also a nullity. Mr. Johnson's estate, however, claimed that although it was not valid under Iowa law to
transfer the homestead to himself, under the court's new "intent" theory, the act of executing and signing the void deed
should at least operate to sever the joint tenancy and convert the ownership into a tenancy in common. n140 Justice Cady,
who wrote the unanimous majority opinion, disagreed. n141
It was well settled at common law that under the Four Unities test the mere manifestation of an intent to sever a
joint tenancy was not legally sufficient. A valid severance required an "actual transfer," usually in the form of a signed
and delivered legal instrument, that caused a break in one or more of the Four Unities. n142 A severance can be made only
through the execution and signing of a valid legal instrument that causes a break in the Four Unities. It follows that the
same requirement should apply under the "intent" theory. It was already decided that Mr. Johnson's deed was a nullity
under Iowa homestead law, so it could not legally work a severance. n143 Besides, reasoned the court, Mr. Johnson had
the wrong intent. He did not intend to sever the joint tenancy and create a tenancy in common with his wife; his clear
plan was to take everything for himself. n144 Thus, absent a stated intent to sever and create a tenancy in common
manifested through a valid legal instrument, there was no severance. n145
A fair question to ask at this point is: Has Johnson radically altered the joint-tenancy landscape with respect to
severance law? I do not think so. There is, however, now a salutary symmetry in Iowa joint-tenancy law due to the
uniform application of an "intent" analysis across the board and due to abandonment of the archaic Four Unities. It
would only be in those rare [*1257] cases where the Four Unities test would produce a counter-intentional result,
however, that Johnson's "intent" analysis would make any difference. The Sprague and Baker cases, cited above, n146
would presumably have been decided differently under the intent analysis, but it is difficult to think of many other types
of cases that would be affected. Once the court reaffirmed its longstanding position that a valid legal instrument is
required to affect a severance, it became apparent that most severance cases the court has decided in the past would
come out the same way under the intent analysis.
It is doubtful the Baker case would have been decided as it was had the court already extended its "intent" analysis
to severance questions as it finally did in the Johnson case. I predict that if the Baker case arose today, the court would
easily find that the husband and wife joint-tenant vendors intended to maintain joint tenancy in the contract proceeds
without requiring an express contract provision saying so.
The adoption of the intent analysis for severance cases probably also solves the vexing problem described above
that could occur when the joint tenants' land contract is forfeited back to them as fee owners. If the parties' intent is truly
the touchstone for determining the continued existence of survivorship rights, it should be fairly clear that vendors who
originally owned in joint tenancy and preserved the joint tenancy in the contract proceeds would intend to continue to
hold the land as joint tenants if fee title were returned to them via a forfeiture.
C.
"Intent" To Sever Manifested in a Will

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Another type of case where heavy reliance on the intent-to-sever analysis could conceivably make a difference is where
a joint tenant attempts to revoke the joint tenancy by will. A joint tenant signing a will that clearly manifests an intent to
revoke the joint tenancy cannot be as easily ignored under an intent analysis as was the void deed in the Johnson case.
An explicit statement of the intent to revoke the joint tenancy in a will is also stronger evidence of the joint tenant's
intent than the vague will provision in the Conlee case cited earlier, n147 which did not contain an express statement of
revocation but merely devised the land at issue to another beneficiary. Frankly, I doubt that Iowa courts would deviate
from their traditional position that wills cannot revoke joint tenancies in light of the strong reaffirmation of the Conlee
no-revocation-by-will rule in the In re Estate of Boldt case. n148 Remembering, however, that the underlying rationale for
this rule is the metaphysical claim that survivorship operates before a will can take [*1258] effect - a claim which is
based on the archaic concept that joint tenants own "by the whole" - it seems that stranger things have happened in Iowa
property law.
D. Intentionally Causing the Death of the Other Joint Tenant
Iowa has a specific "slayer" statute that comes into play when one joint tenant "intentionally and unjustifiably causes or
procures the death of another joint tenant." n149 In the case where such a wrongful killing occurs, the statute states that the
slayer "has no rights by survivorship." n150 Neither the statute nor Iowa case law, however, bar the slayer from retaining
his or her original undivided fractional interest in the jointly owned property. n151 Thus, the wrongful killing of the other
joint tenant is treated like any other act of severance, converting the joint tenancy into a tenancy in common. The
undivided fractional interest of the deceased joint tenant passes down through his or her estate. In the interest of getting
the disincentives for homicide better aligned, a preferable rule might be to treat the slayer as predeceasing the other joint
tenant, as the law now does with a disclaimer, thereby passing the entire property down through the estate of the
deceased joint tenant as retribution for the wrongful killing. Not even the progressive UPC goes this far. n152
E. Simultaneous Death
In a sense, under the current statute, Iowa Code section 633.525, the simultaneous death of all joint tenants operates to
sever the joint tenancy. n153 This statute provides that in the case of simultaneous death, the interest of each joint tenant is
distributed as if she survived, but only as to her proportionate interest in the property. In the absence of proof of unequal
interests, this means that, as a practical matter, the joint tenants' interests are distributed as if the co-ownership was a
tenancy in common.
F. Partial Severance
Suppose A, B, and C take Greenacre as joint tenants. Later A transfers his undivided interest to D. In most jurisdictions,
probably including Iowa, the result of this partial severance is that D owns a one-third undivided interest as a tenant
n154
in common with B and C, who continue to hold their undivided interests in the other two-thirds as joint tenants. Thus, if
B were to die at this point, D would continue to be a tenant in common with C as to his [*1259] one-third undivided
interest, and C would be a tenant in common as to his two-thirds undivided interest, one-third of which he took under
the survivorship right from B. n155
Alternatively, suppose in our A, B, and C joint tenancy of Greenacre, A conveys his undivided interest to B. Within
the joint-tenant group, this change works a partial severance as to A's interest. Thus, B now holds A's one-third
undivided interest as a tenant in common with C, and holds the remaining two-thirds undivided interest as a joint tenant
with C. n156 There are no Iowa cases addressing partial severance in the context of multiple joint tenants.
VIII. Iowa Law Governing Joint Tenancies in Tangible and Intangible Personal Property, and Joint-and-Survivor
Accounts in Financial Institutions
A. Tangible Personal Property
The Iowa Supreme Court has long applied the same legal principles to the creation, lifetime enjoyment, severance, and
survivorship rights to joint tenancies in tangible personal property that it applies to joint tenancies in real property. n157
The presumption against joint tenancy in real property applies with equal force to tangible personal property. As the
Iowa Supreme Court stated in the 1956 case Miller v. Miller (In re Estate of Miller): "The general rule is ... that any
instrument, whether pertaining to realty or personalty, in which two or more persons are grantees, or payees, creates in
them a tenancy in common in the absence of expression of a contrary intent." n158
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B. Untitled Tangible Personal Property Used on Land Held in Joint Tenancy
When valuable land holdings in joint tenancy are used in a business or farm operation involving major investments in
untitled personal property, is the personal property also subject to joint tenancy? For example, consider a modern Iowa
farm operation owned in joint tenancy between a husband and wife or father and son. Are the livestock, stored grain,
farm machinery, trucks, and other equipment used in the farm business subject to survivorship rights? The only reported
Iowa case in which this issue arose involved a partnership agreement that expressly provided for survivorship rights in
the personal property used in the farm business. n159 When there is no express agreement creating a survivorship right in
tangible personal [*1260] property, will the crucial importance of the tangible personal property to the successful use
of the joint tenancy land suffice under the "intent" theory to create an inference of intent to create survivorship rights?
On the other hand, where there is a formal title to the tangible personal property and it is not in joint tenancy, does that
fact effectively rebut the argument that its close association to joint-tenancy land should infer a survivorship right in the
personal property? In practice, untitled items of valuable personal property used primarily in relation to a farm or
business operated on land held in joint tenancy ordinarily pass with the land to the survivor. n160
C. Intangible Personalty - Corporate Stocks and Bonds
On several occasions, the Iowa Supreme Court has affirmed the applicability of standard joint-tenancy law to the joint
ownership of corporate stocks and bonds. When a stock certificate was made out to a husband and wife "as joint tenants
with right of survivorship and not as tenants in common," the court applied its intent analysis to find a joint tenancy,
saying that "no words more clear, explicit, free from misunderstanding nor technically correct could be used." n161 A
similar result was reached by applying an intent analysis with respect to the debentures at issue in Miller, where the
court stated regarding use of the words "or the survivor" on a trust company's debenture: "Any language which clearly
shows an intent to make the grantees in a written instrument of conveyance or ownership joint tenants is sufficient [to
create a joint tenancy]." n162 Recognition of the importance of the parties' intent to create joint tenancies in various forms
of intangible personal property was cited approvingly very recently by the Iowa Court of Appeals in Kettler v. Security
National Bank of Sioux City. n163
In 1997, Iowa adopted the Uniform Transfer on Death Security Registration Act. n164 Iowa Code section 633D.3
specifically authorizes the registration of securities in beneficiary form "by two or more individuals with a right of
survivorship, rather than as tenants in common." n165 This Act also permits the registration of securities in beneficiary
form through express use of the words "transfer on death" ("TOD") or "pay on death" ("POD") in the [*1261]
instrument. n166 When either of these terms appears after the name of the registered owner and before the name of the
beneficiary, without a cancellation or change in the beneficiary form, on the death of the registered owner the ownership
of the securities passes to the named beneficiary or to the survivor of multiple owners. n167
D. Joint-and-Survivor Bank Accounts
Since the 1930s, the majority of Iowa cases dealing with claims of survivorship rights have concerned various forms of
joint-and-survivor accounts with financial institutions, such as checking accounts, savings accounts, certificates of
deposit with banks, accounts with savings and loan associations, and credit-union accounts. n168 During the early part of
this period, the Iowa Supreme Court searched diligently for a satisfactory rationale for upholding survivorship rights in
these accounts. As one Iowa Supreme Court opinion of the time observed:
The increasing use of joint bank accounts makes the problem before us one of general importance. The fact that upon
the death of the husband a sum is at once available to discharge the expenses of the last illness and provide for
household necessities, without court proceedings, has won for such accounts increasing favor. In fact, these accounts are
regarded by people in modest circumstances as a poor man's will. n169
Neither gift law nor joint-tenancy law quite captured what the depositors in these increasingly popular joint-and-
survivor accounts had in mind: control of the funds in the account up to the moment of death and then, after death,
immediate passage of ownership of the funds to a co-depositor designated as having the survivorship right. Gift law did
not work because, in many cases, the primary depositor did not intend to make a completed gift of any part of the
account, but only intended the balance in the account to pass directly to the surviving named depositor at the depositor's
death. Joint-tenancy law was also inappropriate for much of the same reasons. Creation of a joint tenancy in land or
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tangible personal property requires making a completed gift of an undivided interest to the other joint tenant. Again, this
is not at all what the typical primary depositor in a joint-and-survivor bank account would have had in mind. As early as
1942, the Iowa Supreme Court described the conventional joint-and-survivor [*1262] bank account as "creating a
contract of joint tenancy." n170 The relevant Iowa statutes governing financial institutions, which authorized various forms
of joint-and-survivor accounts, were repeatedly found to control only depositors' rights against the financial institution
and to provide no authority for resolving property rights in the accounts among co-depositors. n171
E. The Contract Theory
During the 1940s, the Iowa Supreme Court finally settled on a "contract" theory for validating joint-and-survivor bank
accounts. The contract forming the basis for upholding this form of survivorship arrangement is between the depositors
and the bank and is typically memorialized in the signature card provided by the bank. As set forth lucidly by the court
in a 1951 decision:
The contract is that the bank will, in consideration of the deposit of funds with it and the creation of a debtor-creditor
relation between itself and its depositors, consider them as owners in joint tenancy, with right of survivorship, and not as
tenants in common; and that upon the death of either depositor any balance in the account shall become the absolute
property of the survivor. Language more definite, more explicit, could hardly be devised. n172
As more cases followed this line of reasoning based on a contract analysis, it became evident that the court's occasional
use of the phrase "contract of joint tenancy" in dealing with joint-and-survivor bank accounts was only descriptive. It
did not require the application of all of the principles of Iowa law developed to govern survivorship arrangements for
land and tangible personalty to these joint accounts. n173
F. Problems with Strict Application of "Contract" Principles
The first problem to arise with the Iowa courts using "contract" theory to validate joint-and-survivor bank accounts
arose when one co-depositor failed to sign the signature card, often because that co-depositor did not know about the
account. From time to time, the primary depositor may wish to designate another person as a co-depositor with a
survivorship right but [*1263] not inform the other named depositor about the account in order to either prevent
unintended withdrawals by the other depositor or maintain secrecy with respect to other family members. The first time
this happened, the Iowa Supreme Court ruled that its new contract theory could not validate the survivorship because
the so-called "donee" depositor, who had not signed the signature card, had no contract relationship with the bank. n174
Twenty years later, in Johnson v. Stamets (In re Estate of Stamets), the court corrected this error in its analysis. n175 In
Stamets, the court adopted an evolving contract principle to rule that it was not necessary for the "donee" depositor to
sign the signature card creating the survivorship right or even know about the deposit. n176 It found that the relevant
contract was between the principal depositor and the bank, and the survivor was a third-party beneficiary of that
contract, entitled to enforce the contract against the bank. n177 No distinction was drawn by the court in Stamets between
creditor third-party beneficiaries and donee third-party beneficiaries. The surviving co-depositor in Stamets was most
certainly a donee.
A second problem arising with strict application of contract principles is the invocation of the parol evidence rule to
prevent the introduction of extrinsic evidence to overcome the joint-and-survivor language in a signature card where a
claim is made that the account was really intended only to create an agency in the other party named in the joint
account. Not surprisingly, lay people occasionally mistakenly sign joint-and-survivor signature cards without realizing
their full import. For example, sometimes depositors request a second person's name be added to their bank account for
their personal convenience, contemplating that they will someday need assistance in managing their financial affairs. n178
These depositors are intending to create an informal agency arrangement, not a will substitute. If people intending only
a convenience account nevertheless sign the joint-and-survivor form of signature card with the bank and then die, an
unintended windfall may come to the other named depositor. Strict enforcement of the parol evidence rule means that a
court will not allow extrinsic evidence to rebut the survivorship right created by the signature card unless the signature
card is ambiguous, coercion or fraud can be proven, or the existence of a confidential relationship between the two
depositors can be shown by clear and convincing evidence. n179
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[*1264] Williams v. Williams n180 is a classic illustration of how an account clearly intended to operate for the
convenience of the primary depositor can create an unintended gift at the depositor's death. Specifically, the case
demonstrates how strict enforcement of contract principles can sidetrack common sense. Myrtle Stephens and Walter
Williams, sister and brother, entered the local bank to create two accounts funded by Myrtle's money. n181 Myrtle
intended to place Walter's name on her accounts as an agent for her convenience in case anything happened to her that
might prevent her from accessing the accounts for her benefit. n182 One account used a standard joint-and-survivor
signature card, which both signed. n183 Both also signed a card for the second account, but the second signature card did
not contain the usual joint-and-survivor language. n184 This crucial language was stamped on the signature card in purple
ink by a bank teller after the depositors left the bank. n185 Because the second card was ambiguous as to its intended
property arrangement, parol evidence was admitted to show that this was a convenience account and Myrtle did not
want Walter to succeed to sole ownership of the account on her death. n186 The first account, however, was not subject to
challenge on this ground because the signature card was not ambiguous on its face, and therefore, the court held that
extrinsic evidence of Myrtle's true intent was not admissible. n187 Walter was thus allowed to retain for himself the
balance in this first account after Myrtle's death, even though it was clear from the evidence admitted with respect to the
second account that Myrtle did not intend a survivorship right in either account. n188
G. Reform Needed
In a recent case, the Rhode Island Supreme Court made a quip that could equally hold true for Iowa law: "There are
two ways to start a civil action in this state. The first is [by filing an action in court], and the second is by opening a
joint bank account with right of survivorship." n189 Something needs to be done to reform this troublesome cul-de-sac in
Iowa property law. The UPC deals with the issue expressly by stipulating that "on [the] death of [*1265] a party" to a
"multiple-party account" with a financial institution, the funds in the account pass to the surviving party, without regard
to whether the account is expressly made subject to a survivorship right. n190 This may be too strong a medicine for the
Iowa probate bar and legislature to swallow because it would make it even more difficult to detect joint accounts that
are not intended to create survivorship rights in the other party.
The standard account options some Iowa financial institutions offer simply do not meet the needs of the occasional
depositor who wishes to set up a joint account with another person meant to act as their agent if necessary for their
convenience. One alternative reform would be to persuade Iowa courts that all bank-prepared joint account signature
cards are inherently ambiguous, and therefore, the parol evidence rule should never bar admission of extrinsic evidence
to prove the true intent of the parties to the account. A second reform alternative is for the legislature to adopt a statute
like UPC section 6-204(a), which prescribes uniform multiple-party account forms intended to force co-depositors to
choose exactly the type of joint account they intend to create. n191 A third and perhaps more practical measure would be
to strongly encourage all Iowa banks to make a standard form durable power of attorney based on Iowa Code section
633B readily available to their customers who wish to establish a convenience account with another person. n192 Such a
durable power-of-attorney form could be executed and notarized by the joint depositors at the bank, and a copy could be
attached to the joint account signature card, which plainly states that survivorship is not part of the account
arrangement. n193 Fortunately, this method for handling depositors wishing to establish convenience accounts is routinely
used today by many Iowa banks, and should be adopted by all banks.
H. Rights of Third Parties to Funds Taken by Survivorship
Although in Iowa the property rights of survivors in joint-and-survivor bank accounts and PODs are based on contract
analysis, rather than on traditional joint-tenancy principles, creditors n194 and others claiming an interest in the account
proceeds by reason of a claim against the deceased [*1266] depositor n195 or a special relationship to the deceased
depositor n196 find their claims just as unenforceable against the survivor as do claimants against surviving joint tenants
of land and tangible personal property. n197
A recent Iowa Court of Appeals case, Rains v. Grieve, indirectly raises the question of whether the Gunsaulis v.
Tingler case, cited above, is still good law in Iowa. n198 The question is triggered by the Iowa Supreme Court's 1998
decision in Phillips v. Roe (In re Estate of Nagel), n199 and the two more recent Sieh decisions. n200 In the Nagel case, the
court held that assets in a revocable trust could be reached to satisfy a wrongful-death claim against the deceased trust
settlor. n201 In Sieh I, a revocable trust's assets were held to be vulnerable to a surviving spouse's election against the
deceased spouse's estate. n202 In Sieh II, the same surviving spouse prevailed in arguing that her husband's revocable
trust was responsible for paying her surviving spouse's allowance. n203 In the Rains case, the Iowa Court of Appeals
enforced a judgment against funds that were moved to Iowa and held by a local bank based on the surviving spouse's
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successful elective-share claim against the beneficiary of her deceased husband's POD account in a Florida bank. n204 The
judgment upholding the surviving spouse's claim against the POD beneficiary was entered by a Florida court under
Florida law, and then brought to Iowa to enforce against funds the named beneficiary received from the POD and
deposited in an Iowa bank. n205
This is another area of Iowa law ripe for reform. Once Iowa courts and the Iowa legislature made revocable trust
assets vulnerable to post-mortem [*1267] claims by creditors of the trust settlor and to spousal-rights claims by the
settlor's surviving spouse, it is difficult to defend the notion that joint-and-survivor accounts should be treated
differently. Just as with the settlor of a revocable trust, donor-depositors in a joint-and-survivor account hold all the
cards. Up to the moment of death, the primary depositor can close out the account and take the proceeds entirely for
themselves. n206 The Iowa Supreme Court's stated policy basis for the Nagel and the two Sieh decisions, which greatly
limited the protective character of revocable trusts, was that it was unfair for the settlor to enjoy all the benefits of the
assets during life, including the right to take them back into individual ownership, but then at death to deny creditors
and surviving spouses the power to reach the trust assets to satisfy their claims. n207 In Sieh I, the court quoted the
Restatement (Third) of Property for the proposition that property that is "owned in substance" by a decedent should be
available for purposes of calculating a surviving spouse's elective share, even though the property at issue passed
outside the probate estate at the decedent's death. n208
There is an ongoing debate within the Iowa probate bar regarding whether and how the surviving spouse's election
rights against a decedent's estate should be "augmented" to include "will substitutes" other than just revocable trusts.
There appears to be little support in Iowa for comprehensive reform that goes as far as the UPC with the concept of
augmenting a spousal share, n209 but if some augmentation is to be accomplished, joint-and-survivor bank accounts must
be close to the top of the list of "will substitutes" to be considered. n210
I. Rights of Bank Co-Depositors Inter Se
As suggested above, without further reform by the courts or the legislature, if the signature card contains unambiguous
survivorship language, the rights of surviving co-depositors to claim the balance in the account on the death of the other
co-depositor are still secure in Iowa. Not so certain, however, is the answer to the question: Where do the parties' rights
in the account stand while all parties are still alive? As mentioned [*1268] earlier, Iowa courts have consistently held
that the various statutes governing accounts with financial institutions were exclusively intended to protect the rights
and limit the liabilities of banks, rather than to resolve co-depositors' claims to specific property rights to funds in the
account or to provide a remedy for excessive withdrawals made that are contrary to the intent of the other co-depositor.
n211
Even in the absence of controlling statutory provisions, however, there is still an operative property-rights regime in
Iowa that should be sufficient to govern the lifetime rights of the co-depositors between themselves. n212 As noted earlier,
one Iowa case described joint-and-survivor co-depositors as having two identifiable interests in the account: a
"proportional interest" while all depositors are alive, and an "accretive interest" on the death of a depositor. n213 As to the
so-called "proportional interest," a rebuttable presumption is applied during their lifetimes that co-depositors in joint-
and-survivor bank accounts have equal interests in the account. Proof of unequal contributions to the account is,
however, clearly allowed for the purposes of rebutting this presumption and establishing the intent to have unequal
lifetime interests in the joint account.
The operative property-rights regime referred to above also embraces the concept of "contribution" to adjust and
adjudicate property rights when one co-depositor makes withdrawals that are both not authorized by the other and larger
than the party making the withdrawal's proportionate share of the account. In such a case, the wronged co-depositor can
either approve of the unauthorized withdrawal and treat it as a gift or seek recovery from the other co-depositor as a
converter of funds. n214 In the Kettler case, the husband emptied the joint-and-survivor account held with his wife without
her consent, created a new joint-and-survivor account with another person, and then died. n215 The court of appeals ruled
that the joint-tenancy principle of severance did not apply to the husband's unilateral act but that, in closing the account
and taking all the proceeds, he committed conversion against his wife's presumptive one-half interest in the account. n216
She therefore had a right to recover from his estate her fifty percent share of the funds removed from the original
account. n217 One troubling aspect of the Kettler case was the lack of solid information about who actually contributed
what funds to the original joint-and-survivor account. If the husband was the sole [*1269] contributor, application of
Iowa's contribution rule would dictate that the husband was free during his lifetime to take out all the funds in the
account and do with them as he pleased without the consent of the donee-depositor spouse and without incurring any
liability to her.
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J. Express Revocation or Severance by Will
Iowa courts have repeatedly held that attempts by one co-depositor in a joint-and-survivor bank account to revoke or
sever the survivorship right in a will do not terminate the survivorship right. n218 In the Boldt case, a mother put her funds
into two joint-and-survivor accounts with one of her two daughters. n219 The mother's will stated very clearly that she was
revoking the joint account because her intent was only to create convenience accounts with one of her daughters, and
she wanted both of her daughters to share equally in her estate. n220 Citing Conlee, n221 a real-property joint-tenancy case,
the court held that joint-and-survivor bank accounts were not subject to revocation or alteration by will. n222 On the facts
of the case, however, the court was able to fashion an equitable result that achieved the mother's intended equality of
inheritance between her two daughters by invoking the equitable doctrine of "election." n223 Neither the election doctrine
nor the will language the court suggested in its decision for dealing with the presence of non-probate assets, however,
will serve to equalize the claims of the beneficiaries if the amount of money in joint accounts is larger than the amount
in the probate estate. n224
In Kokjohn v. Harrington (In re Estate of Kokjohn), the court actually looked to the joint depositor's will as
extrinsic evidence in holding that his testamentary reference to the account as jointly owned buttressed the survivor's
claim to own the account. The court noted that the decedent assumed he could revoke the survivorship right in his joint
bank account through his will, and then stated without discussion that "that course of action was not available to him."
n225
Given the relative fluidity of lifetime-ownership rights within the emerging contract-based law governing joint-and-
survivor bank accounts, it [*1270] is not clear to me that a well-drafted will provision should always be ruled
ineffective to revoke or sever a survivorship right, particularly when the will also states that the joint account was
intended only for the donor- depositor's convenience. It is worth noting that the Iowa Trust Code now permits a
revocable trust to be revoked by the settlor's will. n226 In addition, at the settlor's death, the Iowa Trust Code now
subjects assets in revocable trusts to claims by creditors of the settlor. n227 In the same vein, as noted earlier, the Iowa
Supreme Court has ruled that at the death of the settlor assets in a revocable trust are also subject to a surviving
spouse's elective share under Iowa Code section 633.238 n228 and to her right to a spouse's allowance under Iowa Code
section 633.374. n229 Revocable trusts and joint-and-survivor bank accounts are very similar probate-avoidance
mechanisms in that they both allow the settlor and donor-depositor to reassert complete ownership over the assets
involved at their discretion during their lifetimes. To the extent that there is merit in creating some symmetry in the
application of the so-called "subsidiary law of wills" to non-probate transfers, it is difficult to understand why revocable
trusts should be treated one way and joint-and-survivor bank accounts should be treated in another.
K. POD Accounts and TOD Authorizations.
Iowa statutes expressly authorize state-chartered banks and savings and loan associations to accept accounts in Pay of
Death form. n230 It appears that, without express statutory authorization, both federally chartered banks in Iowa and credit
unions also offer some form of POD account. The great advantage POD accounts offer to the donor-depositor is that
there is no risk that the donee-depositor will remove funds from the account without the consent of the donor-depositor
during the donor-depositor's lifetime. POD accounts may, however, raise sticky issues in probate as to their availability
to pay debts and charges of the estate and, if available, where they fit in the statutory abatement scheme. n231 Assets in
POD accounts in state banks, to the extent needed, are expressly made subject to the decedent estate's debts and taxes.
n232
TOD authorizations are of more recent origin than POD accounts. Special statutory provisions allow securities to
be registered in TOD form with the administrator holding the securities and expressly state that TOD transfers
complying with the registration requirements are "not [*1271] testamentary." n233 On the death of the registered owner,
the securities pass outside the decedent's estate directly to the named TOD beneficiary. The Iowa statute controlling
TOD registration expressly provides, however, that TOD's are not effective against the estate of a deceased TOD owner
to the extent that the assets in the estate are insufficient to pay debts, taxes, and expenses of administration, including
statutory allowances to the surviving spouse and children. n234
A recent Iowa Supreme Court case, In re Estate of Meyers, settled one nagging question with regard to the
effectiveness of PODs and TODs as probate avoidance vehicles. n235 At issue in the Meyers case was whether a surviving
spouse's elective share should include access to assets passed to other beneficiaries through PODs created by the
deceased spouse. In writing for a unanimous court, Justice Waterman settled a split among Iowa district courts on how
to interpret dicta in the 2006 Sieh I case that suggested that henceforth all traditional will substitutes would be subject to
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98 Iowa L. Rev. 1233, *
the surviving spouses elective share claim. n236 The Meyers decision ruled that a 2009 amendment to Iowa Code section
633.238 required the result that assets transferred through a POD were not part of the decedent's estate for purposes of
calculating the value of the surviving spouse's elective share. n237 The amendment cited involved inserting the two words
"limited to" in the first line of section 633.238, which enumerates the various components of a surviving spouse's
elective share. n238 To emphasize the effect of its ruling, the court stated, "We overrule Sieh to the extent it is inconsistent
with the opinion." n239
L.
"In Trust For" Accounts
State banks n240 and Iowa credit unions may also offer "in trust for" accounts - sometimes called "Totten Trusts" or
"Tentative Trusts" - that operate in practice very similarly to POD accounts. n241 "In trust for" accounts do not create
formal trusts, but rather, at the death of the depositor, the proceeds in the account are paid directly to the named
beneficiaries. Judging by the absence of reported cases implementing them, these tentative-trust arrangements have not
enjoyed extensive use in Iowa.
[*1272]
IX. Conclusion
Joint tenancy's venerable history in Anglo-American law is strongly reflected in contemporary Iowa property law.
Though a statute has long presumed against them, true joint tenancies in real estate and tangible personal property enjoy
very nearly the same legal status that they held when Iowa became a state over165 years ago. Joint tenancies are,
however, much more widely used today than they were then. The common law concept that joint tenants hold their
concurrently owned property "by the whole," however, has endured in modern Iowa law, and it still guides the
understanding of what happens when one joint tenant dies. Under this ancient idea about the unique nature of joint-
tenancy ownership, upon the death of a joint tenant, the deceased joint tenant's interest simply falls away. As a result,
the ownership of the entire property immediately passes to the surviving joint tenant, unencumbered by any claims
against the property that the deceased joint tenant may have created. There are no signs that this feature of joint tenancy,
which lends to the co-ownership arrangement its cache as a will substitute, is going away any time soon. It may be
eroded somewhat, however, if Iowa moves toward a UPC style augmented elective share for surviving spouses.
By contrast, over time, the traditional Four Unities test for determining the creation, operation, and termination of
joint tenancies has been totally replaced in Iowa law by an intent analysis, which calls for courts to pay close attention
to the parties' stated and assumed intentions. Refinement of this intent analysis not only makes it easier to validate less-
than-perfect language in deeds as creating joint tenancies, it may also create the opportunity for tenancies by the entirety
to take root in Iowa. On the severance side, the intent analysis almost certainly renders moot older cases finding
counter-intentional accidental severances based on the Four Unities test, such as the ruling in the Baker case that signing
a land-sale contract immediately severed a joint tenancy. It remains to be seen whether a strong commitment to
upholding a party's intent will ultimately result in giving effect to clearly worded intentions to sever made in a joint
tenant's will.
The Iowa law governing lifetime rights and death dispositions of funds in joint-and-survivor accounts with
financial institutions is of relatively modern origin. Since the 1940s, the Iowa law on joint-and-survivor accounts has
been based on contract principles. When one or more depositors contract with the financial institution in which the
joint-and-survivor account is opened it creates an enforceable property right to the proceeds in the account after the
death of another co-depositor. There continue to be some problems with working out this contract analysis with respect
to convenience accounts unintentionally opened as joint-and-survivor accounts and to ascertaining and enforcing the
rights to the funds in the account while all parties are living when equal contributions to the account were not made or
intended. With respect to the latter issue, unlike classic joint tenancies, [*1273] where the norm is to recognize equal
fractional interests in each co-tenant upon the creation of the joint tenancy, joint-and-survivor accounts often are
intended to create unequal lifetime rights to funds in the account, and therefore, they are often meant to create nothing
beyond a contingent expectation of a transfer of the fund balance at death if, and only if, funds remain in the account.
The fluidity of joint-and-survivor accounts and the ability of a primary depositor to control the account up to the
moment of death is likened in this Essay to that of the settlor of a revocable trust. This observation leads to the
possibility that joint-and-survivor accounts eventually may be treated in the same way that revocable trusts are now
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98 Iowa L. Rev. 1233, *
treated: the primary depositor may be able to revoke them by will and surviving spouses, creditors, and other claimants
may be allowed to reach assets in a deceased depositor's estate that would otherwise pass to the survivor. If changes in
the law are forthcoming, the most likely starting point will be granting surviving spouses the same elective rights
against their deceased spouses' joint-and-survivor accounts that they now enjoy against assets in their deceased spouses'
revocable trusts. This reform would be entirely consistent with the long-standing policies of the Iowa General
Assembly and the Iowa Supreme Court in affording maximum protection to Iowa's surviving spouses.
When I first taught the law governing joint-and-survivor co-ownership fifty years ago, I was captivated by its
intriguing history and its marvelous utility as a will substitute. In conducting empirical studies of the uses of joint-and-
survivor co-ownerships by Iowa families, I was struck by its enormous popularity across all economic classes. Joint-
and-survivor co-ownership was not just "a poor man's will," as an Iowa court once described it, n242 it was by far the most
pervasive will substitute employed by Iowans all along the wealth spectrum. As this Essay should make clear, joint-and-
survivor co-ownerships are still thriving in Iowa, and some of their key elements have been strengthened in ways that
make them more stable and reliable will substitutes. The downside of unanticipated negative results (unintended gifts,
creditor vulnerability, and unnecessary death taxes) are still present, however, so it continues to be important to remind
lawyers and educate lay persons about these risks.
As mentioned above, many years ago, one of my top professional goals was to write the definitive American legal
treatise on the law of joint-and-survivor co-ownership. Twenty-eight years of service as Iowa's law dean put that project
on a far back burner. In the intervening years, however, to my knowledge no one has stepped forward to write that
particular legal treatise. As full retirement from law teaching now looms on the near horizon, I may yet get my chance to
tackle that writing project. Who knows, this Essay updating the Iowa law may be just the running start I needed to move
my [*1274] fascination with the law of joint-and-survivor co-ownership to the national level.
Legal Topics:
Banking LawBank ActivitiesBank AccountsDeposit AccountsJoint AccountsJoint TenanciesEstate, Gift & Trust
LawNonprobate TransfersJointly Held PropertyBank AccountsReal Property LawEstatesConcurrent
OwnershipTenancies in Common
FOOTNOTES:
n1. N. William Hines, Real Property Joint Tenancies: Law, Fact, and Fancy, 51 Iowa L. Rev. 582 (1966).
n2. N. William Hines, Personal Property Joint Tenancies: More Law, Fact and Fancy, 54 Minn. L. Rev. 509 (1970).
n3. See generally 1 Sheldon F. Kurtz, Kurtz on Iowa Estates§§11.1-.2 (3d ed. 1995) [hereinafter Kurtz, Iowa Estates].
n4. See Anne L. Spitzer, Joint Tenancy with Right of Survivorship: A Legacy from Thirteenth Century England, 16 Tex. Tech L. Rev. 629,
635-36 (1985).
n5. See William M. McGovern, Sheldon F. Kurtz & David M. English, Principles of Wills, Trusts & Estates 266-71 (2d ed. 2012). Most
developments in the law relating to survivorship rights in modern times have occurred in relation to multiple-party accounts in financial
institutions.
n6. Sheldon F. Kurtz, Moynihan's Introduction to the Law of Real Property 231-34 (5th ed. 2011) [hereinafter Kurtz, Moynihan's
Introduction].
Page 265Page 265
98 Iowa L. Rev. 1233, *
n7. See id. at 238-41.
n8. See id. at 281-85.
n9. Fleming v. Fleming, 174 N.W. 946, 953 (Iowa 1919).
n10. See 2 American Law of Property: A Treatise on the Law of Property in the United States 4-6 (A. James Casner ed., 1952); Herbert
Hovenkamp & Sheldon F. Kurtz, The Law of Property: An Introductory Survey 90-91 (5th ed. 2001).
n11. 2 American Law of Property, supra note 10, at 8-9.
n12. Kurtz, Moynihan's Introduction, supra note 6, at 278.
n13. Iowa Code § 557.15 (2011). Although the statute speaks of "conveyances," the Iowa Supreme Court has routinely also applied it to
wills purporting to create joint tenancies. See, e.g., Heckmann v. Brenton State Bank (In re Heckmann's Estate), 291 N.W. 465, 468 (Iowa
1940) (devising to two daughters "jointly in equal shares" created a tenancy in common (internal quotation marks omitted)).
n14. See Kurtz, Moynihan's Introduction, supra note 6, at 279-80.
n15. Hoffman v. Stigers, 28 Iowa 302 (1869).
n16. Id. at 307.
n17. See 1 Kurtz, Iowa Estates, supra note 3, § 11.2.
n18. Hruby v. Wayman, 298 N.W. 639, 640 (Iowa 1941).
n19. See generally Lamoureux v. Iowa Dep't of Revenue (In re Estate of Lamoureux), 412 N.W.2d 628 (Iowa 1987).
n20. Kurtz, Moynihan's Introduction, supra note 6, at 280-81 (internal quotation marks omitted).
n21. See id. at 287-92.
n22. Fay v. Smiley, 207 N.W. 369, 370 (Iowa), modified on denial of reh'g, 209 N.W. 307 (Iowa 1926).
Page 266Page 266
98 Iowa L. Rev. 1233, *
n23. Id. at 371.
n24. See Note, Tenancy by the Entirety - Is It Possible in Iowa?, 44 Iowa L. Rev. 169 (1958).
n25. In re Estate of Epstein, 561 N.W.2d 82, 86-87 (Iowa Ct. App. 1996), overruled on other grounds, Sieh v. Sieh (In re Estate of Sieh), 745
N.W.2d 477 (Iowa 2008).
n26. Id. at 86.
n27. See id. at 86-87.
n28. See id. at 86.
n29. See In re Estate of Johnson, 739 N.W.2d 493, 499 (Iowa 2007).
n30. See Hruby v. Wayman, 298 N.W. 639, 640-41 (Iowa 1941). But see Gruwell v. Gruwell, 171 N.W. 290, 292 (Iowa 1919) (stating that
"survivor" was awarded only a life estate).
n31. Wood v. Logue, 149 N.W. 613, 615 (Iowa 1914) (internal quotation marks omitted).
n32. See Albright v. Winey, 284 N.W. 86, 88-89 (Iowa 1939).
n33. Switzer v. Pratt, 23 N.W.2d 837, 842 (Iowa 1946).
n34. Conlee v. Conlee, 269 N.W. 259, 262-63 (Iowa 1936).
n35. Randolph v. West, 158 N.W.2d 722, 723 (Iowa 1968).
n36. Id. (internal quotation marks omitted).
n37. Id. (internal quotation marks omitted).
n38. See Stonewall v. Danielson, 217 N.W. 456, 459 (Iowa 1928) (holding that an oral agreement for survivorship rights made prior to
purchase of the property created joint tenancy); Stewart v. Todd, 173 N.W. 619, 622-24 (Iowa 1919) (interpreting a partnership agreement as
creating survivorship right in land co-owned by the parties), modified on denial of reh'g, 180 N.W. 146 (Iowa 1920).
Page 267Page 267
98 Iowa L. Rev. 1233, *
n39. In re Estate of Allen, 239 N.W.2d 163, 165-66 (Iowa 1976).
n40. Id. at 167.
n41. Frederick v. Shorman, 147 N.W.2d 478 (Iowa 1966).
n42. Id. at 480-81(internal quotation marks omitted).
n43. Id. at 481.
n44. Id. at 483-84.
n45. Id.
n46. Pollard v. Lovan (In re Estate of Lovan), 798 N.W.2d 350, 2011 WL 662693 (Iowa Ct. App. 2011) (unpublished table decision).
n47. Id. at 1.
n48. Id.
n49. Id. at 1-2.
n50. See id. at 1.
n51. Id. at 3.
n52. Id.
n53. Unif. Probate Code §§6-401 to -417 (amended 2010).
n54. Id. § 6-413(a)(3).

Page 268Page 268
98 Iowa L. Rev. 1233, *
n55. Id. § 6-413(c).
n56. Id. § 6-413(a)(2).
n57. Id. § 6-413(a)(4).
n58. Iowa Code § 633A.4701(1) (2011).
n59. See Kurtz, Moynihan's Introduction, supra note 6, at 285.
n60. Miller v. Hill (In re Anders' Estate), 26 N.W.2d 67, 68 (Iowa 1947) (referring to this presumption with respect to tenants in common);
see infra note 44 and accompanying text for an application of this presumption in the context of a joint tenancy.
n61. Williams v. Monzingo, 16 N.W.2d 619, 622-23 (Iowa 1944).
n62. See Frederick v. Shorman, 147 N.W.2d 478, 484 (Iowa 1966).
n63. See Lowell v. Lowell, 170 N.W. 811, 812 (Iowa 1919) (tenancy in common).
n64. Unif. Probate Code § 6-211 (amended 2010).
n65. Albright v. Moeckly, 193 N.W. 625, 626 (Iowa 1923) (tenancy in common).
n66. Stevens v. Pels, 175 N.W. 303, 306 (Iowa 1919).
n67. Tenants in Common, ch. 27, 1917 Iowa Acts 46 (codified as amended at Iowa Code § 557.16 (2011)).
n68. Iowa Code § 557.16.
n69. See Todd v. Stewart, 202 N.W. 844, 846 (Iowa 1925).
n70. Van Veen v. Van Veen, 238 N.W. 718, 724 (Iowa 1931).
n71. See Mack v. Linge, 119 N.W.2d 897, 899 (Iowa 1963).
Page 269Page 269
98 Iowa L. Rev. 1233, *
n72. See Carpenter v. Ruperto, 315 N.W.2d 782, 786 (Iowa 1982).
n73. Cf. Kurtz, Moynihan's Introduction, supra note 6, at 286-90.
n74. Moy v. Moy, 56 N.W. 668 (Iowa 1893).
n75. Patty v. Payne, 159 N.W. 1012, 1014 (Iowa 1916).
n76. Tice v. Derby, 13 N.W. 301, 302 (Iowa 1882).
n78. See Van Veen v. Van Veen, 238 N.W. 718, 724 (Iowa 1931) (stating that contribution is generally allowed when expenditures are
absolutely necessary to preserve the property).
n79. See Martens v. Martens, 12 N.W.2d 201, 207 (Iowa 1943). But see Cooper v. Brown, 122 N.W. 144, 147 (Iowa 1909).
n81. See Sears v. Munson, 23 Iowa 380, 388 (1867).
n82. See Frye v. Gullion, 121 N.W. 563, 567 (Iowa 1909) (contribution for improvements allowed only in exceptional cases).
n83. See Ruppert v. C., O. & St. J.R. Co., 43 Iowa 490, 493 (1876).
n84. See, e.g., J.J. Newberry Co. v. City of East Chicago, 441 N.E.2d 39, 43 (Ind. Ct. App. 1982) (internal quotation marks omitted).
n85. See City of Des Moines v. Housby-Mack, Inc., 687 N.W.2d 551, 553 (Iowa 2004).
n86. Dodge v. Davis, 52 N.W. 2, 3 (Iowa 1892).
n87. Iowa Code § 658.1A (2011).

Page 270Page 270
98 Iowa L. Rev. 1233, *
n88. Id. § 658.3.
n89. See id. §§651.1-.6.
n90. See William B. Stoebuck & Dale A. Whitman, The Law of Property 215-16 (3d ed. 2000).
n91. See Iowa R. Civ. P. 1.1201-.1228.
n92. Id. 1.1201(2).
n93. See id. 1.1201(1) (stating simply that partition is an equitable procedure containing no perquisites for bringing a partition action).
n94. Id. 1.1217(1).
n96. Stoebuck & Whitman, supra note 90, at 221-23.
n97. Iowa Code § 651.3 (2011).
n98. See Rembe v. Stewart, 387 N.W.2d 313, 313 (Iowa 1986).
n99. 1 Kurtz, Iowa Estates, supra note 3, § 11.2.
n100. Id.
n101. See, e.g., Perez v. Pogge, 303 N.W.2d 145, 147-48 (Iowa 1981) (refusing to recognize spouse's dower right in non-homestead land
where title was taken during marriage by husband in joint tenancy with a third party).
n103. See Iowa Code § 558.66 (2011) (providing a form affidavit for a spouse who is a surviving joint tenant to obtain a change of title to
the real property).
Page 271Page 271
98 Iowa L. Rev. 1233, *
n104. See In re Estate of Kirk, 591 N.W.2d 630, 634-35 (Iowa 1999) (allowing disclaimer of survivor's "accretive" interest in joint-tenancy
property). It is not clear how this explanation moves this analysis forward except perhaps in explaining how the operation of a disclaimer of
a survivorship interest after the death of another joint tenant was intended to work under the earlier disclaimer statute. Here is how it was
described in the Kirk case:
The proportional interest is the joint tenant's interest which comes from the creation of the joint tenancy which necessarily occurs before the
death of another joint tenant. The accretive interest, on the other hand, is the interest the survivor receives at the death of a joint tenant. Thus,
where two joint tenants have an interest in property and one joint tenant dies, the surviving joint tenant has a one-half proportional interest
and a one-half accretive interest.
Id. (citations omitted).
n105. The former provision was Iowa Code section 633.704. Iowa Code § 633.704 (repealed 2004).
n106. Lamoureux v. Iowa Dep't of Revenue (In re Estate of Lamoureux), 412 N.W.2d 628, 629-30 (Iowa 1987).
n107. Id. at 631-32 (citing Kennedy v. Comm'r, 804 F.2d 1332, 1334-36 (7th Cir. 1986) (applying a proportionate and accretive rights
analysis to similar language in the federal estate-tax statute)).
n108. Id. at 631.
n109. Id. at 634.
n110. Iowa Code § 633E.7 (2011).
n111. Id.
n112. Id. § 633E.7(3).
n113. Id. § 633E.4.
n114. See Kurtz, Moynihan's Introduction, supra note 6, at 278-85; see also 2 American Law of Property, supra note 10, at 9-11.
n115. See generally R.H. Helmholz, Realism and Formalism in the Severance of Joint Tenancies, 77 Neb. L. Rev. 1 (1998). This article was
cited repeatedly in In re Estate of Johnson, 739 N.W.2d 493 (Iowa 2007).
n116. Hyland v. Standiford, 111 N.W.2d 260, 264 (Iowa 1961) (holding no severance of joint tenancy in stock certificates by co-tenant's
will).
Page 272Page 272
98 Iowa L. Rev. 1233, *
n117. See In re Sprague's Estate, 57 N.W.2d 212, 215-16 (Iowa 1953).
n118. Baker v. Cobb (In re Baker's Estate), 78 N.W.2d 863, 867 (Iowa 1956).
n119. See Comment, Joint Tenancies - Severance - Effect of Contract To Sell, 42 Iowa L. Rev. 646, 646-47 (1957).
n120. See Iowa State Bar Ass'n, Official Form No. 153: Offer To Buy Real Estate and Acceptance para. 12 (including a recital that sellers
intend to hold the proceeds in joint tenancy).
n121. 2 American Law of Property, supra note 10, at 9-10.
n122. See infra Part VII.B.
n123. See Miller v. Gemricher, 183 N.W. 503, 505 (Iowa 1921).
n124. Hyland v. Standiford, 111 N.W.2d 260, 266 (Iowa 1961).
n125. Frederick v. Shorman, 147 N.W.2d 478, 484 (Iowa 1966).
n126. Megan D. Randolph, Note, Let No Man Put Asunder: Divorce, Joint Tenancy, and Notices of Severance, 47 U. Louisville L. Rev. 607,
616 (2009).
n127. See Indra v. Wiggins, 28 N.W.2d 485, 495-96 (Iowa 1947) (citing Nelson v. Pratt, 230 N.W. 324, 324-25 (Iowa 1930)).
n128. See In re Estate of Boldt, 342 N.W.2d 463, 465 (Iowa 1983) (joint bank accounts); Conlee v. Conlee, 269 N.W. 259, 261-63 (Iowa
1936) (real property and tangible personalty in joint tenancy).
n129. See Baker v. Cobb (In re Baker's Estate), 78 N.W.2d 863, 867 (Iowa 1956); Wood v. Logue, 149 N.W. 613, 615 (Iowa 1914).
n131. In re Estate of Johnson, 739 N.W.2d 493, 497-99 (Iowa 2007).
n132. Id. at 494.

Page 273Page 273
98 Iowa L. Rev. 1233, *
n133. Id.
n134. Id. at 494-95.
n135. Id. at 495.
n136. Id.
n137. Id.
n138. Id. at 499.
n139. Id.
n140. Id. at 499-500.
n141. Id. at 500.
n142. See Christopher Serkin, The Law of Property 88-90 (2013).
n143. Johnson, 739 N.W.2d at 499-500.
n144. Id. at 500.
n145. Id. at 501-02.
n146. See Baker v. Cobb (In re Baker's Estate), 78 N.W.2d 863 (Iowa 1956); In re Sprague's Estate, 57 N.W.2d 212 (Iowa 1953); see also
supra notes 117-18.
n147. See Conlee v. Conlee, 269 N.W. 259 (Iowa 1936).
n148. See In re Estate of Boldt, 342 N.W.2d 463, 465 (Iowa 1983) (applying the Conlee no-revocation-by-will rule to a joint-and-survivor
bank account).
Page 274Page 274
98 Iowa L. Rev. 1233, *
n149. Iowa Code § 633.535(2) (2011).
n150. Id.
n151. See Williams v. Thomann (In re Estate of Thomann), 649 N.W.2d 1, 9 (Iowa 2002).
n152. See Unif. Probate Code § 2-803(c)(2) (amended 2010).
n153. Iowa Code § 633.525.
n155. 2 American Law of Property, supra note 10, at 8.
n156. Id.; see also Stoebuck & Whitman, supra note 90, at 189-90.
n157. See Stewart v. DeMoss, 590 N.W.2d 545, 547 (Iowa 1999).
n158. Miller v. Miller (In re Estate of Miller), 79 N.W.2d 315, 318 (Iowa 1956).
n159. Conlee v. Conlee, 269 N.W. 259, 261-63 (Iowa 1936).
n160. See Comment, Property - Joint Tenancy in Personal Property - Ownership of Offspring of Livestock Held in Joint Tenancy, 36 Iowa
L. Rev. 712 (1951).
n161. Hyland v. Standiford, 111 N.W.2d 260, 262, 264 (Iowa 1961) (internal quotation marks omitted).
n162. Miller, 79 N.W.2d at 317.
n163. Kettler v. Sec. Nat'l Bank of Sioux City, 805 N.W.2d 817, 822-23 (Iowa Ct. App. 2011).
n164. Transfer on Death Security Registration, ch. 178, 1997 Iowa Acts 507 (codified as amended at Iowa Code § 633D (2011)).
Page 275Page 275
98 Iowa L. Rev. 1233, *
n165. Iowa Code § 633D.3.
n166. Id. § 633D.6 (internal quotation marks omitted).
n167. Id. §§633D.6-.7, 633D.9.
n168. See id. § 524.806 (banks); id. § 534.302(3) (repealed 2012) (savings and loan associations); id. § 533.309(2) (credit unions); David L.
Sayre, A Review of Iowa Contract Law: 1942-1952, 38 Iowa L. Rev. 506, 517-19 (1953).
n169. O'Brien v. Biegger, 11 N.W.2d 412, 417 (Iowa 1943) (emphasis omitted) (quoting In re Edwards' Estate, 14 P.2d 274, 276 (Or. 1932))
(internal quotation marks omitted).
n170. In re Winkler's Estate, 5 N.W.2d 153, 157 (Iowa 1942).
n171. Perkins v. City Nat'l Bank of Clinton, 114 N.W.2d 45, 51 (Iowa 1962) ("[Iowa Code section 528.64] is ... for the protection of [the]
depository bank. It does not establish the ownership of funds on deposit."); cf. Petersen v. Carstensen, 249 N.W.2d 622, 625 (Iowa 1977)
(holding that the bank deposit statute created a presumption of a joint-and-survivor account among the depositors).
n172. Hill v. Havens, 48 N.W.2d 870, 876 (Iowa 1951).
n173. See Recent Case, Joint Tenancy - Bank Accounts - The Contract Theory in Iowa, 53 Iowa L. Rev. 1371, 1371-72 (1968).
n174. Murdoch v. Carson (In re Murdoch's Estate), 29 N.W.2d 177, 180 (Iowa 1947).
n175. Johnson v. Stamets (In re Estate of Stamets), 148 N.W.2d 468 (Iowa 1967).
n176. Id. at 474.
n177. Id. at 471-72.
n178. See In re Estate of Lamb, 584 N.W.2d 719, 724 (Iowa Ct. App. 1998) (finding that a joint account belonged wholly to a deceased
depositor).
n179. See Clark v. Swope (In re Estate of Clark), 357 N.W.2d 34, 38 (Iowa Ct. App. 1984); see also Petersen v. Carstensen, 249 N.W.2d
622, 626 (Iowa 1977) (holding that no confidential relationship exists where donor-depositor afforded donee-depositor only kind treatment
and affection); Burns v. Nemo, 105 N.W.2d 217, 223 (Iowa 1960).
Page 276Page 276
98 Iowa L. Rev. 1233, *
n180. Williams v. Williams, 100 N.W.2d 185 (Iowa 1959).
n181. Id. at 187.
n182. Id.
n183. Id.
n184. Id.
n185. Id.
n186. Id. at 188.
n187. Id.
n188. Id.
n189. Trust of McManus v. McManus, 18 A.3d 550, 553 n.6 (R.I. 2011) (quoting Robinson v. Delfino, 710 A.2d 154, 156-57 n.8 (R.I.
1998)) (internal quotation marks omitted).
n190. Unif. Probate Code § 6-212(a) (amended 2010).
n191. Id. § 6-204(a). UPC section 6-204(b) covers cases in which the uniform-account form is not used for some reason and directs that the
account should be governed by the law applicable to the standard form account that "most nearly conforms to the depositor's intent." Id. § 6-
204(b).
n192. See Iowa Code § 633B.1 (2011).
n193. UPC section 6-205 specifically authorizes depositors in multiple-party accounts to designate an agent with a durable power of
attorney to act on their behalf with respect to the account. Unif. Probate Code § 6-205.
n194. See Note, The Right of the Individual Creditor Against the Joint and Survivorship Bank Account, 42 Iowa L. Rev. 551 (1957).
n195. See McCuen v. Hartsock, 159 N.W.2d 455, 460 (Iowa 1968).
Page 277Page 277
98 Iowa L. Rev. 1233, *
n196. See Shaw v. Addison, 28 N.W.2d 816, 833 (Iowa 1947).
n197. See Recent Case, Contracts - Joint Tenancy - Right of Survivorship in Joint Bank Deposit, 37 Iowa L. Rev. 291, 291-92 (1952); see
also Gunsaulis v. Tingler, 218 N.W.2d 575 (Iowa 1974). In Gunsaulis, the second wife was denied the right to claim her surviving-spouse
interest against CDs held in joint-and-survivor form by deceased husband with his niece from a prior marriage. Id. at 576, 578. The same
result was reached for an IPERS retirement-plan death benefit designated for the niece. Id. The court rejected the argument that the joint-
and-survivor account was a sham or constituted fraud on the spouse's interest, given the fact that it was a second marriage for both spouses.
Id. at 579.
n198. See Rains v. Grieve, 808 N.W.2d 754, 2011 WL 5396270 (Iowa Ct. App. 2011) (unpublished table decision).
n199. Phillips v. Roe (In re Estate of Nagel), 580 N.W.2d 810, 812 (Iowa 1998) (holding that the tort creditor was allowed to reach assets in
the decedent's revocable trust if the probate estate was not sufficient to satisfy the tort claim).
n200. Sieh v. Sieh (In re Estate of Sieh) (Sieh II ), 745 N.W.2d 477 (Iowa 2008); Sieh v. Sieh (Sieh I ), 713 N.W.2d 194 (Iowa 2006),
overruled by In re Estate of Myers, No. 11-1378, 2012 WL 5373711 (Iowa Nov. 2, 2012).
n201. Nagel, 580 N.W.2d at 812.
n202. Sieh I, 713 N.W.2d at 198.
n203. Sieh II, 745 N.W.2d at 480.
n204. Rains v. Grieve, 808 N.W.2d 754, 2011 WL 5396270, at 3 (Iowa Ct. App. 2011) (unpublished table decision).
n205. Id.
n206. See Iowa Code § 524.806 (2011). As to deposits in the names of two or more individuals, payable to one or more of them, the statute
authorizes a bank to pay the amounts on deposit to one or more of the co-depositors and be discharged from any further liability for the
payments made. Id.
n207. Sieh II, 745 N.W.2d at 479; Sieh I, 713 N.W.2d at 198; Phillips v. Roe (In re Estate of Nagel), 580 N.W.2d 810, 811 (Iowa 1998).
n208. Sieh I, 713 N.W.2d at 196-97 (quoting Restatement (Third) of Prop.: Wills and Donative Transfers § 9.1(c) (2003)) (internal quotation
marks omitted).
n209. See Unif. Probate Code§§2-202 to -214 (amended 2010).

Page 278Page 278
98 Iowa L. Rev. 1233, *
n210. It is interesting to note that the UPC provides that if the surviving spouse is among multiple survivors in a multiple-party account, the
surviving spouse takes the full share that her deceased spouse could have claimed immediately before death. If there is no surviving spouse,
the multiple survivors share equally. Id. § 6-212(a).
n211. See Petersen v. Carstensen, 249 N.W.2d 622 (Iowa 1977).
n212. See Sinift v. Sinift, 293 N.W. 841 (Iowa 1940); see also Unif. Probate Code § 6-211 (spelling out specific rules governing the
ownership of funds deposited in joint account during the parties' lifetimes).
n213. Williams v. Thomann (In re Estate of Thomann), 649 N.W.2d 1, 6 (Iowa 2002).
n214. Kettler v. Sec. Nat'l Bank of Sioux City, 805 N.W.2d 817, 823 (Iowa Ct. App. 2011).
n215. Id. at 819-20.
n216. Id. at 825.
n217. Id. at 825-26.
n218. In re Estate of Boldt, 342 N.W.2d 463, 465 (Iowa 1983); see also Kokjohn v. Harrington (In re Estate of Kokjohn), 531 N.W.2d 99,
102 (Iowa 1995) (per curiam) (ruling that the deceased co-depositor's will cannot revoke survivorship designation in a joint-and-survivor
savings account).
n219. Boldt, 342 N.W.2d at 464.
n220. Id.
n221. Conlee v. Conlee, 269 N.W. 259 (Iowa 1936).
n222. Boldt, 342 N.W.2d at 465.
n223. Id. at 466.
n224. See Lisa Hines, Comment, Testamentary Revocation of Joint Accounts: In re Estate of Boldt, 70 Iowa L. Rev. 1061 (1985).
n225. Kokjohn v. Harrington (In re Estate of Kokjohn), 531 N.W.2d 99, 102 (Iowa 1995) (per curiam).
Page 279Page 279
98 Iowa L. Rev. 1233, *
n226. See Iowa Code § 633A.3102(3)(b)(2) (2011).
n227. Id. § 633A.3104(2).
n228. See Sieh I, 713 N.W.2d 194 (Iowa 2006), overruled in part by In re Estate of Myers, No. 11-1378, 2012 WL 5373711 (Iowa Nov. 2,
2012).
n229. See Sieh II, 745 N.W.2d. 477 (Iowa 2008).
n230. Iowa Code § 524.805(8).
n232. Iowa Code § 524.805(8).
n233. Id. § 633D.11(1).
n234. Id. § 633D.8(1).
n235. In re Estate of Meyers, No. 11-1378, 2012 WL 5373711 (Iowa Nov. 2, 2012).
n236. Sieh I, 713 N.W.2d 194 (Iowa 2006), overruled in part by Myers, 2012 WL 5373711.
n237. Meyers, 2012 WL 5373711, at 1.
n238. Administration of Estates and Trusts, ch. 52, 2009 Iowa Acts 227, 228 (codified as amended at Iowa Code § 633.238 (2011)).
n239. Meyers, 2012 WL 5373711, at 5.
n240. See Iowa Code § 524.807 (2011).
n241. Id. § 533.309(4).

Page 280Page 280
98 Iowa L. Rev. 1233, *
n242. O'Brien v. Biegger, 11 N.W.2d 412, 417 (Iowa 1943) (quoting In re Edwards' Estate, 14 P.2d 274, 276 (Or. 1932)).
Page 282Page 282
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
61 of 430 DOCUMENTS
FREDRICK G. WILLIAMS, Appellant, v. KETCHIKAN GATEWAY BOROUGH,

Appellee.
Supreme Court No. S-14513, No. 6751
SUPREME COURT OF ALASKA
295 P.3d 374; 2013 Alas. LEXIS 16
February 15, 2013, Decided
PRIOR HISTORY: [**1]

Appeal from the Superior Court of the State of Alaska, First Judicial District, Ketchikan, Trevor Stephens, Judge.
Superior Court No. 1KE-11-00219 CI.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant taxpayer challenged a decision from the Superior Court of the State of Alaska,
First Judicial District, Ketchikan, which affirmed appellee borough's ruling that a house was not exempt from taxation.
OVERVIEW: The taxpayer received a grant to rebuild his house from the Bureau of Indian Affairs Housing
Improvement Program. Under the terms of the grant, the taxpayer was required to repay the grant if he transferred the
house within 10 years of ownership. The repayment amount decreased by 10 percent, resulting in no repayment for a
transfer occurring 20 years or more after the receipt of the grant. The taxpayer executed a deed of trust securing the
federal government's right of repayment. He contended that he was exempt from paying property taxes under the grant
and the deed of trust. The borough found that the house was not exempt, and the superior court affirmed that decision.
On review, the supreme court determined that the house was not exempt under AS 29.45.030 and Ketchikan Gateway
Borough, Alaska, Code § 45.11.020. The taxpayer was the record owner of the real property at issue, which was subject
to property taxes under Ketchikan Gateway Borough, Alaska, Code § 45.11.010. The grant did not divest the taxpayer
of any of his ownership interest in the real property. Moreover, the deed of trust specifically provided that the taxpayer
was responsible for paying any taxes.
OUTCOME: The decision was affirmed. The decision of the superior court was adopted.
CORE TERMS: exempt, deed, real property, deed of trust, federal government's, taxation, borough, housing,
ownership interest, beneficiary, property taxes, mortgage, repayment, security interest, questions of law, property
taxation, agency's decision, quitclaim deed, recorded, trustor, federal law, housing authority, record owner, interests in
land, pertinent part, low-income, ownership, expertise, foreclose, leasehold
Administrative Law > Judicial Review > Standards of Review > General Overview
Administrative Law > Judicial Review > Standards of Review > Rule Interpretation
Administrative Law > Judicial Review > Standards of Review > Substantial Evidence
Evidence > Inferences & Presumptions > Inferences
[HN1] In reviewing administrative decisions, there are at least four principal standards of review. These are the
"substantial evidence test" for questions of fact; the "reasonable basis test" for questions of law involving agency
expertise; the "substitution of judgment test" for questions of law where no expertise is involved; and the "reasonable
and not arbitrary test" for review of administrative regulations. An appellate court reviews an agency's interpretation of
Page 283Page 283
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
its own regulation under the reasonable basis standard, deferring to the agency unless the interpretation is plainly
erroneous and inconsistent with the regulation. The appellate court reviews questions of law and issues of constitutional
interpretation de novo under the substitution of judgment standard. Substantial evidence is evidence that a reasonable
mind might accept as adequate to support a conclusion. An appellate court does not reweigh the evidence nor choose
between competing factual inferences, and the court must uphold an administrative agency's decision if it is supported
by substantial evidence even though there are competing facts that might support a different conclusion. An appellate
court may reverse an agency's decision only if it cannot conscientiously find the evidence supporting the agency's
decision is substantial.
Constitutional Law > State Constitutional Operation

Tax Law > State & Local Taxes > Real Property Tax > General Overview
[HN2] See Alaska Const. art. IX, § 5.
Tax Law > State & Local Taxes > Real Property Tax > Assessment & Valuation > General Overview
[HN3] See Ketchikan Gateway Borough, Alaska, Code § 45.11.010.
[HN4] Ketchikan Gateway Borough, Alaska, Code § 45.11.005 provides that the term "real property" means land and
improvements, all possessory rights and privileges appurtenant to the property, and includes personal property affixed to
the land or improvements. "Improvements" means: all buildings, structures, fences, landscaping and additions erected in
or upon land.
[HN5] See Ketchikan Gateway Borough, Alaska, Code § 45.11.020(a)(8).
[HN6] See Ketchikan Gateway Borough, Alaska, Code § 45.11.030.
[HN7] See AS 29.45.030(a)(8).
[HN8] See AS 29.71.800(17), (19). (17)
Real Property Law > Deeds > General Overview

[HN9] See AS 34.15.010(a).
Real Property Law > Deeds > Types > Quit Claim Deeds
[HN10] See AS 34.15.050.
Real Property Law > Deeds > Types > Quit Claim Deeds
[HN11] According to AS 34.15.050, part of the statutory scheme governing conveyances, a quitclaim deed conveys all
of the existing legal and equitable rights of the seller in the property described in the deed.
Real Property Law > Financing > Mortgages & Other Security Instruments > General Overview
Real Property Law > Priorities & Recording > General Overview
[HN12] See AS 34.20.110.
[HN13] The Alaska Supreme Court treats deeds of trust as identical to mortgages in almost all respects. A deed of trust
is a mortgage in effect, being only a somewhat different device for accomplishing the same purpose, creating a security
interest in land. A deed of trust does not move title out of the trustor, but only creates a lien.

Page 284Page 284
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
Governments > Legislation > Interpretation

[HN14] A taxpayer claiming a tax exemption has the burden of showing that the property is eligible for the exemption.
Furthermore, the courts must narrowly construe statutes granting such exemptions.
[HN15] Under Alaska law, a deed of trust creates a security interest.
COUNSEL: Fredrick G. Williams, Appellant, Pro se, Ketchikan.
Scott A. Brandt-Erichsen, Borough Attorney, Ketchikan, for Appellee.
JUDGES: Before: Fabe, Chief Justice, Carpeneti, Winfree, Stowers, and Maassen, Justices.
OPINION BY: FABE
OPINION
[*374] FABE, Chief Justice.
Fredrick Williams appeals the superior court's decision affirming the Ketchikan Gateway Borough's ruling that the
house at 511 Stedman Street is not exempt from Ketchikan Gateway Borough taxation. In March 2002 Williams
received a grant to rebuild his house from the Bureau of Indian Affairs Housing Improvement Program. Under the grant,
Williams would have been required to repay the full amount of the grant if he had transferred the house within ten years
of ownership. Because Williams has owned the home for ten years, the repayment amount will annually decrease by ten
percent of the original amount, resulting in no repayment for a transfer occurring 20 years or more after Williams
received the grant. Williams executed a deed of trust securing the federal government's right to repayment under the
grant with the Stedman [**2] Street property.
Williams claims that under the grant and the deed of trust, "[t]he federal government [*375] owns . . . the $115,000 it
took to build the home," and that Williams was therefore exempt from paying property taxes on it. On appeal, the
superior court heard this argument and rejected it, upholding the Ketchikan Gateway Borough's view that the deed of
trust securing the grant did not divest Williams, the record owner, of the ownership interest in his real property. 1
1 "When the superior court acts as an intermediate court of appeal in an administrative matter, we independently review the merits of the
agency's decision." Powercorp Alaska, LLC v. State, Alaska Indus. Dev. & Exp. Auth., 171 P.3d 159, 163 (Alaska 2007) (citing Williams v.
Abood, 53 P.3d 134, 139 (Alaska 2002)) (substantial evidence standard applies to review of agency's factual findings and rational basis
standard applies to review of questions of law that involve agency expertise).
Because we agree with the superior court that substantial evidence supports the Ketchikan Gateway Borough's factual
determinations and that the Borough's decision was correct as a matter of law, we AFFIRM the superior court and adopt
its [**3] decision, which is attached as an appendix. 2
2 The attached decision has been edited to conform to the technical rules of the Alaska Supreme Court and internal record citations have
been removed.
IN THE SUPERIOR COURT FOR THE STATE OF ALASKA FIRST JUDICIAL DISTRICT AT KETCHIKAN
FREDRICK G. WILLIAMS,
Appellant,
v.
KETCHIKAN GATEWAY BOROUGH, DIRECTOR OF ASSESSMENTS,
Appellees.
Page 285Page 285
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
Case No. 1KE-11-219 CI
DECISION
Mr. Williams appeals the Ketchikan Gateway Borough's (KGB) decision that the improvements (house) situated on the
real property located at 511 Stedman Street are not exempt from KGB property taxation per Ketchikan Gateway
Borough Code § 45.11.020 and AS 29.45.030. Oral argument occurred on September 14, 2011. The KGB was
represented by KGB Attorney Scott Brandt-Erichsen. Mr. Williams appeared pro se. The court took the matter under
advisement. The KGB's decision is, for the following reasons, AFFIRMED.
I. POINTS ON APPEAL
Mr. Williams' Statement of Points presents the following issue:
a. Whether the federal government has an interest in Lot 20, Block 28 (511 Stedman Street) which exempts the extent of
that interest from KGB property taxation per KGB § 45.11.020 and AS 29.45.030.
II. JURISDICTION
This [**4] court has jurisdiction to review Mr. Williams' appeal of the KGB's decision that the property (including the
house) at 511 Stedman Street is not exempt from taxation under KGB § 45.11.020 or AS 29.45.030 per AS
22.10.020(d), Alaska Appellate Rule 601(b), and KGB § 45.11.100©).
III. STANDARD OF REVIEW

The Alaska Supreme Court has recognized that:
[HN1] In reviewing administrative decisions . . . [there are] at least four principal standards of review. "These are the 'substantial
evidence test' for questions of fact; the 'reasonable basis test' for questions of law involving agency expertise; the 'substitution of
judgment test' for questions of law where no expertise is involved; and the 'reasonable and not arbitrary test' for review of
administrative regulations." We review an agency's interpretation of its own regulation under the reasonable basis standard,
deferring to the agency unless the interpretation is "plainly erroneous and inconsistent with the regulation." We review questions of
law and issues of constitutional interpretation de novo under the substitution of judgment standard. 1
1 Simpson v. State, Commercial Fisheries Entry Comm 'n, 101 P.3d 605, 609 (Alaska 2004) (quoting Jager v. State, 537 P.2d 1100, 1107 n.23
(Alaska 1975) [**5] and Lauth v. State, 12 P.3d 181, 184 (Alaska 2000)).
"Substantial evidence is evidence that a 'reasonable mind might accept as adequate to support a conclusion.' " 2 An
appellate court does not "reweigh the evidence nor [*376] choose between competing factual inferences," 3 and the
court must uphold an administrative agency's decision if it is supported by substantial evidence "[e]ven though there are
competing facts that might support a different conclusion." 4 An appellate court may reverse an agency's decision "only
if we 'cannot conscientiously find the evidence supporting [the agency's decision] is substantial.' " 5
2 May v. State, Commercial Fisheries Entry Comm'n, 175 P.3d 1211, 1216 (Alaska 2007) (quoting Cleaver v. State, Commercial Fisheries
Entry Comm 'n, 48 P.3d 464, 467 (Alaska 2002) (internal citation and quotations omitted)).
3 State of Alaska, Div. of Corps., Bus. & Prof'l Licensing v. Platt, 169 P.3d 595, 601 (Alaska 2007) (quoting Doyon Universal Servs. v. Allen,
999 P.2d 764, 767 (Alaska 2000)).
4 Platt, 169 P.3d at 601.
5 Powercorp Alaska, LLC v. State, Alaska Indus. Dev. & Exp. Auth., 171 P.3d 159, 163 (Alaska 2007) (quoting Robinson v. Municipality of
Anchorage, 69 P.3d 489, 493 (Alaska 2003)).
IV. [**6] RECORD

Page 286Page 286
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
Emily R. Whitesides, Personal Representative of the Estate of Robert Whitesides, executed a Quitclaim Deed on June
19, 1991 conveying the Estate's interest in Lot 20 of Block 28, as shown on plat of U.S. Survey 1990 (511 Stedman
property), to Fredrick George Williams. The Quitclaim Deed was recorded in the Ketchikan Recording District.
The KGB assessed the value of the 511 Stedman property as follows since 1999:
Year Land Improvements Total
1999 $40,700 $9,900 $50,600
2000 $42,500 $6,900 $49,400
2001 $42,500 $6,900 $49,400
2002 $42,500 $0 $42,500
2003 $42,500 $126,500 $169,000
2004 $42,500 $116,600 $159,100
2005 $42,500 $116,600 $159,100
2006 $48,900 $134,100 $183,000
2007 $61,100 $134,100 $195,200
2008 $59,000 $136,800 $195,800
2009 $59,000 $136,800 $195,800
2010 $59,000 $136,800 $195,800
2011 $59,000 $136,800 $195,800
Mr. Williams entered into a Ketchikan Indian Corporation Housing Program Housing Improvement Program Grant
Agreement on March 5, 2002. 6 The Grant Agreement references Block 28, Lot 20 and provides that the grant is being
made by the Bureau of Indian Affairs (BIA) Housing Improvement Program (HIP), and that it is subject to the
regulations set forth at 25 C.F.R. § 256 (1998). The Grant Agreement also provides that the [**7] grant was for
"building materials and labor assistance" and that the assistance provided "will be only that amount necessary to meet
the basic housing needs of the Grantee." The Grant Agreement reflects that the grant was being made under "HIP
Category 'C'," which provides that the entire grant amount would have to be repaid if he sold "the house for which the
grant was made" during the next 10 years, and that the amount due on sale would decrease 10% a year thereafter --
which results in no payment having to be made if the property were sold after 20 years. And the Grant Agreement
provides that the terms thereof were binding on the Grantee's successors in the event of his death during the term of the
grant and "shall be binding on . . . persons who succeed to the grantee's interest(s) in the house for which the grant is
made."
6 Mr. Williams requested that this document be added to the record. The KGB did not oppose the request. The court granted the request. The
document is part of the record but is not numbered as are the other documents in the record.
Mr. Williams executed a Deed of Trust Promissory Note (DOT Note) on March 8, 2002. The DOT Note was recorded
in the Ketchikan Recording [**8] District on April 2, 2002. The DOT Note includes the following:
a. Payment on the Note is secured by Lot 20, Block 28.

b. Mr. Williams promises to pay $115,000 in return for a loan he received from the Ketchikan Indian Corporation Housing
Authority for the U.S. Bureau of Indian Affairs Home Improvement Program.
c. The loan is interest free.
d. If there is a voluntary or involuntary sale or transfer of the security (Lot 20, Block 28) during the first 10 years the amount due
will be the principal loan amount of $115,000. If this occurs during the 10th year the amount due will be 90% of the principal
amount. The balance that would be due is [*377] thereafter reduced by 10% each succeeding year until there is a zero balance
after 20 years.
e. Otherwise, no payments are required.
f. The Promissory Note is secured by a Deed of Trust.
g. The Holder of the Promissory Note "has the right to sue on the Note and obtain a personal judgment... for satisfaction of the
amount due under the Note either before or after a judicial foreclosure of the mortgage or Deed of Trust under AS 09.45.170-
09.45.220."
Page 287Page 287
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
Mr. Williams executed a Deed of Trust (DOT) on March 8, 2002. The DOT was recorded in the Ketchikan Recording
[**9] District on April 2, 2002. The DOT includes the following:
a. Mr. Williams is the Trustor. Ketchikan Indian Corporation Housing Authority is the Beneficiary. Ketchikan Title Agency, Inc. is
the Trustee.
b. The Beneficiary, "for the U.S. Bureau of Indian Affairs, Home Improvement Program," provided funds to Mr. Williams for
repairing and upgrading the property at Lot 20, Block 28. As a result, Mr. Williams owes the Beneficiary $115,000.
c. "The Trustor grants, bargains, sells and conveys to Trustee, in Trust with Power of Sale, that property described as: Lot twenty
(20) of Block Twenty-eight (28)
d. "This Deed of Trust is made for the purpose of securing the following: A. Performance of each agreement of Trustor contained
herein; and B. Payment of the sum of $115,000 cash . . . pursuant to the terms contained in a Deed of Trust Promissory Note of
even date herewith; C. Any and all sums Beneficiary may expend or advance in accordance herewith for the protection or
preservation of the property covered by this Deed of Trust."
e. The term of the Deed of Trust for purposes of AS 34.20.140-34.20.150 is 25 years, "unless the obligation is earlier satisfied."
f. Mr. Williams must: "Protect and preserve [**10] [the] property and maintain it in good condition and repair." He must: "Comply
with all laws, ordinances, regulations, covenants, conditions and restrictions affecting said property and not... commit any act upon
or concerning said property in violation of the law." He must maintain insurance on the property, with the Beneficiary being a loss
payee. He must: "Pay at least ten days before delinquency all taxes and assessments affecting said property...."
g. In the event of default all amounts owed become immediately due and payable. The Beneficiary may elect to sue upon the
Promissory Note and to foreclose judicially per AS 09.45.170-09.45.220 or foreclose extra-judicially per AS 34.20.070-34.20.135,
or it may foreclose judicially or extra-judicially without first suing on the Promissory Note.
[Between October 2010 and September 2011, Mr. Williams and KGB engaged in lengthy correspondence in which Mr.
Williams asserted that the property was owned by the federal government, and thus exempt from taxation, and KGB
responded that Mr. Williams remained the record owner and was liable for property taxes.]
....
V. DISCUSSION
a. Parties' Positions
Mr. Williams claims that the federal government [**11] has an interest in the improvements at 511 Stedman Street
(house); he does not; and, the federal government's interest is exempt from KGB property taxation per AS 29.45.030
and KGB § 45.11.020.
The KGB claims that Mr. Williams is the record owner of the property at 511 Stedman Street, including the
improvements (house); the federal government does not retain an ownership interest in the house by virtue of the DOT
Note, the DOT, or the Grant Agreement; so the house is not exempt from KGB property taxation per AS 29.45.030 or
KGB § 45.11.020.
[*378] b. Law
Article IX, section 5 of the Alaska Constitution provides that [HN2] "Private leaseholds, contracts, or interests in land
or property owned or held by the United States, the State, or its political subdivisions, shall be taxable to the extent of
the interests."
KGB § 45.11.010 provides, in pertinent part, that:
[HN3] All real property in the borough . . . except such . . . property as is by law exempt from taxation, shall be annually assessed,
and a tax thereon shall be annually levied and collected for school and municipal purposes, in the manner set forth herein.
[HN4] KGB § 45.11.005 provides that:
The term "real property" means land and improvements, all possessory [**12] rights and privileges appurtenant to the property,
and includes personal property affixed to the land or improvements.
And that "improvements" means: "All buildings, structures, fences, landscaping and additions erected in or upon land."
Page 288Page 288
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
KGB § 45.11.020(a)(8) provides that:
[HN5] (a) The following property is exempt from general taxation:

....
(8) Property of a political subdivision, agency, corporation, or other entity of the United States to the extent required by federal law;
except that a private leasehold, contract, or other interest in property is taxable to the extent of that interest.
KGB § 45.11.030 provides that:
[HN6] An interest, other than record ownership, in real property of an individual residing in the property is exempt from real
property taxes if the property has been developed, improved, or acquired with federal funds for low-income housing and is owned
or managed as low-income housing by the state building authority or a regional housing authority formed under AS 18.55.996. This
subsection does not prohibit the borough from receiving payments in lieu of taxes authorized under federal law.
Alaska Statute 29.45.030(a)(8) provides that:
[HN7] (a) The following property is exempt from general [**13] taxation:
....
(8) property of a political subdivision, agency, corporation, or other entity of the United States to the extent required by federal law;
except that a private leasehold, contract, or other interest in the property is taxable to the extent of that interest unless the property
is located on a military base or installation and the property interest is created under 10 U.S.C. 2871-2885 (Military Housing
Privatization Initiative), provided that the leaseholder enters into an agreement to make a payment in lieu of taxes to the political
subdivision that has taxing authority.
Alaska Statute 29.71.800 provides, in pertinent part, that:
[HN8] (17) "property" means real and personal property;

....
(19) "real property" means land and improvements, all possessory rights and privileges appurtenant to the property, and includes
personal property affixed to the land or improvements.
Alaska Statute 34.15.010(a) provides, in pertinent part, that: [HN9] "A conveyance of land . . . or interest in land, may
be made by deed . . . ."
Alaska Statute 34.15.050 provides that: [HN10] "A deed of quitclaim and release for the form in common use is
sufficient to pass all the real estate which the grantor can convey [**14] by a deed of bargain and sale." 7
7 See Ellingstad v. State, Dep't of Natural Res., 979 P.2d 1000, 1004 (Alaska 1999) ( [HN11] "[A]ccording to AS 34.15.050, part of the
statutory scheme governing conveyances, a quitclaim deed conveys all of the existing legal and equitable rights of the seller in the property
described in the deed.").
Alaska Statute 34.20.110 provides that:
[HN12] For the purposes of record, a deed of trust given to secure an indebtedness, shall be treated as a mortgage of real estate,
and recorded in full in the book provided for mortgages of real property. The person who makes or executes the deed of trust shall
be indexed as the "mortgagor" and [*379] the trustee and the beneficiary or cestui que trust, as the "mortgagees."
The Alaska Supreme Court has stated that:
[HN13] We treat deeds of trust as identical to mortgages in almost all respects. In Brand, we stated: "A deed of trust is 'a
mortgage in effect,' being only a somewhat different device for accomplishing the same purpose, creating a security interest in
land . . . [A] deed of trust does not move title out of the trustor, but only creates a lien." 8
Page 289Page 289
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
8 Young v. Embley, 143 P.3d 936, 941-42 (Alaska 2006) (quoting Brand v. First Fed. Sav. & Loan Ass'n of Fairbanks, 478 P.2d 829, 831-32
(Alaska 1970)). [**15] See also Belland v. O.K. Lumber Co., 797 P.2d 638, 640 n.4 (Alaska 1990) ("A deed of trust in Alaska is treated as a
lien against the property, much like a mortgage.").
The Alaska Supreme Court has recognized that:
[HN14] A taxpayer claiming a tax exemption has the burden of showing that the property is eligible for the exemption.
Furthermore, the courts must narrowly construe statutes granting such exemptions. 9
9 Greater Anchorage Area Borough v. Sisters of Charity of the House of Providence, 553 P.2d 467, 469 (Alaska 1976).
c. Decision
The court finds that the KGB's determination that Mr. Williams is the owner of the real property and improvements at
511 Stedman Street and that no portion of said property is exempt from KGB taxation is supported by substantial
evidence 10 for five reasons.
10 The court would make the same finding if the substantial evidence standard did not apply and de novo review is appropriate.
First, the record reflects that Mr. Williams became the owner of record of the real property at 511 Stedman Street, and
the improvements thereon, in 1991 by virtue of the quitclaim deed.
Second, Mr. Williams' ownership interest in the property (real and improvements) at 511 Stedman Street [**16] is
subject to KGB property taxes per KGB § 45.11.010.
Third, the 2002 Grant Agreement provided that Mr. Williams would receive a federal grant which would pay for the
demolition of the residence then on the real property at 511 Stedman Street and the building of a replacement residence.
The Grant Agreement provided that he would not have to make any payments but would have to repay the entire grant
amount ($115,000) if he sold the property during the first ten years of the grant term, and that the repayment amount
would decrease by 10% every year thereafter. The Grant Agreement did not divest Mr. Williams of any of his ownership
interest in the real property at 511 Stedman Street, or of any of his ownership interest in the present or future
improvements on said property.
Fourth, Mr. Williams executed the 2002 DOT and DOT Note to implement the Grant Agreement. The DOT and the
DOT Note contain repayment provisions similar to those in the Grant Agreement. Neither the DOT nor the DOT Note
divest Mr. Williams of any of his ownership interest in the real property and improvements at 511 Stedman Street.
[HN15] Under Alaska law a deed of trust creates a security interest. There are no terms in this [**17] DOT, or the
DOT Note, which show that the parties intended that the same created other than a security interest. To the contrary, the
terms demonstrate that the intent was that the federal government would only have a security interest in the property.
The limitations and requirements that are imposed are of the type generally imposed by a lender in order to protect the
security interest. 11 The DOT expressly contemplates that the improvements financed through the Grant Agreement
would be subject to taxation as it specifically provides that Mr. Williams is responsible for paying such taxes. 12
11 A contrary ruling would result in lenders being deemed owners of the security (real property and improvements) and thus responsible for
the payment or related property taxes in the absence of an agreement with the debtor to the contrary.
12 Mr. Williams argues that the Grant he received was for low-income recipients and that this fact somehow results in his not being
responsible for that portion of the KGB property tax allocated to the improvements (the house). But the DOT demonstrates that it was
understood that the same would be taxed and agreed that he would be responsible for paying the taxes. [**18] The court also notes that he is
able, under the terms of the Grant Agreement -- DOT -- and DOT Note -- to possess and reside in the house without having to make any
repayments unless and until he sells the property.
Page 290Page 290
295 P.3d 374, *; 2013 Alas. LEXIS 16, **
[*380] Fifth, given the above, the improvements located at 511 Stedman Street are not exempt from KGB taxation
under KGB § 45.11.020(8) or AS 29.45.030(a)(8). 13
13 The court notes that Mr. Williams argued in his Amended Appellant's Reply that he is a Tlingit and the federal government has a special
relationship with American Indians. To the extent that this is a separate argument, the court is not addressing the same because it was made
in a reply and has not been adequately briefed. To the extent that the court must address this point, Mr. Williams has not shown how the same
results in the federal government having an ownership interest in the improvements at issue or in his not having ownership of the same,
subject to the DOT security interest.
VI. CONCLUSION
The KGB decision that the improvements (house) located at 511 Stedman Street are not exempt from KGB taxation
under KGB § 45.11.020(8) or AS 29.45.030(a)(8) is, for the reasons discussed above, affirmed.
IT IS SO ORDERED.
Dated [**19] at Ketchikan, Alaska this 28th day of September 2011.
/s/ Trevor N.Stephens
Superior Court Judge
Page 292Page 292
65 Baylor L. Rev. 153, *
62 of 430 DOCUMENTS
Copyright (c) 2013 Baylor Law Review

Baylor Law Review
Winter, 2013
Baylor Law Review
65 Baylor L. Rev. 153
LENGTH: 36437 words
ARTICLE: Unjust Enrichment in Texas: Is It a Floor Wax or a Dessert Topping? n1
NAME: George P. Roach*
BIO: * George P. Roach practices damages law and provides consulting on litigation damages and valuation in Dallas.
He is also a Senior Adviser to the litigation consulting firm of Freeman & Mills, Inc. in Los Angeles. His background
includes an M.B.A. (Harvard), J.D. (University of Texas) and an A.B. in economics (University of California). For
further information, see www.litigation-consultant.com. The Author would like to thank the following litigators who
provided suggestions or corrections to prior drafts: John W. Clark, Jr., David Dodge, Barbara Hale, Kevin Isern, Kevin
Jacobs, Karen Milhollin, Mark Murray, Mike Oldham, Dylan B. Russell, William Seele, Ross Spence, Ted Schultz, Jon
Suder, Chris Tramonte, and Nick Zito.
LEXISNEXIS SUMMARY:
... Texas courts resist unjust enrichment as a cause of action; claims for unjust enrichment in equity are rare; the courts'
opinions on jurisdiction fail their glowing words for equity's safety net; and the remedy of forfeiture represents an
unexplained departure from other remedies in equity in Texas. ... For example, if your judge only thinks of quantum
meruit whenever you say "unjust enrichment,' you may want to reconsider unjust enrichment or at least plead for
disgorgement instead. ... The law in equity generally assesses the defendant with liability for uncertainty in the amount
of damages or unjust enrichment unless the defendant disproves the assumed advantage or duty to account. ... Second,
the Restatement Third emphasized the fact that restitution, unjust enrichment, and the new term "disgorgement' are all
just different names for an accounting in equity for claims of conscious wrongdoing. ... The particulars of constructive
trusts would suggest a remedy that improves the claimant's ability to realize and protect her equity interest in assets and
their proceeds.
TEXT:
[*154]
I. Introduction
As the state in which the lone-star maverick has been enshrined as a group role model, Texas could be expected to
pursue an unusual approach to equitable remedies. Texans' penchant for legal innovation was spotted early by United
State Supreme Court Chief Justice Roger Taney in his reversal of a district judge in Texas in 1851. Alarmed that the
federal judge might have "gone native,' Taney chastised him for applying Texas law:
Whatever may be the laws of Texas in this respect, they do not govern the proceedings in the courts of the United States.
And although the forms of proceedings and practice in the State courts have been adopted in the District Court, yet the
adoption of the State practice must not be understood as confounding the principles of law and equity, nor as
authorizing legal and equitable claims to be blended together in one suit. n2
Page 293Page 293
Taney had good reason to fear that his district judge might stray from standard doctrine, as Texas introduced a number
of significant and lasting innovations to American law.
Texas was the first jurisdiction to abolish forms pleading, one of the first to merge courts in equity with courts at
law, and the first to require jury trials for claims in equity. n3 Therefore, our law in equity started from a unique position
and has continued to break its own trail ever since. Unfortunately, along that trail, unjust enrichment in equity got
misplaced or [*155] a little lost, perhaps because Texas had almost no experience with a separate court in equity.
The law in equity was largely developed before the Texas Republic was founded. Empowered with in personam
authority from the English sovereign, the Chancery Court conducted the law in equity to resolve civil complaints that
were otherwise substantively or procedurally irreparable under the common law. n4 It was not developed to repair the
common law but only to provide a safety net for claims ignored or minimized by the common law. n5 Traditionally, it did
not provide trials by jury but it developed a legal process better suited for complicated and evidence-intensive litigation.
n6
When common law or statute failed to adequately address a business claim, the law in equity was frequently effective
by combining injunctive relief and an accounting to resolve the dispute. n7 In the [*156] last two centuries, the
combination of injunctive relief and claims for the defendant's profits has proven to be effective for many types of
business claims but especially those related to wrongful use or misappropriation of intellectual property and intangible
assets. n8
This article will show that Texas courts are not comfortable with the law in equity and unjust enrichment. Texas
courts resist unjust enrichment as a cause of action; claims for unjust enrichment in equity are rare; the courts' opinions
on jurisdiction fail their glowing words for equity's safety net; and the remedy of forfeiture represents an unexplained
departure from other remedies in equity in Texas. Section II discusses the importance of the law in equity to the current
and future data economy. The rapid growth in the number of cases relating to unjust enrichment in both state and federal
courts over the last twenty years confirms an increasing presence in litigation. Section III explains how the key
traditions of the law in equity were developed and provides a baseline for the comparison of Texas law in Section IV.
Texas actively applies the doctrine of irreparable injury despite offering jury trials and courts of general jurisdiction. At
the same time, Texas constrains jurisdiction in equity and therefore limits the safety net compared to other jurisdictions.
Section V examines the dispute about whether unjust enrichment is a cause of action or just a remedy under Texas
law. Not only are the appellate courts split on the issue, but many opinions seem to resist the Supreme Court's consistent
endorsement of unjust enrichment in at least ten modern opinions. Resistance to the Supreme Court position, however
futile, seems to be increasing.
Section VI develops further evidence of Texas courts' discomfort with remedies in equity. It explores why the
Supreme Court endorsed the remedy of forfeiture for breach of fiduciary duty when the remedies of unjust [*157]
enrichment or constructive trust are equally capable and offer a fuller, more defined body of precedents. The Court's
opinions in Burrow v. Arce n9 and ERI Consulting Engineers, Inc. v. Swinnea n10 raise more questions than answers,
highlighting the uncertainties and inconsistencies for forfeiture as a possible remedy in equity as well as for the unifying
principles for Texas remedies in equity.
This article focuses on unjust enrichment in Texas principally for business litigation. Time, space, and editorial
patience are limited, so the related topics of injunctive relief and accounting in equity are not fully addressed. The last
section analyzes the Texas Supreme Court's two most recent opinions on forfeiture as they relate to monetary remedies
in equity but the law underlying forfeiture cannot be fully addressed in the one section. As explained in Section III, this
article will use the term "unjust enrichment' to denote unjust enrichment in equity as a cause of action and
"disgorgement' as the remedy of unjust enrichment in equity.
II. Why Is Unjust Enrichment Important to Texas?
Contrary to the perceptions of many lawyers and judges that unjust enrichment is as outdated as conversational Latin,
unjust enrichment is growing more important in business litigation. n11 For perspective, a simple word search was
conducted to count the number of opinions available on the LEXIS database that mention the term "unjust enrichment"
or "disgorgement" in the text of the opinion. Despite the approximately 50% decline in Texas civil court trials over the
last twenty years, n12 the annual number of opinions citing these terms from federal courts, all state courts, and Texas
courts increased 700%, 264%, and 276%, respectively, from [*158] 1992 through 2011. n13 By comparison, a similar
search was conducted for the term "lost profits" showed increases of 128%, 44%, and 100%, respectively. See Table A
below:
Page 294Page 294
Table A: Annual Case Opinions
Unjust Enrichment or Disgorgement

Federal All States Texas
2011 4,214 1,888 79
2007 to 2011 avg. 3,364 1,697 78
2002 to 2006 avg. 1,459 1,131 58
1997 to 2001 avg. 807 722 38
1992 to 1996 avg. 591 523 19
1992 527 518 21
"Lost Profits"
Federal All States Texas
2011 725 377 36
2007 to 2011 avg. 714 366 44
2002 to 2006 avg. 472 334 40
1997 to 2001 avg. 317 266 35
1992 to 1996 avg. 313 254 25
1992 318 261 18
No detailed breakdown of the sources of this growth has been conducted, but at least three drivers have been identified.
First, remedies in equity have frequently proven more effective in resolving claims relating to intellectual property than
many other forms of remedies. n14 Second, unjust enrichment can present unique advantages in individual corporate
claims. n15 [*159] Third, some federal agencies are shifting a substantial portion of their budgets from administrative
regulation to litigation. n16 The principal remedies claimed by the Securities and Exchange Commission (SEC), the
Commodities Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), and the Food and Drug
Administration (FDA) are injunction and disgorgement of revenues or profits. n17
A. The Data Economy Needs Monetary Remedies in Equity
Monetary remedies in equity came into greater use in business litigation with the appearance of intellectual property
and intangible assets. n18 In the absence of applicable statutes or common law causes of action, claims for the
misappropriation of intellectual property had to rely on a combination of injunctive relief and disgorgement to secure
the only remedy available. n19 In the middle of the nineteenth century, federal statutes provided only for injunctive relief,
but the U.S. Supreme Court held that monetary remedies in equity were also available even if such additional relief was
not pled in [*160] the complaint for an injunction. n20 Similarly in the middle of the twentieth century, Congress passed
enabling legislation that provided jurisdiction for federal regulatory agencies to secure injunctive relief which was
sufficient to imply jurisdiction for monetary remedies in equity. n21
Recently, disgorgement has been applied to state claims on patents, n22 claims for gross negligence against corporate
officers, n23 claims for the misappropriation of a website n24 or confidential information, n25 and can now extend such relief
for the unauthorized viewing of data files whether on the internet or stored on a private computer or network. n26 It is the
only remedy that can be pled in cases relating to the misappropriation of "negative information' (or information on
unsuccessful or failed experiments). n27 New [*161] claims relating to new forms of property such as virtual property n28
and genetic codes or patterns n29 seem likely to appear and challenge traditional principles of property law.
For centuries the flexibility of the law in equity has been the key trait that resolved existing issues and newly
emerging problems. n30 Some observers may underestimate the importance of unjust enrichment for the future by failing
to recognize the breadth of substantive law that is served by the basic accounting in equity principles. A remedy's
underlying origin in equity is revealed by the presence of an unusual rule for measuring the defendant's benefit, much
like genetic relations, can be established with DNA. For more than 150 years, remedies based on accounting in equity
have permitted the plaintiff to measure the defendant's benefit by excluding the defendant's losses from her profits if
those results can be adequately distinguished as separate transactions. The doctrine has been applied to segregate the
defendant's losses as distinguished by year, n31 individual retail outlet, n32 and separate or experimental product lines. n33
[*162] Supporting case law for the anti-netting rule in the U.S. dates back to no later than 1869 and is recognized
as a key principle in measuring unjust enrichment in the recently completed Restatement (Third) of the Law of
Page 295Page 295
Restitution and Unjust Enrichment. n34 This obscure doctrine has been applied in opinions relating to fiduciary claims, n35
patents, n36 copyrights, n37 trademarks, n38 trade secrets, n39 and federal agency claims. n40 In a case relating to the taxation of
domestic oil production in the 1970s and 1980s, the controversy over this doctrine related to a difference of more than $
500 million of damages. n41 Remarkably, only one of the cases cited acknowledged the source of the rule as lying in
trust law. n42 According to the Restatement (Third) of the Law of Trusts, the anti-netting rule holds a trustee who is in
breach accountable for all profits and liable for all losses to remove the temptation for a trustee to gamble further with
trust assets and to gain profits that would otherwise offset or even hide prior losses. n43
B. Strategic and Tactical Advantages of Unjust Enrichment
The strategic advantages of unjust enrichment as a cause of action and the tactical advantages of disgorgement as a
remedy have been analyzed in detail in previous articles. n44 Texas courts regularly grant jurisdiction in [*163] equity
for claims based on fraud, breach of fiduciary duty, mistake, accident, and conversion. n45
Unjust enrichment is sometimes the best alternative as it provides a favorable outcome and at other times because it
is the only alternative. n46 Equity provides the only cause of action when it includes eclectic claims like mutual mistake
or because of safety net claims. n47 Unjust enrichment also offers some tactical advantages that sometimes can be critical
in allowing a claim to survive constraints that would otherwise apply in relation to comparative advantages in the statute
of limitations, contributory liability, and damages in fact. n48
As a remedy, disgorgement can be pled for a variety of causes of action. Compared to remedies at law for the same
facts, disgorgement may be greater in amount, easier to prove, cheaper to prove and enjoy various procedural
advantages. n49 Furthermore, disgorgement may be the only remedy that can be proven either because actual damages are
too speculative n50 or because the plaintiff has no actual damages. n51
[*164] Much of the advantage of unjust enrichment is due to the fact that unjust enrichment is a measure of what
the defendant has actually gained by the time of trial. n52 Unjust enrichment is based on ex post data, which can be
greater than ex ante damages under favorable circumstances. n53 Based on actual results by the time of trial, damages
based on ex post evidence are easier to understand, require less expert testimony, and are sometimes viewed as more
credible to juries. n54 Claims for future unjust enrichment have been rare because injunctive relief is granted to preclude
further gains for the defendant. However, in the absence of injunctive relief, future unjust enrichment is awarded. n55
[*165] For example, the principal attraction of fee forfeiture as a remedy in breach of fiduciary duty claims in
Texas is that proving causation and damages is simpler and easier for fee forfeiture than proving actual damages. There
are a number of Texas appellate opinions that have concluded that, unless the plaintiff can secure the remedy of fee
forfeiture, she has not introduced sufficient evidence to otherwise establish causation and damages in fact. n56 No single
measure or approach is always best, but claims or remedies in equity can also be pled in the alternative or in case ex
post evidence changes favorably before trial. n57
In some cases, however, pleading for unjust enrichment would be a disadvantage for plaintiffs in Texas who require
the four-year limitation period for breach of fiduciary duty rather than the two-year period for unjust enrichment. n58 It
may be either a disadvantage or advantage for the trial judge or opposing counsel to misunderstand unjust enrichment.
n59
For example, if your judge only thinks of quantum meruit whenever you say "unjust enrichment,' you may want to
reconsider unjust enrichment or at least plead for disgorgement instead.
One of the more unusual distinctions regarding unjust enrichment as a remedy is that occasionally its primary
advantage is that "unjust [*166] enrichment" or "disgorgement" is not considered the same as "damages." n60 This
innocuous distinction can sometimes make a major difference when critical statutes or prior documentation are narrowly
drawn. n61 The Fifth Circuit applied this notion to support collection efforts for disgorgement orders, holding that
imprisonment for failure to disgorge unjust enrichment is permissible because disgorgement "is not a remedy at law;
rather disgorgement is equitable in nature, constituting an injunction in the public interest." n62 However, this distinction
can also cut in the other direction. It was recently held that insurance policies that require the insurer to defend lawsuits
for damages do not necessarily cover lawsuits for equitable relief. n63
C. Federal and State Agency Litigation
The possibility that a business may be sued by a regulatory agency is readily acknowledged for some agencies but may
be overlooked for other agencies. n64 Publicly held companies, stock brokerages, and commodity traders operate under
the possibility that they might be sued by the SEC or CFTC. n65 Aware of such a possibility, the companies work with
Page 296Page 296
experienced law firms that are prepared to defend against such claims. n66 For other companies, the possibility that they
might be sued by agencies like the FTC [*167] may seem remote. n67 A previous compilation of case statistics indicates
that the FTC files 80 to 90 suits a year, principally in the Ninth and Eleventh Circuits, and annually wins judgments of
as much as $ 900 million. n68 Most agency attorneys in charge of the case have previously handled five to ten cases. n69
On the other hand most lawyers for the defendant in an FTC case have worked on an average of only one other prior
case. n70
The success of the principal federal agencies has attracted substantial attention from less prominent agencies. If the
SEC, n71 CFTC, and the Department of Energy n72 were in the first generation of successful litigating regulators, the FTC
is a prominent member of the second generation. Now the FDA has adopted a policy of suing pharmaceutical companies
for unjust enrichment for violations of FDA manufacturing standards. n73
Texas businesses are not immune to such actions from state agencies. In 2007, the Texas Attorney General won a
similar "de facto class action" for consumer fraud under the Texas Deceptive Trade Practices Act for injunctive relief
and restitution without having to specify the names of all consumers harmed. n74
[*168]
III. Traditional Law in Equity
Historically, the Chancery Court evolved out of the early practice of the English King to hear petitions that sought his
sovereign intercession. The King originally appointed the Chancellor just to administer the petitions for the King's
judgment but the Chancellor's role grew into the Chancery Court as the King delegated more authority. n75 English
citizens petitioned the King for special assistance for problems in which the common law courts could not help,
problems in which the courts were the source of the trouble, or matters that sought the aid of the King's conscience. n76
U.S. Supreme Court Justice Joseph Story's narrative on the Chancery Court establishes that prior to the seventeenth
century, the jurisdiction of the court was determined by supplementing the common law, not competing with it. n77 The
maxim that "no right shall be left without a remedy" n78 represented the positive or expansive side of what would later
become known as the Doctrine of Irreparable Injury, i.e., that the Chancery Court had jurisdiction over claims that the
common law could not [*169] adequately remedy. n79 The mandate for a court in equity to provide a safety net for
neglected or ignored claims has, therefore, been the key purpose for the court in equity for centuries.
Exercising authority delegated by the Crown, the Chancery Court acted against the parties' person rather than their
property, and it operated under the mandate to emphasize justice and moral conscience in its orders or decrees. n80 A
court in equity is traditionally known as a "court of conscience," and this article will show that many modern opinions
in equity assess the conscionability of the defendant's actions as part of the judgment. However, Justice Story's account
of the history of equity makes it clear that after the early days of the court, the primary criterion for jurisdiction was
whether a claimant's legitimate claim would otherwise be adequately considered on a substantive or procedural basis in
courts at law. n81
Dan Dobbs' treatise adds an additional perspective by explaining that the Chancellor's authority was not solely
based on appealing to the parties' conscience but on the power to hold the defendant in contempt. n82 He explains that the
Chancery did not make or change the law, they issued in personam orders about how to resolve the dispute. n83 The order
was based on what the judge determined was in keeping with good conscience or perhaps [*170] the King's
conscience. n84 The parties were thus told what was or what should be in their consciences. n85 Should the defendant find
that his conscience could not agree with the judge's order and refuse to comply, the judge would enforce his order with a
contempt sanction, which was a form of sovereign authority delegated to incarcerate offenders. n86 The contempt
sanction continues to be exercised in the United States and Texas today, albeit with greater restraint than in England in
the Middle Ages. n87
The British legal system evolved dynamically from the competition between courts at law and courts in equity. n88
Until the middle of the nineteenth century, the majority of an English trial judge's compensation was derived from court
fees and the judgments of most English jurists at the time were not subject to effective appellate procedures. n89 As a
result, the causes of action and remedies permitted by the two court systems expanded in response to innovations in the
other court. n90 For example, when claims at common law were pled for either debt or trespass, the claim for fraud was
recognized only by courts in equity and was only gradually accepted thereafter by courts at law. n91 According to
Dominic O'Sullivan, English common law courts did not recognize a cause of action for rescission until the beginning
Page 297Page 297
of the nineteenth century, when the remedy at law evolved [*171] until the advent of the "judicature reforms" in the
middle of the century when courts in equity and courts at law were fused. n92
The competition between the two court systems in England occasionally flared into dysfunctional jurisprudence,
especially when courts in equity issued injunctions against common law courts that were hearing the same case. n93 The
conflict came to a head in 1616 when King James I intervened to establish a formal boundary between each court's
jurisdiction. n94 He dictated to the judiciary that common law courts would enjoy presumptive jurisdiction and that courts
in equity would supplement the common law courts when the latter could not adequately remedy the dispute. n95 Belying
the primacy of common law courts was the caveat that the adequacy of common law remedies was to be determined by
courts in equity. n96
This formalization of the existing practice did not alter the positive or expansive principle of adequate remedy; it
only formalized the boundary with the common law. n97 The doctrine of irreparable injury (the Doctrine), or the
requirement that the claimant in equity to prove the want of an adequate remedy at law, was thus implemented to avoid
the judiciary's internal struggle for control of jurisdiction; but, the mandate for the courts in equity to provide a safety
net for orphan claims did not diminish. n98
After another 250 years, some jurisdictions began to blend, merge, or fuse their common law courts with courts in
equity. The merger wave started individually with Texas in 1845, New York in 1848, and was completed In England by
1875. n99 After New York adopted the Field Code in 1848, there was a rush among many other states to follow. n100 By
1873, the majority of American states had adopted a version of the Field Code, which merged the two courts and
terminated or modified forms pleading. n101
[*172] In today's terms, merger was an administrative consolidation in which two courts, each with a separate
judge, were consolidated into one court with one judge who presided over the common law and the law in equity: one
judge with two hats. n102 However, it is widely acknowledged that no state or country has made much progress in
blending, merging, or fusing the two bodies of law into one. n103
A. The Doctrine of Irreparable Injury
After most of the states had merged their court systems, another 100 years passed before legal scholars publicly
wondered if any purpose remained for the Doctrine. n104 In 1990, a professor teaching law in Texas, Douglas Laycock,
published a landmark study on the modern role of the irreparable injury rule in American courts. He concluded that
"the[] real reasons for denying equitable remedies are not derived from the adequacy of the legal remedy or from any
general preference for damages... . Sometimes there are good reasons to deny legal relief and grant equitable relief
instead. But there is no general presumption against equitable remedies." n105
Laycock found that the issue of jurisdiction in equity is frequently determined by criteria that are left unmentioned
and unrelated to the Doctrine. n106 He concluded that these covert rules of decision may not be wrong, but they are
unreliable because they are not contested openly in the litigation process. n107
[*173] As of January 9th, 2013, Laycock's study has been cited by at least 115 subsequent articles n108 and was
instrumental in the rejection of the Doctrine by the recently completed Restatement Third. n109 Aside from the judiciary,
most authorities now reject the Doctrine or minimize its relevance. n110 However, Laycock's study remains largely
ignored in the opinions of most courts, including courts in Texas. n111 After twenty years in circulation, the article has
been cited in only six state court cases and sixteen federal cases. n112 This slight reaction in case opinions suggests that
the judiciary want to maintain their discretion and opaque rationale.
Both Dobbs n113 and George Palmer n114 list acknowledged exceptions to the Doctrine. They explain, for example, that
a plaintiff with a claim for unjust enrichment against an insolvent defendant does not have an adequate remedy at law
because restitution at law cannot offer the seniority protections against an insolvent defendant that would be provided
by a [*174] constructive trust. n115 If a remedy at law cannot be measured, it is also generally found to be inadequate.
n116
Another exception to the Doctrine is for claims against trustees or fiduciaries, which is widely recognized by
treatises, n117 restatements n118 and case opinions n119 to be entitled to presumptive jurisdiction in equity. For example,
claims for money are generally restricted to jurisdiction at law unless the claim is made against a fiduciary. n120
Alternatively, section 197 of [*175] Restatement (Second) of Trusts explains that trustee effectively waives his right
to jurisdiction at law for breach of contract. n121
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B. Equity Jurisprudence After Merger
One of the hallmarks of courts in equity is judicial discretion. According to Justice Story, in the early years of the
Chancery Court, the chancellors regarded themselves as royalty who were little educated in the law but sure of the
King's conscience. n122 In modern times, judges in equity remain equally assured of their prerogative to judicial
discretion. n123 The covert process in which jurisdiction is resolved n124 and the sometimes vague standard of remedying
unconscionability or enforcing public policy tend to sustain the broad discretion enjoyed by a judge sitting in equity. n125
[*176] The dilemma of modern law in equity is that the safety net role of equity is still key but the merger of
courts has complicated when and how judges, sitting in equity, should preside in relation to the common law. n126 As long
as the substantive law in equity remains unmerged with the common law, the Doctrine or some substitute standard is
still needed to define the jurisdiction for the law in equity. n127
Merger of the two court systems has brought three related problems that challenge the integrity of the law in equity.
First, judgments based on the law in equity now have consequences for the common law; the law in equity no longer
acts outside the system by issuing orders or decrees. n128 Second, how are legal principles derived in part from the law in
equity to be applied as precedent? If the law in equity caters to case facts, then shouldn't the principle be limited to
comparable case facts? In an aside, Laycock observed that such careful checking for factual comparability is not always
evident. n129 Third, after merger, who are the keepers or guardians of the law in equity? There are currently four states
that maintain courts in equity, n130 most notably Delaware. Are the Delaware courts and the American Law Institute n131
now the principal guardians or keepers of the law in equity? n132
[*177] Thomas Main presents a strong analysis of the development of the role of equity in promoting change in
the common law, tracing many of the substantive and procedural innovations in the common law to changes or
experiments in equity. n133 He makes a strong case that the merger of equity and common law has impaired equity's
capacity as an agent for change and improvement. n134
The law in equity and claims in equity have been criticized for excessive discretion and a potentially unlimited
range of jurisdiction. n135 The term unjust enrichment has also been criticized as too subjective or moralistic. Section 1 of
the Restatement Third argues that the first criterion for any claim in equity is that it relate to a non-consensual transfer:
"Enrichment is unjust, in legal contemplation, to the extent it is without adequate legal basis; and the law supplies a
remedy for unjustified enrichment because such enrichment cannot conscientiously be retained." n136 The Restatement
Third is undoubtedly correct in asserting the strong legal principle, but it would be inaccurate to deny that subjective
factors do not sometimes substantially affect jurisdiction. n137
[*178]
C. Burdens of Proof and Counter-Restitution
Whether or not the underlying claim for unjust enrichment relates to fiduciary issues, the defendant is essentially
treated as similar to a trustee accused of breaching her duty of loyalty. n138 Courts in equity assume that the defendant
enjoys a substantial advantage in information and potential case evidence vis-a-vis the beneficiary. n139 The law in equity
generally assesses the defendant with liability for uncertainty in the amount of damages or unjust enrichment unless the
defendant disproves the assumed advantage or duty to account. n140 The result is a process that shifts the burden of proof
on measuring enrichment and provides a source of motivation for the defendant to produce relevant evidence. n141
For example, to establish a claim for a constructive trust, the plaintiff only needs to identify the applicable res,
traditionally an asset but sometimes related revenues. n142 The claimant's burden thus having been met, [*179] the
burden of proving the net assets or profits applicable shifts to the defendant. To avoid liability for the entire asset or all
of the revenue, the defendant must introduce sufficient evidence to show that the assets or revenues need to be
apportioned or adjusted for expenditures that benefitted the disputed property. n143
While the recent trend seems to be that courts try to moderate the severity of the consequences for the good-faith
defendant that fails to satisfy her burden, the potential liability for revenues rather than profits is real. n144 An earlier
review of 116 modern intellectual property cases reveals that in about half of the cases, when the defendant fails to offer
sufficient evidence of any counter-restitution, the court actually awards revenues. n145 The Second n146 and Federal n147
Circuits now hold that the trial court must try [*180] to estimate the defendant's applicable expenses for the revenues
proven by the plaintiff in intellectual property cases.
Page 299Page 299
An experienced defense counsel understands that the costs and risks of "stonewalling" discovery requests can be
high in this area of the law. If the defendant firmly asserts that certain operating data do not exist or are impossible to
collect, she may be estopped from subsequently entering evidence to apportion or offset the revenues established by the
claimant. Occasionally, courts also impose milder sanctions for the defendant's failure to cooperate. n148
The plaintiff's burden to prove damages in fact, that the plaintiff suffered at least some damage, n149 is less applicable
for such causes of action as breach of fiduciary duty, n150 misappropriation of trademarks, n151 conversion, n152 or
misrepresentation. n153
[*181] Total equity n154 and the related commitment to avoid issuing court orders that themselves result in unjust
enrichment n155 are the driving forces behind [*182] the defendant's right to seek counter-restitution when the plaintiff
pleads for disgorgement or proprietary relief like specific restitution or rescission. n156 When a court in equity orders the
specific restitution of an asset, the order is generally conditioned on the plaintiff compensating the defendant for
reasonable expenses of maintaining the asset. n157 The buyer of an asset is not entitled to rescission of the purchase price
unless she returns the asset and compensates the defendant for any net interim benefits, including attributed rent. n158
In the law of trusts, the trustee must be compensated for all reasonable expenses that benefitted the trust. Even a
trustee in breach of her duty of loyalty, absent extreme circumstances, is entitled to a lien on the trust for the amount of
the indemnity. n159 But reimbursement for expenses does not [*183] necessarily include compensation for the trustee in
breach or other infringing expenses. The standard is not absolute and may vary with the nature of the trustee's breaches
of behavior n160, the benefits that the trustee can prove he produced for the trust and a large amount of discretion. n161
To borrow Andrew Kull's term, are there civil "outlaws" who should not be protected by a court in equity? n162 In
individual cases, the defendant is sometimes denied counter-restitution based on individual case facts and frequently
then on the base of "unclean hands." n163 While their authority is only persuasive, British authorities on the issue agree
that "wicked" or willful defendants still should be eligible for counter-restitution, n164 except when it would violate public
policy based on the nature of the counter-restitution. n165
[*184] The strongest pressure that a claimant will experience to prove causation is likely to come from the
defendant who will contest the claimant's identification of the relevant assets or revenues and introduce evidence to
support a claim for apportionment or to exclude portions of the amounts identified as too remote. n166 To shift her burden
of proof, the claimant must reasonably identify what revenues are attributable to the unjust act. n167
D. Unjust Enrichment at Law
The difference between claims at law and in equity has become a significant issue of dispute especially due to a series
of modern U.S. Supreme Court opinions. n168 Those opinions caused many courts to change their standards but a
reasonable rule of thumb is that unjust enrichment at law seeks a remedy for money n169 (excluding disgorgement and
money remedies from fiduciaries) while a claim in equity generally seeks property and often seeks a personal order
from the court to the defendant to convey legal title. n170
[*185] Traditionally, unjust enrichment at law includes assumpsit or quantum meruit and money had and received.
According to Palmer, there are numerous opinions that confuse quantum meruit with unjust enrichment or that fail to
n171
define the role of quantum meruit within unjust enrichment at law. n172
The remedy of unjust enrichment in equity was emulated by courts at law in the form of assumpsit, including
quantum meruit and money had and received. n173 Lacking the power of in personam authority, courts at law offered
damage remedies based in quasi-contract. Famously championed by Lord Mansfield, who presided as Lord Chief
Justice of the common law courts, n174 unjust enrichment at law was based on the defendant's returning money that
belonged to someone else or paying the defendant for goods or services that the defendant could reasonably have
expected to owe. The authority of a court at law was limited to ordering the sheriff to seize the assets of either party and
sell them for monetary relief, or, for some claims like ejectment or replevin, to seize the asset and deliver it to an
individual who maintained legal title. n175 Typically, as claims for unjust enrichment at [*186] law, quantum meruit and
money had and received, are not subject to the Doctrine nor to the equitable defense of unclean hands.
The claims for unjust enrichment in equity and disgorgement are not based on quasi-contract. The defendant did not
agree to disgorge the benefit and the plaintiff may not have even incurred any losses. n176 The remedy of constructive
trust is not based on the defendant's implicit agreement to act as trustee. Such remedies in equity are founded on a
Page 300Page 300
combination of nonconsensual transfers for the claim and the unconscionability of allowing the defendant to retain the
disputed assets or money. n177
E. Equitable Semantics
"The terminology of restitution is abstruse and confusing and is no matter for amateurs." n178
We are all amateurs compared to professionals such as Professors Dobbs, Kull, Laycock, Rendleman, or Murphy.
The professionals agree that the law in equity is not understood well by practitioners or jurists n179 but they also
acknowledge that prior "professionals" have contributed to the confusion because the key vocabulary of this discipline
has not been properly established as you would otherwise find in the discipline of contracts or torts. n180 Kull, the
Reporter for the Restatement Third, suggests that the original drafters' intended meaning for "restitution" was obscured
by the existing usage that implied compensation or restoration. n181
[*187] The Restatement Third has attempted to resolve the confusion in two ways. First, the title of the
restatement was expanded to "Restitution and Unjust Enrichment' with an explanation that the terms are synonymous.
n182
Second, the Restatement Third emphasized the fact that restitution, unjust enrichment, and the new term
"disgorgement' are all just different names for an accounting in equity for claims of conscious wrongdoing. n183
Similarly the term "equitable' tends to confuse more than it clarifies. n184 It may refer to fairness or justice; it may
refer to the law in equity or it may refer to a general practice or approach. n185 In some cases, it also seems reasonable to
infer that "equitable' is used to hedge uncertainty when one is not sure whether the remedy is in equity or at law. Most of
the time, it is used harmlessly in a manner suggested by Palmer to describe a general perspective or approach. n186 In
Section V.A., the article will show that the Texas Supreme Court fell victim to this confusion when it held that the
affirmative defense in equity of unclean hands can apply to claims for quantum meruit. n187
[*188] Monetary remedies in equity apply the principles of accounting in equity to measure the defendant's net
gain from a willful act. n188 The predominant modern term for her gain is net profit as in an accounting of profit or profit
disgorgement. n189 As "profit,' it's important to understand that this term was actively used before the development of
accepted accounting principles and generally refers to the result of an accounting in equity. According to Section 51 of
the Restatement Third, three of the principal sources of advantage or benefit are an increase in profits, decreased losses,
and an increase in value. n190
In a minority of cases, the claimant can also extend her measure of the defendant's benefits to include secondary,
consequential, or indirect benefits that have accrued to the defendant under the somewhat vague proviso that the
consequential benefits not be unduly remote. n191
IV. Equity in Texas
We simply do not think recovery would be equitable under the circumstances. That, after all, remains the test. Perhaps
this approach lacks analytical rigor, but it was precisely a scrupulous adherence to rigor that resulted in the growth of
the courts of equity in the first place. While we do not deprecate the logic of appellant's legal position, there sometimes
arise cases where law goes only so far and the chancellor must step in. n192
As proscribed in the 1835 Constitution, the British common law and law in equity were adopted into Texas law in 1840.
However, Texas's experience with separate courts in equity was limited to five years of the [*189] Republic n194 after
n193
which the Constitutional Congress of 1845 approved the merger of the two courts. n195 Michael Ariens explains that
Chief Justice John Hemphill was an advocate of the Spanish civil law and was dissatisfied with both the common law
and the law in equity. n196 Ariens suggests that under the adopted Spanish system for pleading civil claims, the distinction
between claims in equity and claims at law was not important. n197 Thomas Jefferson Rusk, the former chief justice,
spoke in favor of jury trials for claims in equity, and the Convention approved the suggestion over Hemphill's
opposition. n198 In the absence of any other explanation, it might be relevant to consider the strong role for juries during
the Republic. n199
Thus, the innovations of blending equity and common law courts and adding juries for claims in equity were not the
result of the Convention's great insight into future trends or doctrine but were choices to change a system that was not
Page 301Page 301
liked or needed. The choices to abolish forms pleading and add community property and homestead law, however,
appear to have been more deliberate and far-sighted. n200
[*190] Almost immediately after 1840, Texas courts began to apply the law in equity. Claims for injunction, n201
mandamus, n202 rescission, n203 and constructive trust n204 are all represented in Texas Supreme Court opinions by 1851.
The need for counter-restitution in rescission or specific restitution was similarly acknowledged in case opinions no
later than 1858. n205 Claims for breach of confidence (fiduciary duty) were litigated and some claimants were awarded a
form of disgorgement for conflicted transactions in 1848. n206
A. The Doctrine of Irreparable Injury
Texas courts apply the Doctrine by rejecting the expansive principle of jurisdiction and embracing the limiting principle
of jurisdiction vis-a-vis alternative remedies at law. Section V will show that only a minority of Texas case opinions
embrace the expansive principle implicit in the positive statement of adequate remedy, i.e. that there is jurisdiction in
equity for all remediable claims that would otherwise go without remedy, such as: n207
Most restitution cases fall into one of the categories just listed; they provide a return to the plaintiff of benefits conferred
in connection with contracts, enforceable or not, in connection with mistakes, and in connection with torts n208 [*191]
and wrongs. n209 But restitution is open-ended; it is not limited definitionally to such cases. n210
Outside of Texas, Dobbs' description relates to general practice. In Texas, jurisdiction in equity is narrower than Dobbs
describes. Therefore, the description would be aspirational and generally only found in dicta on constructive trusts. n211
The Texas Supreme Court regularly applied the Doctrine to injunction and mandamus actions no later than 1846, n212
but only gradually applied it to other equitable remedies. n213 Over the last 100 years, Texas courts have applied the
Doctrine to about twenty to forty percent of cases that address the issue of injunction or mandamus. n214 A comparable
figure for monetary remedies in equity is about five to ten percent. n215 The data are mere approximations and the result
of an unrefined process, but they echo the national pattern that shows a far higher rate for injunctive remedies than
monetary remedies. n216
The active application of the Doctrine is somewhat counter-intuitive in light of the fact that Texas offers courts of
general jurisdiction and offers jury trials for claims in equity. n217 Thus Texas courts do not operate in a [*192] manner
that would normally warrant the restrictive principle of the Doctrine. Some opinions acknowledge that the structure of
the Texas court system warrants less need for the Doctrine but only as a justification for applying the Doctrine less
rigidly than elsewhere. n218
The plaintiff that seeks unjust enrichment must plead and prove irreparable injury (that the plaintiff has no adequate
remedy at law). n219 In Texas, the Doctrine is a relative standard: "An adequate remedy at law is one that is as complete,
practical, and efficient to the prompt administration of justice as is equitable relief." n220
Few equitable remedy case opinions offer detailed analyses of how the Doctrine applies to the case facts. Specific
reasons for approving the plea of irreparable injury include: that the defendant is insolvent n221 or illiquid; n222 [*193] that
the plaintiff's damages cannot be adequately measured; n223 or that the cause of action relates to a unique asset such as
real estate, n224 special personal property, n225 trained animals, or pets. n226
There is a variation of the Doctrine that receives little notice but makes sense for a court in equity. Occasionally, the
Texas Supreme Court has denied an equitable remedy on the basis that a less intrusive or disruptive equitable remedy
would suffice. As the lesser remedy is also an equitable remedy, the criterion is less one of jurisdiction in equity and
more one of which remedy requires the least exertion of the Court's power. n227
[*194]
B. Jurisdiction in Equity
There is substantial support in Texas case law for broad jurisdiction in equity from four groups of cases that espouse
similar principles. The over-arching principle is that "the inadequacies of the remedy at law is both the foundation of
and conversely the limitation on equity jurisdiction." n228 This specific phrase was originally borrowed from Corpus Juris
Page 302Page 302
Secundum (C.J.S.) on equity in general. n229 This is also the traditional interpretation of the Doctrine as described by
Justice Story n230 and Dobbs. n231
The second principle is that, as courts of general jurisdiction, Texas district courts enjoy presumptive jurisdiction
except as it can be shown that the Constitution or the state legislature have specifically reserved that jurisdiction. n232
Third, Texas courts acknowledge and honor the first maxim [*195] in equity that "equity will not suffer a right to be
without a remedy" n233 or as it is otherwise known "where there is a right, there is a remedy." n234 Fourth, two Texas
Supreme Court cases have quoted the maxim that "equity is never wanting in power to do complete justice." n235 This
maxim is more often used to justify the concept of total justice, but in these two Supreme Court opinions it was used to
justify broad jurisdiction. n236
[*196] There is sufficient precedent to support a broad or expansive jurisdiction for equity, yet Texas courts
choose to limit jurisdiction for unjust enrichment. No case law has been found that explains this choice. However, there
is at least one case that expresses concern about the power of the law in equity. n237 State v. Morales, an opinion relating
to criminal law and the balance of power within state government, criticizes the C.J.S. quote for failing to acknowledge
the preeminence of the Texas Constitution over the Doctrine. n238 The plaintiff claimed jurisdiction on the basis that
adequate remedy was not otherwise possible because the law was not enforced (in this case, a law against sodomy) and
could therefore not be otherwise constitutionally challenged in an active case. n239
Justice John Cornyn's opinion expresses concern that a court in equity, limited in jurisdiction only by the Doctrine,
is a court potentially out of control. Therefore, a court utilizing the Doctrine should act with restraint to avoid the risks
created by abusing equity's power. n240 The constitutional challenge seems fairly tame because any such statement is
subject to constitutionality and Morales specifically related to enjoining a criminal statute. n241 Even though the holding
can be distinguished from civil cases that pose no threat to the balance of government powers, the fear of unbridled
jurisdiction in equity seems unmistakable and is consistent with the policy of Texas courts to limit jurisdiction to
specific causes of action. n242
[*197] There is a second issue relating to jurisdiction in equity in which Texas courts maintain a minority view. n243
Only three appellate courts have held that claims related to trusts or fiduciaries are entitled to presumptive jurisdiction
in equity. n244 On the other hand, most Texas courts maintain three related principles that are supportive or consistent with
such a holding. First is the principle established by the Texas Supreme Court in Johnson v. Peckham, similar to Section
197 of the Restatement (Second) of Trusts, n245 that when a party acts as a fiduciary, she consents to jurisdiction in
equity. n246 Second, a number of courts, including both supreme courts, have endorsed the doctrine of springing trusts for
granting a constructive [*198] trust. n247 Under this approach, the trust is said to spring into existence immediately
upon the execution of a breach of fiduciary duty. n248 At that point in time, the rightful claimant is said to have equitable
title to the property in dispute while the defendant maintains legal title. n249 The claimant only has to secure a court in
equity's acknowledgement of the trust and the court's order that confirms the trust to the defendant. There is no role for
courts at law to enforce equitable title. Third, there are a number of case opinions that hold that a fiduciary claim is
sufficient to warrant various remedies in equity sought by the plaintiff. n250
[*199] Presumptive jurisdiction is therefore largely overlooked. Occasionally, Texas courts either challenge n251 or
reject n252 an equitable remedy relating to a trustee or fiduciary.
C. Burdens of Proof and Counter-Restitution
Texas courts take a traditional approach on the parties' shifting burdens of proof for proving the defendant's benefit. In
Pippen v. the City of Fort Worth, a Fort Worth employee accrued a secret profit from self-dealing in buying and
improving city properties. n253 At trial he did not take advantage of his opportunity to prove any reasonable expenses that
he incurred out of [*200] pocket expenditures to improve the properties. n254 The Supreme Court held that he failed to
respond to that opportunity at trial and was not owed a second chance, awarding the amounts initially established by the
city without any adjustment for counter-restitution. n255
Texas courts have affirmed the defendant's liability for uncertainty in two other scenarios: (1) assets of a trust that
are co-mingled with assets of the defendant are presumed to belong to the trust unless proven otherwise; n256 and (2)
disclosed transactions between the trustee and the trust or between the trustee and the beneficiary are presumed to be
unfair or fraudulent unless the trustee can prove the entire fairness of the transactions. n257
Generally, Texas opinions reflect the fact that fiduciaries enjoy a substantial advantage in information and expertise
over the principal and are under obligation to exercise their knowledge and expertise for the [*201] benefit of the
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principal. n258 As a result the defendant is sometimes expected to also bear the burden of proof in regard to liability issues
or fact issues that the plaintiff might otherwise bear in a claim for breach of contract. n259
The defendant's right to prove counter-restitution is regularly observed as to offsetting expenses or apportionment.
Texas courts have maintained a consistent policy of allowing a defendant the right to prove her counter-restitution since
1858. n260 There is a substantial body of case discussion that evidences a commitment to total equity and the court's
protection of the defendant's interests to avoid unjustly enriching the claimant. n261 [*202] Alternatively, counter-
restitution is justified with the well-known maxim that a claimant that seeks equity must act equitably. n262
Texas's commitment to counter-restitution is also strongly evident in claims for rescission. The Court's recent
opinion in Cruz v. Andrews Restoration, Inc. reaffirms the Court's earlier holding in Powell v. Rockow n263 that a
claimant will be denied rescission without a jury finding of any interim consideration that the claimant accrued and
credited to the defendant. n264
[*203]
V. Unjust Enrichment and Constructive Trusts
In the process of searching for unjust enrichment in equity as a cause of action, a separate issue emerged of identifying
the role of the law in equity in the Texas legal system. Despite the occasional glowing endorsement for constructive
trusts from Supreme Court dicta, the actions and policies of Texas courts imply their discomfort with unjust enrichment
and equity in general. The next two sections will substantiate this observation with three issues. This section will
explore the ongoing dispute of whether unjust enrichment is a cause of action. This is an issue that should not have
grown so large for so long in view of traditional doctrine and, more importantly, a consistent line of Supreme Court and
Fifth Circuit opinions that have supported this cause of action. Second, Texas courts effectively constrain the safety net
role of equity when jurisdiction in equity is limited to specific claims. Without a wide-ranging cause of action for unjust
enrichment in equity, the claim has no jurisdiction to establish liability for non-standard claims. Furthermore, in view of
the support available for the principles underlying broad jurisdiction in equity, the policy for narrow jurisdiction can be
reasonably inferred as a choice by the Texas judiciary.
The third issue, addressed in the next section, is that the Supreme Court's endorsement of fee forfeiture as an
appropriate remedy for breach of fiduciary duty is unnecessary when disgorgement would have been adequate and more
consistent with prior case law. While forfeiture or disgorgement of a fiduciary's compensation is not unusual, Texas
forfeiture now stands apart from other remedies in equity in Texas without any attempt to reconcile fee forfeiture with
existing remedies in equity. n265
The biggest problem in understanding unjust enrichment is the misperception that it has only one identity. It can be
a cause of action, a remedy, or both. n266 Similarly, unjust enrichment at law needs to be distinguished from unjust
enrichment in equity. Most causes of action for unjust enrichment in Texas resemble unjust enrichment at law, which is
based on quasi-contract. n267 Unjust enrichment in equity is largely [*204] overlooked or misinterpreted as unjust
enrichment at law. n268 Most claims for unjust enrichment in equity are pled as claims for constructive trusts, another
remedy in equity. n269
The dispute over whether unjust enrichment is a cause of action is a recent controversy. n270 Despite the ten Texas
Supreme Court opinions and four Fifth Circuit opinions that hold or acknowledge unjust enrichment as a cause of
action, the dispute keeps growing. n271 But before that issue is joined the next sub-sections will distinguish quantum
meruit, money had and received, and accounting in equity to clarify that unjust enrichment is a cause of action
independent of these other causes of action.
A. Assumpsit Claims: Quantum Meruit and Money Had and Received
The Supreme Court affirmed quantum meruit and money had and received as causes of action, no later than 1841 n272
and 1843, n273 respectively. The elements for quantum meruit are not presently in serious dispute. n274 The measure of the
remedy for quantum meruit is the reasonable value of [*205] the claimant's goods or services. n275 In this context,
reasonable value means a market value unless the actual or use value to the defendant is less. n276 To the extent that an
express contract is shown not to exist, the alleged contract price may not be a limit on reasonable value. n277 An express
contract is an adequate defense but it requires a jury finding to that effect n278 and does not apply to void or voidable
contracts, n279 unconscionable contracts n280 or to items or services outside the contract. n281
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In Truly v. Austin, the Texas Supreme Court held that quantum meruit is an equitable remedy and subject to the
defense in equity of unclean [*206] hands. n282 The assertion was made ipse dixit without any supporting citations for
the assertion that quantum meruit is a remedy in equity or that unclean hands is an affirmative defense for quantum
meruit. n283 Since that opinion, three appellate courts have followed that holding and repeated this misstatement of Texas
law. n284 This article has already established that in other jurisdictions, quantum meruit is a claim at law as an assumpsit
claim. n285 There are a number of prior Texas Supreme Court opinions that hold or imply that quantum meruit is a claim
at law. n286 For example, in [*207] Texas n287 and most other states, n288 the affirmative defense of unclean hands only
applies for claims in equity.
No Texas case prior to 1988 was discovered that also rejected a claim for quantum meruit because of unclean
hands; only one unrelated case was found that even mentioned both terms in the text of the same opinion. n289 A simple
word search revealed that prior to 1988, there were 1,035 Texas state opinions that contained the term "quantum meruit'
and 323 opinions that contain the term "unclean hands' or "clean hands' but there is only one opinion that contains both
terms. Similar searches revealed 143 cases with "unclean hands' or "clean hands' and "mandamus' or "injunction', 32
cases for rescission, and 15 cases for constructive trust.
As was discussed earlier, mistaking assumpsit remedies for remedies in equity is not unusual, especially in light of
the common misuse of the term "equitable.' n290 Consider the following quote from the U.S. Supreme Court that is
frequently cited or quoted in part in Texas on the claim for money had and received:
This is often called an equitable action and is less restricted and fettered by technical rules and formalities than any
other form of action. It aims at the abstract justice of the case, and looks solely to the inquiry, whether the defendant
holds money, which ex aequo et bono belongs to the plaintiff. It was encouraged and, to a great extent, brought into use
by that great and just judge, Lord Mansfield, and [*208] from his day to the present, has been constantly resorted to in
all cases coming within its broad principles. It approaches nearer to a bill in equity than any other common law action.
n291
According to this quote, money had and received is an equitable remedy but remains a remedy at law.
Texas has adopted the first two sentences from the Jefferson Electric quote on the claim for money had and
received. n292 Most opinions now appear to agree that the key issue in a claim for money had and received is not
wrongful behavior of the defendant but rather to balance the relative equities of the money remaining with the defendant
or transferring the money to the plaintiff. n293 This is meant to be a fact intensive process guided as much by conscience
or fairness as established precedent. n294
The claim applies equally against a third party who received payment in error that was owing to the claimant. n295
The third party need not have committed any unjust act or mistake; rather only continue to retain funds that rightfully
belong to the claimant. n296
[*209] Both quantum meruit and money had and received are forms of common law claims for assumpsit, which
originally was a claim for debt. n297 The remedy for either claim is restitution that seeks compensating damages to restore
the plaintiff to her original position. n298 In comparison, disgorgement is measured by the defendant's gain, regardless of
the claimant's loss (if any), and effectively seeks to restore the defendant to her original position. n299
B. Accounting in Equity
Joel Eichengrun shows that accountings in equity began to appear in the late fifteenth century to provide property
owners a hearing against property managers. n300 The American courts, beginning in the nineteenth century, detached the
accounting process from its fiduciary moorings and made it available whenever accounts were too difficult for a jury to
understand. n301
The cause of action or remedy for an accounting in equity is sometimes sought by itself and other times in
combination with other remedies in equity. n302 An accounting is required under some statutes, n303 but some courts [*210]
require a specific showing that the plaintiff cannot obtain adequate relief under common law procedures and discovery
options. n304
C. Unjust Enrichment
Page 305Page 305
"The ordinary member of the public would be shocked if the position was that the courts were powerless to prevent [a
defendant] profiting from his criminal conduct." n305
In addition to opinions about the other three causes of action described in the immediately preceding sub-sections,
the Texas Supreme Court has acknowledged or held that unjust enrichment is a cause of action under Texas law in ten
modern cases. n306 In addition, in three cases the Court held [*211] that two years is the applicable limitations period. n307
In three of the opinions, the Court's analysis of the claim for unjust enrichment was analyzed separately from quantum
meruit n308 or money had and received. n309 The Fifth Circuit has also issued at least four opinions that confirm unjust
enrichment as a cause of action under Texas law. n310
This compelling case for unjust enrichment has eluded many state and federal judges. Opponents to unjust
enrichment fail to cite any Texas Supreme Court or Fifth Circuit opinion that rejects unjust enrichment as a matter of
law. n311 Many fail to acknowledge the fact that there is a substantial list of case opinions for the claim (federal n312 and
state n313) as well [*212] [*213] as against (federal n314 and state n315) unjust enrichment as a cause of action. [*214]
Some courts even "double down" in their denial and claim that case opinions in general deny unjust enrichment as a
matter of law. n316
While federal opinion has no precedential authority, the confident conclusions of some federal opinions add to the
confusion and would mock the Erie Doctrine based on their assessment of Texas appellate law without the benefit of
adequate legal research. n317 In light of the fact that federal opinions that mention or discuss unjust enrichment are
growing faster than such Texas opinions and that federal opinions in Texas out-numbered state [*215] opinions at a
rate of almost two to one in the last five years, it is likely that federal opinions on unjust enrichment under Texas law
will have an increasing influence (for better or worse) on Texas court opinions on unjust enrichment. n318
Many courts' rejection of unjust enrichment is overstated because as one federal judge noted, n319 many courts that
hold that unjust enrichment is not a cause of action still consider the claim as based on a theory. n320 However [*216]
there are other opinions that reject the claim as a matter of law n321 or hold that unjust enrichment is only a remedy. n322
Most of the adverse case opinions are based on one of two approaches. First is the approach that presumes that
unjust enrichment should either be called "restitution' or that unjust enrichment is an element for restitution. n323 It
ignores the equivalency between the two terms as a cause of action against willful defendants. n324 The second group is
based on the dubious distinction that while unjust enrichment is not a cause of action, Texas law allows for liability to
be found on the basis of the theory of unjust enrichment. n325
[*217] In a semantic analysis that should fail in Moot Court, the holding in HECI is dismissed as unclear or
contradictory. n326 Frequently cited or emulated, the Thirteenth District's opinion in Mowbray argues that the HECI
opinion does not really state that unjust enrichment is a cause of action because it sometimes refers to unjust enrichment
as a "basis of recovery' or "remedy.' n327 Mowbray fails to mention that HECI does refer to unjust enrichment as a cause
of action at least six times and as a claim four times. n328 The subject matter of the case related to the applicable
limitations period for unjust enrichment, which only applies to causes of action, not remedies or theories. n329 HECI also
refers to the Court's prior opinion in Gavenda as based in liability for unjust enrichment. n330 Seemingly insubstantial, the
Mowbray analysis has been favorably cited in six federal and two state opinions. n331
In Elledge, the Second District held that unjust enrichment was not a cause of action but that claims based on such a
theory warrant a limitations period of four years, explaining that the Supreme Court's holding in two prior cases for two
years were mere obiter dictum and not necessarily controlling. n332 The Supreme Court opinion put down the Second
District's [*218] attempted "coup,' reaffirming a limitations period of two years. n333 Even after the Second District's
opinion was reversed, it has been cited for its opinion that unjust enrichment is not a cause of action. n334 Some courts
seem to search pretty hard to find a basis to reject unjust enrichment. n335
Even though Heldenfels' language is vaguer than that of HECI, the substance of the former is not criticized as often
as HECI for its indefinite semantics. Heldenfels refers to unjust enrichment as a theory, doctrine or remedy ("cause of
action' is absent) but it refers to quantum meruit and negligence as theories also. n336 The Mowbray and Elledge analysis
would reverse the traditional maxim and emphasize form over substance.
The Supreme Court opinion in Heldenfels relied on two prior opinions directly and one opinion indirectly. n337
Without any quotation from the case or explanation of how the case directly applies, the key Heldenfels holding cites
the landmark opinion of Pope v. Garrett. n338 As was noted in the previous section, the Pope opinion is a strong supporter
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of expansive [*219] jurisdiction for equity, or at least for constructive trusts, and is a model for applying equity's
safety net. n339
If the Heldenfels opinion relies on Pope for inspirational support, it leans on the Third District's opinion in Austin v.
Duval for mechanics. n340 Drilling down further is Barrett v. Ferrell, n341 which is the foundation for Austin and has
otherwise been frequently cited in related cases. n342 Unfortunately, the Barrett mechanics are based on secondary
references that focus on assumpsit or unjust enrichment at law. n343 For example, Barrett quotes a standard definition of
unjust enrichment from American Jurisprudence on implied contracts:
The doctrine of unjust enrichment or recovery in quasi-contract applies to situations where the person sought to be
charged is in possession of money or property which in good conscience and justice he should not retain but should
deliver to another, the courts imposing a duty to refund the [*220] same to the person to whom in good conscience it
ought to belong. n344
Barrett also relies on the assumpsit section of Texas Jurisprudence to define unjust enrichment in combination with
money had and received:
An action for restitution based on unjust enrichment or for money had and received will lie where one person has
obtained money from another by fraud, duress or taking an undue advantage; or when money is paid by one person in
consideration of an act to be done by another and the act is not performed; or to recover money received on a
consideration that has failed in whole or in part. n345
The Heldenfels opinion reduces this to "[a] party may recover under the unjust enrichment theory when one person has
obtained a benefit from another by fraud, duress, or the taking of an undue advantage" (the "Heldenfels Standard"). n346
This is also sometimes referred to as the active standard because the Barrett discussion distinguished between unjust
enrichment that was actively gained from enrichment that was passively gained. n347 Passive enrichment is also subject to
an additional test for unconscionability. n348
From the Texas Jurisprudence quote, claims for a cause in action for unjust enrichment include "fraud, duress or
taking an undue advantage." n349 The Barrett opinion restates this standard as it explains why it denied the plaintiff's
claim: "Appellee does not aver fraud, accident, mistake, duress or bad faith on the part of appellant. Appellee is in no
position to seek restitution on the theory that there was a partial failure of consideration since appellant fulfilled his
obligation under the agreement." n350
[*221] The case of Austin v. Duval related mainly to a claim for money had and received. n351 It quoted the
expansive language from Staats v. Miller on the elements for money had and received n352 but then anchored the elements
with the quote from Texas Jurisprudence on assumpsit that was quoted in Barrett. n353 The result was further limited by a
caution borrowed from Corpus Juris Secundum that the "Plaintiff cannot recover merely because it might appear
expedient or generally fair that some recompense be afforded for an unfortunate loss." n354
The Heldenfels case related to a subcontractor's claim for negligence, quantum meruit and unjust enrichment
relating to the liability of the City of Corpus Christi for the failure of a contractor to pay the subcontractor for supplying
structural metal beams. n355 According to the dissenting opinion, the majority should have stuck to the issue of negligence
as the discussion of unjust enrichment is gratuitous. n356 Perhaps the holding in the appellate opinion, that unjust
enrichment may not be a cause of action, prompted a correction. n357
To satisfy most courts on the Heldenfels standard the plaintiff should expect to establish a separate claim either for
fraud, duress or taking advantage. n358 One key issue remains as to the meaning of the term "taking [*222] undue
advantage.' It was probably intended to relate to breach of a confidential or fiduciary relationship as the term "breach of
fiduciary duty' is of relative modern usage. n359 The specific applicability of the undue advantage clause has only been
examined in a modest number of cases largely relating to summary judgment standards. n360 Thus, one claim relating to
breach of fiduciary duty was successful n361 as were two that asserted non-payment for goods or services. n362 Plaintiffs'
claims for undue advantage have been made in relation to claims under state law for the misappropriation of intellectual
property with mixed success and much concern about preemption issues: claims related to trade secrets n363 and
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copyrights n364 were approved but a trademark claim was denied. n365 The claim [*223] for the misappropriation of
seismic data was denied but only on the basis that the alleged taking was not contrary to law. n366 In a blend of federal
statute and contract law, a federal court allowed a claim to continue on whether the defendant took undue advantage by
installing optic cable on a railway easement. n367
A review of a large number of cases in state and federal courts in Texas indicates that a substantial number of cases
relate to claims more associated with unjust enrichment at law: n368 claims for reimbursement n369, claims for
overpayments, n370 claims for non-payment or underpayment n371 (including [*224] underpayment of mineral royalties).
n372
Claims relate more to disputed ancillary issues to consensual transactions; therefore, proof of an express contract n373
or the plaintiff's failure to establish a nonconsensual transaction are frequently cited as adequate defenses. n374 As some
courts hold in claims for rescission, some plaintiffs for unjust enrichment are held to be trying to maneuver to avoid the
consequences of their own bad bargains. n375 Class actions for unjust enrichment are feasible, but unlikely, as the
uniformity of key elements seems to be a recurring problem. n376
[*225] The boundaries between unjust enrichment and quantum meruit or money had and received are not clearly
established: some cases accept claims for unjust enrichment that might be better deemed claims for quantum meruit or
money had and received and occasionally courts will misinterpret claims for unjust enrichment in equity as claims for
quantum meruit n377 or money had and received. n378 Other courts hold that there is no difference between the unjust
enrichment and quantum meruit n379 or money had and received. n380
So far, few claims for unjust enrichment that involve intellectual property have survived the defense of federal
preemption. Even when the claim is not dismissed as a matter of law, n381 the plaintiff is required to amend the claim to
explain to a skeptical court how misappropriation of intellectual property satisfies the Heldenfels standard. n382 Claims
relating to trade secrets have more success but can still be problematic. n383
[*226] While there have been a few case opinions for unjust enrichment that assert claims or seek remedies that
resemble traditional claims for unjust enrichment in equity, they appear to be a minority of the total claims. n384 At
present, there is no large group of cases in which a claim for unjust enrichment in equity is overtly rejected for want of
jurisdiction in equity. n385
D. Unconscionablity
Occasionally an appellate court has approved a claim for unjust enrichment on the basis that jurisdiction in equity is
broader than the Heldenfels standard, asserting jurisdiction based on the unconscionability of the defendant retaining the
disputed property or money. n386 The more conservative side of this group points out that Heldenfels was silent on
passive unjust enrichment, which has been a basis for jurisdiction of a group of cases before and after Heldenfels. n387
They focus on the statement [*227] in Barrett, which distinguishes unjust enrichment between the defendant's active
and passive behavior in obtaining the disputed property. n388 The key trait to this sub-group is their emphasis on the
passive nature of how the defendant gained the property. n389 The facts for a few cases do relate to passive receipt n390 but
other cases blur the boundary between active and passive, alleging unconscionable receipt that is related to the
defendant's actions. n391
[*228] The less conservative part of this sub-group of cases asserts a cause of action based on unconscionability,
seemingly regardless of whether the defendant's holding of the asset or money in dispute was from active or passive
unjust enrichment. n392 This group of cases most closely approximates traditional unjust enrichment in equity. n393 Some of
these proscribe broad jurisdiction, but others resemble actions for money had and received which already enjoys broad
jurisdiction. n394
[*229]
E. Constructive Trusts
The remedy n395 of constructive trust grants specific restitution n396 of identified assets by hypothecating equitable title to
the successful claimant. n397 In cases in which the defendant is shown to unjustly hold legal title to property, the law in
equity asserts that the defendant's legal title is superseded by the plaintiff's equitable title. n398 The doctrine is based on
the principle that the trust forms when the defendant unjustly obtains legal [*230] title; n399 the trust appears or springs
into existence. n400 The role of the court in equity is only to acknowledge the trust with the defendant as trustee,
confirming plaintiff's claim as superior to that of the defendant and his creditors. n401 This doctrine of the "springing
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trust' also simplifies determining the starting date for the plaintiff's claim to all revenues or benefits that are produced
from the assets in the trust. n402
The remedy of constructive trust can also be an optional enhancement to protect the priority of the beneficiary's
equitable interest. n403 Typically, the [*231] remedy of constructive trust by itself does not resolve all of the plaintiff's
claims especially when the property to be included in the trust, the res, has generated or will generate revenue or use
value. n404 Either as a part of the trial that awards the constructive trust or in subsequent motion practice, the applicable
benefits and expenses need to be resolved in a manner that is consistent with the principles of an accounting in equity.
n405
The constructive trust can be an important addition to rescission n406 or an accounting in equity. n407 The trust
establishes the plaintiff's security interest in the assets while it enables the claimant to trace and securitize proceeds of
the assets or operations n408 and the accounting allocates cash flow generated since the inception of the trust. n409
[*232] Texas courts require three elements for a constructive trust: (1) the breach of a special trust, fiduciary
relationship, or actual fraud; (2) unjust enrichment of the wrongdoer; and (3) tracing to an identifiable res. n410 Texas
requires liability for fraud or breach of fiduciary duty n411 even though the Restatement Third is not restricted to specific
claims: only that the res must have been acquired non-consensually. n412 However, there is some indication that a
constructive trust in Texas may also be justified upon proof of quantum meruit, n413 conversion, n414 and the general
allowance for mistake or accident. n415
There is an important contrast to draw between the function of constructive trusts in Texas law and the regard in
which they are held by [*233] our Supreme Court. The particulars of constructive trusts would suggest a remedy that
improves the claimant's ability to realize and protect her equity interest in assets and their proceeds. n416 Yet the Court
extols the constructive trust not for its protection of equitable interests, but for its ability to reach assets wrongly
retained by the defendant and thereby realize justice or equity that would otherwise been denied under the common law,
i.e. the safety net. n417
It is interesting that such statements of law are generally used to praise constructive trusts and not the law in equity
in general or the application of restitution or unjust enrichment as causes of action. n418 Consider the following statement
in a 1980 Supreme Court opinion:
A similar loosely defined but useful equitable doctrine is the constructive trust. It is unlike other trusts, but equity
raised it up in the name of good conscience, fair dealing, honesty, and good morals. "A constructive trust is the formula
through which the conscience of equity finds expression." Equity provides the idea of constructive trusts as a tool to
"frustrate skullduggery," even though that kind of a trust is also grounded upon elusive principles. Such a trust is
purely a creature of equity. Its form is practically without limit, and its existence depends upon the circumstances. n419
[*234] There are many other eloquent quotes from the Court about constructive trusts that are consistent with an
expansive view of jurisdiction in equity but the context of this quote is the point of interest. n420 In Bocanegra, the Court
was discussing the election doctrine and described constructive trust as an analogous doctrine in equity. n421 The terms
"law in equity' or unjust enrichment would have been used by other authorities in a generalization about the purpose of
the law in equity but our Court considers constructive trust to be the better paradigm. n422 The Court's opinion in Burrow
again relies on constructive trust as an analogy to justify forfeiture of fiduciary fees as a similar remedy in equity. n423
The features of security interest and trust administration in a constructive trust are not of major interest to fee
forfeiture, but mainly the ability to remedy otherwise irreparable injustice. n424
[*235] As a constructive trust is a remedy and not a cause in action, it is difficult to understand how the remedy
by itself rights irreparable injuries. n425 The key to the safety net lies in the jurisdiction for a cause of action such as
unjust enrichment. If the jurisdiction for unjust enrichment is limited to established claims like breach of fiduciary duty
and fraud, then the safety net will only operate to save claims that would otherwise be procedurally precluded, not rights
without remedies.
The single most influential authority on constructive trusts in Texas for more than 100 years has been Pomeroy's
Equity Jurisprudence. n426 He shows that credit for the safety net is due to the fact that equity has sufficient jurisdiction to
impress a constructive trust:
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In general, whenever the legal title to property, real or personal, has been obtained through actual fraud,
misrepresentations, concealments, or through undue influence, duress, taking advantage of one's weakness or
necessities, or through any other similar means or under any other similar circumstances which render it
unconscientious for the holder of the legal title to retain and enjoy the beneficial interest, equity impresses a
constructive trust on the property thus acquired in favor of the one who is truly and equitably entitled to the same,
although he may never perhaps have had any legal estate therein; and a court of equity has jurisdiction to reach the
property either in the hands of the original wrong-doer, or in the hands of any subsequent holder, until a purchaser of it
in good faith and without notice acquires a higher right, and takes the property relieved from the trust. The forms and
varieties of these trusts, which are termed ex maleficio or ex delicto, are practically without limit. The principle is
applied wherever it is necessary for the obtaining of [*236] complete justice, although the law may also give the
remedy of damages against the wrong-doer. n427
Pomeroy's influence on Texas case opinions starts no later than 1889 n428 and continues through today. n429 For example,
Pope relies on two prior Supreme Court opinions: Hill v. Stampfli and Binford v. Snyder. n430 The Hill v. Stampfli
opinion relies heavily on Pomeroy and a paraphrase of the maxims discussed earlier, n431 which is repeated in Pope. n432
Binford has also been cited for expansive jurisdiction, n433 but it relies on a quote from Ruling Case [*237] Law, which
is almost identical to section 1053 of Pomeroy. n434 Together, Pomeroy's section 1053 and Binford have been directly
quoted or cited by seven Supreme Court opinions and dozens of appellate opinions, including early influential case
opinions that influenced third generation opinions. n435 For example, Fitzgerald and Pope, which both advocate broad
jurisdiction in equity based on the unconscionability of the defendant retaining the disputed asset, are favorably cited by
the principal Supreme Court opinions on constructive trusts. n436
The landmark case of Pope v. Garrett is a good example of how a constructive trust can fulfill equity's role as a
safety net. n437 The case related to the estate of an elderly woman, Carrie Simons, who died intestate. n438 She died
intestate because two of her natural heirs restrained her from executing a will that bequested her assets to someone
outside her family, Claytonia Garrett. n439 The will went unexecuted and the estate assets were distributed to her natural
heirs, some of whom had no knowledge of the duress. n440 The key issue was whether the innocent heirs should have
been allowed to retain their share of the estate or whether their share of the assets should have also been included in a
constructive trust for Garrett. n441 The court found that the [*238] trust sprung into existence immediately upon the
wrongful passing of the property from the estate to all of the natural heirs:
In this case Claytonia Garrett does not acquire title through the will. The trust does not owe its validity to the will. The
statute of descent and distribution is untouched. The legal title passed to the heirs of Carrie Simons when she died
intestate, but equity deals with the holder of the legal title for the wrong done in preventing the execution of the will and
impresses a trust on the property in favor of the one who is in good conscience entitled to it. n442
The opinion mentions no cause of action. n443 In the absence of a cause of action for unjust enrichment or constructive
trust, Garrett has no jurisdiction in a court that can recognize her equitable rights. n444
A subsequent opinion similarly ordered a constructive trust, also without substantial specific precedent or visible
jurisdiction. n445 The defendant was a spouse who had plea bargained a charge for murder. n446 The relevant statute
authorized a constructive trust for the assets only of a murder victim to deprive the murderer of unjust enrichment. n447
The Supreme Court opinion on that case again quickly defended the order for such a constructive trust in general terms.
n448
Other than a cause of action for constructive trust (for which there is little support in Texas or elsewhere) n449 or
unjust enrichment, no other cause [*239] of action would warrant the award of a constructive trust in either case. n450
The right to award a constructive trust against a murderer was based on statute that did not include felons who plead to
a lesser charge. n451 The Court stepped outside of standard norms to award the trust on the basis of a civil jury finding
that the spouse committed murder. n452 In what elsewhere would be considered a standard application of equity, the Court
found an unconscionable but small gap in the rails and filled the gap with discretion to allow good conscience to be
realized. n453
Similarly, the Court applied discretion to fill the gap such that a constructive trust was awarded against the
inheritance of the innocent heirs of Carrie Simons. n454 She was the victim of duress or the breach of her guilty heir's
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fiduciary duty but the innocent heirs did not assist in the duress in any manner. n455 They were passive recipients of
assets, which were unconscionable for them to retain and therefore subject to a claim for unjust enrichment. n456
If this were just a problem of semantics, n457 that Texas lawyers need to plead for constructive trust instead of unjust
enrichment in equity, this difference would be a minor distinction in Texas law. The real problem is availability as
constructive trust is not a cause of action. n458 Even as a remedy, constructive trusts are limited to breach of fiduciary
duty, fraud, mistake and conversion. n459 Alternatively, Texas courts enforce the similar limitations on the range for unjust
enrichment as a cause of action. n460
[*240] Even though Texas courts recognize unjust enrichment as a cause of action, there is no Texas cause of
action that resembles traditional unjust enrichment in equity. n461 Unjust enrichment is currently considered similar to
assumpsit and is limited to specific claims. n462 Only occasionally does it escape its constraints to undertake its role as a
remedial safety net. n463 The positive attributes of unjust enrichment are confused with constructive trust. Seemingly,
Texas courts endorse sufficient supporting principles to justify broad jurisdiction for unjust enrichment. n464 The Supreme
Court's opinions laud constructive trusts and endorse the importance of the safety net role of equity yet jurisdiction in
equity is constrained by choice. n465
VI. Forfeiture: It Tastes Just Like Chicken
"Equity abhors forfeiture." n466

Both of the recent Supreme Court opinions on forfeiture support it as an established and equitable remedy but differ
in tone. Justice Hecht's opinion maintains the importance of deterring breach of fiduciary duty but is willing to
compromise that priority in the name of reasonableness. n467 Thus it holds that fees need not be forfeited in whole and
that the share of the fees to [*241] forfeit, if any, should be determined by a number of factors. n468 Justice Green's
opinion in Swinnea, twelve years later, stresses the sole priority of deterrence and would reinforce that priority with an
additional tranche of punitive damages. n469 Seemingly, Swinnea would argue against partial fee forfeiture for fear of
inadequate deterrence. n470
A. Burrow v. Arce n471
Burrow relates to an industrial accident at a chemical plant in which 23 employees were killed and hundreds more were
seriously injured. n472 The victims and their families retained a group of law firms to represent them in their action, which
was settled for $ 190 million, including a contingency fee of $ 60 million. n473 Thereafter, 49 of the original group of 126
plaintiffs filed a second suit against their legal team for claims that included professional malpractice and breach of
fiduciary duty. n474 The clients sought forfeiture of fees that accrued in a case in which the breach was not directly related
to the receipt of the compensation (as opposed to bribes or secret profits). n475
The trial court granted summary judgment on the grounds that the plaintiffs suffered no actual damages because the
settlement was fair and reasonable. n476 The 14th District reversed the summary motion only on the claim of breach of
fiduciary duty and held that fees could be forfeited in whole or in part as determined only by the trial judge without
proof of [*242] actual damages. n477 The Supreme Court's most important holding was to reject the defendant's proof
that the plaintiffs suffered no actual damages; the defendants' expert testimony was found to be conclusory and without
adequate support. n478 The plaintiffs' claims for malpractice and breach of fiduciary duty were both remanded. n479
Justice Hecht's opinion could have been drawn narrowly but he chose to discuss forfeiture. He also could have
confirmed that professional fees are within the normal definition of the fiduciary's profit, benefit, or advantage for
disgorgement n480 and limited his opinion to the procedural issues raised for remedies in equity. The plaintiffs appealed a
holding for summary judgment at the trial level which was reversed by the 14th District on the issue of whether
evidence of damages in fact is required in a claim of fee forfeiture for breach of fiduciary duty, n481 an issue not subject to
serious debate. n482 Additional procedural issues included whether fees can be forfeited in part or must be forfeited in
whole and whether the jury or the judge should determine whether a remedy in equity should be ordered and what
amount, if any, of fees to be forfeited. n483
[*243] Justice Hecht, however, wrote a broad opinion about fee forfeiture. n484 In the process, the opinion
contradicts Texas law in equity on the defendant's burden of proof, the defendant's right to counter-restitution, the jury's
role of determining the amount of the monetary remedy in equity (as opposed to whether a remedy in equity should be
ordered) and introduces an unexplained new role for adequate remedy. n485 More importantly, the opinion does not
address how a trial judge should determine whether disgorgement or fee forfeiture is more appropriate nor whether the
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principles announced for fee forfeiture also apply to other claims for breach of fiduciary duty such as secret profits and
bribes. n486
The 14th District limited its opinion to claims for forfeiture of fees from lawyers. n487 Justice Hecht's opinion,
however, addresses the issue as fee forfeiture from fiduciaries in breach without limitation to lawyers. n488 The justice
largely relied on the Third Restatement of the Law Governing Lawyers (Restatement Governing Lawyers) with
occasional references to the restatements of agency and trusts. n489 No reference is made to the First Restatement of
Restitution or to any treatise on equity or remedies. n490
The opinion correctly asserted that there is substantial precedent for the judge to decide in her discretion whether a
remedy in equity is appropriate. n491 However, Justice Hecht neglected to acknowledge that existing practice in Texas is
for the jury to make a finding of fact on the amount of appropriate disgorgement in unjust enrichment claims n492 or
[*244] forfeiture. n493 In fact, the Supreme Court has consistently held that a claimant is not entitled to the remedy of
rescission should she fail to secure a jury finding on the amount of the claimant's interim benefits, if any. n494
Justice Hecht's opinion effectively recognized that the traditional approach to total forfeiture is not well suited for
the modern era. The traditional hard and fast rule, allowing all or none, is increasingly being ignored such as was
described earlier about the defendant's burden of proof on apportionment and related expenses. n495 He effectively
compromised the central priority of deterrence in a small way to make the approach seem more reasonable or modern.
In the process, however, his explanation contradicted a couple of longstanding principles in equity. Moreover, his
opinion failed to distinguish between disgorgement of compensation when that compensation is the source of liability
for breach of fiduciary duty and forfeiture of compensation that follows a breach of duty. n496
In the process of revising forfeiture, Burrow overlooked a couple of longstanding principles for remedies in equity.
In disgorgement, the defendant is subject to the tension that revenues rather than profits will be [*245] disgorged if the
she fails to adequately prove which revenues should be apportioned and which expenses should be offset because of the
shifting burdens of proof. n497 The Burrow opinion relieves the defendant of that tension such that the plaintiff is now
required to show why disgorgement of all fees is appropriate according to the multiple factors, including those
identified in Section 49 of the Restatement Governing Lawyers n498 and section 243 of the Second Restatement of
Trusts. n499 To maintain the tension and the traditional burdens of proof, the Court should make it clear that the burden of
proof is on the defendant to show why no fees or only some fees should be liable for disgorgement. n500
Second, the process of establishing counter-restitution has been replaced by multiple factors that are already
somewhat vague and subject to expansion. n501 Two of the factors are related to the issue of apportionment (the timing of
the violation and the value of the work provided to the client). n502 Nothing else is mentioned about counter-restitution for
fees [*246] shared with other attorneys or reasonable expenses like court costs, expert fees, and possibly even
expenses for support personnel or the lawyers themselves. The Restatement for Lawyers makes a brief statement that
indemnity should apply, n503 but the Burrow opinion makes no mention of counter-restitution or indemnity. n504
Both the Burrow opinion and Section 49 of the Restatement Governing Lawyers refer to a concept of adequate
remedy without any explanation. n505 Presumably this refers to the doctrine of irreparable injury. Justice Hecht's opinion
would assign the Doctrine a new role beyond its traditional function relating to jurisdiction in equity (which should not
apply to a claim for breach of fiduciary duty due to presumptive jurisdiction). n506 Presumably a judge would need to
consider the other damages that can or would be awarded in a case when determining how much, if any, fees need to be
forfeited. n507 Unfortunately, his language is confusing and may lead trial judges to preclude forfeiture if the claimant has
a claim for damages. n508
Finally, the opinion's appeal to reasonability sounds appropriate but it offers no specific help on how to implement
the concepts. n509 In the modern era, a "digital' approach to remedies in equity sounds appropriate and [*247] reasonable
except when you experience the struggle that courts now have in trying to render an amount. Under the traditional
opinions that advocated all or nothing, the "analog' approach, the fiduciary's benefit cannot be accurately measured or
quantified. n510 Justice Hecht does not refute that assertion. n511
The Supreme Court has clarified some of the fee forfeiture issues in opinions subsequent to Burrow. That opinion's
enthusiasm for variable forfeiture leads to the mistaken implication that Texas law might not order the disgorgement or
forfeiture of the entire amount of a bribe or secret profit. n512 In fact, disgorging the entire bribe was central to the holding
in Kinzbach. n513 Brewer & Pritchard interprets Kinzbach as a bribe or secret profit case, not forfeiture, n514 and states that
all of the bribe or profit must be disgorged. n515
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In a brief statement, Swinnea draws the essential distinction between Burrow and Brewer & Pritchard or Kinzbach
and therefore between forfeiture and disgorgement. Swinnea states that disgorgement and [*248] forfeiture are
alternative remedies: the plaintiff can plead for disgorgement of the fiduciary's profit or, in the absence of a profitable
fiduciary, plead for forfeiture of the fiduciary's compensation. n516 Swinnea distinguishes between Texas law that requires
disgorgement of all of the fiduciary's compensation when that compensation is itself the breach of fiduciary duty (such
as for bribes and secret profits) or provides for the digital remedy of fee forfeiture when the compensation is not source
of liability. n517 This distinction would appear to contradict Burrow's attempt to justify the forfeiture in Burrow with the
disgorgement in Kinzbach. n518
B. ERI Consulting Eng'rs, Inc. v. Swinnea n519
Justice Green's opinion represents a long step away from traditional remedies in equity in Texas or elsewhere. The
opinion is based on the unfounded assumption that forfeiture of assets is similar to forfeiture of revenues. n520 His
opinion cites no support for this assumption and relies on precedents based on forfeiture of fees to justify his opinion. n521
Other than limit his opinion to the specific circumstance in which breach of fiduciary duty is compounded by fraudulent
inducement, the opinion offers no explanation of how this new remedy of asset forfeiture relates to other remedies in
equity. n522 More importantly, he offers no support to dissuade critics who will allege that this remedy is so intentionally
punitive as to find it a remedy at law rather than a remedy in equity. n523
[*249] This opinion may be an example of how bad case facts can make bad law. n524 The defendant's actions were
indefensible. n525 He was an equal partner who agreed to sell his interest to the other partner. n526 He mislead his partner
into believing that he would continue as an employee and would not violate the non-compete agreement that was a key
component of the sale agreement. n527 Even before that agreement was signed, however, his wife formed a company that
violated that agreement and that impaired the business prospects of the former partner. n528 There was evidence that the
defendant intended to weaken the company after he sold his interest so that he could later repurchase the entire company
at a distressed price. n529 The trial court awarded lost profits of $ 300,000, punitive damages of $ 1,000,000 and forfeiture
of the defendant's partnership interests (which were sold for $ 570,700). n530
The practical impact of the forfeiture was to require the selling partner to return the purchase price of the
partnership interest without receiving that interest in return, a form of specific restitution without counter-restitution. n531
The Twelfth District rejected the remedy of asset forfeiture n532 [*250] and remanded the case on the issue of lost profits
and punitive damages. n533 The Supreme Court reversed the Twelfth District, approving asset forfeiture, although it also
held that the lost profits and punitive damages needed to be adjusted. n534
The key fact is that the defendant did not gain his partnership interest in a non-consensual or unconscionable
manner. n535 Under Swinnea, if a fiduciary fraudulently betrayed her principal by purchasing an asset that should have
been purchased for the principal, that asset could be subject to forfeiture to the principal without any compensation to
the breaching fiduciary for the initial purchase price that was paid by the fiduciary: no counter-restitution for asset
purchases. n536 That holding would represent a reversal of a long string of opinions in Texas and elsewhere that requires
the principal to reimburse the fiduciary. n537
Disgorgement of revenues is different from disgorgement of assets because the revenues were accrued in an unjust
manner, yet Justice Green does not acknowledge the distinction nor answer the Twelfth District's [*251] holding that
forfeiture only relates to fees and revenues. n538 Justice Green recognizes the distinction of forfeiture of assets as "further
equitable return of contractual consideration." n539
The sole justification for asset forfeiture is deterrence, which was also the central purpose of Burrow according to
Swinnea and is a traditional argument for disgorgement. n540 If deterrence were the only appropriate purpose, the
reasonableness of allowing partial forfeiture in lieu of total forfeiture would be moot. If the Court is solely concerned
with a remedy that will "encourage the others' it must not take half measures. n541
The language in Swinnea makes it clear that disgorgement is not being ordered to compensate the plaintiff. n542 The
opinion tries to minimize the punitive appearance of the remedy but not very hard. n543 The notion of stacking lost profits,
punitive damages and asset disgorgement seems confiscatory and should at least be supported by specific jury findings
especially when a jury already participates in the trial, without depriving the trial judge of her discretion to approve or
deny the remedy in equity.
This form of asset forfeiture may not be unconstitutional, but it certainly isn't a remedy in equity n544 and better
resembles a remedy at law. n545 The [*252] remedy in Swinnea exceeds the standard suggested in Snepp, that the
Page 313Page 313
remedy disgorge "only funds attributable to the breach." n546 It exceeds the rationale laid out in Holloway to justify
punitive damages for actions in equity, that a claim based in tort should not receive a materially different remedy
whether the claim is filed in equity or at law. n547 There is also no attempt to consider the total equity or to protect the
defendant from over-reaching as the forfeiture is not related to the amount of plaintiff's damages. n548
Finally, jury instructions in cases that include a plea for exemplary damages as well as asset forfeiture would seem
to offer an opportunity for some interesting motion practice. Does the jury need to know that the trial court might add
asset forfeiture to an award of exemplary damages? Would such notice prejudice the jury in either direction?
VII. Conclusions
Unjust enrichment is accepted as a cause of action and/or a remedy under Texas law. Just like the figurative Shimmer: it
can be both! n549 Unjust enrichment is growing in importance in business litigation in Texas and federal courts. The
importance of our medical, electronic and entertainment business sectors, among others, should be kept in mind lest we
forget that Texas is not immune to the needs of the American data economy for flexible alternative remedies to protect
new and emerging forms of intangible property.
In Texas, we protect what is important to us. It is a felony of the third degree to steal one head of cattle or more than
ten goats, n550 yet if someone misappropriates a gigabyte of data files in electronic form, there may even be no civil
liability presently under Texas law. n551 Unless the files are merged into paper form, they fail to qualify as property under
Texas law. n552 [*253] In the 2003 case of Kremen v. Cohen, the Ninth Circuit referred a question to the California
Supreme Court, asking whether conversion of a website qualified as conversion under California law. n553 On the basis of
the affirmative response, the Ninth Circuit reversed a district court opinion that held that the plaintiff's claim needed to
wait until the California legislature could fashion new statutes that covered the claim. n554 As a result, the plaintiff was
awarded specific restitution of the website plus disgorgement of $ 40 million of profits and $ 25 million of punitive
damages. n555
Texas has a cause of action for unjust enrichment but it does not resemble traditional unjust enrichment in equity
and therefore Texas has a weak safety net. Would the claim for misappropriation of data files or a web site be granted
jurisdiction in equity in the absence of an applicable statute? There may be a claim for fraud, depending on how
intangible property was obtained, but most of the acceptable causes for unjust enrichment would not apply.
Providing broader jurisdiction in equity would not require substantial change in Texas legal principles underlying
jurisdiction in equity, only how those principles are administered. Our courts need to make a different choice than
before and allow for a form of flexible jurisdiction in equity to reinforce the weak safety net.
"Uncomfortable' is not a term generally applied in a legal setting; it is more appropriate for psychotherapy or
women's shoes. In retrospect, the discomfort of Texas Courts with unjust enrichment in equity may be due to [*254]
the fact that Texas merged its courts without gaining sufficient experience with a separate court in equity to appreciate
the advantages of the law in equity and the safety net. Whatever choices Texas courts make in the future, they will not
be able to continue to overlook the law in equity without possibly impairing key business sectors that are essential to the
growth and vitality of our economy.
Legal Topics:
Energy & Utilities LawTaxationGovernmentsFiduciary ResponsibilitiesTax LawExcise TaxesFuels (IRC secs. 4041-
4042, 4081-4084, 4091-4093, 4121)General Overview
FOOTNOTES:
n1. Saturday Night Live (NBC television broadcast Jan. 10, 1976) ("New Shimmer is both a floor wax and a dessert topping!").
n2. Bennett v. Butterworth, 52 U.S. 669, 674, 676 (1851) (holding that the jury verdict was not at issue in the dispute).
Page 314Page 314
n3. See infra notes 194 to 207.
n4. See Kuechler v. Wright, 40 Tex. 600, 681-82 (1874) (explaining that the English court of equity "filled up the vacuum wherever there
was a deficiency in the execution of the laws ... ."); C.C. Langdell, A Brief Survey of Equity Jurisdiction, 1 Harv. L. Rev. 55, 116 (1887)
("The object of equity, in assuming jurisdiction over legal rights, is to promote justice by supplying defects in the remedies which the courts
of law afford.").
n5. 1 Dan B. Dobbs, Law of Remedies, § 2.2, at 72-73 (2d ed. 1993) ("No; the chancellors were keeping the law intact and making personal
orders to the defendant."); Thomas O. Main, Traditional Equity and Contemporary Procedure, 78 Wash. L. Rev. 429, 432 (2003) ("One
virtue of an autonomous system of equity was its authority to act in opposition to the strict law when the unique circumstances of a particular
case demanded intervention.").
n6. See Charles Donahue, Jr., What Happened in the English Legal System in the Fourteenth Century and Why Would Anyone Want to
Know?, 63 SMU L. Rev. 949, 964 (2010) ("In the second half of the fourteenth century, the king's council received an increasing number of
complaints from litigants that they could not obtain justice because their adversaries had bought or intimidated all the jurors in the county.");
see also 1 Dobbs, supra note 5, § 2.2, at 70 ("Petitioner's chief complaint about the law courts was that the defendant was rich and would
bribe the juries."); id. ("Equity developed its own elaborate forms of pleading in due time, but in this simple essence at least, it introduced a
strong emphasis on fact-gathering and fact-decision that permeated modern trials in both law and equity."); 1 Joseph Story, Commentaries on
Equity Jurisprudence, as Administered in England and America § 1.32 (12th ed. 1877) ("[Courts of Equity are established] to detect latent
frauds, and concealments, which the process of courts of law is not adapted to reach; to enforce the execution of such matters of trust and
confidence, as are binding in conscience, though not cognizable in a court of law; to deliver from such dangers as are owing to misfortune or
oversight; and to give a more specific relief, and more adapted to the circumstances of the case, than can always be obtained by the
generality of the rules of the positive or common law." (quoting 1 William Blackstone, Commentaries 92 (1765))).
n7. For an account of some early business disputes that were resolved by this combination of remedies, see 1 Story, supra note 6, § 3.68.
n8. 1 Dobbs, supra note 5, § 4.1(2) ("Restitution as a means for recognizing rights in intangibles[:] ... Restitution in fact seems to be the tool
that allowed law to move from the old medieval world of property and things to the modern world of contracts and by intangibles. Most
wealth today is represented by intangibles like money, stock, trade secrets, or business opportunities. Restitution and unjust enrichment are
often the terms in which rights in intangibles are recognized or rejected."); Douglas Laycock, The Death of the Irreparable Injury Rule, 103
Harv. L. Rev. 687, 699 (1990) ("The explosive growth of substantive protection for intangible rights created more cases in which only
specific relief would do."); Main, supra note 5, at 441 ("As England transitioned from an agricultural to a commercial nation, the more
frequent became situations involving rights not previously contemplated and for which no writ and, thus, no remedy, was available."
(quoting William Q. deFuniak, Origin and Nature of Equity, 23 Tul. L. Rev. 54, 56 (1948))).
n9. 997 S.W.2d 229 (Tex. 1999).
n10. 318 S.W.3d 867 (Tex. 2010).
n11. Andrew Kull, Rationalizing Restitution, 83 Cal. L. Rev. 1191, 1191 (1995) ("Few American lawyers, judges, or law professors are
familiar with even the standard propositions of the doctrine, and the few who are continue to disagree about elementary issues of
definition."); Douglas Laycock, The Scope and Significance of Restitution, 67 Tex. L. Rev. 1277, 1277 (1989) ("Despite its importance,
restitution is a relatively neglected and underdeveloped part of the law. In the mental map of most lawyers, restitution consists largely of
blank spaces with undefined borders and only scattered patches of familiar ground.").
n12. Carl Reynolds, Texas Courts 2030 - Strategic Trends & Responses, 51 S. Tex. L. Rev. 951, 975-78 (2010); Nathan L. Hecht, The
Vanishing Civil Jury Trial: Trends in Texas Courts and an Uncertain Future, 47 S. Tex. L. Rev. 163, 166 (2005).
Page 315Page 315
n13. This search merely estimates the growth in the use of "unjust enrichment" or "disgorgement." For all of the potential errors and biases,
it is reasonable to observe that there has been a substantial increase in the rate at which unjust enrichment is mentioned and that the number
of federal opinions is growing significantly faster than state opinions.
n15. See George P. Roach, How Restitution and Unjust Enrichment Can Improve Your Corporate Claim, 26 Rev. Litig. 265, 319 (2007)
("Combined with rescission and/or specific restitution, this perspective for the measure of the defendant's benefit can produce a unique
award for the plaintiff, especially for a plaintiff with a claim that experienced significant delay after the date of the unjust act and/or a
plaintiff in which the key asset values fluctuate greater than normal.").
n16. Id. at 267.
n17. See id. at 267 n.3.
n18. Laycock, supra note 8, at 713-14 ("Injunctions are a routine remedy for misappropriation of trade secrets; infringement of patents,
copyrights, or trademarks; violations of antitrust laws or covenants not to compete; interference with contract; and other kinds of unfair
competition. In all these cases, damages and restitution are the usual remedies only for past violations beyond the reach of injunctions."
(footnotes omitted)).
n19. Root v. Ry. Co., 105 U.S. 189, 214 (1882) ("It is true that it is declared in those cases that, in suits in equity for relief against
infringements of patents, the patentee, succeeding in establishing his right, is entitled to an account of the profits realized by the infringer,
and that the rule for ascertaining the amount of such profits is that of treating the infringer as though he were a trustee for the patentee, in
respect to profits."); HM A-G v. Blake, [2000] 1 A.C. 268, 279-80 (H.L.) (appeal taken from Eng.) (U.K.) available at
http://www.publications.parliament.uk/ pa/ld199900/ldjudgmt/jd000727/blake-1.htm ("Thus, in 1803 Lord Eldon L.C. stated, in Hogg v.
Kirby, a passing off case: "what is the consequence in Law and in Equity? ... . [A] Court of Equity in these cases is not content with an action
for damages; for it is nearly impossible to know the extent of the damage; and therefore the remedy here, though not compensating the
pecuniary damage except by an account of profits, is the best: the remedy by an injunction and account." (citations omitted)).
n20. See Stevens v. Gladding, 58 U.S. 447, 455 (1855) (applying the doctrine of complete relief, another name for the clean-up doctrine);
see also 1 George E. Palmer, Law of Restitution § 2.7 (Supp. 2007) ("Decisions of the United States Supreme Court in the nineteenth century
established that in a suit in equity for infringement of patent or copyright, the patent or copyright holder was entitled to recover the profits
made through the infringement. Although the Court sometimes explained this as a method for measuring the plaintiff's damages, it was clear
that the relief was based on unjust enrichment, as the Court later recognized. In the cases during this earlier period, recovery of profits could
be obtained only in equity, where there was an independent basis for an injunction." (footnotes omitted)).
n21. Porter v. Warner Holding Co., 328 U.S. 395, 397-98 (1946).
n22. Univ. of Colo. Found., Inc. v. Am. Cyanamid Co., 342 F.3d 1298, 1311 (Fed. Cir. 2003); see also Rhone-Poulenc Agro, S.A. v. DeKalb
Genetics Corp., 272 F.3d 1335, 1359-60 (Fed. Cir. 2001) (affirming jury verdict for fraud, misappropriation of trade secrets and patent
infringement that awards rescission, monetary remedy and punitive damages).
n23. See generally John Kairis, Disgorgement of Compensation Paid to Directors During the Time They Were Grossly Negligent: An
Available But Seldom Used Remedy, 13 Del. L. Rev. 1 (2011).
Page 316Page 316
n24. Kremen v. Cohen, 337 F.3d 1024, 1030 (9th Cir. 2003). For further background, see Kremen v. Cohen, 325 F.3d 1035, 1037-39 (9th
Cir. 2003) (certifying a question to the California Supreme Court regarding whether an Internet domain name is property that can be
converted under California tort law).
n25. Snepp v. United States, 444 U.S. 507, 515, n.11 (1980) (per curiam), ("Even in the absence of a written contract, an employee has a
fiduciary obligation to protect confidential information obtained during the course of his employment.").
n26. Computer Fraud & Abuse Act, 18 U.S.C.A. § 1030(g) (West Supp. 2012 ("Any person who suffers damage or loss by reason of a
violation of this section may maintain a civil action against the violator to obtain compensatory damages and injunctive relief or other
equitable relief.").
n27. See Bourns, Inc. v. Raychem Corp., 331 F.3d 704, 709-10 (9th Cir. 2003) ("Bourns denies that Raychem proved that it suffered $ 9
million in damages. Raychem replies by pointing to Bourns' enrichment by its torts. According to Hogge, "the burn rate,' or development
cost, on PPTCs was $ 3 million per year. According to credible evidence from the industry, Bourns saved at least three years of development
by its torts. As the district court found, this unjust enrichment is fairly recoverable by Raychem.").
n28. See generally Jordan L. Ludwig, Protections For Virtual Property: A Modern Restitutionary Approach, 32 Loy. L.A. Ent. L. Rev. 1
(2011).
n29. See generally Delso Alford, HeLa Cells and Unjust Enrichment in the Human Body, 21 Ann. Health L. 223 (2012).
n30. See 1 Dobbs, supra note 5, § 4.1(2) ("Unjust enrichment cannot be precisely defined, and that very reason has potential for resolving
new problems in striking ways."); see also Main, supra note 5, at 505 ("The ability of equity to correct problems stemming from application
of strict law modernizes and reforms the legal doctrine while also boosting its societal legitimacy. Equity is a fundamental method by which
the law has sought to meet changing conditions... . Equity thus plays an important role in the growth of the law, and without that engine, our
law will be moribund, or worse." (footnotes and quotations omitted)); 1 Story, supra note 6, § 28, at 20 ("So that one of the most striking and
distinctive features of courts of equity is, that they can adapt their decrees to all the varieties of circumstances, which may arise, and adjust
them to all the peculiar rights of all the parties in interest; whereas courts of common law ... are bound down to a fixed and invariable form
of judgment in general terms, altogether absolute, for the plaintiff or the defendant." (footnote omitted)).
n31. See Black & Decker (U.S.), Inc. v. Pro-Tech Power, Inc., 26 F. Supp. 2d 834, 856 (E.D. Va. 1998) ("Given that the calculations of
damages rests on equitable considerations, the Court will not allow Pro-Tech to offset the profits it made in 1995, 1995 [sic], 1997, and 1998
by its losses in 1993 and 1996.").
n32. Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45, 54-55 (2d Cir. 1939), aff'd, 309 U.S. 390 (1940); Burger King Corp. v. Mason,
855 F.2d 779, 781-82 (11th Cir. 1988).
n33. Jones Apparel Grp., Inc. v. Steinman, 466 F. Supp. 560, 563 (E.D. Pa. 1979).
n34. King v. Talbot, 40 N.Y. 76, 90-91 (1869) ("The rule is perfectly well settled, that a cestui que trust is at liberty to elect to approve an
unauthorized investment, and enjoy its profits, or to reject it at his option ... ."); Restatement (Third) of Restitution and Unjust Enrichment §
51(5)(b) (2011) ("A conscious wrongdoer or a defaulting fiduciary who makes unauthorized investments of the claimant's assets is
accountable for profits and liable for losses.").
Page 317Page 317
n35. See Slay v. Burnett Trust, 187 S.W.2d 377, 387-88 (Tex. 1945); King, 40 N.Y. at 91.
n36. See Crosby Steam Gage & Valve Co. v. Consol. Safety Valve Co., 141 U.S. 441, 457 (1891).
n37. See Sheldon, 106 F.2d at 54-55.
n38. See Black & Decker (U.S.) Inc. v. Pro-Tech Power Inc., 26 F. Supp. 2d 834, 856 (E.D. Va. 1998).
n39. See Adolph Gottscho, Inc. v. Am. Mktg. Corp., 139 A.2d 281, 286 (N.J. 1958).
n40. See SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 102 (2d Cir. 1978).
n41. United States v. Sutton, 795 F.2d 1040, 1062-63 (Temp. Emer. Ct. App. 1986).
n42. Commonwealth Chem. Sec., 574 F.2d at 102.
n43. Charles E. Rounds, Jr., Relief for IP Rights Infringement Is Primarily Equitable: How American Legal Education Is Short-Changing the
21st Century Corporate Litigator, 26 Santa Clara Computer & High Tech. L.J. 313, 350 (2010) (explaining that the anti-netting doctrine is
based on the Restatement (Third) of Trusts § 213 (1990)).
n44. Laycock, supra note 11, at 1277; see generally Douglas L. Johnson & Neville L. Johnson, What Happened to Unjust Enrichment in
California? The Deterioration of Equity in the California Courts, 44 Loy. L.A. L. Rev. 277 (2010); Doug Rendleman, When Is Enrichment
Unjust? Restitution Visits an Onyx Bathroom, 36 Loy. L.A. L. Rev. 991 (2003); Paul T. Wangerin, The Strategic Value of Restitutionary
Remedies, 75 Neb. L. Rev. 255 (1996).
n45. See infra section IV.B.
n46. Laycock, supra note 11, at 1284 ("The restitutionary claim matters in three sets of cases: (1) when unjust enrichment is the only source
of liability; (2) when plaintiff prefers to measure recovery by defendant's gain, either because it exceeds plaintiff's loss or because it is easier
to measure; and (3) when plaintiff prefers specific restitution, either because defendant is insolvent, because the thing plaintiff lost has
changed in value, or because plaintiff values the thing he lost for nonmarket reasons.").
n47. Id.
n48. Weiss v. Lehman, 759 F. Supp. 1, 2 (D.D.C. 1989) (denying the plaintiffs' claims at law due to the plaintiffs' own "imprudence and
greed," but granting the claim for unjust enrichment in equity); see also Bank of Saipan v. CNG Fin. Corp., 380 F.3d 836, 841 (5th Cir. 2004)
(holding that negligence is not the same as the unclean hands doctrine); Romano v. Ret. Bd. of the Emps. Ret. Sys., 767 A.2d 35, 44 (R.I.
2001) ("[A] party who has conferred a benefit upon another by mistake is not precluded from maintaining an action for restitution because
the mistake was caused by that party's own lack of care." (citing Toupin v. Laverdiere, 729 A.2d 1286, 1289 (R.I. 1999))). While there have
not been many cases yet on point, it appears that in Texas claims in equity may not be subject to adjustment for the claimant's contributory
Page 318Page 318
negligence. See Holt v. Robertson, No. 07-06-0220-CV, 2008 Tex. App. LEXIS 3735, at 4 (Tex. App. - Amarillo May 21, 2008, pet. denied)
(mem. op., not designated for publication) (adjusting special damages but not award of rescission for contributory liability).
n49. See generally Roach, supra note 15.
n50. Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, 410 (Tex. App. - Houston [1st Dist.] 2012, pet. filed) ("Finally, we note that
the damages that Chief challenges as too speculative to be recovered as actual damages may be available in disgorgement, an equitable
remedy it has not contested.").
n51. Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 514 (Tex. 1942) ("It is beside the point for either Turner or Corbett to
say that Kinzbach suffered no damages because it received full value for what it has paid and agreed to pay."); Slay v. Burnett Trust, 187
S.W.2d 377, 389 (Tex. 1945) ("Self-dealing transactions may be attacked by the beneficiary even though he has suffered no damages and
even though the trustee has acted in good faith.").
n52. Providence Rubber Co. v. Goodyear, 76 U.S. 788, 804 (1869) ("The rule is founded in reason and justice. It compensates one party and
punishes the other. It makes the wrong-doer liable for actual, not possible, gains. The controlling consideration is that he shall not profit by
his wrong. A more favorable rule would offer a premium to dishonesty and invite to aggression."); see also Allen, 367 S.W.3d at 410.
n53. When market values or operating performance improves in the interim between the date of the tort or breach and the trial, ex post data
will favor the plaintiff who sold the business or who seeks damages measured by the performance of the business. Similarly, when market
values or operating performance declines, ex post data will generally favor the plaintiff who bought the business. See supra note 391.
n54. George P. Roach, Correcting Uncertain Prophecies: An Analysis of Business Consequential Damages, 22 Rev. Litig. 1, 64-67 (2003).
n55. Am. Speedy Printing Ctrs., Inc. v. AM Mktg., Inc., 69 F. App'x 692, 699 (6th Cir. 2003) (awarding franchisor "lost future profits");
Next Level Commc'ns v. DSC Commc'ns Corp., 179 F.3d 244, 250 (5th Cir. 1999) (ruling that jury's verdict including future damages was
sufficient compensation to preclude enjoining against future transfer or disclosure of trade secrets); JTH Tax, Inc. v. H & R Block E. Tax
Servs., 245 F. Supp. 2d 749, 751 (E.D. Va. 2002) (calculating net present value of six years' worth of future earnings); Fin. Programs, Inc. v.
Falcon Fin. Servs., Inc., 371 F. Supp. 770, 776 (D. Or. 1974) (applying Oregon law); LJ Charter, L.L.C. v. Air Am. Jet Charter, Inc., No. 14-
08-00534-CV, 2009 Tex. App. LEXIS 9469, at 12 (Tex. App. - Houston [14th Dist.] Dec. 15, 2009, pet. denied) (mem. op., not designated
for publication) ("As part of both causes of action, Air America alleged: "this fraudulent conduct has resulted in a benefit to Defendant
Starflite in increased recapture of fuel costs it has experienced and will experience while in the Hangar ($ 1,381,341), or in the alternative,
the amount of profits it has made and will make while in the Hangar ($ 819,229.17).'").
n56. Finger v. Ray, 326 S.W.3d 285, 287 (Tex. App. - Houston [1st Dist.] 2010, no pet.) ("We hold that the causal connection between the
conduct alleged and any injury is not within a jury's common understanding, and thus the trial court properly ruled that expert testimony was
necessary to show that the lawyer's acts caused the client actual damages. We affirm the judgment of the trial court."); Home Loan Corp. v.
Tex. Am. Title Co., 191 S.W.3d 728, 735 n.22 (Tex. App. - Houston [14th Dist.] 2006, pet. denied) (noting that because plaintiff's claim for
breach of fiduciary duty sought only actual and punitive damages, and not fee forfeiture, the lack of causation in the case was dispositive).
n57. Recently there was an interesting case in which the plaintiff pled money damages and rescission in the alternative on a property-by-
property basis. The plaintiff was awarded a judgment of money damages on two properties and rescission on two others. See Houston v.
Ludwick, No. 14-09-00600-CV, 2010 Tex. App. LEXIS 8415, at 2-3 (Tex. App. - Houston [14th Dist.] Oct. 21, 2010, pet. denied) (mem. op.,
not designated for publication).
n58. See infra notes 300 to 304 and accompanying text.

Page 319Page 319
n59. Merely as an example of how unjust enrichment claims can be sometimes be ignored or overlooked, see Bransom v. Standard
Hardware, Inc., 874 S.W.2d 919, 927 (Tex. App. - Fort Worth 1994, writ denied) ("The trial court specifically found appellant was unjustly
enriched in an amount of at least $ 479,348.33. Appellee contends the judgment for actual damages arising from unjust enrichment must be
affirmed because appellant has presented no point of error challenging the trial court's judgment awarding and the underlying findings of fact
and conclusions of law. We agree.").
n60. Thomas v. State, 226 S.W.3d 697, 710-11 (Tex. App. - Corpus Christi 2007, pet. dism'd) (holding that the remedies of restitution or
rescission are available in addition to injunction in a class and are treated differently from the suit for monetary damages).
n61. Id.
n62. SEC v. AMX, Int'l, Inc. 7 F.3d 71, 74 n.6 (5th Cir. 1993) ("Pierce involved the issue of whether a contempt sanction enforcing
disgorgement of unlawful gains under the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§1701-1720, violated federal and state
prohibitions on imprisonment for debt. This Circuit concluded that disgorgement was not a "debt' because it is not a remedy at law; rather
disgorgement is equitable in nature, constituting "an injunction in the public interest.' Thus, enforcement of the disgorgement order through
contempt sanctions was permissible." (citations omitted) (quoting Pierce v. Vision Invs., Inc., 779 F.2d 302, 307 (5th Cir. 1986))).
n63. Maryland Cas. Co. v. Armco, Inc., 822 F.2d 1348, 1351 (4th Cir. 1987); In re Estate of Corriea, 719 A.2d 1234, 1239-40 (D.C. 1998);
Perl v. St. Paul Fire & Marine Ins. Co., 345 N.W.2d 209, 214 (Minn. 1984). But see Bausch & Lomb Inc. v. Utica Mut. Ins. Co., 625 A.2d
1021, 1033 (Md. 1993).
n64. George P. Roach, Counter-Restitution for Monetary Remedies in Equity, 68 Wash. & Lee L. Rev. 1271, 1314-15 (2011).
n65. Id.
n66. Id.
n67. Id.
n68. Id. at 1314-15 ("The FTC has filed an average of eighty to ninety cases per year for the last ten years or more. The range of annual total
awards of unjust enrichment has ranged from $ 300 million to $ 900 million per year. On the basis of a survey of cases from January 2007 to
October 1, 2010, it was determined that more than ten FTC lawyers had filed more than ten cases during that period, and that more than
twenty had worked on more than five. Over that same time period, the average defense counsel has worked on less than two cases."
n69. Id. at 1315.
n70. Id.
n71. See SEC v. Tex. Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971) (stating that the SEC can seek remedial relief other than an
injunction so long as it is not a penalty assessment).
Page 320Page 320
n72. E.g., Hous. Oil & Ref., Inc. v. FERC, 95 F.3d 1126, 1136 (Fed. Cir. 1996).
n73. Eric M. Blumberg, Universal Management, Abbott, Wyeth, Schering-Plough, and ... : Restitution and Disgorgement Find Another
Home at the Food and Drug Administration, 58 Food & Drug L.J. 169, 170 (2003).
n74. See Thomas v. State, 226 S.W.3d 697, 710-11 (Tex. App. - Corpus Christi 2007, pet. dism'd) There the State of Texas, acting through
the Consumer Protection Division of the Attorney General's Office, sued the defendants under the Texas Deceptive Trade Practices Act
(DTPA). Id. Section 17.47(d) of the act authorizes suits that seek to enjoin violations of the DTPA. Tex. Bus. & Com. Code Ann. § 17.47(d)
(West 2011). The Court held that the remedies of restitution or rescission are available in addition to injunction in a class and are treated
differently from the suit for monetary damages. Thomas, 226 S.W.3d at 710-11. See also Molano v. State, No. 13-10-00477-CV, 2011 Tex.
App. LEXIS 6612 (Tex. App. - Corpus Christi Aug. 18, 2011, pet. den'd); Avila v. State, 252 S.W.3d 632, 646 (Tex. App. - Tyler 2008, no
pet.).
n75. 1 Story, supra note 6, § 44.
n76. Earl of Oxford's Case, (1615) 21 Eng. Rep. 485, 486; 1 Chan. Rep. 1, 6 ("The Cause why there is a Chancery is, for that Mens Actions
are so divers and infinite, that it is impossible to make any general Law which may aptly meet with every particular Act, and not fail in some
Circumstances. The Office of the Chancellor is ... to soften and mollify the Extremity of the Law."); 1 Story, supra note 6, § 44; Main, supra
note 5, at 441 ("Appeals to the king, instead of to his courts, became numerous, and about the time of Edward I, it became usual to refer such
petitions for consideration and disposition to the Lord Chancellor. As "the keeper of the king's conscience,' the Lord Chancellor was a
churchman who was familiar with both the ecclesiastical and the civil or Roman law." (footnotes omitted)).
n77. 1 Story, supra note 6,§§49, 64 ("If this be a true account of the earliest known exercises of equitable jurisdiction, it establishes the point
that it was principally applied to remedy defects in the common-law proceedings; and, therefore, that equity jurisdiction was entertained
upon the same ground which now constitutes the principal reason of its interference, namely, that a wrong is done, for which there is no
plain, adequate, and complete remedy in the courts of common law." (footnote omitted)).
n78. See Cigna Corp. v. Amara, 131 S. Ct. 1866, 1879 (2011) ("Indeed, a maxim of equity states that "equity suffers not a right to be
without a remedy.'" (quoting R. Francis, Maxims of Equity 29 (1st Am. ed. 1823)); Miers v. Brouse, 271 S.W.2d 419, 421 (1954) ("The first
maxim of equity is that it will not suffer a right to be without a remedy."). The Latin legal maxim is ubi jus, ibi remedium ("Where there is a
right, there is a remedy."). Black's Law Dictionary 1520 (6th ed. 1990).
n79. 1 Dobbs, supra note 5, § 4.3(1) ("Equity's moral interest in conscience was coupled with an enormous power the law courts did not
have, to act against the person rather than against the property."); 1 Story, supra note 6, § 21.
n80. 1 Dobbs, supra note 5, § 4.3(1).
n81. Compare Story's description of the Chancery Court in its early days in infra note 122 with the description of the Court in a later period
in infra note 103.
n82. See 1 Dobbs, supra note 5, § 2.2.

Page 321Page 321
n83. See id. ("The idea was that equity's pronouncements in an individual case did not make law; hence, the common law rule retained its
generality and authority as "law.' Equity's decree simply commanded an individual to act in some certain way. When he acted in that way, of
course, he might have changed his legal status or his legal rights, but that would be by operation of "law." Equity did not, therefore, change
the law, it changed the acts of persons."); 1 Story, supra note 6, § 22 ("The decrees of the court of equity were then rather in the nature of
awards, formed on the sudden, pro re nata, with more probity of intention than knowledge of the subject, founded on no settled principles, as
being never designed, and therefore never used, as precedents." (footnote omitted)); Main, supra note 5, at 503 ("But equity does not require
judicial amendment; indeed equity does not accommodate it. The purpose of equity "was to provide a tribunal where the hardship of
particular cases might be relieved; the purpose was not to provide general rules of law.'" (quoting Colin P. Campbell, The Court of Equity-A
Theory of its Jurisdiction, 15 Green Bag 108, 111 (1903))).
n85. See id.
n86. See 1 Dobbs, supra note 5, § 2.2. ("The command was personal and there were echoes in it of the king's political power of an earlier
era. When he disobeyed, there was something like lese majesty, and he was clamped in irons as punishment for his disobedience."); see also
Langdell, supra note 4, at 117.
n87. Compare Ex Parte Werblud, 536 S.W.2d 542, 545 (Tex. 1976), with 1 Dobbs, supra note 5, § 2.1(1).
n88. See William M. Landes & Richard A. Posner, Adjudication as a Private Good, 8 J. Legal Stud. 235, 254-55 (1979).
n89. Daniel Klerman, Jurisdictional Competition and the Evolution of the Common Law, 74 U. Chi. L. Rev. 1179, 1180 (2007) (""The fees
of court seem originally to have been the principal support of the different courts of justice in England. Each court endeavored to draw to
itself as much business as it could.'" (quoting 2 Adam Smith, The Wealth of Nations 241-42 (Edwin Cannan ed., Univ. of Chicago Press
1976)).
n90. See Klerman, supra note 89, at 1179.
n91. 1 Palmer, supra note 20, § 3.13; cf. Williams v. Khalaf, 802 S.W.2d 651, 654-56 (Tex. 1990) (supporting its conclusion regarding the
applicable fraud statute of limitations by pointing to the cause of action's equitable origins as a form of quasi-contractual "debt").
n92. Dominic O'Sullivan et al., The Law of Rescission §§10.20, 10.21 (2008); see also infra note 99-101 and accompanying text (on the
judicature acts and the fusion of the legal and equitable courts).
n94. 1 Otto J. Scott, James I: The Fool as King 351-52 (1976).
n95. Id.; 1 Story, supra note 6, § 51.

Page 322Page 322
n96. See Laycock, supra note 8, at 699-700.
n97. See Id.
n98. See Id.
n99. See Main supra note 5, at 431 ("The Judicature Acts of 1873 and 1875 accomplished much the same for law and equity courts in
England."); id. at 464-65 n.213.
n100. Id.
n101. Id.
n102. See id. at 431.
n103. Rogers v. Daniel Oil & Royalty Co., 110 S.W.2d 891, 894 (Tex. 1937) ("In spite of this blended system of law and equity the
distinction between them is as absolute as ever, and to entitle the plaintiff to equitable relief he must show a proper case for a court of equity
to exercise its equitable jurisdiction."); see also Ochoa v. Am. Oil Co., 338 F. Supp. 914, 920 (S.D. Tex. 1972) ("Although the equity side
and the law side of the federal trial courts were thus fused, we are still far from the time ... when lawyers will cease to inquire whether a
given rule be a rule of equity or a rule of common law." (internal quotation omitted)); Main, supra note 5, at 476 ("As with the Field Code
and the Federal Rules of Civil Procedure, the Judicature Acts of 1873 and 1875, fused only the procedure of law and equity, leaving the
substance of equity both intact and predominant ... ."); O'Sullivan, supra note 92, § 10.04 (stating that British fusion did not substantially
combine the substance of either body of law).
n104. See, e.g., Laycock, supra note 8, at 692-93.
n105. Id. at 692.
n106. Id. at 726-27.
n107. Id. at 770.
n108. See LexisNexis Shepard's Results for Douglas Laycock, The Death of the Irreparable Injury Rule, 103 Harv. L. Rev. 688, 699 (1990)
(search last performed Jan. 9, 2013) (on file with Baylor Law Review) (results included 115 article results, 16 federal case results, and 6 state
case results).
n109. See Restatement (Third) of Restitution and Unjust Enrichment § 4 cmt. e (Supp. 2012) (citing Professor Laycock's article).
Page 323Page 323
n110. See, e.g., 1 Dobbs, supra note 5, § 2.5(1) ("With the merger of law and equity courts into a unitary system of justice, this history offers
no basis for continued use of the rule, and it remains today primarily as a convenient (but perhaps misleading and overstated) expression for
entirely different policies." (footnotes omitted)); 1 Palmer, supra note 20, § 1.6 ("In general there has been a gradual erosion of the
[adequacy] doctrine which suggests that in time it will be discarded, and this on the whole would be a good thing."); Owen M. Fiss, The
Civil Rights Injunction 38-40 (1978). But see eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392 (2006) (holding that the decision to
grant injunctive relief for patent claims must include consideration of four factors including irreparable damage and adequate remedy.).
n111. Supra note 108 and accompanying text. But see Patrick v. Thomas, No. 2-07-339-CV, 2008 Tex. App. LEXIS 3219, at 5 (Tex. App. -
Fort Worth May 1, 2008, no pet.) (mem. op., not designated for publication) (citing Laycock's article as support for an exception to the
adequacy doctrine).
n113. 1 Dobbs, supra note 5, § 5.18(3), at 936 ("The legal remedy is clearly not adequate compared to the equitable remedy whenever the
trust or lien would give the plaintiff a priority, or when the trust would give the plaintiff a return of specific unique property not reachable
at law, but in such cases there is a question whether the more effective equitable remedy appropriately protects the interests of third-party
creditors.").
n114. See 1 Palmer, supra note 20, § 1.6, at 35-37.
n115. See id.
n116. Id. § 1.6.
n117. See, e.g., 1 Dobbs, supra note 5, § 5.18(3) ("Because equity created the substantive rights against fiduciaries, equity has always taken
jurisdiction in claims against them without regard to the adequacy test."); 1 Palmer, supra note 20, § 1.6 ("Equity jurisdiction over
accounting by a trustee or other fiduciary usually has been continued even where an adequate remedy at law in quasi contract has become
available."); 1 John N. Pomeroy & Spencer W. Symons, A Treatise on Equity Jurisprudence § 181, at 257 (5th ed. 1941); Story, supra note 6,
§ 29 ("Thus, what are technically called Trusts, that is, estates vested in persons upon particular trusts and confidences, are wholly without
any cognizance at the common law; and the abuses of such trusts and confidences are beyond the reach of any legal process. But they are
cognizable in courts of equity; and hence they are called equitable estates; and an ample remedy is therefore given in favor of the cestuis que
trust (the parties beneficially interested) for all wrongs and injuries, whether arising from negligence or positive misconduct.").
n118. See, e.g., Restatement (Second) of Trusts § 197 (1959) ("Except as stated in § 198, the remedies of the beneficiary against the trustee
are exclusively equitable."); Restatement (First) of Restitution § 160 cmt. e (1936) ("Even though what is transferred is money ... the payor
or transferor is entitled to maintain a proceeding in equity for specific restitution if the payment or transfer was procured by an abuse of a
fiduciary or confidential relation.").
n119. See, e.g., Cigna Corp. v. Amara, 131 S. Ct. 1866, 1879 (2011) ("The case before us concerns a suit by a beneficiary against a plan
fiduciary (whom ERISA typically treats as a trustee) about the terms of a plan (which ERISA typically treats as a trust). It is the kind of
lawsuit that, before the merger of law and equity, respondents could have brought only in a court of equity, not a court of law."(citations
omitted)); Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 571 n.8 (1990) ("Such damages were available only in
courts of equity because those courts had exclusive jurisdiction over actions involving a trustee's breach of his fiduciary duties."); Duvall v.
Craig, 15 U.S. 45, 56 (1817) (a trustee was "only suable in equity"); Martino v. Weisman (In re Elegant Equine, Inc.), 155 B.R. 189, 192
(Bankr. N.D. Ill. 1993) ("Indeed, every court to consider this issue in the context of bankruptcy proceedings has held that breach of fiduciary
duty actions are equitable"); Sertich v. Moorman, 783 P.2d 1199, 1201 (Ariz. 1989).
n120. Cigna, 131 S. Ct. at 1880; Colleen Murphy, Misclassifying Monetary Restitution, 55 SMU L. Rev. 1577, 1602-03 (2002).
Page 324Page 324
n121. Restatement (Second) of Trusts § 197 cmt. b (1959) ("The trustee by accepting the trust and agreeing to perform his duties as trustee
does not make a contract to perform the trust enforceable in an action at law. The trustee may by contract undertake other duties than those
which he undertakes as trustee, and if he does so he will be liable in an action at law for failure to perform such duties."); see also infra notes
245 and 246 and accompanying text (noting the similarities between the rule promulgated in Peckham and Section 197 of the Restatement
(Second) of Trusts).
n122. 1 Story, supra note 6, § 21("In the early history of English equity jurisprudence there might have been, and probably was, much to
justify ... . And as the chancellors were for many ages almost universally either ecclesiastics or statements, neither of whom are supposed to
be very scrupulous in the exercise of power; and as they exercised a delegated authority from the crown, as the fountain of administrative
justice, whose rights, prerogatives, and duties on this subject were not well defined, and whose decrees were not capable of being resisted, it
would not be unnatural, that they should arrogate to themselves the general attributes of royalty, and interpose in many cases, which seemed
to them to require a remedy, more wide or more summary than was adopted by the common courts of law.").
n123. Doug Rendleman, The Trial Judge's Equitable Discretion Following eBay v. MercExchange, 27 Rev. Litig. 63, 68 (2007) ("Courts
make extravagant statements about their discretion in administering equitable substantive standards."); 1 Dobbs, supra note 5, § 4.3(1), at
587.
n124. See, e.g., BASF Corp. v. Old World Trading Co., 41 F.3d 1081, 1095-96 (7th Cir. 1994); 1 Dobbs, § 2.4(7), at 115 ("Few American
citizens, however, would think of themselves in court as humble petitioners, on their knees before the judge who may deny relief on grounds
that cannot be stated as principles or applied even-handedly to all suitors."); Laycock, supra note 8, at 726-27 (finding that courts often
decide the issue of jurisdiction in equity according to criteria that often go unmentioned).
n125. 1 Dobbs, supra note 5, § 4.1(3), at 569. ("Judges may be willing to expand substantive liabilities when they are limited to mild forms
of restitution, but may desire to constrict those liabilities when large damages might result."); Note, Discretionary Power of Courts of Equity,
16 Harv. L. Rev. 444, 444 (1903) ("Equitable remedies being extraordinary, they may, at the chancellor's discretion, be refused or given in
order to do equity. And equity is viewed in this connection in a large sense; it is not only what is just and right as between plaintiff and
defendant, but also what, according to a sound public policy, is just and right as regards the interests of the public.").
n127. See infra note 109.
n128. State v. Morales, 869 S.W.2d 941, 943 (Tex. 1994) (""The decrees of the Court of Equity were then rather in the nature of awards,
formed on the sudden, pro re nata, with more probity of intention than knowledge of the subject, founded on no settled principles, as being
never designed, and therefore never used, as precedents.'" (quoting 1 Joseph Story, Commentaries on Equity Jurisprudence, as Administered
in England and America 18 (Melville M. Bigelow ed., 13th ed. 1886))).
n129. Laycock, supra note 8, at 767 ("Judicial citations to irreparable injury opinions sometimes emphasize other factually similar cases, so
that the cases cited are actually on point. More often, the citation is simply to the catchphrase, and the case itself is wholly irrelevant.").
n130. Tennessee, Mississippi and Delaware maintain separate courts and New Jersey maintains a separate equity division within trial courts
of general jurisdiction. See Russell Fowler, A History of Chancery and Its Equity: From Medieval England to Today's Tennessee, 48 Tenn.
B.J. 20, 28 (2012).
Page 325Page 325
n131. The American Law Institute constitutes projects to write and update restatements of the law, including restatements on agency, trusts,
and restitution. See Institute Projects, The American Law Institute, http://www.ali.org/index.cfm?fuseaction=about.instituteprojects, (last
visited Jan. 10, 2012).
n132. Cf. Rounds, supra note 43, at 350-51 (noting the declining infrastructure in the modern U.S. for the law in equity as it relates to the
anti-netting rule and IP infringement).
n133. Main, supra note 5, at 505 ("The ability of equity to correct problems stemming from application of strict law modernizes and reforms
the legal doctrine while also boosting its societal legitimacy. Equity is a fundamental method by which the law has sought to meet changing
conditions... . Equity thus plays an important role in the growth of the law, and without that engine, our law will be moribund, or worse."
(quotations omitted)).
n134. Id. at 478 ("Yet the legacy of equity is unfulfilled in a unified procedural system if the procedural apparatus administering jointly the
substantive principles of law and equity is not itself subject to the moderation and correction of the jurisdiction of equity."); see also Roscoe
Pound, The Decadence of Equity, 5 Colum. L. Rev. 20, 25 (1905) ("The very thing that made equity a system must in the end prove fatal to
it. In the very act of becoming a system, it becomes legalized, and in becoming merely a competing system of law insures its ultimate
downfall.").
n135. State v. Morales, 869 S.W.2d 941, 944 (Tex. 1994) (""A court of equity is a happy invention to remedy the errors of common law: but
this remedy must stop somewhere ... .'" (quoting Henry Home, Principles Of Equity 46 (2d ed. 1767))).
n136. Restatement (Third) of Restitution And Unjust Enrichment § 1 cmt. b (2011) ("This is because - notwithstanding the potential reach of
the words, and Lord Mansfield's confident reference to "natural justice" - the circumstances in which American law has in fact identified an
unjust enrichment resulting in legal liability have been those and only those in which there might also be said to be unjustified enrichment,
meaning the transfer of a benefit without adequate legal ground.").
n137. See George P. Roach, Rescission in Texas: A Suspect Remedy, 31 Rev. Litig. 493, 525-29 (2012).
n138. Restatement (Third) of Restitution And Unjust Enrichment § 51 cmt. i (Supp. 2012) ("From a trustee charged with liability for breach
of duty it is a short conceptual step to a defendant charged as a constructive trustee, thence to anyone who is required to account (whether or
not via the remedy of constructive trust) for profits realized in consequence of a wrong to the claimant. Thus in the context of intellectual
property, the notion of treating the infringer as a trustee under a duty to account has been codified in the remedial provisions of the
Copyright Act ... ."); see also Root v. Ry. Co., 105 U.S. 189, 214-15 (1881).
n139. United States v. Carter, 217 U.S. 286, 305-06 (1910) ("It would be a dangerous precedent to lay down as law that unless some
affirmative fraud or loss can be shown, the agent may hold on to any secret benefit he may be able to make out of his agency."); Shannon v.
Marmaduke, 14 Tex. 217, 220 (Tex. 1855) ("Although the fact is not proved by positive evidence that the purchase in this instance was made
directly or indirectly by the defendant, yet the relationship subsisting between himself and the nominal purchaser, the inadequacy of price,
and more especially the reconveyance to the defendant unexplained, afford strong circumstantial evidence tending to that conclusion.
Positive evidence of such secret understandings between parties can rarely be obtained.").
n140. Am. Honda Motor Co. v. Two Wheel Corp., 918 F.2d 1060, 1063-64 (2d Cir. 1990) (noting that Plaintiff's claim for damage award
based on gross sales, because of lack of proof of deductions, was properly rejected because plaintiff received wholesale price of goods sold
to defendant, who was former dealer of plaintiff).
n141. Restatement (Third) of Restitution And Unjust Enrichment §§5(d), 51 (2011) ("(d) A claimant who seeks disgorgement of profit has
the burden of producing evidence permitting at least a reasonable approximation of the amount of the wrongful gain. Residual risk of
uncertainty in calculating net profit is assigned to the defendant.").
Page 326Page 326
n142. Wilz v. Flournoy, 228 S.W.3d 674, 676 (Tex. 2007) ("A party seeking to impose a constructive trust has the initial burden of tracing
funds to the specific property sought to be recovered. Once that burden is met, "the entire ... property will be treated as subject to the trust,
except in so far as the trustee may be able to distinguish and separate that which is his own.'" (emphasis in original) (quoting Eaton v.
Husted, 172 S.W.2d 493, 498 (Tex. 1943))).
n143. Restatement (Third) of Restitution And Unjust Enrichment § 51 cmt. g (2011) ("The general question of attribution may include
issues of apportionment at one or more levels. If the defendant's business is complex, and the underlying wrong to the claimant affects only
one of its various components, threshold apportionment issues may involve (i) the proportion of the firm's overall results properly
attributable to the particular business in which the wrong has been committed, and (ii) the proportion of overhead or other common expenses
properly charged against these results in determining the net profits of the business in question." (emphasis in original)).
n144. See Westinghouse Elec. & Mfg. Co. v. Wagner Elec. Mfg. Co., 225 U.S. 604, 620 (1912) (stating that a guilty trustee's wrongdoing
justifies the risk of offsets being lost); Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 514 (9th Cir. 1985) ("Any doubt as
to the computation of costs or profits is to be resolved in favor of the plaintiff... . If the infringing defendant does not meet its burden of
proving costs, the gross figure stands as the defendant's profits." (internal citations omitted)); Gordon Form Lathe Co. v. Ford Motor Co.,
133 F.2d 487, 494 (6th Cir. 1943) (stating that the defendant's inadequate recordkeeping would be held against it).
n145. See George P. Roach, A Default Rule of Omnipotence: Implied Jurisdiction and Exaggerated Remedies in Equity for Federal
Agencies, 12 Fordham J. Corp. & Fin. L. 1, 61 (2007) ("Out of approximately 116 opinions, the court held the defendant in default and
ordered her to disgorge her revenues in 73 opinions. In the remaining 43 opinions the court acknowledged the default rule but approved an
alternative estimate or rule of thumb to establish the defendant's benefit, generally measured by an estimate of the defendant's gross profit.")
n146. Murphy Door Bed Co. v. Interior Sleep Sys., Inc., 874 F.2d 95, 103 (2d Cir. 1989) ("Even if Zarcone does not offer evidence of his
costs (as he has not heretofore), the court should estimate them based on the evidence before it.").
n147. Dayva Int'l v. Award Prods. Corp., No. 97-CV-1397, 1998 U.S. App. LEXIS 4386, at 10-11 (Fed. Cir. Mar. 11, 1998) ("Thus, a trial
court only has an independent duty to apportion profits, even where the defendant fails to present evidence, if it is clear from the record that
not all the profits claimed are attributable to the infringement.").
n148. See, e.g., Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265 (1946) (maintaining that the plaintiff is held to a lower burden of
proof in ascertaining the exact amount of damages because "the most elementary conceptions of justice and public policy require that the
wrongdoer shall bear the risk of uncertainty which his own wrong has created"); Intel Corp. v. Terabyte Int'l, 6 F.3d 614, 621 (9th Cir. 1993);
Deering, Milliken & Co. v. Gilbert, 269 F.2d 191, 193-94 (2d Cir. 1959) (advocating a more flexible standard for plaintiff's burden of
showing defendant's revenues are appropriate when defendant "prevented proof by direct evidence of the true facts essential to an accurate
determination of the royalties due under the [Copyright] Act" (quotation omitted)); Phillip Morris USA Inc. v. Otamedia Ltd., No. 02 Civ.
7575 (GEL)(KNF), 2005 U.S. Dist. LEXIS 1259, at 16 (S.D.N.Y. Jan. 28, 2005); A & M Records v. Abdallah, 948 F. Supp. 1449, 1459 (C.D.
Cal. 1996); Aris Isotoner Inc. v. Dong Jin Trading Co., No. 87 Civ. 8904 (RO), 1989 U.S. Dist. LEXIS 18447, at 18 (S.D.N.Y. May 16,
1989) ("Thus, when the defendant fails to provide satisfactory evidence of its actual sales, the court may rely on indirect or circumstantial
evidence.").
n149. See ERI Consulting Eng'rs, Inc. v. Swinnea, 318 S.W.3d 867, 877 (Tex. 2010) (""Uncertainty as to the fact of legal damages is fatal to
recovery, but uncertainty as to the amount will not defeat recovery.'" (alteration in original) (quoting Sw. Battery Corp. v. Owen, 115 S.W.2d
1097, 1098-99 (Tex. 1938))).
n150. See Bos. Children's Heart Found., Inc. v. Nadal-Ginard, 73 F.3d 429, 435 (1st Cir. 1996); Brophy v. Cities Serv. Co., 70 A.2d 5, 8
(Del. Ch. 1949); Ex rel. Plugger v. Twp. Bd. of Overyssel, 11 Mich. 222, 225-26 (1863); Diamond v. Oreamuno, 248 N.E.2d 910, 912 (N.Y.
1969) ("It is true that the complaint before us does not contain any allegation of damages to the corporation but this has never been
Page 327Page 327
considered to be an essential requirement for a cause of action founded on a breach of fiduciary duty."); Restatement (First) of Restitution §
128 cmt. f (1937).
n151. Estate of Bishop v. Equinox Int'l Corp., 256 F.3d 1050, 1055 (10th Cir. 2001) ("In short, we have acknowledged that a showing of
actual damages is not required to recover a portion of an infringing defendant's profits in trademark action, and that plaintiffs in such cases
may recover the defendants' profits based upon the alternative theories of the prevention of unjust enrichment and the deterrence of willful
infringement."); ISP.NET.LLC v. Qwest Commc'ns Int'l, No. IP 01-0480-C-B/S, 2004 U.S. Dist. LEXIS 20237, at 7 (S.D. Ind. Sept. 24,
2004); Monsanto Co. v. Campuzano, 206 F. Supp. 2d 1239, 1249 (S.D. Fl. 2002); Riggs Inv. Mgmt. Corp. v. Columbia Partners, L.L.C., 966
F. Supp. 1250, 1271 (D.D.C. 1997); Laskowitz v. Marie Designer, Inc., 119 F. Supp. 541, 555 (S.D. Cal. 1954). But see Intel Corp. v.
Terabyte Int'l, 6 F.3d 614, 621 (9th Cir. 1993) (holding the trial court did not abuse its discretion in calculating damages "somewhat crudely"
because the infringer offered no evidence in rebuttal to the calculation); Pure Oil Co. v. Paragon Oil Co., No. 33755, 1958 WL 6076, at 325-
26 (N.D. Ohio, Jan. 9 & Feb. 17, 1958) (holding that plaintiff needed to prove a loss of profits as a result of the infringement to recover
defendant's profits).
n152. Restatement of Restitution § 128 cmt. f (1937) ("Although it is essential to an action of restitution that the defendant should have had
possession or should have disposed of the chattel, restitution is granted even though the conversion was innocent and the entire transaction
resulted in no net benefit to the defendant.").
n153. Peine v. Murphy, 377 P.2d 708, 712 (1962) ("Plaintiff's suit in the trial court was clearly based on a constructive trust-unjust
enrichment theory in equity where rescission and other relief may be given even though plaintiff did not prove any pecuniary damage."); 2
Dobbs, supra note 5, § 9.3(2) ("Most courts seem to have rejected any pecuniary damages requirement as a pre-condition to restitution where
the misrepresentation was clearly material even though it did not bear on economic value and even where the misrepresentation understated
the value of goods involved." (citing Ind. & Mich. Elec. Co. v. Harlan, 504 N.E.2d 301 (Ind. Ct. App. 1987))).
n154. See Stoffela v. Nugent, 217 U.S. 499, 501 (1910) ("It is true that the defendant acted fraudulently and knew what he was about. But a
man by committing a fraud does not become an outlaw and caput lupinum. He may have no standing to rescind his transaction, but when it is
rescinded by one who has the right to do so the courts will endeavor to do substantial justice so far as is consistent with adherence to law."
(citations omitted)); Stanley v. Gadsby, 35 U.S. 521, 522 (1836) (holding that to be entitled to injunctive relief against a usurious creditor,
the debtor must offer to pay interest and principal); Ehrlich v. United States, 252 F.2d 772, 776 (5th Cir. 1958) ("The harm should be undone
but there is no reason to reward the victim."); Cardiac Thoracic & Vascular Surgery, P.A. v. Bond, 840 S.W.2d 188, 193 (Ark. 1992) ("The
equitable objective of a return to the status quo as the result of a rescission is consistent with the equitable maxim "he who seeks equity must
do equity.'"); O'Sullivan et al., supra note 92, at § 18.10 (""Though the defendant has been fraudulent, he must not be robbed.'" (quoting
Spence v. Crawford [1939] 3 All E.R. 271 (H.L.) 288).
n155. 1 Palmer, supra note 20, § 3.12, at 303 ("The requirement that a party who obtains restitution must return or other-wise account for
benefits received in an exchange transaction does not rest on a principle of mechanics: that since the transaction is being rescinded it
necessarily follows that there must be a re-exchange of benefits transferred on each side. Instead, the true basis of the requirement is to
prevent the unjust enrichment of the plaintiff, who is himself seeking restitution based on the defendant's unjust enrichment.").
n156. See 1 Story, supra note 6, § 437 ("The relief ... is more complete, adequate, and perfect, inasmuch as it adapts itself to the special
circumstances of each particular case; adjusting all cross equities; and bringing all the parties in interest before the court, so as to prevent
multiplicity of suits and interminable litigation." (footnote omitted)).
n157. Restatement (Third) of Restitution And Unjust Enrichment § 51(5)(c) (2011) ("A conscious wrongdoer or a defaulting fiduciary may
be allowed a credit for money expended in acquiring or preserving the property or in carrying on the business that is the source of the profit
subject to disgorgement.").
n158. Id. § 53(1) ("A person who is liable to make restitution of property or its value is liable for supplemental enrichment in the form of
interest, rent, or other measure of use value, to the extent that such further enrichment is either realized in fact or appropriately presumed.
Enrichment of this kind may be presumed in the case of a recipient who is enriched by misconduct ( § 51(1)) or who is otherwise responsible
for the enrichment in question ( § 52).").
Page 328Page 328
n159. Restatement (Second) of Agency § 439 cmt. a (1958) ("Indemnity is allowed, even though in the transaction the agent committed a
breach of trust. Thus where an agent, who is authorized to buy property, makes a secret profit, the principal must indemnify the agent for his
proper expenditures, although entitled to any improper profit made by the agent. Likewise an agent who violated his fiduciary duty in
refusing to convey property bought for the principal is entitled to be reimbursed for the purchase price, as a condition to recovery by the
principal." (citations omitted)); Restatement (Second) of Trusts § 244 cmt. c (1959) ("To the extent to which the trustee is entitled to
indemnity, he has a security interest in the trust property. He will not be compelled to transfer the trust property to the beneficiary or to a
transferee of the interest of the beneficiary or to a successor trustee until he is paid or secured for the amount of expenses properly incurred
by him in the administration of the trust."); Restatement (Second) of Trusts § 245(2) ("Although an expense is not properly incurred in the
administration of the trust, the trustee is entitled to indemnity out of the trust estate for such expense to the extent that he has thereby
conferred a benefit upon the trust estate, unless under the circumstances it is inequitable ... ."); Restatement (Second) of Trusts § 244 cmt. e;
4 Austin Wakeman Scott, et al. , Scott & Ascher on Trusts § 21.2 (4th ed. 2007) ("Denial of indemnification for expenses properly incurred
does not follow from denial or reduction of compensation. Even here, though, the court may offset any liability of the trustee for losses
resulting from a breach of trust against any claim of the trustee to indemnity." (footnotes omitted)).
n160. Compare Restatement (Third) of Restitution and Unjust Enrichment § 51 cmt. h (2011) ("Because the defendants in all these cases are
conscious wrongdoers, it does not seem possible to explain the contrasting outcomes by comparing their relative blameworthiness.") with
Restatement (Third) of Agency § 8.01 (2006) ("Some cases treat the "egregiousness' of an agent's breach as relevant.").
n161. Rounds, supra note 43, at 348-49 ("It is black letter law that if a trustee incurs an expense incident to an unauthorized self dealing
transaction, and in so doing confers upon the trust estate a benefit, the trustee is ordinarily entitled to indemnity to the extent of the benefit
of the value conferred. He who seeks equity must do equity. The Restatement (Third) of Trusts is generally in accord. Under the Uniform
Trust Code, a trustee is entitled to be reimbursed out of the trust property, with interest as appropriate, expenses that were not properly
incurred in the administration of the trust to the extent necessary to prevent unjust enrichment of the trust." (citing Restatement (Second) of
Trusts § 245 cmts. c-d (1959))); see also 3 Scott et al., supra note 159, § 18.1.2.6 (discussing when a trustee improperly incurs an expense
on behalf of the trust); id. § 22.2.1 (discussing when a trustee is entitled to indemnity for expenses improperly incurred); John Mowbray et
al., Lewin On Trusts PP 21-25 (17th ed. 2000) (discussing "indemnity in respect of unauthorized transactions").
n162. Andrew Kull, Restitution's Outlaws, 78 Chi.-Kent L. Rev. 17, 18 (2003).
n163. See id. at 31 ("Restitution ... will sometimes treat the claimant's bad behavior as an affirmative defense.").
n164. See Andrew Burrows, The Law Of Restitution 176 (2d ed. 2005) ("Though the defendant has been fraudulent, he must not be robbed,
nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in
return." (citations omitted)).
n165. Peter Birks, Restitution - The Future 128-32 (1992) (stating that even "wicked" defendants receive counter-restitution, except when
the defendant's reimbursement would be against public policy).
n166. Holiday Inns, Inc. v. Alberding, 683 F.2d 931, 934-35 (5th Cir. 1982).
n167. Restatement (Third) of Restitution and Unjust Enrichment § 51 cmt. i (Supp. 2012) (""If General Motors were to steal your copyright
and put it in a sales brochure, you could not just put a copy of General Motors' corporate income tax return in the record and rest your case
for an award of infringer's profits.'" (quoting Taylor v. Meirick, 712 F.2d 1112, 1122 (7th Cir. 1983))).
n168. See Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 214-15 (2002) ("Admittedly, our cases have not previously drawn
this fine distinction between restitution at law and restitution in equity, but neither have they involved an issue to which the distinction was
relevant."); Grupo Mexicano De Desarrollo v. Alliance Bond Fund, Inc., 527 U.S. 308, 322 (1999); Mertens v. Hewitt Assocs., 508 U.S. 248,
255 (1993) ("Although they often dance around the word, what petitioners in fact seek is nothing other than compensatory damages."); see
Page 329Page 329
also Eichorn v. AT&T Corp., Civ. No. 96-3587, 2005 U.S. Dist. LEXIS 29261, at 36 (D. N.J. 2005) ("While plaintiffs disclaim any resort to
equitable relief, their purported "equitable decree' is on all fours with the type of "legal restitution' that the Great-West case held was not
recoverable under Section 502(a)(3). Thus, plaintiffs' calling the award of back pay-type damages an equitable decree will not save their
claim."); Newby v. Enron Corp., 188 F. Supp. 2d 684, 702 (S.D. Tex. 2002) ("Deciding whether a plaintiff has properly stated a claim for
equitable relief requires an examination, in accordance with Grupo Mexicano, of the equitable claims historically available.").
n169. Feltner v. Columbia Pictures Television, Inc., 523 U.S. 340, 353 (1998) ("We have recognized the "general rule' that monetary relief is
legal, ... and an award of statutory damages may serve purposes traditionally associated with legal relief, such as compensation and
punishment."); see Murphy, supra note 120, at 1581.
n170. 1 Dobbs, supra note 5, § 4.1(1) ("Remedially and historically speaking, however, restitution might be either a purely legal claim or a
purely equitable claim. Restitution claims for money are usually claims "at law.' So are claims for replevin and ejectment. On the other hand,
restitution claims that may require coercive intervention or some judicial action that is historically "equitable' may be regarded as equitable
claims.").
n171. Restatement (Third) of Restitution and Unjust Enrichment § 4 (2011) ("Even these more obvious sources resist a simple
characterization, since the "legal' side of unjust enrichment had been prominently explained in avowedly equitable terms. Causes of action
that would be readily classified today as part of restitution came to be accepted in courts of law in the 17th and early 18th centuries, where
they were pleaded as "implied assumpsit' or on the "common counts' (such as "money had and received,' "money paid,' or "quantum
meruit').").
n172. 1 Palmer, supra note 20, § 1.1, at 4 ("It is not uncommon for courts to confuse quantum meruit and unjust enrichment, probably
because quantum meruit is awarded in order to avoid unjust enrichment.").
n173. Restatement of Restitution, pt. 1, Introductory Note (1937) ("Gradually the common law judges became conscious of their omissions
and jealous of the expanding power of the Court of Chancery, and with the invasion of the action of assumpsit they found a means of
expanding their jurisdiction.").
n174. Restatement (Third) Of Restitution and Unjust Enrichment § 4 (2011) ("It is fair to conclude that even the legal side of unjust
enrichment had its origins in equitable principles, whether English or Roman or both. But it is an error to conclude that it originated in
"equity' as opposed to "law,' since the author of the statement about "natural justice and equity' (and many more like it) was Lord Chief
Justice of the King's Bench.").
n175. See 1 Dobbs, supra note 5, § 4.1(1) ("Remedially and historically speaking, however, restitution might be either a purely legal claim
or a purely equitable claim. Restitution claims for money are usually claims "at law.' So are claims for replevin and ejectment. On the other
hand, restitution claims that may require coercive intervention or some judicial action that is historically "equitable,' may be regarded as
equitable claims.").
n176. See infra Section VI for an example of a claim for fee forfeiture in which the plaintiff is acknowledged to have no actual damages in
the discussion of Burrow v. Arce.
n177. See supra notes 135-137.

Page 330Page 330
n179. See Laycock, supra note 11, at 1277 ("Despite its importance, restitution is a relatively neglected and underdeveloped part of the
law."); Murphy, supra note 120, at 1581 ("The general law of restitution is for many an obscure subject, perhaps explaining why so much
confusion exists as to when monetary remedies are properly characterized as restitutionary."); Doug Rendleman, Common Law Restitution
in the Mississippi Tobacco Settlement: Did the Smoke Get in Their Eyes?, 33 Ga. L. Rev. 847, 892 (1999) ("Restitution is becoming a lost
art ... .").
n180. Kull, supra note 11, at 1194-95 ("Disagreement at this basic level about the content of the law of torts or the law of contracts would be
unthinkable - not because these subjects have an immanent or ideal form (any more than restitution does), but because they have acquired
stable conventional definitions (as restitution has yet to do).").
n181. Restatement (Third) of Restitution And Unjust Enrichment § 1 cmt. h; see also Kull, supra note 11, at 1191-92 ("For many lawyers
the immediate connotation of the word "restitution' will be something else entirely: criminal sanctions requiring wrongdoers to make
restitution to their victims, a topic having almost nothing to do with the subject at hand. The linguistic confusion that bedevils the law of
restitution - necessitating laborious definitions before anyone can understand what you are talking about - affords an early indication that the
common name of this neglected body of law was singularly ill-chosen." (footnote omitted)).
n182. Restatement (Third) of Restitution And Unjust Enrichment § 51 cmt. a ("Restitution measured by the defendant's wrongful gain is
frequently called "disgorgement.' Other cases refer to an "accounting' or an "accounting for profits.' Whether or not these terms are
employed, the remedial issues in all cases of conscious wrongdoing are the same.").
n183. Id.
n184. See Emily Sherwin, Restitution and Equity: An Analysis of the Principle of Unjust Enrichment, 79 Tex. L. Rev. 2083, 2088-89 (2001)
("Equity, of course, is a term with several meanings. It can refer to individuation of justice and overriding of rules; it can refer more
generally to what is morally fair; or it can refer to the rules and practice of English and American courts of equity. This leaves uncertain just
what it means to say that unjust enrichment is a principle of equity or that restitution is equitable in nature.").
n185. Restatement (Third) Of Restitution And Unjust Enrichment § 51(c) ("A statement to the effect that "restitution is equitable" is a
harmless platitude so long as "equity" means only "fairness." The same statement becomes mischievous when it is offered as the basis for
defining the jurisdiction of courts or agencies, or the kinds of relief they are authorized to administer.").
n186. 1 Palmer, supra note 20, § 1.2.
n187. See infra Section V.A.
n188. Restatement (Third) Of Restitution And Unjust Enrichment § 51(4).
n189. Id.
n190. Restatement (Third) Of Restitution And Unjust Enrichment § 51 cmt. e. See also 1 Dobbs, supra note 5, at § 4.1(4); 1 Palmer, supra
note 20, § 1.8; and George P. Roach, Counting the Beans: Unjust Enrichment and the Defendant's Overhead, 16 Tex. Intell. Prop. L.J. 483,
544 (2008) for a more detailed explanation of the law of measuring benefits and advantages in equity.
Page 331Page 331
n191. Restatement (Third) of Restitution and Unjust Enrichment § 51(5)(a) ("Profit includes any form of use value, proceeds, or
consequential gains ( § 53) that is identifiable and measurable and not unduly remote.").
n192. Lincoln Nat'l Life Ins. Co. v. Rittman, 790 S.W.2d 791, 794 (Tex. App. - Houston [14th Dist.] 1990, no writ).
n193. Michael Ariens, Lone Star Law: A Legal History of Texas 248-49 (2011).
n194. Id. at 250-51 ("The Texas Congress's act of February 5, 1840, did not abolish the distinction between law and equity. Section 12
explicitly required the district courts to act either as a law court or in equity, depending on the cause. The supreme court criticized this
provision: "A [sic] hundred judges, in almost any conceivable case, might differ in some degree as to its interpretation and exact function.'"
(quoting Whiting v. Turley, Dallam 453, 456 (Tex. 1842)).
n195. Id.
n196. Id. at 23 (quoting Chief Justice Hemphill: "I cannot say that I am very much in favor of either chancery or the common law system. I
should much have preferred the civil law to have continued in force for years to come. But inasmuch as the chancery system, together with
the common law, has been saddled upon us, the question is now, whether we shall keep up chancery system or blend them together."
(footnote omitted)).
n197. Id. at 24 ("In Texas, however, the adoption of the Spanish system of initiating a civil (that is, noncriminal) case eliminated any need
for a distinction of law and equity. Granting a right to trial by jury in equity matters was simply part of working out a mixed system of
resolving civil disputes, a system traced to both common-law and civil-law origins.").
n198. Id.
n199. Edwards v. Peoples, Dallam 359, 360 (Tex. 1840) ("The jury in this case have not thought proper to rescind the sale, but to award to
the plaintiff what they considered equitable damages. This court will never interfere with the verdict of a jury unless manifestly contrary to
law and evidence.").
n200. Ariens, supra note 193, at 18 ("Two weeks after "adopting' the common law, the Congress of the Republic declared that "the adoption
of the common law shall not be construed to adopt the common law system of pleading.' Instead, Texas adopted a version of the
Spanish/Mexican system of pleading in civil cases, a system that focused on substance and downplayed the importance of form, a system of
pleading unheard of in the common law system."); id. at 24 (explaining that the homestead law, passed in 1839, was constitutionalized in
Article VII, section 22, and the 1840 act that provided for community property was constitutionalized in Article VII, section 19).
n201. Austin v. Andrews, Dallam 447 (Tex. 1841).
n202. Bd. of Land Comm'rs v. Bell, Dallam 366 (Tex. 1840) ("It is clear that a mandamus will not issue where the party has another legal
and specific remedy.").
n203. McKensie v. Hamilton, Dallam 461 (Tex. 1842) (upholding rescission of property lease).
Page 332Page 332
n204. James v. Fulcrod, 5 Tex. 512, 518 (1851).
n205. Patrick v. Roach, 21 Tex. 251, 256 (1858) ("In suits for rescission, the right to the value of improvements, and the measure of its
allowance, depend on principles of equity, and not on the provisions of the statute regulating the actions of trespass to try title.").
n206. Erskine v. De La Baum, 3 Tex. 406, 414 (1848) ("Indeed, the doctrine may be more broadly stated, that executors and administrators
will not be permitted, under any circumstances, to derive a personal benefit from the manner in which they transact the business or manage
the assets of the estate." (internal quotation omitted)).
n208. Id. ("One whose money or property is taken by fraud or embezzlement, or by conversion, is entitled to restitution measured by the
defendant's gain if the victim prefers that remedy to the damages remedy. Breach of fiduciary duty of any kind, if it yields gains to the
fiduciary, is a favorite ground for restitution." (footnotes omitted)).
n209. Id. ("Defendant's gains from tortious interference with the plaintiff's contract, or from commercial or political bribery, from undue
influence or duress are all recoverable as restitution in a proper case." (footnotes omitted)).
n210. Id. ("Almost any kind of case in which the defendant gains from the plaintiff and in which it would be unjust or impolitic to permit
the defendant to retain the gain is a good candidate for a restitutionary recovery.").
n211. See infra Section V.E.
n212. See, e.g., Moore v. Torrey, 1 Tex. 42, 47 (1846) (upholding injunction on principles of equity).
n213. See Roach, supra note 137, at 531.
n214. Based on prior investigations using word searches, the author found that the terms "adequate remedy" or "irreparable injury" were
found in less than five percent of the Texas cases that used "unjust enrichment" or "constructive trust" as core-terms. In contrast, the
corresponding range for injunction or mandamus is from twenty percent to forty percent. Similar searches for U.S. state courts showed
comparable distinctions between rescission and injunction or mandamus for the last 110 years. See Roach, supra note 137, at 538 n.185; see
also id. at 610-15 (Appendix).
n215. Id.
n216. Id.
n217. See Thermo-Stitch, Inc. v. Chemi-Cord Processing Corp., 294 F.2d 486, 490 (5th Cir. 1961) ("the discretion of the trial court is "very
narrowly limited and must, wherever possible, be exercised to preserve jury trial'" (quoting Beacon Theatres v. Westover, 359 U.S. 500, 510
(1959))); Ochoa v. Am. Oil Co., 338 F. Supp. 914, 920 n.4 (S.D. Tex. 1972) ("The Congress was careful to assure that the unification [of the
courts] would not dilute the right to jury trial."); Laycock, supra note 8, at 757 ("Perhaps the most plausible defense of the irreparable injury
Page 333Page 333
rule is that it protects the right to jury trial."). See also 1 Dobbs, supra note 5, § 2.5 ("The main reason today for observing the adequacy test
as a limit on equitable relief is that the plaintiff who gets his case into equity has foreclosed the possibility of a jury trial for the defendant.").
n218. See Story v. Story, 176 S.W.2d 925, 927 (Tex. 1944) ("The rule is generally recognized in this state that the extraordinary writ of
injunction will not be granted where there is a plain and adequate remedy at law. This general rule is not rigidly enforced in this state."
(citations omitted)); Bank of Sw. Nat'l Ass'n v. LaGasse, 321 S.W.2d 101, 106 (Tex. Civ. App. - Houston 1959, no writ) (""In courts
administering both law and equity, like ours, the rules denying injunction when there is a remedy at law should not be applied as rigidly as at
common law, where the issuance of the writ in equity was to a certain extent an invasion of the jurisdiction of another tribunal.'" (quoting
Sumner v. Crawford, 41 S.W. 994, 995 (Tex. 1897)).
n219. See Rogers v. Daniel Oil & Royalty Co., 110 S.W.2d 891, 893-94 (Tex. 1937); Ryan v. Collins, 496 S.W.2d 205, 209 (Tex. Civ. App. -
Tyler 1973, writ ref'd n.r.e.); Chenault v. Cnty. of Shelby, 320 S.W.2d 431, 433 (Tex. Civ. App. - Austin 1959, writ ref'd n.r.e.). But see
Ferguson v. DRG/Colony N., Ltd., 764 S.W.2d 874, 886-87 (Tex. App. - Austin 1989, writ denied) (holding that claimant's testimony was
sufficient to excuse failure to plead irreparable injury).
n220. Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 235 (Tex. App. - Houston [1st Dist.] 2003, no pet.); see also Frost
Nat'l Bank v. Burge, 29 S.W.3d 580, 596 (Tex. App. - Houston [14th Dist.] 2000, pet. denied) ("Equity invokes the "court of conscience,' and
it applies only when "the legal remedy is not as complete as, less effective than, or less satisfactory than the equitable remedy.'" (quoting
First Heights Bank, FSB v. Gutierrez, 852 S.W.2d 596, 605 (Tex. App. - Corpus Christi 1993, writ denied))).
n221. See Donaho v. Bennett, No. 01-08-00492-CV, 2008 Tex. App. LEXIS 8783, at 10 (Tex. App. - Houston [1st Dist.] Nov. 20, 2008, no
pet.) (mem. op.) (awarding injunctive relief for breach of fiduciary duty because defendant would otherwise be insolvent); Loye v.
Travelhost, Inc., 156 S.W.3d 615, 621 (Tex. App. - Dallas 2004, no pet.) ("A plaintiff does not have an adequate remedy at law if defendant
is insolvent."); Chevron U.S.A. Inc. v. Stoker, 666 S.W.2d 379, 382 (Tex. App. - Eastland 1984, writ dism'd) (reversing trial court's grant of
injunctive relief in claim for breach of contract due to failure to show that company was insolvent).
n222. Some opinions confuse illiquidity with insolvency. See, e.g., Matteson v. El Paso Cnty., No. 08-00-00095-CV, 2001 WL 898729, at 2
(Tex. App. - El Paso August 10, 2001, pet. denied) (not designated for publication) ("A debtor who is generally not paying the debtor's debts
as they become due is presumed to be insolvent." (footnote omitted)). While the two conditions frequently cohabit the same company,
evidence of the defendant's inability to pay its bills promptly only proves illiquidity, not necessarily insolvency.
n223. See Butnaru v. Ford Motor Co., 84 S.W.3d 198, 204 (Tex. 2002) (stating that courts may grant temporary injunction if damages
cannot be measured); Ennis v. Interstate Distribs., Inc., 598 S.W.2d 903, 905-07 (Tex. Civ. App. - Dallas 1980, no writ) (granting rescission
for breach of contract when damages could not be determined).
n224. See Butnaru, 84 S.W.3d at 211 ("[A] trial court may grant equitable relief when a dispute involves real property."); Graham Mortg.
Corp. v. Hall, 307 S.W.3d 472, 482 (Tex. App. - Dallas 2010, no pet.) (granting injunctive relief for claim of fraud in a real estate
transaction); see also Forrest Prop. Mgmt. v. Forrest, No. 10-09-00338-CV, 2010 Tex. App. LEXIS 5863, at 8 (Tex. App. - Waco July 21,
2010, no pet.) (mem. op.) (denying injunctive relief because interest at issue was not one in real estate).
n226. See Patrick v. Thomas, No. 2-07-339-CV, 2008 Tex. App. LEXIS 3219, at 8-9 (Tex. App. - Fort Worth May 1, 2008, no pet.) (The
nonmonetary value of the subject horses cannot be adequately measured.). See also Bueckner v. Hamel, 886 S.W.2d 368, 373 (Tex. App. -
Houston [1st Dist.] 1994, writ denied) (mem. op.) (Andell, J., concurring) (affirming equitable relief based on value of domestic animals as
companions).
Page 334Page 334
n227. See Patton v. Nicholas, 279 S.W.2d 848, 857 (Tex. 1955) ("Wisdom would seem to counsel tailoring the remedy to fit the particular
case... . Equity may, by a combination of lesser remedies, including ... reserving the more severe measures as a final weapon against
recalcitrance, accomplish much toward avoiding recurrent mismanagement or oppression on the part of a dominant and perverse majority
stockholder or stockholder group."); W.T. Waggoner Estate v. Sigler Oil Co., 19 S.W.2d 27, 32 (Tex. 1929) ("In Grubb v. McAfee ... we
pointed out that the courts could do complete justice without adjudging a lease forfeited or terminated for breach of implied obligations,
relative to development, even in cases where redress was impossible under an award of damages.").
n228. Lamar Tex. L.P. v. City of Port Isabel, No. B-08-115, 2010 U.S. Dist. LEXIS 8881, at 23 (S.D. Tex. Feb. 3, 2010); Cardinal Health
Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 235 (Tex. App. - Houston [1st Dist.] 2003, no pet.); Sisco v. Hereford, 694 S.W.2d 3, 7
(Tex. App. - San Antonio 1984, writ ref'd n.r.e.); Sw. Weather Research v. Duncan, 319 S.W.2d 940, 944 (Tex. Civ. App. - El Paso 1958)
("Equity was created for the man who had a right without a remedy, and, as later modified, without an adequate remedy."), aff'd, 327 S.W.2d
417 (1959); Burford v. Sun Oil Co., 186 S.W.2d 306, 314 (Tex. Civ. App. - Austin 1944, writ ref'd w.o.m.); see also 27A Am. Jur. 2D Equity
§ 21 (2008) ("Subject to certain qualifications, if a judicially cognizable right exists, and no other adequate remedy is available, equity has
jurisdiction and will grant appropriate relief, unless prevented by some supervening principle, and subject, of course, to the recognition of all
equitable defenses." (footnotes omitted)).
n229. See Burford, 186 S.W.2d at 314.
n232. Dubai Petrol. Co. v. Kazi, 12 S.W.3d 71, 75-76 (Tex. 2000) ("By statute, district courts have "the jurisdiction provided by Article V,
Section 8, of the Texas Constitution,' and "may hear and determine any cause that is cognizable by courts of law or equity and may grant any
relief that could be granted by either courts of law or equity.' For "courts of general jurisdiction, ... the presumption is that they have subject
matter jurisdiction unless a showing can be made to the contrary." (quoting Tex. Gov't Code §§24.007, 24.008 (West 2004))); Dean v. State
ex rel. Bailey, 30 S.W. 1047, 1048 (Tex. 1895) ("No other court having jurisdiction over the cause, the district court has the power to
determine the right of the case, and to apply the remedy."); Assignees of Best Buy, Office Max, & CompUSA v. Combs, No. 03-10-00648-
CV, 2012 Tex. App. LEXIS 5903, at 28-29 (Tex. App. - Austin July 20, 2012 no pet.) ("A district court may hear any case "that is cognizable
by courts of law or equity and may grant any relief that could be granted by either courts of law or equity.'. Courts of general jurisdiction are
presumed to have subject-matter jurisdiction unless a showing can be made to the contrary." (quoting Tex. Gov't Code § 24.008 (West
2004)).
n233. Excess Underwriters at Lloyd's v. Frank's Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 62 n.22 (Tex. 2008); Miers v. Brouse,
271 S.W.2d 419, 421 (Tex. 1954) ("As Lord Holt early said: "If the plaintiff has a right, he must of necessity have a means to vindicate and
maintain it... . It is a vain thing to imagine a right without a remedy.'" (citation omitted)); see also Chandler v. Welborn, 294 S.W.2d 801, 807
(Tex. 1956); Gilmore v. Waples, 188 S.W. 1037, 1041 (Tex. 1916); Parvin v. Dean, 7 S.W.3d 264, 277-78 (Tex. App. - Fort Worth 1999, no
pet.) ("According to Sir William Blackstone, the origin of the common law concept of allowing injured citizens access to the courts to
redress wrongs done to them is at least as old as The Magna Carta, established by King John of England at Runnymede on June 15, 1215."),
rev'd on other grounds 148 S.W.3d 94 (Tex. 2004); King v. Acker, 725 S.W.2d 750, 754 (Tex. App. - Houston [1st Dist.] 1987, no writ)
(quoting Restatement (Second) of Torts (1977) § 774A and then explaining "It is well understood that the law affords a remedy for every
invasion of a legal right. Under the maxim where there is a right, there is a remedy, equity will not suffer a right to be without a remedy"
(internal quotation omitted)); Rahmberg v. McLean, 640 S.W.2d 401, 402 (Tex. App. - San Antonio 1982, writ ref'd) ("Appellant would have
us ignore the statement in Miers that "the first maxim of equity is that it will not suffer a right to be without a remedy'; and this we may not
do."); First Federal Sav. & Loan Ass'n v. Vandygriff, 576 S.W.2d 904, 906 (Tex. Civ. App. - Austin 1979, writ granted), rev'd on other
grounds, 586 S.W.2d 841 (Tex. 1979); State v. Pounds, 525 S.W.2d 547, 551 (Tex. Civ. App. - Amarillo 1975, writ ref'd n.r.e.); supra note 81.
n234. King, 725 S.W.2d at 754; Garza v. Garza, 209 S.W.2d 1012, 1015 (Tex. Civ. App., 1948, no writ hist.) ("It is well established that a
minor child cannot sue his parent for a tort." (internal quotation omitted)); see also Beliveau v. Beliveau, 14 N.W.2d 360, 366 (Minn. 1944)
("The judicial creation of a trust to afford an adequate remedy, where there otherwise would be none, for a right is but a manifestation of
equity's capacity to grow and to fit its remedies to the demands of justice in the particular case. It is justified under the maxim that where
there is a right there is a remedy." (citations omitted)); Banach v. Cannon, 812 A.2d 435, 446 (N.J. Super. Ct. Ch. Div. 2002) ("This maxim
[where there is a right, there is a remedy] is also found in the common law, but is more significant in equity because of the greater ability of
equity to suit the remedy to the situation. This characteristic is the very basis of equity jurisdiction. Historically, it was the lack of
Page 335Page 335
appropriate remedies for certain rights that gave impetus to the rise of chancery. The interpretation of statutes and the provision of remedies
where they do not exist are among the most important functions of equity jurisprudence." (internal quotation omitted)).
n235. Pope v. Garrett, 211 S.W.2d 559, 562 (Tex. 1948) ("Further and in the same trend, it has been said that equity is never wanting in
power to do complete justice."); Hill v. Stampfli, 290 S.W. 522, 524 (Tex. Comm'n App. 1927, holding approved).
n236. Pope, 211 S.W.2d at 560; Hill, 290 S.W. at 524.
n237. See State v. Morales, 869 S.W.2d 941, 942 (Tex. 1994); State v. Patterson, 37 S.W. 478, 479 (Tex. Civ. App. - San Antonio 1896, no
writ) ("Though a court of equity has the power to interfere in all cases of nuisances, yet circumstances may exist in one case which do not
exist in another to induce a court to interfere or refuse its interference by injunction.").
n238. See Morales, 869 S.W.2d at 942 ("Equity jurisdiction does not flow merely from the alleged inadequacy of a remedy at law, nor can it
originate solely from a court's good intentions to do what seems "just' or "right;' the jurisdiction of Texas courts - the very authority to decide
cases - is conferred solely by the constitution and the statutes of the state." (citing to Pope v. Ferguson, 445 S.W.2d 950, 952 (Tex. 1969)).
n239. Id. at 943.
n240. Id. at 943-44 ("Such unlimited authority, over time, became circumscribed by rules of procedure and limitations on jurisdiction. If an
equity court's jurisdiction was limited only by its reach, experience demonstrated that the arbitrary exercise of that power was certain to
result."). See also 1 Dobbs, supra note 5, at § 2.5 ("In theory, this is not a rule of discretion but a rule of policy or even a limitation on
judicial power.").
n241. Morales, 869 S.W.2d at 942.
n242. Id.
n243. Hibbs v. Hibbs, No. 13-97-755-CV, 1998 Tex. App. LEXIS 1876, at 2 (Tex. App. - Corpus Christi Mar. 26, 1998 no pet.) (mem. op.);
Gatlin v. GXG, Inc., No. 05-93-01852-CV, 1994 Tex. App. LEXIS 4047, at 18-19 (Tex. App. - Dallas Apr. 19, 1994 no writ) (not designated
for publication); 183/620 Group Joint Venture v. SPF Joint Venture, 765 S.W.2d 901, 903 (Tex. App. - Austin 1989, writ dism'd w.o.j.).
n244. Hibbs,1998 Tex. App. LEXIS 1876, at 2 ("Where there is a reasonable likelihood that a trustee will commit a breach of trust,
however, the beneficiary can sue in equity to enjoin the breach, with any threat of irreparable harm being immaterial."); Gatlin, 1994 Tex.
App. LEXIS 4047, at 18-19 ("In this case, appellees seek to establish equitable title to various properties through the imposition of a
constructive trust. Appellees argue that in such cases they are not required to show the absence of an adequate legal remedy because a court
of law, by definition, is without power to award them such an equitable remedy. The Austin Court of Appeals has recognized that an
applicant for temporary injunctive relief need not show the inadequacy of its remedy at law in a case where the usages of equity require the
granting of injunctive relief despite the existence of such a remedy."); 183/620 Group Joint Venture, 765 S.W.2d at 903 ("Courts of law do
not enforce, because they do not recognize, fiduciary duties and equitable titles; hence, in a proceeding to enforce either, or protect the latter,
it is meaningless to require the applicant to demonstrate that his remedy at law is inadequate. Because a court of law cannot give a remedy in
such cases, the ordinary requirement does not apply.").
n245. Restatement (Second) of Trusts § 197 cmt. b. (1959) ("Moreover, questions of the administration of trusts have always been
regarded as of a kind which can adequately be dealt with in a suit in equity rather than in an action at law, where questions of fact would be
determined by a jury and not by the court.").
Page 336Page 336
n246. Johnson v. Peckham, 120 S.W.2d 786, 788 (Tex. 1938) ("When persons enter into fiduciary relations each consents, as a matter of
law, to have his conduct toward the other measured by the standards of the finer loyalties exacted by courts of equity. That is a sound rule
and should not be whittled down by exceptions."); see also Tex. Bank & Trust Co. v. Moore, 595 S.W.2d 502, 508-09 (Tex. 1980) ("Nor, we
might add, would the mere fact of the bestowing of benefits do so. But to paraphrase the words of this Court in an analogous context in
Johnson v. Peckham, that fact of a family relationship should not of itself establish an exception to the accepted rule that where trust is
reposed and substantial benefits gained equity will recognize that the beneficiary in such transactions is a fiduciary, and as such is under the
fiducial obligation of establishing the fairness of the transaction to his principal." (citation omitted)).
n247. United States v. Carter, 217 U.S. 286, 309 (1910); Omohundro v. Matthews, 341 S.W.2d 401, 408-09 (Tex. 1960).
n248. Carter, 217 U.S. at 309 ("If an agent to sell effects a sale to himself, under the cover of the name of another person, he becomes, in
respect to the property, a trustee for the principal; and, at the election of the latter, seasonably made, will be compelled to surrender it, or, if
he has disposed of it to a bona fide purchaser, to account not only for its real value, but for any profit realized by him on such resale. And
this will be done upon the demand of the principal, although it may not appear that the property, at the time the agent fraudulently acquired
it, was worth more than he paid for it." (internal quotation omitted)); Omohundro, 341 S.W.2d at 408-09 ("This trust arose not because there
was any agreement for the title to be taken in the name of petitioner, and the property to be held by him in trust for the respondents - as
would be necessary to constitute an express trust - but, because under the facts, equity would raise the trust to protect the rights of the
respondents, and to prevent the unjust enrichment of petitioner by his violation of his promise and duty to the respondents to take title in the
name of the three of them, and for their mutual profit and advantage." (internal quotation omitted) (emphasis in original)); Pope v. Garrett,
211 S.W.2d 559, 561 (Tex. 1948) ("The legal title passed to the heirs of Carrie Simons when she died intestate, but equity deals with the
holder of the legal title for the wrong done in preventing the execution of the will and impresses a trust on the property in favor of the one
who is in good conscience entitled to it."); Eglin v. Schober, 759 S.W.2d 950, 958 (Tex. App. - Beaumont 1988, writ denied).
n249. Omohundro, 341 S.W.2d at 416; Pope, 211 S.W.2d at 561.
n250. Smith v. Bolin, 271 S.W.2d 93, 97 (Tex. 1954) ("While a confidential or fiduciary relationship does not in itself give rise to a
constructive trust, an abuse of confidence rendering the acquisition or retention of property by one person unconscionable against another
suffices generally to ground equitable relief in the form of the declaration and enforcement of a constructive trust, and the courts are careful
not to limit the rule or the scope of its application by a narrow definition of fiduciary or confidential relationships protected by it."); Flores v.
Flores, No. 04-10-00118-CV, 2011 Tex. App. LEXIS 6501, at 18 (Tex. App. - San Antonio Aug. 17, 2011, pet. denied) (mem. op.) ( holding
that once a trial court makes a finding that a party breached its fiduciary duty in connection with a partnership, "the court [has] sufficient
basis to impose a constructive trust"); Garcia v. Garza, 311 S.W.3d 28, 40 (Tex. App. - San Antonio 2010, pet. denied) ("Actual fraud or
breach of a confidential relationship must be present to justify the imposition of a constructive trust."); Hubbard v. Shankle, 138 S.W.3d
474, 483 (Tex. App. - Fort Worth 2004); T.F.W. Mgmt., Inc. v. Westwood Shores Prop. Owners Ass'n, 79 S.W.3d 712, 717 (Tex. App. -
Houston [14th Dist.] 2002, pet. denied) ("To be entitled to an accounting, a plaintiff usually must have a contractual or fiduciary relationship
with the party from which the plaintiff seeks the accounting.").
n251. See Sumner v. Crawford, 41 S.W. 994, 995 (Tex. 1897); Fischer v. Rider, No. 02-10-00294-CV, 2011 Tex. App. LEXIS 385, at 13
(Tex. App. - Fort Worth Jan. 13, 2011, no pet.) (mem. op.) (evaluating irreparable injury for a plea of injunctive relief for breach of fiduciary
duty); Hill v. McLane Co., No. 03-10-00293, 2011 Tex. App. LEXIS 169, at 17-18 (Tex. App. - Austin Jan. 5, 2011, no pet.) (mem. op.)
(finding that, for purposes of justifying a temporary injunction, the defendants were in possession of trade secret material and that the
plaintiff could not otherwise obtain an adequate remedy); Donaho v. Bennett, No. 01-08-00492-CV, 2008 Tex. App. LEXIS 8783, at 10-11
(Tex. App. - Houston [1st Dist.] Nov. 20, 2008, no pet.) (mem. op.) (granting injunctive relief for case relating to breach of fiduciary duty
because defendant would otherwise be insolvent); T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 24 (Tex. App. -
Houston [1st Dist.] 1998, no pet.) (evaluating the adequacy of remedies at law for claim of breach of fiduciary duty).
n252. Forrest Prop. Mgmt. v. Forrest, No. 10-09-00338-CV, 2010 Tex. App. LEXIS 5863, at 8 (Tex. App. - Waco 2010, no pet.) (mem. op.)
(denying injunctive relief for partnership claim for failure of plaintiff to establish that money damages would be inadequate or hard to
calculate); Victory Drilling, LLC v. Kaler Energy Corp., No. 04-07-00094-CV, 2007 Tex. App. LEXIS 4966, at 5-6 (Tex. App. - San Antonio
June 27, 2007, no pet.) (mem. op.) ("Generally, an adequate remedy at law exists and injunctive relief is improper where any potential harm
may be adequately cured by monetary damages." (internal quotation omitted)); CMNC Healthcare Props., LLC v. Medistar Corp., No. 01-
06-00182-CV, 2006 Tex. App. LEXIS 10676, at 20 (Tex. App. - Houston [1st Dist.] Dec. 14, 2006, no pet.) (mem. op.) (precluding requested
temporary injunctive relief because of absence of proof of irreparable injury in case relating to alleged abuse of trade secrets and confidential
Page 337Page 337
information); Ballenger v. Ballenger, 694 S.W.2d 72, 77 (Tex. App. - Corpus Christi 1985, no writ) ("We find from the record that any
damages that might ensue are capable of exact calculation. The proposed distribution of trust corpus involves a distribution of cash which
can be readily replaced with other money (plus statutory interest) should it be determined that appellants, acting as trustees, abused their
discretion and made an unwarranted distribution.").
n253. 439 S.W.2d 660, 662 (Tex. 1969).
n254. Id. at 667.
n255. Id.
n256. Wilz v. Flournoy, 228 S.W.3d 674, 676 (Tex. 2007) ("The Flournoys bet the farm (as it were) when they failed to obtain a jury finding
on their affirmative claim that part of the purchase money came from personal funds. Therefore, this claim is waived on appeal unless they
conclusively established it." (internal quotation omitted)); Peirce v. Sheldon Petroleum Co., 589 S.W.2d 849, 853 (Tex. Civ. App. - Amarillo
1979, no writ) ("When the beneficiary can point to the specific property that was purchased or inherited, or to its mutation, the tracing
burden is met. When, however, tracing to specific property is impossible because the trustee has commingled the property, the right is not
defeated if the beneficiary can trace to the commingled fund. If the commingling was wrongful, the burden is on the trustee to establish
which property is rightfully the trustee's. If the trustee is unable to do so, the entire commingled property is subject to the trust." (citations
omitted)).
n257. Archer v. Griffith, 390 S.W.2d 735, 739 (Tex. 1964) ("The burden of establishing its perfect fairness, adequacy, and equity, is thrown
upon the attorney, upon the general rule, that he who bargains in a matter of advantage with a person, placing a confidence in him, is bound
to show that a reasonable use has been made of that confidence; a rule applying equally to all persons standing in confidential relations with
each other."); Vu v. Rosen, No. 14-02-00809-CV, 2004 Tex. App. LEXIS 2795, at 12 (Tex. App. Houston [14th Dist.] Mar. 30, 2004, pet.
denied) (mem. op.) ("Vu did, however, preserve her claim that Question No. 1 improperly shifted the burden of proof to her. Vu cites the
well established law that when an attorney engages in self-dealing or otherwise benefits or profits from a transaction with the client, a
presumption of unfairness arises that shifts the burden of proof to the attorney to prove the fairness of the transactions and to establish that
the client was informed of all material facts relating to the transactions."); Tanox v. Akin, Gump, Strauss, Hauer & Feld, L.L.P., 105 S.W.3d
244, 264-65 (Tex. App. - Houston [14th Dist.] 2003, pet. denied) ("A presumption of unfairness or invalidity attaches to a fee agreement and
the attorney bears the burden to prove the agreement is fair and reasonable.").
n258. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2002); Burrow v. Arce, 997 S.W.2d 229, 238 (Tex. 1999); Kinzbach
Tool Co. v. The Corbett-Wallace Corp., 160 S.W.2d 509, 514 (1942) ("It would be a dangerous precedent for us to say that unless some
affirmative loss can be shown, the person who has violated his fiduciary relationship with another may hold on to any secret gain or benefit
he may have thereby acquired." (citing United States v. Carter, 217 U.S. 286, (1910))).
n259. Huffington v. Upchurch, 532 S.W.2d 576, 579 (Tex. 1976) ("The partnership contract obligated Roy Huffington to "give his
attendance to, and to the utmost of his skill and power shall exert himself for, the joint interest, benefit and advantage of said partnership
business." In a case of this kind, where the partner who has misappropriated a particular opportunity is also the partner who is primarily
responsible for finding financial backing, the burden of proving financial incapability should be on him so as to encourage the exertion of his
best efforts." (citing Irving Trust Co. v. Deutsch, 73 F.2d 121 (2d Cir. 1934))).
n260. Patrick v. Roach, 21 Tex. 251, 256 (1858); First Heights Bank, FSB v. Gutierrez, 852 S.W.2d 596, 605 (Tex. App. - Corpus Christi
1993, writ denied.) ("Equity is based upon the avoidance of irreparable injury. Moreover, it seeks to prevent unjust enrichment, and in
particular, abhors that unjust enrichment which comes from a double satisfaction of an obligation. Equity seeks to do justice, to strike a
balance by reviewing the entire situation. Equity acts in accordance with conscience and good faith and promotes fair dealing; it will not
further an improper objective which is likely to cause a detriment to the other party." (citations omitted)); Dearing, Inc. v. Spiller, 824
S.W.2d 728, 731 (Tex. App. - Fort Worth 1992, writ denied) ("The judgment also ordered an accounting with respect to all of the production
and expenditures incident to the development of the premises through the Dearing/Royal lease; and after such accounting reduced the claims
to a fixed dollar amount, the judgment further apportioned the revenues, less the applicable costs of development, to the appropriate
parties."); Southern Lumber Co. v. Kirby Lumber Corp., 181 S.W.2d 859, 863 (Tex. Civ. App. - Beaumont 1944) ("A court of equity will not
make Strange a present of the lots because Moroney had intended to defraud him. Therefore, appellee having failed to tender appellants any
Page 338Page 338
portion of the purchase price paid by them to John H. Kirby et al., regardless of what the other facts might have shown, it would not, as we
view it, be entitled to recover the title thus acquired by appellants." (internal quotations omitted)).
n261. See Johnson v. Cherry, 726 S.W.2d 4, 8 (Tex. 1987) ("The equitable power of the court exists to do fairness and is flexible and
adaptable to particular exigencies, "so that relief will be granted when, in view of all the circumstances, to deny it would permit one party to
suffer a gross wrong at the hands of the other.'" (quoting Warren v. Osborne, 154 S.W.2d 944, 946 (Tex. Civ. App. - Texarkana 1941, writ
ref'd))); State v. Snyder, 18 S.W. 106, 108 (Tex. 1886) ("It may be regarded as a universal rule governing the court of equity in the
administration of its remedies that, whatever may be the nature of the relief sought by the plaintiff, the equitable rights of the defendant
growing out of or intimately connected with the subject of the controversy in question will be protected; and for this purpose the plaintiff
will be required, as a condition to his obtaining the relief which he asks, to acknowledge, admit, provide for, secure, or allow whatever
equitable rights, if any, the defendant may have, and to that end the court will, by its affirmative decree, award to the defendant whatever
reliefs may be necessary in order to protect and enforce those rights."); Cas. Reciprocal Exch. v. Bryan, 101 S.W.2d 895, 899 (Tex. Civ. App.
- Eastland 1937, no writ) (""It is also true that courts with equity powers will protect the equitable rights of the defendant arising upon his
answer, regardless of the nature of the relief sought by the plaintiff, and will make all necessary orders to that end, and may require a tender
for that purpose.'" (quoting Oriental v. Barclay, 41 S.W. 117, 126-27 (Tex. Civ. App. - Dallas 1897, no writ))); Wisdom v. Peek, 220 S.W.
210, 214 (Tex. Civ. App. - San Antonio 1920, writ dism'd) ("When a court of equity has obtained jurisdiction of a bill for rescission ... it will
retain jurisdiction for the purpose of adjusting all the rights and claims of the parties, growing out of the transaction and complained of, so as
to do complete equity and leave nothing for future litigation, which it can dispose of in the exercise of its equitable powers upon the parties
before it.").
n262. See Gaffney v. Kent, 74 S.W.2d 176, 178 (Tex. Civ. App. - San Antonio 1934, no writ) ("A court of equity finds no obstacle in the
way of decreeing that which is right and just, though it be in favor of a defendant who is in some particular a wrongdoer. The maxim that he
who seeks equity must do equity imposes upon him who invokes the jurisdiction of the court a plain condition that he must have accorded to
the defendant and must consent for the court to decree to the defendant the latter's rights in the subject-matter of the suit. It is intended
neither as a weapon of offense against nor as a shield of defense for the defendant. It simply requires recognition of the rights, whatever they
may be, of the defendant without regard to other considerations. Thus it occurs that, while the plaintiff will have all of his legal and equitable
rights decreed and enforced, the defendant may also obtain affirmative relief that he would be precluded from seeking if he were the
plaintiff."); Bush v. Gaffney, 84 S.W.2d 759, 764 (Tex. Civ. App. - San Antonio 1935, no writ).
n263. 92 S.W.2d 437, 439 (Tex. 1936).
n264. Cruz v. Andrews Restoration, Inc., 346 S.W.3d 817, 826 (Tex. 2012) ("Generally, rescission is an equitable remedy, and Cruz
correctly asserts that fault is relevant. A defendant's wrongdoing may factor into whether he should bear an uncompensated loss in those
cases in which it is impossible for a claimant to restore the defendant to the status quo ante." But, the court noted, "it does not excuse the
claimant in such cases from counter-restitution when feasible - as it would be here."); See also Powell v. Rockow, 92 S.W.2d 437, 439 (Tex.
1936).
n265. See discussion infra Part VI.
n266. See Pepi v. Galliford, 254 S.W.3d 457, 460 (Tex. App. - Houston [1st Dist.] 2007, pet. denied).
n267. See id.
n268. See id. (noting that a claim for unjust enrichment is interpreted as a claim for quantum meruit); Friberg-Cooper Water Supply Corp. v.
Elledge, 197 S.W.3d 826, 829 n.13, 832 (Tex. App. - Fort Worth 2006) (stating that a claim for unjust enrichment is interpreted as claim for
money had and received), rev'd on other grounds, 240 S.W.3d 869 (Tex. 2007).
n269. See, e.g., Fitz-Gerald v. Hull, 237 S.W.2d 256, 263 (Tex. 1951); see also infra notes 451-459 and accompanying text.
Page 339Page 339
n270. Of the 70 appellate opinions that have been found, an average of 6 per year were handed down from 2007 through 2011, an average of
3.6 in the five years prior to that, and 1.7 in the ten years prior to that. While it is believed that the annual number of similar cases has grown
significantly over this period, the absolute growth indicated may be somewhat overstated. This group of cases was not collected in any
systematic or comprehensive process and does not necessarily represent either the total population of such cases or a sample that is
necessarily representative.
n272. O'Connor v. Van Homme, Dallam 429, 430 (Tex. 1841).
n273. McGill v. Delaplain, Dallam 493, 493 (Tex. 1843).
n274. Vortt Exploration Co. v. Chevron U.S.A., Inc., 787 S.W.2d 942, 944 (Tex. 1990) (""To recover under quantum meruit a claimant must
prove that: 1) valuable services were rendered or materials furnished; 2) for the person sought to be charged; 3) which services and materials
were accepted by the person sought to be charged, used and enjoyed by him; and 4) under such circumstances as reasonably notified the
person sought to be charged that the plaintiff in performing such services was expecting to be paid by the person sought to be
charged.'"(quoting Bashara v. Baptist Mem'l Hosp. Sys., 685 S.W.2d 307, 310 (Tex. 1985)).
n275. Truly v. Austin, 744 S.W.2d 934, 936 (Tex. 1988) ("As a general rule, a plaintiff who seeks to recover the reasonable value of services
rendered or materials supplied will be permitted to recover in quantum meruit ... .").
n276. PIC Realty Corp. v. Southfield Farms, Inc., 832 S.W.2d 610, 614 (Tex. App. - Corpus Christi 1992, no writ) ("There was a question
whether PIC benefitted from Easterwood's post-crop cultivation, and unjust enrichment is closely related to its kinsman in equity, quantum
meruit. Its submission was not an abuse of discretion.").
n277. Emerson v. Tunnell, 793 S.W.2d 947, 948 (Tex. 1990) ("Recovery in quantum meruit is not limited to damages alleged for breach of
contract when, as in this case, the fact finder has failed to find that a contract existed. Tunnell cannot be limited to recovery of the amount he
alleged the Emersons agreed to pay when the jury did not find that such an agreement was ever made.").
n278. Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 685 (Tex. 2000) ("When the existence of or the terms of a contract are in doubt,
and there is a claim for unjust enrichment, it is incumbent on the party disputing that claim to secure findings from the trial court that an
express contract exists that covers the subject matter of the dispute.").
n279. Aurora Petroleum, Inc. v. Cholla Petroleum, Inc., No. 07-10-0035-CV, 2011 Tex. App. LEXIS 1382, at 9 (Tex. App. - Amarillo Feb.
23, 2011) (mem. op.) ("While it often applies when one person has obtained a benefit from another by fraud, duress, or by taking an undue
advantage, it is also available if a contract is unenforceable, impossible, not fully performed, or void for other legal reasons." (citing Walker
v. Cotter Props, Inc., 181 S.W.3d 895, 900 (Tex. App. - Dallas 2006))); City of Harker Heights, Tex. v. Sun Meadows Land, Ltd., 830 S.W.2d
313, 319 (Tex. App. - Austin 1992, no writ) ("The Court finds support in Texas law for the County's proposition. Restitution under a theory
of unjust enrichment is appropriate in circumstances where the agreement contemplated is unenforceable ... or void for other legal reasons."
(internal quotations omitted)).
n280. Spector v. Norwegian Cruise Line Ltd., No. 01-02-00017-CV, 2004 Tex. App. LEXIS 2941, at 27-28 (Tex. App. - Houston [1st Dist.]
Mar. 30, 2004, no pet.) (not designated for publication).
Page 340Page 340
n281. Do v. Pilgrim's Pride Corp., No. 9:05CV238, 2006 U.S. Dist. LEXIS 55374, at 24 (E.D. Tex. Aug. 9, 2006); Corp. Link, Inc. v.
Fairbanks Cap. Corp., No. Civ.A. 3:03-CV-0506, 2005 WL 770564, at 25 (N.D. Tex. Apr. 4, 2005) ; Brender v. Sanders Plumbing, Inc., No.
02-05-00067-CV, 2006 Tex. App. LEXIS 6354, at 8 (Tex. App. - Fort Worth July 20, 2006, pet. denied) (mem. op.).
n282. Truly v. Austin, 744 S.W.2d 934, 938 (Tex. 1988).
n283. Id. ("Recovery in quantum meruit is based on equity. It is well-settled that a party seeking an equitable remedy must do equity and
come to court with clean hands. To justify a recovery in quantum meruit, the plaintiff must not only show that he has rendered a partial
performance of value, but must also show that the defendant has been unjustly enriched and the plaintiff would be unjustly penalized if the
defendant were permitted to retain the benefits of the partial performance without paying anything in return." (citing City of Wink v. Griffith
Amusement Co., 100 S.W.2d 695, 702 (Tex. 1936); Breaux v. Allied Bank of Tex., 699 S.W.2d 599, 604 (Tex. App. - Houston [14th Dist.]
1985, writ ref'd n.r.e.); 5A Arthur Linton Corbin, Corbin on Contracts § 1122 (1964))).
n284. Jones v. Whatley, No. 13-09-00355-CV, 2011 Tex. App. LEXIS 4380, at 10 (Tex. App. - Corpus Christi June 9, 2011, no pet.) (mem.
op.); Grant v. Laughlin Envtl., Inc., No. 01-07-00227-CV, 2009 Tex. App. LEXIS 2092, at 36 (Tex. App. - Houston [1st Dist.] March 26,
2009, pet. denied) (mem. op.) ("LEI presented ample proof that Grant had engaged in unlawful or inequitable conduct. Accordingly, we hold
that the trial court did not abuse its discretion in denying Grant a quantum meruit recovery."); Billy Smith Enters., Inc. v. Hutchison Constr.,
Inc., 261 S.W.3d 370, 373 (Tex. App. - Austin 2008, pet. dism'd); RDG Ltd. P'ship v. Gexa Corp., No. 14-04-00679-CV, 2005 Tex. App.
LEXIS 3123, at 14-15 (Tex. App. - Houston [14th Dist.] April 26, 2005, no pet.) (mem. op.) (holding that claimant did not seriously injure
defendant with unclean hands); Murphy v. Canion, 797 S.W.2d 944, 949 (Tex. App. - Houston [14th Dist.] 1990, no writ).
n285. See supra Section III.E.
n286. Campbell v. Nw. Nat'l Life Ins. Co., 573 S.W.2d 496, 498 (Tex. 1978) (reversing the trial judge's take nothing judgment despite the
jury's finding of damages showing that if quantum meruit were a remedy in equity, the trial judge would not need to enter a take nothing
judgment); Griffin v. Holiday Inns of Am., 496 S.W.2d 535, 539 (Tex. 1973) ("Since petitioner's claim in quantum meruit arose out of the
transaction or occurrence that was the subject matter of the cross-action, the quantum meruit claim was a compulsory counterclaim to the
cross-action under the provisions of Rule 97, T.R.C.P."); Upson v. Fitzgerald, 103 S.W.2d 147, 150 (Tex. 1937) ("Where the consideration
has been paid but nothing more done it does not work a fraud to refuse to enforce an oral contract for the sale of land, since the value of the
consideration may be recovered in an action at law on a quantum meruit."); Colbert v. Dall. Joint Stock Land Bank, 102 S.W.2d 1031, 1034
(Tex. 1937); Hillyard v. Crabtree's Adm'r, 11 Tex. 264, 267 (1854); O'Connor v. Van Homme, Dallam 429, 429 (Tex. 1841); see also Prophet
Capital Mgmt. v. Prophet Equity, LLC, No. A-09-CA-316 LY, 2009 U.S. Dist. LEXIS 88474, at 7-8 (W.D. Tex. Sept. 25, 2009) (rejecting
unjust enrichment claim for violation of trademark).
n287. Bagby Elevator Co. v. Schindler Elevator Corp., 609 F.3d 768, 774 (5th Cir. 2010); McMahan v. Greenwood, 108 S.W.3d 467, 494
(Tex. App. - Houston [14th Dist.] 2003, pet. denied); Steubner Realty 19, Ltd. v. Cravens Rd. 88, Ltd., 817 S.W.2d 160, 165 (Tex. App. -
Houston [14th Dist.] 1991, no writ). But see Bank of Saipan v. CNG Fin. Corp., 380 F.3d 836, 840-41 n.1 (5th Cir. 2004) ("The Bank argues
that the money had and received claim, as an action at law, is not subject to the "unclean hands' equitable doctrine... . Recovery for money
had and received, though legal in nature, is controlled by equitable principles, and ... it is axiomatic that the "clean hands' doctrine functions
in equitable actions.").
n288. See T. Leigh Anenson, Treating Equity like Law: A Post-Merger Justification of Unclean Hands, 45 Am. Bus. L.J. 455, 458 (2008)
("Notwithstanding the merger of law and equity, a majority of courts deny the application of unclean hands in actions at law.").
n289. Cooley v. Buie, 291 S.W. 876, 884 (Tex. 1927) ("The question of quantum meruit is not involved except in so far as it might throw
light upon the question whether the contract represented by the instrument in writing was unfair and unconscionable.").
n290. See supra Section III.F.

Page 341Page 341
n291. United States v. Jefferson Elec. Mfg. Co., 291 U.S. 386, 402-03 (1933) (emphasis added).
n292. Staats v. Miller, 243 S.W.2d 686, 687-688 (Tex. 1951) (quoting Jefferson Elec. Mfg. Co., 291 U.S. at 402-03).
n293. Staats, 243 S.W.2d at 687 (""The question, in an action for money had and received, is to which party does the money, in equity,
justice, and law, belong. All plaintiff need show is that defendant holds money which in equity and good conscience belongs to him.'"
(quoting 58 C.J.S. Money Received § 4a (1948))); Best Buy Co. v. Barrera, 214 S.W.3d 66, 74 (Tex. App. - Corpus Christi 2006), ("The
individualized showings that Best Buy argues are required, such as showings of fraud, duress, and the taking of undue advantage, are
inapplicable here; these elements are not relevant to claims for money had and received because such a claim is not premised on any
wrongdoing.") rev'd on other grounds, 248 S.W.3d 160 (Tex. 2007).
n294. Edwards v. Mid-Continent Office Distribs., L.P., 252 S.W.3d 833, 837 (Tex. App. - Dallas 2008, pet. denied) ("To prove the claim, a
plaintiff must show that a defendant holds money which in equity and good conscience belongs to him. A defendant may present any facts or
raise any defenses that would deny a claimant's right to recover under this theory." (citations omitted)).
n295. See Barrett v. Ferrell, 550 S.W.2d 138, 143 (Tex. Civ. App. - Tyler 1977, writ ref'd n.r.e.).
n296. Austin v. Duval, 735 S.W.2d 647, 649 (Tex. App. - Austin 1987, writ denied); Barrett, 550 S.W.2d at 143 ("It is fundamental that for a
person to be entitled to restitution, he must show not only that there was unjust enrichment, but also that the person sought to be charged had
wrongfully secured a benefit or had passively received one which it would be unconscionable for him to retain.").
n297. City of Harker Heights, Tex. v. Sun Meadows Land, Ltd., 830 S.W.2d 313, 317, 318 (Tex. App. - Austin 1992, no writ).
n298. Id. at 317-18.
n299. Murphy, supra note 120, at 1625 n.265 (""Restitution aims at the defendant's [rightful position]. Disgorgement is the key concept. By
making the defendant disgorge the benefits he cannot justly retain, the law of restitution returns the defendant to the position he should, "in
equity and good conscience,' have occupied.'" (quoting David Schoenbrod et al., Remedies: Public and Private 727 (3d Ed. 2002))). See also
infra Section VI.A. and the discussion of Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999) in accompanying text for an example of a claimant
without damages in fact.
n300. Joel Eichengrun, Remedying the Remedy of Accounting, 60 Ind. L.J. 463, 466-67 (1985).
n301. Id.
n302. Palmetto Lumber Co. v. Gibbs, 80 S.W.2d 742, 748 (Tex. 1935); Lewis v. Xium Corp., No. 07-08-0219-CV, 2009 Tex. App. LEXIS
5210, at 18 (Tex. App. - Amarillo July 8, 2009, pet. denied) (mem. Op.) ("An accounting may be a particular remedy sought in conjunction
with another cause of action or it may be a suit in equity."); T.F.W. Mgmt., Inc. v. Westwood Shores Prop. Owners Ass'n, 79 S.W.3d 712, 717
(Tex. App. - Houston [14th Dist.] 2002, pet. denied); Michael v. Dyke, 41 S.W.3d 746, 754 (Tex. App. - Corpus Christi 2001, no pet.).
Page 342Page 342
n303. Simerka v. Brooks, No. 04-10-00912-CV, 2011 Tex. App. LEXIS 4132, at 5-6 (Tex. App. - San Antonio June 1, 2011, pet. dism'd)
(mem. op.) ("Property Code section 113.151 allows a "beneficiary by written demand [to] request the trustee to deliver to each beneficiary of
the trust a written statement of accounts covering all transactions since the last accounting or since the creation of the trust, whichever is
later.'" (quoting Tex. Prop. Code Ann. § 113.151(a) (West 2007))). Section 113.151 also allows "an interested person [to] file suit to compel
the trustee to account to the interested person." Tex. Prop. Code Ann. § 113.151(b) (West 2007). Section 113.152 sets forth the contents of an
accounting. Id. § 113.152. Only "express trusts" are subject to these provisions. Id. § 111.003. "Resulting trusts," "constructive trusts," and
"business trusts" are not subject to these provisions. Id.
n304. Richardson v. First Nat'l Life Ins. Co., 419 S.W.2d 836, 839 (Tex. 1967) (""The only test recognized by modern decisions is that if the
facts and accounts presented relate to so many different transactions and items in such relationship to each other that it is doubtful whether
adequate relief could be obtained at law, equity should entertain jurisdiction.'" (quoting 4 John Norton Pomeroy, LL.D., A Treatise on Equity
Jurisprudence § 1421 (5th ed. 1941)); Palmetto Lumber Co., 80 S.W.2d at 748; Sauceda v. Kerlin, 164 S.W.3d 892, 927 (Tex. App. - Corpus
Christi 2005), rev'd on other grounds, 263 S.W.3d 920 (Tex. 2008) ("An equitable accounting is proper when the facts and accounts
presented are so complex that adequate relief may not be provided for at law."); T.F.W. Mgmt., Inc., 79 S.W.3d at 717.
n305. HM Att'y Gen. v. Blake, [2000] UKHL 45, [2001] 1 A.C. 268 (appeal taken from U.K.) (internal quotations omitted).
n306. Sw. Bell Tel. Co. v. Mktg. on Hold Inc., 308 S.W.3d 909, 921 (Tex. 2010) ("Whether proof of reliance is required for unjust
enrichment depends on the nature of the allegations."); Miga v. Jensen, 299 S.W.3d 98, 105 (Tex. 2009) ("Prohibiting restitution would
penalize Jensen for the court's mistake and is inimical to the unjust enrichment principles underlying the doctrine. We can no more fault
Jensen for his dogged pursuit of an appellate remedy than reward Miga for wagering on an affirmation of the judgment. The trial court and
the court of appeals correctly concluded that, as a matter of law, restitution comports with the equities."); Excess Underwriters at Lloyd's v.
Frank's Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 62 (Tex. 2008) ("Texas law recognizes restitution as a remedy for unjust
enrichment "when a person has obtained a benefit by taking undue advantage of another.'" (quoting Heldenfels Bros., Inc. v. City of Corpus
Christi, 832 S.W.2d 39, 41 (Tex. 1992))); BMG Direct Mktg. v. Peake, 178 S.W.3d 763, 770 (Tex. 2005) ("Like other equitable claims and
defenses, an adequate legal remedy may render equitable claims of unjust enrichment and equitable defenses of voluntary-payment
unavailable."); Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d 671, 685 (Tex. 2000) ("Conoco therefore failed to establish its affirmative
defense with regard to any part of Cox's claim for unjust enrichment and Hankamer's claim for unjust enrichment after its 1990 contract
expired."); HECI Exploration Co. v. Neel, 982 S.W.2d 881, 891 (Tex. 1998) ("We have recognized that, in some circumstances, a royalty
owner has a cause of action against its lessee based on unjust enrichment, but only when the lessee profited at the royalty owner's expense."
(citing Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 693 (Tex. 1986))); Sw. Elec. Power Co. v. Burlington N. R.R., 966 S.W.2d 467, 471
(Tex. 1998) ("Accordingly, the rates established under the adjustment clauses were the contract rates, and there were no overcharges that
would be recoverable under a theory of unjust enrichment."); Heritage Res., Inc. v. Nationsbank, 939 S.W.2d 118, 123 (Tex. 1996) ("When
an operator prepares a division order that allocates payments among the interest owners in a manner that differs from the lease provisions
and the operator retains the benefits, the division order is not binding. The basis of this rule is unjust enrichment." (citing Gavenda, 705
S.W.2d at 692))); Heldenfels Bros., Inc. v. Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992) ("The trial court also held that Heldenfels was
entitled to recovery under the theory of unjust enrichment. A party may recover under the unjust enrichment theory when one person has
obtained a benefit from another by fraud, duress, or the taking of an undue advantage." (citing Pope v. Garrett, 211 S.W.2d 559, 560, 562
(Tex. 1948))); Gavenda v. Strata Energy, Inc., 705 S.W.2d 690, 692 (Tex. 1986) ("The basis for recovery is unjust enrichment; the overpaid
royalty owner is not entitled to the royalties."); Austin v. Duval, 735 S.W.2d 647, 649 (Tex. App. - Austin 1987, writ denied).
n307. Elledge v. Friberg-Cooper Water Supply Corp., 240 S.W.3d 869, 870 (Tex. 2007); Wagner & Brown, Ltd. v. Horwood, 58 S.W.3d 732,
737 (Tex. 2001); HECI Exploration Co., 982 S.W.2d at 885.
n308. Heldenfels Bros., Inc., 832 S.W.2d at 40-41.
n309. Excess Underwriters at Lloyd's, 246 S.W.3d 42, 62 (Tex. 2008); Sw. Elec. Power Co., 966 S.W.2d at 470-71.
n310. Sullivan v. Leor Energy, LLC, 600 F.3d 542, 550 (5th Cir. 2010); Purselley v. Lockheed Martin Corp., 322 Fed. App'x 399, 403 (5th
Cir. 2009); Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 410 (5th Cir. 2004); McNair v. City of Cedar Park, 993 F.2d 1217, 1220 (5th Cir.
1993).
Page 343Page 343
n312. RPost Holdings, Inc. v. Readnotify.com Pty. Ltd., No. 2:11-CV-16-JRG, 2012 U.S. Dist. LEXIS 90503 (E.D. Tex. June 29, 2012);
Chesapeake La., L.P. v. Buffco Prod., No. 2:10-CV-359, 2012 U.S. Dist. LEXIS 89760, at 15-16 (E.D. Tex. June 28, 2012) ("Here, the Court
finds that Buffco and Freeman have been unjustly enriched by means of Chesapeake's payment to them of the full $ 13,600,000 related to the
sale of the leasehold rights beneath the Geisler Unit, as 53% of such rights were then owned by Harleton and Freeman Capital."); Team
Healthcare/Diagnostic Corp. v. Blue Cross & Blue Shield of Tex., No. 3:10-CV-1441-BH, 2012 U.S. Dist. LEXIS 63760, at 20 (N.D. Tex.
May 7, 2012) ("While Defendant is correct that some Texas appellate courts do not recognize unjust enrichment as an independent cause of
action, the Texas Supreme Court and the Fifth Circuit have recognized unjust enrichment claims."); Johnson v. Affiliated Computer Servs.,
No. 3:10-CV-2333-B, 2011 U.S. Dist. LEXIS 102128, at 23 (N.D. Tex. Sept. 9, 2011); Fisher v. Blue Cross Blue Shield of Tex., Inc., No.
3:10-CV-2652-L-BK, 2011 U.S. Dist. LEXIS 86172, at 25 (N.D. Tex. June 27, 2011) ("Defendant avers Plaintiffs' unjust enrichment claim
should be dismissed because unjust enrichment is not an independent cause of action. However, the Texas Supreme Court, the Court of
Appeals for the Fifth Circuit, and federal courts sitting in Texas have specifically recognized claims for unjust enrichment." (citation
omitted)); Technomedia Int'l, Inc. v. Int'l Training Servs. Inc., No. H-09-3013, 2010 U.S. Dist. LEXIS 93981, at 16 (S.D. Tex. Sept. 9, 2010);
Prophet Capital Mgmt. v. Prophet Equity, LLC, No. A-09-CA-316 LY, 2009 U.S. Dist. LEXIS 88474, p 5-7 (W.D. Tex. Sept. 25, 2009);
Eagle Metal Prods., LLC v. Keymark Enters., LLC, 651 F. Supp. 2d 577, 591 (N.D. Tex. 2009); Breckenridge Enters. v. Avio Alts., LLC, No.
3:08-CV-1782-M, 2009 U.S. Dist. LEXIS 44518, at 34-35 (N.D. Tex. May 27, 2009); Newington Ltd. v. Forrester, No. 3:08-CV-0864-G,
2008 U.S. Dist. LEXIS 92601, at 10-11 (N.D. Tex. Nov. 13, 2008) ("It is true that there are Texas cases drawing a distinction between unjust
enrichment as a "theory of recovery' and a "cause of action.' Some Texas courts, however, have ignored any such distinction and held that
unjust enrichment is a cause of action."); Baisden v. I'm Ready Prods., Inc., No. H-08-0451, 2008 U.S. Dist. LEXIS 39949, at 29 (S.D. Tex.
May 16, 2008) ("Persuaded that the reasoning expressed by the court in Isofoton is sound, the court concludes that plaintiff's claim for unjust
enrichment is not subject to dismissal merely because the subject matter of the claim may be covered by a written agreement but, instead,
that pursuant to Rule 8(d)(2), a claim for unjust enrichment may properly be pleaded in addition and/or as an alternative to a breach of
contract claim."); Patino v. Lawyers Title Ins. Corp., No. 3:06-CV-1479-B, 2007 U.S. Dist. LEXIS 8545, at 24-25 (N.D. Tex. Jan. 11, 2007);
Drawhorn v. Qwest Commcn's Int'l, 121 F. Supp. 2d 554, 562-63 (E.D. Tex. 2000); United States v. Blanche, No. SA-95-CA-0419, 1997
U.S. Dist. LEXIS 3122, at 27-29 (W.D. Tex. 1997).
n313. Aurora Petroleum, Inc. v. Cholla Petroleum, Inc., No. 07-10-0035-CV, 2011 Tex. App. LEXIS 1382, at 9 (Tex. App. - Amarillo Feb.
23, 2011, no pet.) (mem. op.); Houston v. Ludwick, No. 14-09-00600-CV, 2010 Tex. App. LEXIS 8415, at 6 (Tex. App. - Houston [14th
Dist.] Oct. 21, 2010, pet. denied) (mem. op.); LJ Charter, L.L.C. v. Air Am. Jet Charter, Inc., No. 14-08-00534-CV, 2009 Tex. App. LEXIS
9469, at 37 (Tex. App. - Houston [14th Dist.] Dec. 15, 2009, pet. denied) (mem. op.); Tex. Integrated Conveyor Sys., Inc. v. Innovative
Conveyor Concepts, Inc., 300 S.W.3d 348, 367 (Tex. App. - Dallas 2009, pet. denied); SP Midtown, LTD. v. Urban Storage, L.P., No. 14-07-
00717-CV, 2008 Tex. App. LEXIS 3364, at 22 (Tex. App. - Houston [14th Dist.] May 8, 2008, pet. denied) (mem. op.); Pepi v. Galliford, 254
S.W.3d 457, 462 (Tex. App. - Houston [1st Dist.] 2007, pet. denied); ADT Sec. Servs., Inc. v. Hawa, No. 09-04-536 CV, 2005 Tex. App.
LEXIS 9163, at 15 (Tex. App. - Beaumont Nov. 3, 2005, no pet.) (mem. op.); Johnson v. MHSB Enters., L.L.C., No. 03-04-00153-CV, 2004
Tex. App. LEXIS 8900, at 10 (Tex. App. - Austin Oct. 7, 2004, pet. denied) (mem. op.); Villarreal v. Grant Geophysical, Inc., 136 S.W.3d
265, 270 (Tex. App. - San Antonio 2004, pet. denied); Thomason v. Collins & Aikman Floorcoverings, Inc., No. 04-02-00870-CV, 2004 Tex.
App. LEXIS 2823, at 17 (Tex. App. - San Antonio March 31, 2004, no pet.) (mem. op.); Gotham Ins. Co. v. Petroleum Dev. Corp., No. 04-
01-00375-CV, 2003 Tex. App. LEXIS 6297, at 19 (Tex. App. - San Antonio, July 23, 2003, pet. denied) (mem. op.); Pinnacle Data Servs.,
Inc. v. Gillen, 104 S.W.3d 188, 195-96 (Tex. App. - Texarkana 2003, no pet.); Garza v. Mut. of Omaha Ins. Co., No. 05-98-01093-CV, 2001
Tex. App. LEXIS 5288, at 21-22 (Tex. App. - Dallas Aug. 3, 2001, no pet.) (op. on reh'g) (not designated for publication); Janis v. Assocs.
Home Equity Servs., Inc., No. 10-99-217-CV, 2000 Tex. App. LEXIS 6050, at 11-12 (Tex. App. - Waco 2000, pet. denied) (depublished);
Intermarque Auto. Prods., Inc. v. Feldman, 21 S.W.3d 544, 551 (Tex. App. - Texarkana 2000, no pet.); Harper v. Harper, 8 S.W.3d 782, 783
(Tex. App. - Fort Worth 1999, pet. denied); Holder v. Garner, Lovell, & Stein, P.C., No. 07-98-0175-CV, 1999 Tex. App. LEXIS 6298, at 21
(Tex. App. - Amarillo Aug. 24, 1999, pet. denied) (not designated for publication); Matagorda County v. Tex. Ass'n Cnty. Gov't Risk Mgmt.
Pool, 975 S.W.2d 782, 785 (Tex. App. - Corpus Christi 1998), aff'd, 52 S.W.3d 128 (Tex. 2000) (acknowledging that a claim for subrogation
is possible); Bransom v. Standard Hardware, Inc., 874 S.W.2d 919, 927 (Tex. App. - Fort Worth 1994, writ denied); Cmty. Mut. Ins. Co. v.
Owen, 804 S.W.2d 602, 606 (Tex. App. - Houston [1st Dist.] 1991, writ denied); City of Corpus Christi v. S.S. Smith & Sons Masonry, Inc.,
736 S.W.2d 247, 250 (Tex. App. - Corpus Christi 1987, writ denied); Pritchett v. Henry, 287 S.W.2d 546, 549 (Tex. Civ. App. - Beaumont
1955, writ dism'd).
n314. Lilani v. Noorali, No. H-09-2617, 2011 U.S. Dist. LEXIS 440, at 37-38 (S.D. Tex. Jan. 3, 2011); ED&F Man Biofuels, Ltd. v. MV
Fase, 728 F. Supp. 2d 862, 869 (S.D. Tex. 2010); County of El Paso v. Jones, No. EP-09-CV-00119-KC, 2009 U.S. Dist. LEXIS 113149, at
44 (W.D. Tex. Dec. 4, 2009); Hancock v. Chi. Title Ins. Co., 635 F. Supp. 2d 539, 560-61 (N.D. Tex. 2009); Doctors Hosp. 1997 LP v.
Beazley Ins., No. H-08-3340, 2009 U.S. Dist. LEXIS 102081, at 24-25 (S.D. Tex. Nov. 3, 2009); Celanese Corp. v. Coastal Water Auth., 475
F. Supp. 2d 623, 639 (S.D. Tex. 2007).
n315. Sharp v. Mosier, No. 04-11-00449-CV, 2012 Tex. App. LEXIS 4437, at 11-12 (Tex. App. - San Antonio June 6, 2012, no pet. h.) (rule
53.7(f) motion granted Aug. 31, 2012); Braxton v. Chin Tuo Chen, No. 06-10-00134-CV, 2011 Tex. App. LEXIS 7414, at 6 (Tex. App. -
Texarkana Sept. 13, 2011, pet. denied) (mem. op.); Foley v. Daniel, 346 S.W.3d 687, 690 (Tex. App. - El Paso 2009, no pet.); Casstevens v.
Smith, 269 S.W.3d 222, 227-29 (Tex. App. - Texarkana 2008, pet. denied); R.M. Dudley Constr. Co. v. Dawson, 258 S.W.3d 694, 703-04
Page 344Page 344
(Tex. App. - Waco 2008, pet. denied); Hulen v. Hamilton, No. 2-06-288-CV, 2008 Tex. App. LEXIS 1672, at 9-11 (Tex. App. - Fort Worth
Feb. 28, 2008, no pet.) (mem. op.); Argyle Indep. Sch. Dist. v. Wolf, 234 S.W.3d 229, 246-47 (Tex. App. - Fort Worth 2007, no pet.) ("Unjust
enrichment, itself, is not an independent cause of action but rather "characterizes the result of a failure to make restitution of benefits either
wrongfully or passively received under circumstances that give rise to an implied or quasi-contractual obligation to repay.'" (quoting Friberg-
Cooper Water Supply Corp. v. Elledge, 197 S.W.3d 826, 832 (Tex. App. - Fort Worth 2006), rev'd on other grounds, 240 S.W.3d 869 (Tex.
2007))); Doss v. Homecomings Fin. Network, Inc., 210 S.W.3d 706, 709 n.4 (Tex. App. - Corpus Christi 2006, pet. denied); Walker v. Cotter
Props., Inc., 181 S.W.3d 895, 900 (Tex. App. - Dallas 2006, no pet.); RDG Ltd. P'ship v. Gexa Corp., No. 14-04-00679-CV, 2005 Tex. App.
LEXIS 3123, at 9-10 (Tex. App. - Houston [14th Dist.] April 26, 2005, no pet.) (mem. op.); Spector v. Norwegian Cruise Line, Ltd., No. 01-
02-00017-CV, 2004 Tex. App. LEXIS 2941, at 27-28 (Tex. App. - Houston [1st Dist.] Mar. 30, 2004, no pet.) (mem. op.); Treneer v.
Reynolds, No. 13-98-484-CV, 2000 Tex. App. LEXIS 5748, at 15-16 (Tex. App. - Corpus Christi Aug. 24, 2000, no pet.) (not designated for
publication); PIC Realty Corp. v. Southfield Farms, Inc., 832 S.W.2d 610, 614 (Tex. App. - Corpus Christi 1992, no writ); City of Harker
Heights, Tex. v. Sun Meadows Land, Ltd., 830 S.W.2d 313, 317 (Tex. App. - Austin 1992, no writ) ("[Restitution] is a measure of damages,
not a cause of action."); Oxford Fin. Co., Inc. v. Velez, 807 S.W.2d 460, 465 (Tex. App. - Austin 1991, writ denied); City of Corpus Christi v.
S.S. Smith & Sons Masonry, Inc., 736 S.W.2d 247, 250 (Tex. App. - Corpus Christi 1987, writ denied).
n316. Lilani, 2011 U.S. Dist. LEXIS 440, at 37-38 ("The majority of Texas appellate courts hold that unjust enrichment is not an
independent cause of action."); ED&F Man Biofuels, 728 F. Supp. 2d at 869 ("Nevertheless, the courts in the Fifth Circuit and a number of
Texas courts in examining the case law have concluded that rather than an independent cause of action, it is a "theory of liability that a
plaintiff can pursue through several equitable causes of action, including money had and received.'" (quoting Hancock, 635 F. Supp. 2d at
560)); Hancock, 635 F. Supp. 2d at 560 ("Moreover, Texas courts of appeals have consistently held that unjust enrichment is not an
independent cause of action, but is instead a theory upon which an action for restitution may rest.").
n317. Show Servs., LLC v. Amber Trading Co., No. 3:09-CV-2385-D, 2010 U.S. Dist. LEXIS 115512, at 8-9 & n.4 (N.D. Tex. Oct. 29,
2010) ("Moreover, Texas courts of appeals have consistently held that unjust enrichment is not an independent cause of action, but is instead
a theory upon which an action for restitution may rest ... . "Although an intermediate appellate court decision is not controlling where the
highest state court has not spoken on the subject, [the court] ordinarily defers to the holdings of lower appellate courts in the absence of
guidance from the highest court.'" (quoting Holden v. Connex-Metalna Mgmt. Consulting GmbH v. Lexington Ins. Co., 302 F.3d 358, 364-
65 (5th Cir. 2002))); Hancock, 635 F. Supp. 2d at 560. Two other case opinions justify the holding that unjust enrichment is not a cause of
action by citing to the appellate opinion in Heldenfels, which was affirmed as to the final holding but reversed to hold that unjust enrichment
is a cause of action. City of Corpus Christi v. Heldenfels Bros., Inc., 802 S.W.2d 35, 40 (Tex. App. - Corpus Christi 1990), aff'd, 832 S.W.2d
39 (Tex. 1992). See Jones Partners Constr., L.L.C. v. Apopka Plaza Assocs., L.L.C., No. 3:04-CV-1294-D, 2006 U.S. Dist. LEXIS 13560, at
20-21 (N.D. Tex. Mar. 27, 2006) ("Unjust enrichment is probably not an independent cause of action but merely characterizes the result
whereby one fails to make restitution of benefits under circumstances which give rise to an implied or quasi-contractual obligation to return
such benefits." (citing Heldenfels Bros., Inc., 802 S.W.2d at 40)); Wood v. Gateway, Inc., No. 5:03-CV-007-C, 2003 U.S. Dist. LEXIS
22576, at 37-38 (N.D. Tex. Dec. 12, 2003).
n318. From January 1, 2007 to December 31, 2011, there were 572 and 359 case opinions from federal district and state appellate courts in
Texas that contained the term "unjust enrichment' or "disgorgement.'
n319. Newington Ltd. v. Forrester, No. 3:08-CV-0864-G, 2008 U.S. Dist. LEXIS 92601, at 11 (N.D. Tex. Nov. 13, 2008) ("In other words,
Texas courts may waffle about whether unjust enrichment is a theory of recovery or an independent cause of action, but either way, they
have provided the plaintiff with relief when the defendant has been unjustly enriched.").
n320. See Sharp, 2012 Tex. App. LEXIS 4437, at 12-13 ("Accordingly, we hold a fact issue exists on the Sharps' unjust enrichment claim.");
see also Lilani, 2011 U.S. Dist. LEXIS 440, at 38-39 ("If a reasonable trier of fact concludes the parties did not enter into a valid loan
agreement, the trier of fact could alternatively conclude that the Defendants have been unjustly enriched. The court will therefore deny the
Defendants' Summary-Judgment Motion on the restitution (unjust enrichment) claim with respect to the money transfer."); County of El
Paso v. Jones, No. EP-09-CV-00119-KC, 2009 U.S. Dist. LEXIS 113149, at 44, 47 (W.D. Tex. Dec. 4, 2009); Baisden v. I'm Ready
Productions, Inc., No. H-08-0451, 2008 U.S. Dist. LEXIS 39949, at 31 (S.D. Tex. May 16, 2008); Hulen v. Hamilton, No. 2-06-288-CV,
2008 Tex. App. LEXIS 1672, at 10-11 (Tex. App. - Fort Worth Feb. 28, 2008, no pet.) (mem. op.); Spector v. Norwegian Cruise Line Ltd.,
No. 01-02-00017-CV, 2004 Tex. App. LEXIS 2941, at 28-30 (Tex. App. - Houston [1st Dist.] Mar. 30, 2004, no pet.) (mem. op.) (rejecting
the class claim because of varying fact pattern needed to establish claim); PIC Realty Corp. v. Southfield Farms, Inc., 832 S.W.2d 610, 614
(Tex. App. - Corpus Christi 1992, no writ); Oxford Fin. Cos. v. Velez, 807 S.W.2d 460, 466 (Tex. App. - Austin 1991, writ denied) ("As a
matter of law, Oxford's retention of the purchase price under these circumstances would be unconscionable. We conclude that both the
evidence and the jury findings were sufficient to support the court's judgment awarding Mid-Tex recovery of the purchase price.").
Page 345Page 345
n321. See, e.g., Redwood Resort Props., LLC v. Holmes Co., No. 3:06-CV-1022-D, 2006 U.S. Dist. LEXIS 85996, at 27 (N.D. Tex. Nov.
27, 2006); Jones Partners Constr., L.L.C., 2006 U.S. Dist. LEXIS 13560, at 20-21; Wood v. Gateway, Inc., No. 5:03-CV-007-C, 2003 U.S.
Dist. LEXIS 22576, at 37-38 (N.D. Tex. Dec. 12, 2003); Doss v. Homecomings Fin. Network, Inc., 210 S.W.3d 706, 710-111 (Tex. App. -
Corpus Christi 2006, pet. denied); Spector, 2004 Tex. App. LEXIS 2941, at 27 (denying class for overbilling); Treneer v. Reynolds, No. 13-
98-484-CV, 2000 Tex. App. LEXIS 5748, at 15 (Tex. App. - Corpus Christi Aug. 24, 2000, no pet.) (not designated for publication) (stating
that unjust enrichment is the same as quantum meruit); Amoco Prod. Co. v. Smith, 946 S.W.2d 162, 164 (Tex. App. - El Paso 1997, no pet.).
n322. E.g., Target Strike, Inc. v. Marston & Marston, Inc., No. SA-10-CV-0188 OLG (NN), 2010 U.S. Dist. LEXIS 115222, at 15 (W.D.
Tex. Oct. 27, 2010); ED&F Man Biofuels, Ltd. v. MV Fase, 728 F. Supp. 2d 862, 870 (S.D. Tex. 2010); Eagle Metal Prods., LLC v.
Keymark Enters., LLC, 651 F. Supp. 2d 577, 591 (N.D. Tex. 2009); First Union Nat'l Bank v. Richmont Capital Partners I, L.P., 168 S.W.3d
917, 931 (Tex. App. - Dallas 2005, no pet.).
n323. Walker v. Cotter Props., Inc., 181 S.W.3d 895, 900 (Tex. App. - Dallas 2006, no pet.); Oxford Fin. Cos. v. Velez, 807 S.W.2d 460, 465
(Tex. App. - Austin 1991, writ denied) ("Unjust enrichment is not an independent cause of action; however, an action for restitution based on
unjust enrichment will lie "to recover money received on a consideration that has failed in whole or in part.'" (quoting Barrett v Ferrell, 550
S.W.2d 138, 143 (Tex. Civ. App. 1977 - Tyler, writ ref'd n.r.e.))).
n324. See supra III.E.
n325. E.g., Hancock v. Chi. Title Ins. Co., 635 F. Supp. 2d 539, 560 (N.D. Tex. 2009) ("Moreover, Texas courts of appeals have consistently
held that unjust enrichment is not an independent cause of action, but is instead a theory upon which an action for restitution may rest.");
Doctors Hosp. 1997 LP v. Beazley Ins., No. H-08-3340, 2009 U.S. Dist. LEXIS 102081, at 24 (S.D. Tex. Nov. 3, 2009); Sharp v. Mosier, No.
04-11-00449-CV, 2012 Tex. App. LEXIS 4437, at 12 (Tex. App. - San Antonio June 6, 2012) (mem. op.); RDG Ltd. P'ship v. Gexa Corp.,
No. 14-04-00679-CV, 2005 Tex. App. LEXIS 3123, at 9-10 (Tex. App. - Houston [14th Dist.] April 26, 2005, no pet.) (mem. op.) ("Unjust
enrichment is not a distinct independent cause of action, but a theory of recovery." (citing Mowbray v. Avery, 76 S.W.3d 663, 679 (Tex. App.
- Corpus Christi 2002, pet. denied))).
n326. HECI Exploration Co. v. Neel, 982 S.W.2d 881, 885 (Tex. 1998).
n327. Mowbray, 76 S.W.3d at n.25 ("Although the court in HECI refers to "the cause of action' of unjust enrichment, it also refers to unjust
enrichment as a "remedy,' "basis for recovery' and speaks of a "cause of action based on unjust enrichment.' We do not see these statements
as recognition of unjust enrichment as an independent cause of action but simply as a reiteration of the well established principle that a suit
for restitution may be raised against a party based on the theory of unjust enrichment." (quoting HECI Exploration Co., 982 S.W.2d at 891)).
n328. HECI Exploration Co., 982 S.W.2d at 891.
n329. See Tex. Civ. Prac. & Rem. Code Ann. § 16.003(a) (West Supp. 2012) (setting two-year limitations period for actions for taking or
detaining the personal property of another).
n330. HECI Exploration Co., 982 S.W.2d at 891.
n331. Lilani v. Noorali, No. H-09-2617, 2011 U.S. Dist. LEXIS 440, at 38 (S.D. Tex. Jan. 3, 2011); ED&F Man Biofuels, Ltd. v. MV Fase,
728 F. Supp. 2d 862, 869 n.3 (S.D. Tex. 2010); Doctors Hosp. 1997 LP v. Beazley Ins., No. H-08-3340, 2009 U.S. Dist. LEXIS 102081, at
25 (S.D. Tex. Nov. 3, 2009); Hancock v. Chi. Title Ins. Co., 635 F. Supp. 2d 539, 561 (N.D. Tex. 2009); Baisden v. I'm Ready Prods., No. H-
08-0451, 2008 U.S. Dist. LEXIS 39949, at 31 (S.D. Tex. May 16, 2008); Wood v. Gateway, Inc., No. 5:03-CV-007-C, 2003 U.S. Dist.
LEXIS 22576, at 37-38 (N.D. Tex. Dec. 12, 2003); Casstevens v. Smith, 269 S.W.3d 222, 229 (Tex. App. - Texarkana 2008, pet. denied); Sw.
Bell Tel. Co. v. Mktg. on Hold, Inc., 170 S.W.3d 814, 828 (Tex. App. - Corpus Christi 2005), rev'd on other grounds, 308 S.W.3d 909 (Tex.
2010).
Page 346Page 346
n332. Friberg-Cooper Water Supply Corp. v. Elledge, 197 S.W.3d 826, 829 n.13 (Tex. App - Fort Worth 2006), rev'd on other grounds, 240
S.W.3d 869 (Tex. 2007) (describing two prior Supreme Court opinions limitations as non-binding "obiter dictum" which did not resemble
more authoritative "judicial dictum" that is articulated "very deliberately after mature consideration.").
n333. Elledge, 240 S.W.3d at 870 ("Our statements that the two-year statute applies to unjust enrichment claims, though not essential to the
outcomes in HECI and Wagner & Brown, should have been followed.").
n334. Hoffman v. L&M Arts, 774 F. Supp. 2d 826, 848 n.18 (N.D. Tex. 2011); Show Servs., LLC v. Amber Trading Co. LLC, No. 3:09-CV-
2385-D, 2010 U.S. Dist. LEXIS 115512, at 9 (N.D. Tex. Oct. 29, 2010); Packard v. OCA, Inc., No. 4:05CV273, 2009 U.S. Dist. LEXIS
130009, at 3 (E.D. Tex. Aug. 24, 2009); Hancock, 635 F. Supp. 2d at 560 ("Moreover, Texas courts of appeals have consistently held that
unjust enrichment is not an independent cause of action, but is instead a theory upon which an action for restitution may rest."); Casstevens,
269 S.W.3d at 227-28; R.M. Dudley Constr. Co. v. Dawson, 258 S.W.3d 694, 703 (Tex. App. - Waco 2008, pet. denied); Hulen v. Hamilton,
No. 2-06-288-CV, 2008 Tex. App. LEXIS 1672, at 9-10 (Tex. App. - Fort Worth Feb. 28, 2008, no pet.) (mem. op.).
n335. The court insists that unjust enrichment is just another name for money had and received and that unjust enrichment is just another
form of assumpsit as originated by Lord Mansfield. The analysis of money had and received as debt is sound but should not include unjust
enrichment in equity. See Friberg-Cooper Water Supply Corp., 197 S.W.3d at 832, n.13.
n336. Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 40 (Tex. 1992).
n337. Id. at 41 ("The trial court also held that Heldenfels was entitled to recovery under the theory of unjust enrichment. A party may
recover under the unjust enrichment theory when one person has obtained a benefit from another by fraud, duress, or the taking of an undue
advantage." (citing Pope v. Garrett, 211 S.W.2d 559, 560, 562 (Tex. 1948); Austin v. Duval, 735 S.W.2d 647, 649 (Tex. App. - Austin 1987,
writ denied))).
n338. See Heldenfels Bros., Inc., 832 S.W.2d at 41 (citing Pope, 211 S.W.2d at 560, 562).
n339. Pope, 211 S.W.2d at 560 (""The specific instances in which equity impresses a constructive trust are numberless - as numberless as
the modes by which property may be obtained through bad faith and unconsientious acts.'" (quoting 4 John Norton Pomeroy, A Treatise on
Equity Jurisprudence, § 1045 (5th Ed.))).
n340. See Heldenfels Bros., Inc., 832 S.W.2d at 41.
n341. 550 S.W.2d 138, 143 (Tex. Civ. App. - Tyler 1977, writ ref'd n.r.e.).
n342. McNair v. City of Cedar Park, 993 F.2d 1217, 1221 n.18 (5th Cir. 1993); United Water Servs., L.L.C. v. Zaffirini, No. 04-08-00211-
CV, 2009 Tex. App. LEXIS 328, at 18 n.4 (Tex. App. - San Antonio Jan. 21, 2009, pet. denied) (mem. op.) ("The party seeking restitution
based on unjust enrichment must establish both that there was unjust enrichment and that the person sought to be charged either "wrongfully
secured a benefit or had passively received one which it would be unconscionable for him to retain.'" (quoting Villareal v. Grant
Geophysical, Inc. 136 S.W.3d 265, 270 (Tex. App. - San Antonio 2004, pet. denied))); Burlington N. R.R. Co. v. Sw. Elec. Power Co., 925
S.W.2d 92, 97 (Tex. App. - Texarkana 1996), aff'd, 966 S.W.2d 467 (Tex. 1998); Oxford Fin. Co. v. Velez, 807 S.W.2d 460, 465 (Tex. App. -
Austin 1991, writ denied); City of Corpus Christi v. Heldenfels Bros., Inc., 802 S.W.2d 35, 40 (Tex. App. - Corpus Christi 1990), aff'd on
other grounds, 832 S.W.2d 339 (Tex. 1992); City of Corpus Christi v. S.S. Smith & Sons Masonry, Inc., 736 S.W.2d 247, 250 (Tex. App. -
Corpus Christi 1987, writ denied).
Page 347Page 347
n343. Friberg-Cooper Water Supply Corp. v. Elledge, 197 S.W.3d 826, 829 n.13, 832 (Tex. App - Fort Worth 2006), rev'd on other grounds,
240 S.W.3d 869 (Tex. 2007); Mitsuba Tex., Inc. v. Brownsville Indep. Sch. Dist., No. 05-97-01271-CV, 2000 Tex. App. LEXIS 772, at 12-13
(Tex. App. - Dallas Feb. 2, 2000, no pet.) (not designated for publication); Amoco Prod. Co. v. Smith, 946 S.W.2d 162, 164 (Tex. App. - El
Paso 1997, no pet.).
n344. Barrett, 550 S.W.2d at 143 (quoting 66 Am. Jur. 2d Restitution and Implied Contracts § 11 (1973)).
n345. Id. (quoting 6 Tex. Jur. 2d Assumpsit § 6 (1959)).
n346. Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992).
n347. Barrett, 550 S.W.2d at 143.
n348. Id. ("It is fundamental that for a person to be entitled to restitution, he must show not only that there was unjust enrichment, but also
that the person sought to be charged had wrongfully secured a benefit or had passively received one which it would be unconscionable for
him to retain." (citing 66 Am. Jur. 2d Restitution and Implied Contracts, § 4 (1973))).
n349. 6 Tex. Jur. 2d Assumpsit § 6 (1959).
n350. Id.; accord Burlington N. R.R. v. S.W. Elec., 925 S.W.2d 92, 98 n.6 (Tex. App. - Texarkana 1996, writ granted), aff'd, 966 S.W.2d 467
(Tex. 1998).
n351. 735 S.W.2d 647, 649 (Tex. App. - Austin 1987, writ denied).
n352. Staats v. Miller, 243 S.W.2d 686, 687-88 (Tex. 1951) ("It is generally recognized that any surplus arising on the sale of a security for a
debt may be recovered by the person entitled thereto. So, the same authority says, "The question, in an action for money had and received, is
to which party does the money, in equity, justice and law, belong. All plaintiff need show is that defendant holds money which in equity and
good conscience belongs to him.' Again, it has been declared that a cause of action for money had and received is "less restricted and fettered
by technical rules and formalities than any other form of action. It aims at the abstract justice of the case, and looks solely to the inquiry
whether the defendant holds money, which ... belongs to the plaintiff.'" (quoting United States v. Jefferson Elec. Mfg. Co., 291 U.S. 386, 404
(1934))).
n353. Austin, 735 S.W.2d at 649.
n354. Id. (quoting 58 C.J.S. Money Received § 41 (1948)).
n355. Heldenfels Bros., Inc. v. Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992) (citing Vortt Exploration Co., Inc. v. Chevron U.S.A., Inc.,
787 S.W.2d 942, 944 (Tex. 1990)).
Page 348Page 348
n356. Id. at 42 (Gammage, J., dissenting).
n357. See City of Corpus Christi v. Heldenfels Bros., Inc., 802 S.W.2d 35, 40 (Tex. App. - Corpus Christi 1990), aff'd on other grounds, 832
S.W.2d 339 (Tex. 1992) ("Unjust enrichment is probably not an independent cause of action but merely characterizes the result whereby one
fails to make restitution of benefits under circumstances which give rise to an implied or quasi-contractual obligation to return such
benefits.").
n358. Breckenridge Enters. v. Avio Alternatives, LLC, No. 3:08-cv-1782-M, 2009 U.S. Dist. LEXIS 44518, at 35 (N.D. Tex. May 27, 2009)
("However, as against Alan and Nancy Gagleard, the unjust enrichment theory mirrors the Plaintiff's fraud claims, which were dismissed for
failing the particularity requirements of Rule 9(b). If Plaintiff successfully pleads its fraud claims against Alan and Nancy Gagleard, it may
also replead its unjust enrichment theory against them, but it would be nonsensical to allow what is essentially a fraud claim to evade the
particularity requirements through pleading under an equitable, rather than legal, theory. As against Alan and Nancy Gagleard, this theory is
dismissed." (citing Fed. R. Civ P. 9(b))); see also Allstate Ins. Co. v. Donovan, No. H-12-0432 2012, U.S. Dist. LEXIS 92401, at 50-51 (S.D.
Tex. July 3, 2012); Wu v. Tang, No. 3:10-CV-0218-O, 2011 U.S. Dist. LEXIS 4489, at 26-27 (N.D. Tex. Jan. 14, 2011); Lone Star Partners v.
Nationsbank Corp., No. 05-98-02049-CV, 2001 Tex. App. LEXIS 4785, at 14 (Tex. App. - Dallas July 18, 2001, writ denied) (not designated
for publication).
n359. 2 Story, supra note 6, § 259 ("Other [cases] again, rather grow out of some special confidential or fiduciary relation between all the
parties or between some of them, which is watched with especial jealousy and solicitude, because it affords the power and the means of
taking undue advantage, or of exercising undue influence over others.").
n360. See infra notes 359-67.
n361. Chesapeake Louisiana, L.P. v. Buffco Prod., Inc., No. 2:10-CV-359 (JRG), 2012 U.S. Dist. LEXIS 89760, at 15-16 (E.D. Tex. June
28, 2012).
n362. Team Healthcare/Diagnostic Corp. v. Blue Cross & Blue Shield of Tex., No. 3:10-CV-1441-BH, 2012 U.S. Dist. LEXIS 63760, at 21
(N.D. Tex. May 7, 2012); RDG Ltd. P'ship v. Gexa Corp., No. 14-04-00679-CV, 2005 Tex. App. LEXIS 3123, at 10-13 (Tex. App. - Houston
[14th Dist.] April 26, 2005, no pet.) (mem. op.).
n363. SP Midtown, Ltd. v. Urban Storage, L.P., No. 14-07-00717-CV, 2008 Tex. App. LEXIS 3364, at 23 (Tex. App. - Houston [14th Dist.]
May 8, 2008, pet. denied) (mem. op.).
n364. Baisden v. I'm Ready Productions, Inc., No. H-08-0451, 2008 U.S. Dist. LEXIS 39949, at 28 (S.D. Tex. May 16, 2008) ("Thus, IRP's
subsequent actions are not covered by the Agreement. As a result, [plaintiff] may seek recovery for this period under a theory of unjust
enrichment. In addition, citing Federal Rule of Civil Procedure 8(d)(2), plaintiff argues that his claim for unjust enrichment is permissible
and appropriate at this stage of the case as an alternative to his claims for breach of contract and copyright infringement." (internal
quotations omitted)).
n365. Prophet Capital Mgmt. Ltd. v. Prophet Equity, LLC, A-09-CA-316 LY, 2009 U.S. Dist. LEXIS 88474, at 6-7 (W.D. Tex. Sept. 25,
2009).
n366. Villarreal v. Grant Geophysical, Inc., 136 S.W.3d 265, 270 (Tex. App. - San Antonio 2004, pet. denied).
n367. Drawhorn v. Qwest Commc'ns. Int'l, Inc., 121 F. Supp. 2d 554, 563 (E.D. Tex. 2000).
Page 349Page 349
n368. A group of 245 cases were selected on the basis that the cases contained the term "unjust enrichment"" and either "HECI" or
"Heldenfels" for the last 15 years. This does not include all unjust enrichment cases and the cases cited in the remainder of this subsection
are listed merely as examples.
n369. See Leal v. Weightman, No. 01-03-01006-CV, 2004 Tex. App. LEXIS 8991, at 12 (Tex. App. - Houston [1st Dist.] Oct. 7, 2004, no
pet.) (mem. op.) (rejecting reimbursement as basis for unjust enrichment.); Gotham Ins. Co. v. Petroleum Dev. Corp., No. 04-01-00375-CV,
2003 Tex. App. LEXIS 6297, at 19 (Tex. App - San Antonio, July 23, 2003, pet. denied) (mem. op.) (denying summary judgment for claim
for reimbursement of insured's unnecessary payments).
n370. Mid-Town Surgical Ctr., LLP v. Blue Cross Blue Shield of Tex., No. H-11-2086, 2012 U.S. Dist. LEXIS 102789, at 11 (S.D. Tex. July
24, 2012) (holding that plaintiff states a claim for defendant's overbilling); Chesapeake Louisiana, L.P. v. Buffco Prod., Inc., No. 2:10-CV-
359 (JRG), 2012 U.S. Dist. LEXIS 89760, at 15-16 (E.D. Tex. June 28, 2012) ( affirming judgment for overpayment to partial owners for
100% of acquisition price); UNUM Life Ins. Co. of Am. v. Munoz, No. 3:06-CV-1052-G ECF, 2007 U.S. Dist. LEXIS 14019, at 12 (N.D.
Tex. Feb. 27, 2007) (granting summary judgment to plaintiff on claim for overpayment under contract); Patino v. Lawyers Title Ins. Corp.,
No. 3:06-CV-1479-B, 2007 U.S. Dist. LEXIS 85457, at 23-24 (N.D. Tex. Jan. 11, 2007) (denying summary judgment against claim for
wrongfully retaining pricing discounts); Johnson v. MHSB Enters., L.L.C., No. 03-04-00153-CV, 2004 Tex. App. LEXIS 8900, at 11-12
(Tex. App. - Austin Oct. 7, 2004, no pet.) (mem. op.) (denying class for overcharges due to lack of nonconsensual transfer).
n371. Team Healthcare/Diagnostic Corp. v. Blue Cross & Blue Shield of Tex., No. 3:10-CV-1441-BH, 2012 U.S. Dist. LEXIS 63760, at 21
(N.D. Tex. May 7, 2012); Peak Technical Servs., Inc. v. Land & Sea Eng'g, LLC, No. H-10-1568, 2011 U.S. Dist. LEXIS 99795, at 22-23
(S.D. Tex. Sept. 6, 2011); Fisher v. Blue Cross Blue Shield of Tex., Inc., No. 3:10-CV-2652-L-BK, 2011 U.S. Dist. LEXIS 86172, at 25-26
(N.D. Tex. June 27, 2011); RDG Ltd. P'ship v. Gexa Corp., No. 14-04-00679-CV, 2005 Tex. App. LEXIS 3123, at 12 (Tex. App. - Houston
[14th Dist.] April 26, 2005, no pet.) (mem. op.); Ariz. Premium Fin. Co. v. CSI Agency Servs., Inc., No. 05-00-01030-CV, 2001 Tex. App.
LEXIS 5437, at 15 (Tex. App. - Dallas Aug. 13, 2001, no pet.) (not designated for publication).
n372. Shell Oil Co. v. Ross, 356 S.W.3d 924, 928-29 (Tex. 2011) (rejecting claim for underpayment of royalties based on limitations);
Union Pac. Res. Grp., Inc. v. Hankins, 51 S.W.3d 741, 754 (Tex. App. - El Paso 2001), rev'd on other grounds, 111 S.W.3d 69 (Tex. 2003)
(certifying class for underpayment of royalties).
n373. Khatib v. Cathay Bank, No. 4:11-CV-540-A, 2012 U.S. Dist. LEXIS 105047, at 10-11 (N.D. Tex. July 26, 2012); Vanhauen v. Am.
Home Mortg. Servicing, Inc., No. 4:11-CV-461, 2012 U.S. Dist. LEXIS 34138, at 23 (E.D. Tex. Feb. 17, 2012); Baker v. Deutsche Bank
Nat'l Trust Co., No. 4:11-CV-61, 2011 U.S. Dist. LEXIS 132586, at 9-10 (E.D. Tex. Oct. 19, 2011); Kiggundu v. Mortg. Elec. Registration
Sys., No. 4:11-1068 ECF, 2011 U.S. Dist. LEXIS 70889, at 29 (S.D. Tex. June 30, 2011); Anderson v. CitiMortgage, Inc., No. 4:10-CV-398,
2011 U.S. Dist. LEXIS 31191, at 17-18 (E.D. Tex. Mar. 23, 2011); Merry Homes, Inc. v. Dao, 359 S.W.3d 881, 884 (Tex. App. - Houston
[14th Dist.] 2012, no pet.); R.M. Dudley Constr. Co. v. Dawson, 258 S.W.3d 694, 704 (Tex. App. - Waco 2008, pet. denied).
n374. United States v. Medica Rents Co., No. 03-111297, 2008 U.S. App. LEXIS 17946, at 12-13 (5th Cir. Aug. 19, 2008); McNair v. City
of Cedar Park, 993 F.2d 1217, 1221 (5th Cir. 1993) (denying claim for lack of nonconsensual transfer); Trammell Crow Residential Co. v.
Am. Prot. Ins. Co., No. 3:10-CV-2163-B, 2012 U.S. Dist. LEXIS 134620, at 36 (N.D. Tex. Sept. 20, 2012); Vought Aircraft Indus. v. Falvey
Cargo Underwriting, Ltd., 729 F. Supp. 2d 814, 843-44 (N.D. Tex. 2010); Cristobal v. Allen, No. 01-09-00126-CV, 2010 Tex. App. LEXIS
5829, at 16-17 (Tex. App. - Houston [1st Dist.] July 22, 2010, no pet.) (mem. op.); Argyle Indep. Sch. Dist. ex rel. Bd. of Trs. v. Wolf, 234
S.W.3d 229, 246-47 (Tex. App. - Fort Worth 2007, no pet.); Walker v. Cotter Props., Inc., 181 S.W.3d 895, 900 (Tex. App. - Dallas 2006, no
pet.).
n375. Hern Family Ltd. P'ship v. Compass Bank, 863 F. Supp. 2d 613, 628 (S.D Tex. 2012); Williams v. Glash, 789 S.W.2d 261, 265 (Tex.
1990) ("The doctrine of mutual mistake must not routinely be available to avoid the results of an unhappy bargain. Parties should be able to
rely on the finality of freely bargained agreements. However, in narrow circumstances a party may raise a fact issue for the trier of fact to set
aside a release under the doctrine of mutual mistake."); Burlington N. R.R. Co. v. Sw. Elec. Power Co., 925 S.W.2d 92, 97 (Tex. App. -
Texarkana 1996), ("The doctrine does not operate to rescue a party from the consequences of a bad bargain, and the enrichment of one party
at the expense of the other is not unjust where it is permissible under the terms of an express contract.") aff'd, 966 S.W.2d 467 (Tex. 1998).
Page 350Page 350
n376. Bridgewater v. Double Diamond-Del., Inc., No. 3:09-CV-1758-B ECF, 2011 U.S. Dist. LEXIS 47248, at 60 (N.D. Tex. Apr. 29, 2011)
(rejecting class for non-uniformity of waiver case facts); Sw. Bell Tel. Co. v. Mktg. on Hold Inc., 308 S.W.3d 909, 923 (Tex. 2010) (rejecting
class for overbilling); Spector v. Norwegian Cruise Line Ltd., No. 01-02-00017-CV, 2004 Tex. App. LEXIS 2941, at 29-30 (Tex. App. -
Houston [1st Dist.] Mar. 30, 2004, no pet.) (mem. op.) (denying class for overbilling); Union Pac. Res. Grp., Inc. v. Hankins, 51 S.W.3d 741,
754 (Tex. App. - El Paso 2001), rev'd on other grounds, 111 S.W.3d 69 (Tex. 2003) (certifying class for underpayment of royalties).
n377. Pepi Corp. v. Galliford, 254 S.W.3d 457, 460 (Tex. App. - Houston [1st Dist.] 2007, pet. denied) (interpreting claim for unjust
enrichment as a claim for quantum meruit).
n378. Friberg-Cooper Water Supply Corp. v. Elledge, 197 S.W.3d 826, 832, 829 n.13 (Tex. App. - Fort Worth 2006), rev'd on other grounds,
240 S.W.3d 869 (Tex. 2007) (holding claim for unjust enrichment is interpreted as claim for money had and received).
n379. Treneer v. Reynolds, No. 13-98-484-CV, 2000 Tex. App., LEXIS 5748, at 15 (Tex. App. - Corpus Christi Aug. 24, 2000, no pet.) (not
designated for publication) (stating that unjust enrichment is the same as quantum meruit).
n380. Hancock v. Chi. Title Ins. Co., 635 F. Supp. 2d 539, 561 (N.D. Tex. 2009).
n381. Aguirre v. Powerchute Sports, LLC, No. SA-10-CV-702-XR, 2011 U.S. Dist. LEXIS 86207, at 32 (W.D. Tex. Aug. 4, 2011)
(approving Fed. R. Civ. P. 12(b)(6) motion for claim of fraud for patent violation); Mary Kay, Inc. v. Weber, 601 F. Supp. 2d 839, 864 (N.D.
Tex. 2009) (rejecting claim for unjust enrichment when a trademark claim would be more specific); Recursion Software, Inc. v. Interactive
Intelligence, Inc., 425 F. Supp. 2d 756, 768-69 (N.D. Tex. 2006) (holding claim for unjust enrichment is preempted by copyright statute);
Novell, Inc. v. CPU Distrib., Inc., No. H-97-2326, 2000 U.S. Dist. LEXIS 9975, at 33 (S.D. Tex. May 4, 2000) (permitting claim for unjust
enrichment to include fraud for misrepresenting itself as an authorized Novell reseller and through the unauthorized use of Novell
trademarks).
n382. Prophet Capital Mgmt., Ltd. v. Prophet Equity, LLC, A-09-CA-316 LY, 2009 U.S. Dist. LEXIS 88474, at 7-8 (W.D. Tex. Sept. 25,
2009) (rejecting unjust enrichment claim for violation of trademark).
n383. Target Strike, Inc. v. Marston & Marston, Inc., No. SA-10-CV-0188 OLG (NN), 2010 U.S. Dist. LEXIS 115222, at 14-15 (W.D. Tex.
Oct. 27, 2010) (adopting magistrate's decision) (denying claim for conversion or unjust enrichment related to trade secrets); Tex. Integrated
Conveyor Sys., Inc. v. Innovative Conveyor Concepts, Inc., 300 S.W.3d 348, 380-81 (Tex. App. - Dallas 2009, pet. denied) (reversing
summary judgment for unjust enrichment based on misuse of trade secrets and confidential information); SP Midtown, LTD. v. Urban
Storage, L.P., No. 14-07-00717-CV, 2008 Tex. App. LEXIS 3364, at 23 (Tex. App. - Houston [14th Dist.] May 8, 2008, pet. denied) (mem.
op.) (finding that undue advantage includes misappropriation of trade secrets).
n384. Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 410 (5th Cir. 2004) (holding that unjust enrichment is viable alternative claim for
employer's wrongful holding of life insurance policy on employee); Kirkpatrick v. Jasmine Inc., No. 3:06-CV-0793-BH, 2012 U.S. Dist.
LEXIS 46839, at 16 (N.D. Tex. Apr. 2, 2012) (denying summary judgment for claim for disgorgement); Renwick v. Bonnema, No. 2:08-CV-
337 (TJW), 2009 U.S. Dist. LEXIS 11862, at 9-10 (E.D. Tex. Feb. 13, 2009); Newington Ltd. v. Forrester, No. 3:08-CV-0864-G, 2008 U.S.
Dist. LEXIS 92601, 10-12 (N.D. Tex. Nov. 13, 2008) (denying Fed. R. Civ. P. 12(b)(6) motion for unjust enrichment against escrow agent
for waste of assets); SkillMaster Staffing Servs. v. J.M. Clipper Corp., No. H-04-3619, 2006 U.S. Dist. LEXIS 57969, at 23 (S.D. Tex. Aug.
17, 2006) (denying summary judgment for fraud in which the remedy is measured as the defendant's savings); Sharp v. Mosier, No. 04-11-
00449-CV, 2012 Tex. App. LEXIS 4437, at 11-12 (Tex. App. - San Antonio June 6, 2012, no pet.) (mem. op.); LJ Charter, L.L.C. v. Air Am.
Jet Charter, Inc., No. 14-08-00534-CV, 2009 Tex. App. LEXIS 9469, at 37-38 (Tex. App. - Houston [14th Dist.] Dec. 15, 2009, pet. denied)
(mem. op.); Mowbray v. Avery, 76 S.W.3d 663, 679-80 (Tex. App. - Corpus Christi 2002, pet. denied).
Page 351Page 351
n385. But see Angelo Broad., Inc. v. Satellite Music Network, Inc., 836 S.W.2d 726, 731 (Tex. App. - Dallas 1992, writ denied), (denying
unjust enrichment when the contract was fully performed and remaining debt was liquidated) overruled on other grounds by, Hines v. Hash,
843 S.W.2d 464, 467 (Tex. 1992).
n386. See infra notes 387, 392.
n387. County of El Paso v. Jones, EP-09-CV-00119-KC, 2009 U.S. Dist. LEXIS 113149, at 45-46 (W.D. Tex. Dec. 4, 2009); RDG Ltd.
P'ship v. Gexa Corp., No. 14-04-00679-CV, 2005 Tex. App. LEXIS 3123, at 13 (Tex. App. - Houston [14th Dist.] April 26, 2005, no pet.)
(mem. op.) ("We fail to see any contradiction between the two doctrines, but, instead, find they are fully compatible, and any determination
on unjust enrichment will necessarily depend upon the evidence presented in the case. In any event, several courts of appeals have relied on
the "passively received' language even after the Texas Supreme Court decided Heldenfels Brothers. Moreover, the Supreme Court in
Heldenfels Brothers did not address the "passively retained' language or otherwise disapprove or overrule any case law applying that
language in unjust enrichment analysis. Therefore, we conclude the "passively retained' language is still viable. RDG's third issue is
overruled." (footnote omitted) (citing Heldenfels Bros., Inc. v. City of Corpus Christi 832 S.W.2d 39, 40-42 (Tex. 1992); Gotham Ins. Co. v.
Petroleum Dev. Corp., No. 04-01-00375-CV, 2003 Tex. App. LEXIS 6297, at 19 (Tex. App. - San Antonio, July 23, 2003, pet. denied) (mem.
op.))).
n388. Barrett v. Ferrell, 550 S.W.2d 138, 143 (Tex. Civ. App. - Tyler 1977, writ ref'd n.r.e.) ("It is fundamental that for a person to be entitled
to restitution, he must show not only that there was unjust enrichment, but also that the person sought to be charged had wrongfully secured
a benefit or had passively received one which it would be unconscionable for him to retain.").
n389. Jones, 2009 U.S. Dist. LEXIS 113149, at 45-46 ("Texas law also reveals that unjust enrichment can touch "passively received'
benefits, where the nexus is some related third party's acts against a plaintiff, when it would be "unconscionable for the receiving party to
retain' them." (quoting Mowbray, 76 S.W.3d at 679))).
n390. Gotham Ins. Co., 2003 Tex. App. LEXIS 6297, at 19 ("Therefore, under the JOA, WRI was liable for 12.5% and the Fund was liable
for 75% of "all costs and liabilities incurred in operations' under the JOA. However, as noted above, $ 1,823,156.25 in blow out costs were
paid by Gotham via the Rush Johnson escrow fund. To this extent, the debts of WRI and the Fund under the JOA for operational costs was
extinguished. Thus, WRI and the Fund passively benefitted from and were unjustly enriched by Gotham's payment of the insurance proceeds
under the mistaken belief that there was coverage."); Cmty. Mut. Ins. Co. v. Owen, 804 S.W.2d 602, 606 (Tex. App. - Houston [1st Dist.]
1991, writ denied) ("For a party to be entitled to restitution, it must show the person sought to be charged wrongfully secured a benefit or
passively received one which it was unconscionable to retain. If the insurance company has grounds for either, it is that Owen passively
accepted a benefit he should not have retained." (citation omitted)).
n391. Patino v. Lawyers Title Ins. Corp., No. 3: 06-CV-1479-B, 2007 U.S. Dist. LEXIS 85457, at 22-24 (N.D. Tex. Jan. 11, 2007)
("Lawyers Title next argues that Patina's mere allegation that Lawyers Title failed to apply the required reissue discount to the premium for
Patina's new mortgage title policy fails to state a claim for unjust enrichment under Texas law ... . Here, Patino has alleged that he qualified
for a reissue discount for lender title insurance under Texas law, that Lawyers Title failed to give it to him, and that, in so doing, Lawyers
Title wrongfully and/or passively received a benefit which would be unconscionable for it to retain. Patino further alleges that Lawyers Title
lacked good faith in accepting the allegedly illegal overcharges and obtained a benefit by taking undue advantage of him and the class he
seeks to represent. The Court finds that these allegations are sufficient to state an unjust enrichment claim under Texas law." (citations
omitted)); RDG Ltd. P'ship, 2005 Tex. App. LEXIS 3123, at 10-11 ("We find the evidence shows that RDG obtained the benefit of the
electricity by the taking of undue advantage of Gexa's mistake when it refused to pay for the electricity. Gexa mailed six invoices to the
address at 3633 Shaver (although addressed to Jesus Fornadeo) for the period from June 18, 2002, through October 18, 2002, which were
never returned [sic] Gexa. When Gexa had not received payment for any of the invoices, Gexa's collections manager contacted RDG about
the unpaid invoices. An RDG employee admitted to Gexa that RDG had not been billed for electricity by its usual provider - Reliant Energy.
While initially agreeing to pay Gexa for the electricity, RDG ultimately refused to pay any of the invoices for the electricity it had received
and made use of, thus obtaining a benefit by the taking of an undue advantage.").
n392. United States v. Blanche, No. SA-95-CA-0419, 1997 U.S. Dist. LEXIS 3122, at 27-28 (W.D. Tex. 1997) ("Finally, this Court finds
that the doctrine of unjust enrichment should be applied in this case. It would be unconscionable to allow Hewitt to keep his interest in the
property as well as the substantial benefits conferred to him by the Blanches. The purpose of restitution under this remedy is to do what
justice demands."); Drawhorn v. Qwest Commc'ns Int'l, 121 F. Supp. 2d 554, 562-63 (E.D. Tex. 2000); Tex. Integrated Conveyor Sys., Inc. v.
Innovative Conveyor Concepts, Inc., 300 S.W.3d 348, 367 (Tex. App. - Dallas 2009, pet. denied); SP Midtown, LTD v. Urban Storage, L.P.,
Page 352Page 352
No. 14-07-00717-CV, 2008 Tex. App. LEXIS 3364, at 22 (Tex. App. - Houston [14th Dist.] May 8, 2008, pet. denied) (mem. op.); Spector v.
Norwegian Cruise Line Ltd., No. 01-02-00017-CV, 2004 Tex. App. LEXIS 2941, at27-28 (Tex. App. - Houston [1st Dist.] Mar. 30, 2004, no
pet.) (mem. op.); Bransom v. Standard Hardware, Inc., 874 S.W.2d 919, 927 (Tex. App. - Fort Worth 1994, writ denied) ("Recovery is based
on fundamental principles of justice or equity and good conscience which give rise to an implied or quasi-contract to repay. A right of
recovery under unjust enrichment is essentially equitable and does not depend upon the existence of a wrong." (citation omitted)).
n393. See, e.g., Blanche, 1997 U.S. Dist. LEXIS 3122, at 27-28.
n394. Chesapeake Louisiana, L.P. v. Buffco Prod., Inc., No. 2:10-CV-359 (JRG), 2012 U.S. Dist. LEXIS 89760, at 14-15 (E.D. Tex. June
28, 2012) ("In this circumstance, the Court looks to the "simple justice of the case' and inquires whether Buffco and Freeman have received
money which rightfully belongs to Harleton and Freeman Capital." (quoting Greer v. White Oak State Bank, 673 S.W.2d 326, 329 (Tex. App.
- Texarkana, no writ))); Oxford Fin. Cos. v. Velez, 807 S.W.2d 460, 466 (Tex. App. - Austin 1991, writ denied) ("If Oxford is not compelled
to restore the purchase price to Mid-Tex, Oxford will have gained almost $ 15,000 although it gave Mid-Tex nothing of value in return. As a
matter of law, Oxford's retention of the purchase price under these circumstances would be unconscionable.").
n395. Most courts and authorities reject constructive trust as a cause of action. See, e.g., Cadle Co. v. Mims (In re Moore), 608 F.3d 253,
263 (5th Cir. 2010); Beverly Found. v. Lynch, 301 S.W.3d 734, 736 (Tex. App. - Amarillo 2009, no pet.); Restatement (Third) of Restitution
and Unjust Enrichment § 55 cmt. f (2010). But see Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App. - Corpus Christi 2002, pet. denied)
("We first note that while it is true that a constructive trust is an equitable remedy, it would be overly simplistic to state that therefore a suit
for a constructive trust cannot lie as a distinct action." (citation omitted)).
n396. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. c (2010) ("Whatever the defendant's assets, specific restitution
will be more attractive than a money judgment when the property in question has special value for the claimant; when it has appreciated in
value; when its value might be difficult to establish; or when recovery of a specific thing is merely less costly than proof and recovery of its
value. Constructive trust is available in all these cases, though only if the claimant can satisfy the requirements of specific identification
(tracing).").
n397. The hypothecation process is sometimes referred to as a legal fiction. See Procom Energy, L.L.A. v. Roach, 16 S.W.3d 377, 381 (Tex.
App. - Tyler 2000, pet. denied) (citing Ginther v. Taub, 675 S.W.2d 724, 728 (Tex. 1984)).
n398. Fitz-Gerald v. Hull, 237 S.W.2d 256, 259 (Tex. 1951); Edwards v. Strong, 213 S.W.2d 979, 981 (Tex. 1948) ("The purpose of this suit
is not to enforce a trust against any interest in the land created by the option, but to impose a trust upon the legal title which passed to
Edwards by the deed executed to him by Griffin with all the legal formalities."); Talley v. Howsley, 176 S.W.2d 158, 160 (Tex. 1943) ("A
constructive trust is a relationship with respect to property, subjecting the person by whom the title to the property is held to an equitable
duty to convey it to another, on the ground that his acquisition or retention of the property is wrongful and that he would be unjustly enriched
if he were permitted to retain the property."); Baker Botts, L.L.P. v. Cailloux, 224 S.W.3d 723, 736 (Tex. App. - San Antonio 2007, pet.
denied) ("The constructive trust may be defined as a device used by chancery to compel one who unfairly holds a property interest to
convey that interest to another to whom it justly belongs." (quoting George Gleason Bogert & George Taylor Bogert, The law of Trust and
Trustees § 471 (rev. 2d ed. 1983))); In re Marriage of Nolder, 48 S.W.3d 432, 434 (Tex. App. - Texarkana 2001, pet. denied) ("When a party
in such a situation retains title to property and is unjustly enriched by his actions with that property, the creation of a constructive trust is an
appropriate remedy."); Restatement (Third) of Restitution and Unjust Enrichment § 55 (2010).
n399. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt e (2010) ("The answer to the question posed, therefore, is that the
constructive trust "exists' from the moment of the transaction on which restitution is based; or (if the court prefers) that the constructive
trust arises on the date of judgment, but that the state of title it describes "relates back' to the transaction between the parties. The practical
consequence is that the ownership rights of the constructive trust beneficiary, once recognized, are protected from the moment the trustee
acquires legal title.").
n400. United States v. Carter, 217 U.S. 286, 309 (1910) ("If an agent to sell effects a sale to himself, under the cover of the name of another
person, he becomes, in respect to the property, a trustee for the principal, and, at the election of the latter, seasonably made, will be
compelled to surrender it, or, if he has disposed of it to a bona fide purchaser, to account not only for its real value, but for any profit realized
by him on such resale. And this will be done upon the demand of the principal, although it may not appear that the property, at the time the
Page 353Page 353
agent fraudulently acquired it, was worth more than he paid for it."); Omohundro v. Matthews, 341 S.W.2d 401, 408-09 (Tex. 1960) ("This
trust arose not because there was any agreement for the title to be taken in the name of petitioner, and the property to be held by him in trust
for the respondents - as would be necessary to constitute an express trust - but, because under the facts, equity would raise the trust to
protect the rights of the respondents, and to prevent the unjust enrichment of petitioner by his violation of his promise and duty to the
respondents to take title in the name of the three of them, and for their mutual profit and advantage."); Pope v. Garrett, 211 S.W.2d 559, 561
(Tex. 1948) ("The legal title passed to the heirs of Carrie Simons when she died intestate, but equity deals with the holder of the legal title
for the wrong done in preventing the execution of the will and impresses a trust on the property in favor of the one who is in good
conscience entitled to it."); Eglin v. Schober, 759 S.W.2d 950, 953 (Tex. App. - Beaumont 1988, writ denied).
n401. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. e (2010); Emily L. Sherwin, Constructive Trusts in Bankruptcy,
1989 U. Ill. L. Rev. 297, 297-98 ("If the state court would impose a constructive trust on certain property in an action between the claimant
and the debtor, the bankruptcy court treats the claimant as the equitable owner of the property and allows her to recover it in bankruptcy, to
the exclusion of other creditors").
n402. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. e ("For example, income from constructive trust property is for
the account of the claimant from the date the property was acquired by the defendant, not from the date of a subsequent decree recognizing
the existence of a constructive trust.").
n403. Sw. Livestock &Trucking Co. v. Dooley, 884 S.W.2d 805, 811 (Tex. App. - San Antonio 1994, writ denied) ("The judgment is
therefore reversed and this cause remanded to the trial court for an accounting of the corporate assets of Southwest Livestock Exchange, Inc.
If the trial court deems it necessary to protect the assets of the corporation, a constructive trust may also be imposed.").
n404. Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex. 1974); Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. l
("A determination that the defendant holds particular property in constructive trust for the claimant does not necessarily resolve all questions
relating to the extent of the defendant's unjust enrichment at the expense of the claimant. The defendant may have used the claimant's
property to earn a profit.").
n405. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. l.
n406. Meadows, 516 S.W.2d at 129.
n408. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. f (2010) ("By contrast, constructive trust supplies the remedy by
which the original owner can reach the traceable product of stolen property, whether in the hands of a thief or anyone else not qualifying as a
bona fide purchaser.").
n409. Geo-Goldenrod #2 #3 & #4 Joint Venture v. Rose (In re Thueringia, LLC), No. 09-34555, 2010 Bankr. LEXIS 2820, at 6-7 (Bankr.
N.D. Tex. Aug. 25, 2010) ("A constructive should be imposed on the Defendants and the property in question in order for the Joint Venture to
receive, collect and distribute all monies received from Cypress pursuant to the Lease."); Bright v. Addison, 171 S.W.3d 588, 601 (Tex. App.
- Dallas 2005, pet. denied); Bristol v. Placid Oil Co., 74 S.W.3d 156, 158 (Tex. App. - Amarillo 2002, no pet.) ("Fourth, given the foregoing
definition of a constructive trust, Bristol effectively demanded the conveyance of both the mineral leasehold at issue and revenue produced
therefrom to himself."); see also Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. l ("If the defendant has had possession
of the constructive trust property for any length of time, the defendant may be liable for rent or another measure of use value, subject to
credits for taxes or similar expenses paid by the defendant. In these and other cases, a judicial order stating that B holds X in constructive
trust for A is easily combined with an order requiring B (as constructive trustee) to account to A, in the same manner as a trustee's
accounting under an express trust, for the purpose of determining B's net liability in restitution.").
Page 354Page 354
n410. Estate of Wallis, No. 12-07-00022-CV, 2010 Tex. App. LEXIS 3710, at 11 (Tex. App. - Tyler 2010, no pet.) (mem. op.) (citing Troxel
v. Bishop, 201 S.W.3d 290, 297 (Tex. App. - Dallas 2006, no pet.)).
n411. Talley v. Howsley, 176 S.W.2d 158, 160 (Tex. 1943); III Forks Real Estate, L.P. v. Cohen, 228 S.W.3d 810, 817 (Tex. App. - Dallas
2007, no pet.); Troxel v. Bishop, 201 S.W.3d 290, 297 (Tex. App. - Dallas 2006, no pet.); Mangione v. Jaffe, 61 S.W.3d 591, 593 (Tex. App. -
San Antonio 2001, pet. dism'd) ("Mangione's pleadings asserted a single cause of action - breach of contract. Mangione did not allege actual
or constructive fraud, which is an essential element in the creation of a constructive trust.").
n412. Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. a ("A transaction in which the defendant (i) has been unjustly
enriched (ii) by acquiring legal title to specifically identifiable property (iii) at the expense of the claimant or in violation of the claimant's
rights is one in which - by the traditional formula - the defendant's title to the property is subject to the claimant's equitable interest.").
n413. Thomason v. Collins & Aikman Floorcoverings, Inc., No. 04-02-00870-CV, 2004 Tex. App. LEXIS 2823, at 16 (Tex. App. - San
Antonio March 31, 2004, pet. denied) (mem. op.) ("Therefore, if Thomason established his claim for either unjust enrichment or quantum
meruit, he may have been entitled to a constructive trust for the difference between the prices C&A quoted to him and the prices C&A
actually charged Gomez.").
n414. Amarillo Oil Co. v. Energy-Agri Prods., Inc., 32 Tex. Sup. Ct. J. 252, 1989 Tex. LEXIS 15, at 21-22 (Tex. March 8, 1989) withdrawn
and superseded on other grounds, 794 S.W.2d 20 (Tex. 1990); Countrywide Home Loans, Inc. v. Howard, 240 S.W.3d 1, 6 (Tex. App. -
Austin 2007, pet. denied) ("Typically, in a conversion suit, the claimant alleges that the proceeds of the converted property were used to
purchase real estate and then seeks a constructive trust on that real property."); Paschal v. Great W. Drilling, Ltd., 215 S.W.3d 437, 443, 457
(Tex. App. - Eastland 2006, pet. denied).
n415. Simmons v. Wilson, 216 S.W.2d 847, 853 (Tex. Civ. App. - Waco 1949, no writ) ("Having thereafter discovered the mistake in the
designation of the leased premises and having in practical effect corrected the same so as to conform with the true intention of the parties in
so far as he and the Rawlinsons were concerned, we think appellant, in all good conscience, ought to have reinstated the equitable overriding
royalty interests held by appellees on Survey No. 43, rather than to have offered them a reinstatement thereof on Survey No. 44.").
n416. Andrew Kull, Restitution in Bankruptcy: Reclamation and Constructive Trust, 72 Am. Bankr. Inst. L. Rev. 265, 290 (1998) ("The
truth about constructive trust and bankruptcy is that only in bankruptcy does constructive trust really matter.").
n417. Fitz-Gerald v. Hull, 237 S.W.2d 256, 263 (Tex. 1951) ("Equity impresses a constructive trust on the property thus acquired in favor
of the one who is truly and equitably entitled to the same, although he may never perhaps have had any legal estate therein; and a court of
equity has jurisdiction to reach the property either in the hands of the original wrongdoer, or in the hands of any subsequent holder, until a
purchaser of it in good faith and without notice acquires a higher right, and takes the property relieved from the trust." (quoting 4 Pomeroy,
supra note 117 § 1053)); Schneider v. Sellers, 84 S.W. 417, 421 (Tex. 1905).
n418. Compare Bocanegra v. Aetna Life Ins. Co., 605 S.W.2d 848, 851 (Tex. 1980) (stating that a constructive trust is "practically without
limit"), with Heldenfels Bros., Inc. v. Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992) (stating that recovery through unjust enrichment is
allowed for fraud, duress, or the taking of an undue advantage).
n419. Bocanegra, 605 S.W.2d at 851 (Tex. 1980) (footnote and citations omitted) (quoting Beatty v. Guggenheim Exploration Co., 122 N.E.
378, 380 (N.Y. 1919)).
n420. Burrow v. Arce, 997 S.W.2d 229, 241 (Tex. 1999) ("Constructive trusts, being remedial in character, have the very broad function of
redressing wrong or unjust enrichment in keeping with basic principles of equity and justice... . Moreover, there is no unyielding formula to
which a court of equity is bound in decreeing a constructive trust, since the equity of the transaction will shape the measure of relief
granted."); Ginther v. Taub, 675 S.W.2d 724, 728 (Tex. 1984) ("Constructive trusts, being remedial in character, have the very broad
Page 355Page 355
function of redressing wrong or unjust enrichment in keeping with the basic principles of equity and justice. In Meadows we further stated
that a transaction may, depending on the circumstances, provide the basis for a constructive trust where one party to that transaction holds
funds which in equity and good conscience should be possessed by another." (citing Meadows, 516 S.W.2d at 131)); Pope v. Garrett, 211
S.W.2d 559, 560 (Tex. 1948) ("It has been said that "The specific instances in which equity impresses a constructive trust are numberless, -
as numberless as the modes by which property may be obtained through bad faith and unconscientious acts.'" (quoting 4 Pomeroy, supra note
117, § 1045)); Everett v. TK-Taito, L.L.C., 178 S.W.3d 844, 860 (Tex. App. - Fort Worth 2005, no pet.) ("The purpose of a constructive trust
is to right wrongs that cannot be addressed under other legal theories.").
n421. Bocanegra, 605 S.W.2d at 851.
n422. Compare CML V, LLC v. Bax, 28 A.3d 1037, 1044 (Del. 2011), as corrected (Sept. 6, 2011) ("Judicially-created equitable doctrines
may be extended so long as the extension is consistent with the principles of equity. To that end, courts may extend, in equity, the judicially
created equitable doctrine of corporate derivative standing to address new circumstances." (footnote omitted)), with Bocanegra, 605 S.W.2d
at 851.
n423. Burrow v. Arce, 997 S.W.2d 229, 241(Tex. 1999) (""Constructive trusts, being remedial in character, have the very broad function of
redressing wrong or unjust enrichment in keeping with basic principles of equity and justice... . Moreover, there is no unyielding formula to
which a court of equity is bound in decreeing a constructive trust, since the equity of the transaction will shape the measure of relief
granted.'" (quoting Meadows, 516 S.W.2d at 131)).
n424. See Burrow, 997 S.W.2d at 241.
n426. Some of the more significant cases to directly cite 4 Pomeroy, supra note 117, § 1053 are Fitz-Gerald v. Hull, 237 S.W.2d 256, 262-63
(Tex. 1951); Hill v. Preston, 34 S.W.2d 780, 786 (Tex. 1931); Schneider v. Sellers, 84 S.W. 417, 421 (Tex. 1905); Leach v. Conner, No. 13-
01-468-CV, 2003 Tex. App. LEXIS 10173, at 24-25 (Tex. App. - Corpus Christi Dec. 4, 2003, no pet.) (mem. op.); Wheeler v. Blacklands
Prod. Credit Ass'n, 627 S.W.2d 846, 849 (Tex. App. - Fort Worth 1982, no writ); Hill v. Stampfli, 290 S.W. 522, 524 (Tex. Comm'n App.
1927, holding approved) ("This text has often been quoted and the principle applied in this state.").
n427. 4 Pomeroy, supra note 117, § 1053.
n428. Zundell v. Gess, 10 S.W. 693, 694 (Tex. 1889) ("It may be conceded that "whenever one party has obtained money which does not
equitably belong to him and which he cannot in good conscience retain or withhold from another who is beneficially entitled to it,' a
constructive trust will arise, whether the money came to the possession of such person by accident, mistake of fact, or fraud." (quoting 2
Pomeroy, supra note 117, § 1047)).
n429. Leach v. Conner, No. 13-01-468-CV, 2003 Tex. App. LEXIS 10173, at 24-25 (Tex. App. - Corpus Christi 2003, no pet.) (mem. op.)
("The principle is applied wherever it is necessary for the obtaining of complete justice, although the law may also give the remedy of
damages against the wrong-doer." (citing Fitz-Gerald, 237 S.W.2d at 262-63 (quoting 4 Pomeroy, supra note 117, § 1053))).
n430. Binford v. Snyder, 189 S.W.2d 471, 473 (Tex. 1945); Hill, 290 S.W. at 524 ("This text has often been quoted and the principle applied
in this state. It is indeed true that the forms and varieties of these trusts are practically without limit. They are as varied as human ingenuity
can make them, each case depending upon the circumstances surrounding the acquisition of the legal title. Equity is never wanting in power
to do complete justice between the parties or even as to third parties dealing with the property where no superior rights have supervened
upon the principle of innocent purchaser." (citations omitted)).
Page 356Page 356
n431. Hill, 290 S.W. at 524.
n432. Pope v. Garrett, 211 S.W.2d 559, 562 Tex. 1948).
n433. Sullivan v. Barnett, 471 S.W.2d 39, 47 (Tex. 1971); Pope, 211 S.W.2d at 560; Warner v. Winn, 197 S.W.2d 338, 341 (Tex. 1946);
Lesikar v. Rappeport, 33 S.W.3d 282, 303 (Tex. App. - Texarkana 2000, pet. denied); Stodder v. Evans, 860 S.W.2d 651, 654 (Tex. App. -
Waco 1993, writ denied); Consolidated Bearing & Supply Co. v. First Nat'l Bank, 720 S.W.2d 647, 649 (Tex. App. - Amarillo 1986, no writ);
Batten v. Batten, 497 S.W.2d 394, 398 (Tex. Civ. App. - Houston [1st Dist.] 1972, writ ref'd n.r.e.); Consolidated Gas & Equipment Co. v.
Thompson, 397 S.W.2d 260, 262-63 (Tex. Civ. App. - Amarillo 1965) rev'd on other grounds, 405 S.W.2d 333 (Tex. 1966); Purcell v.
Snowden, 387 S.W.2d 138, 141 (Tex. Civ. App. - Eastland 1965, writ ref'd n.r.e.); Gathright v. Western Alliance Ins. Co., 324 S.W.2d 894,
897 (Tex. Civ. App. - Austin 1959); Cadmus v. Evans, 320 S.W.2d 176, 183 (Tex. Civ. App. - Dallas 1958, writ ref'd n.r.e.); Mathews v.
Mathews, 310 S.W.2d 629, 633 (Tex. Civ. App. - Houston [1st Dist.] 1958, no writ); Burgess v. Burgess, 282 S.W.2d 118, 120-21 (Tex. Civ.
App. - Waco 1955, writ ref'd n.r.e.); Dennis v. Dennis, 256 S.W.2d 964, 965 (Tex. Civ. App. - Amarillo 1952, no writ); Simmons v. Wilson,
216 S.W.2d 847, 853 (Tex. Civ. App. - Waco 1949, no writ).
n434. Binford, 189 S.W.2d at 472 (""It is a well settled general rule that if one person obtains the legal title to property, not only by fraud, or
by violation of confidence of fiduciary relations, but in any other unconscientious manner, so that he cannot equitably retain the property
which really belongs to another, equity carries out its theory of a double ownership, equitable and legal, by impressing a constructive trust
upon the property in favor of the one who is in good conscience entitled to it, and who is considered in equity as the beneficial owner.'"
(quoting 26 Ruling Case Law § 83 (William M. McKinney & Burdett A. Rich eds., 1920))).
n435. Sullivan, 471 S.W.2d at 47; Omohundro v. Matthews, 341 S.W.2d 401, 416 (Tex. 1960); Barker v. Coastal Builders, Inc., 271 S.W.2d
798, 807 (Tex. 1954); Fitz-Gerald v. Hull, 237 S.W.2d 256, 262-63 (Tex. 1951); Sevine v. Heissner, 224 S.W.2d 184, 186 (Tex. 1949); Pope,
211 S.W.2d at 560; Warner, 197 S.W.2d at 341.
n436. Fitz-Gerald, 237 S.W.2d at 262-63 is cited by Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex. 1974); Thigpen v. Locke, 363
S.W.2d 247, 253 (Tex. 1962); and Omohundro, 341 S.W.2d at 405. Pope, 211 S.W.2d at 560, 562, is cited by Heldenfels Bros., Inc. v. Corpus
Christi, 832 S.W.2d 39, 41 (Tex. 1992); Ginther v. Taub, 675 S.W.2d 724, 728 (Tex. 1984); Bounds v. Caudle, 560 S.W.2d 925, 928 (Tex.
1977); and Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex. 1974).
n437. Pope, 211 S.W.2d at 560, 562.
n438. Id. at 559.
n439. Id.
n440. Id. at 560.
n441. Id.
n442. Id. at 564.

Page 357Page 357
n443. Id. at 560-62.
n444. See id. at 561-62.
n445. See Bounds v. Caudle, 560 S.W.2d 925, 928 (Tex. 1977).
n446. Id. at 926.
n447. Id. at 928.
n448. Id. ("We therefore conclude that the imposition of a common law constructive trust in a situation such as presented here is not
inconsistent with the legislative intent behind Sec. 41(d) which requires an outright forfeiture in the case of a convicted killer." (citing Tex.
Prob. Code Ann. § 41(d) (West Supp. 1973))).
n449. Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App. - Corpus Christi 2002, pet. denied) ("We first note that while it is true that a
constructive trust is an equitable remedy, it would be overly simplistic to state that therefore a suit for a constructive trust cannot lie as a
distinct action." (citation omitted)). But see Garcia v. Garza, 311 S.W.3d 28, 40 (Tex. App. - San Antonio 2010, pet. denied); Beverly Found.
v. Lynch, 301 S.W.3d 734, 736 (Tex. App. - Amarillo 2009, no pet.) (stating that a constructive trust is actually an equitable remedy, not an
independent cause of action).
n450. Beverly Found., 301 S.W.3d at 736.
n451. Bounds, 560 S.W.2d at 928.
n452. Id.
n453. Id.
n454. Pope v. Garrett, 211 S.W.2d 559, 562 (Tex. 1948).
n455. Id. at 560.
n456. See id.
n457. Restatement (Third) of Restitution and Unjust Enrichment § 55 note b (2010) ("To call the infringer an agent or trustee [of the profits
realized through trademark infringement] is not to state a fact but merely to indicate a mode of approach and an imperfect analogy by which
the wrongdoer will be made to hand over the proceeds of his wrong. (quoting L.P. Larson, Jr., Co. v. Wm. Wrigley, Jr., Co., 277 U.S. 97, 99-
100 (1928) (Holmes, J.))).
Page 358Page 358
n458. Beverly Found v. Lynch, 301 S.W.3d 734, 736 (Tex. App. - Amarillo 2009, no pet.).
n459. Restatement (Third) of Restitution and Unjust Enrichment § 55(a), (f) ("The first step is to establish that the defendant is liable in
restitution by one of the substantive provisions of this Restatement. The underlying transaction is ordinarily one that is subject to avoidance
for fraud, mistake, or comparable grounds of invalidity, or one in which the defendant has acquired property by wrongful interference with
the claimant's legally protected interests."); 1 Dobbs, supra note 5, at 597 ("Sometimes it is still said that the constructive trust applies only
to misdealings by fiduciaries or in cases of fraud. But this is a misconception. The constructive trust is based on property, not wrongs. It
proceeds on the notion that the defendant has legal title but that the plaintiff has the superior moral or equitable claim ... . At any rate, the
constructive trust is no longer limited to misconduct cases; it redresses unjust enrichment, not wrongdoing.").
n460. Morris v. Morris, 642 S.W.2d 448, 450 (Tex. 1982); Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex. 1974); Mangione v. Jaffe,
61 S.W.3d 591, 593 (Tex. App. - San Antonio 2001, writ dism'd); Jackson v. Houston Indep. Sch. Dist., 994 S.W.2d 396, 401 (Tex. App. -
Houston [14th Dist.] 1999, no pet.) ("Second, a court will impose a constructive trust only where either actual or constructive fraud
exists."); see Exploration Co. v. Vega Oil & Gas Co., 843 S.W.2d 123, 127 (Tex. App. - Houston [14th Dist.] 1992, writ denied).
n461. See Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App. - Corpus Christi 2002, pet. denied).
n462. Barrett v. Ferrell, 550 S.W.2d 138, 143 (Tex. Civ. App. - Tyler 1977, writ ref'd n.r.e.).
n463. Mowbray, 76 S.W.3d at 681.
n464. Id.
n465. See Hill v. Stampfli, 290 S.W. 522, 524 (Tex. Comm'n App. 1927, holding approved).
n466. Wagner & Brown, Ltd. v. Sheppard, 282 S.W.3d 419, 429 (Tex. 2008) ("Further, it is well-settled that "equity abhors forfeiture [sic].'"
(quoting Jones v. N.Y. Guar. & Indem. Co., 101 U.S. 622, 628 (1879))).
n467. Burrow v. Arce, 997 S.W.2d 229, 239-45 (Tex. 1999).
n468. Id. at 245.
n469. ERI Consulting Eng'rs, Inc. v. Swinnea, 318 S.W.3d 867, 874-75 (Tex. 2010).
n470. Justice Green does, however, state that asset forfeitures should be determined by the same factors as for fee forfeitures. See id.
n471. 997 S.W.2d at 229.

Page 359Page 359
n472. Id. at 232.
n473. Id. (stating that there were 126 plaintiffs in the underlying litigation that was settled for $ 190 million and that provided $ 60 million
of contingent fees.).
n474. Id.
n475. Burrow, 997 S.W.2d at 233 (The clients' complaints against the lawyers: "In many instances the contingent fee percentage in the
contract was left blank and 33-1/3% was later inserted despite oral promises that a fee of only 25% would be charged. The attorneys settled
all the claims in the aggregate and allocated dollar figures to the plaintiffs without regard to individual conditions and damages. No plaintiff
was allowed to meet with an attorney for more than about twenty minutes, and any plaintiff who expressed reservations about the settlement
was threatened by the attorney with being afforded no recovery at all.")
n476. Id. at 233.
n477. Id. at 233-34.
n478. Id. at 236-37.
n479. Id. at 232-33, 236-37.
n480. Snepp v. United States, 444 U.S. 507, 515-16 (1980); Armstrong v. O'Brien, 19 S.W. 268, 273 (Tex. 1892); Anderson v. Griffith, 501
S.W.2d 695, 702 (Tex. Civ. App. - Fort Worth 1973, writ ref'd n.r.e) (ordering the fiduciary in breach to disgorge both his profit and his
compensation); Russell v. Truitt, 554 S.W.2d 948, 952 (Tex. Civ. App. - Fort Worth 1977, writ ref'd n.r.e.) (holding that plaintiffs were
entitled to recovery of agency fees as a matter of law if the breach of fiduciary duty was proved without regard as to whether the breach
caused any harm).
n481. Burrow, 997 S.W.2d at 233; Anderson v. Griffith, 501 S.W.2d 695, 702 (Tex. Civ. App. - Fort Worth 1973, writ ref'd n.r.e) (ordering
the fiduciary in breach to disgorge both his profit and his compensation); Burleson v. Earnest, 153 S.W.2d 869, 875 (Tex. Civ. App. -
Amarillo 1941, writ ref'd w.o.m.) (holding that the disgorgement for the fiduciary's secret profit should include the real estate commission).
n482. Kinzbach Tool Co., Inc. v. Corbett-Wallace Corp., 160 S.W.2d 509, 514 (Tex. 1942) ("It is beside the point for either Turner or
Corbett to say that Kinzbach suffered no damages because it received full value for what it has paid and agreed to pay."); Slay v. Burnett
Trust, 187 S.W.2d 377, 389 (Tex. 1945) (stating that self-dealing transactions may be attacked by the beneficiary even though he has
suffered no damages and even though the trustee has acted in good faith); Armstrong v. O'Brien, 19 S.W. 268, 274 (Tex. 1892) ("It makes no
difference that the principal was not in fact injured, or that the agent intended no wrong, or that the other party acted in good faith.").
n483. Burrow, 997 S.W.2d at 234.
n484. Id. at 239-45.

Page 360Page 360
n485. Id.
n486. See notes infra 512-18 and accompanying text for a brief discussion of some clarification of these issues in subsequent opinions.
n487. Burrow, 997 S.W.2d at 234.
n488. Id. at 242-43 ("The rule is not dependent on the nature of the attorney-client relationship, as the court of appeals thought, but applies
generally in agency relationships.").
n489. Id. at 241 (citing Restatement (Third) of the Law Governing Lawyers § 49 (Proposed Final Draft No. 1, 1996)).
n490. Id. at 242-43.
n491. Burrow, 997 S.W.2d at 245; see also Meadows v. Bierschwale, 516 S.W.2d 125, 131 (Tex. 1974).
n492. Wilz v. Flournoy, 228 S.W.3d 674, 676-77 (Tex. 2007) (finding that no personal funds were used to purchase the farm which justified
the award of a constructive trust on the farm); International Bankers Life Ins. Co. v. Holloway, 368 SW 2d 567, 571 (Tex. 1963) (Based, in
part, on special issues submitted to the jury on real estate profit and commissions that accrued to the defendants, the trial court entered
judgment in favor claimants for disgorgement and exemplary damages); Houston v. Ludwick, No. 14-09-00600-CV, 2010 WL 4132215, at 6
(Tex. App. - Houston [14th Dist.] Oct. 21, 2010, pet. denied) (mem. op.); Harper v. Harper, 8 S.W.3d 782, 783 (Tex. App. - Fort Worth 1999,
pet. denied).
n493. Russell v. Truitt, 554 S.W.2d 948, 954 (Tex. Civ. App. - Fort Worth 1977, writ ref'd n.r.e.) ("However, there is no dispute that an $
8,000.00 management fee was paid to Defendant Russell Company, the agent for the joint venturers. The jury's finding that defendants
received no monetary advantage does not render the $ 8,000.00 award improper here. Nor was any special issue necessary to support the
award because there was no dispute as to the amount of the agency fees.").
n494. See Cruz v. Andrews Restoration, Inc., 364 S.W.3d 817, 826 (Tex. 2012) (holding that claimant "was obliged to prove and obtain a
finding that he had surrendered or offered to surrender to Protech and Martinez the value of the services they provided at his house as a
prerequisite for [rescission]."); Powell v. Rockow, 92 S.W.2d 437, 439 (Tex. 1936).
n495. See supra Section III.D.
n496. ERI Consulting Eng'rs, Inc. v. Swinnea, 318 S.W.3d 867, 873 (Tex. 2010) ("For instance, courts may disgorge all ill-gotten profits
from a fiduciary when a fiduciary agent usurps an opportunity properly belonging to a principal, or competes with a principal; see, e.g.,
Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2002) (stating the rule that courts may disgorge any profit where "an agent
diverted an opportunity from the principal or engaged in competition with the principal, [and] the agent or an entity controlled by the agent
profited or benefitted in some way"). Similarly, even if a fiduciary does not obtain a benefit from a third party by violating his duty, a
fiduciary may be required to forfeit the right to compensation for the fiduciary's work. See, e.g., Burrow, 997 S.W.2d at 237 ("[A] person
who renders service to another in a relationship of trust may be denied compensation for his service if he breaches that trust."). For further
discussion see infra notes 512 to 518 and accompanying text.

Page 361Page 361
n498. Burrow v. Arce, 997 S.W.2d 229, 241 (Tex. 1999) (citing the factors from § 49 [renumbered as section 37 in the final version of the
Restatement] of the Restatement Governing Lawyers to be considered in determining forfeiture of attorney fees, including the following: (a)
The gravity and timing of the violation; (b) The willfulness of the violation; (c) The effect of the violation on the value of the lawyer's work
for the client; (d) Any other threatened or actual harm to the client; and (e) The adequacy of other remedies).
n499. Id. at 243 (""It is within the discretion of the court whether the trustee who has committed a breach of trust shall receive full
compensation or whether his compensation shall be reduced or denied. In the exercise of the court's discretion the following factors are
considered: (1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or negligent or without fault;
(3) whether the breach of trust related to the management of the whole trust or related only to a part of the trust property; (4) whether or
not the breach of trust occasioned any loss and whether if there has been a loss it has been made good by the trustee; (5) whether the
trustee's services were of value to the trust.'" (quoting Restatement (Second) of Trusts § 243 cmt. c (1959))).
n500. For an example of an opinion that reverses the traditional burden shifting on remedies, see Jones v. Whatley, No. 13-09-00355-CV,
2011 Tex. App. LEXIS 4380, at 28-29 n.7 (Tex. App. - Corpus Christi June 9, 2011, no pet.) (mem. op.) ("Independently evaluating this
conclusion of law de novo to determine its correctness, even were we to conclude that the facts support a conclusion that there was a "clear
and serious breach of duty' to Whatley, we cannot conclude that Jones is not entitled to any additional fees - that he must forfeit additional
fees. There are simply no facts in the record supporting a conclusion that partial fee forfeiture was necessary to satisfy the public's interest in
protecting the attorney client relationship." (citation omitted)).
n501. Burrow, 997 S.W.2d at 241.
n502. See supra note 498 and the discussion of factors a and c.
n503. Restatement (Third) of the Law Governing Lawyers § 37(e) (2000) ("Forfeiture does not extend to a disbursement made by the
lawyer to the extent it has conferred a benefit on the client (see § 40, Comment d).").
n504. See infra Section VI.B (discussing the lack of counter-restitution for asset forfeiture).
n505. See infra Section VI.B (discussing the lack of counter-restitution for asset forfeiture).
n506. See supra notes 117-21, 244 and accompanying text.
n507. Burrow v. Arce, 997 S.W.2d at 243-44 (Tex. 1999) ("The adequacy-of-other-remedies factor does not preclude forfeiture when a client
can be fully compensated by damages. Even though the main purpose of the remedy is not to compensate the client, if other remedies do not
afford the client full compensation for his damages, forfeiture may be considered for that purpose.").
n508. Jeffrey A. Webb & Blake W. Stribling, Ten Years After Burrow v. Arce: The Current State of Attorney Fee Forfeiture, 40 St. Mary's
L.J. 967, 1003-04 (2009) ("It seems courts have taken a view that almost relegates forfeiture to an alternative to actual damages. That is,
where actual damages are present, the likelihood of forfeiture also being granted appears to be low. Such a reality stems from the notion that
any other outcome results in a windfall to the client."). But see Rash v. J.V. Intermediate, Ltd., 498 F.3d 1201, 1213 (10th Cir. 2007)
("Finally, Rash contends that forfeiture is not an available remedy since JVIC sought actual damages and was adequately compensated.
Burrow specifically forecloses this line of reasoning.").
Page 362Page 362
n509. See Piper Aircraft Corp. v. Wag-Aero, Inc., 741 F.2d 925, 938 (7th Cir. 1984) (Posner, J.) ("A standard that asks the district judge to
consider a large number of factors ... in no particular order and with no particular weighting of each factor is nondirective; it is effectively no
standard." (citations omitted)).
n510. Crites, Inc. v. Prudential Ins. Co., 322 U.S. 408, 416-17 (1944); United States v. Carter, 217 U.S. 286, 306-07 (1909) ("It obviously is,
or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the
cestui que trust, which it was possible to obtain.").
n511. See Burrow 997 S.W.2d at 239-45.
n512. Burrow 997 S.W.2d at 241 ("But Kinzbach did not involve issues of whether forfeiture should be limited by circumstances or in
amount. The agent there intentionally breached his fiduciary duty in a single, narrow transaction, and his only compensation was a
commission. Our holding that his entire compensation was subject to forfeiture cannot fairly be said to require automatic, complete forfeiture
of all compensation for any misconduct of an agent.").
n513. Kinzbach Tool Co. v. Corbett-Wallace Corp., 160 S.W.2d 509, 514 (Tex. 1942). In Kinzbach, the Court held that the employer was
entitled to offset from the installment payment the ratable portion of the bribe. Id. ("It appears that when the first installment of $ 2,500.00
became due on this contract, Kinzbach tendered to Corbett, in payment thereof, the sum of $ 1,500.00. This was all that was due, because
Kinzbach had a right to deduct therefrom the $ 500.00 Turner had received on the $ 2,500.00 cash payment it had made and the $ 500.00
Turner was to receive out of the proceeds of such installment.")
n514. Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 200 (Tex. 2002) ("In virtually all of the cases that we have found in which an
agent diverted an opportunity from the principal or engaged in competition with the principal, the agent or an entity controlled by the agent
profited or benefitted in some way. That was the situation in Kinzbach Tool.")
n515. Id. at 203 ("However, an associate owes a fiduciary duty not to accept or agree to accept profit, gain, or any benefit from referring or
participating in the referral of a client or potential client to a lawyer or firm other than the associate's employer. With these premises in mind,
we turn to the summary judgment record.").
n519. ERI Consulting Eng'rs, Inc. v. Swinnea, 318 S.W.3d 867 (Tex. 2010).
n520. Id. at 872-73.
n521. Id. at 873 ("The situation in this case is akin in many respects to the fee forfeiture scenario between a principal and agent, which we
discussed at length in Burrow, 997 S.W.2d at 237-45.").
Page 363Page 363
n522. Id. at 870 ("We hold that when a partner in a business breached his fiduciary duty by fraudulently inducing another partner to buy out
his interest, the consideration received by the breaching party for his interest in the business is subject to forfeiture as a remedy for the
breach, in addition to other damages that result from the tortious conduct.").
n523. Id. at 873 ("The situation arises because here the contracting party, Swinnea, was a fiduciary, such that we must consider whether
under the circumstances an equitable remedy may cross the line from actual damages for breach of contract or fraud (redressing specific
harm) to further, equitable return of contractual consideration.").
n524. It is interesting to speculate on the unspoken dynamic between the Twelfth District's opinion and that of Justice Green. Both opinions
agreed on the prejudicial nature of the defendant's behavior but the Twelfth District basically awarded little to no damages because of errors
and holes in the plaintiff's case on damages. The upshot of the Supreme Court opinion will be to award the plaintiff about $ 1.5 million in
total damages. Would Justice Green's opinion have been so supportive of asset forfeiture if the alternative would have awarded substantial
damages to the plaintiff? Compare supra note 493, with 494.
n525. For a case with more prejudicial case facts but a similar outcome, see Acevedo v. Stiles, No. 04-02-0077-CV, 2003 Tex. App. LEXIS
3854, at 1 (Tex. App. - San Antonio May 7, 2003, pet. denied) ("She sought [Ricardo Acevedo's] legal services to transfer title to her home to
a healthcare worker in exchange for services. Instead [of the transfer Stiles planned, Acevedo] had [Stiles] sign a power of attorney and title
to [Stiles'] home was transferred to [Ricardo's] wife [and legal assistant, Janet Acevedo]. [Stiles] did not receive the care she needed [from
Janet] and was forced to leave her home.").
n526. ERI Consulting Eng'rs, Inc., 318 S.W.3d at 870.
n527. Id.
n528. Id. at 871.
n529. Id. ("In fact, because Swinnea believed Snodgrass would "run [ERI] into the ground,' Swinnea told Power to "be patient because we
can buy this company back 50 cents on the dollar.'").
n530. Id. at 871-72.
n531. Watson v. Ltd. Partners of WCKT, Ltd., 570 S.W.2d 179, 182 (Tex. Civ. App. - Austin, 1978, writ ref'd n.r.e.).
n532. Swinnea v. ERI Consulting Eng'rs, Inc., 236 S.W.3d 825, 841 (Tex. App. - Tyler 2007) ("We acknowledge that fees collected by a
fiduciary may be forfeited as a result of a breach of fiduciary duty. However, to the extent Appellees assert that the trial court's awards are
valid based on the equitable remedy of fee forfeiture, we disagree. Here, there is no such fee involved and therefore that line of cases is
inapposite." (citations omitted)), rev'd, 318 S.W.3d 867 (Tex. 2010).
n533. Id. at 843 ("Because Appellees presented no evidence of actual damages arising out of the buyout, the trial court erred in awarding
them $ 437,500.00 as a portion of the up front cash paid, $ 150,000.00 as one half the value of Malmeba, and $ 300,000.00 for loss of
income from their business relationship with Merico. It follows that the awards for exemplary damages, prejudgment and postjudgment
interest, and attorneys' fees cannot stand. We reverse the trial court's judgment as to these awards and render judgment that Appellees take
nothing on their claims against Appellants." (citations omitted)).
Page 364Page 364
n534. Swinnea v. ERI Consulting Eng'rs, Inc., 364 S.W.3d 421, 425 (Tex. App. - Tyler 2012, pet. filed) (On remand, the Twelfth District
reduced lost profits from $ 300,000 to $ 178,601.05, the punitives of $ 1,000,000 were affirmed and the asset forfeiture was remanded to the
trial court for consideration of the factors enumerated in the Supreme Court opinion. The asset forfeiture was valued at about $ 570,700.).
n537. S. Lumber Co. v. Kirby Lumber Corp., 181 S.W.2d 859, 863 (Tex. Civ. App. - Beaumont 1944) (""A court of equity will not make
Strange a present of the lots because Moroney had intended to defraud him.' Therefore, appellee having failed to tender appellants any
portion of the purchase price paid by them to John H. Kirby et al., regardless of what the other facts might have shown, it would not, as we
view it, be entitled to recover the title thus acquired by appellants." (quoting Homes Inv. Co. v. Strange, 195 S.W. 849, 853 (Tex. 1918))); see
also supra notes 132-44 and accompanying text.
n540. Id. at 874-75.
n541. Voltaire, Candide (Stanley Appelbaum ed., Dover Publ'ns 1991) In the French novel of 1759, a French admiral is blindfolded and
executed on the deck of his own ship, merely "Pour encourager les autres" or "to encourage the others." The term is also loosely associated
with a wave of French Army trials for cowardice or treason in 1917 that led to dozens of executions of French soldiers. See generally id.
n542. ERI Consulting Eng'rs, Inc., 318 S.W.3d at 873 ("The situation arises because here the contracting party, Swinnea, was a fiduciary,
such that we must consider whether under the circumstances an equitable remedy may cross the line from actual damages for breach of
contract or fraud (redressing specific harm) to further, equitable return of contractual consideration.").
n543. Id.
n544. Kull, supra note 162, at 18 ("Restitution does not generally impose forfeitures. Even within the context of restitution for wrongs -
where the defendants are malefactors by definition - standard remedies in restitution devote considerable effort to measuring the extent of the
defendant's enrichment at the claimant's expense.").
n545. Feltner v. Columbia Pictures Television, Inc., 523 U.S. 340, 352 (1998) ("We have recognized the "general rule' that monetary relief is
legal, and an award of statutory damages may serve purposes traditionally associated with legal relief, such as compensation and
punishment. (quoting Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 570 (1990))); Tull v. United States, 481 U.S.
412, 422 (1987) ("Remedies intended to punish culpable individuals ... were issued by courts of law, not courts of equity.").
n546. Compare ERI Consulting Eng'rs, Inc., 318 S.W.3d at 873-75, with Snepp v. United States, 444 U.S. 507, 515-16 (1980).
Page 365Page 365
n547. See Int'l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 583 (Tex. 1963).
n548. See ERI Consulting Eng'rs, Inc., 318 S.W.3d at 873-75.
n550. Tex. Penal Code Ann. § 31.03(d)(5) (West 2011).
n551. See Robin Singh Educ. Servs., Inc. v. Test Masters Educ. Servs., No. 14-09-00974-CV, 2011 Tex. App. LEXIS 1624, at4-5 (Tex. App.
- Houston [14th Dist.] March 8, 2011, no pet.) (mem. op.).
n552. Quantlab Techs. Ltd. (BVI) v. Godlevsky, 719 F. Supp. 2d 766, 778 (S.D. Tex. 2010) ("Texas law has never recognized a cause of
action for conversion of intangible property except in cases where an underlying intangible right has been merged into a document and that
document has been converted." (quoting Express One Int'l, Inc. v. Steinbeck, 53 S.W.3d 895, 901 (Tex. App. - Dallas 2001, no pet.))); Robin
Singh Educ. Servs., Inc., 2011 Tex. App. LEXIS 1624, at 4-5 ("Appellant's claim is based solely on the alleged conversion of intangible
electronic communications which appellant alleges were mistakenly sent to appellee by potential customers of appellant. However, under
Texas law, a tort action for conversion is limited to tangible property. Because the allegedly misdirected emails are intangible, they cannot
support a conversion claim. Therefore, we overrule appellant's first issue." (citation omitted)).
n553. Kremen v. Cohen, 337 F.3d 1024, 1036 (9th Cir. 2003) ("The district court thought there were methods better suited to regulate the
vagaries of domain names' and left it "to the legislature to fashion an appropriate statutory scheme. The legislature, of course, is always free
(within constitutional bounds) to refashion the system that courts come up with. But that doesn't mean we should throw up our hands and let
private relations degenerate into a free-for-all in the meantime. We apply the common law until the legislature tells us otherwise. And the
common law does not stand idle while people give away the property of others." (internal quotations omitted)).
n554. Id.
n555. Id. at 1027.

Page 367Page 367
82 U. Cin. L. Rev. 523, *
63 of 430 DOCUMENTS
Copyright (c) 2013 University of Cincinnati

University of Cincinnati Law Review
Winter, 2013
University of Cincinnati Law Review
82 U. Cin. L. Rev. 523
LENGTH: 13403 words
ESSAY: TWENTY-SEVENTH ANNUAL CORPORATE LAW SYMPOSIUM: CROWDFUNDING REGULATIONS

AND THEIR IMPLICATIONS: A CHANGING MOSAIC IN SEC REGULATION AND ENFORCEMENT:
BROKER--DEALERS AND INVESTMENT ADVISERS
NAME: Douglas M Branson
LEXISNEXIS SUMMARY:
... First, the Commission shall study "the effectiveness of existing legal or regulatory standards of care for brokers,
dealers, investment advisers . . . and persons associated . . . for providing personalized investment advice and
recommendations about securities to retail customers . . . ." ... If the retail investor has no interest in mutual funds, or in
proprietary products, or if the broker has no interest in selling them, the broker may then attempt to sell the customer a
WRAP account. ... In today's firms, in addition to stocks, brokers can sell WRAP account services, money-market
checking accounts, banking services of all types including home mortgages, mutual funds, annuities, accident and life
insurance, and so on. ... He had to juggle compliance duties with the myriad other legal matters which he and his cohort
were expected to deal, including the extensive underwriting of limited partnerships (tax shelters) sold in numerous
private placements and most of which blew up soon after sale, much like IEDs (Improvised Explosive Devices). ...
Such a required disclosure would not hurt and on the contrary, may be of some value if brokers are required to disclose
the conflicts of interests in selling proprietary products and in cross-selling, including not only the extra commissions
but the favor with superiors which will be curried and gained by doing so.
TEXT:
[*523] I. INTRODUCTION
Bernie Madoff was an investment adviser registered with the SEC pursuant to provisions of the Investment
Advisers Act of 1940. n1 He was subject to across-the-board fiduciary standards. n2 Yet Madoff embezzled $ 17 billion,
or more, from his clients. n3
R. Allen Stanford, too, was a registered investment adviser. He was subject to across-the-board fiduciary standards.
He embezzled over $ 7 billion from investors in his enterprise. n4
By contrast, broker--dealers, at least rank-and-files ones, are not subject to fiduciary duties of care and loyalty.
Without more--such as making a representation or holding oneself out--a broker is not a fiduciary when giving
personalized investment advice and making recommendations. But brokers do not commit large and glaring frauds such
as those Madoff and Stanford perpetrated, or at least they have not done so in recent times.
Brokers may be subject to several discrete commands such as those emanating from the suitability ("know thy
customer") n5 and basis ("know thy security") n6 doctrines as well as the dictates of the shingle theory (by [*524]
hanging out your shingle you impliedly promise to treat your customers honestly and fairly). n7 But the shingle theory is
as close as regulation has come, at least historically, to imposing an across-the-board, gap-filling standard such as
fiduciary duties. n8
Page 368Page 368
82 U. Cin. L. Rev. 523, *
Now comes the Wall Street Reform and Consumer Protection Act of 2010, better known as the Dodd--Frank Act,
which has now been enacted. n9 Dodd--Frank does many things and is over 700 pages long, but for purposes of this
Essay one section, Section 913, is particularly relevant. Section 913 requires the SEC to study and report on whether the
Commission should impose an across-the-board fiduciary standard on brokers similar to that applicable to investment
advisers. The Section further grants to the SEC the authority to adopt such a standard should the Commission decide to
do so. n10 The SEC staff conducted a study on this issue, rendering a 166 page report to the Commission in January
2011. n11
Predictably perhaps, the study recommended that the Commission impose such a standard. n12 More than two years
later, the SEC announced that it would promulgate the first draft of proposed rules on or about March 31, 2013 n13 but,
as this Essay nears completion, no proposed SEC rule has been forthcoming.
The purpose of this Essay is not to predict and then foretell consequences of the Commission's probable actions,
specifically whether enhanced standards will promote public and private enforcement. The purpose of this Essay also is
not to rehash all the [*525] arguments pro and con for imposition of such a standard. Very able scholars have argued
the issues, in exhaustive fashion. n14
Rather this Essay seeks to draw on my twenty years' experience as a FINRA (formerly NASD) arbitrator of
customer--broker disputes; as an expert witness in countless arbitrations; as a litigator or consultant in court cases; and
as counsel to compliance officers at several smaller and midsized financial services firms. As a legal scholar, I have also
written about the financial services industry and individual investors. n15
The upshot? Imposition of a fiduciary, or similar, standard on broker--dealers will not add much, or not nearly as
much as observers believe, for several reasons:
. Because of the way brokers are compensated, which is not likely to change;
. Because of the futility of attempting by regulation to curb the uncurbable (striving for larger pieces of
the compensation pie) in human nature;
. Because of the numerous conflicts of interest occasioned by the creation of diversified financial
services firms, and engagement by those firms in cross-selling, determined to ram the "one-stop financial
shopping" concept down consumers' throats;
. Because those conflicts will not go away simply because of the adoption of a newer, more exacting
standard;
. Because brokers frequently are fiduciaries in many more instances than have heretofore been
recognized; and
. Because of the relative powerlessness of financial firms' compliance officers and their efforts, the new
standard will receive much less attention where it counts. Such compliance officers' efforts are the front
line, the boots on the ground so-to-speak, in enforcement of any new standard, and if history is our guide
compliance officers and departments will at most give lip service to the new regime.
Ah, though, the yin and the yang. Adoption of a new standard will add some new things and fill some gaps here and
there. In the penultimate Part, this Essay also will attempt to outline several possible new additions brought about under
a new standard. But rather than preview what those items may be, this Essay begins with a brief reprise of the past.
II. BACKGROUND
A. Dodd--Frank Section 913
The Section begins simply enough, ordering the SEC to conduct a study with two aims in mind.
First, the Commission shall study "the effectiveness of existing legal or regulatory standards of care for brokers,
dealers, investment advisers . . . and persons associated . . . for providing personalized investment advice and
recommendations about securities to retail customers . . . ." n16
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Second, the Commission shall study "whether there are legal or regulatory gaps, shortcomings, or overlaps in legal
or regulatory standards in the protection of retail customers relating to the standards of care . . . ." n17
Third, the Section then becomes more complex, listing twelve considerations the SEC is to have in mind as it
conducts the study. Salient among those considerations are the following:
. "[W]hether retail customers understand that there are different standards of care applicable to brokers,
dealers, [and] investment advisers;" n18
. Whether, if they are cognizant of it, that difference is "a source of confusion for retail customers;" n19
. What are the "regulatory, examination, and enforcement resources" which the Commission, the states,
and self-regulatory securities organizations devote to "enforce the standards of care for brokers, dealers,
and investment advisers," including the frequency of examinations and the length of examinations; n20
. The potential impact on broker--dealers of imposing on them the standards and requirements applicable
to investment advisers; n21 and
. Consider "the varying level of services provided by brokers, dealers, [and] investment advisers . . . and
the varying scope of customer relationships . . . ." n22
B. The Landscape
Eleven thousand investment advisers are registered with the SEC. n23 Registered advisers manage more than $ 38
trillion on behalf of individual investors, managed funds (including hedge funds), and institutional investors. n24 More
than 275,000 individuals are registered as advisers within state or federally registered firms. n25 A further 15,000
investment advisory firms are registered with the states. n26 Formerly, advisers who managed less than $ 25 million
registered with the states only. As of July 21, 2011, Dodd--Frank raised the threshold to $ 100 million. n27 Presumably
then, the number of state-only registrations will have risen in the last few years.
Registered broker--dealers are more numerous than advisers, although the number of firms is smaller (5,100 versus
11,000). The Commission oversees those 5,100 broker--dealers who, in the aggregate, service 110 million customer
accounts. n28 There are over 600,000 registered representatives or registered principals (owners), "engaging in a variety
of business activities, which may or may not include the provision of personalized investment advice or
recommendations about securities to retail customers." n29
C. The Commentary
No need exists to rehash the learned commentary that has debated the wisdom vel non of the SEC imposing a
uniform fiduciary standard upon broker--dealers. There has been more than a modest amount of it.
[*528] One of the earliest and most learned of the commentators, Professor Don Langevoort of Georgetown
University, observes that a fiduciary mantle seems antithetical to the role expected of registered representatives, that is,
to be a sales person--albeit one whose sales pitch often is leavened by a dose of supposedly disinterested advice. n30
Professor Arthur Laby of Rutgers University School of Law urges the holding out implicit, or often explicit, in
brokerage firm advertising and the choice of titles used--"financial adviser"--as providing a policy basis for imposing a
uniform fiduciary standard. n31 This Essay, of course, argues that under precedents already existing in many states' laws,
a holding out is a legal basis for stating that a fiduciary duty already exists. n32
A third commentator, James Wrona, is a senior official at FINRA. By means of a painstaking study of FINRA's
rules and their antecedents, as well as his knowledge of the industry, Mr. Wrona points out that the existing web of rules
and institutional constrains comes very close to imposing upon most brokers a regime very similar to the one which a
uniform fiduciary standard might produce. n33
Professor Barbara Black, Charles Hartsock Professor of Law at the University of Cincinnati, was among the earliest
to write on the topic. n34 In one early piece, she chided the SEC for interpreting the "solely incidental" exception to
application of the Advisers Act as permitting brokers to charge asset based lump sum fees to customers without having
to register as investment advisers. n35 The Advisers Act contains exemptions from registration for advisers who service
fewer than ten accounts, or whose provision of advice is solely incidental to provision of some other service such as
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legal services (probating a will, offering suggestions on investment of a personal injury settlement). The SEC "made a
serious mistake in allowing broker--dealers to hold themselves out as financial advisers or financial consultants" without
registration under and application of the Act. n36
III. THE UNDERWHELMING IMPACT OF ANY NEW STANDARD
A. Brokers' Compensation
The mind's eye picture of a broker is of an individual recommending the purchase and on occasion the sale, of
common and preferred stocks, as well as fixed income instruments (bonds), and the subsequent execution of trades to
which the customer has assented. Indeed, that is what many registered representatives, what colloquially we refer to as
brokers, do. But execution of such trades usually will represent the lowest level of compensation for which the broker is
eligible.
The usual commission of a trade by a full service broker hovers around 1.5% of the trade amount. Thus on the
purchase of, say, 1000 shares of a $ 20 stock, the "ticket" will include a commission of $ 300.
How much of that sum the individual broker receives is subject to a sliding scale. If the broker is a novice, or a low-
level producer (say, less than $ 100,000 in gross commissions for the year), she may receive only 25% of the total
commission, or $ 75. Moving up the scale, if the broker is a medium level producer (say, between $ 100,000 and $
500,000 annually), she receives a larger share of the commission, 37.5% of the total commission, or $ 112.50 on the $
20,000 trade. At the top of the food chain is the high level producer, who receives half of the total commission on every
ticket she writes. In this case, she would receive $ 150. n37
On other products, though, the commissions are much greater. More importantly here, perhaps, the low-level and
middle-range producers receive a much greater share of the commission on products other than listed stocks or bonds.
In fact, novice brokers may stand shoulder-to-shoulder with the high-end producers on these products; no sliding scale
exists. For example, mutual fund sales used to sell with a 7.5% commission. With the advent and subsequent ubiquity of
no-load funds, commissions on load fund sales have been reduced, but 4 to 4.5% is still greater than 1.5% on a stock
transaction (which eventually will be doubled to 3% for a roundtrip, that is, a purchase and a later sale of a stock, but
that may be far into the future; by contrast, there are no commissions on the subsequent sale of a mutual fund share,
which will be back to the fund itself). So on a $ 20,000 mutual fund sale the upfront commission may be as high as $
800 rather than $ 300. n38 The individual broker will receive half, $ 400, regardless of whether she is a low-level or a
high-end producer.
Then there is the matter of A shares versus B shares. On A shares, the purchaser pays the commission up front, at
the time of purchase. n39 On B shares, the investor pays the commission over time, which seems preferable to a thrifty
investor, at least until he finds out that he will pay a higher commission overall, a fact not easily ascertained. n40
Traditionally, a FINRA arbitration has had one industry representative. n41 The industry representatives with whom I
have sat generally do not take issue with a broker selling mutual funds rather than stocks. They do, however, take issue,
and do so universally, when a broker has put a customer into B shares. n42
Escalating, we come to the issue of proprietary products, that is, products devised and packaged internally by the
financial services firms themselves. Limited partnership interests in mining, oil and gas, real estate, vineyards,
Christmas tree farms, airplanes, long-haul trucks, wheat farms, and so on, come to mind, as do some annuity products.
The commission on proprietary products may be as much as 7%, even as high as 10%. n43 Firms give half, or more, even
sometimes 100%, of the commission to the brokers who sell the products, regardless of their annual output. n44 The
firms can afford to do so because they rake in millions in terms of management fees, indirect overhead expenses, and
other items they charge to the entities they create. n45 So for a low or
[*531] middle level producer, which would include the majority of all registered representatives, her take will range
from $ 75-$ 112.50 on a stock sale, to $ 400 on a mutual fund transaction, to $ 700 on sale of an in-house, or
proprietary, product. It is easy to surmise on which side of the ledger the average broker will overload her time and
effort. n46
In my experience, most of the sharp dealing and misrepresentation occurs when brokers sell nonstock products,
such as mutual funds and proprietary products. Why? Because of the commission structure, and the significantly greater
amounts of compensation selling brokers are in line to receive, brokers push too hard, making unsuitable or hard sales
of products for which they often have no basis or an inadequate one. n47
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B. Curbing the Uncurbable in Human Nature

In theory, introduction of a uniform fiduciary standard will mean that, at all times, brokers will have to keep
ascendant the best interests of the customer rather than the best interests of the broker or of the firm for whom the
broker works. In the old world, "the broker can recommend a high-load mutual fund to a customer," or some other
product, "without revealing that Vanguard [a low cost, no load fund complex] has a comparable product in terms of
expected market returns that costs substantially less." n48 In the new world, at least on paper, the broker subject to an
overriding fiduciary duty may not do so. Will anything really change? Probably not. Given the way in which firms
compensate brokers, a subject over which the SEC has no direct power, adoption of a fiduciary standard for brokers will
not accomplish more than an iota of what the uninitiated believe.
[*532] C. Broker's Compensation--Round II
Euphemistically, commentators distinguish between "fee-based" broker's compensation and "transaction-based"
compensation. n49 The later type compensation is the commission or, in the over-the-counter market, the markup. In
contrast, commentators never seem to spell out what they mean by the former but, in the trade, the term used is
"WRAP" accounts, rather than "fee-based."
If the retail investor has no interest in mutual funds, or in proprietary products, or if the broker has no interest in
selling them, the broker may then attempt to sell the customer a WRAP account. Financial services firms too pressure
their "account executives" to sign up customers for WRAP accounts.
What precisely is a WRAP account? n50 Taking their inspiration from hedge fund managers, who amass huge
fortunes charging "2 and 20," that is, an annual 2% of the amount under management plus 20% of any profits made
under their management, n51 brokers urge clients to sign up for accounts charged only an annual fee based upon the size
of the account, rather than trade-by-trade commissions, as has been traditional. Typically, WRAP account agreements
provide for an annual fee equal to 1.5% of the amount under management, although many firms permit their brokers to
negotiate down from that level to 1% or 80-90 basis points. Most brokers do so, and rather quickly at that.
The reason brokers do so is that even at a reduced rate the WRAP account represents a higher compensation level
than do trade-by-trade commissions, usually a much higher level. Take for instance an investor with a $ 1 million
account. If she has a turnover rate of 25% in the account, which would be a high level of purchases and sales in an
individual account, she would pay $ 3,750, or perhaps less, in commissions. If her broker persuaded her to sign up for a
WRAP account, she would pay $ 9,000, $ 10,000, or even as much as $ 15,000 annually. n52
Brokers and the financial services industry vigorously defend the idea of WRAP accounts. For one, they say, a
WRAP removes from the [*533] broker the conflict of interest which results when she is compensated only if a
transaction ensues. n53
That is hogwash. Individuals go to a full-service rather than discount broker such as Charles Schwab or E*Trade for
a reason. The reason is that they expect a full service broker to provide them with a variety of advice and observation,
such as "That's a stupid idea," which my broker has told me on more than occasion. "You realize that by making this
trade you'll have more than 5% in railroad stocks," or "keep your powder dry because there may be better buying
opportunities in the future," or "it's okay to buy some but I would just nibble here," or "our prediction is that this stock
(or industry, or the market as a whole) will only move sideways for the next (6 months? Year?)" are examples of advice
full service brokers give to their clients. You get what you pay for and what you pay for in a full-service broker is advice
like that, not bare-bones executions. WRAP accounts seem like a bad deal, an escalation above the full commission
level, making the investor pay extra for the receipt of what he already should be receiving for standard commissions. To
an experienced investor WRAP accounts are simply beyond the pale. n54
D. Curbing the Uncurbable in Human Nature--Round II
Will the adoption of an across-the-board fiduciary standard curb brokers from hard sell of WRAP accounts, at least
to their less sophisticated customers? As my Australian and English friends would say, "Not bloody likely!" The stakes
and the temptations are simply too great. A broker who signs up a score of million dollar plus portfolios to [*534]
WRAP accounts has placed a comfortable floor, or cushion, underneath pursuance of her livelihood. Adoption of a new
standard, not enforced, will not stop that.
E. The Myriad Conflicts of Interest in the Modern Financial Firm
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Brokers used to sell stocks and bonds. In today's firms, in addition to stocks, brokers can sell WRAP account
services, money-market checking accounts, banking services of all types including home mortgages, mutual funds,
annuities, accident and life insurance, and so on. n55 Moreover, brokers have strong incentives to move customers into
areas in which the broker's compensation will be greater and residuals may ensure compensation in future years as well,
as in the sale of ? mutual fund shares or life insurance policies. n56
That said and done, many brokers, particularly experienced ones, have little or no interest in selling anything other
than their first love, stocks and bonds. Nonetheless, their superiors may attempt to force them to do so. n57 Heedless of
the myriad of conflicts involved, the financial services industry, and most of the firms within it, have been enamored of
the "one stop financial shopping" for over thirty years now. n58 CEO Brian Moynihan of Bank of America sees "cross-
selling" [*535] as the solution to the near insoluble problems brought on by Bank of America's acquisition of
Countrywide Mortgage and Merrill Lynch. n59 Sandy Weill blended brokerage, banking, insurance, and other financial
firms into Citigroup because of the opportunities for "cross-selling" such a combination represented. n60
One stop financial shopping has not made nearly the inroads with consumers which gurus of the financial world
predicted. It seems that while agreeing with the notion of a level playing field, consumers still want that field divided
into several paddocks. Consumers want investments handled through a brokerage firm; their insurance needs handled by
an insurance agent; and their commercial banking down the block from the local bank.
Nonetheless, the financial services industry continues its headlong pursuit of the cross-selling notion. Some persons
who come through a firm's front door wanting an investment in a blue chip stock or two will wind up with an annuity or
a life insurance policy. Will adoption of a fiduciary standard applicable to broker--dealers change any of that?
Somewhat but not appreciably. n61
F. The Low Priority Given Compliance in the Industry
If the SEC promulgates a new, uniform fiduciary standard, the task of implementing and enforcing it will in the first
instance fall upon compliance officers at brokerage firms. The effort therefore will be a weak one--throughout the
industry firms give only lip service to compliance. Nothing in any new or proposed rule will change this fact.
My experiences are only anecdotal but extensive. Overall, broker--dealer firms give the compliance function to a
relatively junior person. That junior person has the last office, at the end of the corridor, on the executive floor, or,
indeed, on the floor below. Senior executives do not hear from, and do not expect to hear from, the compliance officer.
The usual result is that to be heard at the top, the compliance officer "must shoot to kill." If she does that, executives and
managers in the firm will sit up and listen but one consequence may be that the compliance office [*536] loses her job
as well. n62
I was a consultant to one of my former students who was one of two in-house attorneys at a sizeable regional
broker--dealer firm in Seattle. He had to juggle compliance duties with the myriad other legal matters which he and his
cohort were expected to deal, including the extensive underwriting of limited partnerships (tax shelters) sold in
numerous private placements and most of which blew up soon after sale, much like IEDs (Improvised Explosive
Devices).
Another compliance officer at another firm assumed the compliance role first, attending law school later, where I
taught him in evening school and later became a consultant to him and his firm. His firm was another large, Los Angeles
based regional firm which since that time has become a national firm. He was the only compliance officer, for the entire
firm, which even at that time had offices on both coasts.
In arbitration cases, financial firms often have a compliance officer testify, to the effect that as a controlling person,
the firm "had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the
liability of the controlled person [the registered rep] is alleged to exist." n63 In other cases, the branch manager will
proffer the testimony. Sometimes both individuals, compliance officer and branch manager, will testify.
When the witness is a compliance officer, invariably he or she is a very junior person. Good evidence would be that
the firm had a written plan of supervision, written or at least extensively reviewed and revised at headquarters, and that
the plan was in fact implemented. But the evidence offered almost always falls far short of the mark. One reason is that
the compliance officer comes from corporate headquarters and may have never met the respondent registered rep until
the morning the arbitration commences. n64
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One of the more recent case in which I was involved was a state court proceeding in Louisiana involving an
institutional investor who had invested $ 62 million in a proprietary product of a regional financial [*537] firm. When
the product, and its manager (a rogue in the extreme), began a precipitous downward slide, the compliance officer, a
relatively junior person, drafted a bulletin for branch offices and "FAs." The bulletin asked FAs and wealth managers to
review all accounts holding the product, warning that the product no longer was suitable for discretionary or trust
accounts or any other accounts over which firm employees had management responsibilities. The CEO of the entire
organization intervened to quash release of the bulletin. He vetoed it instantaneously.
That the CEO did so is not surprising. Financial firms are about selling. Compliance and the details attendant to it
are at most a necessary evil. "[S]tories from the financial crisis frequently tell of lower end institutions--small city or
township pension funds, for example--who were easy prey for salespeople from securities firms peddling exotic debt
instruments . . . ." n65 We will never have complete knowledge but probably compliance officers did not, and could not,
stop those sales efforts. "[P]ushing excessively costly investment strategies is profitable for the industry," n66 often
extremely so. Firm mangers are not likely to permit compliance officers to intervene in any but the most egregious
cases. "The broker may spend time helping the customer with general asset allocation advice [or] basic financial
education . . . . Of course, some (perhaps a lot) of the time there is little or no added value: the broker is simply pushing
an inferior product on unsophisticated investors . . . ." n67 The CEO may not approve of that but he does not want the
compliance officer getting in the way of it.
The weak link that compliance officers and departments represent is a major factor in why any standard the SEC
adopts will have much less force and effect than one might predict. n68
G. Opacity of the Dispute Resolution Process
Traditionally the United States is a common law jurisdiction which operates by the common law method. General
principles issue forth, either mouthed by authoritative courts or contained in legislation. [*538] Through case-by-case
adjudication, courts apply those general principles to actual disputes, adumbrating subprinciples or providing a factual
and legal framework from which further broader principles may be deduced. Judges write and publish opinions,
available in law libraries or on the Internet, making those opinions, general principles, and more discrete applications
available to all.
The content of those opinions enable legal practitioners and citizens to "bargain in the shadow of the law," as a
famous law review article discussed. n69 Either alone or in conjunction with our attorney--counselors, we also shape our
conduct in the shadow of the law.
In this area, broker--dealer law, since 1987, we have had no law, or little law, in whose shadow we can bargain, or
shape conduct. The reason is the Supreme Court's reversal of its 1953 decision Wilko v. Swan. n70 Wilko held that an
agreement to arbitrate a securities law broker--customer dispute constituted an illicit waiver of the securities statutes'
protection which provisions of the Act expressly render void. n71 Twin decisions in 1987 reversed Wilko v. Swan, holding
that rather than a waiver of statutory protections an agreement to arbitrate constitutes merely a selection of the forum in
which questions will be decided. n72 Since that time, all customer agreements at brokerage firms contain an arbitration
clause. All, or most all, customer dispute go to FINRA arbitration proceedings rather than to court.
Judges write opinions. Arbitrators seldom do, in part because the pay arbitrators receive is miniscule. So aside from
an outlier or two, such as when a dispute against a bank or a small, less sophisticated broker makes it to court, the stage
has gone dark. Broker--dealer disputes disappear into the arbitration black hole. In an earlier arbitration case in
judgment of which I sat, my fellow arbitrators were incredulous when I opined that I might write an opinion.
Ordinarily, then, when the SEC, another agency, or a court enunciates a new general standard, such as a uniform
fiduciary standard, further decisions will adumbrate subprinciples, case holdings, and valuable dicta. That process will
not unfold here because arbitration has come to rule the roost and one of its salient characterizations ranges from
"opaque" to "completely dark."
Over time, though, the SEC and FINRA staffs could deduce and [*539] evolve more discrete rules from the
general principle, that is, the uniform fiduciary standard. I have very little confidence in an SEC staff which shows itself
largely unaware that most broker--dealer customer disputes go to arbitration rather than to court. Blissfully unaware, the
SEC staff seems to believe that case-by-case court adjudications have continued and in the future will flesh out what the
general standard requires in various sets of circumstances. n73 Staff members further believe, apparently, that the
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determination of a fiduciary relationship's existence is a matter of federal law. They delve not one iota into the state law
which would govern such issues. n74
A famous juridical statement concerns fiduciary status: "But to say that a man is a fiduciary only begins the
analysis; it gives direction to further inquiry." n75 SEC staff authoring the Investment Adviser/Broker Dealer Study
attribute the remark to Justice Benjamin Cardozo. n76 The difficulty is that, as every lawyer should know, Justice Felix
Frankfurter penned the statement when Justice Cardozo had been dead for five years. n77 Though trivial, such gaffes do
not inspire confidence in the SEC staff's ability to take the laboring oar on the adumbration of subprinciples and rules
for broker--dealers.
IV. Brokers Already May Be and Frequently Are Fiduciaries
A. Introduction
Thus the adoption of a fiduciary standard will not add much to the equation. Any new standard may add even less
when one considers that many more broker--dealers have taken on the mantle of fiduciary, either voluntarily or
inadvertently, or so it may be argued, than commentators previously have recognized. This may be discerned in part by
a simple review of the labels brokers and firm place upon the position. In the '50s and '60s many brokers called
themselves "customers' men" (there were few women brokers then). n78 In the '70s and '80s, brokers called [*540]
themselves "account executives." n79 Today the vogue is, officially and unofficially, to call firm representatives who deal
with the public "financial advisers," or "FAs" for short. n80 The choice of label is, (1) ubiquitous within the industry; (2)
not inadvertent; and, (3) highly conducive to finding that today many brokers already are fiduciaries, at least in the eyes
of the law. n81
One aside: the SEC staff's study of this issue is woefully insufficient. Absent a statute preempting state law, the
creation of a fiduciary relationship is a subject for state, and not federal, law. That said and done, many federal
decisions, including most of the later opinions, blithely gloss over this issue, citing and analyzing federal cases only. n82
The better decisions, however, recognize and analyze the creation of a fiduciary relations vel non to be an issue of state
law. n83 Yet in discussing this subject, the SEC's Study on Investment Advisers and Broker--Dealers neither cites nor
inquiries into state law, at all. n84
B. Holding Out by Broker--Dealers Make Them Fiduciaries
Professor Arthur Laby makes a case that reasonable expectations created both by brokerage firm advertising and by
brokers' own actions should justify a fiduciary obligation for broker--dealers. n85 A strong argument can be made that
such activities already do result in duties of the utmost care, loyalty, and good faith.
First, the "should" part, which borrows heavily from Professor Laby's treatment. Merrill Lynch was among the first
of the brokerage firms to [*541] advertise, beginning in the 1940s. n86 The New York Stock Exchange (NYSE)
encouraged ersatz investors with its "Own Your Share of American Business" from 1954 to 1968. n87 The NYSE
encouraged investors to sign up with a broker for the Monthly Investment Plan (MIP), emphasizing "shirt sleeve
capitalism." n88 One financial services firm advertised "service to every investor, including the little guy"; another
promised "investment insight" tailored to "the individual needs" of the client. n89
The advertisements the industry published were replete with come-ons and holdings-out. One firm promised
"[t]otal [f]inancial [p]lanning [which] requires a careful assessment of your entire financial situation." n90 "Talk to your
financial consultant for straight answers" exhorted another. n91 A third had the mantra in its advertising that "If you want
to know What's Going On On Wall Street, Ask Shearson Hammill." n92
One argument for imposition of a fiduciary duty comes from agency law. If a third party reasonably believes an
agent (the financial advisor) has authority to act, and that belief is traceable to the manifestations of the principal (the
financial services firm), the agent will be deemed to have apparent authority. n93 The numerous television and print
advertisements of modem financial services firms create in would-be investors and clients the reasonable apprehension
that the registered representative is a fiduciary and acts at all times in the best interests of the client, and many times has
confidential or inside information.
The representations which individual brokers make mirror what the firms' advertisements state. Just use of the title
"financial adviser" constitutes a holding out which should provide strong evidence that reliance is hoped for, and that a
fiduciary relationship has come into being.
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The use of advertising and of labels and titles "laden with the language of advice" providers surely supports
imposition of a fiduciary duty. However, the advertisements and labels support the contention that a fiduciary
relationship already exists in a great many cases.
[*542] Courts are quite firm in stating that creation of a franchisor-franchisee relationship does not result in the
franchisor becoming a fiduciary. n94 Courts state unequivocally that, without more, a franchisee is an independent
contractor only, to whom no overriding duties of care, loyalty, and good faith are owed. n95
Typically, the "more" is a holding out by the franchisor that it will assume responsibility for the overall financial
and business health of the franchisee. "[Franchisor] Sabaro's representatives convinced their franchisees there was
nothing to worry about, Sabaro would handle all." n96 A fiduciary relationship exists if there exists "an understanding,
held by both parties to the subject agreement, that a special trust and confidence has been reposed . . . ." n97 In the words
of a federal district judge, "[a] fiduciary relationship permits an individual to relax his or her guard and trust another to
care for their interests." n98 "Superior knowledge and assumption of the role of advisor and friendship are two factors
that may contribute to establishment of a fiduciary relationship." n99
Scenarios that fit those facts like a glove unfold in every brokerage firm and office in the country every business
day. Most broker--dealers are fiduciaries already, as much as they may deny it.
C. Entrustment
A broker--dealer may become a fiduciary by a holding out. Frequently, the holding out on the broker's side of the
table induces a placement of trust and confidence by the customer seated on the opposite side of the table. The two, a
holding out and an entrustment, frequently go hand-in-hand. Nonetheless, courts in some states [*543] emphasize the
latter.
In Butcher v. Newberger, n100 the investor received 100 shares of a utility stock in 1930. He never closely inspected
it. Two years later the investor discovered that the certificate was for common shares rather than for the preferred shares
which he had ordered and paid for, and which had twice the value of the common. The court upheld rejection of any
notion that the plaintiff was barred by laches or by contributory negligence. Finding brokers' relation to their customers
to be "in the nature of trust," the Supreme Court of Pennsylvania expounded on application of that principle:
Where, as here, the parties dealt on a basis of trust and confidence, the rule is to hold the party making a
representation bound by it. . . . [I]t is said that, if fiduciary relations obtain, nothing short of actual
knowledge will prevent recovery of misrepresentations. n101
Illinois appears to be another entrustment state. In Fischer v. Slayton & Co., n102 a broker dealer had sold the
plaintiff out of common stock, putting the funds in an in-house managed product which, inter alia, charged whopping
9% commissions. Referring to the broker as a "trustee," the appellate judge generalized: "[A] fiduciary relation is not
limited to cases of trustee and cestui que trust, guardian and ward, attorney and client, or other recognized legal
relations, but it exists in all cases where confidence is reposed on one side and a resulting superiority and influence on
the other side arises . . . ." n103
D. Fiduciary in All Customer Dealings
A surprising number of states fall into this category. Seemingly, Ohio falls into this group. Silverberg v. Thompson
McKinnon Securities Inc. n104 involves the all-too-frequent fact pattern in which a registered representative switches an
investor from stocks and bonds into options trading. The court makes a flat and unequivocal statement on the status of
broker--dealers in Ohio:
A broker--deal is a fiduciary who owes his customer a high degree of care in transacting his business. A
fiduciary must disclose all material information which he learns concerning the subject matter of the
fiduciary relationship. Good intent is not a defense to a breach of this [*544] duty. n105
Other Ohio cases contain similar flat, unequivocal statements. "A broker and client are in a fiduciary relationship
and, therefore, the broker owes the client a duty to disclose material information concerning investments." n106 Another
Ohio appellate court concluded: "[T]here is general agreement that a broker or financial advisor is in a fiduciary
relationship with his clients." n107
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Florida seems to be in this camp as well. A bank kept confidential adverse information the bank possessed about the
Atlantic Peru Equity Fund into which it had put the plaintiff investor. The investor lost $ 300,000 when the negative
information came to light. "In general, a stockbroker must deal with its clients in good faith and owes them a fiduciary
duty of loyalty and care," the court flatly concluded. n108
E. Fiduciary Duty in All Customer Dealings--California
Since at least 1962, California courts have held broker--dealers across-the-board fiduciaries, similar to the
nationwide rule for which many contend. The leading case is Twomey v. Mitchun, Jones & Templeton. n109 There the
financial adviser told a widow to sell everything, give him the proceeds, and let him invest the funds. The stockbroker
telephoned her daily. The firm duly sent to her confirmation slips, which she professed not completely to understand.
She lost a great deal of money and sued for breach of fiduciary duty.
The defendant argued that across the board fiduciary duty obtained only in the case of discretionary accounts,
which plaintiffs was not. The court rejected any such notion. The court then began as though it intended to put
California in the entrustment camp, as outlined above:
Confidential and fiduciary relations are, in law, synonymous, and may be said to exist whenever trust
and confidence is reposed by one person in the integrity of another. . . . An agent is a fiduciary. His [or
her] obligation of diligent and faithful service is the same as that imposed upon a trustee. n110
[*545] Switching horses in midstream so to speak, though, the California court transitioned from an entrustment
approach to announcement of a unequivocal and universal principle:
The relationship between broker and principal is fiduciary in nature and imposes on the broker the duty
of acting in the highest good faith toward the principal. . . . The duties of the broker, being fiduciary in
character, must be exercised with the utmost good faith and integrity. n111
The cases are not plentiful because since 1987 most broker--customer disputes, in California as well as elsewhere,
have gone to arbitration rather than to court. Nonetheless, the few judicial opinions which see the light of day invariably
follow the Twomey analysis, denominating the principle as "well-settled." n112
F. The Antipode--No Fiduciary Duty
The opposite end of the spectrum is found on the opposite coast, specifically, in New York. In their typically terse
opinions, New York appellate courts state a flat, unequivocal principle, namely that, "[a] broker does not, in the ordinary
course of business, owe a fiduciary duty to a purchaser of securities." n113
But the New York cases do not present quite as united a front as the California cases do. Saboundjian v. Bank Audi
revolved around an experienced currency trader's allegation of breach of fiduciary duty. In finding a duty and then a
n114
breach of that duty, the court seemed to accept that a broker may become a fiduciary, based upon the entrustment
principle: "The relationship between a customer and his stockbroker is that of principal and agent; the duty owed by the
stockbroker is that of a fiduciary." n115
But Saboubdjain involved a muffled execution rather than the rendition of investment advice or another more
substantive act. In the case of an execution, all courts, including those in New York, hold that a broker is an agent. As
such, she owes fiduciary duties but those duties are limited to the scope of the agency, which tends to be quite narrow.
[*546] "Once an order for the sale [or purchase] of securities is accepted, a broker has a duty to execute it in
accordance with the instructions given and is liable for the resultant loss if it fails to do so." n116 All courts agree with
this limited application of fiduciary status to a broker. Some specifically adumbrate the nature of the duties fiduciary
status brings with it in the execution of customers' orders. n117
The New York cases negative statement may not only be flimsy, as some New York courts toy with notions of
entrustment and holding out, but illusory nearly across the board. Gilman v. Merrill Lynch, Pierce, Fenner & Smith, Inc.
n118
was filed as a purported class action seeking damages, or use of money foregone, occasioned by Merrill's practice of
paying East Coast customers with checks drawn on a West Coast bank, and vice versa. Merrill thus enjoyed an extra day
or two of interest on the "float," the period when the check was in transit back across the country. The court held that,
indeed, a broker could become a fiduciary when it possessed customer's funds or other property. "[T]he relationship
between a stockbroker and his customer is one of principal and agent. The broker, once he has received his customer's
funds, is a fiduciary with respect to those fund[s] . . . ." n119
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The New York court, though, saw the potential hole opening up in the traditional New York analysis. The court
stuck its finger in the dike, limiting its holding to the handling of customer funds: "The obligation which a stockbroker
owes to its customer with regard to advice and counsel in respect to investments is here immaterial. What is material is
the broker's possession of the funds belonging to the customer." n120
G. Does Any of It Matter?--Implication of Fiduciary-like Contract Terms Under the Implied Covenant of Good Faith
and Fair Dealing
Under the Alternative Entities Acts in Delaware, in organic documents, planners may limit, or eliminate altogether,
fiduciary duties, provided that the entity is not a corporation. Thus, planners and promoters can and do limit fiduciary
principles and their application in limited liability companies (LLCs), limited partnerships (LPs), limited liability
partnerships (LLPs), and so on. What some of those planners did not contemplate, though, is that plaintiffs would
contend for the [*547] same sorts of duties and responsibilities on managers' parts. They would do using the implied
covenant of good faith and fair dealing which exists in Delaware as well as a number of other jurisdictions. n121
V. RESULTS A NEW STANDARD MIGHT PRODUCE
A. Beyond Suitability
A broker need only recommend stocks suitable for the customer, given her age, financial resources, and investment
objectives. As has been observed, faced with a choice between a no-load and a loaded fund, roughly equivalent to one
another in all other material respects, a broker does not violate prevailing suitability standards by recommending the
fund which brings him the greater commissions. n122
By contrast, a fiduciary, including a broker who is a fiduciary, must at all times serve the best interests of the
customer. He cannot favor his own interests or those of family, friends, business associates, or other businesses in which
he may have an interest, over those of the customer. By choosing the fund with higher commissions, and thus feathering
his own nest at the customer's expense, the broker will have violated his duty.
Adoption of a uniform fiduciary standard will fill in some gaps and raise the standard of conduct expected of
brokers, but not by as much as might be hoped. A majority of the cases claimants bring against brokers already posit the
existence of a fiduciary relationship and further allege violations of the fiduciary duties flowing from that connection.
n123
B. Reverse Suitability
Most, if not all, invocations of the suitability mantra involve broker recommendations, urgings, and the like of
riskier or more speculative stocks and other products. Thus, a broker urges a client to sell Dow Jones Industrial Average
stocks to generate cash which the broker urges should then be used for options trading or, worse yet, trading in naked
options. n124 Another example might be the broker who advises and [*548] facilitates a sale of bank and utility shares in
favor of investment in biotech stocks.
Beginning in the '70s, and accelerating in this era of cross-selling and "one stop financial shopping," brokers have
also available to them a variety of more conservative products into which they can put their customers. Moreover,
brokers may well be tempted to do so because the commissions on those products, such as life insurance, annuities or
real estate limited partnerships, will be significantly greater, say, 6 or 7% versus a 1.5% or so.
Most arbitrators with whom I have sat do not see the issue as one of suitability, having a mindset that suitability
involves more risk, not less. They might more clearly see the issue, and the inappropriateness of the conduct, if the
broker's duty were not only to make recommendations which are suitable but also in the client's best interests.
The reverse suitability issue, though, is a tiny one, on the margin at best. The reason is that even though they may
do so, and the commissions are much greater, most brokers I know or have met have little or no interest in hawking
more conservative products as, for example, in selling life insurance. Their first love, and their last love, tends to be
markets, stocks, bonds, mutual funds, exchange-traded-funds, and options.
Nonetheless, it would do no harm to have the shotgun well-oiled and loaded but behind the door, so to speak, which
adoption of a uniform fiduciary standard would represent.
C. Comprehensive Introductory Disclosure Requirement
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At the commencement of an adviser--client relationship, the adviser must deliver to the customer an upfront
generalized disclosure document or pamphlet known in the trade as Form ADV. In its Investment Adviser/Broker Dealer
Study, the SEC staff recommended that, as part of its adoption of a uniform fiduciary standard, the SEC "should
facilitate the provision of uniform, simple and clear disclosures to retail customers about the terms of their relationships
with broker--dealers and investment advisers, including any material conflicts of interest." n125 The proponents made
specific reference to investment adviser requirements: "the disclosures . . . should be provided (a) in a general
relationship guide akin to the new Form ADV Part 2A that advisers deliver at the [*549] time of entry into the retail
customer relationship . . . ." n126
Such a required disclosure would not hurt and on the contrary, may be of some value if brokers are required to
disclose the conflicts of interests in selling proprietary products and in cross-selling, including not only the extra
commissions but the favor with superiors which will be curried and gained by doing so. Over time, of course, many
such disclosures will degenerate into meaningless boilerplate, at least if SEC staffers fail adequately to police the
waterfront.
VI. CONCLUSION
Too much water has flowed over the damn for it to become a reality now but the SEC may have been better served
by adopting a series of discrete, specific, and visible rules, such as a reverse suitability rule, than by adopting an across-
the-board uniform standard. n127 That is particularly true as the adoption of an opaque fiduciary duty standard will not be
followed by a flow of cases and opinions as to what the standard calls for in various sets of circumstances. Instead,
application of the uniform standard will take place after most disputes have submerged into the arbitration vortex. We
may never obtain a good feel for what the standard requires or what changes its adoption has bought about.
Much of the effect of a new standard's adoption also will, as prophylactic, be blunted or neutered altogether by the
weakness in financial services firms' compliance departments. A tension exists between two inconsistent aims: investor
protection, on the one hand, and designing products, selling products, and making money, on the other, which exists at
every firm. Until the SEC and FINRA figure out how to raise the stature and therefore effectiveness of brokerage firms'
compliance departments and personnel, a large gap will persist between the elevated standard on paper and its effect in
reality. Conflicts of interest, abandonment of notions of loyalty, and conduct wholly in brokers' and firms' rather than
customers' interests is, in my opinion, the prime mover behind the most egregious cases and practices in the financial
services area, as it probably always has been. The emphasis on cross-selling, on selling proprietary products, and the
provision of significantly higher, alluring commissions, ratchet up the stakes.
Adopted in 1933, the Glass--Steagall Act required the separation of investment and retail banking. n128 Banks could
not sell securities [*550] products and financial firms could not offer banking services. In 1999, the Clinton
administration caused the repeal of the Glass--Steagall Act, green lighting an unprecedented wave of proprietary
investment, selling of proprietary products, and cross-selling. n129 The excessive waves of leverage taken on by large
financial firms, motivated by the greed of their executives, caused three of out the five largest financial firms to fail and
ruined millions of individual investors, causing a near death experience for many of us. n130 So my one alternative to
adoption of a uniform fiduciary standard would be to re-enact the Glass--Steagall Act or, indeed, a beefed-up version of
it. But that is not going to happen. n131 Seeing themselves as "Masters of the Universe," financial firms' executives and
lobbyists even are opposing a watered down version of Glass--Steagall, limiting proprietary investment to no more than
3% of Tier One (low risk) capital. The financial firms are opposing this "Volcker Rule" every step of the way and, in my
judgment, ultimately will prevail in watering it down, or eliminating it altogether. It may take ten years, or even fifteen,
but ultimately they will succeed.
So I will return to my original point, made in the introduction: there exist a number of reasons why the SEC's
adoption of a uniform fiduciary standard, applicable to broker--dealers as well as to investment advisers, will not deliver
very much. Expect some incremental improvements from rules the SEC promulgates but don't expect too much. It may
turn out to be little more than a nonevent, "Much Ado About Nothing."
FOOTNOTES:
n1 Section 202(a)(11) of the Investment Advisers Act defines investment adviser to include "any person who, for compensation, engages in
the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities or
Page 379Page 379
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who . . . issues or promulgates analyses or reports concerning securities . . . ." 15 U.S.C. § 80b-2(a)(11) (2012). Thus both private wealth
managers and publishers of market letters such as Value Line are included. Brokers are not if their advisory services are "solely incidental" to
their securities business and they receive "no special compensation" for rendition of the advice. Id. § 80b-2(a)(11)(C).
n2 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963).
n3 See Leslie Wayne, Madoff Case Puts Harsh Light on Investment Advisers, N.Y. TIMES, Apr. 4, 2009, at B4. Early reports were that
Madoff's scheme had made $ 50 billion disappear. See Diana B. Henriques, Madoff Scheme Kept Rippling Outward, Crossing Borders, N.Y.
TIMES, Dec. 20, 2008, at A1; Frank Rich, Eight Years of Madoffs, N.Y. TIMES, Jan. 11, 2009, at WK10.
n4 Compare Daniel Gilbert & Jean Eaglesham, Stanford Hit with 110 Years, WALL ST. J., June 15, 2012, at Cl ($ 7 billion), with Steve
Stecklow, Hard Sell Drove Stanford's Rise and Fall, WALL ST. J., Apr. 3, 2009, at A1 ($ 8 billion).
n5 FINRA Rule 2111(a) provides in part that a broker--dealer "must have a reasonable basis to believe that a recommended transaction or
investment strategy . . . is suitable for the customer, based upon the information obtained through the reasonable diligence of the [broker-
dealer] to ascertain the customer's investment profile." FINRA R. 2111(a), available at
http://finra.complinet.com/en/display/display_main.html?rbid=2403&record_id=13390.
n6 See, e.g., Hanly v. SEC, 415 F.2d 589 (2d Cir. 1969). See generally JAMES COX, ROBERT HILLMAN & DONALD LANGEVOORT,
SECURITIES REGULATION 1035-40 (5th ed. 2006).
n7 See, e.g., Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 (1944). See generally COX, supra note
6, at 1032-35. FINRA's rules contain a "broad, generalized ethical provision" similar to the common law shingle theory. James S. Wrona,
The Best of Both Worlds: A Fact-Based Analysis of the Legal Obligations of Investment Advisers and Broker-Dealers and a Framework for
Enhanced Investor Protection, 68 BUS. LAW. 1, 32 (2012). FINRA Rule 2010 states that a broker--dealer "in the conduct of its business,
shall observe high standards of commercial honor and just and equitable principles of trade." FINRA R. 2010, available at
http://finra.complinet.com/en/display/display.html?rbid=2403&element_id=5504.
n8 See notes and accompanying text infra.
n9 Dodd--Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376-2223 (codified as amended in
scattered sections of 12, 15 U.S.C.) [hereinafter Dodd--Frank].
n10 Id. § 913(g).

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n11 U.S. SECURITIES AND EXCHANGE COMMISSION, STUDY ON INVESTMENT ADVISERS AND BROKER-DEALERS (2011)
[hereinafter IA/BD STUDY], available at http://www.sec.gov/news/studies/2011/913studyfinal.pdf.
n12 "[R]etail customers should be protected uniformly when receiving personalized investment advice or recommendations about
securities . . . . Therefore, this Study recommends that the Commission exercise its rulemaking authority to adopt and implement . . . the
uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about
securities to retail customers." Id. at 165.
n13 See Stephen Joyce & Yin Wilczek, SEC to Issue Unified Fiduciary Standard Guidance in Q1, SIFMA's Bentsen Says, SEC. L. DAILY,
Jan. 18, 2013. As of the date this is being submitted to the University of Cincinnati Law Review, the SEC has not promulgated proposed
rules.
n14 Two excellent pieces are Arthur B. Laby, Selling Advice and Creating Expectations: Why Brokers Should be Fiduciaries, 87 WASH. L.
REV. 707 (2012) [hereinafter Laby, Selling Advice], and Wrona, supra note 7(reviewing current standards and leaning against imposition of
new requirements). See also Arthur B. Laby, Fiduciary Obligations of Broker-Dealers and Investment Advisers, 55 VILL. L. REV. 701
(2010).
n15 See, e.g., Douglas M. Branson, Securities Regulation After Entering the Competitive Era: The Securities Industry, SEC Policy and the
Individual Investor, 75 NW. U. L. REV. 857 (1980).
n16 Dodd--Frank, supra note 9, § 913(b)(1).
n17 Id. § 913(b)(2).
n18 Id. § 913(c)(3).
n19 Id. § 913(c)(4).
n20 Id. § 913(c)(5)(B)-(C).
n21 Id. § 913(c)(9).

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n22 Id. § 913(c)(11).
n23 IA/BD STUDY, supra note 11, at 6.
n24 Id.
n25 Id.
n26 Id.
n27 Dodd--Frank, supra note 9, § 410.
n29 Id.
n30 See Donald Langevoort, Brokers as Fiduciaries, 71 U. PITT. L. REV. 439, 440 (2010) ("Brokers have always offered advice, but
usually in the context of selling products and services, and selling is not a fiduciary occupation.").
n31 Laby, Selling Advice, supra note 14, at 753-68.
n33 Wrona, supra note 7, at 17-36.

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n34 Barbara Black, Brokers and Advisers--What's in a Name?, 11 FORDHAM J. CORP. & FIN. L. 31 (2005).
n35 These are so-called WRAP, or "all-in" accounts, discussed in notes and accompanying text infra.
n36 Black, supra note 34, at 54 (footnote omitted) (internal quotation marks omitted). See also Barbara Black & Jill I. Gross, Economic
Suicide: The Collision of Ethics and Risk in Securities Law, 64 U. PITT. L. REV. 483 (2003).
n37 Brokerage firms regard their compensation arrangements to be proprietary information. The examples used in the text are not based
upon any single firm's compensation schedule. Rather they are based upon the author's extensive experience working with and in the
broker--dealer field.
n38 One frequently cited source uses 5% as a benchmark for load funds with a distribution between 4% and 8%. See No-Load Fund,
INVESTOPEDIA.COM, http://www.investopedia.eom/terms/n/no-loadfund.asp (last visited Dec. 31, 2013).
n39 "Class A shares typically charge a front-end sales charge . . . . Class A shares may impose an asset-based sales charge (often 0.25 per
year), but it generally is lower than the charge imposed by other classes (often 1 percent per year for B and C shares)." FINRA,
Understanding Mutual Fund Classes (Oct. 6, 2008), http://www.finra.org/investors/protectyourself/investoralerts/mutualfunds/p006022.
n40 "Class B shares . . . normally impose a contingent deferred sales charge (CDSC), which you would pay if you sell your shares within a
certain period, often six years," in addition to a charge on the original sale but paid over time. Id.
n41 Effective February 1, 2011, claimants with a dispute involving more than $ 100,000 may elect an "all public arbitration panel . . . ."
FINRA, Regulatory Notice 11-05 (Feb. 1, 2011), http://www.fmra.org/Industry/Regulation/Notices/2011/P122880. Formerly, at least one of
the three arbitrators comprising an arbitration panel had to be an industry representative. Id.
n42 Another wrinkle is "shelf space," which may involve greater commissions for brokers who sell shares of a certain select group of
mutual funds which have, in effect, paid "payola" for a financial services firm to push their funds, or to sell their funds alone. See, e.g.,
Edward D. Jones & Co., Securities Act Release No. 8520, Exchange Act Release No. 50,910, 84 SEC Docket 1798, 2004 WL 3177119 (Dec.
22, 2004) (joint NASD, SED, and NYSE proceeding).
n43 See, e.g., KURT ElCHENWALD, SERPENT ON THE ROCK 250 (2005) (8% commission at Prudential Bache). See also id. at 21 (8%
for limited partnership participations versus 1% on sale of stock).
n44 See id. at 144, 183 (sales commission plus one half of cash receipts to Prudential Bache if sales of product exceeded $ 25,000).
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n45 See id. at 152 (in investment partnerships more than 20% of investors' dollars went to fees for Prudential and its affiliates); id. at 247-48
(as general manager of partnerships, brokerage received "fat fees" and "huge fees"); id. at 285-86 (Prudential Bache received 30% of
investors' funds up-front in Energy Growth Fund). As a rule, the sponsoring broker--dealer served as general partner of the limited
partnership, receiving generous fees in that capacity. See, e.g., id. at 145 (shared general partner duties with actual promoter); id. at 296
(service as general partner). They rewarded themselves with other fees as well, often paid through affiliates. See id. at 117 (monitoring fee);
id. at 248 (allowances for organization and offering expenses, or O&O fees); id. at 249 (acquisition fee on acquisition of the assets).
n46 Somewhat oddly, I find that the old warhorses, and the high-end producers, have little or no interest in selling fund shares or proprietary
products. Their interest is in their first love, which brought them into the business in the first place: the analysis and sale of stocks and bonds.
Perhaps it is that at that stage of their careers experienced brokers are writing much larger tickets for higher net worth individuals and
institutions. They make more money doing that than they could selling proprietary products or loaded funds, products in which their clients
are likely to have very little interest.
n47 Nonetheless, in spite of all of that, Dodd-Frank "provides that offering only proprietary products by a broker-dealer shall not, in and of
itself, violate the uniform fiduciary standard" (if one is adopted). IA/BD STUDY, supra note 11, at 113. In all probability, knowing that some
of the most egregious abuses occur on the sale of proprietary products, the brokerage industry sought inclusion of a very targeted provision
in the legislation.
n48 Langevoort, supra note 30, at 445.
n49 See, e.g., Black, supra note 34, at 31-32.
n50 The SEC study refers to this as an "all-in fee." IA/BD STUDY, supra note 11, at 152.
n51 See, e.g., Thomas J. Brennan & Karl S. Okamoto, Measuring the Tax Subsidy in Private Equity and Hedge Fund Compensation, 60
HASTINGS L.J. 27 (2008) (2 and 20 compensation for hedge fund managers reviewed).
n52 Typical WRAP fees are 1.5% on equity holdings and .35% on bond holdings, according to one source. Asher Hawkins, WRAP Account
Ripoff, FORBES.COM (Mar. 25, 2010, 1:40 PM), http://www.forbes.com/forbes/20I0/0412/investing-brokerage-commission-retirement-
finra-ripping-you-off.html. According to another source, WRAP fees may be even higher. See JOHN C. BOGLE & DAVID SWENSEN,
COMMON SENSE ON MUTUAL FUNDS 54 (10th Anniversary ed. 2010) (as high as 3% annually).
n53 "In many cases the best advice [a broker] can give ... is to 'do nothing.'" Report of the Committee on Compensation Practices, [1995
Transfer Binder] Fed. Sec. L. Rep. (CCH) P 85, 614, at 86,508 (Apr. 10, 1995). "Accordingly, fee-based accounts better align the customers'
and the brokers' interests, because brokers are not financially motivated to give advice to generate a sales commission." Black, supra note
34, at 32 (footnote omitted).
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n54 The brokerage industry won this one, at least from a regulatory viewpoint. Under the long prevailing interpretation of the Investment
Advisers Act (IAA), a broker was excluded from the IAA's definition of investment adviser only if both (1) his performance of advisory
services was "solely incidental" to the conduct of his business as a broker--dealer; and (2) he received "no special compensation" for his
services. 15 U.S.C. § 80b-2(a)(11)(C) (2012). In 1999, when brokerage firms had begun in large measure to sell WRAP accounts, a rule
change was necessary so that brokers receiving WRAP fees did not become investment advisers because of the receipt of special
compensation. So, after intense lobbying by the financial services industry, in 2005 the SEC changed the rule to accommodate the marketing
of fee-based accounts. It adopted rule 202(a)(11)-1, eliminating the no special compensation aspect of the definition. 17 C.F.R. § 275.202(a)
(11)-1 (reserved by Rules Implementing Amendments to the Investment Advisers Act of 1940, 76 Fed. Reg. 42,950 (July 19, 2011)). See
also Certain Broker-Dealers Deemed Not to Be Investment Advisers, Investment Advisers Act Release No. 2376, 70 Fed. Reg. 20,424 (Apr.
19, 2005). Professor Barbara Black has termed this change a "mistake" and a "serious mistake." Black, supra note 34, at 54, 56.
n55 See, e.g., IA/BD STUDY, supra note 11, at 94 n.447 ("Years ago, I was pretty sure who I was dealing with . . . . Today, it's a totally
different story. All kinds of products such as securities, insurance, fee based products, bank accounts, loans, health insurance,
auto/homeowners insurance, etc. are sold by people calling themselves: financial advisers; financial consultants; investment advisers;
investment consultants; financial planners; asset managers; financial services advisors; [and] registered representatives . . . . It has come to
the point that I really don't know who I'm dealing with . . . ." (quoting Letter from Bert Oshiro (Aug. 29, 2010))). It is highly unlikely that
imposition of a fiduciary standard will lessen the confusion.
n56 Life insurance agents typically receive commissions of 6% per year of the premium paid on whole-life life insurance and 4% per year
on term life insurance, plus a bonus for initiating a new policy. Bobbie Sage, How Much Money Does My Agent Make from My Life
Insurance Purchases?, ABOUT.COM, http://www.personalinsurance.about.com/od/life/f/lifefac3.htm (last visited Dec. 31, 2013). Increasing
the attraction for the selling agent, insurance premia typically are front-end loaded, with the selling agent receiving up to 70%, or even 85%,
of the premia the insured pays in the first year, with correspondingly disproportionately smaller commissions on the policy's back end, which
usually ends with the policy's tenth year. Thereafter the selling agent continues to receive a fee but only a small one, known as a "persistency
fee." See Jay MacDonald, How Much Does a Life Insurance Agent Make?, BANKRATE.COM (Aug. 15, 2011),
http://www.bankrate.com/finance/insurance/life-insurance-agent-make-1.aspx (estimates commissions on life insurance at 7.5% overall and
front-end loading up to 85%); Faizah Imani, What Kind of Commissions Do Insurance Agents Get?, ZIPRECRUITER.COM,
http://career.ziprecruiter.com/kind-commissions-insurance-agents-get-1406.html (last visited Dec. 31, 2013) (front end loading up to 70%).
n57 And the SEC may aid and abet brokerage firms that want to move into the insurance area. See, e.g., Insurance Agencies Gain No-Action
Relief For Plans to Network with Brokerage Firms, SEC. L. DAILY, Apr. 26, 2013 (SEC ruling green lights joint efforts to sell "variable
annuity contracts, variable life insurance policies, and other life insurance policies and annuity contracts" to investors).
n58 See, e.g., Branson, supra note 15, at 887 (industry emphasis on "one stop financial shopping" in 1980).
n59 See Shayndi Raice & Corrie Driebusch, Bull Sees Red Over B of A Cross-Sales, WALL ST. J., May 21, 2013, at C1 ("Chief Executive
Brian Moynihan's strategy [is] to squeeze more revenue and profit from 'cross-selling' everything from stocks to mutual funds to credit cards
to mortgages.").
n60 . SANDY WEILL & JUDAH S. KRAUSHAAR, THE REAL DEAL: MY LIFE IN BUSINESS AND PHILANTHROPY 371 (2006)
(Citigroup efforts at joint venture with AOL to extend cross-selling to "an online financial supermarket"); id. at 389 (Citigroup cross-selling
of brokerage services, annuities and life insurance, bank credit cards, and home mortgages).
Page 385Page 385
82 U. Cin. L. Rev. 523, *
n61 Discussed notes and text accompanying infra.
n62 But see In First-of-Its-Kind SEC Suit, Ex-Exec Settles Allegations of Misleading CCO Over Trades, SEC. L. DAILY, Aug. 28, 2013
(portfolio manager who misled compliance officer paid $ 350,000 in settlement).
n63 Securities Act of 1933 § 15(a). The controlling person provision of the Securities Exchange Act is slightly different. The controlling
person must prove that they "acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of
action." Securities Exchange Act of 1934 § 20(a), 15 U.S.C. § 78t(a) (2012).
n64 In cases against a particular firm, characterized by one and two person offices in smaller cities and towns, all supervision and
compliance emanates from the home office in St. Louis. My estimate is that under such a supervision-from-afar setup, rogue brokers are
brought to heel, and schemes nipped in the bud, only 90 or 120 days later than would have been the case at a more traditional shop, with 15
or 20 brokers under the watchful eye of a branch manager. My fellow arbitrators did not agree with me, or agree wholeheartedly.
n66 Id. at 445.
n67 Id. at 448.
n68 The Commission staff has expressed a great deal of faith in brokerage firm compliance officers, a significant amount more than the
author would. See, e.g., IA/BD STUDY, supra note 11, at 76 ("FINRA Rules [Rule 3130(a)] require broker-dealers to designate one or more
principals to serve as CCO. At least annually, the CCO must meet with the broker-dealer's chief executive officer ("CEO") to discuss the
compliance program, and the CEO must certify that, among other things, the firm has in place processes to establish, maintain, review,
modify and test policies and procedures reasonably designed to achieve compliance . . . .").
n69 See Robert H. Mnookin & Lewis Komhausert, Bargaining in the Shadow of the Law: The Case of Divorce, 88 YALE L.J. 950 (1979).
n70 Wilko v. Swan, 346 U.S. 427 (1953).
n71 Securities Act of 1933 § 14 (Contrary Stipulations Void); Securities Exchange Act of 1934 § 29(a) (Validity of Contracts).
Page 386Page 386
82 U. Cin. L. Rev. 523, *
n72 Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 (1987); Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989) (expressly
overruling Wilko v. Swan).
n73 See, e.g., IA/BD STUDY, supra note 11, at 46-87 (Commission and Self-Regulatory Regulation of Broker--Dealers). The staff
discussion fails to cite a single arbitration decision or to note that most of the cases which its study cites are relatively old, that is, of 1990 or
older vintage.
n75 SEC v. Chenery Corp., 318 U.S. 80, 85-86 (1943).
n77 Justice Cardozo died in 1938. See Benjamin N. Cardozo, WlKlPEDIA.ORG, en.wikipedia.org/wiki/Benjamin_N_Cardozo (last visited
Dec. 31, 2013).
n78 See, e.g., DOUGLAS M. BRANSON, THE LAST MALE BASTION: GENDER AND THE CEO SUITE IN AMERICA'S PUBLIC
COMPANIES 43 (2010) (Marion Sandler, later to become CEO of Golden West Financial, in the 1950s said that as a woman she could never
be made at partner at Dominick & Dominick, a leading Wall Street firm where she had spent 5 years as an analyst.).
n79 See, e.g., Advertisement by Reynolds Securities, Inc., FORBES, Jan. 15, 1973, at 35; Advertisement by Merrill Lynch, Forbes, July 1,
1966, at 41.
n80 See, e.g., Advertisement by Prudential Securities, Inc., FORBES, Apr. 20, 1998, at 75. Financial Adviser is the most widely used title in
the industry today; see also ANGELA A. HUNG ET AL., INVESTOR AND INDUSTRY PERSPECTIVES ON INVESTMENT ADVISERS
AND BROKER-DEALERS 91 (2008), available at http://www.sec.gov/news/press/2008/20081_randiabdreport.pdf.
n81 Claimants recognize this. Of 7,137 arbitrations filed with FINRA in 2009, 4,206 alleged that the respondent was a fiduciary who had
breached fiduciary duties. IA/BD STUDY, supra note 11, at 81, 81 n.384. Misrepresentation (3,408), negligence (3,405), breach of contract
(2,802), failure to supervise (2,691), and unsuitability (2,473) were the next most popular claims. Id.
Page 387Page 387
82 U. Cin. L. Rev. 523, *
n82 See, e.g., United States v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (holding that a fiduciary duty is "[m]ost commonly" found when "a
broker has discretionary authority over a customer's account"); United States v. Szur, 289 F.3d 200, 211 (2d Cir. 2002) ("Although it is true
that there 'is no general fiduciary duty inherent in an ordinary broker/customer relationship,'" a relationship of trust and confidence may
arise where there has been an entrustment by the customer.).
n83 See, e.g., Associated Randall Bank v. Griffin, 3 F.3d 208, 212 (7th Cir. 1993) ("A broker-dealer in Wisconsin is not a fiduciary with
respect to accounts over which the customer has the final say, and in the absence of unusual circumstances owes the customer only a duty of
ordinary care."); Midamerica Fed. Savings & Loan v. Shearson/Am. Express, Inc., 886 F.2d 1249, 1257 (10th Cir. 1989) (existence of a
fiduciary relationship is a matter of Oklahoma state law).
n84 See IA/BD STUDY, supra note 11, at 52-84.
n85 Laby, Selling Advice, supra note 14, at 753-74.
n86 Id. at 754.
n87 Id.
n88 Branson, supra note 15, at 860.
n89 Laby, Selling Advice, supra note 14, at 755 (footnotes omitted) (internal quotation marks omitted).
n90 Id. at 756 (internal quotation marks omitted).
n91 Id.
n92 Stephen Miller, Alger Chapman: Street Veteran Who Sold Shearson Hammill, WALL ST. J., Feb. 20, 2013, at C2 (Obituary).
n93 RESTATEMENT (THIRD) OF AGENCY § 2.03 (2006); Laby, Selling Advice, supra note 14, at 758-59.
Page 388Page 388
82 U. Cin. L. Rev. 523, *
n94 "The general rule is that there is no fiduciary relationship between a franchisee and a franchisor." Legend Autorama, LTD. v. Audi of
Am., Inc., 954 N.Y.S.2d 141, 144 (N.Y. App. Div. 2012). See also Flegles, Inc. v. TrueServ Corp., 289 S.W.3d 544, 552 (Ky. 2009) (the
principle is "almost universally held"); RHC, LLC v. Quizno's Franchising, LLC, No. 04CV985, 2005 WL 1799536, at *8 (Colo. App. July
19, 2005).
n95 See, e.g., Allen v. Hub Cap Heaven, Inc., 484 S.E.2d 259 (Ga. Ct. App. 1997).
n96 In re Sabaro Holding Inc., 445 N.Y.S.2d 911, 914 (N.Y. Sup. Ct. 1981) (finding fiduciary relationship). See also Dunfee v. Baskin-
Robbins, Inc., 740 P.2d 1148, 1151 (Mt. 1986) ("[T]he general rule [is] that under a franchise agreement a fiduciary relationship does not
ordinarily develop. However, [the plaintiff franchisees] argue that special trust and confidence was reposed by [plaintiffs] in the expertise of
the [defendant franchisor] and that . . . a fiduciary duty resulted. When a fiduciary duty exists the one in the stronger position owes an
obligation, by virtue of that trust relationship, to act in the best interests of the beneficiary.").
n97 Saydell v. Geppetto's Pizza & Ribs Franchise Sys. Inc., 652 N.E.2d 218, 231 (Ohio Ct. App. 1996).
n98 McGowan v. Pillsbury Co., 723 F. Supp. 530, 536 (W.D. Wa. 1989).
n99 Id. (internal quotation marks omitted) (finding that no fiduciary relationship existed in the case at bar).
n100 Butcher v. Newburger, 179 A. 240 (Pa. 1935).
n102 Fischer v. Slayton & Co., Inc., 134 N.E.2d 673 (Ill. App. Ct. 1956).
n103 Id. at 676.
n104 Silverberg v. Thomson, McKinnon Sec., Inc., No. 48545, 1985 WL 6611 (Ohio Ct. App. Feb. 14, 1985).
Page 389Page 389
82 U. Cin. L. Rev. 523, *
n105 Id. at *4 (citations omitted).
n106 Byrley v. Nationwide Life Ins. Co., 640 N.E.2d 187, 198 (Ohio Ct. App. 1994).
n107 Mathias v. Rosser, Nos. 01AP-768, 01AP-770, 2002 WL 1066937 (Ohio Ct. App. May 30, 2002). But see Ed Schory & Sons, Inc. v.
Soc'y Nat'l Bank, 662 N.E.2d 1074, 1081 (Ohio 1996) ("[A] fiduciary relationship has been defined by this court as a relationship in which
special confidence and trust is reposed in the integrity and fidelity of another and there is a resulting position of superiority or influence,
acquired by virtue of this special trust." (internal quotation marks omitted)).
n108 Ward v. Atl. Sec. Bank, 777 So.2d 1144, 1147 (Fla. Dist. Ct. App. 2001). Accord Gochnauer v. A.G. Edwards & Sons, Inc., 810 F.2d
1042, 1049 (11th Cir. 1987).
n109 Twomey v. Mitchum, Jones & Templeton, Inc., 69 Cal. Rptr. 222 (Cal Ct. App. 1968).
n110 Id. at 235-36 (internal quotation marks omitted).
n112 See, e.g., Duffy v. Cavalier, 264 Cal. Rptr. 740, 748-51 (Cal. Ct. App. 1989). See also San Francisco Residence Club, Inc. v. Amado,
773 F. Supp. 822, 834 (N.D. Cal. 2011) (finding that although historically defendants had acted as brokers the broker--customer relationship
had not carried over to the period of the acts complained of); Brown v. Cal. Pension Adm'rs & Consultants, Inc., 52 Cal. Rptr. 2d 788, 796-
97 (Cal. Ct. App. 1996) (principle did not apply to bank which only executed customers' orders).
n113 Perl v. Smith Barney Inc., 646 N.Y.S.2d 678, 680 (N.Y. App. Div. 1996). Accord Fekety v. Gruntal & Co., Inc., 595 N.Y.S.2d 190
(N.Y. App. Div. 1993).
n114 Saboundjian v. Bank Audi, 556 N.Y.S.2d 258 (N.Y. App. Div. 1990).
n115 Id. at 260-61.

Page 390Page 390
82 U. Cin. L. Rev. 523, *
n116 Id. at 260.
n117 See, e.g., Ward v. Atl. Sec. Bank, 777 So.2d 1144, 1147 (Fla. Dist. Ct. App. 2001) ("the duty to perform the customer's orders promptly
in a manner best suited to serve the customer's interests" and "the duty to transact business only after receiving approval from the customer"
(emphasis omitted)).
n118 Gilman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 404 N.Y.S.2d 258 (N.Y. Sup. Ct. 1978).
n119 Id. at 262 (citations omitted).
n120 Id.
n121 See, e.g., Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, C.A. No. 3658-VCS, 2009 WL 1124451 (Del. Ch. Apr. 20,
2009).
n123 See notes and accompanying text supra.
n124 A naked option is "[a] trading position where the seller of the option does not own any, or enough, of the underlying security to act as
protection against adverse price movements." Naked Option, INVESTOPEDIA.COM, http://investopedia.com/terms/n/naked option.asp
(visited Dec. 31, 2013). "If the price of the underlying security moves against the trader . . . [the seller of a call] would be required to
purchase the shares regardless of how high the price is. The potential for losses, then, can be unlimited . . . . Inexperienced traders . . . would
not be allowed [by some brokerage firms] to place this type of order." Id. See also Douglas M. Branson, Nibbling at the Edges--Regulation
of Short Selling: Policing Fails to Deliver and Restoration of an Uptick Rule, 65 BUS. LAW. 67, 77-78 (2009) (discussing the practice of
naked short selling).
n125 IA/BD STUDY, supra note 11, at 117 (internal emphasis omitted).
n126 Id.
Page 391Page 391
82 U. Cin. L. Rev. 523, *
n128 Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C.). See also Inv. Co. Inst.
v. Camp, 401 U.S. 617, 637-38 (1971) (holding that the act prohibits a commercial bank from entering into any arrangement in which it has
a "salesman's stake" in selling securities or securities based products).
n129 Gramm--Leach--Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999).
n130 See, e.g., LAWRENCE G. MCDONALD & PATRICK ROBINSON, A COLOSSAL FAILURE OF COMMON SENSE: THE INSIDE
STORY OF THE COLLAPSE OF LEHMAN BROTHERS (2009). The 3 firms which failed were Bear Stearns, Lehman Brothers, and, as a
practical matter, Merrill Lynch. Of the "Big 5," only Morgan Stanley and Goldman Sachs remained standing.
n131 But see Michael R. Crittenden, Senators Want to Resurrect Depression-Era Curbs on Risk Taking, WALL ST. J. ONLINE (July 12,
2013), http://online.wsj.com/news/articles/SB10001424127887324694904578600053346763038 ("[L]awmakers need to keep the gamblers
out of our banks by separating traditional bank activities such as home loans and checking accounts from riskier activities such as trading
derivatives and investment banking." (quoting Sen. Elizabeth Warren) (internal quotation marks omitted)).
Page 393Page 393
49 Gonz. L. Rev. 331, *
64 of 430 DOCUMENTS
Copyright (c) 2013 The Corporation of Gonzaga University

Gonzaga Law Review
2013
Gonzaga Law Review
49 Gonz. L. Rev. 331
LENGTH: 26785 words
ARTICLE: Wrongful Foreclosures in Washington
NAME: David A. Leen*
BIO: * Mr. Leen has been a member of the Washington Bar Association since 1971. His practice focuses on consumer
protection and foreclosure defense. He is also the litigation director of the Northwest Consumer Law Center. Special
thanks for research help from Nathan Quigley and Audrey Udashen, Staff Attorneys, Northwest Consumer Law Center.
LEXISNEXIS SUMMARY:
... Because the processing of non-judicial foreclosures is being consolidated into large companies such as Quality Loan
Services, Northwest Trustee, Regional Trustee, and others, the in-house attorneys for these companies have begun to
advise and represent both the trustees and lenders, creating considerable conflicts of interest, which short
homeowners. ... Next, it is important that the attorney hold the creditor narrowly to its rights by considering all defenses
to the debt, such as liability of the lender for predatory lending, violations of consumer protection laws, and rescission
of the loan contract under Truth-in-Lending Act. ... Because a vast majority of Washington's residential foreclosures
leverage a non-judicial process and trustees have a duty to grantors, courts actively guard against wrongful foreclosure
by allowing the recovery of damages for its unlawful institution. ... A Cause of Action for Wrongful Commencement of
a Non-Judicial Foreclosure Despite Washington's historical recognition of various causes of action for wrongful
foreclosure, a number of recent trial court opinions have severely misconstrued the common law underpinnings of tort
claims associated with the initiation of defective or wrongful foreclosure. ... District Court of Washington concluded
that there was no cause of action for wrongful foreclosure, because the Washington Deed of Trust Act does not
specifically provide for a statutory cause of action for damages for the wrongful institution of non-judicial foreclosure
proceedings where no trustee's sale occurs.
TEXT:
[*332]
I. Introduction
As the nation faces an onslaught of foreclosures following a catastrophic crisis of predatory and improvident lending,
current homeowners seek relief in a variety of ways. For example, homeowners can attempt to avoid foreclosure by
qualifying for government loan modification programs to prevent the loss of their homes, the loss of their business
properties, and mounting deficiency judgments. n1 These modifications are difficult to get, provide only limited and
short-term relief, and frequently leave the homeowner owing much more than the home is worth. Once the temporary
reduction in the payment amount has ended, the home is again unaffordable, and the homeowner will not qualify for a
refinance because the value is below the debt. Courts are often, therefore, the only place where a homeowner, facing a
wrongful non-judicial foreclosure, can turn for help. n2
In 2002 several large lenders, including Countrywide and Washington Mutual, lost quality control of their lending
business. n3 These lenders generated loans to almost any applicant regardless of qualification, on homes regardless of
value, and with deferred teaser rates that allowed people surviving only on Social Security payments, or even less, to
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49 Gonz. L. Rev. 331, *
acquire homes "valued" by the lenders' "in-house" appraisers at greatly inflated prices. n4 Lenders were happy to make a
loan to purchase a home with the customary down payment coming from the same lender secured by a second mortgage
on the same property. n5
[*333] When monthly payments on most of these loans exceeded the borrower's monthly net income, this
expanding balloon became visible to everyone. As a result, values in real estate dropped twenty-five percent in 2008, in
part due to having been over-valued by lenders' in-house appraisers; homeowners had no equity and could not qualify
for a refinance at the attractive rates offered once the crisis was in full bloom. By 2010, foreclosures in America topped
two million and have not seen a significant decline since. n6 The largest foreclosure frenzy in history had begun. Large
numbers of homeowners across the nation defaulted on their loans, but only after depleting their retirement accounts,
their savings, their equity in the home, and finally, their sanity. n7
In Washington, lawyers seeking to help clients in foreclosure are faced with two major obstacles. First, lawsuits to
stop a wrongful foreclosure are often defeated by judge-made rules holding that there is no such cause of action unless
the foreclosure is actually completed. n8 Even worse is the obstacle to lawsuits filed after a wrongful foreclosure; in these
cases, courts often find that homeowners have waived their claims by not raising them prior to foreclosure. n9 This
somewhat enviable position allows lenders and foreclosing trustees to ignore basic protections of law and places
homeowners in the proverbial "damned if you do and damned if you don't" position. n10 Moreover, hiring a lawyer to
raise defenses is expensive and beyond the reach of many homeowners who already cannot make their mortgage
payments. Courts, with the urging of lawyers for the largest lenders, have placed many roadblocks in the path of the
homeowner who seeks merely to resume reasonable payments on a home that may someday have equity. n11
This article explores this difficult and expensive process of retaining home ownership in the face of unaffordable
loans. It identifies areas where courts impose unnecessary roadblocks to the vindication of homeowners' rights and
analyzes the legal basis for a number of causes of action that may be brought to enforce rights in the foreclosure
process. Additionally, this article proposes legislative reforms to the Deed of Trust Act that would give courts more
[*334] flexibility to dispense justice without unduly burdening secured lenders, while favoring home retention over a
quick foreclosure.
This article surveys the various causes of action available to challenge wrongful foreclosures, examines where
courts have strayed from the true path, and urges proper and sensible methods for homeowners to seek redress from
improper foreclosures. More importantly, because the primary method of foreclosure is outside of court supervision,
when litigation is brought to raise defenses, courts should not impose roadblocks such as waiver of defenses or, worse
yet, not allowing any compensable claims when no sale occurs. Finally, as foreclosure laws are all state specific and
statute based, and trustees are unregulated and unlicensed, this article will focus on Washington cases addressing non-
judicial foreclosures, noting trends in other jurisdictions, and common law remedies, sometimes of ancient origin, which
provide handy solutions to modern problems.
This article describes the various methods of foreclosure, discusses substantive defenses that might be raised in
both judicial and non-judicial foreclosures, and concludes with argument that wrongful foreclosure should be
recognized as a tort to protect homeowners from improperly initiated foreclosures.
II. Washington Foreclosure Procedures
This section outlines the procedures in Washington statutes that provide for foreclosure, either by non-judicial
procedures or judicial foreclosure, which are both available to a creditor when the homeowner defaults.
A. Judicial Foreclosure in Washington
Every state in the country has a judicial foreclosure statute that spells out the procedures necessary for the mortgagee,
typically the lender, to realize in a civil lawsuit against the collateral pledged to secure repayment of the loan. n12
Generally, the Uniform Commercial Code (UCC) applies to the acceleration and collection of promissory notes (a
precondition to foreclosure) and the loan agreement and mortgage ("Deed of Trust"). n13 The UCC also provides more
specific terms and conditions to be followed, while the court rules define the judicial procedures.
[*335] Many states have enacted mitigation statutes limiting the harsh effects of deficiency judgments n14 and
allowing for redemption; n15 federal bankruptcy laws have provided some measure of protection against aggressive
foreclosures, such as the automatic stay of creditor's actions until approved by the bankruptcy court. n16 Washington
allows an "upset price" to be set by the court in cases where the economic forces have depressed the value of property
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49 Gonz. L. Rev. 331, *
and a deficiency judgment is sought. n17An upset price can be set by the court, upon motion of the homeowner, to establish
the value of the property that must be credited to the debt at a foreclosure sale, regardless of the actual price paid. n18
This is an important protection when market forces deflate the value of the home, ultimately reducing the deficiency
judgment against a homeowner that is foreclosed upon. n19
There are, however, many other defenses to a foreclosure based upon predatory lending. Usury, breach of contract
of the loan agreement or deed of trust/mortgage, and improper credit of payments made are all defenses that may be
easily raised in judicial foreclosures as a counter claim or set off; these defenses may even be raised after the statute of
limitations have run during recoupment. n20 Homestead rights often allow for redemption of the property during a post-
sale period, n21 such as the one-year period allowed in Washington, n22 during which time the debtor can remain in
possession and redeem the property by either a sale or payoff of the loan in full. n23
[*336] Wrongful judicial foreclosures are preventable since the statutory framework for the requirements
necessary to foreclosure are provided in the foreclosure statute and the general rules of pleading and evidence ensure
that an unfounded foreclosure will not be successful in court. Moreover, Federal Rule of Civil Procedure 11 discourages
institution of civil litigation that is not well founded in both fact and law.
B. Non-Judicial Foreclosures in Washington
Slightly more than half of the states, including Washington, have enacted non-judicial foreclosure statutes using deeds
of trust with a power of sale, which allows a trustee to sell the homeowner's, or grantor's, property at a public auction
for the beneficiary, or lender, after adequate notice and opportunity to cure. n24 This process has many advantages over a
judicial foreclosure, such as shortening the time to complete a foreclosure, discouraging defenses, reducing the cost of
foreclosure, and eliminating the redemption rights of the homeowner and other judgment creditors. n25 Not surprisingly,
virtually all of the residential foreclosures in Washington are now completed using this non-judicial process. n26
Because these foreclosures are largely undertaken by trustees outside the purview of the courts, and conducted by
trustees n27 appointed by the lender, n28 [*337] there are strict compliance requirements regarding notice and
opportunities to reinstate the loan contract. n29 There is also an emerging body of case law regarding trustee misconduct
that has resulted in courts invalidating defective or wrongful foreclosures. n30 Trustees have enormous power: they are
responsible for sending out all of the notices, postings, publications; verifying the authenticity of debt instruments; n31
mediating disputes between lenders and borrowers; conducting auctions; and executing and recording the trustee's deed
accomplishing the final transfer. n32 Because of the vast power that trustees possess, courts exact strict compliance with
the procedures and liberally construe the non-judicial statute in favor of homeowners and against creditors. n33 Courts
have held that a trustee may not have conflicting roles in these various contexts. n34 In Cox v. Helenius, the court held
that because the trustee, Helenius, was also the attorney for the beneficiary there existed a conflict of interest that
provided an additional basis upon which to invalidate that foreclosure. n35 The Washington Bar Association issued an
opinion precluding lawyers from representing both sides of a foreclosure controversy. n36 Because the processing of non-
judicial foreclosures is being consolidated into large companies such as Quality Loan Services, Northwest Trustee,
Regional Trustee, and others, the in-house attorneys for these companies have begun to advise and represent both the
trustees and lenders, creating considerable conflicts of interest, which short homeowners. Typically, in-house counsel
advise the trustees on continuances, represent the trustees and lenders in requesting relief from stay motions in
bankruptcy court, represent lenders in mediations when their client-trustees are foreclosing, and represent trustees in
litigation when they are sued, a bankruptcy is filed, or the debtor has claims [*338] against a lender. n37 In one case,
Barrus v. ReconTrust, a bankruptcy court held that a debtor did not have standing to challenge the opposing party's
counsel, n38 and effectively avoided the ethical issue. In another case, FMC Technologies v. Edwards, a federal district
court disqualified an attorney on a motion to disqualify a conflicted opposing counsel. n39 More recently, the Washington
Supreme Court expressed substantial concern when counsel for the lender and the trustee were representing both entities
at the foreclosure stage, in litigation, and before that supreme court. n40 This is a bad practice, given the duties that
trustees have to all parties in a foreclosure; the trustee must have unfettered discretion to follow the applicable laws and
procedures. n41
In addition to concerns surrounding conflicts of interest, another legal problem for trustees in the discharge of their
duties is the growing use of subcontractors or other companies to expedite the process and save money for [*339] the
lenders. n42 The result is that the trustees delegate and often eliminate important responsibilities. n43 For example, Lender
Processing Service, Inc. (LPS) is involved in over half of the foreclosures in the United States, n44 acting to streamline
the process for lenders through the use of databases that largely eliminate direct trustee contact with beneficiaries. n45 As
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49 Gonz. L. Rev. 331, *
a former Fidelity subsidiary, LPS is used by the top thirty-nine banks in the United States for mortgage processing
(MPS) of half of the mortgage loans in the United States by dollar volume. n46 LPS's "default management service,"
Newtrak, is used in the same magnitude for foreclosures and bankruptcy. n47 Washington trustees are doled out
foreclosures from participating lenders by LPS based upon only one criterion: speed of completion. n48 All
communications between lenders and trustees are "facilitated" by LPS and its subsidiaries (such as DocX) in turn,
which in the experience of the author, contribute to many of the wrongful foreclosures. n49 In these cases, trustees may
not be aware that modifications are pending and may foreclose anyway, in order to keep their speed rating with LPS
high. n50 Most of the time, the trustees never communicate with the client. [*340] The Washington Attorney General
confronted these practices and obtained a consent decree, four million dollars, and injunctive relief in State of
Washington v. Lender Processing Service. n51
This use of NewTrak has been described by one court as a "barrier that obstructs [] client/attorney communications
[which] is contrary to the Model Rules of Professional Conduct. Rule 1.4." n52 Recently, the unsupervised conduct of
LPS became public when a senior executive was convicted and sentenced to up to twenty years in federal prison for
forging over one million foreclosure documents for courts and trustees in the United States. n53 Lenders and attorneys
were sanctioned for this wholesale abdication of their professional responsibilities. n54
In 2011 the Washington State Legislature enacted (and amended in 2012) the Foreclosure Fairness Act (FFA), thus
formalizing the requirement that the trustee "meet and confer" with the homeowner prior to commencement of
foreclosure to ensure that the homeowner is maximizing their chances of qualifying for and receiving loan
modifications under various governmental or lender in-house programs. n55 The meet-and-confer rule allows qualified
borrowers to have a face-to-face meeting prior to mediation. n56 In 2012 the time period for the meet and confer was
extended from thirty days to ninety days if the borrower responded within the initial thirty days from the notice of pre-
foreclosure options. n57 The initial contact letter, known as the Notice of Pre-Foreclosure Options (NOPFO), initiates this
option. If the borrower does not [*341] respond to this initial contact, the Notice of Default (NOD) can be issued after
the initial thirty days. n58 The purpose of this legislation is to allow additional time prior to commencing a foreclosure for
consideration of potential loan modifications under various programs, such as the Home Affordable Modification
Program (HAMP).
III. Defenses to Non-Judicial Foreclosures
In a non-judicial foreclosure, by definition, there is no court proceeding where a homeowner can file a counterclaim, go
before a judge, and complain about an illegal foreclosure or improper commencement of foreclosure. In this situation, a
lawsuit must be commenced to present opportunities for courts to evaluate a defense to the foreclosure. Thus, the
lawsuit must first enjoin the non-judicial proceeding and subsequently raise defenses or affirmative claims in court to
defeat the foreclosure or to obtain damages or set-offs against the debt being foreclosed. n59 There are many defenses to
foreclosure, just as there are defenses to many lawsuits. The following section will outline various approaches to
defending foreclosures in the non-judicial context.
A. Evaluating a Case
There are many defenses to a wrongful foreclosure that an attorney can identify and use to improve the homeowner's
position. A good practitioner should (1) determine the loan specifics, (2) determine the value of the property, (3)
determine the extent of default, (4) explore opportunities available to the homeowner, (5) identify the creditor's rights,
and (6) identify long-term solutions available to the homeowner.
First, the attorney must investigate and determine the specifics of a particular loan, including the nature of the
security for the loan(s), the proper recording, and assignment, if any. Additionally, all parties involved in the loan must
be identified, including the loan servicer responsible for collecting the payments and the owner of the loan who is
entitled to foreclose. There are very few lost notes and fewer free houses.
Second, it is imperative to determine the value of the property compared to the amount of the debt(s), even if the
calculation is simply a rough estimate at first. Often, a homeowner is concerned about a second lien and is inclined to
walk away from a property that is worth considerably less than the secured debt(s).
[*342] Next, the attorney must determine the nature and extent of default by the homeowner and the amount of
total debt that is secured by the property. The default may not be a monetary default, but it is nevertheless important to
evaluate the total default.
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49 Gonz. L. Rev. 331, *
Once the attorney has an understanding of the loan and the homeowner's circumstances, it is necessary to explore
all possible loan workout opportunities, such as those created in various federal programs such as HAMP. n60 The
attorney should consider deeds in lieu of foreclosure. The Deed in Lieu transfers the property back to the secured lender
and, generally releases the homeowner from all or part of the debt. The lender will want to get a title search to identify
any intervening liens, which will not be eliminated unless a foreclosure is completed. The attorney should also consider
a short sale, because the lender might allow sale of the property for below the debt, release its lien, and possibly forgive
the remaining debt that might otherwise be uncollectable. A short sale is where the lender releases its lien to allow an
arm's length sale below the amount of the debt. Beware of tax consequences of debt forgiveness which can be treated as
taxable income. A short refinance allows reducing the balance and interest rate, while retaining the home. A good
practitioner should also advise homeowners considering either of these options to get tax advice on the tax implications
of the debt that is forgiven.
Next, it is important that the attorney hold the creditor narrowly to its rights by considering all defenses to the debt,
such as liability of the lender for predatory lending, violations of consumer protection laws, and rescission of the loan
contract under Truth-in-Lending Act. If the statute of limitations has run on these affirmative claims, a good practitioner
should consider asserting a set-off or, in the non-judicial context, arguing for recoupment of a time-barred claim against
the debt. n61
Finally, the attorney must look for long-term solutions by evaluating all avenues. In pursing the homeowner's best
interests, it is imperative that a good practitioner consider all options including selling the property, refinancing, renting
a portion of the property to increase income, or leveraging the benefits of a foreclosure, such as the anti-deficiency rule
n62
and "free rent" n63 during the period of time it takes to complete a foreclosure.
[*343]
B. Common Causes of Action
1. Initiation or Completing a Wrongful Foreclosure Is a Tort
"Common law tort causes of action remain the [best] vehicle" for recovery of damages for breach of the trustee's
common law or statutory duties set forth in the Deed of Trust Act. n64 Lower courts in Washington have not readily
embraced using tort analysis in wrongful foreclosure cases, but recent cases have moved in this direction. n65 This issue
is coming to a head before the Washington Supreme Court, having accepted a certified question n66 as to whether, under
Washington law, a plaintiff may "state a claim for damages relating to a breach of duties under the Deed of Trust Act
and/or failure to adhere to the statutory requirements of the Deed of Trust Act in the absence of a completed trustee's
sale of real property?" n67 In this analysis, the Supreme Court will likely adhere to the three-prong test in Bennett v.
Hardy where a "new" tort must be (1) for the benefit of a class of plaintiffs protected, generally, under the Deed of
Trust Act (or common law decisions); (2) whether legislative intent exists to support protection with a remedy; and (3)
whether implying a new tort remedy is consistent with the underlying purpose of the Deed of Trust Act. n68
Clearly, the Deed of Trust Act provides protections for homeowners as well as lenders. Cases decided by the
Washington Supreme Court interpreting the statute make it clear that the statute is to be strictly construed for the benefit
of homeowners because non-judicial procedure is utilized without the benefit of court oversight. n69 The Deed of Trust
Act was recently amended to provide for additional homeowner protections including a mediation program designed to
mitigate the harshness of the current foreclosure crisis. n70 Finally, these [*344] legislative findings make it clear that a
damage claim for failure to properly conduct a foreclosure is consistent with the articulated legislative purposes. The
only reported case following this test and finding a tort cause of action is [*345] Walker v. Quality Loan Services
Corp., n71 decided recently by Division I of the Washington Court of Appeals. The Washington courts have, however,
readily found breaches of the foreclosure process to violate the Consumer Protection Act, n72as discussed in the next
section.
2. Attempted or Completed Wrongful Foreclosure Is a Consumer Protection Act Violation Because It Is an Unfair
or Deceptive Act or Practice
One of the most positive developments for homeowners in Washington foreclosure law is the application of the
Consumer Protection Act (CPA) to wrongful foreclosures. n73
To prevail on a Consumer Protection Act case in Washington, the plaintiff must show: (1) an unfair or deceptive act
or practice, (2) occurring in trade or commerce, (3) public interest impact, (4) causation, and (5) injury or damage to
Page 398Page 398
49 Gonz. L. Rev. 331, *
business or property. n74 A CPA claim may also be based upon an unfair act, independent of a deceptive act, or both. n75 In
Panag v. Farmers Ins., n76 the court held, "The universe of "unfair' business practices is broader than, and encompasses,
the universe of "deceptive' business practices." n77 Thus, even if an act is not deceptive, it can still be unfair. n78
Several recent cases have clearly approved findings of a violation of the CPA in the context of wrongful
foreclosure. First, in Bain v. Metropolitan Mortgage, n79 a case answering questions certified from a federal district court,
the Washington Supreme Court ruled that using Mortgage Electronic Registration System (MERS) n80 as a beneficiary,
while hiding the true [*346] ownership of the debt, violated the Washington Deed of Trust Act and "could be" an
unfair or deceptive practice, violating the Consumer Protection Act. n81
Shortly after Bain, in Klem v. Washington Mutual Bank, Justice Chambers again authored a comprehensive opinion
reviewing the prior case law on trustee duty, and held that the trustee's duty was closer to "fiduciary" than mere equal
treatment of both homeowner and lender. n82 The court also found a violation of the Consumer Protection Act for lack of
trustee neutrality:
We hold that the practice of a trustee in a nonjudicial foreclosure deferring to the lender on whether to postpone a
foreclosure sale and thereby failing to exercise its independent discretion as an impartial third party with duties to both
parties is an unfair or deceptive act or practice and satisfies the first element of the CPA. Quality failed to act in good
faith to exercise its fiduciary duty to both sides and merely honored an agency relationship with one. n83
Finally, in Schroeder v. Excelsior Management Group, the court voided a completed sale and reinstated a CPA claim
because the property was agricultural land and did not qualify for a non-judicial foreclosure. n84 Most other courts have
ruled in a similar fashion. n85 The relief allowed under the CPA is broad and the damages recoverable can be
considerable. n86
[*347]
3. Other Causes of Action (Infliction, Trespass, Slander of Title, FDCPA, Etc.)
Stand-alone torts, such as outrageous conduct and infliction of emotional distress n87 may also be raised in defense to a
wrongful attempted foreclosure. Additionally, statutory violations of laws regulating collection of debts, such as the
Equal Credit Opportunity Act (ECOA) and Fair Debt Collection Practices Act (FDCPA) can be violated in non-judicial
foreclosures. n88 The above list is certainly not exhaustive, but these breaches are all subject to redress by the courts upon
a timely action and are competent proof. n89
4. Federal Loan Modification Program Violations May Be Enforced During a Foreclosure
A number of federal programs were enacted to mitigate the large number of predatory loans made during the past
decade. n90 Unfortunately, many lenders and servicers are slow to process requests for loan modification, yet the lenders
are often quick to initiate foreclosure. n91 Worse yet, the servicer frequently forgets to advise the foreclosing trustee to
discontinue a sale or to move a sale to allow for processing of a loan modification. n92 Both the Home Affordable
Modification Program (HAMP) and the Attorney General National Mortgage Settlement require large servicers to
promptly send a final modification agreement to borrowers who have enrolled in a trial period plan under the current
HAMP guidelines and who have made the required number of trial period payments. n93
The HAMP manual makes this clear:
[*348]
Following underwriting, NPV evaluation and a determination, based on verified income, that a borrower qualifies for
HAMP, servicers will place the borrower in a trial period plan (TPP). The trial period is three months in duration (or
longer if necessary to comply with applicable contractual obligations) and governed by terms set forth in the TPP
Notice. Borrowers who make all trial period payments timely and who satisfy all other trial period requirements will be
offered a permanent modification. (emphasis added).
Page 399Page 399
49 Gonz. L. Rev. 331, *
Servicers should service mortgage loans during the TPP in the same manner as they would service a loan in forbearance.
n94
The HAMP manual is binding on most loan servicers. As a part of the nationwide consent decree reached in settlement
between the five largest lenders and the attorneys general of several states, the manual clearly requires servicers to
finalize loan modifications approved on a temporary basis. n95 For the lender or servicer to commence a foreclosure
during consideration of a loan modification also violates its own contract with the Department of Treasury n96
Additionally, it is consistent with emerging cases grappling with enforcement of the programs to help homeowners
through this crisis. n97
In affirmative actions, a breach of contract claim should be pled in the alternative as promissory estoppel, so the
court could, under proper proof, adopt either theory. Usually, servicers promise to send homeowners a written loan
modification if the homeowner (1) stops making normal payments for three months; n98 (2) pays a specified payment for
three more months; and (3) verifies their financial circumstances with appropriate documentation.
Moreover, under the HAMP program regulations agreed to by the large servicers in contracts with the federal
government, the modification, called a Trial Period Plan (TPP), should be in writing so that it may be signed by the
[*349] parties and enforceable. n99 Failing to do so is a breach of that promise and actionable n100 under Washington law:
The defense of the statute of frauds may not be asserted by a party who has breached his promise to reduce a contract to
writing when the other party relied the promise to his detriment. n101
Although Washington has adopted a version of the Uniform Bank Protection Act, n102 which codifies the common law
statute of frauds, which exempts oral contracts to performed in under one year, in equity, courts may enforce these
promises, especially if the TPP is to be completed within one year, which is usually the case. n103
Enforcement of promised loan modifications are currently litigated nationwide. The prevailing trend is to allow
enforcement of the modifications under a number of theories, including breach of contract, n104 breach of covenant of
good faith and fair dealing, n105 consumer protection, n106 specific performance, n107 promissory estoppel as to offers of
forbearance and temporary modification, n108 and fraud. n109
[*350]
5. Defenses Available in the Context of a Non-Judicial Foreclosure of Government Owned Loans
May the federal government use a state non-judicial foreclosure process and ignore state law defenses such as anti-
deficiencies? In the event that state law is used by the federal agency to conduct a foreclosure, it is reasonable to believe
that the full statutory framework should apply, including a prohibition against a deficiency in the event that non-judicial
procedures are used. n110
Unfortunately this was not the case in Carter v. Derwinski, n111 where the Veteran's Administration (VA) guaranteed a
loan in a non-judicial foreclosure, and the VA asserted a deficiency in contravention to state law. n112 There are a number
of reasons why that case may be decided differently today, including changes made to the VA program in 1989. n113
Many authorities support the proposition that federal interests can be subjected to state laws which limit or even bar
federal claims. n114 The Ninth Circuit has confused "rights," which are conceded, and "remedies," which Congress has
declared are to be pursued in state foreclosure actions. n115
In the area of real estate financing, there is an even stronger presumption that state law should be adopted, since
there is no federal foreclosure statute. n116 All state foreclosure laws have some effect upon the VA's claims. For example,
the length of time necessary to foreclose is a feature of state law that results in direct losses to the lender and ultimately
the VA, because of the time value of the mortgage debt. n117 In Washington, the non-judicial foreclosure sale cannot occur
sooner than 190 days from default, in contrast to California where the home can be recovered in 90 days. n118 The VA
must not ignore this aspect of state law. n119 In Carter v. Derwinski, the district court, and the dissent in the Ninth Circuit
[*351] decision, properly limited the application of U.S. v. Shimer, because of developments in preemption law. n120 VA
regulations now reflect congressional intent that state law minimum bid requirements control the VA's ultimate liability.
n121
Limitations on deficiencies, redemption rights, upset price protections, and other aspects of state law are functional
equivalents. n122
Page 400Page 400
49 Gonz. L. Rev. 331, *
In Whitehead v. Derwinski, the Ninth Circuit properly analyzed the VA's indemnity rights vis-a-vis integral
remedies in state foreclosure law. In Whitehead, the court did not find that the VA indemnity right was "second fiddle"
to the subrogation right, but rather used the Kimbell Foods test to avoid creating a conflict between state and federal
law. n123 The holding in Whitehead required the VA to use appropriate state law remedies that are available by
subrogation before resorting to indemnity. Indemnity would violate important portions of state law, and are not
necessary to the accomplishment of VA program objectives. n124
The Ninth Circuit, in Carter, rejected well-developed state rules that create loss of predictability and do not create
federal uniformity. n125 Under the Ninth Circuit's Carter rule, a homeowner in Washington would lose redemption rights,
homestead rights, and judicial due process for the sole purpose of giving the VA a right to collect more money from a
veteran who has already lost his or her home. n126 In judicial foreclosure states, however, veterans would presumably also
have redemption rights when a deficiency is obtained, because they are part of the process. n127 Veterans are now,
ironically, better off in the twenty-five states where non-judicial remedies are unavailable, because they remain in
possession of their homes longer and have judicial supervision. Finally, the VA acts as a market participant, rather than a
market regulator, and should therefore fare no better or worse than private creditors. n128
Another defense to a federal loan foreclosure is that non-judicial foreclosures are a violation of due process rights.
Indeed, in the recent case [*352] of Klem v. Quality Loan Services, n130 the court left open a door for a due process
n129
challenge to the non-judicial process under article I, section 3, of the Washington State Constitution, which states that
"no person shall be deprived of life, liberty, or property, without due process of law." n131
In the non-judicial foreclosure process, it is not simple to assert a defense; first a lawsuit must be initiated to stop
the non-judicial process, then a defense raised, and finally litigated while keeping the foreclosure at bay.
IV. Obstacles for Homeowners Challenging Their Non-Judicial Foreclosure
Once a suit is filed to raise a defense to a non-judicial foreclosure, there are many roadblocks facing the homeowner.
This section illustrates these roadblocks by discussing the necessity for injunctive relief to stop non-judicial foreclosure
sales, post-sale challenges, and wavier of claims.
A. Injunctive Relief Is a Necessity
The basic objectives of foreclosure are best met when foreclosure sales are enjoined so that litigation can resolve the
issues. n132 Damages flowing from wrongful foreclosure or repossession proceedings are compensable under numerous
common law theories of liability. n133 Washington courts have recognized the importance of avoiding wrongful
foreclosures. n134 In the first case laying out the rules for trustees, the court in Cox v. Helenius n135 held that Washington's
Deed of Trust Act should be construed to further three basic [*353] objectives: (1) the non-judicial foreclosure process
should remain efficient and inexpensive; (2) the integrity and stability of titles should be promoted; and (3) the process
should provide an adequate opportunity for interested parties to prevent wrongful foreclosure. n136
Because a vast majority of Washington's residential foreclosures leverage a non-judicial process and trustees have a
duty to grantors, courts actively guard against wrongful foreclosure by allowing the recovery of damages for its
unlawful institution. n137 In order to raise defenses to a wrongful foreclosure, however, the homeowner must first file a
lawsuit alleging the defenses and then enjoin the sale so there is time to litigate. n138
Court rules generally allow for an injunction against a wrongful foreclosure. n139 A movant must show that there is a
meritorious defense, immediate likelihood of irreparable harm, and no adequate remedy at law. n140 The Deed of Trust
Act, however, has its own provisions allowing a court to enjoin a non-judicial sale; n141 any interested party in the
property can seek an injunction against a foreclosure on any proper ground, including any defenses to a judicial
foreclosure, such as amount due, usurious interest, illegal loan fees, etc. n142 Specifically, the Act requires: (1) that a
trustee have at least five days' notice n143 of the injunctions hearing; n144 (2) conditional payment of the monthly [*354]
interest and reserves due on the loan to be registered by the court; and in some instances, (3) a conditional injunction on
posting a bond to indemnify the lender for damages and attorney fees. Additionally, the statute allows the court to
consider, in lieu of a bond, equity, which a borrower may have in the property. n145
There are a number of problems with an injunction hearing, including the amount of the bond, the temporary or
preliminary nature of the injunctions, inadequate notice, conflicts of interest, and the burden of proof. n146
Page 401Page 401
49 Gonz. L. Rev. 331, *
First, courts have inherent equitable powers and can waive a bond if the equities permit. n147 Courts should consider
that in a judicial foreclosure, the creditor receives no bond and a trial date for a minimum of two years. n148 Courts should
not prevent a plausible defense by imposing a bond that is beyond the reach of the homeowners. In the absence of these
considerations, the homeowner may be forced to declare bankruptcy when an injunction against a creditor's actions is
automatic and free. n149 Recently, an appellate court held that the inability of a homeowner to pay a bond could be raised
post-sale, without a waiver of defenses, because the lender was on notice of the claims and the homeowner was not,
essentially, sitting on their hands. n150
Secondly, to comply with the stated purpose of efficiency, the Deed of Trust Act requires a preliminary hearing
with full notice and copies of pleadings provided to the trustee within five days. n151 The statue does not require notice to
the lender because lenders and holders of the debt are likely to be out of state and not readily available to the borrower.
Additionally, because [*355] lenders usually hire the trustee to conduct the foreclosure, lenders are easily notified by
the trustee. n152 In the event that inadequate notice is given, the court may issue a temporary show cause order and grant a
return date for consideration of preliminary relief. n153
In the event that the debtor is unable to give the trustee adequate notice, the court may also consider temporary
equitable relief and issue a show cause type order to provide the affected parties with more notice, under its inherent
equitable powers. n154 The courts are also free to modify such orders as circumstances may warrant. n155 The difficulty of
vacating an improperly conducted foreclosure encourages courts to favor an injunction to maintain the status quo.
Conflicts of interest are another flaw in injunction hearings. n156 An attorney cannot ethically represent both the
trustee and the lender in a motion to enjoin the sale. n157 The trustee's requirement of neutrality should prevent it from
ever having the opportunity to oppose a motion to enjoin a foreclosure. n158 This is of particular concern when the trustee
has an elevated duty of good faith to both the borrower and the lender, and thus cannot act in an adversarial position to
either, as would be required if the trustee sought to seek relief from a bankruptcy stay. n159
Finally, as the injunction motion is conducted in court, the lender has the burden to prove the validity of the debt
being foreclosed in addition to showing both procedural compliance with, and the basis for, the foreclosure. n160
However, the homeowner merely needs to demonstrate a reason to delay the sale. n161 Once a suit is in place and an
injunction is obtained, however, many obstacles must be overcome to stop a foreclosure. These obstacles include the
cost of attorneys' fees, the need to bring the mortgage loan current, and success in a claim to offset the mortgage debt.
[*356]
B. Post Sale Challenges and Wavier of Claims
Post-sale challenges cut against the grain of promoting stability of titles and keeping the non-judicial process
economical. n162 Nevertheless, courts will vacate a void sale and, in equity, vacate a sale at an unconscionable price when
coupled with procedural defects. n163 An important distinction to determine at the outset is whether the sale is void or
voidable. These standards, which allow a void sale to be vacated, are much easier than trying to invalidate a voidable
sale. n164
A void sale passes no legal or equitable title to a purchaser or subsequent owner, except occasionally by adverse
possession of ten years, and can be nullified by proper proof. n165 A forged deed of trust is the best example of a void
sale, but other material violations may also render a sale void: a trustee that lacks authority to act because there has been
no default on the loan by the homeowner, n166 the failure to properly record an appointment authorizing the trustee to act,
n167
a sale conducted on the wrong date or at the wrong location, or a sale without proper notice and publication. n168 In the
event that a potential bidder was misled about the date, or location, or the grantor was not properly notified, there is a
clear basis to vacate the sale. n169 A sale conducted without all statutory prerequisites is void. n170
[*357] When there is an inadequate sale price n171 and a material or significant defect in the process, a sale may be
invalidated at the discretion of a court in equity as a voidable sale. n172 To be considered voidable, the sale price must
"shock the conscience," n173 thus supporting the claim that the grantor would have recovered equity if the sale had not
occurred, if the sale had not occurred properly, or if the property had been sold in an arms-length transaction to a willing
purchaser. n174 For a sale to be voidable due to defect, a defect must be significant. n175 In the event that bona fide
purchaser acquires the property, it is unlikely that a court would vacate a sale that was voidable. n176 Typically, the greater
the inadequacy of the sale price, the fewer defects that will suffice. n177
Page 402Page 402
49 Gonz. L. Rev. 331, *
A substantial body of law allows for a post-sale challenge to a defective sale. n178 For example, "Washington courts
have a long tradition of guarding property from being wrongfully appropriated through judicial process. When "a jury ...
returned a verdict which displeased [Territorial Judge J.E. Wyche] in a suit over 160 acres of land,' he threatened to set
aside their verdict and remarked, "While I am judge it takes thirteen men to steal a ranch.'" n179 Such challenges are
usually generally described as wrongful foreclosure, which is a tort consisting of a breach of a duty owed to the grantor
by the foreclosing trustee (or lender), causation, and resulting damage. n180
[*358] The major obstacle to filing a successful claim after the sale of a foreclosed property is the doctrine of
waiver. n181 A party's failure to seek the restraint of a sale may constitute a waiver of all rights to later challenge the sale
for defects. n182 Often, the party who received notice of the right to enjoin the trustee's sale had actual or constructive
knowledge of a defense to foreclosure prior to the sale, and failed to bring an action to enjoin the sale. n183 The doctrine
of waiver precludes a challenge to a completed sale. n184
For example, in Koegel, the homeowner was aware of several minor defects in the notice well before the sale of the
home, which were corrected with continuances by the trustee. n185 After several continuances, and without any action by
the homeowner, the sale was upheld. n186 Although Koegel and his attorney appeared at the sale, they did not object when
the sale was conducted; a third party bidder acquired the property. n187 The court noted that Koegel could have prevented
the loss of the property by: restraining the sale, filing bankruptcy, filing a lis pendens, curing the monetary default, or
protesting at the sale. n188 Rather, Koegel "appeared at the sale and said nothing." n189 As previously discussed, the
practitioner should take all appropriate steps to effectuate a remedy prior to the sale to avoid this trap. Recently,
however, the Washington Supreme Court held that none of the statutory prerequisites, including notices, publication,
venue, and sale, are subject to waiver, such as using a non-judicial foreclosure of agricultural land. n190
The Act helps borrowers avoid large bonds by allowing the court to factor in the grantor's equity when it establishes
the security amount. n191 A court can find that a lender is protected when an analysis finds equity in the property. [*359]
Because there is no bond in a judicial foreclosure, the lender relies on getting the property back at the end of a yearlong
redemption period.
Laches may bar the action when a party that should have been aware that it had a cause of action unreasonably sits
on its claim long enough to have damaged the defendant. n192
Two recent cases, Albice v. Premier Mortgage Services of Washington, Inc., n193 and Schroeder v. Excelsior
Management Group, LLC, n194 limit waiver arguments as an equitable doctrine that may be supported by appropriate
facts. n195 In Albice, the court vacated a void sale for non-compliance with the Deed of Trust Act and rejected the
purchaser's claim that he was a bona fide purchaser, thus protecting the conclusive presumption of a valid sale in favor
of a bona fide purchaser. n196
Further advancing consumer rights, Schroeder emphasized that the Deed of Trust Act set forth conditions that are
mandatory for a foreclosure to be valid. n197 Despite a written waiver, the court held that a waiver of statutory
preconditions went against legislative intent. n198 The court remanded to determine whether the proper procedure had
been observed. n199 The waiver doctrine is now relegated to an equitable doctrine that may apply after a proper sale to a
bona fide purchaser is completed, as was the case in Koegel.
In a somewhat countervailing doctrine, the court in Udall v. TD Services n200 approved a bidding process in a non-
judicial foreclosure sale in favor of a bidder, who was involved in and profited from a notable price irregularity at the
sale. n201 Here, Udall purchased property at a non-judicial sale from an auctioneer-agent of the trustee for exactly $
100,000 below the amount of the debt, the opening bid set by the lender. n202 When the trustee discovered this, it "refused
to deliver the deed to Udall." n203 Udall brought a lawsuit to enforce the contract. n204 The trial court, on summary
judgment, upheld the contract in favor [*360] of Udall. n205 On appeal, however, the court properly adopted the general
rule throughout the country; the court held that there was no contract between Udall and the trustee, and that the
statutory framework of the Deed of Trust Act allowed a trustee to withhold the deed if a serious irregularity existed. n206
The Washington Supreme Court granted discretionary review and reversed the decision, holding that Udall was
entitled to the property at the discounted price from the sale. n207 The Washington State Legislature subsequently revised
the Deed of Trust Act to allow a trustee to withhold a deed under these circumstances. n208
V. Advocating for the Use of Tort Analysis in Wrongful Foreclosure Cases
Page 403Page 403
49 Gonz. L. Rev. 331, *
First, this section advocates for the courts' use of tort analysis when evaluating a cause of action for wrongful
foreclosure. Second, this section explains why recent decisions denying claims for wrongful initiation of foreclosure
proceedings are unsound. Third, this section explains why courts should recognize that a wrongful commencement of a
non-judicial foreclosure is tortious, and how courts across the country have considered this issue. Finally, this section
discusses Deed of Trust Act violations that support the use of tort claims to enforce and protect the rights of
homeowners.
A. Recent Decisions Denying a Claim for Wrongful Initiation of Foreclosure
The cases highlighted below were dismissed because the trial courts found that the claimant did not have any
compensable damages until a foreclosure sale actually occurs. Under traditional tort analysis, however, a cause of action
is implied by a breach of duty, whether the duty is set forth in a statute or by common law decision. n209 It is illogical for
advocates to consider foreclosure as [*361] a single event consisting only of the sale of the home. Rather, foreclosure
is a yearlong, multi-faceted process in which damages begin to accrue upon the date of the first notice of pre-foreclosure
options, and continue well beyond the actual sale. n210
Examples of pre-sale misconduct causing considerable damages to homeowners abound. For example, former
attorney Norman Maas instituted a collusive foreclosure against his former clients, known as "the R's", and other lien
holders. n211 The action was a judicial foreclosure, but the plaintiff could have just as easy used the non-judicial
procedure. Lien holder "Mr. H" challenged the validity of the foreclosure contending that when he advanced money to
the Ross's, he paid off their debt to Mr. Maas, so it had been satisfied. n212 Because of the lapse of time, little evidence of
the payment could be produced. n213 Nevertheless, the hearing officer found that "Mr. H" had indeed paid off the lien and
the foreclosure was collusive. n214 Mr. Maas fabricated the claim to get the property free and clear for himself and had
destroyed records that would prove otherwise. n215 The Washington Supreme Court, after Mr. Hope's counsel filed a bar
complaint against Mr. Mass, disbarred Mr. Maas n216 on January 3, 2002, concluding that the foreclosure was based on a
fabricated claim.
In another instance of improvident lawyer conduct, the trial court faced a claim that a self-proclaimed loan shark
was attempting to foreclose on a residence of a woman who borrowed money to stave off a foreclosure at the rate of
seventy-five percent. n217 Mr. Kandi initiated a foreclosure by sidestepping the foreclosure procedures by shortening the
notice period, scheduling the sale well before the time allowed, and only halting when a lawsuit was initiated. n218 The
court awarded a usury penalty of $ 240,000 (to be set off against the debt) and an additional penalty for punitive
damages of [*362] $ 100,000 plus attorney fees and costs. n219 As the damages exceeded the deed of trust debt, the title
was quieted in favor of the plaintiff, thus nullifying the deed of trust. n220 Although many pre-sale cases may not have
significant damages, there are at least attorney fees coupled with considerable anguish about the prospect of losing their
home. Other states have readily accepted such pre-sale claims.
A Georgia court sums up the rule that a lender's last minute cancellation of the foreclosure sale does not bar a
homeowner from pursuing a claim of damages for humiliation and emotional distress, from the attempted wrongful
foreclosure by the lender:
It strains credulity to insist that the recovery of appellant's wrongfully foreclosed residence has made her whole, and we
find no bar in law or in logic to a recovery of damages for her humiliation and emotional distress should evidence at
trial establish the truth of the allegation in her pleadings that the foreclosure was instituted intentionally and without
basis. Accordingly, we do not agree that because the foreclosure sale had been cancelled, appellant could not pursue her
separate claim for damages. n221
Additionally, the Georgia court specifically found liability for attempted wrongful foreclosure in the common law of
tort liability:
We do not agree with the trial court that a wrongful foreclosure action sounds only in contract. There exists a statutory
duty upon a mortgagee to exercise fairly and in good faith the power of sale in a deed to secure debt. Although arising
from a contractual right, breach of this duty is a tort compensable at law. n222
Page 404Page 404
49 Gonz. L. Rev. 331, *
Judge Karen Overstreet, Chief Bankruptcy Judge in the Western District of Washington, has rejected the proposition
that a foreclosure must be completed in order to give rise to a legal remedy. Judge Overstreet argues, "[A] plaintiff who
actually stops the foreclosure should not be in a worse position than someone who doesn't stop the foreclosure," and "a
plaintiff who stops [*363] foreclosure has as many rights, at least as many rights if not more than someone who fails to
stop the foreclosure." n223
Many jurisdictions have found that attempted wrongful foreclosure gives rise to a common law cause of action, if
under the rubric of other claims. n224 For example, Georgia courts have found liability for attempted wrongful foreclosure
in common law theories of damage to compensate a grantor's damaged reputation, invasion of privacy, and libel arising
from the illegal foreclosure. n225 These courts allow plaintiffs to assert a claim for attempted wrongful foreclosure when a
defendant breaches their duty by knowingly and intentionally publicizing "untrue and derogatory" information
concerning the debtor's financial condition and the debtor sustains damages as a direct result of this publication. n226
Attempted wrongful foreclosure can be characterized by a number of different labels, including the intentional or
negligent infliction of emotional distress or outrage, both of which are well-established common law causes of action.
n227
However, it is the allegation of fact, not the label that determines the cause of action and the appropriate relief. "In a
wrongful foreclosure action, an injured party may seek damages for mental anguish in addition to cancellation of the
foreclosure." n228 Initiating a foreclosure where the homeowner is not in default, may cause the servicer or lender to be in
violation of the Fair Debt Collection Practices Act. n229
"In some cases, an award of damages for intentional infliction of emotional distress may be supported by the
evidence of an intentional wrongful [*364] foreclosure," if it would be foreseeable that such damages would be
suffered. n230 Washington has well-established case law regarding the tort of outrage/emotional distress lodged in the
foreclosure context. A person who inten-tionally or recklessly causes emotional distress to another by extreme and
outrageous conduct is liable for severe emotional distress resulting from such conduct. n231 The torts of intentional
infliction of emotional distress and outrage are nearly identical. n232 Foreclosure, repossession, and other forms of
wrongful debt collection may give rise to a claim for emotional damages and/or outrage under Washington law. n233
In their comprehensive and widely cited treatise, Grant Nelson and Dale Whitman describe the starting point for
determining what remedies are available to address a defective non-judicial foreclosure:
The nature and scope of the remedy will depend on several factors. Among these are whether the defect is discovered
before or after sale, the nature of the defect, and, importantly, if the sale has already been completed, whether the sale
purchaser or any subsequent grantee is a bona fide purchaser. n234
In general, judicial foreclosures can be stopped by payment of the debt. n235 However, because a well-settled maxim of
Washington law holds that "equity abhors forfeitures," n236 courts have frequent occasion to review both judicial and non-
judicial foreclosures. n237
[*365]
B. A Cause of Action for Wrongful Commencement of a Non-Judicial Foreclosure
Despite Washington's historical recognition of various causes of action for wrongful foreclosure, a number of recent
trial court opinions have severely misconstrued the common law underpinnings of tort claims associated with the
initiation of defective or wrongful foreclosure. n238 Unfortunately, these claims often turn on how the cause of action is
labeled rather than the factual allegations showing that relief may be appropriate. n239 For this reason, courts must focus
on the specific allegations, not the labels, in determining if a proper claim has been asserted. n240
Courts often, at the urging of the lender's counsel, or in the absence of argument by the pro se homeowner, find
complete waiver of defenses if the homeowner failed to get an injunction prior to the foreclosure sale. n241 Conversely, if
a suit is brought prior to the sale, there is no cause of action and no harm. n242
The historic cause of action against interference with real property by a wrongful foreclosure is trespass on the
case, a tort that has deep support in the common law. n243
1. Cases That Do Not Support a Cause of Action for Wrongful Commencement of a Non-Judicial Foreclosure
Page 405Page 405
49 Gonz. L. Rev. 331, *
In cases rejecting all claims for wrongful initiation of foreclosure, this narrow view is best illustrated by Vawter v.
Quality Loan Service Corp. of Washington n244 and its growing progeny. n245 These cases are predominantly [*366]
federal district court opinions, and most derive support from the unpublished opinion in Krienke v. Chase Home
Finance, holding that, absent a trustee's sale of the property, there is no claim for wrongful foreclosure and the action
must be dismissed as a matter of law. n246 If the sale had occurred, the lender's counsel could argue renvoi n247 because the
sale had occurred without the homeowner obtaining an injunction, the homeowner has waived all of their claims. n248
In Vawter, the U.S. District Court of Washington concluded that there was no cause of action for wrongful
foreclosure, because the Washington Deed of Trust Act does not specifically provide for a statutory cause of action for
damages for the wrongful institution of non-judicial foreclosure proceedings where no trustee's sale occurs. n249
However, Vawter relies largely upon two unpublished opinions for this proposition - Pfau v. Washington Mutual, Inc. n250
and Krienke v. Chase Home Financial, LLC n251 - and was decided before a Washington appellate court, which held that a
homeowner had a cause of action for initiating a foreclosure in violation of the provisions of the Washington Deed of
Trust Act. n252 The conflict between these cases has been recognized, and the question has been certified to the
Washington Supreme Court. n253
[*367] Reliance on Krienke is particularly troublesome in this case, because the homeowners in Krienke were not
represented by an attorney when arguing the motion for summary judgment in either the trial n254 or appellate courts. n255
In these circumstances, courts wisely issue unpublished opinions, as one party of the case is typically not thoroughly
briefed. n256 These cases may be decided unfairly because a pro se litigant has failed to raise important and persuasive
issues that would allow an appellate court to decide a case fully on the merits. For this reason, unpublished appellate
opinions may not be cited to as authority in state proceedings, n257 but may be cited in federal court. n258 Should there be
any doubt how Washington law should be interpreted, federal courts may invoke certification of questions to the
Washington Supreme Court. n259 Vawter does not identify any published - and therefore binding - precedent which states
that Washington does not recognize attempted wrongful foreclosure as a cause of action, but relies instead upon
Krienke. n260 Moreover, the only legal basis for the Vawter court's rejection of the plaintiffs' claims for damages for the
wrongful institution of non-judicial foreclosure proceedings was that the Washington Deed of Trust Act does not
specifically provide for a cause of action for wrongful institution of foreclosure proceedings. n261 Yet many jurisdictions
have recognized causes of action at least incidentally derived from wrongful [*368] foreclosures, n262and Washington
state courts have recently begun to explicitly reject the Vawter court's analysis due to subsequent legislative action. n263
The Vawter reasoning is faulty, because the basis for the tort of wrongful initiation of foreclosure or attempted wrongful
foreclosure is found in the common law and not, almost by definition, in statutes. n264 The Washington Supreme Court
has recently pointed out that denial of a tort claim solely because there is a statutory remedy available is unnecessary
and "would unsettle ... tort law." n265
Even the rarely used implied cause of action doctrine would encompass homeowners as a class of persons under the
Deed of Trust Act, as intended, to benefit from the protections in that statute. n266 This common law doctrine does
[*369] not provide a cause of action directly, but the factual allegations, demonstrating either legal or equitable
entitlement to relief, may justify the protection. n267
2. Cases That Support a Cause of Action for Wrongful Commencement of a Non-Judicial Foreclosure
In Cox v. Helenius, n268 the paradigmatic case that establishes the rules on vacating defective non-judicial foreclosure
sales, the court specifically declared that one of the three goals of the Deed of Trust Act is to "prevent wrongful
foreclosure." n269 This strongly demonstrates that there are, or should be, judicial remedies or a cause of action that
prevents a wrongful foreclosure from being completed. Recently, Division I of the Washington Court of Appeals held
that a violation of the Deed of Trust Act is a tort, but elected not to characterize it as "wrongful foreclosure." n270
Moreover, a certified question was issued to the Washington Supreme Court by the U.S. District Court for the Western
District of Washington that would answer whether there is a cause of action in Washington for damages for wrongful
foreclosure where no sale has been conducted. n271
Most jurisdictions recognize the tort of wrongful foreclosure, or a variation thereof. n272 As some courts have held,
"the degree of misconduct that will support an action for wrongful foreclosure may range from mere negligence to
outright maliciousness." n273 A homeowner is entitled to recover damages if ""the [*370] foreclosure is conducted
negligently or in bad faith to his or her detriment,'" and causes damage. n274
In addition, attempted wrongful foreclosure - the wrongful institution or advancement of the foreclosure process -
has been widely recognized as a valid cause of action. n275 Attempted wrongful foreclosure causes damage similar to the
Page 406Page 406
49 Gonz. L. Rev. 331, *
completion of a wrongful foreclosure; including emotional damage, damage to a homeowner's credit score, invasion of
privacy through notice of foreclosure, slander of title, loss of value, and the costs and attorney fees incurred to enjoin a
wrongful foreclosure. n276 The only difference between wrongful foreclosure and attempted wrongful foreclosure is the
quantum of total damages, and accounting for the ultimate loss of the equity in the home at the time of sale. n277
Therefore, wrongful foreclosure and attempted wrongful foreclosure should not be bifurcated into two separate tort
causes of action. Denying recovery unless and until a sale occurs ignores the considerable effort and money required to
stall a wrongful or defective foreclosure, which is in addition to the anguish and distress experienced by the homeowner,
the moving expenses incurred, and the attorney fees. n278 Bankruptcy protection is also used [*371] to stop the sale of a
home, but the bankruptcy process impairs the homeowner's credit and requires the expenditure of substantial attorney
fees. n279
Non-judicial foreclosures may be stopped at least eleven days before the foreclosure sale date, by a statutory right
to reinstate, or "de-accelerate," the debt. n280 Many other affirmative defenses to a non-judicial foreclosure are available,
but a suit must first be filed to enjoin the sale, thus giving a court the opportunity to evaluate the validity of the
defenses, and either reinstate the loan, or award or set-off any damages. n281
The Walker case n282 should be approved by the Washington Supreme Court in answering the question certified by
the U.S. district court in Frias n283 and broadly hold that there is a cause of action in the State of Washington for wrongful
foreclosure, regardless of whether the tortious conduct occurred before or after a wrongful sale. Such a holding is
consistent with recent cases from that court protecting the rights of homeowners in the face of a defective or wrongful
non-judicial foreclosure. n284
C. Violations of the Deed of Trust Act
There are, of course, specific sections of the Deed of Trust Act that provide for remedies. This includes a breach of one
of several specified duties that trustees owe the grantor and other individuals involved in the loan process, such as junior
lien holders and bidders, giving proper statutory notices, n285 such as notices of pre-foreclosure options and notice of
default, n286 notices of sale, n287 and proper conduct of the sale. n288 A trustee must be impartial and not controlled by or
owned by the beneficiary. n289 One of the possible statutory qualifications is that a corporate trustee be an actual
Washington corporation, and therefore a [*372] Washington resident, with an officer who is a Washington resident. n290
Additionally, the trustee must maintain a "physical presence and have telephone service" at an office in Washington
from prior to the sale until the sale has concluded. n291
A trustee may continue the sale so long as the sale will benefit either the grantor or beneficiary; additionally, the
trustee may continue the sale in the event that a junior lien holder or bidders may benefit from the sale and possibly
generate a surplus for the grantor's benefit. n292 The trustee must be empowered to act; n293 if the beneficiary appoints a
new trustee, it will not have the powers of the original trustee until the recording of the appointment. n294 The trustee
must also act for the true owner as the real party in interest of the note, and not as a nominee for an agent, acting as an
attorney-in-fact. n295 The owner of the debt needs to be specifically identified as the beneficiary in the foreclosure
notices. n296 More importantly, if the trustee does not have authority to foreclosure because there has not been a default
on the loan, appointment by a proper holder of the promissory note, expiration of sale date, or other statutory
prerequisite, would still render any sale of the property void. n297
Additional violations that are considered wrongful foreclosure include the practice of dual tracking, which involves
moving the sale date just beyond a mediation date. n298 Under dual tracking, a sale could be conducted on a Friday if the
mediation fails on Thursday, which gives the hapless homeowner no time to enjoin the sale or otherwise discuss loan
modification or settlement. n299 Dual tracking also includes circumstances when a sale is scheduled alongside efforts of
the homeowner to obtain a modification of the loan under HAMP or other [*373] programs designed to eliminate harsh
loan terms. n300 Often, homeowners are told by beneficiaries "not to worry" about scheduled foreclosures while a
modification is being processed, only to find themselves in foreclosure because the beneficiary failed to keep the trustee
at bay. n301 Treasury regulations under the HAMP program, and cases interpreting those regulations, forbid initiating or
advancing a foreclosure while the homeowner has a pending application for modification. n302
Enforcement of promised loan modifications are currently being litigated all over the country; the overriding trend
is to allow enforcement under a number of theories, including specific performance, promissory estoppel, and breach of
contract. n303 The Seventh Circuit recently upheld a borrower's breach of contract claim on the merits when the plaintiff
alleged that the servicer "agreed to permanently modify her loan, deliberately misled her into believing it would do so,
and then refused to make good on its promise." n304 The borrower made several timely payments on a TPP and the
Page 407Page 407
49 Gonz. L. Rev. 331, *
servicer then threatened foreclosure. n305 The court found that the facts of this case "support garden-variety claims for
breach of contract or promissory estoppel." n306 The Ninth Circuit has upheld the trend, allowing breach of contract
claims based on TPPs to survive at the pleading stage. n307
The foreclosure sale must be held in the county where the property is located or at least on the parcel, and in a
public place designated in the notice of sale. n308 Additionally, auctioneers cannot make materially misleading statements
about the sale, n309 and the deed of trust must be properly recorded and executed. n310 Finally, the trustee must not have a
conflict of interest between [*374] his or her relationship with the beneficiary and the duty owed to the grantor. n311 A
lawyer acting as trustee cannot continue to act in this role if any conflicts arise regarding the property at issue in a non-
judicial foreclosure; the lawyer must transfer the authority to another attorney. n312 No party "may be both a trustee and
beneficiary under the same deed of trust." n313
Other defenses are unique to non-judicial foreclosure of deeds of trust because of the particular obligations
imposed upon trustees who conduct the sale of the real property. n314 A trustee selling property at a non-judicial
foreclosure sale has strict obligations imposed by law. n315 In most states, "[A] trustee is treated as a fiduciary for both the
borrower and the lender." n316 In an earlier Washington case regarding the duty of a trustee, the court of appeals approved
the following statement describing the duties of a trustee: "among those duties is that of bringing "the property to the
hammer under every possible advantage to his cestui que trusts,' using all reasonable diligence to obtain the best
price." n317
In Cox v. Helenius, the supreme court adopted the following view that "because the deed of trust foreclosure
process is conducted without review or confrontation by a court, the fiduciary duty imposed upon the trustee is
exceedingly high." n318 The court highlighted four duties of the trustee, including (1) the duty to use diligence in
presenting the sale of the property with "every possible advantage to the debtor as well as the creditor;" (2) the duty to
""take reasonable and appropriate steps to avoid sacrifice of the debtor's property and his interest;'" (3) the duty to
ensure that conduct undertaken is "reasonably calculated to instill a sense of reliance ... by the grantor, that the course of
conduct may not be abandoned without notice to the grantor;" and (4) the duty to prevent a breach of fiduciary duty by
ensuring that the attorney withdraws when an actual conflict of interest arises between the roles of attorney for the
beneficiary and trustee. n319
[*375] Since Cox, the legislature has distinguished a trustee from a true fiduciary by requiring a trustee to act with
a duty of "good faith" to all parties. n320 However, more recently in Klem v. Quality Loan Services, n321 the Washington
Supreme Court elevated the duty of a trustee. The court held trustees to the general standard in all non-judicial
foreclosure states, placing "fiduciary" in its proper context of independent discretion:
We hold that the practice of a trustee in a non-judicial foreclosure deferring to the lender on whether to postpone a
foreclosure sale and thereby failing to exercise its independent discretion as an impartial third party with duties to both
parties is an unfair or deceptive act or practice and satisfies the first element of the CPA. Quality failed to act in good
faith to exercise its fiduciary duty to both sides and merely honored an agency relationship with one. n322
Scholarly commentators have summarized the duty of a trustee as "a fiduciary for both the mortgagor and mortgagee
and [acting] impartially between them." n323
The trustee for sale is bound by his office to bring the estate to a sale under every possible advantage to the debtor as
well as to the creditor, and he is bound to use not only good faith but also every requisite degree of diligence in
conducting the sale and to attend equally to the interest of debtor and creditor alike, apprising both of the intention of
selling, that each may take the means to procure an advantageous sale. n324
[*376] Generally, a trustee may not purchase the property it is selling without express permission from the grantor. n325
If necessary, courts have historically required additional duties of the trustee. n326 Washington law allows a trustee to
extend a sale for up to 120 days for "any cause he deems advantageous." n327 Continuing a sale beyond this point results
in a void sale. n328
Page 408Page 408
49 Gonz. L. Rev. 331, *
Alternatively, a trustee does not need to use due diligence in notifying interested parties of a coming sale, n329 and in
most cases, a trustee is usually not required to disclose interests, such as liens, that the purchaser's own investigation
should have uncovered. n330 In Washington, the duty to disclose only once the party "makes representations or answers
questions concerning the title." n331
A trustee must stay the sale if it is aware of defects. In Cox v. Helenius, the court found that the trustee ought to
have told the grantor's attorney that it had failed to halt the sale when it knew that that its ability to foreclose was
contended. n332 The sale was voided because of this failure. n333 Similar to the loan modification problem with dual
tracking, discussed earlier, Cox suggests it is a breach of fiduciary duty to tell a homeowner "not to worry" about a
foreclosure while neglecting to have the trustee cancel the sale. The homeowner has a much more difficult time (and
burden of proof) vacating a sale than electing a pre-sale remedy.
Trustees are prohibited from "chilling" the sale through suggestions that would decrease interest in the sale. n334 Such
suggestions may be enough to cause the sale to be vacated. n335 Further, a trustee must not overcharge for their [*377]
services, nor are they permitted to profit from the associated costs of the foreclosure. n336
Because these breaches of duty constitute wrongful foreclosure by a trustee (and possibly the lender), a number of
defenses to wrongful foreclosure are directed almost exclusively at the lender and subject the lender or servicer to
possible liability. n337 These defenses include attempting to foreclose on a usurious loan; n338 foreclosing when the Deed of
Trust has been properly rescinded; n339 foreclosing on a forged instrument, such as the Deed of Trust or Note; or
predatory, unconscionable, improvident, n340 and extortionate loans, n341 which can be reformed or eliminated. HAMP
modifications offered or improperly denied can be enforced. n342
Fraudulent liens or invalid filings that cloud title can be enjoined and the title quieted or cleared. n343 Defective
notaries can also be a major problem and can be a violation of the Consumer Protection Act (CPA). n344
Although logic suggests that wrongful or illegal attempts to take one's home would be actionable, some courts
focus too narrowly on the labels given to these causes, actions, or claims, and give short shrift to efforts to stop
foreclosures and recover damages. n345 Whether these claims are tort claims, statutory violations, n346 or fall under more
broad consumer protection laws, n347 courts have a duty to resolve proper claims, invoke appropriate equitable powers,
and facilitate just resolution of claims. Foreclosures are equitable in [*378] nature and can be denied for lack of "doing
equity" or delayed on equitable grounds. n348
Courts prefer, of course, that presale remedies, such as injunctions, be used rather than attempting to resolve loan
problems after a foreclosure sale, n349 which presents more complicated title issues and waiver defenses. However, a void
sale is a nullity and can be set aside within the appropriate statute of limitation, even against a bona fide purchaser. n350
There is a significant difference whether the claims are brought before sale, after sale, in a bankruptcy adversary, or
in state or federal court. In order to be heard in court, a lawsuit needs to be filed and the sale enjoined. n351
D. Defending a Wrongful Foreclosure at the Eviction Hearing
The eviction proceeding is the final step in the foreclosure process and the last line of defense for a homeowner. The
unlawful detainer hearing is an expedited proceeding before a court commissioner, and is often held on seven days
notice. n352 The commissioner determines if a writ of restitution n353 is to be summarily issued, or whether an evidentiary
trial should be conducted on the material facts in dispute. n354
In Washington, "the purchaser at a trustee's sale shall be entitled to possession of the property on the twentieth day
following the sale ... ." n355 The purchaser may bring an unlawful detainer action to remove the grantor or [*379] person
deriving their rights from the grantor. n356 Certain defenses are not allowed in an unlawful detainer action. n357 As in
Washington, most states restrict the defenses available in an eviction action. n358 In Cox, the court allowed a defense
based on defects in the foreclosure process in an unlawful detainer action. n359 In Savings Bank of Puget Sound v. Mink,
n360
the Washington state court of appeals found several defenses were unable to be raised in an unlawful detainer action,
but rather, a defective foreclosure may be a proper defense:
[In Cox], the Supreme Court recognized that there may be circumstances surrounding the foreclosure process that will
void the sale and thus destroy any right to possession in the purchaser at the sale.
Page 409Page 409
49 Gonz. L. Rev. 331, *
[The Court also recognized] two bases for post-sale relief: defects in the foreclosure process itself, i.e., failure to
observe the statutory prescriptions and the existence of an actual conflict of interest on the part of the trustee ... . n361
When defending a foreclosure in an eviction proceeding, it is advisable to file a companion civil action and move to
consolidate and join all other defenses when attempting to raise a defense to the foreclosure at the eviction stage. n362
This is because the eviction proceeding is limited to issues relating to the right of possession of the property, not
deciding formal title questions.
Lawyers should keep in mind that a commissioner ruling in an eviction case could be brought before a superior
court judge for revision, essentially a de novo proceeding from the record below. n363 Most important, however, is to raise
claims before the property is sold at sale and an eviction commenced.
[*380]
VI. Conclusion
Washington must enact stronger legislation to control actions of trustees who prosecute non-judicial foreclosures. First,
trustees should be licensed by the Washington Department of Financial Institutions similar to escrows. The work of
trustees is the practice of law, where deeds are prepared and recorded, priorities evaluated, legal notices filed and
served, and debts collected. n364 Many out-of-state corporations process Washington foreclosures and do not have in-state
offices, n365 despite a statutory requirement that the trustee maintain an office in this state. n366 Trustees operating from
out-of-state are often hard to communicate with and unaware of the requirements of Washington law. This difficulty was
demonstrated in Douglas, with ReconTrust, a California corporation and a subsidiary of Bank of America, meeting the
minimum statutory requirements of "physical presence." n367 A simple registration and monitoring system for statutory
compliance would have prevented this, strengthening the plaintiff's case. Additionally, licensing disclosures would help
to remedy the conflict that arises currently when many trustees are owned or controlled by the lenders conducting the
foreclosures. n368 Moreover, these mass foreclosures by large foreclosure mills are largely co-opted by Lender Processing
Service, a large corporation "managing" foreclosure processing by trustee companies. n369 This largely eliminates direct
contact between trustees and servicers, a main concern in Klem.
[*381] Second, Washington should require trustees to be licensed attorneys. n370 Attorneys who are licensed and
insured are typically readily available to address and evaluate problems in the process, bound by rules of professional
conduct, and more likely to understand the importance of complying strictly with the applicable statutes and court
precedents in the non-judicial process. Lawyers would be reluctant to delegate their responsibilities to others, whereas
trustees take the place of judges who adjudicate judicial foreclosures. There is no fundamental difference in the two
procedures when considering what is at stake during a foreclosure; entrusting an out-of-state shell corporation to
adequately ensure that the rights of all parties are protected is a stretch and has resulted in considerable litigation. n371
Most trustee companies are linked to law firms and lawyers who readily participate in the process; thus, this
requirement would not present a hardship to the trustee or the lender, nor would it require any re-engineering of the
foreclosure process.
Third, the Deed of Trust Act should not unduly restrict courts, as it does in its present form, by rigidly requiring
five days notice of an application for an injunction, mandating bonds and payments into court, and limiting claims
brought after sale. Courts are empowered with equitable powers that cannot be limited by a legislature. n372 Courts are
better able to evaluate equities and appellate courts provide a further safety net for the homeowner in a non-judicial
foreclosure.
Fourth, because of the considerable confusion among lower courts, the legislature should specifically indicate in the
Deed of Trust Act that no limitation is intended as a cause of action for a violation of the Act, either post sale or pre-
sale. The normal three-year tort claim statute and four-year CPA limitation is proper.
Fifth, before a non-judicial foreclosure can be instituted, all assignments of promissory notes should be required to
be recorded in the county recorder's system. This protects priority of the loan from competing creditors or illegal
transfers and allows homeowners to identify the owner of the obligation so it can be readily determined what programs
are available to avoid foreclosure. Bankruptcy trustees assume rights to debtor assets when bankruptcy actions are filed
and they need to know what entity is entitled to notice.
Page 410Page 410
49 Gonz. L. Rev. 331, *
Sixth, Washington statute, section 61.24.127, was an ill-fated effort to avoid waiver of claims in a foreclosure and a
poor compromise between [*382] creditors and homeowners, ultimately achieving neither party's objectives and
leaving confusion for the courts to sort out. The law should simply be eliminated. Waiver is an equitable doctrine and a
court can properly apply this doctrine in the context of specific facts and equities. n373 This blanket attempt by the
legislature to fix the foreclosure process falls short of its goals.
Finally, any material violation of section 61.24.127 should be a per se violation of the CPA, and the Deed of Trust
Act should make this clear. This per se violation is the best way to ensure private enforcement of the CPA and the
protections in the Deed of Trust Act. Based upon the last three supreme court cases in this area, all of which support
enforcement of wrongful foreclosure claims using the CPA, Washington courts are strongly leaning in this direction. n374
Most lenders lose considerable money in the foreclosure process and would benefit from a performing loan, fully
secured by real property. Large amounts of money are wasted on judicial actions to stop foreclosures and in bankruptcy
court. Lenders should take advantage of the various government programs, such as HAMP, that provide incentives to
lenders for a reduction of the interest rate, reduction of principle, and easing of the foreclosure crisis, which was largely
created by these same large lenders, servicers, and the regulators who failed to protect the American economy from
corporate greed.
Transfers and ownership of loans should be accessible in the public record, and not hidden from borrowers through
private companies such as Mortgage Electronic Registration System. n375 Trustees should be licensed and strictly
required to comply with Washington law regarding residence, neutrality, and competence, rather than operating as
another profit center for lenders. Courts should be the last resort for homeowners seeking protection of their rights
under the various consumer protection laws that discourage misconduct. Compensation for victims should be made
available by broadening rights to litigate pre-sale abuses for all tortious conduct during the foreclosure process.
A reasonable accommodation on a loan modification for the qualified homeowner saves money for the lender, for
the homeowner, for the community, and for the justice system. Foreclosures, on the other hand, displace homeowners
(often onto the public welfare system), reduce tax revenues, increase crime, and only rarely facilitate repayment in full
to the lenders.
Legal Topics:
Estate, Gift & Trust LawTrustsTrusteesGeneral OverviewReal Property LawFinancingMortgages & Other Security
InstrumentsMortgagee's InterestsReal Property LawFinancingSecondary FinancingResidential Secondary Mortgages
FOOTNOTES:
n1. Hedrick Smith, Who Stole the American Dream 209 (2012); Elizabeth Renuart, Toward a More Equitable Balance: Homeowner and
Purchaser Tensions in Non-Judicial Foreclosure States, 24 Loy. Consumer L. Rev. 562, 583 (2012); see James Charles Smith, The Structural
Causes of Mortgage Fraud, 60 Syracuse L. Rev. 473, 474 (2012).
n2. Joseph L. Hoffmann, Court Actions Contesting the Nonjudicial Foreclosure of Deeds of Trust in Washington, 59 Wash. L. Rev. 323,
330 (1984).
n3. See Smith, supra note 1, at 223.
n4. See generally Smith, supra note 1, at 223.
n5. See generally Chris Amisano, What Is an 80/20 Mortgage Loan?, SFGate, http://homeguides.sfgate.com/80-20-mortgage-loan-
7591.html (last visited Mar. 22, 2014) (stating that these were commonly called "80/20" loans. The first lien was 80 percent of the purchase
Page 411Page 411
49 Gonz. L. Rev. 331, *
price, and, of course, the 20 percent was the down payment. Today these second liens are all but unsecured by any equity, and are sold off to
collection agencies or discharged in ever increasing consumer bankruptcies). See also Elizabeth Renuart, Uneasy Intersections: The Right to
Foreclose and the U.C.C, 48 Wake Forrest L. Rev . (forthcoming Issue5 2013) (manuscript at 1210-11) available at http://papers.ssrn.com
/sol3/papers.cfm?abstract_id=2316152.
n6. National Real Estate Trends & Market Info, Realty Trac (Feb. 2014) http://www.realtytrac.com/statsandtrends/foreclosuretrends;
(showing that during 2009-2013 an average of two million foreclosures were completed in this country each year).
n7. Smith, supra note 1, at 193-94.
n8. Vawter v. Quality Loan Serv. Corp. of Wash., 707 F. Supp. 2d 1115, 1123 (W.D. Wash. 2010).
n9. Brown v. Household Realty Corp., 189 P.3d 233, 240 (Wash. Ct. App. 2008).
n10. Compare id. at 233 (case filed too late), with Vawter, 707 F. Supp. 2d at 1124 (case filed too soon).
n11. See Vawter, 707 F. Supp. 2d at 1124.
n12. See Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law § 7.11 (5th ed. 2007).
n13. See generally Elizabeth Renuart, Uneasy Intersections: The Right to Foreclose and the U.C.C, 48 Wake Forrest L. Rev. (forthcoming
Issue5 2013) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2316152.
n14. Id. § 8.1. In a judicial foreclosure, the lender seeks a judgment, then has the property sold to credit the sale price against the debt. If the
sale price is not sufficient, a deficiency remains and is entered as a judgment against the homeowners.
n15. 11 U.S.C. § 362(a) (2000) (showing, in the automatic stay provision, that redemption is allowed for homeowners who can sell the
property after a foreclosure sale for enough to pay the judgment).
n16. Id. (automatic stay of all proceedings against debtor's property).
n17. Wash. Rev. Code § 61.12.060 (2013); see also, Nat'l Bank of Wash. v. Equity Investors, 506 P.2d 20, 44 (Wash. 1973) (the upset price
statute "calls not for what the court would determine to the be minimum value, but rather its fair value"); Wash. Rev. Code § 61.12.093-94
(Stating if the owner abandoned the property for more than 6 months, the mortgagee has no right to a deficiency, nor is there a redemption
right).
n18. Wash. Rev. Code § 61.12.060.
n19. Lee v. Barnes, 379 P.2d 362, 365 (Wash. 1963).

Page 412Page 412
49 Gonz. L. Rev. 331, *
n20. Felthouse & Co. v. Bresnahan, 260 P. 1075, 1076 (Wash. 1927) (stating that the statute of limitation "never runs" on a set-off); Seattle
First Nat'l Bank v. Siebol, 824 P.2d 1252, 1255 (Wash. Ct. App. 1992).
n21. Wash. Rev. Code § 6.23.080 (2013).
n22. Wash. Rev. Code § 6.23.020; Wash. Rev. Code § 61.12.093 (stating that if the property is abandoned for six months, there is no
redemption right or corresponding right to a deficiency).
n23. Wash. Rev. Code § 61.12.060.
n24. Wash. Rev. Code § 61.24.030.
n25. John A. Gose, The Trust Deed Act in Washington, 41 Wash. L. Rev. 94, 96-97 (1966); John A. Gose & Aleana W. Harris, Deed of
Trust: Its Origin, History and Development in the United States and in the State of Washington, 32 Real Prop., Probate, & Trust J., 10-11
(2005); John Rao & Geoff Walsh, Foreclosing a Dream: State Laws Deprive Homeowners of Basic Protections, Nat'l Consumer Law Center
14 (2009), available at http://www.nclc.org/images/pdf/foreclosure_mortgage/state _laws/foreclosing-dream-report.pdf.
n26. Kenneth Harney, A Key to Housing Recovery? Out-of-Court Foreclosures, The Seattle Times, Nov. 30, 2013,
http://seattletimes.com/html/businesstechnology/2022333 977_bizharney01xml.html (arguing that states where non-judicial procedures are
used for foreclosure, resulted in quicker economic recovery because foreclosed homes get into the hands of new owners faster).
n27. See Wash. Rev. Code § 61.24.010 (showing that trustees have considerable power over the foreclosure process and that the duty of the
trustee must be exercised fairly toward both lender and homeowner); see also Klem v. Washington Mut. Bank, 295 P.3d 1179, 1188 (Wash.
2013); John Campbell, Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures, 63 Catholic Univ. L. Rev. (forthcoming
2014) (manuscript at 69-70) (citing history of the duty in Washington and application of the Consumer Protection Act) available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2191738.
n28. 15 U.S.C. § 1692(a)(6) (1982) (showing that trustees, who conduct foreclosures on a regular basis, are debt collectors under the Fair
Dept Collection Practices Act); McDonald v. OneWest Bank, 929 F.Supp. 1079, 1087 n.6 (W.D. Wash. 2013) (citing numerous district court
cases in the Ninth Circuit); Beaton v. Chase, No. C11-0872-RAJ at 8 (W.D. Wash. Mar. 26, 2013) (court order).
n29. See Udall v. T.D. Escrow Servs., Inc., 154 P.3d 882, 885 (Wash. 2007).
n30. See Wash. Rev. Code § 61.24; see also Gose & Harris, supra note 25, at 10-11; William B. Stoebuck & John W. Weaver, Washington
Practice, 18 Real Estate: Transactions § 20.1 (2013); David A. Leen et al., Due Process and Deeds of Trust - Strange Bedfellows?, 48 Wash.
Law Rev. 763, 766-767 (1973); Klem, 295 P.3d at 1192; Walker v. Quality Loan Serv. Corp., 308 P.3d 716, 722 (Wash. Ct. App. 2013).
n31. Campbell, supra note 27, at 40.
n32. Wash. Rev. Code § 61.24.030-40.

Page 413Page 413
49 Gonz. L. Rev. 331, *
n33. Cox v. Helenius, 693 P.2d 683, 686 (Wash. 1985); see Washington Appleseed, Foreclosure Manual for Judges 202 (2013), available at
http://www.scribd.com/doc/ 139844990/Foreclosure-Manual-for-Judges-Wa-Appleseed-1 [hereinafter Appleseed].
n34. Cox, 693 P.2d at 687.
n35. Id.
n36. Trustee; Deed of Trust; Client Conflict, 926 Op. WSBA at 3 (1987).
n37. See, e.g., Schroeder v. Excelsior Mgmt. Grp., 297 P.3d 667, 680-81 n.3 (Wash. 2013).
n38. Barrus v. ReconTrust, No. C11-618-RSM, 2011 WL 2360206, at 1 (W.D. Wash. June 9, 2011); see Ethics Opinion of Professor Dave
Beorner, Professor, Seattle University of Law, to David Leen (August 11, 2001) (on file with author).
n39. FMC Techs., Inc. v. Edwards, 420 F. Supp. 2d 1153, 1162-63 (W.D. Wash. 2006).
n40. Schroeder, 297 P.3d at 680-81 n.3 ("The issue has not been briefed. It is not before us, and we do not mean to imply any finding of
improper action by the trustee. However, we are uncomfortable reciting these facts without making an observation concerning the multiple
roles played by Haberthur lest we seem to be tacitly approving of an attorney for a party acting as the trustee. The deed of trust act does not
specifically permit or prohibit an attorney for a party acting as a trustee but imposes a duty of good faith on the trustee that may, at least in
contested foreclosure actions, be difficult for a party's attorney to execute. RCW 61.24.010(4). We note the act specifically states that the
trustee "shall have no fiduciary duty or fiduciary obligation to the grantor or other persons having an interest in the property subject to the
deed of trust.' RCW 61.24.010(3). However, we also note this court has stated that to prevent property from being wrongfully appropriated
through non-judicial means and to avoid constitutional and equitable concerns, at a minimum, a foreclosure trustee must be independent and
"owes a duty to act in good faith to exercise a fiduciary duty to act impartially to fairly respect the interests of both the lender and debtor.'
Klem v. Wash. Mutual Bank, No. 87105-1, slip op. at 20 (Wash. Feb. 28, 2013) ... "Attorneys owe an undivided duty of loyalty to the client.'
Mazon v. Krafchick, 158 Wn.2d 440, 448-49, 144 P.3d 1168 (2006). At the very least, on review, it makes it difficult to determine which of
Haberthur's acts were made in his capacity as trustee and which as counsel for the beneficiary.")
n41. John Campbell, Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures; 63 Cath. U. L. Rev. (forthcoming 2014),
available at http://papers.ssrn.com/ sol3/papers.cfm?abstract-id=2191738.
n42. See State v. Lender Processing Servs., King County Superior Court No. 13-2-04196-5 entered February 13, 2013 (a subcontractor
entered into a consent decree admitting fault and agreeing to pay a judgment of over $ 4 million).
n43. In re Taylor, 407 B.R. 618 (Bankr. E.D. Pa. 2009) rev'd 90-CV-2479-JF, 2010 WL 624909 (E.D. Pa. Feb. 18, 2010) aff'd in part,
vacated in part, rev'd in part, 655 F.3d 274 (3d Cir. 2011); The Mortgage Industry's Best Servicing Solutions, LPS,
http://www.lpsvcs.com/Products/Mortgage/Servicing/Pages/default .aspx (last visited Mar. 22, 2014) ("MSP and our other related
technologies are the top mortgage loan servicing technologies in the industry. LPS' dynamic and innovative Loan Servicing Platform, or
MSP - pioneered more than 45 years ago - today processes more mortgages in the U.S. by dollar volume than any other servicing system.
MSP's technology helps manage millions of loans with total balances exceeding $ 4 trillion.").
Page 414Page 414
49 Gonz. L. Rev. 331, *
n44. About Us, LPS, http://www.lpsvcs.com/LPSCorporateInformation/AboutUs/ Pages/default.aspx (last visited Mar. 22, 2014).
n45. The Mortgage Industry's Best Servicing Solutions, LPS, http://www.lpsvcs.com /Products/Mortgage/Servicing/Pages/default.aspx (last
visited Feb. 22, 2014).
n46. In re Taylor, 407 B.R. at 622 n.2.
n47. See id. at 623. For background on the reach of LPS impacting foreclosures and relief from stay motions in bankruptcy proceedings see
In re Parsley, 384 B.R. 138, 183 (Bankr. S.D. Tex. 2008) (Countrywide's cost savings process "fostered a corrosive "assembly line' culture of
practicing law.").
n48. Tsutsumi v. Regional Trustee Services, King County Superior Court No. 13-2-24705-4 SEA (Declaration of Gutierrez, dated October
10, 2013) [hereinafter Declaration of Gutierrez].
n49. Id.
n50. See e.g., In re Taylor, 407 B.R. at 638. In Washington, LPS rates foreclosure mills by "green, yellow, and red, with the green ranking"
getting the most foreclosures. See Declaration of Gutierrez, supra note 48 at 3.
n51. State of Washington v. Lender Processing Services, No. 13-2-04106-5 (King County Superior Court Consent Decree and Judgment)
(February 19, 2013).
n52. In re Taylor, 407 B.R. at 645.
n53. Plea Agreement, at 5, United States v. Brown (M. D. Fla. 2012) (No. 3:12-cr-198-J-25-MCR), 2012 WL 5869994.
n54. In re Taylor, 407 B.R. at 645.
n55. See, e.g., H.R. 1362, 62nd Leg., Reg. Sess., at § 1(a) (Wash. 2011) (establishing state's Foreclosure Fairness Mediation program); H.R.
2614, 62nd Leg., Reg. Sess., at § 1 (Wash. 2012) (enacting various provisions effective June 7, 2012 related to short sales and the mediation
program).
n56. See Wash. Rev. Code§§61.24.030-031(for prerequisites to sale). "Meet and confer" requires the beneficiary in all residential loans to
actually meet with the homeowner to discuss a solution. Wash. Rev. Code § 61.24.031. This rarely occurs, and when it does, the lender has a
low-level agent telephone the homeowner, and that agent has no authority to solve any problems. It is, however, an important requirement of
the Deed of Trust Act if invoked. A sale would be void if a beneficiary refuses to participate. See Bagley v. Wells Fargo Bank, 2013 WL
350527 (E.D. Va. 2013) ("the face-to-face meeting requirement of 24 C.F.R.. 203.604(b) [of the National Housing Act] is a condition
precedent to the accrual of the right of acceleration and foreclosure incorporated into the Deed of Trust."); see also Mathews v. PHH Mortg.
Corp., 724 S.E.2d 196, 202 (Va. 2012).
n57. Wash. Rev. Code § 61.24.031-33.

Page 415Page 415
49 Gonz. L. Rev. 331, *
n58. Wash. Rev. Code § 61.42.031(1)(a)(i) (2012).
n59. Wash. Rev. Code § 61.24.130 (2008) sets forth the procedure for enjoining the sale to raise defenses.
n60. See Appleseed, supra note 33.
n61. See Seattle First Nat'l Bank v. Siebol, 824 P.2d 1252, 1255 (Wash. Ct. App. 1992) (the statute of limitations does not run on a set-off);
see also John Rao et al., National Consumer Law Center, Foreclosures: Mortgage Servicing, Mortgage Modifications, and Foreclosure
Defense, § 4.2.3 (4th ed. 2012).
n62. Wash. Rev. Code § 61.24.100 precludes a deficiency or judgment on the primary debt after a non-judicial foreclosure.
n63. The non-judicial foreclosure process from the initial notice to completed sale takes at least 190 days, as set forth in Wash. Rev. Code §
61.24.040.
n64. Jackowski v. Borchelt, 278 P.3d 1100, 1108 (Wash. 2012); Bennett v. Hardy, 784 P.2d 1258, 1260 (Wash. 1990).
n65. Walker v. Quality Loan Serv. Corp., 308 P.3d 716, 720 (Wash. Ct. App. 2013).
n66. Wash. Rev. Code § 2.60.020 sets forth the procedure for federal courts to seek determination of state law issues not clearly resolved in
cases pending in federal courts under diversity jurisdiction, or otherwise involving issues of state law.
n67. Frias v. Asset Foreclosures Servs., 2013 WL 6440205, at 2 (W.D. Wash. 2013).
n68. Bennett, 784 P.2d at 1261-62.
n69. Cox v. Helenius, 693 P.2d 683, 685-86 (Wash. 1985); Klem v. Wash. Mut. Bank, 295 P.3d 1179, 1188 (Wash. 2013); Schroeder v.
Exelsior Mgmt. Grp., 297 P.3d 677, 682 (Wash. 2013).
n70. Wash. Rev. Code § 61.24.163 (2012). The legislature made specific findings, which were set forth at the end of RCW § 61.24.005
about the need to protect homeowners from the increase in foreclosures. 2011 Wash. Leg. Serv. Ch. 58 (S.S.H.B. 1362) Sec. 1(1)(a)-(2)(c)
(2013):
(1) The legislature finds and declares that:

Page 416Page 416
49 Gonz. L. Rev. 331, *
(a) The rate of home foreclosures continues to rise to unprecedented levels, both for prime and subprime loans, and a new wave of
foreclosures has occurred due to rising unemployment, job loss, and higher adjustable loan payments;
(b) Prolonged foreclosures contribute to the decline in the state's housing market, loss of property values, and other loss of revenue to
the state;
(c) In recent years, the legislature has enacted procedures to help encourage and strengthen the communication between homeowners
and lenders and to assist homeowners in navigating through the foreclosure process; however, Washington's nonjudicial foreclosure process
does not have a mechanism for homeowners to readily access a neutral third party to assist them in a fair and timely way; and
(d) Several jurisdictions across the nation have foreclosure mediation programs that provide a cost-effective process for the homeowner
and lender, with the assistance of a trained mediator, to reach a mutually acceptable resolution that avoids foreclosure.
(2) Therefore, the legislature intends to:
(a) Encourage homeowners to utilize the skills and professional judgment of housing counselors as early as possible in the foreclosure
process;
(b) Create a framework for homeowners and beneficiaries to communicate with each other to reach a resolution and avoid foreclosure
whenever possible; and
(c) Provide a process for foreclosure mediation when a housing counselor or attorney determines that mediation is appropriate. For
mediation to be effective, the parties should attend the mediation (in person, telephonically, through an agent, or otherwise), provide the
necessary documentation in a timely manner, willingly share information, actively present, discuss, and explore options to avoid foreclosure,
negotiate willingly and cooperatively, maintain a professional and cooperative demeanor, cooperate with the mediator, and keep any
agreements made in mediation.
n71. See generally Walker v. Quality Loan Serv. Corp., 308 P.3d 716, 720 (Wash. Ct. App. 2013).
n72. Wash. Rev. Code § 19.86 et seq.
n73. See Bain v. Metro. Mortg. Grp. Inc., 285 P.3d 34, 49-50 (Wash. 2012); Klem, 295 P.3d at 1187-89; Schroeder, 297 P.3d at 286-87.
n74. Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 719 P.2d 531, 533 (Wash. 1986).
n75. Panag v. Farmers Ins. Co. of Wash., 204 P.3d 885, 896 (Wash. 2009).
n76. Id.
n77. Id. The Federal Trade Commission (FTC) has defined what constitutes an unfair act or practice as one that causes or "is likely to cause
substantial injury to consumers which is not reasonably avoidable by consumers themselves and is not outweighed by counter-vailing
benefits to consumers or to competition." 15 U.S.C. § 45(n) (2012).
n78. Panag, 204 P.3d at 896 (Wash. 2009).

Page 417Page 417
49 Gonz. L. Rev. 331, *
n79. Bain v. Metro. Mortg. Grp. Inc., 285 P.3d 34, 52 (Wash. 2012).
n80. Id. at 36 (Mortgage Electronic Registration System is a private company allowing lenders to "privately" record and keep track of
assigned mortgages).
n81. Id. at 51.
n82. Klem, 295 P.3d at 1189.
n83. Id. at 1190 (emphasis added).
n84. Schroeder, 297 P.3d at 687.
n85. See Arielle L. Katzman, Round Peg for a Square Hole: The Mismatch between Subprime Borrowers and Federal Mortgage Remedies,
31 Cardozo Law Rev. 497, 540-41 (2009); see also, Morse v. Mut. Fed. Savs. & Loan Ass'n of Whitman, 536 F. Supp. 1271, 1277 (Mass.
Dist. Ct. 1982) (holding that attempted wrongful foreclosure is a CPA violation under the "unfair" prong: "The jury warrantably found that
defendant was wilfully or knowingly unfair").
n86. See, e.g., Keyes v. Bollinger, 640 P.2d 1077, 1084 (Wash. 1982) (holding that embarrassment and inconvenience damages recoverable
under CPA if entail pecuniary loss); Washington Distressed Property Act, Wash. Rev. Code § 61.34.040 (2008) (allowing for double or triple
damages under the CPA, plus, when bad faith exists, up to $ 100,000 may be further awarded); Sherwood v. Bellevue Dodge, 669 P.2d 1258,
1263 (Wash. 1983) (holding CPA damages for emotional distress in wrongful repossession); Schmidt v. Cornerstone Invs., 795 P.2d 1143,
1146 (Wash.1990) (CPA violation to inflate appraisals, civil conspiracy).
n87. See, e.g., In re Keahey, 414 F.App'x 919, 921 (9th Cir. 2011); Theis v. Fed. Fin. Co., 480 P.2d 244, 247 (Wash. Ct. App. 1971).
n88. Schlegel v. Wells Fargo Bank, 720 F.3d 1204, 1207-08 (9th Cir. 2013).
n89. Rao et al. supra note 61, at ch. 6.
n90. These programs include, Home Affordable Modification Program (HAMP), Principal Reduction (PRA), Second Lien Modification
(2MP), FHA Hamp, USDA-HAMP, VA-HAMP, HAFA (short sales), HARP (affordable refinances), and HAMP Tier 2 (expansion of
HAMP). These programs have been extended until 2015. See generally Appleseed, supra note 33 at 121.
n91. See generally Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 Wash. L.
Rev. 755, 759-61 (2011).
n92. Rao et at., supra note 61, § 2.9.4 (4th ed. 2012) (Restrictions on the Dual Track-ing Foreclosure Proceedings).
Page 418Page 418
49 Gonz. L. Rev. 331, *
n93. See Making Home Affordable, Handbook for Servicers of Non-GSE Mortgages, 118 (Version 4.1 2012), available at
https://www.hmpadmin.com//portal/ programs/docs/hamp_servicer/mhahandbook_41.pdf.
n94. Id. at 118.
n95. Id.
n96. Id.
n97. See generally, Corvello v. Wells Fargo Bank, 728 F.3d 878 (9th Cir. 2013). The other federal circuit weighing in on this issue has
affirmed a right to seek court enforcement of promised modifications. See Wigod v. Wells Fargo Bank, 673 F.3d 547, 555 (7th Cir. 2012).
n98. This was never required, but servicers nevertheless, caused many homeowners to ruin their credit before attempting to negotiate for a
loan modification. All the while, servicers reported negative credit information to reporting agencies. See generally Making Home
Affordable, supra note 93, at 63.
n99. Making Home Affordable, supra note 93.
n100. Corvello, 728 F.3d at 880-81.
n101. In re Estate of Nelson, 537 P.2d 765, 771 (1975).
n102. Wash. Rev. Code § 19.36 (2013).
n103. See WASH. REV. CODE § 19.36.010(1); see also, e.g., Lyons v. Bank of Am., No. C11-1232 CW., 22011 WL 6303390 (N.D. Cal.
Dec. 16, 2011); Ansanelli v. JP Morgan Chase Bank, No. C10-03892 WHA., 2011 WL 1134451 ( N.D. Cal. Mar. 28, 2013)
n104. See, e.g. Corvello, 728 F.3d at 882; Sutcliffe v. Wells Fargo Bank, 283 F.R.D. 533, 549, 553 (N.D. Cal. 2012); Gaudin v. Saxon
Mortg. Servs., 820 F. Supp. 2d 1051, 1053-54 (N.D. Cal. 2011); Mendez v. Bank of Am. Home Loans Serv., 840 F. Supp. 2d 639, 651
(E.D.N.Y. 2012); Picini v. Chase Home Fin., 854 F. Supp. 2d 266, 273 (E.D.N.Y. 2012).
n105. See, e.g. Bosque v. Wells Fargo Bank, 762 F. Supp. 2d 342, 353 (D. Mass. 2011); Plastino v. Wells Fargo Bank, 873 F. Supp. 2d 1179,
1192 (N.D. Cal. 2012).
n106. See, e.g., Okoye v. Bank of N.Y. Mellon, No. 10-11563-DPW, 2011 WL 3269686, at 3 (Mass. Dist. Ct. 2011); In re Ulberg, No. 10-
53637-E-13, 2011 WL 6016131, at 3 (Bankr. E.D. Cal. Nov. 29, 2011); Parker v. Bank of Am., 29 Mass. L. Rptr. 194 (Mass. Sup. Ct. 2011).
n107. See, e.g., Crafts v. Pitts, 162 P.3d 382 (Wash. 2007).
Page 419Page 419
49 Gonz. L. Rev. 331, *
n108. See, e.g., Lucia v. Wells Fargo Bank, 798 F. Supp. 2d 1059, 1069 (Cal. Dist. Ct. 2011); Nicdao v. Chase Home Fin., 839 F. Supp. 2d
1051, 1076 (D. Alaska 2012); Harvey v. Bank of Am., 906 F. Supp. 2d. 982, 993 (N.D. Cal. 2012).
n109. See, e.g., Singh v. Wells Fargo Bank, No. 1:10-CV-1659 AWI SMS, 2011 WL 66167, at 5 (Cal. Dist. Ct. App. 2011); Slowey v.
Flagstar Mortg. Corp., No. 10-11891-RGS, 2011 WL 1118470, at 2 (Mass. Dist. Ct. 2011); Parker, 29 Mass. L. Rptr. at 4; Picini v. Chase
Home Fin., 854 F. Supp. 2d 266, 275-76 (E.D.N.Y. 2012).
n110. See generally Frank S. Alexander, Federal Intervention in Real Estate Finance: Preemption and Federal Common Law, 71 N.C. L.
Rev. 293, 306 (1993).
n111. Carter v. Derwinski, 987 F.2d 611, 612 (9th Cir. 1993).
n112. In this case, Idaho Code Ann.§§45-1512, 6-101 (2014) were violated.
n113. Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, § 8032, 104 Stat. 1388 (1990).
n114. United States v. Yazell, 382 U.S. 341, 358 (1966); United States v. Kimbell Foods, 440 U.S. 715, 740 (1979); Kamen v. Kemper Fin.
Servs., 500 U.S. 90, 108 (1991); see generally Alexander, supra note 110, at 370.
n115. 38 U.S.C. § 3720(a)(6) (2012).
n116. See generally, Wilson v. Omaha Indian Tribe, 442 U.S. 653, 673 (1979); Kamen, 500 U.S. at 99.
n117. See generally, Alexander, supra note 110, at 305-06.
n118. Wash. Rev. Code § 61.24.040 (2012); for California foreclosure procedure see, Bernhardt, California Mortgages and Deeds of Trust
(4th Ed. -California State Bar).
n120. Carter v. Derwinski, 987 F.2d 611, 612, 617 (9th Cir. 1993).
n121. 38 C.F.R. 36.4320 (2010).

Page 420Page 420
49 Gonz. L. Rev. 331, *
n123. Whitehead v. Derwinski, 904 F.2d 1362, 1369 (1990).
n124. Id.
n125. Carter, 987 F.2d at 616-17.
n126. Id. at 614.
n127. Wash. Rev. Code § 6.23.010 (2013).
n129. The due process clause of the Fifth Amendment applies to the federal government and the Fourteenth Amendment appliea to the state.
Rao et al., supra note 61, § 3.1.2.1; Boley v. Brown, 10 F.3d 218, 222 (4th Cir. 1993); Vail v. Derwinski, 946 F.2d 589, 593 (8th Cir. 1991);
Leen, supra note 30, at 780; cf., Kennebec v. Bank of the West, 565 P.2d 812, 816 (Wash. 1977) (holding no state action to trigger due
process as to a non-judicial foreclosure).
n130. Klem v. Washington Mutual Bank, 295 P.3d 1179, 1188-89 (Wash. 2013).
n131. See id. at 1189 n.11; Kennebec, 565 P.2d at 816.
n132. Hoffmann, supra note 2 at 326. It should be noted that even though that the Washington Deed of Trust Act has a procedure in place to
enjoin a non-judicial sale, the attorney fees are still costly. Wash. Rev. Code § 61.24.130. The cost remains high because the lawsuit must be
filed complete with defenses properly pled, together with a motion to enjoin the sale. Additionally, the suit must be argued with supporting
evidence and the homeowner must also begin making the normal monthly payments that were even initially unaffordable. There also could
be an additional, costly bond. Wash. Rev. Code § 61.24.130.
n133. Albice v. Premier Mortg. Servs. of Wash., Inc., 276 P.3d 1277, 1284 (Wash. 2012); Walker v. Quality Loan Servs. Corp., 308 P.3d
716, 722 (Wash. 2013); In re Keahey, BAP No. WW-08-1151-PaJuKa, 2008 WL 8444817, at 6 (B.A.P. 9th Cir. Nov. 3, 2008) aff'd, 414 F.
App'x 919 (9th Cir. 2011).
n134. Cox v. Helenius, 693 P.2d 683, 686 (Wash. 1985).
n135. Id. at 685.
n136. Id. at 685-86; Savings Bank of Puget Sound v. Mink, 741 P.2d 1043 (Wash. Ct. App. 1987); Theis v. Fed. Fin. Co., 480 P.2d 244, 246-
47 (Wash. Ct. App. 1971) (emotional distress damages for wrongful foreclosure of Chattel Mortgage).
Page 421Page 421
49 Gonz. L. Rev. 331, *
n137. Theis, 480 P.2d at 247; Walker v. Quality Loan Serv. Corp., 308 P.3d 716, 724 (2013).
n138. See Wash. Rev. Code § 61.24.130 (2012) (outlining the procedure for obtaining an injunction).
n139. See Wash. R. Civ. P. 65; See also, Fed. R. Civ. P. 65.
n140. See Fed. R. Civ. P. 65(b).
n141. Wash. Rev. Code § 61.24 (2013).
n142. Wash. R. Civ. P. 65. CR 65 is generally the guide for an injunction that most courts use when granting injunctive relief. However, the
Deed of Trust Act provides for a more relaxed standard because most disputes, if a judicial foreclosure had been commenced, would be
resolved in court with considerable protections against a wrongful foreclosure. Wash. Rev. Code § 61.24.130. The Notice of Sale, Section IX
provides "Anyone having any objection to the sale on any grounds whatsoever will be afforded an opportunity to be heard as to those
objections if they bring a lawsuit to restrain the sale pursuant to RCW 61.24.130"; see also, Appleseed, supra note 33 at 107-121.
n143. The reason that the Trustee gets this notice is because the real party in interest, the owner of the Promissory Note, is not always
known. Wash. Rev. Code § 61.24.040 (2012). However, the Trustee should know how to find the owner since the owner of the note likely
hired the Trustee. The Trustee, however, should never participate in the injunction hearing because of the required neutrality imposed by the
Deed of Trust Act and subsequent case law. Wash. Rev. Code § 61.24.020 (2012).
n144. The trustee is notified because often the owner of the loan is not identified or known. Because the lender (beneficiary) appoints the
trustee, that trustee, in turn, can get notice of the hearing to the lender, who needs to respond to the motion. Typically, the lender will agree to
put off the sale for a few weeks to schedule a hearing on the injunction. There should be the need for only one hearing, not a TRO and then a
preliminary injunction. A trustee should never oppose an injunction or participate in the argument, since the trustee's duty is equally to both
lender and homeowner. Wash. Rev. Code § 61.24.040 (2012).
n145. Wash. Rev. Code § 61.24.130(b) (2012).
n146. See generally Hoffmann, supra note 2; see also Appleseed, supra note 33.
n147. See Bowcutt v. Delta N. Star Corp., 976 P.2d 643, 647 (Wash. Ct. App. 1999); Blanchard v. Golden Age Brewing Co., 63 P.2d 397,
405 (Wash. 1936).
n148. King County, Washington. Local Civil Rule (LCR) 4. Judicial foreclosures proceed on the normal civil track in most Washington
counties.
n149. 11 U.S.C § 362(a) (2012).
n150. See Albice v. Premier Mortg. Servs. of Wash., Inc., 276 P.3d 1277, 1282 (Wash. 2012); but see Frizzell v. Murray, 313 P.3d 1171,
1174 (Wash. Dec. 5, 2013) (private loan foreclosure where court held failure to maintain bond limited debtor's rights).
Page 422Page 422
49 Gonz. L. Rev. 331, *
n151. The statute is silent as to whether the five days are "court days" or calendar days. To be safe, use "court days", or see if opposing
counsel will agree on a later date, continuing the sale as needed.
n152. Wash. Rev. Code § 61.24.130(2) (2012) (only requiring notice to the trustee, not lender, of an injunction motion).
n153. That is the common practice, at least, in King County, Washington. Local Civil Rule (LCR) 65(b)(2).
n154. Hoffmann, supra note 2 at 332.
n155. See Blanchard v. Golden Age Brewing Co., 63 P.2d 397, 407 (Wash. 1936).
n156. Schroeder v. Excelsior Mgmt., 297 P.3d 677, 679 (Wash. 2013) (note the court's concern about the role of the attorney who
represented the lender and acted as trustee).
n157. Trustee; Deed of Trust; Client Conflict, 926 Op. WSBA at 1 (1987).
n158. See id. at 3.
n159. Wash. Rev. Code § 61.24.010(4) (2012); Model Rules of Prof'l Conduct R. 1.7(a)(2), 1.7(b) (2011).
n160. Wash. Rev. Code § 61.24.020.
n161. Wash. Rev. Code § 61.24.130(1) (allowing an injunction on "any proper legal or equitable ground").
n162. See Cox v. Helenius, 693 P.2d 683, 686 (Wash. 1985).
n163. Fred Fuchs, Defending Nonjudicial Residential Foreclosure Actions, 47 Tx. Bar J. 1196, 1198 (1984).
n164. Nelson & Whitman, supra note 12, § 7.20.
n165. See Fid. & Deposit Co. of Md. v. Ticor Title Ins. Co., 943 P.2d 710, 713 (Wash. Ct. App. 1997); see also Anderson v. Cnty. Props.,
Inc., 543 P.2d 653, 654 (Wash. Ct. App. 1975); Koster v. Wingard, 314 P.2d 928 (Wash. 1957); George v. Butler, 67 P. 263, 267 (Wash.
1901); Lewis v. Kujawa, 291 P. 1105, 1109 (Wash. 1930); Nelson & Whitman, supra note 12.
Page 423Page 423
49 Gonz. L. Rev. 331, *
n166. Albice v. Premier Mortg. Servs. of Wash., Inc., 276 P.3d 1277, 1285 (Wash. 2012); Staffordshire Invs., Inc. v. Cal-Western
Reconveyance Corp., 149 P.3d 150, 156 (Or. Ct. App. 2006); Taylor v. Just, 59 P.3d 308, 313 (Idaho 2002); Diversified, Inc. v. Walker, 702
S.W.2d 717, 721 (Tex. App. 1985); Dimock v. Emerald Props., 97 Cal. Rptr. 2d 255 (Ct. App. 2000).
n167. Albice, 276 P.3d at 1281; Graham v. Oliver, 659 S.W.2d 601, 603 (Mo. Ct. App. 1983).
n168. Schroeder, 297 P.3d at 682-83 (characterizing a void sale as one where the requisites in the Deed of Trust Act have not been met).
n169. See Cox, 693 P.2d at 686.
n170. Schroeder, 297 P.3d at 685-86; Albice, 276 P.3d at 1281-1282.
n171. " Inadequate" can be less than twenty percent of fair market value. Restatement (third) of Prop.: Mortgages § 8.3 (1997); but see, Cox,
693 P.2d at 685 (where an inadequate sale price ($ 1 over the $ 11,783 second deed of trust) was based upon the second lien being
foreclosed, junior to a $ 250,000 first).
n172. Nelson & Whitman, supra note 12, § 7.20.
n173. Id. § 7.21.
n174. Id. § 7.20.
n175. Id § 7.20.
n176. See Wash. Rev. Code § 61.24.040(7) (2012) (provides that the trustee's deed recitals can be given a presumption of validity as to the
Trustee's statutory compliance with the foreclosure procedures); but see, Albice, 276 P.3d at 1284-85.
n177. Cox, 693 P.2d at 686.
n178. See, e.g., Albice, 276 P.3d at 1284; Schroeder, 297 P.3d at 687.
n179. Klem v. Wash. Mut. Bank, 295 P.3d 1179, 1189 n.10 (2013) (quoting Wilfred J. Airey, A History of the Constitution and Government
of Washington Territory (1945) (unpublished Ph.D. thesis, University of Washington) (on file with Gallagher Law Library, University of
Washington).
n180. See Rao et al., supra note 61, at § 8.10.10 ("While initially the claim was meant to address improprieties in the sale itself or in the
notice, in recent years it has been used to deal with servicer improprieties that lead to foreclosure."); see also Walker v. Quality Loan Service,
308 P.3d 716, 721 (Wash. 2013) (explaining that the legislature recognized a cause of damages for "a trustee's presale failure to comply" with
the Deeds of Trust Act).
Page 424Page 424
49 Gonz. L. Rev. 331, *
n181. See, e.g., Brown v. Household Realty Corp., 189 P.3d 233, 236 (Wash. Ct. App. 2008).
n182. See id. at 239; see also Wash. Rev. Code § 61.24.127 (2004) (omitting the applicable tort from a list of claims that cannot be waived).
n183. See, e.g., Koegel v. Prudential Mut. Sav. Bank, 752 P.2d 385, 389 (Wash. Ct. App. 1988).
n184. See, e.g., id. Following a decision in Brown v. Household Realty Corp., 189 P.3d 233 (2008), the legislature placed limitations on
waivers of post-sale damage and deceptive practices claims. See Wash. Rev. Code § 61.24.127 (2013). A "void" sale can always be vacated,
however, on a proper ground. See, e.g., Albice, 276 P.3d at 1282.
n185. Koegel, 752 P.2d at 388.
n186. Id. at 386.
n187. Id.
n188. Id. at 389.
n189. Id.at 389.
n190. Schroeder, 297 P.3d at 685-86 (holding that notice could not be waived, because agricultural land must be foreclosed judicially).
n191. Wash. Rev. Code § 61.24.130(1)(b) (2013).
n192. See, e.g., Carlson v. Gibraltar Sav. of Wash., 749 P.2d 697, 700 (Wash. Ct. App. 1988); but see Wash. Rev. Code § 61.24.127 (2013).
n193. Albice, 239 P.3d at 1148.
n195. Schroeder, 297 P.3d at 683-84; Albice, 239 P.3d at 1158.
n196. Albice, 239 P.3d at 1158-59.

Page 425Page 425
49 Gonz. L. Rev. 331, *
n198. Id. at 683 (quoting Bain v. Metro. Mortg. Grp., 285 P.3d 34, 46 (Wash. 2012)).
n199. Id. at 687 ("The requirement of the act may not be waived by the parties ... .").
n200. Udall v. T.D. Escrow Servs., Inc., 154 P.3d 882, 885-86, 890 (Wash. 2007).
n201. Id.
n202. Id. at 885.
n203. Id. at 885.
n204. Id. at 886.
n205. Id.
n206. Udall v. T.D. Escrow Servs., Inc., 130 P.3d 908, 913-14 (Wash. Ct. App. 2006); accord Moeller v. Lien, 30 Cal. Rptr. 2d 777, 784 (Ct.
App. 1994) ("An irregularity in the nonjudicial foreclosure sale coupled with a gross inadequacy of price may be sufficient to set aside the
sale, where the conclusive presumption does not come into effect because the trust deed has not yet been delivered." (citation omitted)).
n207. Udall, 154 P.3d at 890.
n208. 2012 Wash. Sess. Laws c. 185 § 14 (codified at Wash. Rev. Code § 61.24.050(2) (2013)).
n209. Restatement (Second) of Torts § 874A; see, e.g., Bennett v. Hardy, 784 P.2d 1258, 1261 (Wash. 1990) (discussing state and federal
standards for implying a cause of action upon breach).
n210. See generally, Thompson West, American Jurisprudence Proof of Facts, 123 § 24 (3d ed. 2003) ("Some states recognize a cause of
action for attempted wrongful mortgage foreclosure.").
n211. Washington State Bar Association, Discipline Notice - Norman Bradford Maas, WSBA.ORG (January 3, 2002),
https://www.mywsba.org/DisciplineNotice/Discipline Detail.aspx?dID=188.
Page 426Page 426
49 Gonz. L. Rev. 331, *
n212. Id.
n213. Id.
n214. Id.
n215. Id.
n216. Id.
n217. Complaint at 2-3, Provost v. Kandi, No. 09-2-25191-6 SEA (Wash. Sup. Ct. King Ctny. May 10, 2010).
n218. Decl. of David Leen, March 16, 2010, Provost v. Kandi, No. 09-2-25191-6 SEA (Wash. Sup. Ct. King Ctny. May 10, 2010).
n219. Judgment and Findings for Damages and Quiet Title at 3, Provost v. Kandi, No. 09-2-25191-6 SEA (Wash. Sup. Ct. King Ctny. May
10, 2010).
n220. Id. at 4.
n221. Clark v. West, 395 S.E.2d 884, 885 (Ga. Ct. App. 1990).
n222. Clark, 395 S.E.2d at 886 (internal citations omitted).
n223. Amicus Curiae Brief of Nw. Justice Project, Nw. Consumer Law Ctr., & Columbia Legal Services as Counsel for Wa. Homeowners at
14, Frias v. Asset Foreclosure Services, Inc, 2014 WL 583078 (No. 89343-8) (Wash. 2014) (internal citation omitted).
n224. See, e.g., In re Pullen, 451 B.R. 206, 2010-11 (Bankr. N.D. Ga. 2011) (finding borrower stated a claim for attempted wrongful
foreclosure after lender wrote letters threatening borrower with immediate foreclosure, even though the lender had not complied with the
notice provisions of the deed to secure the debt).
n225. See Aetna Fin. Co. v. Culpepper, 315 S.E. 2d 228, 232 (Ga. Ct. App. 1984); Jenkins v. McCalla Ravmer LLC, 492 Fed. Appx. 968,
972 (11th Cir. 2012); Sale City Peanut Co. v. Planters & Citizens Bank, 130 S.E. 2d 518, 520 (Ga. Ct. App. 1963); Hodson v. Whitworth,
266 S.E. 2d 561, 565 (Ga. Ct. App. 1980); Mayo v. Bank of Carroll County, 276 S.E.2d 660 (Ga. Ct. App. 1981).
n226. See Jenkins, 492 Fed. Appx. at 972.

Page 427Page 427
49 Gonz. L. Rev. 331, *
n227. E.g., Sherwood v. Bellevue Dodge, 669 P.2d 1258 (Wash. Ct. App. 1983).
n228. 52 C.O.A. 2d 119 Causes of Action in Tort for Wrongful Foreclosure of Residential Mortgage § 37 (2012).
n229. See McDonald v. One West Bank, FSB., 929 F. Supp. 2d 1079, 1096 (W.D. Wash. 2013); Glazer v. Chase Home Fin., 704 F.3d 453
(6th Cir. 2013).
n230. 123 Am. Jur. Proof of Facts 3d 419 Proof of Wrongful Mortgage Foreclosure § 18 (2011).
n231. Grimsby v. Samson, 530 P.2d 291, 295-96 (Wash. 1975).
n232. See Kloepfel v. Bokor, 66 P.3d 630, 631 n.1 (Wash. 2003) (the two causes of action are "synonyms for the same tort"); Robel v.
Roundup Corp., 59 P.3d 611, 619 n.7 (Wash. 2002) ("outrage encompasses causes of action based on reckless and intentional conduct").
n233. Thies v. Federal, 480 P.2d 244 (Wash. Ct. App. 1971) (emotional distress damages for wrongful foreclosure).
n234. Nelson & Whitman, supra note 12, § 7.22. Next to the Gose articles, see articles cited supra note 25, Nelson & Whitman is considered
the foreclosure "bible."
n235. Both judicial and non-judicial foreclosure statutes allow this. Wash. Rev. Code § 61.12.060 (2013); Wash. Rev. Code § 61.24.090
(2013).
n236. Jacobson v. McClanahan, 264 P.2d 253, 254 (Wash. 1953).
n237. See Hoffmann supra note 2, at 328-29 ("Remedies available to grantor include bringing an action to set aside the sale [and] bringing
an action for damages for wrongful foreclosure against the beneficiary or the trustee... ." (emphasis added) (footnote omitted)).
n238. See, e.g., Vawter v. Quality Loan Serv. Corp. of Wash., 707 F. Supp. 2d 1115, 1123-24 (W.D. Wash. 2010) (finding no cause of action
for wrongful foreclosure when the trustee's sale is halted).
n239. See id. at 1122-23 (the court's focus rests with the foreclosure ending, rather than the damage actually done to the plaintiffs).
n240. Pleadings generally are to be construed liberally, and if factual allegations show entitlement to some kind of relief, "it is immaterial by
what name the action is called." Simpson v. State, 615 P.2d 1297, 1299 (Wash. Ct. App. 1980) (citing Christensen v. Swedish Hosp., 368
P.2d 897 (Wash. 1962)).
Page 428Page 428
49 Gonz. L. Rev. 331, *
n241. See, e.g., Brown v. Household Realty Corp., 189 P.3d 233, 234 (Wash. Ct. App. 2008) ("[A] borrower waives [wrongful foreclosure]
claims by failing to timely request this relief before the foreclosure sale.").
n242. See Vawter, 707 F. Supp. 2d at 1127. .
n243. David K. DeWolf and Keller W. Allen, 16 Washington Practice Series, Tort Law and Practice § 3:8, ( 4th ed. 2013).
n244. Vawter v. Quality Loan Serv. Corp. of Wash., 707 F. Supp. 2d 1115 (W.D. Wash., 2010).
n245. See, e.g., Mikhay v. Bank of Am., N.A., No. 2:10-cv-1464-RAJ, 2011 WL 167064 at 3 (W.D. Wash. Jan. 12, 2011) ("Plaintiffs have
not cited any authority supporting their ability to raise such a claim where no trustee's sale has occurred and a number of courts have recently
found that such a cause of action does not exist." (citing Vawter, 707 F. Supp. 2d at 1123-24)); Thein v. Recontrust Co., N.A., No. C11-
5939BHS, 2012 WL 527530 at 2 (W.D. Wash. Feb. 16, 2012) (citing Vawter, 707 F. Supp. 2d at 1123-24); accord Spenser v. Deutsche Bank
Nat. Trust Co. NA., No. 11-5599-BHS, 2011 WL 6816343 at 2 (W.D. Wash. Dec. 28, 2011) (citing Vawter, 707 F. Supp. 2d at 1123-24);
Ronzone v. Aurora Loan Serv., LLC, No. C11-05025BHS, 2011 WL 4074715 at 3 (W.D. Wash. Sept. 13, 2011). These federal trial court
opinions all rely on Vawter to hold that absent a trustee's sale of property, a claim for wrongful foreclosure must be dismissed as a matter of
law. Vawter took this proposition from Krienke v. Chase Home Fin., LLC, 140 Wash. App. 1032, No. 35098-0-II, 2007 WL 2713737 at 5
(Wash. Ct. App. Sept. 18 2007) (unpublished).
n246. Krienke, 2007 WL 2713737 at 5.
n247. Or is Heller's "Catch 22" a more apt description?
n248. See, e.g., Brown v. Household Realty, 189 P.3d 233, 239 (Wash. Ct. App. 2008). Brown's strict waiver language has been limited by
the Legislature shortly after Brown was decided. See Wash. Rev. Code § 61.24.127 (2013).
n249. See Vawter, 707 F. Supp at 1124.
n250. Pfau v. Wash. Mutual, Inc., No. CV-08-00142-JLQ, 2009 WL 484448, at 12 (E.D. Wash. Feb. 24, 2009).
n251. Krienke, 2007 WL 2713737 at 1.
n252. Walker v. Quality Loan Servs., 308 P.3d 716, 724 (Wash. Ct. App. 2013).
n253. See Frias v. Asset Foreclosures Servs., Inc., No. C13-760-MJP, 2013 WL 6440205, at 2 (W.D. Wash. Sep. 25, 2013).
n254. Krienke v. Chase Home Fin., LLC, No. 05-2-10102-0 at 2 (Wash. Sup. Ct. filed Feb. 10, 2006).
n255. See Krienke, 2007 WL 2713737 at 1 (see headnote).

Page 429Page 429
49 Gonz. L. Rev. 331, *
n256. See McKenna, Judith A., et al, Case Management Procedures in the Federal Courts of Appeals 19 (Federal Judicial Center 2000)
(highlighting low number of published federal court opinions when litigant is pro se).
n257. Wash. Ct. G.R. 14.1(a) (2014) ("A party may not cite as an authority an unpublished opinion of the Court of Appeals.").
n258. See Fed. R. App. P. 32.1(a) (allowing citation of unpublished cases). The practice of citing an unpublished opinion approaches
unethical conduct, under rules regarding candor to the tribunal and dealing with unrepresented persons. See Thul v. OneWest Bank, No. 12 C
6380, 2013 WL 212926 at 1 (N.D. Ill. January 18, 2013) (defendant lawyers were ordered to show cause why they should avoid sanctions for
citing law that had clearly been overruled by the Seventh Circuit).
n259. See Wash. Rev. Code § 2.60.020 (2013).
n260. Vawter v. Quality Loan Serv. Corp. of Wash., 707 F. Supp. 2d 1115, 1123 (W.D. Wash. 2010).
n261. Id. at 1123. Note that the remedies for Deed of Trust Act violations may be provided by the Washington Consumer Protection Act.
See Wash. Rev. Code § 19.86.090 (2013). However, pre-sale remedies, such as injunctive relief, are specifically allowed under the Deed of
Trust Act. Wash. Rev. Code § 61.24.130(1) (2013). When taken with the recently added Wash Rev. Code § 61.24.127, this implies that there
are some claims to waive if injunctive relief is not sought. See, e.g., Walker v. Quality Loan Servs. Corp., 308 P.3d 716, 721 (Wash. Ct. App.
2013) (holding that the homeowner had a proper cause of action for the trustee's violation of the provisions of the Deed of Trust Act).
n262. See Curl v. First Federal Savings & Loan Assn., 257 S.E.2d 264, 265-66 (Ga. 1979) (affirming the award of damages for mental pain
and aggravation and punitive damages in an action for wrongful foreclosure); Countrywide Home Loans, Inc. v. Thitchener, 192 P.3d 243
(Nev. 2008) (allowing evidence of wrongful foreclosure to establish punitive damages); McCarter v. Bankers Trust, 543 S.E. 2d 755, 758
(Ga. Ct. App. 2000) ("Further, where emotional damages are sought for an action for intentional wrongful foreclosure, such are recoverable
as tort damages." (citing Curl, 257 S.E.2d at 265-66)); Nat'l Mortg. Co. v. Williams, 357 So. 2d 934, 935-36 (Miss. 1978); Matthews v.
Homecoming Fin. Network, No. 03 C 3115, 2005 WL 2387688 at 7 (N.D. Ill. 2005) (foreclosure without cause sufficient basis for
intentional infliction of emotional distress claim); see also Stafford v. Puro, 63 F.3d 1436, 1442 ( 7th Cir. 1995) (finding that emotional
distress damages to wrongfully terminated employee were supported by loss of home in foreclosure, ruined credit, as well as physical
symptoms including spastic colon and high blood pressure); Johnstone v. Bank of Am., N.A., 173 F.Supp. 2d 809, 816 (N.D. Ill. 2011)
(ongoing foreclosure sufficient to state emotional distress damages and survive motion to dismiss RESPA claim).
n263. Walker, 308 P.3d at 722 (Wash. Ct. App. 2013) (rejecting Vawter). Another Division I case, although unpublished, also follows Walker
and recognizes a damage claim for violations of the Deed of Trust Act even when a sale has not occurred. See Leipheimer v. ReconTrust.,
N.A., 175 Wash. App. 1065 (2013) (unpublished opinon).
n264. " The word "tortious" is appropriate to describe not only an act which is intended to cause an invasion of an interest legally protected
against intentional invasion, or conduct which is negligent as creating an unreasonable risk of invasion of such an interest, but also conduct
which is carried on at the risk that the actor shall be subject to liability for harm caused thereby, although no such harm is intended and the
harm cannot be prevented by any precautions or care which it is practicable to require." Restatement (Second) of Torts § 6 cmt. a (1965); see
also In re Keahey, No. WW-08-1151, 2008 WL 8444817 (B.A.P. 9th Cir. Nov. 3 2008) (unpublished decision), aff'd in part, vacated in part,
414 F.App'x 919 (9th Cir. 2011) (unpublished decision) (court awarded substantial damages for emotional distress).
n265. Piel v. City of Federal Way, 306 P.3d 879, 883 (Wash. 2013) ("Declaring a wrongful termination tort claim dead on arrival in the face
of administrative remedies would unsettle body of [tort] law this court has developed ... .").
Page 430Page 430
49 Gonz. L. Rev. 331, *
n266. See Bennett v. Hardy, 784 P.2d 1258, 1261-62 (Wash. 1990) (The three-part test for an implied cause of action is: "first, whether the
plaintiff is within the class for whose "especial' benefit the statute was enacted; second, whether the legislative intent, explicitly or implicitly,
supports creating or denying a remedy; and third, whether implying a remedy is consistent with the underlying purpose of the legislation."
(citation omitted)).
n267. See State v. Adams, 732 P.2d 149, 155 (1987) (implication of cause of action allowed in face of administrative remedies); see also
Yeager v. Dunnavan, 174 P.2d 755, 757 (Wash. 1946) (whether claim is tort or contract depends on the factual allegations).
n268. Cox v. Helenius, 693 P.2d 683 (Wash. 1985).
n269. Id. at 686.
n270. Walker v. Quality Loan Servs. Corp., 308 P.3d 716, 720 (Wash. Ct. App. 2013) (instead labeling it "as a claim for damages arising
from [Deed of Trust Act] violations").
n271. See Frias v. Asset Foreclosure Services, No. C13-760-MJP, 2013 WL 6440205 (W.D. Wash. Sept. 25, 2013).
n272. 123 Am. Jur. Proof of Facts 3d Proof of Wrongful Mortgage Foreclosure § 6 (2011); 59 C.J.S. Mortgages § 650 (2013); 52 C.O.A. 2d
119 Causes of Action in Tort for Wrongful Foreclosure of Residential Mortgage § 5 (2013); William M. Howard, Recognition of Action for
Damages for Wrongful Foreclosure - General Views, 81 A.L.R.6th 161 (2013).
n273. 52 C.O.A. 2d 119 Causes of Action in Tort for Wrongful Foreclosure of Residential Mortgage § 4 (2013) (citing Nat'l Mortg. Co. v.
Williams, 357 So. 2d 934 (Miss. 1978)).
n274. See Dabney v. Countrywide Home Loans, Inc., 428 Fed. Appx. 474, 476 (5th Cir. 2011) (unpublished decision) (quoting Nat'l Mortg.
Co., 357 So. 2d at 935-36); see also 52 C.O.A. 2d 119 Causes of Action in Tort for Wrongful Foreclosure of Residential Mortgage § 4 (2013)
(citing Nat'l Mortg. Co., 357 So. 2d at 934).
n276. Numerous other jurisdictions recognize that wrongful foreclosure can cause the intentional infliction of emotional distress or outrage.
An award of damages for intentional infliction of emotional distress may be supported by intentional wrongful foreclosure. See, e.g., Clark v.
West, 395 S.E.2d 884, 885 (Ga. Ct. App. 1990) (Mortgagor, who succeeded in having foreclosure sale set aside as wrongful, stated cause of
action against mortgagees for mental pain and suffering and attorney fees allegedly incurred by her as a result of foreclosure.). Many
jurisdictions award punitive damages for a wrongful foreclosure. See, e.g., Nat'l Mortg. Co. 357 So. 2d at 938 (Miss. 1978) (punitive
damages award upheld where mortgagee's failing to credit mortgagor's account with payments resulted in mortgagor being delinquent on her
loan); accord Countrywide Home Loans, Inc. v. Thitchener, 124 Nev. 725, 729-30 192 P.3d 243, 246 (2008) (Punitive damages award upheld
in case brought against mortgage company arising from company's mistaken identification of owners' unit as one subject to foreclosure and
disposal of owners' personal property to prepare units for sale while owners were temporarily out of state); see also Wash. Rev. Code §
19.86.090 (2013) (damages under Consumer Protection Act limited to treble damages).
n277. See Nguyen v. JP Morgan Chase, No. 12-CV-04183, 2013 WL 2146606, at 4 (N.D. Cal. May 15, 2013) ("If the foreclosure is indeed
wrongful, it seems artificial and counter to the rules of equity to require Plaintiffs to wait for the inevitable to take place - the sale of their
property.").
Page 431Page 431
49 Gonz. L. Rev. 331, *
n278. Id.
n279. See id.
n280. Wash. Rev. Code § 61.24.090(1) (2013).
n281. Hoffmann, supra note 2 at 328-29 ("Remedies available to grantor after a sale is a suit to set aside the sale, and bringing an action for
damages for wrongful foreclosure against the beneficiary or trustee ... ." (footnotes omitted).
n282. Walker v. Quality Loan Serv. Corp., 176 Wash. App. 294, 308 P.3d 716 (2013).
n283. Frias v. Asset Foreclosures Servs., Inc., No. C13-760-MJP, 2013 WL 6440205 (W.D. Wash. Sep. 25, 2013).
n284. See, e.g., Bain v. Metro. Mortg. Grp. Inc., 285 P.3d 34 (Wash. 2012); see also Klem v. Washington Mut. Bank, 295 P.3d 1179 (2013).
n285. See Wash. Rev. Code § 61.24.040(1)(b) (2013) (notice of sale must be sent to junior lienholders).
n286. Wash. Rev. Code § 61.24.030(8).
n287. Wash. Rev. Code § 61.24.040(1)(b).
n288. See Wash. Rev. Code § 61.24.040 (3)-(8).
n289. See Walker, 308 P.3d at 724; accord Klem, 295 P.3d at 1188.
n290. Wash Rev. Code § 61.24.010.
n291. Wash Rev. Code § 61.24.040(6).
n292. See Wash Rev. Code § 61.24.040(6) (2012) (allowing a sale to be continued for up to 120 days).
n293. See Albice v. Premier Mortg Servs. of Wash., Inc., 239 P.3d 1148, 1156 (Wash. Ct. App. 2010) (finding sale invalid because trustee
lost power to act as trustee), aff'd, 276 P.3d 1277 (Wash. 2012); see also Bain v. Metro. Mortg. Grp. Inc., 285 P.3d 34, 36 (Wash. 2012) ("The
deed of trust protects the lender by giving the lender the power to nominate a trustee and giving that trustee the power to sell the home if the
homeowner's debt is not paid.").
Page 432Page 432
49 Gonz. L. Rev. 331, *
n294. Wash Rev. Code § 61.24.010(2).
n295. Bain, 285 P.3d at 36.
n296. See Wash Rev. Code § 61.24.040(2).
n297. See Schroeder v. Excelsior Mgmt. Grp., 297 P.3d, at 686 (2013) (ultimately vacating a sale because a beneficiary "could not vest the
trustee with authority the statute did not.").
n298. Rao et al., supra note 61, at § 2.9.4.
n299. See id.
n300. Id.
n301. See id.
n302. See Appleseed, supra note 33 at 51.
n303. See Corvello v. Wells Fargo Bank, NA, 728 F.3d 880 (9th Cir. 2013) (plaintiff argued promissory estoppel); Dixon v. Wells Fargo
Bank, NA, 798 F. Supp. 2d 336 (D. Mass. 2011) (specific performance, promissory estoppel); In re Bank of Am. Home Affordable
Modification Program (HAMP) Contract Litigation, No. 10-md-02193-RWZ, 2011 WL 2637222 (D. Mass. July 6, 2011) (multi district class
action including Oregon); Aceves v. U.S. Bank, 192 Cal. App. 4th 218 (2011) (breach of contract, promissory estoppel).
n304. Wigod v. Wells Fargo Bank, 673 F.3d 547, 555 (7th Cir. 2012).
n305. Id. at 558.
n306. Id. at 555.
n307. Corvello, 728 F.3d at 880.
n308. Wash. Rev. Code § 61.24.040 (2013).

Page 433Page 433
49 Gonz. L. Rev. 331, *
n309. McPherson v. Purdue, 585 P.2d 830, 831-32 (Wash. Ct. App. 1978).
n310. Wash. Rev. Code § 61.24.030(7).
n312. Meyers Way v. Univ. Savings, 910 P.2d 1308, 1315-16 (Wash. Ct. App. 1996).
n313. Wash. Rev. Code § 61.24.020.
n314. See generally, Cox, 693 P.2d at 683.
n315. See, e.g., Wash. Rev. Code § 61.24.040 (detailing the many notice and sale requirements).
n316. Klem v. Washington Mut. Bank, 295 P3d 1179, 1188 (Wash. 2013) (internal quotation marks omitted) (quoting Cox, 693 P.2d at 686);
see also Baxter Dunaway, THE LAW OF DISTRESSED REAL ESTATE § 17.3 (Clark Boardman Co., Ltd., 1990); Spires v. Edgar, 513
S.W.2d 372, 378 (Mo. 1974).
n317. McPherson v. Purdue, 585 P.2d 830, 831 (Wash. Ct. App. 1978).
n318. Cox, 693 P.2d at 686.
n319. Id. at 686-87 (internal citation omitted).
n320. Wash. Rev. Code § 61.24.010(3)-(4) (2013).
n321. Klem v. Quality Loan Serv., 295 P.3d 1179, 1190 (2013).
n322. Id. at 1190 (emphasis added); see also, Blodgett v. Martsch, 590 P.2d 298, 302 (Utah 1978) ("The duty of the trustee under a trust
deed is greater than the mere obligation to sell the pledged property; it is a duty to treat the trustor fairly and in accordance with a high
punctilio of honor."). The Utah Supreme Court in Blodgett went even further and found that the breach of this duty may be regarded as
constructive fraud. See Blodgett, 590 P.2d at 302.
n323. Nelson & Whitman, supra note 12, at § 7.21.
n324. Mills v. Mut. Bldg. & Loan Ass'n, 6 S.E.2d 549, 552 (N.C. 1940) (internal citations omitted). But see Monterey S.P. Part v. W.L.
Bangham, 777 P.2d 623, 628 (Cal. 1989) ("The similarities between a trustee of an express trust and a trustee under a deed of trust end with
Page 434Page 434
49 Gonz. L. Rev. 331, *
the name. "Just as a panda is not a true bear, a trustee of a deed of trust is not a true trustee... . The trustee under a deed of trust does not
have a true trustee's interest in, and control over, the trust property. Nor is it bound by the fiduciary duties that characterize a true trustee."
(internal citation omitted)).
n325. See Smith v. Credico Indus. Loan Co., 362 S.E.2d 735, 737 (Va. 1987); Whitlow v. Mountain Trust Bank, 207 S.E.2d 837, 840 (Va.
1974).
n326. See West v. Axtell, 17 S.W.2d 328, 334 (Mo. 1929).
n327. Wash. Rev. Code § 61.24.040(6) (2013).
n328. Albice v. Premiere Mortg., 276 P.3d 1277, 1281 (Wash. 2012).
n329. Morrell v. Arctic Trading Co., 584, P.2d 983, 985 (Wash. Ct. App. 1978).
n330. Ivrey v. Karr, 34 A.2d 847, 852 (Md. 1942).
n331. McPherson v. Purdue, 585 P.2d 830, 832 (Wash. App. 1978).
n333. Id. at 385.
n334. See, Larry D. Dingus, Mortgages-Redemption After Foreclosure Sale in Missouri, 25 Mo. L. Rev. 261, 274 (1960), available at
http://scholarship.law. missouri.edu/cgi/viewcontent.cgi?article=1658&context=mlr; see also, Nelson & Whitman, supra note 12, § 7.21, at
648-50.
n335. Sullivan v. Fed. Farm Mortg. Corp., 8 S.E.2d 126, 128 (Ga. Ct. App. 1940) (bank suggested it would by the property to discourage
other bids, sale found invalid).
n336. Marking up the posting charges by one hundred percent resulted in a one year suspension for a lawyer acting as a trustee. In re David
Fennel, No. 01#00061 (Wash. Bar. Assoc. Disciplinary Bd. Feb. 3, 2004). Fennel was found to have violated several of the Washington
Rules of Professional Conduct. Id.
n337. An example would be a usurious loan in violation of Wash. Rev. Code § 19.52.

Page 435Page 435
49 Gonz. L. Rev. 331, *
n339. See, e.g., Gilbert v. Residential Funding, 678 F.3d 271, 277 (4th Cir. 2012); see also Sherzer v. Homestar Mortg. Serv., 707 F.3d 255,
258 (3rd Cir. 2013).
n340. Washington State Bar Association, Discipline Notice - Norman Bradford Maas, wsba,org (January 3, 2002),
https://www.mywsba.org/DisciplineNotice/DisciplineDetail.aspx?dID=188.
n341. See Wash. Rev. Code § 9A.82.030 (2001); Bowcutt v. Delta N. Star Corp., 976 P.2d 643 (Wash. Ct. App. 1999).
n342. See, e.g., Corvello v. Wells Fargo Bank, 728 F.3d 878, 885 (9th Cir. 2013).
n344. Klem v. Washington Mut. Bank, 295 P.3d 1179, 1190 (Wash. 2013).
n345. See supra Part IV.1.
n346. Walker v. Quality Loan Service, 308 P.3d 716, 722 (Wash. Ct. App. 2013) (finding claims arose from statutory violations).
n347. Klem, 295 P.3d at 1187 (finding that a claim under the CPA could be based on "an unfair or deceptive act or practice not regulated by
statute but in violation of public interest").
n348. See generally Crummer v. Whitehead, 230 Cal. App. 2d 264, 268 (1964); see also Hoffmann, supra note 2, at 337. A general
discussion of equitable principles in contexts other than trustee's sale can be found in Eastlake Cmty. Council v. Roanoake Assoc.'s, 513 P.2d
36 (Wash. 1973) and Arnold v. Melani, 449 P.2d 800 (1968).
n349. Hoffmann, supra note 2, at 328-29 ("Remedies available to the grantor include bringing an action to set aside the sale, [and] bringing
an action for damages for wrongful foreclosure against the beneficiary or the trustee." (emphasis added)); see also supra Part III.
n350. See e.g., Albice v. Premier Mortg. Servs. of Wash., 276 P.3d 1277, 1284-85 (Wash. 2012) (knowledgeable bona fide purchaser was
stripped of that protection because procedural irregularities should have alerted him to problems with the same).
n351. This is a truism, as the non-judicial foreclosure is just that. In a civil lawsuit, a litigant can challenge a wrongful foreclosure on any
proper ground. Wash. Rev. Code § 61.24.130 (2013).
n352. Wash. Rev. Code § 59.12.070 (2013).

Page 436Page 436
49 Gonz. L. Rev. 331, *
n353. A writ of restitution directs the Sherriff to physically remove a tenant or foreclosed upon homeowner from the property and place their
belongings on the street. Wash. Rev. Code § 59.18.132 (2013) (residential tenants) or Wash. Rev. Code § 59.12.090 (2013) (all others).
n354. Wash. Rev. Code § 59.12.380 (2013); Wash. Rev. Code § 59.18.130 (2013).
n355. Wash. Rev. Code § 61.24.030 (2013).
n356. See Wash. Rev. Code § 59.12 (2013).
n357. See People's Nat'l Bank v. Ostrander, 491 P.2d 1058, 1060 (Wash. Ct. App. 1971) ("set-offs or counterclaims have not been allowed"
(internal citations omitted)).
n358. Id. at 1060-61.
n360. Savings Bank of Puget Sound v. Mink, 741 P.2d 1043 (Wash. Ct. App. 1987).
n361. Id. at 1046. A void sale is a proper defense to an eviction action. Albice v. Premier Mortg. Servs. of Wash., 276 P.3d 1277, 1286
(Wash. 2012).
n362. Because evictions deal only with right to possession, the courts are limited in issues raised. Compare Ostrander, 491 P.2d at 1060,
with Mink, 741 P.2d at 1046. Therefore, to be safe, file a separate civil action, and move to consolidate.
n363. Wash. Rev. Code § 2.24.050 (2013) (The revision statute arguable has a provision tolling the effectiveness of a Commissioner ruling,
"unless a demand for revision is made within ten days from the entry of the order or judgment of the court commissioner, the orders and
judgments shall be and become the orders and judgments of the superior court."). However, in practice, one should anticipate that a revision
may not automatically toll the lower ruling.
n364. See Perkins v. CTX Mortg. Co., 969 P.2d 93 (Wash. 1999) ("selection and preparation of promissory notes and deeds of trust is the
practice of law" (internal citation omitted)); see also Washington State Bar Ass'n v. Great W. Union Fed. Sav. & Loan Ass'n, 586 P.2d 870,
875 (Wash. 1978).
n365. Douglas v. Recontrust Co., No. C11-1475RAJ, 2012 WL 5470360 (W.D. Wash. Nov. 9, 2012).
n366. Wash. Rev. Code § 61.24.030(6).
n367. See Douglas, No. C11-1475RAJ, 2012 WL 5470360, at 1 .

Page 437Page 437
49 Gonz. L. Rev. 331, *
n368. See U.S. Department of Justice, Former Executive at Florida -Based Lender Processing Services Inc. Sentenced to Five Years in
Prison for Role in Mortgage-Related Document Fraud Scheme, FBI Press Release, June 25, 2013, available at
http://www.fbi.gov/jacksonville/press-releases/2013/former-executive-at-florida-based-lender- processing-services-inc.-sentenced-to-five-
years-in-prison-for-role-in-mortgage-related-document-fraud-scheme. Lender Processing Services, Inc. doled out foreclosures to processing
mills who demonstrate only speed in completing a foreclosure. Id. One effort to increase speed in the process by forging necessary
foreclosure documents used in court proceedings during a six year period. Id. The senior executive, Loraine Brown, age "56, of Alfaretta,
Georgia, was sentenced" to five years in federal prison on June 25, 2013. Id.
n369. See id.
n370. Gose & Harris, supra note 25, at 8.
n371. See John E. Campbell, Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures; 63 Cath. U. L. Rev. (forthcoming
2014) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=21917 38.
n372. See Bowcutt v. Delta N. Star. Corp., 976 P.2d 643, 647 (Wash. Ct. App. 1999); Blanchard v. Golden Age Brewing, 63 P.2d 397, 407
(Wash. 1936).
n373. See Schroeder v. Excelsior Mgmt. Grp., 297 P.3d 667, 683 (Wash. 2013); Albice v. Premier Mortg., 276 P.3d 1277, 1282 (Wash.
2012).
n374. See Klem v. Wash. Mut. Bank, 295 P.3d 1179, 1192 (Wash. 2013); Schroeder, 297 P.3d at 687; Albice, 276 P.3d at 1285.
n375. See, e.g., Bain v. Metro Mortg. Grp., Inc., 285 P.3d 34 (2012).
Page 439Page 439
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65 of 430 DOCUMENTS
IN RE THE PEIERLS FAMILY INTER VIVOS TRUSTS
CONSOLIDATED C.M. No. 16812-N-VCL
COURT OF CHANCERY OF DELAWARE, NEW CASTLE
59 A.3d 471; 2012 Del. Ch. LEXIS 280
October 25, 2012, Submitted

December 10, 2012, Decided
SUBSEQUENT HISTORY: Affirmed by In re Peierls Family Inter Vivos Trusts, 2013 Del. LEXIS 513 (Del., Oct. 4,
2013)
PRIOR HISTORY: In re Ethel F. Peierls Charitable Lead Unitrust, 59 A.3d 464, 2012 Del. Ch. LEXIS 281 (Del. Ch.,
2012)
CASE SUMMARY:
PROCEDURAL POSTURE: The current beneficiaries of five inter vivos trusts petitioned for orders, inter alia,
approving the resignations of the individual trustees, confirming the appointment of a sole successor trustee for each
trust, determining that Delaware law governed the administration of each trust, confirming Delaware as the situs of
each trust, and reforming the trusts to modify their administrative provisions.
OVERVIEW: The four petitions concerned five inter vivos trusts. There were two pairs of trusts that were
substantively identical. There had previously been several trust settlements. The petitions averred that the parties with
interests in the trusts had become generally unhappy with the level of communication and responsiveness provided by
the current bank. The petitions sought to remove the bank as the corporate trustee and appoint a successor corporate
trustee. By titling the trust assets in the name of the successor corporate trustee, the petitions sought to change the situs
of the trust to Delaware and establish that Delaware law governed the administration of the trusts. The petitions failed
primarily because Delaware law did not govern the trusts. Each of the trusts affirmatively selected the governing law
of a different jurisdiction. In light of the terms of one of the trusts, to rule on two conditional resignations or the
successor corporate trustee's conditional acceptance of its appointment as trustee would constitute an impermissible
advisory opinion.
OUTCOME: The petitions were denied. Jurisdiction over the trusts was not retained.
CORE TERMS: settlor, choice of law, successor trustee, beneficiary, appointment, situs, trust agreements, inter vivos
trusts, administered, law governing, trust's administration, select, resignation, appoint, trust instrument, corporate
trustee, successor, law governs, governing law, trust assets, local law, testamentary, appointed, reformed, pair, power of
appointment, declaratory, dispositive, confirming, actual controversy
Civil Procedure > Declaratory Judgment Actions > State Judgments > Scope
[HN1] See Del. Code Ann. tit. 10, § 6504.
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59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
[HN2] See Del. Code Ann. tit. 10, § 6501.
Civil Procedure > Justiciability > Case or Controversy Requirements > Actual Disputes
[HN3] It constitutes reversible error for a trial court to have addressed issues as to which there was no actual
controversy. Inquiry into whether an actual controversy exists is jurisdictional in its character, and presents an issue
which the court itself is bound to raise. That all parties consented to jurisdiction is immaterial.
[HN4] First, judicial resources are limited and must not be squandered on disagreements that have no significant current
impact and may never ripen into legal action appropriate for judicial resolution. Second, to the extent that the judicial
branch contributes to law creation in our legal system, it legitimately does so interstitially and because it is required to
do so by reason of specific facts that necessitate a judicial judgment. Whenever a court examines a matter where facts
are not fully developed, it runs the risk not only of granting an incorrect judgment, but also of taking an inappropriate or
premature step in the development of the law. These principles apply fully to petitions seeking declarations regarding
the meaning of trusts.
Civil Procedure > Justiciability > Case or Controversy Requirements > Actual Disputes
[HN5] A petition or request for judicial relief is not appropriate when the trust agreement expressly authorizes the
contemplated action. Such a request consumes judicial resources unnecessarily and does not present a live dispute
capable of resolution.
Civil Procedure > Federal & State Interrelationships > Choice of Law > Forum & Place
[HN6] In a multistate trust proceeding the forum court must first apply its own law to determine the local law of the
state to be applied in determining the substantive issue. The forum court's rules do not themselves determine the rights
and liabilities of the parties, but rather guide decision as to which local law will be applied to determine these rights and
duties.
Civil Procedure > Federal & State Interrelationships > Choice of Law > General Overview
[HN7] To resolve choice of law issues, Delaware follows the Restatement (Second) of Conflict of Laws. Restatement
(Second) of Conflict of Laws § 6 (1971) explains that in the first instance, a court, subject to constitutional restrictions,
will follow a statutory directive of its own state on choice of law. In light of the constitutional obligation to show comity
to other co-equal state sovereigns, a court may not apply the local law of its own state to determine a particular issue
unless such application of this law would be reasonable in the light of the relationship of the state and of other states to
the person, thing or occurrence involved.
[HN8] If there is no controlling statutory directive, a court faced with a choice of law issue should consider(a) the needs
of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other
interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of
justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and
uniformity of result, and (g) ease in the determination and application of the law to be applied. In addition to these
general guidelines, the Restatement provides specific principles for particular choice of law problems. For trusts, the
Restatement provides different guidance depending on (i) whether the trust is a testamentary, inter vivos, or charitable
trust, (ii) whether the trust holds real estate (described in the Restatement as "immovables") or personal property
(described by the Restatement as "movables"), and (iii) whether the choice of law issue concerns the validity,
construction, or administration of the trust.
Estate, Gift & Trust Law > Trusts > Irrevocable Living Trusts
[HN9] In regard to an inter vivos trust, if the trust instrument selects a particular law to govern the trust's
administration, then that selection controls. Even without an explicit designation, it may otherwise be apparent from the
language of the trust instrument or from other circumstances, such as the extent of the contacts with a particular state,
Page 441Page 441
59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
that the settlor wished to have the local law of a particular state govern the administration of the trust. If the settlor's
intent is apparent, then the settlor's choice again controls.

[HN10] See Del. Code Ann. tit. 12, § 3332(b).
[HN11] In regard to Del. Code Ann. tit. 12, § 3332, for Delaware law to apply to the exclusion of other sovereigns, the
scope of the administration in this State must be sufficiently substantial so that the trust is principally administered in
this State.
[HN12] Contracting parties, within definite limits, have some right of choice in the selection of the jurisdiction under
whose law their contract is to be governed. And where the donor in a trust agreement has expressed his desire, or if it
pleases, his intent to have his trust controlled by the law of a certain state, there seems to be no good reason why his
intent should not be respected by the courts, if the selected jurisdiction has a material connection with the transaction.
More frequently, perhaps, the trust instrument contains no expression of choice of jurisdiction; but, again, there is no
sufficient reason why the donor's choice should be disregarded if his intention in this respect can be ascertained from an
examination of attendant facts and circumstances, provided that the same substantial connection between the transaction
and the intended jurisdiction shall be found to exist.
[HN13] A choice of law provision in a trust instrument can speak generally and need not use the magic word
"administration" to designate the law of a particular jurisdiction.
Estate, Gift & Trust Law > Trusts > Irrevocable Living Trusts
[HN14] Generally speaking, a creator of an inter vivos trust has some right of choice in the selection of the jurisdiction,
the law of which will govern the administration of the trust. Whether the choice of jurisdiction has been affirmatively
stated or whether the donor's intention is deducible from surrounding facts and circumstances, is a question of evidence
and consequent proof; and in what manner the donor's intention is made to appear ought not to affect the result.
[HN15] Parties operating in interstate and international commerce seek, by a choice of law provision, certainty as to the
rules that govern their relationship. Delaware obviously relies upon the willingness of other state courts to honor the
choice of law reflected in the corporate charters of Delaware firms, even when the parties before them are not
geographically situated in Delaware. When the fact of Delaware incorporation has no bearing on the parties'
relationship, and they have agreed to a broad choice of law provision that logically governs the claims brought before a
Delaware court and that selects another state's law to govern, that choice of law provision must and should be respected
by the judiciary.

[HN16] The text of a choice of law provision should not be interpreted in a crabbed way that creates a senseless
bifurcation of the law that governs different issues. When the drafter of an agreement selects a law to govern the
agreement and the relationship it creates, the logical conclusion is that the drafter intended that law to apply to all
aspects of the agreement and relationship, unless the provision specifically states otherwise. For example, a broad
choice of law provision that encompasses all matters arising out of or relating to an agreement extends to tort claims,
such as challenges to the agreement based on misrepresentation, duress, undue influence, or mistake. To presume that a
choice of law provision applies only to one aspect of the relationship would create uncertainty of precisely the kind that
the parties' choice of law provision sought to avoid. These sensible principles apply equally to trusts. When a settlor
includes a broad choice of law provision in a trust agreement that logically governs the issues brought before a
Delaware court, and it provides for another state's law to govern, the provision should and will be respected. A broad
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59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
choice of law provision should not be interpreted in a crabbed way that results in a senseless multiplication of the
jurisdictions whose law governs different aspects of the trust.
[HN17] If the actual place of administration is changed, either because the trustee acquires a place of business or
domicil in another state, or if in the exercise of a power of appointment a trustee is appointed whose place of business or
domicil is in another state, the question arises whether thereafter the administration of the trust is governed by the local
law of the other state.
[HN18] Moving the situs or place of administration of a trust from one state to another does not automatically result in
a change in the law that applies; whether the governing law changes depends on the terms of the trust. In a private trust
where the settlor has indicated an intent that it should be administered in a certain jurisdiction, it seems both proper and
convenient that the law of that jurisdiction should govern questions of administration. When the place of administration
has been fixed, a subsequent change of residence by the trustee does not alter the controlling law. By contrast, if the
settlor has not selected a particular law to govern the trust, then a simple power to appoint a successor trustee may be
construed to include a power to appoint a trust company or individual in another state. In such cases, the law governing
the administration of the trust thereafter is the local law of the other state and not the local law of the state of original
administration.
[HN19] Delaware gives broad effect to the settlor's intent to select a single law to govern a trust. Where a settlor
chooses a governing law, that choice is dispositive. The settlor need not deploy talismanic language in a choice of law
provision or specify a litany of trust issues to be governed by the chosen law. The settlor's intent to chose a particular
law may be implied from the trust document as a whole. When a settlor has selected a governing law, the power to
appoint a successor trustee in and of itself is insufficient to override this intent, unless the trust document as construed
by the Court expressly provides for such a change.
COUNSEL: [**1] Daniel F. Hayward, GORDON, FOURNARIS & MAMMARELLA, P.A., Wilmington, Delaware;
Counsel for Petitioners.
JUDGES: Vice Chancellor LASTER.
OPINION BY: Laster
OPINION
[*473] LASTER, Vice Chancellor.
Current beneficiaries of five inter vivos trusts have petitioned for orders (i) approving the resignations of the individual
trustees, (ii) confirming the appointment of Northern Trust Company of Delaware as the sole successor trustee for each
trust, (iii) determining that Delaware law governs the administration of each trust, (iv) confirming Delaware as the
situs of each trust, (v) reforming the trusts to modify their administrative provisions and create the positions of
Investment Direction Adviser and Trust Protector, and (vi) accepting jurisdiction over the trusts. The petitions are
denied. Jurisdiction over the trusts is not retained.
I. FACTUAL BACKGROUND
The petitioners are Brian E. Peierls and E. Jeffrey Peierls. The four petitions concern five inter vivos trusts. There are
two [*474] pairs of trusts that are substantively identical, with one pair benefiting Brian and the other pair benefiting
Jeffrey. A fifth trust benefits Brian, Jeffrey, and Brian's two adult sons, Stefan Peierls and Derek Peierls.
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59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
Jennie Newgass Peierls, Brian [**2] and Jeffrey's grandmother, settled the first pair of trusts under agreements dated
January 14, 1953, with Bankers Trust Company, Edgar S. Peierls, and Ethel F. Peierls as initial trustees. Edgar and
Ethel, presently deceased, were Brian and Jeffrey's parents. I will refer to this pair of trusts as the "1953 Trusts."
Ethel settled the second pair of trusts under agreements dated August 14, 1975, with Bankers Trust Company, Philip J.
Hirsch, and Jeffrey as initial trustees. I will refer to this pair of trusts as the "1975 Trusts."
Edgar settled the final trust under agreement dated May 24, 1957, with Bankers Trust Company, Newman Pearsall, and
Ethel as initial trustees. I will refer to this trust as the "1957 Trust."
Brian is the sole current beneficiary of his 1957 Trust and his 1975 Trust. Stefan and Derek are the presumptive
remainder beneficiaries of both trusts.
Jeffrey is the sole current beneficiary of his 1957 Trust and his 1975 Trust. Jeffrey is not married and does not
currently have children. Brian is the presumptive remainder beneficiary of Jeffrey's trusts.
Jeffrey is the sole current beneficiary of the 1953 Trust. Brian, Stefan, and Derek are the presumptive remainder and
contingent [**3] remainder beneficiaries.
The current individual trustees of each trust are Jeffrey and Malcolm A. Moore, an attorney and trusted family advisor.
The current corporate trustee of each trust is Bank of America, N.A., as corporate successor to U.S. Trust Company.
The petitions aver that the parties with interests in the trusts have become generally unhappy with the level of
communication and responsiveness provided by Bank of America, particularly with respect to carrying out investment
decisions made by the individual trustees, who comprise a majority of the trustees of each trust. The petitions seek to
remove Bank of America as the corporate trustee and appoint Northern Trust as the successor corporate trustee. By
titling the trust assets in the name of Northern Trust, a trust company subsidiary domiciled in Delaware, the petitions
seek to change the situs of the trust to Delaware and establish that Delaware law governs the administration of the
trusts. The petitions then request that the trusts be reformed to take advantage of provisions authorized by the
Delaware Code.
The proposed changes will alter the structure and administrative schemes of the trusts by converting them to directed
[**4] trusts. Currently, each of the trust agreements contemplates three trustees, one institutional trustee and two
individual trustees. Each trustee must exercise fiduciary judgment over the administration of the trust. The proposed
changes will reform each trust to have only a single institutional trustee, who will follow directions of the Investment
Direction Adviser and the Trust Protector, two newly created positions. The single institutional trustee will not have
significant substantive responsibility for overseeing the trust.
Jeffrey will serve initially in the newly created position of Investment Direction Adviser. According to the proposals,
"[t]he Investment Direction Adviser shall hold and exercise the full power to manage the investments of the Trust . . . ."
See e.g., 1953 Trusts Pet. Ex. G. at 3. The proposals require that "[t]he Trustee shall follow the [*475] direction of the
Investment Direction Adviser with respect to all matters relating to the management and investment of the assets of the
Trust." Id. at 4. The Investment Direction Adviser "may be entitled to reasonable compensation for its services as
agreed upon by the Investment Direction Adviser and the Trust Protector," [**5] a second new position created by the
proposed amendments. Id. at 9.
Moore will serve initially as Trust Protector. For as long as either Jeffrey or Brian lives, the Trust Protector will have
the power to remove any trustee or appoint any successor trustee by providing notice to the trustee, the Investment
Direction Adviser, and the adult income beneficiaries of the trust. After the death of the survivor of Jeffrey or Brian, the
Trust Protector only will be able to remove or appoint a trustee with the written consent of a majority of the adult
income beneficiaries of the trust. The Trust Protector will have the power to remove the Investment Direction Adviser
and appoint any successor Investment Direction Adviser by the same mechanism, with the caveat that Brian
automatically becomes the successor Investment Direction Adviser after Jeffrey. The Trust Protector also will assume
primary oversight over requests from beneficiaries for distributions from the trust, which the Trust Protector will have
the power to veto.
The proposed changes are designed to facilitate future changes in the language of the trust. The Trust Protector will be
granted "the power to amend the administrative and technical [**6] provisions of the Trust at such times as the Trust
Protector may deem appropriate for the proper administration of the Trust and for tax purposes." See e.g., 1953 Trusts
Pet. Ex. G. at 10. In addition, a new section will provide that "Delaware law shall govern the administration of the Trust
Page 444Page 444
59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
as long as Delaware is the situs of the Trust." Id. at 2. In light of these provisions, the application of Delaware law to
the trusts and Delaware's interest in them easily could be transitory and passing things.
The proposed changes make clear that the successor institutional trustee will not have any responsibility for or
involvement in the decisions made by the Investment Direction Adviser or Trust Protector. Under the proposed
changes, the trustee will have
no duty to monitor the conduct of the Investment Direction Adviser, provide advice to the Investment Direction Adviser or consult
with the Investment Direction Adviser or communicate with or warn or apprise any beneficiary or third party concerning instances
in which the Trustee would or might have exercised the Trustee's own discretion in a manner different from the manner directed.
See e.g., 1953 Trusts Pet. Ex. G. at 6. The trustee "shall [**7] incur no liability for any act or failure to act by the
Investment Direction Adviser, or for acting on a direction of the Investment Direction Adviser or with respect to its
implementation of any such direction of the Investment Direction Adviser." Id. The trustee also "shall not be liable for
any loss resulting from action taken by the Investment Direction Adviser." Id. Moreover, the trustee will have "no
obligation to investigate or confirm the authenticity of directions it receives or the authority of the person or persons
conveying them" and is "exonerated from any and all liability in relying on any such direction from a person purporting
to be the Investment Direction Adviser without further inquiry by the Trustee." Id. at 5. Similar provisions apply to the
trustee's relationship with the Trust Protector.
The amendments will require the trust to indemnify the Investment Direction Adviser, [*476] as long as either Jeffrey
or Brian is serving in that capacity. The indemnification obligation will extend to "all losses, costs, damages, expenses
and charges, public and private, including reasonable attorneys' fees, including those arising from all litigation,
groundless or otherwise, that [**8] result from the performance or non-performance of the powers given to the
Investment Direction Adviser . . . ." See e.g., 1953 Trusts Pet. Ex. G. at 7. If anyone other than Jeffrey or Brian is
serving as Investment Direction Adviser, then indemnification only will be available "to the extent agreed upon by such
Investment Direction Adviser, the Trustee, and those individuals with the authority to appoint Investment Direction
Advisers . . . ." Id. at 8. A parallel indemnification obligation will cover the Trust Protector.
II. LEGAL ANALYSIS

The petitions seek declarations designed to cause Delaware to govern the administration of the trusts so that they can be
reformed to take advantage of features authorized by the Delaware trust statute. The petitions proceed on the
assumptions that if a trustee domiciled in Delaware becomes sole successor trustee and takes custody of the trust assets,
then Delaware will become the situs of the trust, Delaware law will govern the administration of the trust, and
reformation can proceed. The requests for orders approving the resignations of the individual trustees, confirming the
appointment of Northern Trust as the successor corporate trustee for each [**9] trust, and declaring Delaware as the
situs of each trust are intended to create a factual predicate for applying Delaware law. The petitions fail primarily
because Delaware law does not govern the trusts. Each of the trusts affirmatively selects the governing law of a
different jurisdiction.
A. The Requests For Declarations Regarding The Trustees' Resignations And The Appointment Of A Sole
Successor Trustee
Each petition seeks an order declaring that the resignations of the two individual trustees are approved. Neither
individual trustee has actually resigned. Instead, each has submitted a resignation conditioned on receiving judicial
approval. Each petition also seeks an order confirming the appointment of Northern Trust as successor trustee. As with
the individual trustees' resignations, Northern Trust has not actually taken over as trustee but rather conditioned its
acceptance of the appointment on this Court's approval.
With respect to the 1957 Trust and the 1953 Trusts, the requested relief cannot be granted unless the trusts are first
reformed. Section 5 of the 1957 Trust and Article TENTH of the 1953 Trusts provide that there shall always be three
trustees for each trust, two of [**10] whom shall always be individuals and one of whom shall always be a bank or
trust company. Whether this Court can reform the trusts depends on what law governs the trusts. For the reasons
discussed in later sections of this opinion, Delaware law does not govern the trusts, and it is not appropriate to reform
the trusts.
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With respect to the 1975 Trusts, there is no actual controversy for this Court to resolve. The Court's power to issue
declaratory judgments like those requested in this case flows from the Delaware Declaratory Judgment Act, which
states:
[HN1] Any person interested as or through an executor, administrator, trustee, guardian or fiduciary, creditor, devisee, legatee, heir,
next-of-kin or cestui que trust, in the administration of a trust, or of the estate of a decedent, an infant, a person [*477] with a
mental condition, may have a declaration of rights or legal relations in respect thereto:
(1) To ascertain any class of creditors, devisees, legatees, heirs, next-of-kin or others; or
(2) To direct the executors, administrators or trustees to do or abstain from doing any particular act in their fiduciary capacity; or
(3) To determine any question arising in the administration of the estate [**11] or trust, including questions of construction of
wills and other writings.
10 Del. C. § 6504.
To grant a declaratory judgment, a case must present an actual controversy. See 10 Del. C. § 6501.
[HN2] (1) It must be a controversy involving the rights or other legal relations of the party seeking declaratory relief; (2) it must be
a controversy in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claim;
(3) the controversy must be between parties whose interests are real and adverse; (4) the issue involved in the controversy must be
ripe for judicial determination.
Rollins Int'l, Inc. v. Int'l Hydronics Corp., 303 A.2d 660, 662-63 (Del. 1973). [HN3] It constitutes reversible error for a
trial court to have "addressed issues as to which there was no actual controversy." Gannett Co., Inc. v. Bd. of Managers
of the Del. Criminal Justice Info. Sys., 840 A.2d 1232, 1238 (Del. 2003). Inquiry into whether an actual controversy
exists is "jurisdictional in its character, and presents an issue which the court itself [is] bound to raise." Stabler v.
Ramsay, 32 Del. Ch. 547, 88 A.2d 546, 549 (Del. 1952). "That all parties consented to jurisdiction is immaterial." Id.
Sound [**12] policy reasons underlie this careful approach:
[HN4] "First, judicial resources are limited and must not be squandered on disagreements that have no significant current impact
and may never ripen into legal action [appropriate for judicial resolution]. Second, to the extent that the judicial branch contributes
to law creation in our legal system, it legitimately does so interstitially and because it is required to do so by reason of specific facts
that necessitate a judicial judgment." Whenever a court examines a matter where facts are not fully developed, it runs the risk not
only of granting an incorrect judgment, but also of taking an inappropriate or premature step in the development of the law.
Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989) (alteration in original) (citation omitted) (quoting Schick
Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235, 1239 (Del. Ch. 1987) (Allen, C.)). These
principles apply fully to petitions seeking declarations regarding the meaning of trusts. See Bessemer Trust Co. of Del.,
N.A. v. Wilson, 2011 Del. Ch. LEXIS 144, 2011 WL 4484557, at *5 (Del. Ch. Sept. 28, 2011) (raising sua sponte
whether an actual controversy existed in adversarial proceeding [**13] involving a trust).
A consent petition or similar request for judicial relief involving a trust can be appropriate in many circumstances.
Recently, the Court of Chancery formally recognized the longstanding practice of hearing consent petitions by adopting
Rules 100-103. A consent petition may be appropriate, for example, in cases where the trust agreement does not
expressly authorize the action in question, the agreement is genuinely ambiguous, or there are minor or unborn
beneficiaries whose interests must be protected through judicial oversight of the virtual representation process or, if
necessary, the appointment of a guardian or attorney ad litem. [HN5] A petition [*478] or request for judicial relief is
not appropriate when the trust agreement expressly authorizes the contemplated action. Such a request consumes
judicial resources unnecessarily and does not present a live dispute capable of resolution.
Section 7(f) of the agreements governing the 1975 Trusts provides that any trustee shall have the power to resign by
delivering written notice to any successor or co-trustee, with the resignation to take effect on the date specified in the
notice, without necessity for prior accounting or judicial [**14] approval. Jeffrey and Moore can readily execute
resignations as individual trustees of the 1975 Trusts, and they already have done so, albeit conditioned on judicial
approval. In conjunction with the petitions, Jeffrey and Moore delivered their resignations to each other and Bank of
America (the current co-trustees), to Northern Trust (the successor trustee), and to Stefan and Derek (the presumptive
remainder beneficiaries of Brian's trusts). Section 6 of the 1975 Trusts authorizes the individual trustees of each trust
to remove the corporate trustee and appoint a successor corporate trustee. Jeffrey and Moore exercised their authority,
before conditionally resigning, by removing Bank of America and appointing Northern Trust. In light of the terms of
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the 1975 Trusts, to rule on Jeffrey and Moore's conditional resignations or Northern Trust's conditional acceptance of
its appointment as trustee would constitute an impermissible advisory opinion.
The requests for declarations regarding the trustees' resignations and the appointment of a sole successor trustee are
therefore denied.
B. Whether Delaware Law Governs The Trusts

The petitions next seek orders confirming that Delaware law governs [**15] the administration of each trust. As noted,
the petitions proceed on the assumption that once a Delaware corporate trustee has been appointed and the custody of
the trust assets has been transferred to the Delaware corporate trustee, then Delaware law will govern administration of
the trust. These requests are denied because the orders would be contrary to the choice of law provisions in the trust
agreements.
1. Choice Of Law Principles For Multistate Trusts

[HN6] "In a multistate trust proceeding the forum court must first apply its own law to determine the local law of the
state to be applied in determining the substantive issue." George Gleason Bogert, et al., The Law Of Trusts And Trustees
§ 294 [hereinafter Bogert]. "The forum court's rules do not themselves determine the rights and liabilities of the parties,
but rather guide decision as to which local law will be applied to determine these rights and duties." Id. (internal
quotation marks omitted).
[HN7] To resolve choice of law issues, Delaware follows the Restatement (Second) of Conflict of Laws. See, e.g., State
Farm Mut. Auto. Ins. Co. v. Patterson, 7 A.3d 454, 457 (Del. 2010); Travelers Indem. Co. v. Lake, 594 A.2d 38, 47 (Del.
1991). [**16] Section 6 of the Restatement explains that in the first instance, "[a] court, subject to constitutional
restrictions, will follow a statutory directive of its own state on choice of law." Restatement (Second) of Conflict of
Laws § 6 (1971) (the "Restatement"). In light of the constitutional obligation to show comity to other co-equal state
sovereigns, "[a] court may not apply the local law of its own state to determine a particular issue unless such application
of this law would be reasonable in the light of the relationship of the state and of other [*479] states to the person,
thing or occurrence involved." Id. § 9.
[HN8] If there is no controlling statutory directive, a court faced with a choice of law issue should consider
(a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other
interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified
expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Restatement § 6. [**17] In addition to these general guidelines, the Restatement provides specific principles for
particular choice of law problems. For trusts, the Restatement provides different guidance depending on (i) whether the
trust is a testamentary, inter vivos, or charitable trust, (ii) whether the trust holds real estate (described in the
Restatement as "immovables") or personal property (described by the Restatement as "movables"), and (iii) whether the
choice of law issue concerns the validity, construction, or administration of the trust. See generally Restatement §§
267-82. All of the trusts at issue are inter vivos trusts that hold cash and marketable securities. The petitions recite that
the trusts also hold certain unidentified real estate, but the account statements show only shares in publicly traded real
estate investment trusts. This decision assumes that the trusts do not own any real estate directly.
Section 272 of the Restatement summarizes the common law rules for determining the law that governs the
administration of an inter vivos trust where the corpus consists of personal property and not real estate. As with trust
law in general, the rules begin with the settlor's intent: [HN9] If [**18] the trust instrument selects a particular law to
govern the trust's administration, then that selection controls. Even without an explicit designation, it may "otherwise
be apparent from the language of the trust instrument or from other circumstances, such as the extent of the contacts
with a particular state, that the settlor wished to have the local law of a particular state govern the administration of the
trust." Restatement § 272 cmt. c. If the settlor's intent is apparent, then the settlor's choice again controls.
2. Applying Delaware's Choice Of Law Rules Within The Restatement Framework

Under the Restatement, the choice of law analysis begins with the forum state's relevant choice of law statute, if any.
The Delaware General Assembly has adopted Section 3332(b) of Title 12 which states, in pertinent part, that [HN10]
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"[e]xcept as otherwise expressly provided by the terms of a governing instrument or by court order, the laws of this
State shall govern the administration of a trust while the trust is administered in this State." 12 Del. C. § 3332(b).
Under the petitioners' theory, Northern Trust will administer the trusts in Delaware, satisfying the statute and causing
Delaware law to [**19] apply. But the statute does not dispose of the choice of law issues in this case.
First, Section 3332(b) is not dispositive because it contemplates that a trust agreement may contain a choice of law
provision specifying that a particular law will govern. Delaware respects freedom of contract. The trusts in this case
contain choice of law provisions, and the Court must interpret them to determine whether administration falls within
their scope.
[*480] Second, Section 3332(b) is not dispositive because it contemplates the possibility of a determination "by court
order" that the law of a different state would govern, notwithstanding that a trust may be "administered in this State."
Section 3332(b) thus establishes a default rule, while recognizing that some cases may result in a different state's law
governing pursuant to a court order. Section 3332(b) does not dictate the outcome of a petition seeking a "court order,"
such as the petitions in this case.
Third, Section 3332(b) is not dispositive because the trusts in this case are not currently being "administered in this
State." The petitions seek this Court's approval of the appointment of Northern Trust as successor trustee, and Northern
Trust [**20] has conditioned its acceptance of the role of successor trustee on an order of this Court. At present,
therefore, the trusts are not yet being administered in Delaware.
Fourth, to the extent that Northern Trust were to become successor trustee in conjunction with and conditioned upon
the simultaneous reformation of the trust agreements in the manner sought by the petitions, it is far from clear that the
limited functions that Northern Trust will perform would satisfy the statutory requirement that the trust be
"administered in this State." For the application of Delaware law to be "reasonable in the light of the relationship of the
state and of other states to the person, thing or occurrence involved," Restatement § 9, the term "administration" must
have meaningful content. [HN11] For Delaware law to apply to the exclusion of other sovereigns, the scope of the
administration in this State must be sufficiently substantial so that the trust is principally administered in this State.
Otherwise, Delaware cannot claim a greater interest than other states in the administration of the trust, and Delaware
would not have grounds to trump the jurisdiction of its sister states or authority to implement [**21] its own public
policies and regulatory regime to the exclusion of those of its sister states. See Ch. Ct. R. 100(d)(4) ("the trust petition
shall explain why Delaware is the principal place of trust administration"); see also Unif. Trust Code § 107 cmt.
(2000) (noting that if the trust agreement does not select a governing law, "[u]sually, the law of the trust's principal
place of administration will govern administrative matters"); id. § 202 (providing that trustees and beneficiaries consent
to suit in principal place of administration).
If reformed as proposed in the petitions, the powers, responsibilities, and functions of Northern Trust will bear little
resemblance to those of a traditional trustee. Responsibility for substantive decision-making will be stripped from
Northern Trust and vested in the Investment Direction Adviser and Trust Protector, who will not live, work, or make
trust-related decisions in Delaware. Northern Trust simultaneously will be divested of any obligation to investigate
instructions provided by the Investment Direction Adviser or Trust Protector or even confirm their authenticity.
Northern Trust will have no obligation to monitor the conduct of, provide [**22] advice to, or consult with the
Investment Direction Adviser or Trust Protector. Northern Trust also will have no obligation to communicate, warn, or
apprise any beneficiary of Northern Trust's views about any action taken by the Investment Direction Adviser or Trust
Protector. It remains possible that a further and more detailed showing could be made, but based on the current record,
the proposed allocation of powers, responsibilities, and functions among Northern Trust, the Investment Direction
Adviser, and the Trust Protector raises serious questions about [*481] whether the trusts would be principally
administered in Delaware.
Because Section 3332(b) is not dispositive, common law principles apply. The leading Delaware Supreme Court choice
of law decisions are fully consistent with the Restatement and establish that the touchstone for choice of law analysis is
the settlor's intent.
In the first decision, Wilmington Trust Co. v. Wilmington Trust Co., 26 Del. Ch. 397, 24 A.2d 309 (Del. 1942), the
Delaware Supreme Court stated:
[HN12] Contracting parties, within definite limits, have some right of choice in the selection of the jurisdiction under whose law
their contract is to be governed. And where the donor in a [**23] trust agreement has expressed his desire, or if it pleases, his
intent to have his trust controlled by the law of a certain state, there seems to be no good reason why his intent should not be
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respected by the courts, if the selected jurisdiction has a material connection with the transaction. More frequently, perhaps, the
trust instrument contains no expression of choice of jurisdiction; but, again, there is no sufficient reason why the donor's choice
should be disregarded if his intention in this respect can be ascertained from an examination of attendant facts and circumstances,
provided that the same substantial connection between the transaction and the intended jurisdiction shall be found to exist.
Id. at 313 (emphases added). In this passage, the Delaware Supreme Court was considering the choice of law principles
for determining the law that governs the validity of a trust, with the requirement that a settlor select the law of a state
with a "material connection" to the trust. Id. Subject to this condition, the Delaware Supreme Court held squarely that
the choice of law inquiry focuses on the settlor's intent. The Delaware Supreme Court's directive to give primacy to the
settlor's [**24] intent applies all the more clearly to the selection of the law that governs trust administration, where a
settlor can select the law of any jurisdiction, even one with no connection to the trust. See Restatement § 272 cmt. c.
In a second Delaware Supreme Court decision, Wilmington Trust Co. v. Pennsylvania Co., 40 Del. Ch. 1, 172 A.2d 63
(Del. 1961), the high court made clear that [HN13] a choice of law provision in a trust instrument can speak generally
and need not use the magic word "administration" to designate the law of a particular jurisdiction. In Wilmington Trust
Co. v. Pennsylvania Co., a provision in a will that created a testamentary trust stated: "I direct further that the laws of
the State of Delaware shall be controlling as to all questions pertaining to the Trusts by said Will created . . . ." Id. at 67.
The Delaware Supreme Court remarked as follows: "The Chancellor held that the provision applies to questions of the
scope of trust powers, questions concerning the administration of the trust, and to like matters. We think he was clearly
right." Id. Because of the strong public policies that govern probate and decedents' estates, a testator generally has less
freedom to select the governing [**25] law for a testamentary trust than the settlor of an inter vivos trust. See
Restatement § 272 cmt. c. The high court's holding that the quoted language was adequate in the context of a
testamentary trust, a more restrictive setting, strongly indicates that that the same or similar language is sufficient to
demonstrate a settlor's intent to select the law that would govern the administration of an inter vivos trust, which is a
less restrictive setting.
A third decision, Lewis v. Hanson, 36 Del. Ch. 235, 128 A.2d 819 (Del. 1957), illustrates how a settlor may implicitly
designate the law of a [*482] particular jurisdiction. In Lewis, a Pennsylvania resident settled an inter vivos trust under
an agreement with Wilmington Trust Company, a Delaware institutional trustee. The trust agreement was signed in
Delaware, and the trust assets were delivered to Wilmington Trust in Delaware. The agreement directed Wilmington
Trust to invest and manage the trust assets and pay the income to the settlor during her lifetime. Wilmington Trust was
given "in substance . . . the ordinary powers granted to a trustee," but only could exercise three specific powers at the
direction of an investment advisor: (i) the power to sell trust [**26] assets, (ii) the power to invest the proceeds from
the sale of trust assets, and (iii) the power to participate in mergers or consolidations of corporations whose securities
were owned by the trust. Id. at 824.
The Delaware Supreme Court observed that " [HN14] [g]enerally speaking, a creator of an inter vivos trust has some
right of choice in the selection of the jurisdiction, the law of which will govern the administration of the trust." Id. at
826. The trust in Lewis did not expressly select a law to govern trust administration. The Delaware Supreme Court
noted that the trust agreement was "signed and the securities [were] delivered to a trustee doing business in Delaware"
and concluded that "this circumstance clearly indicates the intent of [the settlor] to have the trust administered and
governed according to the law of Delaware." Id. Delaware law therefore governed both the administration and validity
of the trust. Id. In reaching this conclusion, the Lewis court followed the rule announced in Wilmington Trust Co. v.
Wilmington Trust Co., where the high court held that "[w]hether [the] choice of jurisdiction has been affirmatively
stated . . . or whether the donor's intention is deducible [**27] from surrounding facts and circumstances, is a question
of evidence and consequent proof; and in what manner the donor's intention is made to appear ought not to affect the
result." 24 A.2d at 313. The Supreme Court's approach in Lewis also accords with the Restatement, which recognizes
that "[d]espite the absence of an express designation, it may otherwise be apparent from the language of the trust
instrument or from other circumstances . . . ." Restatement § 272 cmt. c.
The Delaware Supreme Court decisions giving broad effect to the settlor's intent in selecting the law to govern a trust
comport with Delaware's general approach to choice of law provisions. [HN15] "Parties operating in interstate and
international commerce seek, by a choice of law provision, certainty as to the rules that govern their relationship." Abry
P'rs V, L.P. v. F&W Acq., LLC, 891 A.2d 1032, 1048 (Del. Ch. 2008).
Our state obviously relies upon the willingness of other state courts to honor the choice of law reflected in the corporate charters of
Delaware firms, even when the parties before them are not geographically situated in Delaware. When the fact of Delaware
incorporation has no bearing on the parties' relationship, [**28] and they have agreed to a broad choice of law provision that
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logically governs the claims brought before a Delaware court and that selects another state's law to govern, that choice of law
provision must and should be respected by our judiciary.
Weil v. Morgan Stanley DW Inc., 877 A.2d 1024, 1035 (Del. Ch. 2005). Outside of the trust context, this Court has
cautioned that [HN16] the text of a choice of law provision "should not be interpreted in a crabbed way that creates a . .
. senseless bifurcation" of the law that governs different issues. Id. at 1032. When the drafter of an agreement selects a
law to govern the [*483] agreement and the relationship it creates, the logical conclusion is that the drafter intended
that law to apply to all aspects of the agreement and relationship, unless the provision specifically states otherwise. See
id. at 1033. For example, a broad choice of law provision that encompasses all matters arising out of or relating to an
agreement extends to tort claims, such as challenges to the agreement based on misrepresentation, duress, undue
influence, or mistake. Abry P'rs, 891 A.2d at 1048. To presume that a choice of law provision applies only to one aspect
of the relationship [**29] "would create uncertainty of precisely the kind that the parties' choice of law provision
sought to avoid." Id. (footnote omitted).
These sensible principles apply equally to trusts. When a settlor includes a broad choice of law provision in a trust
agreement that logically governs the issues brought before a Delaware court, and it provides for another state's law to
govern, the provision should and will be respected. A broad choice of law provision should not be interpreted in a
crabbed way that results in a senseless multiplication of the jurisdictions whose law governs different aspects of the
trust.
3. The Effect Of Changing The Place Of Trust Administration

Determining whether the settlor intended for a single law to govern the administration of a trust can be more
complicated if the trust agreement permits a transfer of situs and the appointment of a successor trustee.
[HN17] If the actual place of administration is changed, either because the trustee acquires a place of business or domicil in
another state, or if in the exercise of a power of appointment a trustee is appointed whose place of business or domicil is in another
state, the question arises whether thereafter the administration [**30] of the trust is governed by the local law of the other state.
Restatement § 272 cmt. e; see also Daniel M. Schuyler, Creating A Revocable Trust: Some Conflict of Laws Problems,
1 Real Prop. Prob. & Tr. J. 363, 372 (1966) ("A change in the place of administration . . . may raise an issue as to
whether the law applicable to the administration of the trust is also to change.").
[HN18] Moving the situs or place of administration of a trust from one state to another does not automatically result in
a change in the law that applies; whether the governing law changes depends on the terms of the trust. See Richard W.
Nenno, The Trust from Hell: Can It Be Moved to A Celestial Jurisdiction?, 22 Prob. & Prop. 60, 61 (May/June 2008);
Schuyler, supra, at 372; accord Restatement § 272 cmt. e (discussing how the terms of the trust dictate whether the
governing law over administration will change). If the settlor has selected a particular law to govern administration,
explicitly or implicitly, then that law will continue to govern:
[I]n a private trust where the settlor has indicated an intent that it should be administered in a certain jurisdiction, it seems both
proper and convenient that the law of that [**31] jurisdiction should govern questions of administration. When the place of
administration has been fixed, a subsequent change of residence by the trustee does not alter the controlling law.
David F. Cavers, Trusts Inter Vivos and the Conflict of Laws, 44 Harv. L. Rev. 161, 163 n.10 (1930) (citations omitted);
accord Nenno, supra, at 61; cf. Unif. Trust Code § 107(1) (2000). By contrast, if the settlor has not selected a particular
law to govern the trust, then
[a] simple power to appoint a successor trustee may be construed to include a [*484] power to appoint a trust company or
individual in another state. In such cases, the law governing the administration of the trust thereafter is the local law of the other
state and not the local law of the state of original administration.
Restatement § 272 cmt. e.

Consistent with the Restatement, [HN19] Delaware gives broad effect to the settlor's intent to select a single law to
govern a trust. See Part II.B.2, supra. Where a settlor chooses a governing law, that choice is dispositive. The settlor
need not deploy talismanic language in a choice of law provision or specify a litany of trust issues to be governed by
the chosen law. The settlor's intent to chose [**32] a particular law may be implied from the trust document as a
whole. When a settlor has selected a governing law, the power to appoint a successor trustee in and of itself is
insufficient to override this intent, unless the trust document as construed by the Court expressly provides for such a
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change. These principles can be seen operating in the leading cases of Wilmington Trust Co. v. Wilmington Trust Co., 26
Del. Ch. 397, 24 A.2d 309 (Del. 1942) [hereinafter Wilmington Trust III], Wilmington Trust Co. v. Sloane, 30 Del. Ch.
103, 54 A.2d 544 (Del. Ch. 1947), and Annan v. Wilmington Trust Co., 559 A.2d 1289 (Del. 1989).
In Wilmington Trust III, the Delaware Supreme Court construed a power to appoint a successor trustee as authorizing
both a change in situs and the law governing administration. The trust did not contain a choice of law provision.
Instead, the Delaware Supreme Court readily concluded that the trust initially was formed under and governed by the
law of New York, noting that "every operative factor pointed solely to that State." 24 A.2d at 313. The high court
determined, however, that a power of appointment in the trust instrument contemplated that the law governing
administration would change. In reaching [**33] this conclusion, the Delaware Supreme Court relied on express
language in the trust instrument. Without the express language, a different rule would have applied, and the case would
have come out differently.
In Wilmington Trust III, the Delaware Supreme Court reviewed two successive trial court decisions in which the then-
sitting Chancellor and his predecessor reached opposite conclusions. In the first decision, Chancellor Josiah O. Wolcott
held that New York law continued to govern the trust even after the change in situs, following the general rule that "[a]
change of domicile by the trustee which is accompanied by a change of the location of the trust property itself does not
change the status of the trust." Wilmington Trust Co. v. Wilmington Trust Co., 21 Del. Ch. 188, 186 A. 903, 909 (Del.
Ch. 1936) [hereinafter Wilmington Trust I]. As Chancellor Wolcott saw the matter,
Had the original trustee removed to Delaware bringing the trust res with her and there continued to administer the trust, it can
hardly be denied that the New York law would have continued to govern its terms. In substance all we have here is the appointment
of a new trustee by the beneficiaries with the approval of the living settlor [**34] and a removal of the trustee to Delaware with
like approval. It is difficult to see anything in that fact which looks to a fundamental change in the terms and conditions of the
trust.
Id.
Chancellor Wolcott next considered whether the explicit language of the trust instrument required a contrary
conclusion. The trust agreement stated that "the successor trustee shall hold the said trust estate subject to all the
conditions herein, [*485] to the same effect as though named herein." Id. I will refer to this language as the "Same
Effect Provision."
Chancellor Wolcott held that the Same Effect Provision referred "to the conditions as stated and existing at the time the
trust was created" and did not imply that the settlor intended for the law governing administration to change if a
successor trustee in a different jurisdiction was appointed. Id. In his view, under a contrary interpretation,
if later the person of the trustee should be changed to successive trust companies located in several states respectively, the terms of
the trust would vary with the migration of its administration according as the law of the state for the time being provided. The
possibility of this situation is the less likely [**35] of acceptance as having been intended by the [settlor] when it is remembered
that, though his assent to a change of the trustee to a trust company of any other state was necessary while he lived, after his death
the adult beneficiaries were fully empowered to make the change in their absolute discretion. . . .
It is hardly to be thought that the [settlor] intended consequences of so fundamental a character to flow from the mere circumstance
that he provided that . . . a trust company in any state of the Union could be chosen [as successor trustee].
Id. at 909-10.
After issuing his decision in Wilmington Trust I, but before a final decree was entered, Chancellor Wolcott passed away.
The pleadings were amended and presented for further decision to his successor, Chancellor William W. Harrington,
who took a different view of the case. See Wilmington Trust Co. v. Wilmington Trust Co., 25 Del. Ch. 121, 15 A.2d 153
(Del. Ch. 1940) [hereinafter Wilmington Trust II]. Chancellor Harrington agreed with Chancellor Wolcott about the
general rule: "After a trust has been set up in one State, the mere removal of the trustee to another State, though he
takes the trust assets with him, will not alter its original location, [**36] or the law governing its interpretation and
administration." Id. at 161. Chancellor Harrington also agreed with Chancellor Wolcott that when a settlor specifies a
law to govern the trust, his intent controls. See id. at 162 ("[T]he late Chancellor adopted the so-called intent rule, and I
am likewise in accord with that conclusion."). Chancellor Harrington disagreed only "in applying [the intent] rule to the
facts." Id. In Chancellor Harrington's opinion, the plain language of the Same Effect Provision established that the
settlor intended for the law governing the trust to change with a change in situs, because the language stated that the
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new trustee would hold the property "to the same effect as though now named herein," viz. as if the successor trustee
had been appointed as the original trustee. Id. at 163, 168.
On appeal, the Delaware Supreme Court agreed with the general principles of trust law as articulated by both
Chancellor Wolcott and Chancellor Harrington, noting that "[t]here was no disagreement in the Court below with
respect to the general rules to be applied in ascertaining the situs of an inter vivos trust of personalty." 24 A.2d at 313.
The Delaware Supreme Court then [**37] focused on which of the trial court decisions interpreted the Same Effect
Provision correctly. Id. The Delaware Supreme Court held that Chancellor Wolcott erred because his analysis adhered to
the general rule and "treated [the Same Effect Provision], virtually, as a redundancy." Id. at 314. The Delaware Supreme
Court agreed with Chancellor Harrington's interpretation and read the Same Effect Provision to have "very plainly
declared [*486] that if the trustee should be changed . . . the successor trustee should have the same status, and should
be considered in all respects, as an original appointee." Id. This in turn meant if the successor trustee were a Delaware
trustee and the trust corpus moved to Delaware, then the Same Effect Provision called for the application of Delaware
law, just as if the trust originally had been created with a Delaware trustee and a trust corpus located in Delaware. Id.
Without the Same Effect Provision, however, it appears that both Wilmington Trust II and Wilmington Trust III would
have adhered to the general principles that Chancellor Wolcott articulated and the result he reached in Wilmington Trust
I.
Consistent with the Wilmington Trust trilogy, the Court [**38] of Chancery subsequently held in Wilmington Trust Co.
v. Sloane that an inter vivos trust permitted a change in the law governing administration because the trust expressly
provided for creation of a new trust. Sloane, 54 A.2d at 550. The Court initially inferred that the settlor intended to
create an inter vivos trust governed by New York law. Id. at 549. In the trust terms, the settlor gave the beneficiary a
"general testamentary power of appointment over the fund," id., in other words, permission to establish an entirely new
trust. Once the power of appointment was exercised to create a new trust with a Delaware trustee, Delaware law
governed the administration of the new trust. Id. In so holding, the Court followed an established rule:
The power of appointment . . . had its origin in the donor's deed of trust; the provisions of the deed of appointment are viewed in
law as though they had been embodied in that instrument; and the rights and interests appointed to the children are regarded as
creations of the trust deed.
Id. at 550 (emphases added) (internal quotation marks omitted). In the same case, the Court held that a testamentary
trust, established under the laws of New Jersey, [**39] would remain governed by New Jersey law despite the
appointment of a successor trustee located in Delaware. See Sloane, 54 A.2d at 550 (applying New Jersey law to
determine whether a fund "subject to a general testamentary power of appointment may also be appointed in trust").
Because all that had occurred was the appointment of a successor trustee--and not the creation of a new trust--New
Jersey law continued to apply. Id.
Most recently, in Annan v. Wilmington Trust Co., the Delaware Supreme Court affirmed this Court's reliance on an
explicit choice of law provision. One of the trusts at issue in Annan was created in Quebec, initially administered in
Quebec, and provided that Quebec law would govern. Although the trust subsequently was moved to Delaware and
administered by a Delaware trustee, the Delaware Supreme Court held that "the Vice Chancellor correctly upheld the
choice of law provision." 559 A.2d at 1293.
These decisions comport with the choice of law analysis outlined in the Restatement. Where a choice of law provision is
broad enough to cover administration, the settlor's selection is dispositive. Even where a choice of law provision does
not expressly mention administration, [**40] the settlor's intent may "otherwise be apparent from the language of the
trust instrument or from other circumstances." Restatement § 272 cmt. c. The combination of the appointment of a
successor trustee located in a different jurisdiction and a change in situs is not sufficient to override the settlor's choice
of law. The appointment of a successor trustee combined with a change in situs will change the law governing
administration only if the trust document so [*487] provides or can be construed to contemplate such a change.
4. Application To The 1953, 1957, And 1975 Trusts

The 1953 Trusts explicitly designate the law that will govern trust administration. Article THIRTEENTH of the
agreements governing the 1953 Trusts states: "This trust has been created by the Settlor and accepted by the Trustees
in the State of New York, and all questions pertaining to its validity, construction and administration shall be determined
in accordance with the laws of the State of New York." New York law therefore governs the administration of the trust.
Page 452Page 452
59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
The petition avers that the 1953 Trusts have been administered for several years under Texas law by U.S. Trust. This
fact does not change the controlling law. [**41] A trustee's erroneous belief about the law that governs administration
cannot trump the settlor's intent. Changing the place of administration, without more, will not alter a controlling
designation of law. See Annan, 559 A.2d at 1293-94; Wilmington Trust III, 24 A.2d at 314; Sloane, 54 A.2d at 550.
The 1975 Trusts contain a broad choice of law provision selecting New York law. Section 8(b) of the 1975 Trusts
states: "This Agreement shall be governed by and its validity, effect and interpretation determined by the laws of the
State of New York." Although Section 8(b) of the 1975 Trusts does not use the word "administration" explicitly, it
refers to the "effect and interpretation" of the agreement. Under the Delaware Supreme Court's decision in Wilmington
Trust Co. v. Pennsylvania Co., this language is broad enough to apply to "questions concerning the administration of the
trust, and to like matters." 172 A.2d at 67.
Reading the agreements governing the 1975 Trusts as a whole confirms the selection of New York law to govern the
administration of the trust. See Dutra de Amorim v. Norment, 460 A.2d 511, 514 (Del. 1983) (determining intent of
settlor "by considering the language of the [**42] instrument, read as an entirety, in light of the circumstances
surrounding its creation"); accord Annan, 559 A.2d at 1292 (quoting Dutra de Amorim).
Matters of administration are normally thought to include matters relating to trust management, such as the powers and duties of a
trustee, the investments he may make, his right to compensation or indemnity and the liabilities to which he may be subjected for
breach of trust. Matters seemingly somewhat more substantive, such as the right of beneficiaries to terminate a trust and the effect
of spendthrift provisions, are, at least in a sense, also regarded as administrative in character.
, supra, at 370. 1
1 Accord Bogert, supra, § 293; see Restatement § 272 cmt. c. (including matters such as "what compensation should be paid to the trustee,
what investments he may properly make, what powers are conferred and what duties are imposed upon the trustee"); id. § 268 cmt. d (citing
as "administration" such matters as "those involving the powers and duties of the trustee in general, and in particular the investments he may
properly make; the compensation to which he is entitled; his right to indemnity . . . ; the liabilities for breach of [**43] trust which may be
incurred . . . and the power of the beneficiaries to terminate the trust"); see also Nenno, supra, at 61 ("Questions of trust 'administration'
involve matters such as the powers and duties of the trustee, trust investments, compensation of the trustee and its right to indemnity,
liability for breach of trust, and the power of the beneficiaries to terminate the trust."); Cavers, supra, at 164 ("Clearly matters concerning
the conduct of the trustee, his powers and duties with regard to the corpus of the trust, and his liability to account, may be relegated to
administration. So, too, may the often litigated problem of division of extraordinary acquisitions between income and capital.").
The agreement governing the 1975 Trusts contains numerous provisions addressing [*488] aspects of trust
administration, including but not limited to:
o The duty of the trustee to invest and reinvest the principal of the trusts and circumstances when the trust should be divided or
subdivided (§ 2);
o Circumstances under which the trustee can terminate the trust early (§ 5);
o The selection of trustees, including the designation of successor trustees, the removal and appointment of a corporate trustee,
[**44] and the filling of vacancies (§ 6);
o Whether a trustee must post bond or other security (§ 6);
o The trustees' discretionary powers (§ 7); and
o The trustees' ability to exercise their powers to administer and make distributions from the trust corpus after termination (§ 8(a)).
The settlor also chose a New York institution as the initial institutional trustee. Accord Walton v. Harris, 38 Mass. App.
Ct. 252, 647 N.E.2d 65, 68 (Mass. Ct. App. 1995) ("[A]n institutional trustee 'is relatively likely to remain domiciled in
the same forum over the entire period of the trust's existence. By choosing such an institution as trustee, the settlor has
impliedly chosen a state of administration.'") (quoting Norton v. Bridges, 712 F.2d 1156, 1161 (7th Cir. 1983)); see also
Andreas F. Lowenfeld, "Tempora Mutantur . . ."--Wills and Trusts in the Conflicts Restatement, 72 Colum. L. Rev. 382,
387-88 (1972).
SchuylerBy specifying that New York law will govern the "effect and interpretation" of the trust agreement, by
including numerous provisions that address the administration of the trust, and by selecting a New York institution as
the initial institutional trustee, the settlor expressly chose New York law to govern trust administration. [**45]
Although the agreement governing the 1975 Trusts authorizes the appointment of successor trustees, it does not contain
Page 453Page 453
59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
language similar to the Same Effect Provision interpreted in Wilmington Trust III that could be construed as causing the
governing law to change with the appointment of a successor trustee in a different jurisdiction. The settlor chose New
York law to govern the administration of the trust, and that choice must be respected.
The 1957 Trust contains a choice of law provision selecting New Jersey law that uses language comparable to Section
8(b) of the 1975 Trusts. Section 7(h) states: "This Indenture shall be construed and regulated, and its validity and effect
determined by the laws of the State of New Jersey." This paragraph does not use the word "administration" explicitly,
but requires that the trust be "regulated" under New Jersey law. As with the 1975 Trusts, numerous provisions of the
1957 Trust address matters of administration, which thus must be "regulated" under New Jersey law. Moreover, when
the trust agreement is read as a whole, it is clear that the settlor expressly chose New Jersey law to govern the
administration of the 1957 Trust.
The petition avers [**46] that the 1957 Trust has been administered in accordance with New York law ever since
Bankers Trust Company was directed to turn over the trust property to U.S. Trust Company of New York by order
dated March 16, 2001, issued by the Superior Court of New Jersey, Chancery Division: Essex County Probate Part. The
order does not say anything about changing the law governing the administration of the trust. As with [*489] the 1953
Trusts, the settlor's intent continues to control notwithstanding the current erroneous application of another state's law.
New Jersey law continues to govern.
When the settlor or grantor has selected a law to govern a trust, Delaware will enforce that choice. The 1953 Trusts
and the 1975 Trusts provide for the application of New York law, and the 1957 Trust provides for the application of
New Jersey law. Those designations are controlling, even if a Delaware successor trustee is appointed or the situs of the
trust shifts to Delaware.
C. The Confirmation Of Delaware As The Situs Of The Trusts

The petitions also seek orders confirming Delaware as the situs of the trusts. In order to change the situs of a trust,
whether by expressly modifying the trust or by appointing a successor [**47] trustee in another jurisdiction, the law of
the state which presently governs administration of the trust must be followed. See Restatement § 272 cmt. e. As
explained in the preceding section, New York law governs the administration of the 1953 Trusts and the 1975 Trusts,
and New Jersey law governs the administration of the 1957 Trust. The petitions do not address the parameters of New
York law or New Jersey law, and the issues have not been briefed.
Equally important, it is not clear factually where trust administration principally is taking place. Although Northern
Trust is a Delaware entity and apparently does some unspecified trust business in Delaware, the individual trustees are
not domiciled here. Jeffrey is a resident of Colorado, and Moore is a resident of Washington. The petitions aver that
Jeffrey takes the lead on investment decisions, which is a central part of trust administration. If the trusts were
reformed as contemplated by the petitions, then there is good reason to doubt that Delaware would be the principal
place of administration. As discussed above, the Investment Direction Adviser and the Trust Protector will carry out the
bulk of a trustee's traditional duties, [**48] functions, and responsibilities. Neither the Investment Direction Adviser or
the Trust Protector will live, work, or make trust-related decisions in Delaware. Perhaps the necessary factual showing
could be made, but it has not been made to date.
This Court is therefore not in a position to address the change of situs. Regardless, for the reasons discussed in the
previous section, changing the situs of the trusts would not change the law governing administration.
D. Reformation
The petitions seek to reform the trusts to modify their choice of law provisions, change the number of trustees, create
the positions of Investment Direction Adviser and Trust Protector, establish powers for the new positions and limit the
duties of the sole trustee, and provide broad exculpation from liability for the trustee and indemnification for the
Investment Direction Adviser and Trust Protector. Whether the 1953 Trusts and the 1975 Trusts can or should be
reformed is a matter governed by New York law. Whether the 1957 Trust can or should be reformed is a matter
governed by New Jersey law. The petitions do not address the parameters of New York or New Jersey law, and the
issues have not been briefed. This [**49] Court is therefore not in a position to address the requests for reformation.
E. Accepting Jurisdiction Over The Trusts

Page 454Page 454
59 A.3d 471, *; 2012 Del. Ch. LEXIS 280, **
The petitions ask the Court to accept jurisdiction over the trusts. The trusts will not have any ongoing obligations
[*490] to the Court, and the trustees will not be submitting accountings. Under the circumstances, it is not clear what
accepting jurisdiction over the trusts would mean. Equally important, there is a risk that such a determination could
imply a continuing jurisdictional relationship with this Court that could be invoked in response to other litigation filed
elsewhere. See, e.g., Bessemer Trust Co. of Del. N.A. v. Wilson, 2011 Del. Ch. LEXIS 144, 2011 WL 4484557, at *1
(Del. Ch. Sept. 28, 2011) (seeking declaratory judgments relating to trust from Delaware court in response to Florida
tort action); In re Trusts U/A/D December 30, 1996 & Trusts U/A/D January 13, 2006 Created by Farrell, 2008 Del.
Ch. LEXIS 194, 2008 WL 5459270, at *3 (Del. Ch. Dec. 18, 2008) (seeking declaratory judgments relating to trust
from Delaware court in response to Pennsylvania family court action). The Court will not accept an ill-defined, ongoing
role that could be used for forum shopping.
III. CONCLUSION
The petitions are denied. This [**50] matter is dismissed. Jurisdiction is not retained. IT IS SO ORDERED.
Page 456Page 456
319 Ga. App. 354, *; 734 S.E.2d 908, **;
2012 Ga. App. LEXIS 1047, ***; 2012 Fulton County D. Rep. 3908
66 of 430 DOCUMENTS
NALLEY et al. v. LANGDALE (two cases). NALLEY et al. v. THE LANGDALE

COMPANY. NALLEY et al. v. LANGDALE (two cases). LANGDALE v. NALLEY
et al.
A12A1602, A12A1603. A12A1604. A12A1605, A12A1606, A12A1607.
COURT OF APPEALS OF GEORGIA
319 Ga. App. 354; 734 S.E.2d 908; 2012 Ga. App. LEXIS 1047; 2012 Fulton County
D. Rep. 3908
November 30, 2012, Decided
SUBSEQUENT HISTORY: Reconsideration denied December 13, 2012 -- Cert. applied for.
Writ of certiorari denied Langdale v. Nalley, 2013 Ga. LEXIS 394 (Ga., Apr. 29, 2013)
Writ of certiorari denied Langdale Co. v. Nalley, 2013 Ga. LEXIS 399 (Ga., Apr. 29, 2013)
Related proceeding at, Summary judgment granted by Langdale Co. v. Nat'l Union Fire Ins. Co., 2014 U.S. Dist. LEXIS
184163 (N.D. Ga., June 3, 2014)
PRIOR HISTORY: Trust. Lowndes Superior Court. Before Judge Horkan.
DISPOSITION: [***1] Judgments affirmed in Case Nos. A12A1603 and A12A1607. Judgment affirmed in part and
reversed in part in Case No. A12A1606. Judgments reversed in Case Nos. A12A1602, A12A1604 and A12A1605.
CASE SUMMARY:
PROCEDURAL POSTURE: Plaintiff beneficiaries filed suit against defendants, trustees, a former trustee, and a
company, alleging claims for breach of trust, breach of fiduciary duty, fraud, constructive trust, and conspiracy. The
parties filed cross-motions for summary judgment. The Superior Court of Lowndes County (Georgia) granted summary
judgment in part, largely in favor of defendants. Plaintiffs appealed and a former trustee cross-appealed.
OVERVIEW: The beneficiaries contended that the trial court erred in granting partial summary judgment in favor of
the trustees, because their allegedly false statements gave rise to claims for fraud and breach of trust. The beneficiaries
argued that the trustees' fraudulent misrepresentations were the entire foundation for the stock transaction and that they
were severely damages by the trustees' sale of stock for less than its true value. The appellate court agreed that summary
judgment was granted in error. Contrary to the trustees' claim, the beneficiaries' acceptance of the benefit flowing from
the unauthorized distribution of the trust corpus and the sale of the stock by the income beneficiaries was not an
implied ratification, as the beneficiaries did not learn about the generation-skipping trust instrument until after their
elections were made. The trial court also erred in granting summary judgment in favor of the company on the tortious
interference claim, as a jury might infer from the evidence that the company, through its officers and directors,
knowingly aided and abetted the trustees in their alleged breach of fiduciary duty.
OUTCOME: The trial court's grant of partial summary judgment to the former trustee on the claims for fraud and
breach of trust, grant of summary judgment to trustees on claims for breach of trust and fraud, and grant of summary
judgment in favor of the company for tortious interference with a fiduciary relationship were reversed. The judgment of
the trial court was otherwise affirmed.
Page 457Page 457
319 Ga. App. 354, *; 734 S.E.2d 908, **;
CORE TERMS: stock, summary judgment, income beneficiaries, beneficiary, breach of trust, trust agreement, trust
corpus, cause of action, generation-skipping, stock redemptions, breach of fiduciary duty, fiduciary duties, remainder,
shareholder, terminating, indemnification, co-trustee, indemnity, infer, redeem, wrongdoer's, terminate, matter of law,
trust funds, trust beneficiaries, wrongful conduct, constructive trust, "conspiracy, fiduciary, survive
Civil Procedure > Summary Judgment > Appellate Review > Standards of Review
Civil Procedure > Summary Judgment > Burdens of Production & Proof > Movants
Civil Procedure > Summary Judgment > Standards > General Overview
[HN1] In order to prevail on a motion for summary judgment under O.C.G.A. § 9-11-56, a moving party must show that
there exists no genuine issue of material fact, and that the undisputed facts, viewed in the light most favorable to the
nonmoving party, demand judgment as a matter of law. Moreover, on appeal from the denial or grant of summary
judgment, the appellate court is to conduct a de novo review of the evidence to determine whether there exists a genuine
issue of material fact, and whether the undisputed facts, viewed in the light most favorable to the nonmoving party,
warrant judgment as a matter of law.
Civil Procedure > Remedies > Constructive Trusts

Estate, Gift & Trust Law > Trusts > Constructive Trusts
[HN2] A claim for the imposition of a constructive trust is not an independent cause of action.
Torts > Procedure > Multiple Defendants > Concerted Action > Civil Conspiracy > General Overview
[HN3] Where a plaintiff seeks to impose civil liability for a conspiracy, the conspiracy in and of itself furnishes no
independent cause of action. Rather, the gist of the action, if a cause of action exists, is not the conspiracy alleged, but
the tort committed against the plaintiff and the resulting damage.
Estate, Gift & Trust Law > Trusts > Trustees > Duties & Powers > Claims By & Against
[HN4] A trustee shall be accountable to a beneficiary for the trust property. A violation by the trustee of any duty that
the trustee owes the beneficiary shall be a breach of trust. O.C.G.A. § 53-12-300. In order to recover for a trustee's
breach of trust, a beneficiary must show proof of damages proximately caused by the breach.
Torts > Intentional Torts > Breach of Fiduciary Duty > Elements
[HN5] Establishing a claim for breach of fiduciary duty requires proof of three elements: (1) the existence of a fiduciary
duty; (2) breach of that duty; and (3) damage proximately caused by the breach.
Torts > Business Torts > Fraud & Misrepresentation > Actual Fraud > Elements
Torts > Business Torts > Fraud & Misrepresentation > Constructive Fraud > Elements
[HN6] The tort of fraud has five elements: a false representation by a defendant, scienter, intention to induce the
plaintiff to act or refrain from acting, justifiable reliance by plaintiff, and damage to plaintiff. For an action for fraud to
survive a motion for summary judgment, there must be some evidence from which a jury could find each element of the
tort.
Civil Procedure > Trials > Jury Trials > Province of Court & Jury
Torts > Business Torts > Fraud & Misrepresentation > General Overview
[HN7] Given that fraud is inherently subtle, slight circumstances of fraud may be sufficient to establish a proper case.
Moreover, it is peculiarly the province of the jury to pass on these circumstances showing fraud.
Estate, Gift & Trust Law > Trusts > Trustees > Duties & Powers > General Overview
Governments > Fiduciary Responsibilities
[HN8] A trustee is a fiduciary. Fiduciaries are held to the highest standard of the law. A "fiduciary" is a person who is
required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to
another the duties of good faith, trust, confidence, and candor.
Contracts Law > Defenses > Fraud & Misrepresentation > General Overview
Page 458Page 458
319 Ga. App. 354, *; 734 S.E.2d 908, **;
Contracts Law > Remedies > Ratification

Contracts Law > Remedies > Rescission & Redhibition > General Overview
[HN9] A party alleging fraudulent inducement to enter a contract has two options: (1) affirm the contract and sue for
damages from the fraud or breach; or (2) promptly rescind the contract and sue in tort for fraud. The right to affirm the
contract and the right to sue for damages due to fraud coexist. However, if the defrauded party, with knowledge of the
fraud, does an act in ratifying or affirming the contract which shows his intention to abide by the contract as made, with
the fraud in it, and thus waives the fraud, he can not afterwards set up the fraud and recover damages therefor. Whether
such a ratification has occurred is usually a fact question for the jury.
Estate, Gift & Trust Law > Trusts > Beneficiaries > General Overview
Estate, Gift & Trust Law > Trusts > Trustees > General Overview
[HN10] A beneficiary may ratify a breach of trust. Even though an act of the trustee is unauthorized and constitutes a
breach of trust, it may be so acquiesced in, confirmed, or ratified by the cestui que trust as to estop him or her from
repudiating it and attempting to hold the trustee liable. However, the cestui que trust must have acted with full
knowledge of all facts and of his or her legal rights. Generally, the question of ratification is one which depends upon
the intention of the parties, and is a matter of fact to be determined by the jury.
Contracts Law > Contract Conditions & Provisions > Indemnity

Contracts Law > Defenses > General Overview
[HN11] In Georgia, contractual indemnities do not extend to losses caused by an indemnitee's own negligence unless
the contract expressly states that the negligence of the indemnitee is covered. The words of the contract will be
scrutinized closely to discover whether such an intent is actually revealed in them and every presumption is against such
intention. In the absence of explicit language to the contrary, courts will not interpret an indemnity agreement as a
promise by the indemnitor to save the indemnitee harmless on account of the latter's own negligence. Georgia courts
never imply an agreement to indemnify another for one's own negligence in the absence of express language.
Civil Procedure > Justiciability > Abatement on Death of Party

[HN12] See O.C.G.A. § 9-2-41.
Civil Procedure > Justiciability > General Overview

[HN13] A cause of action has been defined as being the entire set of facts which give rise to an enforceable claim.
Torts > Business Torts > Fraud & Misrepresentation > Constructive Fraud > Elements
[HN14] An actionable claim for fraud requires proof of detrimental reliance upon a misrepresentation.
[HN15] A claim for breach of fiduciary duty requires proof of injury proximately caused by the breach.
Civil Procedure > Remedies > Damages > General Overview

Torts > Damages > Nominal Damages
[HN16] See O.C.G.A. § 51-12-4.
Governments > Fiduciary Responsibilities

Torts > Business Torts > Commercial Interference > General Overview
[HN17] A plaintiff may recover for tortious interference with a fiduciary duty upon proof of the following elements: (1)
through improper action or wrongful conduct and without privilege, the defendant acted to procure a breach of the
primary wrongdoer's fiduciary duty to the plaintiff; (2) with knowledge that the primary wrongdoer owed the plaintiff a
fiduciary duty, the defendant acted purposely and with malice and the intent to injure; (3) the defendant's wrongful
conduct procured a breach of the primary wrongdoer's fiduciary duty; and (4) the defendant's tortious conduct
proximately caused damage to the plaintiff.
HEADNOTES Georgia Advance Headnotes

Page 459Page 459
319 Ga. App. 354, *; 734 S.E.2d 908, **;
(1) Estate, Gift & Trust Law. Trusts. Beneficiaries. Appellate court could not say that the acceptance of the benefit
flowing from the unauthorized distribution of the trust corpus and the sale of the stock by the income beneficiaries
amounted to an implied ratification as a matter of law, because the beneficiaries did not learn about the existence of the
generation-skipping trust instrument until after suit was filed and their election made; further, all of the beneficiaries
agreed that any recovery should be structured to compensate those newly-discovered remainder beneficiaries. Whether,
given those facts, the beneficiaries intended to ratify any breach of trust remained a question of fact for the jury to
resolve and precluded the granted of summary judgment.
(2) Civil Procedure. Justiciability. Standing. Because a former trustee was no longer a trustee, the former trustee
lacked standing to pursue claims on behalf of the remainder beneficiaries for the return of the trust funds. Rather, the
right to pursue an action concerning the wrongful distribution of trust funds belonged exclusively to the trust
beneficiaries or to one with the authority to act on behalf of the trust beneficiaries, such as a cotrustee or successor
trustee. OCGA § 53-12-301.
(3) Contracts Law. Contract Conditions & Provisions. Indemnity. Summary judgment was not proper on claims for
indemnification and set off, because issues of fact remained as to whether a former trustee engaged in wrongful conduct
or acted in bad faith. If a jury found that the former trustee acted in good faith and within the former trustee's discretion
in selling the stock, the former trustee would be permitted to invoke the indemnity clause as a defense.
(4) Civil Procedure. Justiciability. Because the beneficiaries had no cause of action against a former trustee before his
death, any fraud claim against the former trustee failed.
(5) Torts. Business & Employment Torts. Interference With a Contract. The trial court erred in granting summary
judgment in favor of the company on the claim for tortious interference with fiduciary relationship, because there was
sufficient evidence from which a jury might infer that the company, through some of its officers and the majority of its
directors, knowingly aided and abetted the trustees in the alleged breach of their fiduciary duties. There was some
evidence that the stock was undervalued, and there is evidence from which a jury could infer that the company was
secretive about its intent to purchase the stock to discourage other potential buyers.
COUNSEL: Butler, Wooten & Fryhofer, James E. Butler, Jr., George W. Fryhofer III, John C. Morrison III, Tedra C.
Hobson, William E. Moore, Jr., Gregory A. Voyles, for Nalley.
Jones, Cork & Miller, H. Jerome Strickland, Matthew T. Strickland, Christopher J. Arnold, Hunter, Maclean, Exley &
Dunn, John M. Tatum, Matthew C. Henderson, Rachel C. Young, for John Langdale.
Watson Spence, Frank F. Middleton IV, Evans J. Plowden, Jr., Louis E. Hatcher, Sarah F. Kjellin, for Harley Langdale.
Bryan, Cave, Powell & Goldstein, William V. Custer IV, Raymond J. Burby IV, Edwin M. Cook, Coleman Talley, William
E. Holland, for The Langdale Company.
JUDGES: ELLINGTON, Chief Judge. Phipps, P. J., concurs and Dillard, J., concurs dubitante in judgment only.
OPINION BY: ELLINGTON
OPINION
[*354] [**910] ELLINGTON, Chief Judge.
These consolidated cases concern a trust created in 1959 by Judge Harley Langdale, Sr. ("Judge Langdale"). The
plaintiffs, who are beneficiaries under the trust or their legal representatives, filed suit in the Superior Court of
Lowndes County, claiming, inter alia, that the trustees breached their fiduciary duties in administering the trust and in
distributing the trust corpus, which was comprised of stock held in The Langdale Company ("TLC"). The parties filed
cross-motions for summary judgment, which the trial court granted in part, largely in favor of the defendants. The
plaintiffs appeal, and one of the former trustees, defendant Harley Langdale, Jr. ("Harley Jr."), has filed a cross-appeal.
For the reasons explained below, we affirm in part and reverse in part.
Page 460Page 460
319 Ga. App. 354, *; 734 S.E.2d 908, **;
[HN1] In order to prevail on a motion for summary judgment under OCGA § 9-11-56,
the moving party must show that there exists [***2] no genuine issue of material fact, and that the undisputed facts, viewed in the
light most favorable to the nonmoving party, demand judgment as a matter of law. Moreover, on appeal from the denial or grant of
summary judgment[,] the appellate court is to conduct a de novo review of the evidence to determine whether there exists a genuine
issue of material fact, and whether the undisputed facts, viewed in the light most favorable to the nonmoving party, warrant
judgment as a matter of law.
(Citations omitted.) Benton v. Benton, 280 Ga. 468, 470 (629 SE2d 204) (2006).
1. Viewed in the light most favorable to the nonmovants, the record shows the following relevant facts.
(a) The Langdale Company. In 1947, Judge Langdale incorporated TLC,1 a closely-held, family-owned business
headquartered in Valdosta. The ownership of TLC was initially divided evenly between its first directors, Judge
Langdale and his three sons, Harley Jr., John [*355] Langdale, Sr. ("John Sr."), and William Langdale ("Billy"). Judge
Langdale also had a daughter, Virginia Langdale Miller ("Virginia"). Between 1956 and 2000, each of the sons served a
few years as an officer of TLC or a member of the Board of Directors, and Virginia [***3] served as a director for
approximately 12 years.
1 TLC functions as a holding company for subsidiaries that conduct a number of businesses (including forest products, auto dealerships, and
banks) and whose assets include substantial tracts of timberland.
Over the years, TLC appraised its stock2 using the "Stanley methodology," a formula developed by Dr. Kenneth Stanley,
a professor in the business school at Valdosta State College and a paid consultant of TLC, for estimating the value of
stock in private, closely-held corporations. According to Stanley, because there typically is no active market for a
minority interest in a private, [**911] closely-held corporation, it is difficult to estimate the value of the stock.3
2 In 1974, TLC issued nonvoting shares of stock, designated Class B; the original common (voting) shares were amended and designated
Class A.
3 The record shows that Stanley appraised TLC stock for the company almost every year from 1987 through 1999. The estimates were done
primarily for establishing the value of stock for estate and gift tax purposes in accordance with IRS rules.
There is some evidence that a disagreement existed in the Langdale family concerning the governance of [***4] TLC.
Billy and his sons formed one faction, and Harley Jr., John Sr., and John Sr.'s son, John W. Langdale, Jr. ("Johnny")
formed the other. There is some evidence that Harley Jr., John Sr., and Johnny planned to consolidate ownership and
control of TLC in Johnny's line of descendants.4 There is no evidence, however, that Billy and his sons actively
competed for control of TLC. Billy and his sons sold their interest in TLC to the company in 2009 following a lawsuit. 5
4 The plaintiffs point to what they contend is evidence of a 1993 "takeover plan" by Harley Jr. and Johnny. These plans appear to have been
generated by a consultant who met with certain TLC board members and who proposed that TLC use insurance products to fund stock
redemptions from shareholders upon their death. The plaintiffs contend that, pursuant to this plan, Harley Jr. and John Sr. executed
documents that would give Johnny control of TLC's voting shares.
5 TLC acquired control of the voting stock held in trust for Virginia in 1999 and 2000, as will be discussed further below.
The record shows that, beginning in 1976, TLC executed a number of shareholders' agreements restricting the sale of
TLC stock. On February 25, [***5] 1994, all of TLC's shareholders, including the trust through its trustees, Harley Jr.
and John Sr., entered into a new shareholders' agreement governing the purchase and sale of TLC stock. The 1994
shareholders' agreement provided that no shareholder could sell or transfer TLC stock to a third party without first
offering to sell or transfer the stock to TLC or the remaining shareholders. It also provided that the "agreed value [of the
stock] shall be arrived at using a new evaluation employing the same methods and guidelines used by [Stanley] in his
appraisal dated the 29th day of [*356] December 1993, and using [TLC's] profit and loss statements for the fiscal year
immediately preceding the date of evaluation."
Page 461Page 461
319 Ga. App. 354, *; 734 S.E.2d 908, **;
(b) The Trust Agreements. Judge Langdale sought to provide for his daughter, Virginia, who was not one of the original
TLC shareholders, by placing his shares of TLC stock in trust for her and for her descendants. On December 8, 1959,
Judge Langdale executed an irrevocable trust agreement for her benefit.6 Judge Langdale, on that same day, funded the
trust with his interest in TLC, 250 shares of common stock. He appointed John Sr. and Harley Jr. as co-trustees, and
both co-trustees [***6] signed the trust agreement. The trustees controlled the trust property, and were given wide
discretion to manage and invest the trust corpus as the "[t]rustees may deem advisable." This discretion included selling
or transferring trust holdings "either at public or private sale, at such prices and places and at such times as they
consider[ed] best, without advertisement" or court order, in "their uncontrolled discretion," so long as it was "in the best
interest of [the] Trust."
6 The agreement provided that "this Trust is and shall be irrevocable and that[,] after the execution of this Trust[,] I ... shall have no right to
alter, amend, revoke or terminate this Trust or any provision thereof."
At the time the trust was created, Virginia had three living children, Langdale Nalley ("Dale"), James R. Miller
("Jimmy"), and Virginia Ruth Miller. The trust agreement provided that the net income of the trust was to be
distributed annually to Virginia and her children and that, after the death of Virginia, "the net income shall be divided
annually into as many shares as there are children of [Virginia] living and deceased children with lineal descendants
living." The agreement also provided [***7] that the trust "shall terminate on the 21st anniversary of the death of the
last surviving beneficiary who was in life at the date of the execution" of the agreement, that is, Virginia, Dale, Jimmy,
and Virginia Ruth. On the date that the trust terminated, the agreement directed that "[a]ll property remaining in the
corpus of [the] Trust shall then, or as soon thereafter as practicable, be distributed to the persons then entitled to
[**912] the income, to be theirs absolutely in the same proportion as they are entitled to the income." Thus, this
agreement was a generation-skipping trust.7
7 See generally IRC § 2611 (a) (defining the term "generation-skipping transfer" for estate tax purposes).
On December 16, 1959, John Sr. sent a conformed copy8 of this agreement to Virginia and to Judge Langdale's
accountant. A 1997 letter to Harley Jr. from Virginia's estate planning attorney indicated [*357] that both Virginia and
her attorney believed the trust agreement was the operative agreement and noted that "the Trust works very well for
Virginia and her descendants, in that it skips generations for estate tax purposes[.]" Virginia's accountant, who also had a
copy of the generation-skipping trust agreement, [***8] had the same understanding of the trust.
8 A "conformed copy," as the parties use that term, is a copy in which the handwritten signatures are replaced by the notation "/s/."
Almost immediately after executing the generation-skipping trust agreement, however, Judge Langdale apparently
changed his mind9 about when the trust should terminate, and he executed a new trust document, the "1999 terminating
trust agreement."10 The terms of the 1999 terminating trust agreement and the generation-skipping trust agreement are
almost identical. Both agreements provide that the corpus of the trust would be comprised of 250 shares of TLC
common stock, name John Sr. and Harley Jr. as co-trustees, and provide that the net income of the trust is to be
distributed annually to Virginia and to her children equally, with her grandchildren to receive per stirpes the share of a
deceased parent. Unlike the generation-skipping trust agreement, however, the 1999 terminating trust agreement
provides that "[the] Trust shall terminate on the 31st day of December, 1999. All property remaining in the corpus of
this Trust shall then, or as soon thereafter as practicable, be distributed to the persons then entitled to [***9] the
income, to be theirs absolutely in the same proportion as they are entitled to the income."
9 Copies of unsigned letters found in John Sr.'s files indicate that, on December 29, 1959, John Sr. wrote to Judge Langdale's accountant,
advising him that his father had "[s]hortly after execution ... changed his mind and desired that the Trust should terminate on December 31,
1999[,] rather than as originally drafted." John Sr. told the accountant to "destroy this letter and [to] destroy the copy [of the original trust
agreement] which was forwarded to you previously." The record also shows that someone marked a red "X" across the first page of the
generation-skipping trust agreement and placed it in a file in John Sr.'s filing cabinet.
Page 462Page 462
319 Ga. App. 354, *; 734 S.E.2d 908, **;
10 The 1999 terminating trust agreement was signed by Judge Langdale, the same trustees, and the same witness, was notarized, and was
also dated December 8, 1959. The original of this agreement was attached to a gift tax return that Judge Langdale filed following the
creation of the trust, and the documents were placed in a vault at TLC's headquarters. There is no dispute that Judge Langdale signed both
trust agreements. There is also no evidence, however, [***10] that he intended to create two separate trusts. In fact, he only owned 250
shares of common stock in TLC, so he could not have transferred 250 shares to two individual trusts. There is no evidence that Judge
Langdale, who died in 1972, made any statement concerning the operative agreement.
Harley Jr. served as a co-trustee of the trust until December 27, 2010, and he was the trustee who primarily
communicated with the income beneficiaries. John Sr. served as a co-trustee until a serious illness prompted him to
resign on December 30, 1994.11 His son, [*358] Johnny, succeeded him as a co-trustee in 1994 pursuant to a document
executed in October 1993 by Harley Jr. and John Sr.12 The plaintiffs contend that they were not aware that Johnny had
been appointed trustee. Johnny, however, was aware that he was a trustee. On May 27, 1999, Johnny resigned as trustee
with the consent of the trust's beneficiaries. Bob, Billy's son, was appointed to replace Harley Jr. in 2010.
11 There is no evidence in the record that suggests that John Sr. engaged in any discussions with the beneficiaries or their advisors
concerning the sale of TLC stock while he was a trustee. He resigned in 1994, and he died in early [***11] 1998.
12 A similar document, executed by Harley Jr. alone, provided a schedule of successor trustees for the trust, beginning with Johnny and
followed by Johnny's son, John Wesley Langdale III and, then by Billy's son, Robert Harley Langdale ("Bob").
[**913] (c) The Sale and Distribution of the Trust Corpus. It is unclear from the record who initially proposed allowing
TLC to redeem the stock held in the trust. The record shows, however, that discussions concerning the disposition of
that stock were underway in late 1997. On August 8, 1997, Virginia's lawyer, Jay Reynolds, wrote to Harley Jr. and
asked for information concerning the trust, its assets, and its trustees, so he could advise Virginia about her estate
planning. On August 13, Harley Jr. responded, informing Reynolds that the value of the stock was difficult to estimate
and that TLC had used the Stanley methodology to value the stock in the past. On September 2, Reynolds wrote to
Harley Jr. again, stating: "Virginia mentioned to me, she had understood from you, that in 1999 there was to be some
change in either the Trust or perhaps [the TLC] stock." Harley Jr. responded, stating that the trust was to terminate in
1999 and that "[o]ur [***12] plans are to distribute the [trust] assets" to the beneficiaries.
Reynolds wrote back immediately, expressing concern that the trust agreement in his possession did not show that the
trust terminated on December 31, 1999. Harley Jr. responded on September 15:
I have discussed [the trust] with John [Sr.] and he does not remember,[13] but he says it is apparent to him that our father must have
changed his mind about the termination [provision] on the same day [he created the trust]. [John Sr.] says he can't recall when the
conformed copy was sent to [Virginia], but apparently a copy of the first draft was handed to him and it was sent to [Virginia] in
error. We regret that this has happened, but we are certain there is no signed instrument other than the [1999 terminating trust
agreement] enclosed with this letter.
13 The record indicates, however, that in April 1997, John Sr.'s administrative assistant had written a memorandum concerning the trust on
John Sr.'s behalf which indicated that John Sr. was of the opinion that the trust did not terminate in 1999.
[*359] From this point forward, the trustees proceeded as though the 1999 terminating trust governed. Virginia, Dale,
and Jimmy (hereinafter, [***13] "the income beneficiaries")14 and their advisors had "multiple discussions" with TLC
representatives concerning the disposition of the stock in the trust. The income beneficiaries were represented by their
attorney, Reynolds, and by a certified public accountant, Deborah Chambless. In April 1999, Reynolds and Chambless
met with TLC representatives to discuss a plan for TLC to redeem the trust's shares. Both Reynolds and Chambless
deposed that they were told that the redemption plan required valuing the stock according to the Stanley methodology as
set forth in the shareholders' agreement.
14 Virginia's third child, Virginia Ruth, died in 1971.

Page 463Page 463
319 Ga. App. 354, *; 734 S.E.2d 908, **;
In late 1998, Johnny and TLC's chief financial officer, Steve Watts, began planning how TLC would redeem the stock
held in the trust. Watts deposed that he and Johnny thought it was a good idea for TLC to redeem the stock, that TLC
had "good cash flow" at the time and that owning the stock would "accrete to [TLC's] earnings." Watts also conceded
that the stock redemption plan was intended to give Johnny control of TLC. According to Watts, Johnny wanted to keep
the deal quiet because he was afraid that if Billy's family found out that they would [***14] either spoil the deal by
telling the income beneficiaries what they believed the stock was worth or that they would bid on the stock and, if they
"got control of the company, they would want it sold and therefore Johnny and all of those guys would lose their jobs."
Watts further deposed that Johnny was trying to convince Virginia and Jimmy "to let the trust sell its stock to [TLC]."
During the negotiations, the co-trustees of the trust were Harley Jr. and Johnny. Both Harley Jr. and Johnny were also
shareholders of TLC and together controlled more than half of TLC's voting stock.
On May 5, 1999, Reynolds wrote to Watts, expressing his clients' interest in proceeding with the stock redemption. TLC
made a number of internal financial documents available for Reynolds and Chambless to review, [**914] including
past stock valuations, TLC balance sheets, statements concerning operating expenses and earnings, and reports of
independent auditors. On May 21, 1999, Watts wrote a proposal for Harley Jr.'s approval, outlining how to redeem the
stock from the trust with the consent and approval of the income beneficiaries and of the TLC Board of Directors.
Ultimately, the parties agreed to break the transaction [***15] into two parts for tax purposes, a May 1999 sale and
distribution and a January 2000 sale and structured payment over a ten-year term.
[*360] On May 28, 1999, TLC redeemed the trust's voting stock and entered into a number of agreements, including
an irrevocable option agreement for the purchase of the balance of the stock at the predetermined Stanley value. On the
same day, Harley Jr., still in his capacity as trustee, entered into a reimbursement and indemnification agreement with
the income beneficiaries. In the agreement, the income beneficiaries acknowledged that they "have requested that the
Trustee enter into a transaction to sell a portion of [the TLC] stock prior to December 31, 1999," and distribute the cash
proceeds to them. In return, the income beneficiaries agreed
to release, indemnify, save and hold harmless the Trustee, of, from and against any and all liabilities, claims, demands, causes of
action, costs, ... and judgments incurred or suffered on behalf of the Trustee, whether presently existing or arising in the future,
whether from claims made by them or on their behalf or by any other person having an interest in the Trust, such as contingent or
alternate beneficiaries [***16] of the Trust, which in any way relate to, or arise from: the sale of the stock by the Trustee; the
distribution of the Net Cash Proceeds; ... and any other agreements contained herein or actions of the Trustee under or related to
this Agreement.
After the closing of the Redemption Agreement and the execution of the reimbursement and indemnification agreement,
Virginia, Dale, and Jimmy each received checks for approximately $2.4 million, each check representing one third of
the proceeds from the stock redemption.
On January 4, 2000, Harley Jr., acting as trustee, notified TLC that the trust had terminated and directed TLC to reissue
the remaining Class B stock that he held on behalf of the trust to Virginia, Dale, and Jimmy. TLC's Board of Directors
adopted a resolution on January 24, authorizing the company's representatives to redeem the balance of the stock. On
January 28, 2000, TLC redeemed the balance of the stock pursuant to agreements substantially similar to those executed
in May. After executing the agreements, Virginia, Dale, and Jimmy each received checks for $1.6 million and ten-year
installment notes for $5 million plus interest.
(d) The Instant Lawsuit. Sometime in 2007, [***17] Dale had a conversation with her cousin that led her to believe that
she, Virginia, and Jimmy had gotten "shortchanged" in the sale of the TLC stock. The income beneficiaries met with
counsel to investigate claims that they had been defrauded. In May 2009, Dale, individually and as attorney-in-fact for
Virginia, and James IV, individually and as executor of [*361] Jimmy's estate, filed this action against Harley Jr.,
Johnny as the executor of John Sr.'s estate, and Johnny individually. TLC was added as a defendant in 2010. Virginia,
Dale, and Jimmy (the income beneficiaries) premised their complaint on an averment that the 1999 terminating trust
agreement was the operative agreement. They asserted claims for breach of trust, breach of fiduciary duty, fraud,
constructive trust, and conspiracy. In essence, the income beneficiaries averred that the stock that TLC redeemed was
worth at least $100 million more than TLC paid for it and that they were consequently damaged to the extent of the
difference between the stock's true value and the amount they actually received when Harley Jr. distributed the trust's
corpus to them. The plaintiffs' expert opined that the TLC stock was worth significantly [***18] more than the Stanley
value. The defendants dispute the plaintiffs' valuation of the stock; however, they concede that Stanley's valuation in
this case may not have taken into account the full value of some of TLC's assets or holdings. In addition, the [**915]
Page 464Page 464
319 Ga. App. 354, *; 734 S.E.2d 908, **;
plaintiffs averred that the stock redemption agreement, by reducing the number of voting shares and by paying only a
fraction of the stock's value, substantially increased the value of the TLC stock owned and controlled by the defendants
and enabled them to control TLC for their own profit. The income beneficiaries prayed that a constructive trust be
imposed upon the defendants' TLC stock and upon all benefits the defendants gained as a result of their alleged scheme.
In June 2009, attorneys representing Harley Jr. and Johnny discovered the original, generation-skipping trust in one of
John Sr.'s filing cabinets. These defendants filed their answers, asserting defenses based upon the discovery of the
generation-skipping trust instrument; Harley Jr. also asserted counterclaims against the income beneficiaries, seeking
the return of the proceeds of the stock redemptions. Harley Jr. asserted that he relied upon the 1999 terminating trust
[***19] agreement in good faith and denied that he acted intentionally or negligently in disbursing the trust corpus to
the income beneficiaries.
After Harley Jr. and Johnny filed their answers, the income beneficiaries amended their complaint on September 3,
2009, adding as plaintiffs Virginia's six grandchildren, that is, James IV (individually) and Dale's five children. William
McIntosh was appointed guardian ad litem for the minor and unborn potential remainder beneficiaries, and he joined the
litigation as a plaintiff on February 19, 2010. Bob, the successor trustee, also joined the suit as a plaintiff on January 7,
2011. These additional plaintiffs aligned themselves with the income beneficiaries and adopted the allegations of the
complaint.
[*362] The plaintiffs asserted that, "since the beneficiaries -- all of them -- have elected to seek a damages remedy, the
May 28, 1999 transaction stands." The remainder beneficiaries and their representatives also took the position that they
have elected to affirm the transaction and pursue a damages remedy for breach of trust. All of the plaintiffs have
asserted that they would redistribute any award of damages in the instant suit to the remainder beneficiaries. [***20]
And, if there is no award of damages, they have agreed to redistribute to the remainder beneficiaries the funds paid to
the income beneficiaries with court approval. We note that all of the parties have taken the position that the generation-
skipping trust agreement is the operative trust agreement and that Judge Langdale lacked the authority to revoke that
agreement or to alter any of its provisions, as he attempted to do when executing the 1999 terminating trust agreement.
After hearings on the various motions, the trial court granted summary judgment in favor of Johnny, individually, on the
plaintiffs' claims. The plaintiffs appeal this ruling in Case No. A12A1602. The court also granted summary judgment in
favor of Johnny, as the executor of the estate of John Sr., on the plaintiffs' claims. The plaintiffs appeal this ruling in
Case No. A12A1603. The trial court granted summary judgment in favor of TLC on the plaintiffs' claims, and the
plaintiffs appeal this ruling in Case No. A12A1604.
The trial court denied Harley Jr.'s motion for summary judgment in part as to the remainder beneficiaries' claims that he
"committed a breach of trust or breach of fiduciary duty by dispersing the [***21] trust corpus to the income
beneficiaries." The trial court otherwise granted summary judgment in favor of Harley Jr. on the plaintiffs' claims. In
Case No. A12A1605, the plaintiffs appeal the grant of partial summary judgment in favor of Harley Jr. In Case No.
A12A1607, Harley Jr. appeals the denial of partial summary judgment on the issue of whether he committed a breach of
trust or fiduciary duty by dispersing the trust corpus to the income beneficiaries.
Finally, the trial court denied the plaintiffs' motion for summary judgment on Harley Jr.'s counterclaims, and the
plaintiffs appeal this ruling in Case No. A12A1606.
Case Nos. A12A1605 and A12A1607
2. In Case No. A12A1605, the plaintiffs contend that the trial court erred in granting partial summary judgment in favor
of Harley Jr. on their claims.15 Specifically, they contend [**916] that Harley Jr.'s [*363] allegedly false statements
gave rise to claims for fraud and breach of trust against Harley Jr. as a trustee.16 They argue that Harley Jr.'s "fraudulent
misrepresentations and concealments were the entire foundation of the [stock] transaction, and the transaction could not
have occurred without them." They also argue that they were "severely [***22] damaged" by Harley Jr.'s actions in that
he sold the stock to TLC for less than its true value and that he "disenfranchised" the remainder beneficiaries by
distributing the trust corpus in 1999.
15 The counts of the original complaint, as amended, against Harley Jr. are for (1) breach of trust, (2) breach of fiduciary duty, (3) breach of
fiduciary duty as a director of TLC, (4) fraud, (5) constructive trust, and (6) conspiracy. Counts 5 and 6 do not state independent causes of
action. [HN2] A claim for the imposition of a constructive trust is not an independent cause of action. Morrison v. Morrison, 284 Ga. 112,
113 (1) (663 SE2d 714) (2008). And [HN3] where a plaintiff seeks to impose civil liability for a conspiracy, the conspiracy in and of itself
Page 465Page 465
319 Ga. App. 354, *; 734 S.E.2d 908, **;
furnishes no independent cause of action. Cook v. Robinson, 216 Ga. 328, 328-329 (1) (116 SE2d 742) (1960). Rather, the "gist of the action,
if a cause of action exists, is not the conspiracy alleged, but the tort committed against the plaintiff and the resulting damage." (Citation
omitted.) Id. at 329 (1). See also Alta Anesthesia Assoc. of Ga. v. Gibbons, 245 Ga. App. 79, 85 (3) (537 SE2d 388) (2000). Thus, the claims
at issue are those for fraud [***23] and breach of trust.
16 The plaintiffs make no argument that the trial court erred in granting summary judgment on their claim against Harley Jr. for breach of
fiduciary duty as a director of TLC. That claim of error, therefore, is deemed abandoned. Court of Appeals Rule 25 (c) (2).
In both Case Nos. A12A1605 and A12A1607, Harley Jr. contends that all of the plaintiffs ratified the stock transactions
and the distribution of the trust corpus, thereby estopping them from pursuing claims for breach of trust or fraud
arising out of those transactions.17 Therefore, he argues that the trial court's partial grant of summary judgment in his
favor was correct, but that the court erred in denying his motion for summary judgment as to the plaintiffs' claim for the
wrongful distribution of the trust corpus.
17 Harley Jr. also contends that the plaintiffs' claims are barred by the six-year statute of limitation concerning a breach of trust, OCGA §
53-12-307. We find no merit to this contention, however. The original plaintiffs filed suit in 2009, two years after they discovered that they
may have been paid less for the stock than it was actually worth. The additional plaintiffs joined the suit as soon [***24] as they learned of
the existence of the generation-skipping trust instrument. See Snuggs v. Snuggs, 275 Ga. 647, 647-648 (1) (571 SE2d 800) (2002) ("The
applicable statute of limitation for a breach of trust claim ... , is, in relevant part, six years from the date the beneficiary discovered, or
reasonably should have discovered, the subject of the claim.") (punctuation and footnote omitted).
It is undisputed that, under the generation-skipping trust agreement, the trustees were not authorized to distribute the
trust corpus to anyone in 1999. Yet Harley Jr., acting as trustee, allowed the stock comprising the trust corpus to be
distributed to the income beneficiaries in violation of the terms of the trust instrument and then allowed TLC to redeem
it from the beneficiaries at a price the plaintiffs argue was a fraction of its true value. They argue that Harley Jr. "duped"
them into the transactions at issue by misrepresenting the trust's termination date, that he conspired with others to
[*364] orchestrate a clandestine stock redemption pursuant to the shareholders' agreement to suppress the value of the
stock, and that he used the stock redemption to increase the value of his stock and to [***25] consolidate control of
TLC in Johnny's line of descendants.
Given that Harley Jr. was a trustee when the stock redemption occurred, any claim against him sounding in fraud is also
a claim for breach of trust. [HN4] "The trustee shall be accountable to the beneficiary for the trust property. A
violation by the trustee of any duty that the trustee owes the beneficiary shall be a breach of trust." OCGA § 53-12-
300.18 In order to recover for a trustee's breach of trust, a beneficiary must show [**917] proof of damages proximately
caused by the breach. See SunTrust Bank v. Merritt, 272 Ga. App. 485, 489 (2) (612 SE2d 818) (2005) ( [HN5]
"Establishing a claim for breach of fiduciary duty requires proof of three elements: (1) the existence of a fiduciary duty;
(2) breach of that duty; and (3) damage proximately caused by the breach.") (punctuation and footnote omitted). In this
case, the plaintiffs argue that Harley Jr. breached his duties as a trustee of good faith and loyalty 19 by fraudulently
inducing the income beneficiaries to enter into the stock redemption transactions. As we have held:
[HN6] The tort of fraud has five elements: a false representation by a defendant, scienter, intention to induce the plaintiff [***26]
to act or refrain from acting, justifiable reliance by plaintiff, and damage to plaintiff. For an action for fraud to survive a motion for
summary judgment, there must be some evidence from which a jury could find each element of the tort.
(Citations omitted.) Crawford v. Williams, 258 Ga. 806 (375 SE2d 223) (1989). [HN7] "Given that fraud is inherently
subtle, slight circumstances of fraud may be sufficient to establish a proper case. ... Moreover, it is peculiarly the
province of the jury to pass on these circumstances showing fraud." (Citations omitted.) Almond v. McCranie, 283 Ga.
App. 887, 889 (2) (643 SE2d 535) (2007).
18 Although the Revised Georgia Trust Code became effective July 1, 2010, it applies to any trust regardless of the date such trust was
created, with two exceptions: "to the extent it would impair vested rights" and "except as otherwise provided by law." OCGA § 53-12-1 (b);
see also McPherson v. McPherson, 307 Ga. App. 548, 550 (1) (a) (705 SE2d 314) (2011). As no party has shown that either exception
applies in this case, we proceed under the Revised Trust Code as supplemented by the common law. See McPherson, 307 Ga. App. at 550-
551 (1) (a).
19 [HN8] A trustee is a fiduciary. [***27] Fiduciaries are held to the highest standard of the law. A "fiduciary" is a "person who is required
to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith,
Page 466Page 466
319 Ga. App. 354, *; 734 S.E.2d 908, **;
trust, confidence, and candor." Alvista Healthcare Center v. Miller, 286 Ga. 122, 127 (686 SE2d 96) (2009), quoting Black's Law Dictionary
(8th ed. 2004) (Melton, J., dissenting).
[*365] In the instant case, the plaintiffs have asserted facts from which the jury could infer that Harley Jr. exceeded the
scope of his discretion as a trustee and committed a breach of trust. He represented to the income beneficiaries that the
trust terminated in 1999, and that representation was false. Under the circumstances of this case, whether that
representation was made negligently, fraudulently, or in good faith remains for the jury to resolve. In the record before
us, there is some evidence from which the jury might infer that Harley Jr. intentionally induced the income beneficiaries
to enter into the stock redemption transactions for his personal gain, that is, for obtaining control of TLC at a discount
and for maximizing the value of his own shares. There is [***28] some evidence that using the Stanley methodology
resulted in a low value for the trust's stock. Further, the jury may infer that the income beneficiaries were justified in
relying on Harley Jr.'s representation that the trust terminated in 1999 and that the stock was properly valued because
Harley Jr. was, in fact, their trustee and owed them a fiduciary duty. Finally, although the income beneficiaries received
a windfall in that they received a payment comprising the entire trust corpus rather than a payment for annual income,
all of the plaintiffs were damaged in that the trustee did not allocate the trust proceeds according to the settlor's intent.20
In light of the evidence as outlined above, we conclude that the plaintiffs presented sufficient evidence on each element
of fraud and breach of trust to survive a motion for summary judgment.
20 In trusts like the generation-skipping trust at issue, that is, those with income beneficiaries and remainder beneficiaries, "the interests of
the two beneficiaries are to a certain extent antagonistic, and the trustee is under a duty so to administer the trust as to preserve a fair
balance between them." (Citation, punctuation and footnote omitted.) [***29] SunTrust Bank v. Merritt, 272 Ga. App. at 488-489 (1).
Harley Jr. contends that, pretermitting whether he made any fraudulent misrepresentations, the plaintiffs ratified any
fraud at issue in the stock transactions or any breach of trust in the distribution of the trust corpus. We disagree. "In
general, [HN9] a party alleging fraudulent inducement to enter a contract has two options: (1) affirm the contract and
sue for damages from the fraud or breach; or (2) promptly rescind the contract and sue in tort for fraud." (Citations
omitted.) Ainsworth v. Perreault, 254 Ga. App. 470, 471 (1) (563 SE2d 135) (2002). The right to affirm the contract and
the right to sue for damages due to fraud coexist. [**918] Tuttle v. Stovall, 134 Ga. 325, 329 (67 SE 806) (1910).
However, if the defrauded party, "with knowledge of the fraud, does an act in ratifying or affirming the contract which
shows his intention to abide by the contract as made, with the fraud in it, and thus waives the fraud, he can not
afterwards set up the [*366] fraud and recover damages therefor." Id. at 329. Whether such a ratification has occurred
"is usually a fact question [***30] for the jury." Brock v. Yale Mtg. Corp., 287 Ga. 849, 854 (3) (700 SE2d 583) (2010).
Similarly, [HN10] a beneficiary may also ratify a breach of trust. "[E]ven though an act of the trustee is unauthorized
and constitutes a breach of trust, it may be so acquiesced in, confirmed, or ratified by the cestui que trust as to estop
him or her from repudiating it and attempting to hold the trustee liable." (Footnote omitted.) 90A CJS Trusts, § 334.21
However, the cestui que trust must have acted with full knowledge of all facts and of his or her legal rights. Id.; see
also Warner v. Hill, 153 Ga. 510, 513 (112 SE 478) (1922) (The beneficiaries of a trust may impliedly ratify the actions
of the trustee by accepting the benefits of the action.). "Generally[,] the question of ratification is one which depends
upon the intention of the parties, and is a matter of fact to be determined by the jury." (Citations omitted.) Warner v.
Hill, 153 Ga. at 513.
21 See also Bogert, Law of Trusts, 5th ed., p. 629 ("After the commission of a breach of trust or other wrong to the beneficiary, the latter
may approve of the act and thus prevent himself from asserting later [that] he has a cause of action. This is generally [***31] called
'ratification.' ") (footnote omitted).
(1) We cannot say that the acceptance of the benefit flowing from the unauthorized distribution of the trust corpus and
the sale of the stock by the income beneficiaries amounts to an implied ratification as a matter of law in this case
because the plaintiffs did not learn about the existence of the generation-skipping trust instrument until after suit was
filed and their election made; further, all of the plaintiffs have agreed that any recovery should be structured to
compensate those newly-discovered remainder beneficiaries. Whether, given these facts, the plaintiffs intended to ratify
any breach of trust remains a question of fact for the jury to resolve.
Page 467Page 467
319 Ga. App. 354, *; 734 S.E.2d 908, **;
Accordingly, we reverse the trial court's grant of partial summary judgment to Harley Jr. on the plaintiffs' claims for
fraud and breach of trust. We also affirm the trial court's order denying Harley Jr.'s motion for summary judgment on
the plaintiffs' claims that he "committed a breach of trust or breach of fiduciary duty by dispersing the trust corpus to
the income beneficiaries."
Case No. A12A1606
3. The income beneficiaries contend that the trial court erred in denying their motion for [***32] summary judgment on
Harley Jr.'s counterclaims. They contend that Harley Jr. cannot prosecute claims for the return of the trust corpus,
whether those claims sound in unjust [*367] enrichment, recoupment, set-off, constructive trust, or money had and
received, because Harley Jr. is no longer the trustee and such a claim can only be prosecuted on behalf of the trust by
the current trustee. They also contend that Harley Jr. is not entitled to indemnity for his allegedly wrongful distribution
of the trust corpus, because the indemnity agreement that the income beneficiaries executed did not indemnify Harley
Jr. for his own negligence, wrongdoing, or other misconduct.
(a) Claims for the Return of Trust Funds. Harley Jr. asserted his counterclaims for unjust enrichment, money had and
received, recoupment, and constructive trust in his capacity "as trustee," seeking the return of misapplied trust funds in
the possession of the income beneficiaries. (2) Because Harley Jr. is no longer the trustee, however, he lacks standing to
pursue claims on behalf of the remainder beneficiaries for the return of the trust funds. Rather, the right to pursue an
action concerning the wrongful distribution of trust funds [***33] belongs exclusively to the trust beneficiaries or to
one with the authority to act on behalf of the trust beneficiaries, such as a co-trustee or successor trustee. OCGA § 53-
12-301.22 Consequently, [**919] the trial court erred in denying the plaintiffs' motion for summary judgment as to
Harley Jr.'s counterclaims for the return of the trust corpus.
22 That Code section provides, in relevant part, that "[i]f a trustee commits a breach of trust, or threatens to commit a breach of trust, a
beneficiary shall have a cause of action to seek ... [t]o compel the trustee to redress a breach of trust by payment of money or otherwise[.]"
(Emphasis supplied.) OCGA § 53-12-301 (a) (5).
(b) Claims for Indemnification and Set-off. It is undisputed that, during the May 1999 sale of stock, the income
beneficiaries signed indemnification agreements "to release, indemnify, save and hold harmless" Harley Jr. as trustee
from any claims -- including those made by contingent beneficiaries -- arising from the sale of the stock and distribution
of proceeds. Similarly, at the January 2000 closing, the parties agreed to indemnify each other for any loss, liability, or
claim arising from any breach of the representations [***34] made in the agreement. The plaintiffs assert, however, that
Harley Jr. should not be able to rely on the indemnification agreement to shield himself from his wrongdoing.
Public policy is reluctant to cast the burden of negligent actions upon those who are not actually at fault. Thus it is well established
[HN11] in Georgia that contractual indemnities do not extend to losses caused by an indemnitee's own negligence unless the
contract expressly states that the negligence of the indemnitee is covered. The words of the contract [*368] will be scrutinized
closely to discover whether such an intent is actually revealed in them and every presumption is against such intention. In the
absence of explicit language to the contrary, courts will not interpret an indemnity agreement as a promise by the indemnitor to
save the indemnitee harmless on account of the latter's own negligence. Georgia courts never imply an agreement to indemnify
another for one's own negligence in the absence of express language.
(Citations and punctuation omitted.) Ryder Integrated Logistics v. BellSouth Telecommunications, 281 Ga. 736, 737-738
(642 SE2d 695) (2007). According to the plaintiffs, this policy applies to intentional wrongdoing [***35] as well as
negligent acts. See, e.g., Corbett v. Benioff, 126 Cal. App. 772, 776 (14 P2d 1028) (1932) (indemnity clause was not
intended to protect trustees against their own wrongful conduct in violation of the trust).
Here, however, we have found that (3) issues of fact remain as to whether Harley Jr. engaged in wrongful conduct or
acted in bad faith. If a jury finds that Harley Jr. acted in good faith and within his discretion as a trustee in selling the
stock, Harley Jr. should be permitted to invoke the indemnity clause in his defense. See, e.g., Coleman v. B-H Transfer
Co., 284 Ga. 624, 627 (3) (669 SE2d 141) (2008) (Georgia courts will enforce an indemnification clause in a contract
unless such enforcement contravenes public policy). It follows that the trial court properly denied the plaintiffs' motion
for summary judgment as to the claim for indemnification and set-off.
Case No. A12A1603
Page 468Page 468
319 Ga. App. 354, *; 734 S.E.2d 908, **;
4. The plaintiffs contend that the trial court erred in granting summary judgment to Johnny, as the executor of the estate
of John Sr., on their claims against the estate. The plaintiffs' claims against John Sr.'s estate, as amended, are identical to
those alleged against Harley Jr.23 The trial court [***36] did not err in granting summary judgment in the estate's favor,
as a matter of law, for the following reasons.
23 See footnote 15, supra.
The claims against John Sr.'s estate fail for the reason that, as of the date of John Sr.'s death in 1998, none of the
plaintiffs had suffered any injury flowing from John Sr.'s alleged wrongdoing and, therefore, any cause of action based
on such wrongdoing was extinguished, pursuant to OCGA § 9-2-41.
[*369] "At common law[,] a cause of action for a personal tort abated on the death of the tort-feasor." Smith v. Jones,
138 Ga. 716 (76 SE 40) (1912). However, OCGA § 9-2-41, which is in derogation of the common law, provides:
[HN12] No action for a tort shall abate by the death of either party, where the wrongdoer received any benefit from the tort
[**920] complained of; nor shall any action or cause of action for the recovery of damages for homicide, injury to the person, or
injury to property abate by the death of either party. The cause of action, in case of the death of the plaintiff and in the event there is
no right of survivorship in any other person, shall survive to the personal representative of the deceased plaintiff. In case of the
death of the defendant, the cause [***37] of action shall survive against said defendant's personal representative. However, in the
event of the death of the wrongdoer before an action has been brought against him, the personal representative of the wrongdoer in
such capacity shall be subject to the action just as the wrongdoer himself would have been during his life, provided that there shall
be no punitive damages against the personal representative.
(Emphasis supplied.) See also Wrinkle v. Rampley, 97 Ga. App. 453, 454 (1) (103 SE2d 435) (1958) ("It follows that[,]
if the plaintiff could not have maintained the [cause of] action against the decedent during his life, the action cannot be
maintained against his personal representative.") (citation omitted). Thus the plaintiffs may prosecute an action against
John Sr.'s estate only if the cause of action was viable against John Sr. before his death. [HN13] "A cause of action has
been defined as being the entire set of facts which give rise to an enforceable claim." (Citations and punctuation
omitted; emphasis in original.) Haley v. Regions Bank, 277 Ga. 85, 91 (2) (586 SE2d 633) (2003).
The plaintiffs seek to recover damages allegedly flowing from TLC's redemption of stock from the [***38] Trust and
from the income beneficiaries. As recounted above, these transactions occurred in May 1999 and January 2000. John Sr.
was neither a trustee nor a director of TLC at that time, having resigned from both positions in 1994. And he died on
February 20, 1998, over a year before formal negotiations concerning the stock redemption commenced. The record is
devoid of any evidence that the plaintiffs took any action to their detriment based upon anything John Sr. said or did.
Moreover, no plaintiff had suffered any injury as a result of any alleged breach of trust prior to [*370] John Sr.'s death.
Under the circumstances of this case, the plaintiffs' claims against John Sr. did not survive his death.
(4) Because the plaintiffs had no cause of action against John Sr. before his death, any fraud claim against him must fail.
See Middleton v. Troy Young Realty, 257 Ga. App. 771, 772 (572 SE2d 334) (2002) ( [HN14] An actionable claim for
fraud requires proof of detrimental reliance upon a misrepresentation.). Moreover, no breach of trust ascribed to John
Sr. proximately caused any injury to any beneficiary during John Sr.'s lifetime. See SunTrust Bank v. Merritt, 272 Ga.
App. at 489 (2). [***39] ( [HN15] A claim for breach of fiduciary duty requires proof of injury proximately caused by
the breach.). The plaintiffs' contention that the alleged breach of trust entitles them to nominal damages and that,
therefore, they were injured, lacks merit. Under OCGA § 51-12-4, nominal damages are only available upon a showing
of injury.24 Under the circumstances of this case, the plaintiffs' causes of action against John Sr. do not survive to his
estate. Therefore, the trial court did not err in granting summary judgment in the estate's favor.
24 [HN16] "Damages are given as compensation for injury; generally, such compensation is the measure of damages where an injury is of a
character capable of being estimated in money. If an injury is small or the mitigating circumstances are strong, nominal damages only are
given." OCGA § 51-12-4.
As for the plaintiffs' claim against John Sr. for breach of fiduciary duty as a director of TLC, they have made no
argument that the trial court erred in granting summary judgment on that claim. Therefore, it is deemed abandoned.
Court of Appeals Rule 25 (c) (2).
Page 469Page 469
319 Ga. App. 354, *; 734 S.E.2d 908, **;
Case No. A12A1602
5. The plaintiffs contend that the trial court erred in granting summary judgment in favor of [***40] Johnny,
individually, on their claims. The plaintiffs' claims against Johnny, as amended, are for breach of trust and fraud and are
identical to those alleged [**921] against Harley Jr.,25 and Johnny raises many of the same defenses. We conclude that
the trial court erred in granting summary judgment in Johnny's favor, as a matter of law, for the same reasons set forth in
Division 2, supra. The jury could infer from the evidence adduced that Johnny, who was a trustee when the plan to
redeem the TLC stock from the trust was effectuated, acted in concert with Harley Jr., was aware of the existence of the
generation-skipping trust agreement and the true value of the TLC stock, and took advantage of his position as trustee
for personal gain.
25 See footnote 15, supra.
[*371] As for the plaintiffs' claim against Johnny for breach of fiduciary duty as a director of TLC, they have made no
argument that the trial court erred in granting summary judgment on that claim. Therefore, it is deemed abandoned.
Court of Appeals Rule 25 (c) (2).
Case No. A12A1604
6. The plaintiffs contend that the trial court erred in granting summary judgment in favor of TLC on the plaintiffs' claim
for tortious interference with a fiduciary [***41] relationship, also referred to by the plaintiffs as either "aiding and
abetting a breach of fiduciary duty" or "conspiracy to breach a fiduciary duty." 26 For the following reasons, we agree.
26 The plaintiffs have made no legal argument concerning the grant of summary judgment to TLC on any of their remaining claims.
Therefore, any claim of error concerning any other aspect of the court's grant of summary judgment to TLC is deemed abandoned. Court of
Appeals Rule 25 (c) (2).
[HN17] A plaintiff may recover for tortious interference with a fiduciary duty upon proof of the following elements:
(1) through improper action or wrongful conduct and without privilege, the defendant acted to procure a breach of the primary
wrongdoer's fiduciary duty to the plaintiff; (2) with knowledge that the primary wrongdoer owed the plaintiff a fiduciary duty, the
defendant acted purposely and with malice and the intent to injure; (3) the defendant's wrongful conduct procured a breach of the
primary wrongdoer's fiduciary duty; and (4) the defendant's tortious conduct proximately caused damage to the plaintiff.
(Citations and footnotes omitted.) Insight Technology v. FreightCheck, 280 Ga. App. 19, 25-26 (1) (a) (633 SE2d 373)
(2006).
In [***42] this case, to establish the "improper action or wrongful conduct" element of their tort claim, the plaintiffs
rely upon allegations that TLC's officers and Board of Directors conspired with the trustees to induce the income
beneficiaries to sell their stock to TLC at a discount, in violation of the terms of the trust agreement. Here, we find (5)
sufficient evidence from which a jury might infer that TLC -- through some of its officers and the majority of its
directors -- knowingly aided and abetted the trustees in the alleged breach of their fiduciary duties. 27 First, there is some
evidence that the stock [*372] was undervalued. TLC provided the documents that Stanley used to value the stock, and
the defendants concede that the valuation may not have taken into account the full value of some of TLC's assets or
holdings. Second, there is evidence from which a jury could infer that TLC was secretive about its intent to purchase the
stock to discourage other potential buyers. Specifically, Watts deposed that the proposed sale was concealed from Billy
and from the public so that others would not spoil the deal. Under these circumstances, the trial court erred in granting
summary judgment in favor of [***43] TLC on the plaintiffs' claim for tortious interference with a fiduciary
relationship. See Insight Technology v. FreightCheck, 280 Ga. App. at 26 (1) (b).
27 "[K]nowledge of officers of a corporation is knowledge to that corporation and the corporation is bound thereby." Stein Steel & Supply
Co. v. Franco, 148 Ga. App. 186, 188 (251 SE2d 74) (1978).
Page 470Page 470
319 Ga. App. 354, *; 734 S.E.2d 908, **;
Judgments affirmed in Case Nos. A12A1603 and A12A1607. Judgment affirmed in part and reversed in part in Case
No. A12A1606. [**922] Judgments reversed in Case Nos. A12A1602, A12A1604 and A12A1605. Phipps, P. J., concurs.
Dillard, J., concurs dubitante in judgment only.
CONCUR BY: DILLARD
CONCUR
DILLARD, Judge, concurring dubitante in judgment only.
I concur in today's result. I concur because I cannot say with confidence that my colleagues on the panel are incorrect in
the manner they have chosen to resolve the issues before us. But I do so with serious doubts.28 And if I were deciding
this case alone, my reasoning and conclusions might differ from the majority's in several material respects. That said, I
am satisfied that my colleagues have carefully and seriously studied this case. Chief Judge Ellington has penned a
thoughtful opinion in which Presiding Judge Phipps has fully concurred. I commend them both for the amount of
[***44] time and effort they have exerted in resolving this difficult and important case. Unfortunately, our constitutional
duty to resolve this appeal today (within two terms of docketing)29 precludes me from engaging in the type of extended
study necessary to achieve a high degree of confidence that my experienced, able colleagues are right.30 As such, I
[*373] defer to the conclusions they have reached in this case, albeit with considerable reservations.
28 See generally United States v. Kaley, 677 F3d 1316, 1330-32 (11th Cir. 2012) (Edmondson, J., concurring in the result); Benefield v.
Tominich, 308 Ga. App. 605, 613 (708 SE2d 563) (2011) (Blackwell, J., concurring dubitante); Jason J. Czarnezki, The Dubitante Opinion,
39 Akron L. Rev. 1 (2006).
29 Ga. Const. art. VI, § 9, ¶ 2 ("The Supreme Court and the Court of Appeals shall dispose of every case at the term for which it is entered
on the court's docket for hearing or at the next term.").
30 The parties to this appeal are represented by talented and skillful attorneys who have vigorously advanced their clients' interests
throughout this unique and complex piece of litigation--so much so that their considerable efforts have produced a staggering appellate
[***45] record consisting of eighty parts (and thousands upon thousands of pages), six transcripts, and numerous lengthy and detailed briefs.
It is in this context that I suggest extended study on my part would be required in order for me to achieve a high degree of confidence that
my distinguished colleagues are correct in the reasoning outlined in their majority opinion, as well as in the conclusions they have reached.
Page 472Page 472
19 Tex. Wesleyan L. Rev. 145, *
67 of 430 DOCUMENTS
Copyright (c) 2012 Texas Wesleyan Law Review

Texas Wesleyan Law Review
Fall, 2012
Texas Wesleyan Law Review
19 Tex. Wesleyan L. Rev. 145
LENGTH: 19362 words
FOURTH ANNUAL ENERGY LAW SYMPOSIUM: MOVING THROUGH THE ROCKY LEGAL TERRAIN TO
FIND A "SAFE" ROYALTY CLAUSE OR A "NEW" MARKET AT THE WELL
NAME: By Patricia Proctor, n1 J. Kevin West, n2 and Gregory P. Neil n3
LEXISNEXIS SUMMARY:
... The majority of oil and gas producing states interpret such "wellhead" language to provide for royalty to be paid as
stated in the lease - based on value at the wellhead - absent express language to the contrary, and therefore to allow
producers to calculate the royalty through a "net back" or "work back" method, deducting the post-production expenses
in order to arrive at the wellhead value. ... In Rogers, a dispute arose between royalty holders and working interest
owners regarding the expenses that could be deducted from royalty payments. ... Applying this rule of construction, the
Court concluded that the lessees had not adequately addressed allocation of post-production expenses: Simply put, if the
drafter of the leases below originally intended the lessors to bear a portion of the transportation and processing costs of
oil and gas, he or she could have written into the leases specific language which clearly informed the lessors exactly
how their royalties were to be calculated and what deductions were to be taken from the royalty amounts for post-
production expenses. ... The Kilmer Court recognized that historically, and at the time the GMRA was enacted in 1979,
producers merely explored for and produced oil and gas and sold the resulting unprocessed minerals to a pipeline
company at the wellhead. ... In the wake of the "implied covenant to market" rulings, all leases should include an
express provision defining the lessee's marketing obligation in order to avoid a court's imposition of an implied duty.
TEXT:
[*147]
I. Introduction
Just as the nation's attention has been riveted by natural gas drilling opportunities in the Marcellus and the Utica Shale
formations, the oil and gas industry's attention has been focused on a myriad of difficult issues on the road to the
effective development of these resources.
Some of the issues are technological and are being resolved through science and engineering. Others are political
and are being addressed in various ways, including by administrative agencies, legislation, and to a certain degree,
through public education. The issue we deal with in this Article is judicially created by courts that have declined to
follow basic rules of contract interpretation and construction, electing instead to reinterpret bargains made between gas
producers and royalty owners in a way that confers benefits on royalty owners and corresponding disadvantages on
producers regardless of the deal they actually made in the lease contract.
Specifically, the issue explored is how to deal with the calculation of royalty in light of the uncertainty and risk
created by various states' holdings regarding allocation of post-production expenses and the implied duty to market.
Traditional lease verbiage placing the point of valuation for payment of royalty "at the well" or "at the wellhead" has
been the subject of much litigation in recent years. The opportunity for arguing about this exists because such leases are
Page 473Page 473
based on the idea that gas is typically sold at the wellhead (as it once was), when, as a result of deregulation and other
factors, this has not been the case for nearly twenty years. n4
The idea for this Article came about as the result of several prominent commentators positing that one of the most
roundly criticized decisions - Estate of Tawney v. Columbia Natural Resources, LLC - actually created a renewed
incentive for producers to sell unprocessed gas at the well in order to be entirely consistent with lease language
measuring value of the gas for royalty calculation purposes "at the wellhead." n5 The Tawney decision was made by the
Supreme Court of [*148] Appeals of West Virginia, a state with great potential for development of both the Marcellus
and Utica Shale. While the language of Tawney might support such an outcome in West Virginia, recent cases by federal
district courts reviewing wellhead sales in other states indicate that some courts might find such sales impermissible,
depending on their interpretations of the implied covenant to market the gas. n6
This Article will explore whether re-emergence of a market at the wellhead is legally viable considering judicial
rulings related to the issue and specifically, whether such a development would be held to run afoul of the implied
covenant to market. This Article will review the law of each state with potential for developing Marcellus and Utica
Shale gas, while keeping in mind that some states have no law on the issue, again creating uncertainty because of the
divergent rulings by other states' courts. Finally, this Article will discuss the merits of completely abandoning the "at the
well" approach to valuation for purposes of royalty calculation in new leases as the preferred way of avoiding litigation
over this issue.
II. The Problem: Allocation of Post-Production Expenses
A. The Reason for the Fight: A Brief History of the Allocation of Post-Production Expenses
In the typical lease, the gas company bears all the expenses of exploring for and producing gas. These expenses are
called "production costs" and include activities such as exploration, drilling, hydraulic fracturing, and completion of the
well. Production is generally understood to occur when the gas breaks the surface of the earth at the well. n7
Historically, production companies typically sold their gas to pipeline companies at the well location, and the
pipeline companies then processed it into "sweet" marketable gas and transported it to the interstate pipeline. This all
changed in 1992 when the Federal Energy Regulatory Commission issued Order No. 636, requiring the pipeline
companies to "unbundle" transportation from sales and provide common carriage to others, including production
companies. n8 The point [*149] of sale for the production companies then moved "downstream" to the interstate
pipeline connection point, with the producers now performing the processing, treating, gathering, compression, and
transportation activities that add value to the gas (or paying others to do so). n9 The costs incurred in doing so are
commonly referred to as "post-production expenses."
The question of where the gas should be valued for purposes of royalty calculation has arisen in the context of
leases that call for royalty to be calculated based on the value of the gas "at the well" or "at the wellhead" or "net all
costs beyond the wellhead." This language has become problematic in recent years because it presumes that gas is sold
at the wellhead (as it once was) when, as a result of deregulation and other factors, this is no longer the case. n10
The majority of oil and gas producing states interpret such "wellhead" language to provide for royalty to be paid as
stated in the lease - based on value at the wellhead - absent express language to the contrary, and therefore to allow
producers to calculate the royalty through a "net back" or "work back" method, deducting the post-production expenses
in order to arrive at the wellhead value. California, Michigan, Mississippi, Montana, New Mexico, North Dakota,
Louisiana, Texas, Pennsylvania, and Kentucky follow this majority rule. n11
The minority approach - followed by Colorado, Kansas, Oklahoma, and West Virginia - expanded the producer's
"implied duty to market" gas by creating a "first marketable product" doctrine. This doctrine requires the producer to
bear all costs incurred up to the first point of marketability or, in the case of West Virginia, up to the point of sale, absent
express language in the lease specifying the expenses to be deducted before calculation of royalty. The highest courts of
Colorado [*150] and West Virginia made their holdings despite lease language stating that royalty would be paid based
on the value of the gas at the well, with Colorado's Supreme Court maintaining in Rogers v. Westerman Farm Co. that
lease language stating that royalty was to be paid on the value of gas "at the well" was "silent" with respect to the
allocation of post-production expenses n12 and West Virginia's Supreme Court in Estate of Tawney v. Columbia Natural
Resources, L.L.C. finding that language providing that royalty to be calculated "at the well" or "at the wellhead," or be
"equal to one-eighth of the price, net all costs beyond the wellhead" was "ambiguous." n13
Page 474Page 474
The remaining state courts with potential Marcellus or Utica Shale gas resources - New York, Ohio, Maryland,
Virginia, and Tennessee - have not addressed the issue, though a federal magistrate judge sitting in Virginia recently
predicted in recommendations to deny motions to dismiss that Virginia would "impose an implied duty to market on
lessees under oil and gas leases ... and that Virginia courts would construe this duty to market to include a duty to make
the product marketable." n14 These recommendations were adopted by the federal district judge without comment on this
prediction. n15
B. The Dueling Incentives of Lessors and Lessees
The traditional "at the well" lease language has been challenged for a reason expressed very well by the distinguished
Professor Pierce: "When compensation under a contract is based upon a set percentage of the value of something, there
will be a tendency by each party to either minimize or maximize the value. This is also the foundation for why there will
never be peace under the oil and gas lease." n16 In other words, mineral owners will always want to maximize the amount
they are paid, and mineral lessees will always want to maximize their profit.
Treatment and transportation of gas after it leaves the wellhead creates additional economic value. This is true
because the value of gas increases in excess of the cost of investments made in treatment and transportation as the gas
moves downstream; its improved condition and location make it more valuable. n17 The economic value created in excess
of actual post-production expenses provides the producers' incentive to undertake post-production improvements:
[*151]
As a general proposition, as oil or gas moves downstream from the wellhead it increases in value. This increase in value
is comprised of two components: (1) investments made in the production either by the lessee providing a facility or
service or purchasing the service from others; and (2) the increased value of the production in a particular form at a
particular location. For example, the lessee may spend 50 [cents] /Mcf in gathering and compression costs to transport
gas from the wellhead to an interstate pipeline. If we assume the gas has a wellhead value of $ 1.00/Mcf, and a value at
the point where the gathering system enters the interstate pipeline of $ 1.55/Mcf, the total enhanced value is comprised
of the 50 [cents] in additional investment plus 5 [cents] in additional value. As the gas moves further downstream from
the wellhead it is typically subject to additional value-increasing investment until it is sold to the purchaser that
consumes the gas. n18
Recent court decisions disallowing deduction of post-production expenses for purposes of royalty calculation
effectively remove the producers' incentive to add value to their product by post-production treatment and transportation
because producers are required to pay royalties not only on the enhanced value of the gas itself, but also on the value of
their investments in processing the gas. n19 This results in an economic loss to all parties because where producers are
required to pay for all post-production expenses and also surrender one-eighth of the final proceeds received, the
incentive to generate this additional value disappears. n20 Rather than creating this additional value for both producer and
royalty owner, producers are instead encouraged to sell the gas as early in the process as possible in order to avoid
additional royalty payments generated wholly at the producer's expense. n21
[*152] It should be recognized, then, that a wellhead market is less lucrative for both producers and royalty
owners than a downstream market. The questions then become whether the producer has a duty to seek a downstream
market and whether it is legally viable to do so.
III. The Implied Covenant to Market: How Expansive is the Covenant in the Marcellus and Utica States?
The principal question to be addressed in assessing the viability of marketing gas at or near the wellhead is how
expansively the implied covenant to market will be applied by the courts in question. The implied covenant to market
generally provides that "the lessee has the duty to produce a marketable product, and the lessee alone bears the expense
in making the product marketable." n22 The question is whether a producer can satisfy the duty to produce a marketable
product if it actually sells gas at the well to a willing buyer in its raw, unprocessed form.
A. Differing Judicial Approaches
Page 475Page 475
Traditionally, an oil and gas lease was treated and construed like any other contract. n23 Accordingly, courts applying the
traditional approach to evaluating oil and gas leases, such as those in Texas, California, New Mexico, and Michigan,
would consider their principal task to be giving effect to the parties' intent in making a bargain under the circumstances
prevailing at the time it was made. n24 In Yturria v. Kerr-McGee Oil & Gas Onshore, LP for example, the court framed its
analysis of an oil and gas lease around the parties' freedom to contract, declaring that "the parties to a contract are
considered masters of their own choices and to that end they must select the terms and provisions to include in a
contract before they execute it ... . Because [*153] the parties are masters of their own fate, they may thus voluntarily
bind themselves in the manner they choose." n25 Under this approach, courts refuse to "rewrite an agreement between
parties or make a new contract for the parties, one they did not make." n26 A court will not, moreover, "change the
contract merely because it or one of the parties dislikes the provision or thinks it unfair." n27
This is principally because "for a court to change the parties' agreement merely because the Court did not like the
agreement, or because one of the parties subsequently found it distasteful, would be to undermine not only the sanctity
afforded the contract but also the expectations of those who created and relied upon it." n28 In other words, if a lease was
negotiated at the time that all gas was sold to a pipeline company at the well, a sale at the wellhead was all that was
contemplated and bargained for. If a court departs from this, it is rewriting the parties' agreement. Applying these well-
settled principles of contract interpretation, Texas (and other) courts have concluded that "market value at the well has a
commonly accepted meaning in the oil and gas industry," n29 namely, "value at the well, net of any value added by
compressing the gas after it leaves the wellhead." n30
Courts applying the traditional approach to lease construction have been reluctant to impose implied covenants that
add to or contradict the express intent of the mineral lease: "A covenant will not be implied unless it appears from the
express terms of the contract that 'it was so clearly within the contemplation of the parties that they deemed it
unnecessary to express it.'" n31 In other words, these courts refuse to create an implied covenant "to achieve what [the
court] believes to be a fair contract or to remedy an unwise or improvident contract." n32
Although most states continue to apply these same basic principles of construction to nearly every other form of
contract, n33 a number of [*154] courts have abandoned the "freedom of contract" model when interpreting royalty
provisions in oil and gas leases and have instead employed numerous devices to supply terms to make contracts "fair"
regardless of the parties' intent upon entering into the contract. n34 Each approach has been applied to nearly identical
lease royalty provisions, leading to wildly divergent results in producing states.
B. The Notable Detour: Colorado Expands the Implied Covenant to Market to Impose Heightened Condition and
Location Requirements Despite Language in the Lease Providing that Royalty Will be Based on Value "At the Well"
While this Article deals primarily with the jurisprudence in states with Marcellus and Utica Shale potential, the implied
covenant to market was first applied to invalidate or re-interpret "at the well" type language in Colorado, Kansas, and
Oklahoma. In order to fully understand the later development of royalty jurisprudence in the Marcellus and Utica states,
it is first necessary to discuss the judicial devices applied by the Colorado Supreme Court.
In Garman v. Conoco, Inc., the Colorado Supreme Court started down the road that led to Rogers by holding that an
overriding royalty owner was not responsible for a pro-rata share of post-production expenses. n35 In reaching this
conclusion, the Garman Court recognized two distinct lines of authority addressing the allocation of post-production
expenses. The first approach, applied by courts in Texas and Louisiana, holds that "gas is 'produced' when it is severed
from the land at the wellhead." n36 On the other hand, courts in Kansas and Oklahoma hold that gas is not "produced"
until it is available for market, requiring the lessee "to get the product to the place of sale in marketable form" at its own
expense. n37 The Garman Court held that this duty to market is implied in every Colorado lease and concluded that "the
implied covenant to market obligates the lessee to incur those post-production costs necessary to place gas in a
condition acceptable [*155] for market. Overriding royalty interest owners are not obligated to share in these costs." n38
The Garman Court limited its holding to those expenses "required to transform raw gas into a marketable product"
and recognized that expenses required to enhance an already marketable product are to be shared. The Court recognized
that a product is marketable when it is "fit to be offered for sale in a market; being such as may be justly and lawfully
bought or sold ... wanted by purchasers." n39 The Court further noted the definition of marketability offered by the
leading treatise on oil and gas, Williams & Meyers: "sufficiently free from impurities that it will be taken by a
purchaser." n40 The Court did not address whether gas could be considered marketable at the wellhead if a purchaser was
willing to buy it there.
Page 476Page 476
The definition of marketability was a central issue a few years later in Rogers v. Westerman Farm Co. n41 In Rogers,
a dispute arose between royalty holders and working interest owners regarding the expenses that could be deducted
from royalty payments. The Court recognized that some of the gas in dispute was sold directly at the wellhead, and
royalty was calculated as one-eighth of the proceeds of the sale. The Court recognized that the gas at issue was both
sweet and dry at the wellhead, but the plaintiffs nonetheless complained that this gas was not "marketable" at the well
and contended that they would have received higher royalties if the gas had been sold downstream. n42
Rather than determining that the leases, which provided for payment of royalties "at the well" or "at the mouth of
the well," controlled the allocation of post-production costs, the Rogers Court concluded that the leases were entirely
silent with respect to such expenses, freeing the Court to apply judicially created standards based on the implied duty to
market:
We conclude that the leases in this case are silent with respect to allocation of costs. We disagree with those
jurisdictions that conclude that "at the well" is sufficient to allocate costs. Moreover, we disagree with the conclusion
that "at the well" language addresses transportation costs, while not addressing other costs incurred in processing the
gas. Instead, we conclude that because the leases are silent, we must look to the implied covenant to market, and our
previous decision in Garman v. Conoco, to determine the proper allocation of costs. n43
[*156] The Rogers Court focused on when and under what conditions a product can be considered to be "marketable."
The Court stated that "deductibility of costs is determined by whether gas is marketable, not by the physical location of
the gas or the condition of the gas." n44 The Court held, moreover, that "if gas is not marketable at the physical location
of the well, either because it is not in a marketable condition, or because it is not acceptable for a commercial market,
then the lessee has not met its burden of making the gas marketable." n45 The Court concluded that "because the lessees
had a duty to make the product marketable, they alone must bear any expenses incurred in order for the gas to reach that
marketable condition." n46
In determining how to define marketability, the Rogers Court recognized and adopted the definitions of
"marketable" set out in Garman. The Court went beyond these definitions, however, looking to the first marketable
product doctrine for guidance. The Court explained that
the first-marketable product rule states that 'the point where a marketable product is first obtained is the logical point
where the exploration and production segment of the oil and gas industry ends, is the point where the primary objective
of the lease contract is achieved, and therefore is the logical point for the calculation of royalty.' n47
Applying the first marketable product doctrine, the Rogers Court adopted a definition of marketability with reference to
both physical and geographical considerations: "Gas is marketable when it is in the physical condition such that it is
acceptable to be bought and sold in a commercial marketplace, and in the location of a commercial marketplace, such
that it is commercially saleable in the oil and gas marketplace." n48
The Court specifically rejected the lower court's conclusion that the gas was marketable at the wellhead as a matter
of law because it was sold there. While recognizing that a sale of gas in good faith was evidence of marketability, the
Court declared that "gas is not marketable merely because it is sold." n49 Rather, the Court stated that "the gas [*157]
must be more than merely sold in order for the lessee to meet the duty to market the gas. Instead, ... the gas must meet
the standard of being suitable for a commercial market." n50 The Court concluded, moreover, that "the determination of
marketability is a question of fact." n51
Although the Rogers decision does not expressly foreclose a finding of marketability at the mouth of the well, the
Court held that such a conclusion would only be appropriate where a jury finds that there is a "commercially viable
market for the gas" at that location. It provided no guidance regarding what it would consider to be a "commercial
marketplace" but rejected the elementary economic proposition that a market exists where there is a willing buyer and a
willing seller. Where no "commercial marketplace exists at the wellhead," it is likely that the Colorado Supreme Court
Page 477Page 477
would require royalties to be paid based on the value of the gas wherever a jury decides is a commercial market - likely
measured by what a jury considers to be appropriate comparable sales - even if the gas is actually sold at the well.
C. Application/Expansion of the Implied Covenant to Market in the Marcellus and Utica States
1. West Virginia Adopted the Reasoning of Garman in Wellman v. Energy Resources, Inc. but Declined to Address
Direct Sales at the Well
While the decisions in Garman and Rogers turned on the definition of "marketability," West Virginia's jurisprudence
took a slightly different route. The West Virginia Supreme Court first addressed the allocation of post-production
expenses in Wellman v. Energy Resources, Inc. n52 In Wellman, the Court recognized that "from the very beginning of
the oil and gas industry it has been the practice to compensate the landowner by selling the oil by running it to a
common carrier and paying [the landowner] one-eighth of the sale price received." n53 The Court negatively
characterized the deduction of post-production expenses, clearly revealing its disposition:
In spite of this, there has been an attempt on the part of oil and gas producers in recent years to charge the landowner
with a pro rata share of various expenses connected with the operation of an oil and gas lease such as the expense of
transporting oil and gas to a point of sale, and the expense of treating or altering the oil and gas so as to put it in a
marketable condition. To escape the rule that the [*158] lessee must pay the costs of discovery and production, these
expenses have been referred to as "post-production expenses." n54
The Wellman Court recognized the implied duty to market and followed Colorado, Kansas, and Oklahoma in
concluding that costs incurred in order to market gas should be borne by the producer. The Court discussed Garman at
length, stating that "implied lease covenants related to operations typically impose a duty on the oil and gas lessee ... .
Accordingly, the lessee bears the cost of compliance with these promises." n55 The Court concluded that "this Court
believes that the rationale employed by Colorado, Kansas, and Oklahoma in resolving the question of whether the lessor
or the lessee should bear 'post-production' costs is persuasive. Like those states, West Virginia holds that a lessee
impliedly covenants that he will market oil or gas produced." n56 The Court accordingly concluded in Syllabus Point 4 n57
that "if an oil and gas lease provides for a royalty based on proceeds received by the lessee, unless the lease provides
otherwise, the lessee must bear all costs incurred in exploring for, producing, marketing, and transporting the product to
the point of sale." n58
The Wellman Court based its decision exclusively on the implied duty to market, declining to analyze the language
of the leases at issue. The Court recognized that the language of the leases at issue might be construed to allocate
transportation expenses to the lessors: "this Court believes that the language of the leases in the present case indicating
that the 'proceeds' shall be from the 'sale of gas as such at the mouth of the well where gas ... is found' might be
language indicating that the parties intended that the Wellmans, as lessors, would bear part of the costs of transporting
the gas from the wellhead to the [*159] point of sale." n59 Nonetheless, the Court declined to consider the actual
language of the leases, reasoning that "whether that was actually the intent and the effect of the language of the lease is
moot because Energy Resources, Inc., introduced no evidence whatsoever to show that the costs were actually incurred
or that they were reasonable." n60 The Court recognized, however, that appropriate lease language, supported by
sufficient proof, could compel a different result: "if an oil and gas lease provides that the lessor shall bear some part of
the costs incurred between the wellhead and the point of sale, the lessee shall be entitled to credit for those costs to the
extent that they were actually incurred and they were reasonable." n61
The Wellman Court declined to address what it referred to as gas "sold directly," explaining that "where leases call
for the payment of royalties based on the value of oil or gas produced, and sold directly, the Court perceives that there
are possibly different issues, and they are excluded from this discussion." n62 It is unclear what the Court meant by this,
but it is possible that the Court was referring to gas sold at the well.
2. The Court in Estate of Tawney v. Columbia Natural Resources, L.L.C. Declined to Follow Rogers but Held That
"At the Well" Language Did Not Suffice to Allocate a Share of
Post-Production Costs to Lessors
Page 478Page 478
Although the Wellman Court declined to interpret the "at the well" language of the leases in that case, such lease
language was directly at issue in Estate of Tawney v. Columbia Natural Resources, L.L.C. n63
In determining whether "at the wellhead" type language served to allocate post-production expenses, the Court
recognized the split of authority among the courts addressing the issue. The Tawney Court acknowledged Creson v.
Amoco Production Co., a New Mexico decision holding that such lease language was unambiguous and required that
lessors bear a share of such expenses. n64 It further recognized Rogers v. Westerman Farm Co., noting that the Colorado
court had found such language entirely silent and relied instead on the implied duty to market to hold that the producer
could not allocate a portion of post-production costs. n65 Declining to follow the reasoning set forth in either Creson or
Rogers, the Tawney Court opted instead to "look to our own settled law" in analyzing the issue, stating that
"traditionally [*160] in this State the landowner has received a royalty based on the sale price of the gas received by
the lessee." n66
The Court acknowledged its statement in Wellman that "at the well" type language might serve to allocate costs.
Nonetheless, the Court stated that the meaning of the language was not necessary to its prior decision in Wellman, and
was therefore not binding. Rather, in what has been widely criticized as a result-driven analysis, the Tawney Court held
that the "at the well" lease language was ambiguous "because it [was] susceptible to more than one construction and
reasonable people [could] differ as to its meaning." n67
While acknowledging lessee's representation that many of the lessors were sophisticated business entities, had the
assistance of sophisticated counsel in entering the leases, and had actually negotiated certain revisions to the leases, the
Court chose to apply "the general rule as to oil and gas leases ... that such contracts will generally be liberally construed
in favor of the lessor, and strictly as against the lessee." n68 Stating that the "at the well" language was drafted by the
lessees, the Court also determined that "uncertainties in an intricate and involved contract should be resolved against the
party who prepared it." n69 Applying this rule of construction, the Court concluded that the lessees had not adequately
addressed allocation of post-production expenses:
Simply put, if the drafter of the leases below originally intended the lessors to bear a portion of the transportation and
processing costs of oil and gas, he or she could have written into the leases specific language which clearly informed the
lessors exactly how their royalties were to be calculated and what deductions were to be taken from the royalty amounts
for post-production expenses. n70
Although the Tawney decision is unfavorable to lessees in requiring them to bear all post-production costs, it was based
on the stated rationale that royalties are to be paid on amounts received. As such, the Tawney decision does not limit
sales of gas at the well like the Rogers decision appears to do in announcing an expanded implied covenant to market.
Rather, paying royalties based on the amount realized from a sale of gas at the wellhead appears to be entirely consistent
with the holding in Tawney, as long as no expenses whatsoever are [*161] deducted from payment of such royalties,
and so long as the sale is made at arm's length for a commercially reasonable price.
3. Virginia State Courts Have Not Addressed the Issue, but a
Federal Magistrate Judge Has Predicted That Virginia
Would Follow Colorado Down the Road to an
Expansive Implied Covenant to Market
Virginia's state courts have expressed no opinion to date regarding the allocation of post-production expenses or the
implied covenant to market. In a letter opinion issued on June 10, 2009, then-Virginia Attorney General William Mims
stated that "it is my opinion that the Virginia Gas and Oil Board may issue compulsory pooling orders that permit
deduction of post-production costs downstream of the wellhead when computing gas owners' one-eighth royalty
interests." n71 In so concluding, the Attorney General noted that "the source of the 'at the wellhead' language developed
from industry practice where common carriers regularly purchased the gas at the well." n72 The advisory opinion further
notes that "traditionally, 'at the well' or 'wellhead' has been used to describe not only location but also quality. In many
jurisdictions, 'at the well' describes a cruder product with a market value that is not yet enhanced in value by processing
and transportation to far-reaching retail markets." n73 Based on this reasoning, and the statutory authority granted to the
Page 479Page 479
Board, Attorney General Mims concluded that the Virginia Gas and Oil Board could properly provide for allocation of
post-production expenses when pooling unleased coalbed methane interests. n74
For a short time, the Virginia Attorney General's advisory opinion seemed to provide general support for allocating
post-production expenses. However, in 2011, a federal magistrate judge predicted in two nearly identical
recommendations that the Virginia Supreme Court would reach exactly the opposite conclusion. n75 Magistrate Judge
Pamela Sargent acknowledged in Legard v. EQT that "the parties have not cited, and I cannot find, any Virginia
authority interpreting similar ['at the well' type] language in oil and gas leases." n76 Magistrate Judge Sargent declared,
however, that "I am persuaded by the reasoning of the Oklahoma Supreme Court in Wood," holding that because
producers receive a larger share of proceeds, they must bear [*162] the risk and the cost of producing a marketable
product. n77 Based on this persuasive authority, Magistrate Judge Sargent concluded, "I hold that Virginia courts would
follow the 'first marketable product' rule, and hold the lessee solely responsible for all costs making the gas produced
from the well marketable, unless ... the parties specifically agree otherwise." n78 Relying on Garman v. Conoco, Inc., n79
Magistrate Judge Sargent also concluded that "Virginia courts would recognize an implied duty on the part of oil and
gas lessees to operate diligently and prudently, including a duty to market the gas produced." n80
Magistrate Judge Sargent's report and recommendation in Legard was accepted without discussion by the district
court judge. n81 Such federal trial court opinions are not, of course, binding on the Virginia state courts, and
notwithstanding her prediction, Magistrate Judge Sargent's discussion acknowledges the lack of authority from Virginia
state courts suggesting how the Virginia Supreme Court might actually rule on the issue. There is, however, reason for
producers to hope that Magistrate Judge Sargent's analysis would not be adopted by the Virginia Supreme Court.
William Mims, former Virginia Attorney General and author of the advisory opinion discussed above, was appointed to
the Virginia Supreme Court in March 2010 to fill a vacancy left when Judge Barbara M. Keenan was appointed to the
United States Court of Appeals for the Fourth Circuit. Judge Mims's term will not expire until March 31, 2022,
providing him ample opportunity to weigh in on any royalty litigation that might reach that state's highest court in years
to come. It is likely, however, that these battles will continue to be waged in federal court, as removal is generally
possible, and royalty owners have enjoyed a hospitable "welcome" there. Of course, producers have the option of
requesting certification of the question to the Virginia Supreme Court if they decide that it would likely enforce their
contracts as written.
[*163]
D. Pennsylvania and Kentucky Follow the Majority of Producing States, Holding That "At the Well" Signifies the
Condition and Location of Gas for Purposes of Royalty Valuation
1. The Pennsylvania Supreme Court Has Applied the Reasoning of the Traditional Approach When Construing the
State's Minimum Royalty Statute
In contrast to the supreme courts of West Virginia and Colorado, and the federal district court in Virginia,
Pennsylvania's highest court has held that reasonable post-production expenses can be allocated to the royalty owner. In
Kilmer v. Elexco Land Services, Inc., the Supreme Court of Pennsylvania considered whether deduction of post-
production expenses was allowable under Pennsylvania's Guaranteed Minimum Royalty Act ("GMRA"). n82 The GMRA
requires oil and gas lessees to pay "at least one-eighth royalty of all oil, natural gas or gas of other designations removed
or recovered from the subject real property." n83 The Act, enacted by the Pennsylvania General Assembly in 1979, does
not specifically address allocation of post-production expenses.
The leases at issue in Kilmer explicitly provided for deduction of a one-eighth share of post-production expenses.
The landowner plaintiffs sought cancellation of their leases claiming that the deduction of expenses violated the
minimum royalty statute because they did not in effect receive a full one-eighth share of gas recovered. The plaintiffs
argued that the Court should follow Colorado, Oklahoma, and Kansas in applying the first marketable product doctrine
and hold that an oil and gas lessee is responsible for all expenses required to treat and move gas to a downstream
market.
The Kilmer Court recognized that historically, and at the time the GMRA was enacted in 1979, producers merely
explored for and produced oil and gas and sold the resulting unprocessed minerals to a pipeline company at the
wellhead. The royalty due to landowners was calculated based on the price received at the wellhead for the unprocessed
gas. The Court determined that the term "royalty" should be defined with reference to the realities at the time the
GMRA was enacted and in accordance with the technical definitions provided by industry practice. The Court
Page 480Page 480
accordingly recognized that royalty is understood in the oil and gas industry to mean "the landowner's [*164] share of
production, free of expenses of production." n84 The Court further noted that "expenses of production" are generally
understood to include only those expenses of drilling and bringing oil and gas to the surface, but do not include post-
production expenses of treatment or transportation. n85
The Kilmer Court noted that mineral royalties are technically payable either as a share of the oil or gas produced or
as a share of the value of such minerals. n86 The Court acknowledged the inconsistency that would result if some lessors
were to receive royalties based on the enhanced value of treated minerals while those who received royalties in-kind
necessarily received a less valuable royalty of unprocessed minerals. The Court concluded that "the use of the net-back
method eliminates the chance that lessors would obtain different royalties on the same quality and quantity of gas
coming out of the well depending on when and where in the value-added production process the gas was sold." n87
Despite this ruling, mineral owners in some of the pending cases continued to argue that the Kilmer ruling should
be limited to royalty clauses identical to those considered in Kilmer and furthermore, that Tawney's requirements for
express language specifically allowing deduction of post-production expenses should apply in Pennsylvania. In April
2011, U.S. District Court Judge John E. Jones III dismissed one such complaint:
We cannot imagine that the Pennsylvania Supreme Court ... meant to render a holding so narrow as to invite its
consideration of myriad other cases involving leases that were not entirely identical to the Kilmer lease. We empathize
with Plaintiffs' desire to escape what they consider to be bad bargains. But they have put too fine a point on Kilmer in
aid of voiding their leases. Both the Pennsylvania Supreme Court, and this Court, recognize the need for finality. A
holding contrary to the one we render today would trigger havoc in a multi-billion dollar industry. More importantly, it
would be in error. n88
Similarly, the Pennsylvania Superior Court recently declined to declare an oil and gas lease void in Katzin v. Central
Appalachia Petroleum, rejecting the plaintiff's argument that a lease violated the GMRA on its face simply because it
was vague with respect to what [*165] expenses could be deducted before calculating royalties. n89 The court instead
noted that a promise to take action necessary to carry out the purpose of the contract is implied in every contract, and
concluded that "we must therefore imply a promise by Central Appalachia ... to comply with the mandates of the
[GMRA]." n90 In so holding, the court left open the possibility of a claim that the lessee had breached this implied
promise by improperly allocating post-production expenses but declined to terminate the lease as a matter of law. n91
Under Kilmer and its progeny, Pennsylvania courts will almost certainly allow deduction of a pro rata share of post-
production expenses where the lease provides for valuation of the gas for royalty purposes at the wellhead and does not
otherwise expressly forbid such deductions. Where the lease provides that all post-production expenses are to be borne
by the lessee, it is still likely that a Pennsylvania court would find that an arm's length sale of gas at the wellhead is
appropriate.
2. The United States Court of Appeals for the Sixth Circuit Has Predicted That Kentucky Would Follow the "At the
Well" Rule
Although Kentucky state courts have not recently addressed the implied covenant to market or the allocation of post-
production expenses, in Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., the United States Circuit Court of
Appeals for the Sixth Circuit predicted in 2011 that Kentucky would follow the "'at-the-well' rule, which allows for the
deduction of post-production costs before paying appropriate royalties." n92 In so holding, the court relied on several old
Kentucky cases construing the lessor's royalty obligations.
One of the cases that the Poplar Creek court relied upon was Warfield Natural Gas Co. v. Allen, in which the court
was asked to construe a lease provision providing for "the lessee to pay for each gas well from the time and while the
gas is marketed the sum of one-eighth of proceeds received from the sale thereof." n93 While gas was typically sold at the
well at the time this dispute arose, the defendant had actually sold the gas off the lease for a higher price but had
calculated the royalty based on the value of the gas at the well. The court noted that "it was as much [lessee's] duty to
find the market as to find the gas." n94 Nevertheless, the court recognized that gas was ordinarily sold at the well and
"that custom prevailed there when these [*166] leases were made." n95 Accordingly, the court concluded that "this lease
Page 481Page 481
must be held to mean one-eighth of the gross proceeds of a sale of the gas at the well side, and that is all for which
defendant must account even though it may market the gas elsewhere and get a much greater sum for it." n96
The Poplar Creek court also cited the 1923 decision in Rains v. Kentucky Oil Co. n97 In Rains, the Court
acknowledged that a lessee has a duty to market the gas produced from leased property but refused to cast this duty so
broadly as to require additional treatment or processing in order to obtain a better price:
While the lessee of a gas well may be under the duty of using reasonable effort to market the gas, we are not inclined to
the view that this duty, in the absence of a contract to that effect, is so exacting as to require him to market the gas by
obtaining a franchise from some town or city and distributing the gas to the inhabitants thereof. On the contrary, he fully
complies with his duty if he sells the gas at a reasonable price at the well side to another who is willing to undergo the
risk of expending a large amount of money for the purpose of distributing the gas to the ultimate consumers. n98
The Sixth Circuit also cited its own prior decision in La Fitte Co. v. United Fuel Gas Co., holding that under Kentucky
law, "a presumption exists that the wellhead is the point of sale and delivery at which point the royalty is to be
computed, absent an express stipulation to the contrary." n99 The Poplar Creek court accordingly held that Kentucky
would follow the "at the well" rule, allowing appropriate post-production expenses and that the term "'at-the-well' refers
to gas in its natural state, before the gas has been processed or transported from the well." n100
Although based on strong state precedent, Poplar Creek and La Fitte Co. do not bind Kentucky courts in construing
the duty to market. A Kentucky court taking up the question more than seventy years later could more carefully
scrutinize the allocation of post-production expenses in the modern gas industry where gas is normally sold downstream
after processing. Even so, the sale of gas at the wellhead itself would seem to be entirely consistent with these holdings,
and there does not appear to be any reason to believe that a Kentucky court would rewrite a lease providing for wellhead
sales to disallow those very sales should a producer choose to sell gas at the well site.
[*167]
E. Ohio, Tennessee, and New York Remain Undecided
1. Ohio Has Recognized the Implied Duty to Market, but Only in the Context of Lessees Who Failed to Produce Oil
and Gas
Ohio law is relatively undeveloped with respect to oil and gas royalty issues; there is no recent case law regarding
allocation of post-production expenses. As Ohio is experiencing much activity with respect to Marcellus and Utica
leases, it is likely that such questions will soon reach Ohio's state or federal appellate courts. How these courts will
answer the questions posed is currently a matter of speculation, but there is some old Ohio precedent that suggests that
Ohio would construe an oil and gas lease like any other contract, according to its terms and the circumstances prevailing
when the deal was made.
In an 1898 decision, the Ohio Supreme Court was asked to construe a lease that provided simply for royalty to be
paid of "one-eighth of income dollars." n101 The Court concluded that the term "income" referred to the gross amount
received by the lessor. In reaching this conclusion, however, the Court made clear that "the meaning of 'income' must
generally be determined by the intention of the parties as deduced from the context, the subject-matter of the contract
and the character of the person contracting." The Court accordingly recognized that the term "income" used by a
merchant or a farmer might mean total receipts less cost of goods or operation. Nevertheless, the Court concluded that
because the lease in question provided for delivery of one-eighth of all oil to the lessor in-kind, the parties likely
intended the same result with respect to gas sold from the lease. n102 Although (unsurprisingly considering the time period
involved) the Court did not differentiate between production and post-production costs, the Court's analysis indicates
that the meaning of lease terms is to be determined according to the circumstances prevailing when the contract was
entered into.
Nearly a hundred years after the Busbey decision, the Ohio Court of Appeals in American Energy Services v. Lekan
recognized the implied duty to market, holding that "the covenant to market the product places an obligation upon a
lessee to use due diligence to market the gas and/or oil produced from a well." n103 However, this statement was made in
Page 482Page 482
the context of a lessee who drilled a well but failed to produce any oil or gas from the well for seventeen years, relying
instead on payment of a "shut in" royalty provided for in the lease. Although this decision indicates that Ohio courts will
recognize a lessee's duty to produce and market gas, this duty was narrowly circumscribed within the context of a
lessee's failure to produce gas in any form. Nothing in American Energy suggests that an Ohio court [*168] would
expand this duty to impose a particular condition or location requirement on the sale of gas.
More recently, in 2008, the Ohio Court of Appeals again considered the implied duty to market in a case similar to
American Energy Services. In Moore v. Adams, the court confirmed that "the covenant to market the product places an
obligation upon a lessee to use due diligence to market the gas and/or oil produced from a well" and held that "this
covenant is not eliminated by a shut-in royalty clause." n104 This holding was again made in the context of non-
production and did not deal with issues regarding the condition or the location of gas at the time of sale or the allocation
of post-production expenses. The court affirmed, however, that leases are to be treated like other contracts:
The rights and remedies of the parties to an oil or gas lease must be determined by the terms of the written instrument,
and the law applicable to one form of lease may not be, and generally is not, applicable to another and different form.
Such leases are contracts, and the terms of the contract with the law applicable to such terms must govern the rights and
remedies of the parties. n105
Although increased development of Marcellus and Utica Shale resources in Ohio will undoubtedly spur litigation
regarding the proper manner of calculating royalties, a recent decision of the United States District Court for the
Northern District of Ohio casts some light on one possible reason for the present lack of authority on this topic. In Lutz
v. Chesapeake Appalachia, L.L.C., the court dismissed the plaintiffs' claims for underpayment of royalties based on
Ohio's unique statute of limitations. n106 Specifically, section 2305.041 of the Ohio Revised Code, enacted in 2006,
provides in relevant part that
with respect to a lease or license by which a right is granted to operate or to sink or drill wells on land in this state for
natural gas or petroleum and that is recorded in accordance with section 5301.09 of the Revised Code, an action alleging
breach of any express or implied provision of the lease or license concerning the calculation or payment of royalties
shall be brought within the time period that is specified in section 1302.98 of the Revised Code. An action alleging a
breach with respect to any other issue that the lease or license involves shall be brought within the time period specified
in section 2305.06 of the Revised Code. n107
Section 1302.98 of the Ohio Revised Code, referenced in this section, provides that "an action for breach of any
contract for sale [*169] must be commenced within four years after the cause of action has accrued," and it
additionally provides that "[a] cause of action accrues when the breach occurs, regardless of the aggrieved party's lack
of knowledge of the breach." n108 Pursuant to section 2305.06 of the Ohio Revised Code, on the other hand, any other
breach of contract claim enjoys a fifteen-year statute of limitations. n109
The Lutz court rejected the plaintiffs' claim that the enactment of this statute retroactively impaired a substantive
right, holding that "a statute of limitations is remedial or procedural and not substantive." n110 More interestingly,
however, the court also rejected the plaintiffs' claim that the breach was continuous, creating a new breach each time a
"fraudulent" royalty payment was made. The court instead held that a breach occurred only when the decisions affecting
future royalty payments were made: "Plaintiffs have alleged breaches of contract that occurred on two occasions: in
1993 when the contract was breached by a change in the deduction methodology and in 2000 when the contract was
breached by a change in the rate methodology." n111 Finding that these breaches occurred more than four years prior to
suit being filed, the court dismissed the plaintiffs' claims. n112
Lutz suggests that a particular method of royalty calculation, as long as it is consistently applied for more than four
years, simply cannot be challenged. Although Ohio's law remains unclear regarding the allocation of post-production
expenses and the location where gas can be permissibly sold, assuming that Ohio's supreme court would agree with the
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district court's interpretation, Ohio's unique statute of limitations will likely foreclose truly "high stakes" royalty
litigation seen in other states because the recovery window is so limited. Lutz is not, however, binding on the Ohio
Supreme Court, and its premise is likely to be challenged in future royalty litigation.
In summary, while Ohio's holdings regarding lease interpretation could be taken as indicating that its courts would
enforce contracts as written, the issue remains untested there.
2. Tennessee Has Only Recognized the Implied Duty to Market in Passing but Has Indicated That It Would
Construe Leases Against the Lessor
Like Ohio, Tennessee law is relatively undeveloped with respect to oil and gas royalty issues. The implied duty to
market was briefly acknowledged in Waddle v. Lucky Strike Oil Co., where the court noted that
[*170]
implied covenants against the lessee comprise an important phase of the law of oil and gas. While there is some
difference of opinion as to the best classification of these implied covenants, Merrill and Kulp discuss the legal
problems involved under the following descriptive titles: (1) to drill an exploratory well; (2) to drill off-set wells; (3) to
drill additional wells during and after the exploratory period; and (4) to diligently operate and market. n113
Waddle is also instructive regarding the Court's construction of oil and gas leases. In Waddle, the lessee drilled a well
and found gas, but because the well was drilled too close to the adjoining property line, the Tennessee Oil and Gas
Board "red-tagged" the well and refused to allow production. n114 Even though the well never produced oil or gas, the
lessee failed to pay shut-in royalties, claiming that the lease was held by production because it had found gas. In
construing the lease terms, the Tennessee Supreme Court recognized that "instruments of this character are construed
most favorably to development ... time is the essence of the contract, and the real motive for the giving of such
instruments is the development of the leased property. Therefore such a lease or option is properly construed strongly
against the lessee, so as to secure such speedy development." n115 The Court accordingly found that the lessee had failed
to perform duties necessary to hold the lease. The lessee attempted to avoid forfeiture of the lease, citing the following
lease provision:
It is agreed that this lease shall never be terminated, forfeited, or cancelled for failure to perform in whole or in part,
any of its implied covenants, conditions or stipulations, until it shall have been first finally determined that such failure
exists, and after such final determination, lessee is given a reasonable time therefrom to comply with any such
covenants, conditions or stipulations. n116
The Court declared, however, that "the validity of such a provision, where the issue is the performance by lessee of one
of the implied covenants of an oil and gas lease, is questionable" and concluded that "the no termination or forfeiture
clause has no application to those obligations." n117 Notably, such "judicial ascertainment" clauses [*171] are held to be
void by many states, so Tennessee is not unique in this regard. n118
Similarly in Lone Star Oil & Gas, Inc. v. Howard, the Tennessee Court of Appeals applied the same principles of
construction where the lessor ceased production of gas and failed to pay shut-in royalties. The court acknowledged that
"[a] lease should be considered in its entirety, and it is construed according to the plain meaning of the language used
unless the language is ambiguous." n119 The court noted, however, that "if disputed language in a contract is ambiguous,
or uncertain, it will be construed most strongly against the author," and it reiterated the principle from Waddle that "such
a lease or option is properly construed against the lessee, so as to secure such speedy development." n120 Applying these
principles to lease provisions requiring shut-in royalties, the court declared, "we construe this uncertain term against
Lessee and find that the shut-in royalty payments were due monthly." n121
While not addressing the duty to market or the allocation of post-production expenses, Waddle and Lone Star are
instructive regarding Tennessee's general treatment of implied covenants in oil and gas leases and how lease terms are
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likely to be construed. Although it is not clear that an inference against the lessee exists in every case, it is clear that the
Tennessee Supreme Court will not hesitate to apply such a rule of construction when it deems it appropriate to do so.
3. New York Has Recognized the Implied Duty to Market but Has Not Indicated That It Would Apply It
Expansively to Impose Specific Condition or Location Requirements
There is little authority discussing the implied covenant to market or the allocation of post-production expenses in New
York. In La Barte v. Seneca Resources Corp., and Cherry v. Resources American, Inc., the plaintiffs sued the oil and gas
lessees and various affiliates for breach of the implied covenant to market under leases providing for royalty to be
calculated at the "mouth of the well," at the "connecting point," "at the wellhead," or based on "the field price." n122 The
plaintiffs [*172] contended that their royalty should have been based on the price received from "end-users" and that
the defendants breached their contractual duties by manipulating the price received through "sham" sales to third-party
gas marketers. The defendants moved for dismissal of plaintiffs' claims.
Without construing the lease language in either case, a New York intermediate appellate court, in two nearly
identical memorandum opinions issued on the same day, found that the plaintiffs had stated sufficient facts "to withstand
a pre-answer motion to dismiss" on their breach of contract claims. n123 The court equated the implied covenant to market
with the covenant of good faith and fair dealing:
Because every contract contains an implied covenant of good faith and fair dealing in the course of performance of the
contract, we further conclude that the court properly denied that part of defendants' motion seeking dismissal of the
cause of action for breach of an implied covenant to market the gas ... . n124
In addressing the plaintiffs' claims for breach of fiduciary duty, the court recognized that "whether a fiduciary
relationship exists between parties 'is necessarily fact-specific to the particular case.'" n125 Citing Oklahoma authority, the
court noted that "in at least one oil-producing state, it has been recognized that the operator of an oil and gas lease owes
a fiduciary duty to royalty owners to market oil or gas at the highest market price available." n126 The court declined to
adopt this rule outright, but instead it concluded that "it is unclear at this stage of the litigation whether plaintiffs will
ultimately succeed in establishing a fiduciary relationship with Seneca that is separate and distinct from their contractual
relationship." n127
Although the La Barte and Cherry cases do not define the parameters of the implied covenant to market, they do
indicate that such a duty would be recognized and that the sale of gas to third party marketers might constitute a breach
of this covenant under an "at the well" type lease. In equating the duty to market with the implied covenant of good faith
and fair dealing, moreover, the court suggested that this will be treated as an inherently factual matter. n128
[*173]
IV. Can the Market Really Return to the Wellhead?
A. Re-Emergence of a Market at the Wellhead Would Once Again Marry Lease Language to Practice, but Decisions
from Kansas and Oklahoma May Provide a Roadblock
As noted above, it appears that a return to a wellhead market would be permissible in West Virginia, Pennsylvania, and
Kentucky. In Kentucky and Pennsylvania, the jurisprudence permits allocation of post-production expenses in
"wellhead" leases, making a return to a wellhead market unnecessary. It is unclear, on the basis of existing cases,
whether courts in Ohio, New York, or Tennessee would find that such sales run afoul of some implied duty to market
(although based on New York's and Ohio's general jurisprudence honoring contracts, it seems unlikely). Finally, the only
rulings in Virginia incorporate the reasoning of a federal magistrate judge and predict that Virginia would imply an
expanded duty to market. Opinions by the former state attorney general contradict this. The probable view of the
Virginia Supreme Court is therefore unclear.
A return to the practice of marketing gas at the wellhead rather than downstream would have the positive effect of
realigning lease language with the marketing model contemplated by that language. On its face, a market at the well,
while not economically optimal for either party, is consistent with the traditional lease language calling for royalty to be
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calculated based on the value of gas "at the well." n129 However, the minority states have disregarded this history in
construing oil and gas leases and have instead implied covenants to reach a result they deem "fair." The clear language
of the lease, and the circumstances in which it was made, cannot necessarily be relied upon as determinative of whether
a market at the well is viable. Federal courts in Oklahoma and Kansas, moreover, have recently signaled that selling gas
at the wellhead could violate an implied duty to market. While these decisions do not bind courts in the Marcellus or
Utica states, courts such as West Virginia's have been open to such reasoning before, and could be again. n130
[*174]
B. Are Old Marketing Methods Compatible with the Newly Expanded Covenant to Market? Perhaps Not,
According to Federal Judges in Oklahoma and Kansas
Attempts to sell gas directly at the well were recently addressed by federal courts in both Kansas and Oklahoma,
resulting in further expansion of the implied covenant to market to include a requirement to put gas in near perfect
condition seemingly without reference to the existence of an actual market, or the demands thereof. This conclusion
seems to foreclose any possibility of a market for gas at the well in those states, even though that is exactly what the
parties originally contemplated when they entered into the leases.
Merit Energy Co., a gas producer in Kansas, attempted to forego any value that might be added by post-production
processing and transportation, and instead opted to sell its unprocessed gas to a third party at the wellhead. As a result,
in Freebird, Inc. v. Merit Energy Co., the royalty owners brought suit alleging that the producer breached the implied
covenant to market and sought class certification in the United States District Court for the District of Kansas. n131
In opposition to class certification, the defendant argued that the predominance requirement was not met because an
inquiry would have to be made regarding the existence of a market for gas at each individual well. The court rejected
this argument, instead holding that "although the Kansas Supreme Court has not expressly held that application of the
implied covenant to market does not require a fact specific, lease-by-lease inquiry, its jurisprudence in this area
indicates that no such inquiry is required." n132 In support of this holding, the court recognized prior Kansas authority
discussing the location of the market to differentiate between transportation and gathering costs. n133 Nevertheless, the
court concluded that this market location inquiry only applied where gas is already marketable at the well. n134 Without
[*175] discussing how marketability would be defined, the court accepted at face value the plaintiffs' allegations that
the gas was not in marketable condition at any well in issue and concluded, "therefore, Sternberger does not apply here."
n135
While rejecting the need to inquire into the availability of a market at each individual well in order to establish the
existence of a covenant to market, the Freebird decision glosses over the need for such an inquiry to establish a breach
of that covenant. The court noted that Sternberger "did not rely on a fact-specific inquiry to determine whether the
implied covenant to market applied to the lease." Rather than recognizing that such a fact-specific inquiry is required to
establish a breach, the court accepted the plaintiffs' representation that proof of breach could be made by "common
evidence." n136
Under Freebird, therefore, a producer could conceivably be found in breach of the implied covenant to market
regardless of whether there is an actual commercial market at the well if the condition of the gas does not meet some
arbitrary standard for "marketability." This "marketability" standard was not defined by the court.
In Naylor Farms v. Anadarko OGC Co., the United States District Court for the Western District of Oklahoma
picked up on the merits of the question, holding as a matter of law that the gas producer violated the implied covenant to
market by selling raw gas at the well. n137 In Naylor Farms, a class of royalty owners alleged that the producer, QEP, had
breached its duty to produce a marketable product by selling the raw gas produced from its wells to an unrelated
company, DCP Midstream, L.P., which in turn processed and sold the gas downstream. In return, DCP paid QEP a
percentage of its sales proceeds, and QEP calculated royalty payments based on these receipts. n138 The plaintiffs alleged
that QEP had a duty to put the gas in a marketable condition and deliver it to a commercial market location free of
charge to the royalty owners and that QEP's sale of raw "unmarketable" gas at the well inappropriately circumvented
this duty. Interpreting Oklahoma law, the federal district court agreed. n139
[*176] The court held that the duty to market required a "free and open market at the wellhead[] ... where there
were two or more perspective [sic] willing purchasers." n140 Strangely, however, the court held that proof of the existence
of a commercial market for raw gas at the well would not satisfy the producer's duty to put the gas in marketable form.
In a footnote, the court noted that in its view, existing Oklahoma case law distinguished between "marketable" and
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"saleable." Although the court acknowledged that "it would be hard to imagine any gas not being saleable at least for
some price the moment it comes out of the ground," it went on to conclude that the duty to make gas marketable
requires the producer to put the gas in "interstate or intrastate pipeline quality." n141
After the Naylor Farms decision was issued on July 14, 2011, the defendants moved for reconsideration, pointing
out that existing Oklahoma case law specifically held that gas did not have to be in interstate pipeline condition in order
to be marketable. n142 While agreeing with the defendants that Oklahoma precedent "did not impose an interstate or
intrastate pipeline quality standard for gas marketability," the court nonetheless declined to reverse its prior holding
because the defendants had failed to produce evidence that the processes performed by DCP "enhanced an already
marketable product, that the costs were reasonable and that the royalty revenues increased in proportion to those costs."
n143
While recognizing that this proof should have been made to justify any deduction from royalties, the court
nevertheless dismissed the possibility that this proof ever could be made:
If the gas is marketable at the well, it requires no dehydration, compression or processing for the pipeline purchaser to
accept it, although it is necessary for the gas to be transported to the point of purchase, i.e., to the pipeline. The fact that
the transportation costs (and such costs only) are chargeable to the royalty interest is not surprising ... . n144
Thus, under Naylor Farms, the marketable condition requirement is wholly divorced from the location or demands of
an actual commercial market, and evidence of a market for a particular grade or form of gas will not establish
marketable condition. These decisions seem to wholly negate the purpose of the rule that excess treatment to an already
marketable product is deductible since it seems to be impossible [*177] to prove that gas is in marketable form unless
it is already in interstate pipeline condition.
The Naylor Farms court's seemingly harsh treatment of the gas operator can be explained at least in part by its
conclusion that a fiduciary duty existed between the operator of a statutory pooling unit and the royalty owners. The
court noted that
the Oklahoma Supreme Court described the trustee relationship between a unit ... operator in relation to all who are
interested in production from the unit ... to act for the benefit of the beneficiaries and not to benefit the unit and/or
operator in antagonism to the beneficiaries and not to use the advantage of the position as trustee to gain any benefit for
himself at the expense of the cestui que trustent. n145
Against this backdrop, it is perhaps less surprising that the court would conclude that
Defendant QEP, by marketing gas for itself and other working interest owners and paying royalty interests in the
manner it did, benefitted itself and the other working interest owners at the expense of the royalty owner class Plaintiffs,
in breach of its fiduciary duties as operator of each of the drilling and spacing units in which the class wells are located.
n146
The Oklahoma Supreme Court's recognition of a fiduciary duty appears to arise from the unitization order or
agreement, and not from the lease itself. n147 Kansas has also applied fiduciary "principles" to reach an equitable result in
limited circumstances, n148 but these two states appear to be unique in this regard. n149 Of the Marcellus and Utica Shale
states addressed in this Article, a federal court in West Virginia has rejected attempts to impose a fiduciary relationship
between lessee and lessor in Wellman v. Bobcat Oil & Gas, Inc., n150 and a federal magistrate judge sitting in Virginia
similarly rejected the existence [*178] of a fiduciary duty in the context of a voluntary lease in Healy v. Chesapeake
Appalachia, L.L.C. n151 The same magistrate judge later relied on Oklahoma law, however, in predicting that Virginia
would recognize a fiduciary duty on forced pooled unit operators in the context of coalbed methane production. n152 An
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intermediate appeals court in New York has recognized Oklahoma's position, but it has held that the existence of a
fiduciary relationship "is necessarily fact-specific." n153 Courts in Pennsylvania, Ohio, and Tennessee have not yet
addressed the question.
C. Additional Obstacles on the Road to the Wellhead Market: Title, Measurement, and Affiliate Issues
Gas producers may be tempted to sell gas at the wellhead to a marketing affiliate that will then compress, treat, and
transport the gas to a downstream market. Through this arrangement, the producer would claim a sale at the wellhead
and calculate royalties based on the wellhead value of the gas. If anything is clear from the flood of litigation regarding
royalty issues in recent years, however, it is that any transaction in which a producer sells gas to an affiliate is fraught
with peril and should be avoided:
In spite of a demanding body of corporate law on when a court can disregard the corporate separateness of affiliated
entities, these situations do not play well in the courtroom. Even when you have defensible separate corporate entities
that are affiliates, you still must contend with the reality of an upstream sales number, which was used to calculate the
"wellhead" royalty, that will always be smaller than the sales number obtained by the purchasing affiliate when it resells
into a downstream market. The jury is then informed that all the stock of Marketing Affiliate is owned by Producing
Affiliate and that many of the directors, officers, and employees of Marketing [*179] Affiliate are the same as
Producing Affiliate. It is impossible to blunt the impact of "little number/big number" with explanations of the law of
corporate separateness, service agreements, and the legitimate isolation of risk in separate business enterprises. n154
In Rogers v. Westerman Farm Co., discussed supra, the plaintiffs claimed that the gas producer had sold gas to an
affiliate in a less than arm's-length transaction. n155 The Colorado Supreme Court agreed that the plaintiffs in that case
had been prejudiced because the jury was not fully instructed on the appropriate standards to determine whether this
behavior constituted bad faith. The Oklahoma Supreme Court has similarly found that "when the actual value is not
obtainable because of a producer's self-dealing, the courts will carefully scrutinize the transactions on which the royalty
payments are based ... an intra-company gas sale cannot be the basis for calculating royalty payments." n156
It is clear, therefore, that any sale of gas at the wellhead should be through an arm's-length transaction with an
unaffiliated entity. Even where gas is actually sold at the wellhead in an arms-length transaction, moreover, it must be
abundantly clear that title to the minerals is actually transferred at that location. This is particularly true where a mineral
lessee owns its own gathering lines and equipment, making it unclear at what point the lessee's interest in the gas
terminates.
In order to ensure that title is passed at the wellhead, the sale price should be established according to the metered
volume of gas physically measured at the well site. A sale price determined according to measurements taken elsewhere
- such as at the interstate pipeline interconnect - would bring into question whether the gas was really sold at the well
and whether the sale was really an arms-length transaction. n157 It would also retain the disadvantages of a "net-back"--
exactly what producers would be seeking to avoid.
V. The Royalty Lease Clauses for the Future:
A New Road to Avoiding Litigation?
In the wake of decisions such as Tawney and Rogers, practitioners drafting new leases have struggled to find language
that the most restrictive courts would find acceptable for purposes of allocating post-production expenses and allowing
accurate royalty payment for the [*180] product actually provided by the lessor pursuant to "wellhead" leases - raw gas
produced at the wellhead.
It is important to note that in Tawney, the West Virginia Supreme Court stated that a lease could properly provide
for allocation of post-production expenses; it merely must be done in a particular way. According to the Court, language
stating that value for royalty purposes is to be based on the value "at the well" (or similar language) is ambiguous and
ineffective to allocate to the lessor any portion of the costs incurred between the wellhead and the point of sale. Rather,
the Court instructed that
Page 488Page 488
language in an oil and gas lease that is intended to allocate between the lessor and lessee the costs of marketing the
product and transporting it to the point of sale must expressly provide that the lessor [1] shall bear some part of the costs
incurred between the wellhead and the point of sale, [2] identify with particularity the specific deduction the lessee
intends to take from the lessor's royalty (usually 1/8) and [3] indicate the method of calculating the amount to be
deducted from the royalty for such post-production costs. n158
The Court found "notable" the absence of "any specific provisions pertaining to the marketing, transportation, or
processing of the gas." n159
While practitioners have attempted to formulate royalty provisions that retain the concept of paying royalty based
on the value of gas at the wellhead and specifically providing that the lessor will be charged its proportionate share of
expenses incurred in gathering, compressing, dehydrating, processing, marketing, and transporting the gas to the point
of sale, n160 until a court such as the West Virginia Supreme [*181] Court or the Colorado Supreme Court blesses a
particular formulation, it is by definition unknown whether attempts to conform to such instructions will suffice. n161
Perhaps the best suggestion is that of Professor Pierce, who recommends avoiding future litigation over the "net-
back" issue by simply abandoning the "at the well" approach to valuation and replacing the location for purposes of
royalty calculation with a downstream point of sale. n162 As he explains,
Instead of developing patch-up language to respond to ambiguities [declared by courts], we must recognize the basic
problem that the traditional royalty clause rarely reflects contemporary marketing patterns. If most lessees now market
their gas at a downstream location, it makes more sense to begin, and end, the royalty calculation process using a
downstream sales value. n163
[*182] He acknowledges that lessees prefer an upstream valuation point and lessors a downstream valuation point
"because royalty is most often stated as a fraction of the production or some measure of the value of production," and
"following extraction, oil and gas tend to increase in value as they move downstream away from the wellhead." As he
explains, "this increase in value is comprised of two components: (1) investments made in the production either by the
lessee providing a facility or service or purchasing the service from others; and (2) the increased value of the production
in a particular form at a particular location." n164
As discussed at length above, however, courts have not been universally receptive to lessees' adjustments of
downstream values to allow payment of royalty based on wellhead values, even when this is the value designated in the
parties' leases. Moreover, adjustments to account for post-production expenses are subject to challenges based on the
propriety of each post-production expense deducted and to questions regarding the point at which the production first
becomes "marketable" and the definition of a "marketplace." Noting that "few topics have generated as much litigation,
or transferred as much wealth, as the so-called 'deduction of costs' issue," Professor Pierce recommends that future
leases be structured to eliminate any net-back process. n165 This could be achieved by drafting a clause that contemplates
paying lessors based on an index price or market value discounted by a negotiated percentage. The discount would
reflect the value differential from the wellhead to the pipeline connection (his example is "80% of the market value at
the XYZ interconnect to Acme Interstate Pipeline Company.") n166
In the wake of the "implied covenant to market" rulings, all leases should include an express provision defining the
lessee's marketing obligation in order to avoid a court's imposition of an implied duty. Even the most restrictive courts
have observed that express language covering particular subject matter should prevail over implied covenants regarding
the same subject matter. n167 In a clause electing to pay [*183] royalty based on a downstream valuation point, the
royalty clause should
make it clear that the lessee can fulfill its marketing obligations by selling the gas at the wellhead or any point
downstream of the wellhead. If using an upstream valuation, an express marketing clause will support the valuation by
making it clear the lessee is not obligated to seek out markets further downstream. From the lessor's perspective, a
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downstream valuation point should be supported with an express marketing obligation requiring the lessee to seek out a
designated downstream market, such as the first available pipeline regulated by state or federal government as a
common carrier or public utility. n168
For purposes of litigation avoidance, the approach of avoiding the netback process, with its potential for argument over
every component, would certainly be helpful. Moreover, plainly defining the marketing obligation through an express
covenant that takes into account a producer's ability to sell the gas at various points in the post-production process
would obviate application of an implied covenant to rewrite obligations covered by the express covenant. While nothing
can insulate parties from creative attempts to fight over contracts (particularly where large amounts of money are
involved), this change in approach would appear to avoid the problems typically litigated with respect to the post-
production expense issue.
VI. Conclusion
This road ends as it began: with a desire to avoid having courts rewrite agreements made by lessors and lessees. This
Article has explored two possible ways to do so, but both follow the same map: namely, the route of making the
marketing practice match the language in the contracts the courts review if litigation ensues as a way of reducing their
opportunity to chart courses they think better.
Returning to a wellhead market may be viable in a few states, but doing so would require careful observation of
protocol to ensure that arm's-length final transactions are made for commercially reasonable prices. Producers would
likely face challenges regarding whether the sales were commercially reasonable and how to demonstrate this through
comparable sales. Such sales have been met with resistance in the states more likely to disregard the parties' actual
agreements through application of implied covenants. Even though Tawney can be read as indicating that such sales
would be upheld, the West Virginia court has not specifically addressed whether such sales would [*184] violate the
"first marketable product" doctrine. Freebird and Naylor Farms now provide persuasive authority to look to in
considering the question.
For new leases, producers may wish to consider striking a whole new kind of bargain by abandoning the concept of
wellhead valuation in favor of a downstream point of valuation. And for any type of new lease or modification, the
parties should clearly define the producer's duty to market in such a way as to avoid having a court impose its idea of
what would be better.
Legal Topics:
Contracts LawTypes of ContractsLease AgreementsGeneral OverviewEnergy & Utilities LawImplied
CovenantsAdministration & MarketingEnergy & Utilities LawRoyaltiesGeneral Overview
FOOTNOTES:
n1. Patricia Proctor is the Founding Director of the Simon Perry Center for Constitutional Democracy at Marshall University. From 2007 to
2011, she was a member of Steptoe & Johnson PLLC, focusing her practice on oil and gas law. She now works with the firm as part-time Of
Counsel. From 2000 to 2004, she was a partner in Drinker Biddle & Reath LLP in Philadelphia. She earned her J.D. from the University of
Pennsylvania and her B.A. from Marshall University.
n2. J. Kevin West is a member of Steptoe & Johnson PLLC. He has worked in and with the oil and gas industry for more than twenty-five
years. Before joining Steptoe & Johnson PLLC in January 2012, he was Managing Director of External Affairs for EQT Corporation for
three years. Prior to that, he was Vice President, Legislative and Regulatory Affairs from 2008 to 2009 and Vice President and General
Counsel from 2007 to 2008 for Equitable Production Company. From 1990 to 2007, he was a partner in McCoy, West and Franklin in
Lexington, Kentucky. He earned his J.D. from the University of Kentucky and his B.A. from Centre College of Kentucky.
Page 490Page 490
n3. Gregory P. Neil is an associate with Steptoe & Johnson PLLC, focusing his practice on energy litigation. He earned his J.D. from the
University of Kentucky and his B.A. from Berea College.
n4. See Owen L. Anderson, Royalty Valuation: Should Royalty Obligations Be Determined Intrinsically, Theoretically, or Realistically? (pt.
1), 37 Nat. Resources J. 547, 553 (1997); see also Bruce M. Kramer, Interpreting the Royalty Obligation by Looking at the Express
Language: What A Novel Idea?, 35 Tex. Tech L. Rev. 223, 224 (2004) ("One of the root causes of the disparate treatment of royalty clauses
in the past two decades has been the change of external circumstances regarding the production and marketing of both oil and natural gas
that does not mesh with the language used by the parties in instruments which may be decades old.").
n5. See David E. Pierce, Royalty Jurisprudence: A Tale of Two States, 49 Washburn L.J. 347, 366-67 (2010) [hereinafter Pierce, Royalty
Jurisprudence]. See also Rachel M. Kirk, Variations in the Marketable-Product Rule from State to State, 60 Okla. L. Rev. 769, 813 (2007);
Scott Lansdown, The Marketable Condition Rule, 44 S. Tex. L. Rev. 667, 707 (2003).
n6. See Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-08-668-R, 2011 WL 7053789, at 3-4 (W.D. Okla. July 14, 2011); Freebird, Inc.
v. Merit Energy Co., No. 10-1154-KHV-JPO, 2011 WL 13638, at 4-5 (D. Kan. Jan. 4, 2011). See also discussion infra Part IV.
n7. See Cont'l Oil Co. v. Fed. Power Comm'n, 266 F.2d 208, 211 (5th Cir. 1959) ("In the ordinary sense of the terms, production of the gas
has been completed at or just above the surface of the ground where it is physically deliverable ... .").
n8. For a full explanation of the process of deregulation culminating in FERC Order 636, see David E. Pierce, From Extraction to End Use:
The Legal Background, 1 Rocky Mtn. Min. L. Found. 3 app. A (2003) [hereinafter Pierce, From Extraction to End Use]. It has also been
suggested that this shift away from the well as the point of sale was also partially due to the reform of the mineral "depletion allowance"
under various tax reform statutes. See Anderson, supra note 4, at 554.
n9. See Creson v. Amoco Prod. Co., 10 P.3d 853, 857 (N.M. Ct. App. 2000).
n10. See Anderson, supra note 4, at 554. See also Kramer, supra note 4, at 224.
n11. See, e.g., Atlantic Richfield Co. v. State, 262 Cal. Rptr. 683, 688 (Ct. App. 1989); Schroeder v. Terra Energy, Ltd., 565 N.W.2d 887,
893-94 (1997); Piney Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225, 231 (5th Cir. 1984) (applying Mississippi law); Pursue
Energy Corp. v. Abernathy, 77 So. 3d 1094, 1099 (Miss. 2011) (stating that "we agree with the Fifth Circuit's analysis in Piney Woods ... .");
Mont. Power Co. v. Kravik, 586 P.2d 298, 302-03 (Mont. 1978); Creson v. Amoco Prod. Co., 10 P.3d 853, 857 (N.M. Ct. App. 2000); Bice v.
Petro-Hunt, L.L.C., 768 N.W.2d 496, 502 (N.D. 2009); Babin v. First Energy Corp., 693 So. 2d 813, 815 (La. Ct. App. 1997); Heritage Res.,
Inc. v. NationsBank, 939 S.W.2d 118, 122 (Tex. 1996); Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235, 238 (6th Cir.
2011) (interpreting Kentucky law); Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147, 1149 (Pa. 2010). The Authors' conclusion that
Pennsylvania - a Marcellus and Utica state - would follow the majority is based upon the Pennsylvania Supreme Court's holding in Kilmer,
which construed the issue of allocation of post-production expenses in the context of a minimum royalty statute, as discussed below. It
should also be noted that the only recent authority from Kentucky is from a federal district court applying very old precedent from
Kentucky's highest court.
n12. See Rogers v. Westerman Farm Co., 29 P.3d 887, 902 (Colo. 2001) (en banc).
n13. Estate of Tawney v. Colum. Natural Res., L.L.C., 633 S.E.2d 22, 30 (W. Va. 2006).
Page 491Page 491
n14. Legard v. EQT Prod. Co., No. 1:10cv00041, 2011 WL 86598, at 10 (W.D. Va. Jan. 11, 2011); see also Healy v. Chesapeake Appalachia,
LLC, No. 1:10cv00023, 2011 WL 24261, at 15 (W.D. Va. Jan. 5, 2011).
n15. Legard, 2011 WL 4527784, at 1.
n16. Pierce, From Extraction to End Use, supra note 8, at app. A.
n17. See id.
n18. David E. Pierce, Judicial Interpretations of Royalty Obligations and the Resulting Drafting Lessons, 5 Rocky Mtn. Min. L. Found. 7
(2008) [hereinafter Pierce, Judicial Interpretations of Royalty Obligations].
n19. See id. ("The lessee will note that if it is required to pay royalty on the downstream value, it will not be paying royalty on just the oil or
gas, instead it will be paying a royalty on the oil, gas, and money the lessee spent to move the gas from the wellhead to the pipeline. Without
an appropriate adjustment, the more the lessee pays in expenses, the higher its royalty - not on the production, but rather on expenses
incurred to enhance the value of the production as it moves away from the wellhead.") (emphasis in original).
n20. See Pierce, Royalty Jurisprudence, supra note 5, at 349 ("Royalty litigation merely re-slices the old pie without bringing anything new
to the table. In some instances, the prospective effect of a state's royalty jurisprudence can result in a smaller "old pie" with all parties worse
off. This could occur when a lessee, fearful of its ability to deduct or defend downstream costs, elects to enter into an arm's length sale at the
wellhead instead of investing additional capital to pursue downstream markets.").
n21. See Kirk, supra note 5, at 813 (recognizing that "although the West Virginia Supreme Court was attempting to put a more stringent
requirement on the lessee to bear costs and to protect the lessor from improper deductions, the court did neither. This is because the West
Virginia rule's requirement that a lessee bear all costs incurred until the point of sale may encourage producers to sell at or near the wellhead.
This is contrary to the implied covenant to market, which historically required the lessee to diligently market the product and obtain the best
possible price and terms. The practice of selling at or near the wellhead at arm's length would comply with the West Virginia rule because the
lessee would incur all costs up to the point of sale. This practice, however, could result in a lessee selling the gas inefficiently-perhaps even
before the gas is actually in a marketable condition, thus contradicting the rule's purpose."). See also Lansdown, supra note 5, at 707 ("By
allowing the lessee to deduct transportation costs when calculating royalty, the lessee is encouraged to market gas for the best possible price
and terms. In addition to upsetting well-established principles, the marketable-location rule will adversely affect the marketing of gas by
encouraging producers to market gas close to the wellhead even though that location may not be the most efficient marketplace.").
n22. Sternberger v. Marathon Oil Co., 894 P.2d 788, 799 (Kan. 1995).
n23. See Yturria v. Kerr-McGee Oil & Gas Onshore, LP, No. 7:05-CV-181, 2006 WL 3227326, at 7 (S.D. Tex. Nov. 6, 2006) ("Texas courts
consider an oil and gas lease a contract."), aff'd sub nom. Yturria v. Kerr-McGee Oil & Gas Onshore, L.L.C., 291 F. App'x 626 (5th Cir.
2008).
n24. See Heritage Res., Inc. v. NationsBank, 939 S.W.2d 118, 121 (Tex. 1996) ("In construing an unambiguous oil and gas lease our task is
to ascertain the parties' intentions as expressed in the lease.").
n25. Yturria, 2006 WL 3227326, at 7.

Page 492Page 492
n26. Barn-Chestnut, Inc. v. CFM Dev. Corp., 457 S.E.2d 502, 509 (W. Va. 1995).
n27. Yturria, 2006 WL 3227326, at 7 (citing HECI Exploration Co. v. Neel, 982 S.W.2d 881, 888-89 (Tex. 1998)).
n28. Cross Timbers Oil Co. v. Exxon Corp., 22 S.W.3d 24, 26-27 (Tex. App. - Amarillo 2000, no pet.).
n29. Heritage Res., Inc., 939 S.W.2d at 122.
n30. Judice v. Mewbourne Oil Co., 939 S.W.2d 133, 135 (Tex. 1996); Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d
235, 238 (6th Cir. 2011) (interpreting Kentucky law); Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147, 1149 (2010); Bice v. Petro-Hunt,
L.L.C., 768 N.W.2d 496, 501 (N.D. 2009).
n31. HECI Exploration Co. v. Neel, 982 S.W.2d 881, 888 (Tex. 1998) (quoting Danciger Oil & Ref. Co. of Tex. v. Powell, 154 S.W.2d 632,
635 (Tex. 1941)).
n32. Id. at 889.
n33. Even the Supreme Court of Appeals of West Virginia, which has been widely criticized for disregarding clear terms such as "at the
wellhead" in Estate of Tawney v. Colum. Natural Res., L.L.C., 633 S.E.2d 22, 27 (W. Va. 2006) would apply traditional principles of
construction in other circumstances. See, e.g., Barn-Chestnut, Inc. v. CFM Dev. Corp., 457 S.E.2d 502, 509 (W. Va. 1995) (holding in the
context of a commercial franchise agreement that "where the express intention of contracting parties is clear, a contrary intent will not be
created by implication."). See also Freebird, Inc. v. Merit Energy Co., No. 10-1154-KHV-JPO, 2011 WL 13638, at 7 (D. Kan. Jan. 4, 2011)
(recognizing that "absent an express lease provision to the contrary, Kansas courts seem to presume that implied covenants apply to all oil
and gas leases" but noting that "this approach is particularly striking because it stands in stark contrast to Kansas implied covenant
jurisprudence in other areas.").
n34. See Kramer, supra note 4, at 238-40.
n35. Garman v. Conoco, Inc., 886 P.2d 652, 653 (Colo. 1994).
n36. Id. at 657-58 (quoting Martin v. Glass, 571 F. Supp. 1406, 1415 (N.D. Tex. 1983), which recognized a duty to market but held that "the
duty to market is a separate and independent step, once or more removed from production, and as such is a post-production expense, and the
lessee is entitled to a pro rata reimbursement.").
n37. Id. at 658 (quoting Wood v. TXO Prod. Corp., 854 P.2d 880, 882 (Okla. 1992)).
n38. Id. at 659.
n39. Id. at 661 n.28 (quoting Webster's Third New International Dictionary 1383 (1986)).
Page 493Page 493
n40. Id. at 665 (quoting Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 692 (1993)).
n41. Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001) (en banc).
n42. Id. at 892-93.
n43. Id. at 902.
n44. Id. at 900-01.
n45. Id. at 900.
n46. Id. at 903.
n47. Id. at 904 (quoting Owen L. Anderson, Royalty Valuation: Should Royalty Obligations Be Determined Intrinsically, Theoretically, or
Realistically? (pt. 2), 37 Nat. Resources J. 611, 636-37 (1997)). Professor Anderson responded to this citation of his article by sending a
letter to the Colorado Supreme Court protesting its mischaracterization of his commentary. The Court relied on his commentary as
recognizing a duty to transport gas to the location of a commercial market, which as Professor Anderson later pointed out, "is the opposite of
what I had actually said." Owen L. Anderson, Rogers, Wellman, and the New Implied Marketplace Covenant, 1 Rocky Mtn. Min. L. Found.
13A (2003).
n48. Rogers, 29 P.3d at 906.
n49. Id. at 910.
n50. Id. at 911.
n51. Id. at 905; see also Pierce, Royalty Jurisprudence, supra note 5, at 359 (noting that the "location-based assessment" of marketability -
i.e., the holding in Rogers that the gas must be "saleable in a commercial marketplace" - has created a new term, the meaning of which "is
left for a jury to determine").
n52. Wellman v. Energy Res., Inc., 557 S.E.2d 254 (W. Va. 2001).
n53. Id. at 264.
n54. Id. To be fair, the Court was likely influenced by the factual scenario in Wellman. The Court noted that the producer paid royalties
based on $ .87 per thousand cubic feet even though it had received $ 2.22 per thousand cubic feet when it sold the gas downstream. Id. at
258. While the producer claimed that this difference was explained by post-production processing costs, it failed to produce any evidence to
show that the claimed expenses were actually incurred or that they were reasonable. Id. at 264.
Page 494Page 494
n55. Id. (quoting Garman v. Conoco, Inc., 886 P.2d 652, 658 (Colo. 1994)).
n56. Id. at 265.
n57. In decisions of the Supreme Court of Appeals of West Virginia, the syllabus points are provided as part of the Court's decision and are
binding precedent. West Virginia's state constitution requires the Supreme Court of Appeals to incorporate syllabus points of applicable law
into the beginning of each of its decisions, which points represent the Court's holdings on the law. Because they are adopted as general
propositions, syllabus points may have greater precedential force than language parsed from the body of the decision. W. Va. Const. Art.
VIII, § 4 ("It shall be the duty of the court to prepare a syllabus of the points adjudicated in each case in which an opinion is written and in
which a majority of the justices thereof concurred, which shall be prefixed to the published report of the case."); see also Walker v. Doe, 558
S.E.2d 290, 291 (W. Va. 2001) ("This Court will use signed opinions when new points of law are announced and those points will be
articulated through syllabus points as required by our state constitution.").
n58. Wellman, 557 S.E.2d at syl. pt. 4.
n59. Id. at 267.
n60. Id. at 265.
n61. Id. at 265.
n62. Id. at 263 n.3.
n63. Estate of Tawney v. Columbia Natural Res., L.L.C., 633 S.E.2d 22 (W. Va. 2006).
n64. Id. (citing Creson v. Amoco Prod. Co., 10 P.3d 853, 855 (N.M. Ct. App. 2000)).
n65. Id. at 26-27 (citing Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001)).
n66. Tawney, 633 S.E.2d at 27.
n67. Id. at 29.
n68. Id.
n69. Id.
Page 495Page 495
n70. Id. at 29-30. This analysis, of course, ignores that the question about the parties' intent should have been: On what basis did the lessors
expect to be paid at the time the contract was entered into? By definition, as gas was typically not sold downstream at the time the leases
were entered into, post-production expenses were not at issue, and allocation of them was therefore irrelevant. What was relevant, if one
were to apply the language of the leases in the context of the time they were executed, was the parties' agreement that royalty should be
based on the value of gas at the well.
n71. Va. Att'y Gen. Op. No. 09-018, 2009 WL 1716837, at 1 (June 10, 2009).
n72. Id. at 3.
n73. Id. at 4 (emphasis in original).
n74. Id. at 6.
n75. See Legard v. EQT Prod. Co., No. 1:10cv00041, 2011 WL 86598, at 10 (W.D. Va.), report and recommendation adopted, 2011 WL
4527784 (W.D. Va. Sept. 28, 2011); Healy v. Chesapeake Appalachia, L.L.C., No. 1:10cv00023, 2011 WL 24261 (W.D. Va. Jan. 5, 2011).
n76. Legard, 2011 WL 86598, at 10.
n77. Id. at 10-11 (citing Wood v. TXO Prod. Corp., 854 P.2d 880, 882-83 (Okla. 1992)).
n78. Id. at 11.
n79. Garman v. Conoco, Inc., 886 P.2d 652 (Colo. 1994).
n80. Legard, 2011 WL 86598 at 13; but see Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235, 241 (6th Cir. 2011)
(noting that "our task is not to determine which approach is best, but rather to decide the approach that the Kentucky Supreme Court would
adopt if the issue were before it.").
n81. See Legard, 2011 WL 4527784, at 1.
n82. See Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147, 1151 (Pa. 2010). Kilmer was one of more than seventy cases brought by
Pennsylvania mineral owners seeking to invalidate leases negotiated prior to the recent Marcellus rush that resulted in more lucrative lease
terms for new lessors. Id. at 1149 n.1. With seventy cases pending involving the same issues, and because of concern that delay could stymie
economic development, the Pennsylvania Supreme Court granted a motion to exercise extraordinary jurisdiction to immediately issue a
definitive interpretation of the GMRA. Id.
n83. Id. at 1150.

Page 496Page 496
n84. Id. at 1157 (quoting Howard R. Williams & Charles J. Meyers, Manual of Oil and Gas Terms § R (Patrick H. Martin & Bruce M.
Kramer eds., 14th ed. 2009)).
n85. Id. at 1157.
n86. While recognizing that in-kind gas royalties are rare due to the processing required to make gas usable, the Court noted that the GMRA
also governs oil royalties, which can be physically paid in kind. Id. at 1156-57.
n87. Id. at 1158.
n88. Ulmer v. Chesapeake Appalachia, L.L.C., No. 4:08-cv-2062, 2011 WL 1344596, at 3 n.1 (M.D. Pa. Apr. 8, 2011).
n89. Katzin v. Cent. Appalachia Petroleum, 39 A.3d 307, 309 (Pa. Super. Ct. 2012).
n90. Id.
n91. Due to the extremely favorable bonus and royalty terms currently being offered to oil and gas lessors in the Marcellus and Utica Shale,
termination of old leases, rather than damages for breach, is the royalty owners' preferred remedy.
n92. Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235, 238 (6th Cir. 2011).
n93. Warfield Natural Gas Co. v. Allen, 88 S.W.2d 989, 990 (Ky. 1935).
n94. Id. at 991.
n95. Id.
n96. Id. at 992.
n97. Rains v. Ky. Oil Co., 255 S.W. 121, 122 (Ky. 1923).
n98. Id.
Page 497Page 497
n99. Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235, 242 (6th Cir. 2011) (citing La Fitte Co. v. United Fuel Gas Co.,
284 F.2d 845, 848 (6th Cir. 1960)).
n100. Id. at 244.
n101. Busbey v. Russell, 1898 WL 1419 (Ohio Cir. Ct. Nov. 9, 1898).
n102. Id. at 26-27.
n103. Am. Energy Serv. v. Lekan, 598 N.E.2d 1315, 1321-22 (Ohio Ct. App. 1992).
n104. Moore v. Adams, No. 2009AP090066, 2008 WL 4907590, at 5 (Ohio Ct. App. Nov. 17, 2008).
n105. Id. at 3.
n106. Lutz v. Chesapeake Appalachia, L.L.C., No. 4:09CV2256, 2010 WL 2541669, at 1 (N.D. Ohio June 18, 2010).
n107. Ohio Rev. Code Ann. § 2305.041 (LexisNexis 2009).
n110. Lutz, 2010 WL 2541669, at 3.
n111. Id. at 2.
n112. Id. at 4.
n113. Waddle v. Lucky Strike Oil Co., 551 S.W.2d 323, 327 (Tenn. 1977). The citation to Professor Merrill is instructive as he advocates
expansive application of implied covenants to achieve "fairness" to the lessors.
n114. Id. at 325. A representative of the lessee explained that the drilling contractor "encountered a boulder" and moved the well location
twenty-one feet to the south east of the original well location "in the middle of the night," resulting in violation of certain well spacing
regulations. Id.
Page 498Page 498
n115. Id. at 326 (quoting Mountain States Oil Corp. v. Sandoval, 125 P.2d 964, 967 (Colo. 1942)).
n116. Id. at 327.
n117. Id.
n118. See, e.g., Frick-Reid Supply Corp. v. Meers, 52 S.W.2d 115, 118 (Tex. Civ. App. - Amarillo 1932, no writ) (holding that such judicial
ascertainment clauses are void because they would preclude a final judgment and would result in "piecemeal" litigation); Wellman v. Energy
Res., Inc., 557 S.E.2d 254, 256 syl. pt. 3 (W. Va. 2001) ("'Judicial ascertainment' clauses in oil and gas leases in West Virginia are void under
the public policy of this State ... .").
n119. Lone Star Oil & Gas, Inc. v. Howard, No. E2009-00428-COA-R3-CV, 2010 WL 520934, at 3 (Tenn. Ct. App. Feb. 12, 2010) (citing
Cali-Ken Petroleum Co. v. Slaven, 754 S.W.2d 64, 65 (Tenn. Ct. App. 1988)).
n120. Id. at 3.
n121. Id. at 6.
n122. La Barte v. Seneca Res. Corp., 728 N.Y.S.2d 618, 620 (App. Div. 2001); Cherry v. Res. Am., Inc., 727 N.Y.S.2d 848, 849 (N.Y. App.
Div. 2001).
n123. La Barte, 728 N.Y.S.2d at 621.
n124. Id. (citations omitted).
n125. Id. at 622 (quoting Wiener v. Lazard Freres & Co., 672 N.Y.S.2d 8, 14 (App. Div. 1998)).
n126. Id. (citing Coosewoon v. Meridian Oil Co., 25 F.3d 920, 931 (10th Cir. 1994)); but see infra note 153.
n127. Id.
n128. See Pernet v. Peabody Eng'g Corp., 248 N.Y.S.2d 132, 135 (App. Div. 1964) ("Generally, in every case, the question [of bad faith]
would be one of fact."). See also Rus, Inc. v. Bay Indus., Inc., 322 F. Supp. 2d 302, 309 (S.D.N.Y. 2003) ("If the terms are not clear, the
interpretation of the contract becomes a question of fact for the jury and extrinsic evidence of the parties' intent is admissible.").
n129. See Warfield Natural Gas Co. v. Allen, 88 S.W.2d 989, 991 (Ky. 1935) (noting that gas was ordinarily sold at the location of the well,
and "that must have been what the parties contemplated when they made this lease").
Page 499Page 499
n130. See Kramer, supra note 4, at 257-58 (describing the approach of courts that apply the traditional approach of contract construction as
"parsing" and the approach of the Colorado and West Virginia courts as "extrinsic," and concluding that "it does not necessarily follow that a
state that tends to follow the parsing approach will limit the application of implied covenants, nor does it necessarily follow that a state that
tends to follow the extrinsic approach will ignore the express language of the instrument. Having said that ... a certain confluence inherently
exists between the parsing and express covenant approaches and the extrinsic and implied covenant approaches.") Professor Kramer
concludes that "regarding the effect of express leasehold language on the implication of covenants, most court decisions tend to fall
somewhere in between, realizing that the courts are not free to rewrite a written agreement, but taking the temporizing view that an oil and
gas lease may not cover all of the future events that can impact the relationship between the parties." Kramer, supra note 4, at 261.
n131. Freebird, Inc. v. Merit Energy Co., No. 10-1154-KHV-JPO, 2011 WL 13638 (D. Kan. Jan. 4, 2011).
n132. Id. at 7; see also Hershey v. ExxonMobil Oil Corp., No. 07-1300-JTM, 2011 WL 1234883, at 11 (D. Kan. Mar. 31, 2011) (citing
Freebird for the proposition that no lease-by-lease inquiry is required to apply the implied duty to market.).
n133. See Sternberger v. Marathon Oil Co., 894 P.2d 788, 801 (Kan. 1995).
n134. Id. at 800 (holding that "once a marketable product is obtained, reasonable costs incurred to transport or enhance the value of the
marketable gas may be charged against nonworking interest owners"); see also Roderick Revocable Living Trust v. XTO Energy, Inc., 679
F. Supp. 2d 1287, 1292 (D. Kan. 2010) (holding that "excess dehydration to an already marketable product is to be allocated proportionately
to the royalty interest when such costs are reasonable, and when actual royalty revenues are increased in proportion to the costs assessed
against the royalty interest. It is the lessee's burden to show that the excess dehydration costs charged against the royalty interest occurred to
a marketable product, i.e., that the cost is a post-production cost") (emphasis in original).
n135. Freebird, 2011 WL 13638, at 6.
n136. Id. at 8.
n137. Naylor Farms, Inc. v. Anadarko OGC Co., No. CIV-08-668-R, 2011 WL 7053789, at 4 (W.D. Okla. July 14, 2011).
n138. Id. at 1.
n139. Id. at 1-4. The court provided the following example to illustrate how this arrangement resulted in increased profits for the defendant
and reduced royalty for the mineral owners:
In a class well in which, for ease of example, Defendant QEP owns 100 percent of the working interest and under a POP or POPI contract
with DCP, QEP receives $ 900 from DCP and DCP sells the gas for $ 1,000, a one-eighth royalty interest owner who, for ease of example,
was the lessor of all mineral rights in the drilling and spacing unit, would receive $ 112.50 and Defendant QEP would receive $ 787.50.
However, if the royalty owner's royalty was properly calculated, without improperly allocating the costs of making the gas marketable to the
royalty owner, the royalty owner would receive $ 125.00 and Defendant QEP would receive $ 775.00.
Id. at 5.
Page 500Page 500
n140. Id. at 3.
n141. Id. at 4 n.2.
n142. Id. at 1.
n143. Id. at 2.
n144. See id.
n145. Id. at 4.
n146. Id. at 5.
n147. See ENI Producing Props. Program Ltd. P'ship v. Samson Invs., Co., 1999 OK 21, P 14, 977 P.2d 1086, 1088.
n148. See Short v. Cline, 676 P.2d 76, 84 (Kan. 1984). The unit operator in that case held the reversionary interest in a certain lease and
attempted to terminate the royalty owners' defeasible term interest held in production under the lease by ceasing production. Id. at 78-79. The
court concluded that
it would violate the terms and intent of the [unit] agreement and work a substantial inequity upon defendants here to permit plaintiff to
repudiate the agreement by claiming termination of the Wertman lease by reason of lapse of production when he is both the operator-lessee
who specifically assumed the obligation of producing the leases in the unit and owner of the reversion in the Bartlesville formation on
termination of the Wertman lease.
Id. at 84.
n149. See Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 990 (Patrick H. Martin & Bruce M. Kramer eds., 46th ed. 2011).
n150. Wellman v. Bobcat Oil & Gas, Inc., No. 3:10-0147, 2010 WL 2720748 (S.D. W. Va. July 8, 2010).
n151. Healy v. Chesapeake Appalachia, LLC, No. 1:10cv00023, 2011 WL 24261 (W.D. Va. Jan. 5, 2011).
n152. See Adair v. EQT Prod. Co., No. 1:10cv00037, 2011 WL 4527433, at 25 (W.D. Va. Jan. 21), report and recommendation adopted, No.
1:10cv0037, 2011 WL 4527647 (W.D. Va. Sept. 28, 2011).
n153. La Barte v. Seneca Res. Corp., 728 N.Y.S.2d 618, 622 (App. Div. 2001). Note that the court in La Barte cited the Tenth Circuit's
decision in Coosewoon for the propositions that "under Oklahoma law, an operator of an oil or gas lease owes a fiduciary duty to royalty
Page 501Page 501
owners to market oil or gas at the highest market price available at the time of any production under the lease." Id. at 622 (citing Coosewoon
v. Meridian Oil Co., 25 F.3d 920, 931 (10th Cir. 1994)). This interpretation of Oklahoma law clearly goes too far in suggesting that the
fiduciary duty is owed by every oil and gas lessee. Rather, Oklahoma courts have made clear that these fiduciary obligations arise from the
involuntary nature of coerced unitization, not from lease agreements themselves. See, e.g., Leck v. Cont'l Oil Co., 800 P.2d 224, 229 (Okla.
1989) ("This is not a duty created by the lease agreement but rather by the unitization order and agreement."); Howell v. Texaco Inc., 2004
OK 92, P 25, 112 P.3d 1154, 1160 (recognizing that a fiduciary relationship was not created by communitization agreements, which the court
pointed out "are contracts just as the leases are contracts").
n154. Pierce, Judicial Interpretations of Royalty Obligations, supra note 18.
n155. See Rogers v. Westerman Farm Co., 29 P.3d 887, 911 (Colo. 2001) (en banc).
n156. Howell, 2004 OK 92, P 25, 112 P.3d at 1160.
n157. Note that one of the problems with the arrangement between the operator and third party purchaser in Naylor Farms, discussed supra
Part IV.B, was that the contract price received by the producer was tied to the final sale price received by the buyer. Such an arrangement
could create a question regarding when and where the title to the gas actually passed.
n158. Estate of Tawney v. Colum. Natural Res., L.L.C., 633 S.E.2d 22, 30 (W. Va. 2006).
n159. Id. at 28.
n160. See Williams & Meyers, supra note 149, § 641 (reciting such a lease clause and explaining that it was provided by two experienced
attorneys, who, after reviewing many lease royalty clauses and model clauses, attempted to craft a royalty clause responsive to decisions in
the different states). Specifically, the following clause was provided by Milam Randoph Pharo and Gregory R. Danielson:
PROD 88 (2004) PAID UP OIL AND GAS LEASE (a.k.a. the "Modified Lynch Form"):
6. Royalty Payment. For all Oil and Gas Substances that are physically produced from the leased premises, or lands pooled, unitized or
communitized therewith, and sold, lessor shall receive as its royalty % of the sales proceeds actually received by lessee or, if applicable, its
affiliate, as a result of the first sale of the affected production to an unaffiliated party, less this same percentage share of all Post Production
Costs and this same percentage share of all production, severance and ad valorem taxes. As used in this provision, Post Production Costs
shall mean all costs actually incurred by lessee or its affiliate and all losses of produced volumes whether by use as fuel, line loss, faring,
venting or otherwise from and after the wellhead to the point of sale. These costs include without limitation, all costs of gathering,
marketing, compression, dehydration, transportation, removal of liquid or gaseous substances or impurities from the affected production, and
any other treatment or processing required by the first unaffiliated party who purchases the affected production. For royalty calculation
purposes, Lessee shall never be required to adjust the sales proceeds to account for the purchaser's costs or charges downstream of the point
of sale.
Lessee or its affiliate shall have the right to construct, maintain and operate any facilities providing some or all of the services
identified as Post Production Costs. If this occurs, the actual costs of such facilities shall be included in the Post Production Costs as a per
barrel or per mcf charge, as appropriate, calculated by spreading the construction, maintenance and operating costs for such facilities over
the reasonably estimated total production volumes attributable to the well or wells using such facilities.
If the Lessee uses the Oil and Gas Substances (other than as fuel in connection with the production and sale thereof) in lieu of receiving
sale proceeds, the price to be used under this provision shall be based upon arm's length sale(s) to unaffiliated parties for the applicable
month that are obtainable, comparable in terms of quality and quantity, and in closest proximity to the leased premises. Such comparable
arm's-length sales piece shall be less any Post Production Costs applicable to the specific arm's length transaction that is utilized.
Milam Randoph Pharo & Gregory R. Danielson, The Perfect Oil and Gas Lease: Why Bother!, 50 Rocky Mtn. Min. L. Found. 19, § 19.05
(2004). It should be noted that this clause was offered after the Colorado Supreme Court's decision in Rogers, but before the West Virginia
Supreme Court decided Tawney.
Page 502Page 502
n161. For example, exactly what did the court mean by its instruction to include language explaining the "method of calculating" the
amount to be deducted? This should be self-explanatory--in a lease providing for one-eighth royalty based on the value of the gas at the
wellhead, and specifically listing each and every post-production cost as an expense in which the lessor will proportionately share (one-
eighth) of that expense, the "method of calculating" should be the aforementioned description and the arithmetical calculation required to
deduct one-eighth of those expenses from the one-eighth royalty on the proceeds received from an arm's-length sale downstream from the
well (a "net-back" or "work back" specifically described).
n162. Pierce, Judicial Interpretations of Royalty Obligations, supra note 18. In his article, Professor Pierce outlines several drafting lessons
and exhaustively describes issues to be contemplated in creating a royalty provision, including how to achieve the goals of creating a clear
and totally transparent lease and avoid problem situations that enable courts to interfere with the parties' intended bargain. See id.
n163. Id.
n164. Id.
n165. Id.
n166. Id. Of course, the lease should specifically provide for alternatives to be employed should the selected index cease to exist or be
viable for whatever reason. Professor Pierce acknowledges that lessors might not want to use a set percentage discount to cover post-
production costs, but points out that lessors take the same sort of risk by agreeing to pay a fixed fractional royalty.
n167. See Williams & Meyers, supra note 149, § 858 (observing that "implied covenants are displaced by inconsistent express lease
provisions ... . Decisions are few that consider the effect of express lease provisions on the implied covenant to market the product, but the
few in existence follow the general rule"). See also Rogers v. Westerman Farm Co., 29 P.3d 887, 906 (Colo. 2001) (en banc) ("Absent
express lease provisions addressing allocation of costs, the lessee's duty to market requires that the lessee bear the expenses incurred in
obtaining a marketable product"); Estate of Tawney v. Colum. Natural Res., L.L.C., 633 S.E.2d 22, 28 (W. Va. 2006) (citing Wellman v.
Energy Res., Inc., 557 S.E.2d 254, 265 (W. Va. 2001)) ("If an oil and gas lease provides for a royalty based on proceeds received by the
lessee, unless the lease provides otherwise, the lessee must bear all costs incurred in exploring for, producing, marketing and transporting the
product to the point of sale.") (emphasis added).
n168. Pierce, Judicial Interpretations of Royalty Obligations, supra note 18.

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68 of 430 DOCUMENTS
Copyright (c) 2012 New York University Journal of Law & Business
NYU Journal of Law & Business
Summer, 2012
NYU Journal of Law & Business
8 N.Y.U. J. L. & Bus. 395
LENGTH: 37120 words
ACADEMIC ARTICLE: THE PATH OF CORPORATE FIDUCIARY LAW
NAME: David Kershaw*
BIO: * Professor of Law, London School of Economics. Many thanks to Alan Dignam, Neil Duxbury, Josh Getzler,
Alison Kershaw, Ewan McGaughey, Kai Moller, Gemma Mootoo-Rajah, the participants of the Oxford Law and
Finance Workshop, and a seminar hosted by the Centre for Corporate Law and Securities Regulation at Melbourne Law
School for comments on earlier versions of this article. Special thanks go to Harald Halbhuber for our many invaluable
transatlantic conversations about the relationship between takeover law and the conception of the corporation.
TEXT:
[*396]
I.
Introduction
A discipline's theory of legal change and evolution provides its presumptive vantage point for understanding and
assessing contemporary rules. For example, if the underlying theory of legal change understands law as an adaption to
the needs of its constituency of users, then the scholar will seek to account for how the law satisfies those needs, and the
regulator or legislator will be wary of intervention. But if the theory of change identifies extraneous bias and distortion
in the process of lawmaking, then the vantage point of both scholar and lawmaker will be critical of law's failure to
fulfill its function [*397] and will be more reform-orientated. A discipline's theory of historical change is therefore
central to its assessment of the legitimacy and efficacy of existing rules and central to what the discipline does: what it
views as the role of scholarship, and what it views as legitimate approaches to that scholarship. Understanding the
drivers of legal evolution is at the heart of contemporary corporate law scholarship. Over the past half-century, scholars
have provided innovative and compelling accounts of why corporate law looks as it does today. These accounts share a
theory of legal change which, in different guises, views legal change as the product of pressure exerted by the economic
and financial needs and interests of the marketplace and its constituent players. It is an approach that has a close affinity
with Marxist historiography, which views superstructure as the direct product of "material behavior." n1
This article argues that this dominant theory of legal change is partial and therefore inaccurate. The dominant
theory treats subsidiary drivers as primary drivers and pays scant regard to the actual primary driver. Following Holmes,
American scholars have long been warned against treating the life of law as logic. n2 But in embracing Holmes' call for
engagement with economics and statistics, n3 corporate scholars have increasingly ignored the fact that a legal system
may have certain internal biases that have a substantial impact on the path of legal change. Today the "legal" in
mainstream "corporate legal history" is disappearing. Without it, accounts of legal change are inaccurate and the
contemporary scholarly vantage point finds itself in the wrong place.
There are several layers of this economic understanding of historical change. The first and most readily accessible
is the idea that lawmakers are responsive to instrumental economic imperatives. In this account, law will adapt to ensure
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that it is responsive to the needs and interests of commerce, although in doing so it may mistake the interests of
individuals, such as [*398] managers, for the interests of commerce. n4 A second and dominant economic account of
corporate legal change for the past forty years focuses on the horizontal competition between states for corporate
charters, n5 and the vertical pressures placed on state corporate lawmaking as a result of the threat of federal pre-emption
of corporate law. n6 Through these lenses, law is seen as the product of the economic incentives and pressures exerted by
the players in the corporate chartering process - the state and its coffers, the Federal Government, the founders, the
managers, the shareholders, the capital markets and the plaintiff's bar. "Race-to-the-bottom" theorists view the
management-friendly nature of Delaware law as the product of the state's responsiveness to the interests of managers
who control the re-incorporation decision. "Race-to-the-top" theorists, on the other hand, view corporate law as
responsive to the economic imperative of maximizing the value of the corporation's shares. Scholars that adopt a more
nuanced view of the debate, such as Professor Bebchuk, argue that charter competition will generate pro-managerial
rules in areas of corporate law, such as self-dealing and corporate opportunities, that are significantly re-distributive to
managers, and pro-shareholder rules which maximize value where they are not. n7 Other accounts of legal change and
variation fall outside of [*399] the charter competition debate but share the same underlying conception of legal
change as the product of economic forces and pressures exerted by interest groups. n8 For example, in recent important
work Professors Armour and Skeel have argued that the divergence in the nature of takeover defence regulation in the
United States and the United Kingdom is the result of variation in the structure of corporate ownership in these
countries, particularly the stronger presence of institutional investors in the United Kingdom in the late 1960s, who
lobbied forcefully to protect their economic interests. n9 They argue further that the common law rules in both
jurisdictions are similar as a result of repeat-player litigation that pressures courts to take account of managerial
interests. n10
Through this lens of legal change, the system of law becomes a black box in relation to which economic pressures
are exerted to produce a legal product that comes out of the box. Through this lens, law as a relatively autonomous
system does not play a role that could distort pressures, block some pressures and facilitate others. Rather, law, within
the black box, simply becomes a mechanism of mediating multiple pressures and interests. Corporate law is essentially
a blank sheet of paper, and it is the economic fight over who gets to hold and control the pencil that determines the legal
outcome.
Central to these accounts of legal change are certain disciplinary narratives that serve as standard-bearers of legal
change as the outcome of economic pressures and incentives. The most important example is the general decline of the
disciplinary [*400] power of fiduciary duties n11 and, more specifically, the evolution of the self-dealing standard from a
strict standard under which all self-dealing transactions were voidable regardless of fairness, to a standard that requires
only fairness. Other important narratives relate to the evolution of takeover defenses, including both the adoption of
state takeover statutes and the failure to provide Unocal proportionality review with any teeth. n12
This article takes issue with the dominant economic understanding of legal change by challenging the widely
accepted narrative about the evolution of U.S. self-dealing law and the related claim about the decline of U.S. fiduciary
standards. It does so through a close tracing of the evolution of self-dealing law in both the United Kingdom and the
United States. Self-dealing law in both the United Kingdom and the United States began by adopting the same fiduciary
principles from English trust law to fill the gaps in their silent corporate codes, and for a brief period they both looked
to the same U.K. case as the leading case. However, their laws rapidly diverged to provide starkly different fiduciary
standards for directors. The mid-19th-century U.K. common law held that a self-dealing transaction was voidable by the
company in the absence of ex-ante authorization or ex-post ratification. n13 The leading case, Aberdeen Railway Co. v.
Blaikie, n14 observed that "so strictly is this principle adhered to, that no question is allowed to be raised as to the fairness
or unfairness ... of the transaction." Key U.S. states such as New Jersey and New York adopted an apparently identical
rule in the mid-to-late 19th century. Indeed, the leading U.S. cases of this period invariably relied upon, and often
extensively quoted from, Aberdeen [*401] Railway. Harold Marsh described the 1880s position in similar terms:
In 1880 it could have been stated with confidence that in the United States the general rule was that any contract
between a director and his corporation was voidable at the instance of the corporation or its shareholders, without regard
to the fairness or unfairness of the transaction. n15
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Explaining the evolution of self-dealing law in the United States has long been viewed as a puzzle for U.S. corporate
scholars. n16 In his 1966 article, Are Directors Trustees?, Marsh describes the evolution of U.S. self-dealing law in three
stages. First, in 1880, the rule was as stated above; then, by 1910, the strict voidability rule had been replaced with a
rule that allowed directors to enter into transactions with the corporation provided the transaction was fair and had been
approved by a disinterested majority of directors; and by 1960, in the third stage, all that was required for a legitimate
self-dealing transaction was that the transaction was fair. Marsh famously decried this shift away from the voidability
rule. He accused the courts who presided over this shift as being "shamefaced" and noted the courts' wholesale failure to
articulate the reasons for abandoning the voidability rule. By way of contrast, in 1880, 1910, 1960 and 1980, the
position in the United Kingdom was unaltered from the strict voidability rule articulated in Aberdeen Railway in 1854.
How do we explain the apparent evolutionary dynamism of U.S. corporate laws and the evolutionary stasis of U.K.
corporate law? Naturally, when legal starting points - the absence of regulation in either U.K. or U.S. corporate codes,
the shared sources of English fiduciary law upon which both U.S. and U.K. corporate law were based, and the
apparently identical initial interpretation of such underlying legal principles - are the same, we look outside of the law
and not within it to explain the divergent paths taken by each country. The widely held understanding of U.S. self-
dealing law, even without this comparative viewpoint, has been to understand its evolution as [*402] an example of
law's responsiveness to economic forces and interest group pressure. Scholars have suggested that courts were captured
by managerial interest group pressure or that courts became increasingly aware of the need for law to adjust to the
instrumental economic needs of the marketplace: self-dealing transactions can provide significant benefits to
companies, especially in small companies. n17 Furthermore, this account of the evolution of self-dealing law is a perfect
fit with U.S. corporate law's primary contemporary narrative about the external drivers of legal change, namely the
effects of state competition for corporate charters.
The juxtaposition of U.K. self-dealing law next to U.S. self-dealing law ostensibly affirms this view of the drivers
of the evolution of self-dealing law in the United States. It is often claimed that U.S. judges adopt, and have long
adopted, a more consequentialist style of legal reasoning which is necessarily more open to influence from the real
economic world. n18 If one were to place any contemporary U.K. corporate case next to its Delaware counterpart, the
absence of consequentialist reasoning and policy discussion as an acknowledged driver of legal outcomes in the U.K.
judgments would be immediately striking. By contrast, the Delaware courts pride themselves on their receptiveness to
the needs and vocabulary of the marketplace and the understanding of the policy rationales that underpin the legal rules.
n19
One might therefore conclude that the different paths of U.K. and U.S. self-dealing law can be explained by a much
greater receptivity on the part of U.S. [*403] courts, as compared to their U.K. counterparts, to the instrumental
economic needs of the marketplace. Furthermore, the United Kingdom is not, and has never been, a jurisdiction that is
subject to charter competition in any meaningful respect. n20 Accordingly, the different U.K. and U.S. trajectories of self-
dealing law fit well with a narrative that explains U.S. legal evolution through the lens of the pro-managerial pressures
on lawmaking in significantly redistributive areas.
But such accounts of legal change are too easy. Law does not respond to instrumental economic pressures by
simply sacrificing its internal rules, principles and structures to an identified economic need or a lobbyist's financial
interests. Rather, it engages with such needs and pressures through the existing rules, principles and structures of the
legal system. These systemic components contribute to, and are therefore determinative of, how law responds to these
pressures and the path that law crafts through interaction with these pressures. Legal changes and adjustments, even
when pursued by the most instrumental of lawmakers, must benefit from a facade of legitimacy and must be proffered
in ways that are consistent with or explained by reference to existing internal rules, principles and structures. If the legal
historian finds that no reason is given for an apparently profound legal change such as the shift from voidability to
fairness in self-dealing law, it is likely that the lawmakers to whom the changes are attributed did not view the change as
profound at all, in which case it is necessary to dig deeper to understand how apparent legal change can be explained
through the lens of continuity.
To explain the divergence of U.K. and U.S. self-dealing laws, it is necessary to understand their points of departure.
Both jurisdictions started with a blank slate - there were no rules on self-dealing in the corporate code and no prior
common law rules dealing with generally incorporated companies, [*404] which did not exist until the mid-19th
century. Furthermore, both jurisdictions borrowed from the same source of legal ideas to address corporate self-dealing:
fiduciary law contained within English trust law and agency law authorities. However, the core systemic characteristics
of U.S. and U.K. corporate law, with which they translated these source materials into the corporate context, were
profoundly different. Most important in this regard were each jurisdiction's divergent conceptions of the corporation.
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In the United Kingdom, a generally incorporated company, known as a registered company, was viewed
conceptually as the continuation of unincorporated companies, which were known as deed of settlement companies.
These were effectively large-scale partnerships formed by using contract and trust law, which were widely used prior to
the availability of general incorporation. The generally incorporated company was not viewed as a paradigm shift in the
form of business organization, but merely as a means of addressing some of the practical difficulties associated with the
unincorporated company. Following the introduction of general incorporation, the incorporated company continued to
be perceived as the product of private partnership and enterprise. It followed, therefore, that the U.K. incorporated
company was viewed from inception as the endogenous product of private contract. Accordingly, the rules imposed on
the company to regulate its governance were open to variation at the election of the shareholders. Importantly, the
powers of the directors were also a function of this corporate contract. Stripped of the formal complications engendered
by the creation of a separate legal entity, power in a U.K. company was understood to be delegated directly from
shareholders to directors, who then formed the board. This contractual conception of the governance of a U.K. company
operated as the safety valve for instrumental economic pressures in multiple contexts, including self-dealing, and
allowed directors and shareholders to mold governance rules to their preferences, thereby relieving the courts from the
need to respond to these pressures and allowing, without consequence, inflexible rules to ossify.
In contrast, in the United States, general incorporation was viewed as an extension of statutory chartering. Each
generally incorporated company was viewed as a product of legislative action; the state's creation and empowerment of
an entity [*405] and its empowerment of a board of directors. This understanding of the corporation placed clear limits
on the extent to which the parties themselves could change the rules, including those applicable to self-dealing
transactions, without permission from the state to do so. Accordingly, responses to external pressure to allow self-
dealing transactions had to come from within the law itself. However, U.S. state courts did not respond by tearing up
and re-writing the rules. Rather, they responded in different, internally consistent and jurisdiction-specific ways. The
juxtaposition of U.K. and U.S. self-dealing laws sheds light on the evolution of U.S. self-dealing law. It allows us to see
that the path of U.S. self-dealing law from voidability to fairness is not illogical and unexplained and is not, therefore,
open to crude economic forces accounts of legal change. On the contrary, the path to fairness is consistent with the early
19th-century fiduciary law and the options made available by the U.S conception of the corporation.
This article does not directly address claims about the influence of charter competition on U.S. corporate law, but it
should generate, as a by-product, a dose of skepticism about its relevance. Claims about horizontal competitive
pressures on Delaware lawmakers have generally resisted providing a granular account of how the common law is
changed by such pressures. This is hardly surprising because the nature of such effects renders it impracticable to
identify a single case or event to demonstrate increased managerial bias or lawmakers' resistance to managerial bias to
ensure that the governance rules maximize value in the eyes of smart arbitrageurs. But it does mean that rules over time
must gravitate to particular positions that support the claim. The relevant time period starts from the advent of the
competition. The timeline established by this article does not support the existence of any significant charter
competition effect in the self-dealing context because fairness review was established before the charter competition
process was kick-started by New Jersey in 1889. n21
[*406] Part I of this article sets forth an account of the conceptions of the corporation in the United Kingdom and
the United States with particular regard to the extent to which corporate governance rules were deemed to be
contractible. Part II sets forth the article's thesis through a detailed consideration of the evolution of self-dealing law in
the United Kingdom and in the three most (historically) important U.S. jurisdictions: New Jersey, New York and
Delaware. Part III concludes.
II.
The Conception of The Corporation
A. The United Kingdom: A Contractual Conception of the Company
Prior to the introduction of general incorporation in the United Kingdom, large-scale business activity was carried out
through unincorporated associations or companies that, for legal purposes, were, in effect, large-scale partnerships.
These unincorporated companies were legally constructed through an innovative combination of trust law and contract
law. The assets of the company were vested in trustees and directors of the unincorporated company (who were
typically different individuals than the trustees n22) who were appointed and empowered to manage and deploy those
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assets in accordance with a contract - the deed of settlement - entered into by all the "partners"/"members" in the
unincorporated association. The directors' powers over the unincorporated company's assets were a direct function of
the provisions set forth in this deed of settlement. These companies were often referred to as "deed of settlement
companies."
[*407] There were multiple practical problems associated with carrying out business through an unincorporated
company, including, in particular, the difficulties involved in taking legal action in the company's own name n23 and the
problem of unlimited member liability which, although partially managed through contract, could never be fully
excluded. n24 The U.K. Parliament was clearly cognizant of these practical problems in the early 19th century. Indeed, the
introduction of general incorporation - known as "incorporation by registration" - in the United Kingdom through the
Joint Stock Companies Act of 1844, which did not provide for limited liability, n25 can be viewed as one step in a
continuum of legislative steps designed to incrementally address some of these practical problems. Accordingly, the
broad availability of the corporate form through a simple form-filling registration process was not viewed as an
organizational paradigm shift from partnership to separate legal entity, but rather as a means of addressing the practical
problems of existing institutions. n26
The legislative steps prior to the Joint Stock Companies Act of 1844 included providing the Crown with the
authority to grant letters patent to enable the unincorporated company to sue in the name of the company through a
"public official" n27 [*408] and, thereafter, allowing banking companies to appoint such a "public official" through a
registration process. n28 For such unincorporated companies with an appointed "public official," Lord Justice Lindley, the
19th century's leading English company law scholar and senior judge, observed that they could "without any great
inaccuracy be likened to a corporation." n29
For scholars of Lord Lindley's generation the term "company" was the umbrella term applying to both
unincorporated and incorporated companies which were, roughly speaking, viewed as different forms of partnership and
which were, to a significant extent, subject to the same legal architecture of contract and trust law that governed a
partnership. In his treatise on company law, which is tellingly entitled A Treatise on the Law of Companies, Considered
as a Branch of the Law of Partnership, Lindley refers to companies incorporated by registration as "partnerships
incorporated by registration." n30 Francis Palmer, a leading 19th-century commentator on company law, observed that the
unincorporated company was the "lineal ancestor of the ordinary company" formed under the Companies Acts. n31
Companies, whether incorporated or unincorporated, were distinct from corporations. Corporations "in the proper sense
of the term" were the product of state action - through Crown charter or statutory charter. n32
[*409] This view of incorporated companies reflected the position encoded within the general incorporation
legislation. The 1844 Joint Stock Companies Act defines the "joint stock company," which is required to be registered
and incorporated, to include "every partnership whereof the capital is divided or agreed to be divided into shares, and so
as to be transferable without the express consent of all the copartners [and e]very partnership which at its formation, or
by subsequent admission... shall consist of more than twenty-five members." n33 As a precondition to registration, the Act
required the production of a "deed of settlement" signed by the shareholders just as an unincorporated company would
be formed by the members signing a deed of settlement. n34 The 1844 Act provided, as was typical in unincorporated
companies, that the deed of settlement contain a covenant on the part of the shareholders to observe the terms of the
deed. n35 Section 11 of the 1862 Companies Act - an Act that consolidated the Acts regulating companies enacted
between 1844 and 1856 and is viewed as the United Kingdom's first major piece of companies legislation n36 - similarly
provided that the memorandum of association n37 is a contract binding on the members and members inter se. n38 [*410]
However, this provision did not provide that the company, in addition to the shareholders, was bound to observe the
contract. n39 The failure to notice the legal entity is instructive: corporate personality was a means of addressing
identified practical problems associated with the unincorporated company and was not intended to alter the legal
relationships amongst those who invested in or carried out the business of the company, which were set forth in deed of
settlement entered into by the shareholders. n40
The introduction of incorporation by registration did not simply involve legal conceptual continuity but also, for the
business, chronological factual continuity. That is, the starting point for the business was not the creation of the
corporate entity. Rather, business activity and the company were understood to be prior to incorporation. Hence the
vocabulary of "registration." Gladstone, n41 requesting leave to move the Joint Stock Companies Bill in 1844, described
the Bill's objective as "for the Registration of Joint Stock Companies, and for conferring on such Companies certain
privileges of Corporate Bodies." n42 Through this dominant lens of factual and conceptual continuity, the English
incorporated company was viewed predominantly as private: the product of endogenous business activity. The role of
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the state in creating the incorporated entity was side-lined. Accordingly, U.K. legislators and commentators in the 19th
century did not envisage the corporate form as a concession n43 of the state, empowered by the state. In the United
Kingdom there was no 19th-century legal debate as there was in the United States n44 about whether or not a general
corporate charter represented a contract between the corporation [*411] and the state or whether the corporate charter
amounted to a legislative act. References to the relationship between the state and the corporation in leading 19th-
century U.K. corporate law texts are absent. n45
However, this dominant bias towards the private did not completely disregard the public nature of incorporation.
Incorporation created a legal entity that benefited from limited liability, which was viewed as a privilege and not the
statutory rubber stamping of something that could be achieved by contract. n46 It was understood that limited liability
generated risks for the public and, in particular, for the creditors and that legal protections were therefore required.
These protections were provided by restricting what incorporated companies could do through an unalterable
memorandum of association - the primary constitutional document. This memorandum, which was not alterable at all
until 1890 unless specifically permitted by the statute, n47 contained information about, among other things, the
company's business objects, its limited liability, its name, and its share capital. n48 The permissions and restrictions of the
memorandum were viewed through a public lens. Indeed, courts would sometimes refer to the memorandum in this
context as a "charter." n49 However, these restrictions [*412] on contractibility n50 did not apply to the governance of the
corporation, which was left to the subsidiary constitutional document, the articles of association, which could be altered
at any time by supermajority shareholder resolution. n51
With regard to corporate governance, the continuity from the contractual underpinnings of the unincorporated
company to the incorporated company was untrammelled. How directors were appointed and removed, when
shareholder meetings could be called, the extent of the powers of the directors and the directors' obligations to the
company were subject to specification and variation by the corporate contract. Consider, for example, director power,
removal of the directors and duty of care liability waivers.
The 1844 Act explicitly refers to the powers of the directors. n52 However, the directors' powers "to conduct and
manage the affairs of the company" are not provided directly to the directors by the statute but are provided "according
to the provisions and ... restrictions" of the Act and the deed of settlement. n53 That is, the statute delegates board
empowerment to the shareholder contract. The Companies Act of 1862 went further than this and did not provide for
director power at all. n54 Rather, as with an unincorporated, deed-of-settlement [*413] company, the directors were
empowered by the shareholders through the company's constitution, a document which could only be altered by the
members and, as contrasted with most U.S. jurisdictions, over which the board had no amendment veto. n55 Accordingly,
for a U.K. incorporated company, director power was not original but clearly delegated by the shareholders through the
constitutional documents. Palmer's Company Law observed that the 1862 Act "leaves the members entirely free to
determine how and by whom the business shall be managed." n56 Note also that power, pursuant to the 1844 Act, and
subsequent model articles of association, is delegated to the directors and not to the board of directors.
Accordingly, from the inception of incorporation by registration, a U.K. incorporated company may have been
created by a process of registration, but its ability to function through representative directors was dependent upon the
powers the shareholders were willing to confer through contract. Contract was, and is, at the heart of the conception of
the corporation in the United Kingdom and at the heart of board power. In Ernest v. Nicholls, n57 a case dealing with a
company formed under the 1844 Act, counsel for the appellants who were challenging the legality of a sale of all the
company's assets to a company controlled by the company's directors argued that "directors are trustees for their
shareholders, and have no power whatever beyond what is given them by their deed of trust." Agreeing with counsel,
Lord Wensleydale held that the deed "restricted and regulated their authority." n58
With regard to director removal, until the Companies Act of 1947, there was no statutory provision dealing with the
removal of directors. n59 Removal was dealt with by the corporate contract, which could be fashioned in any way that the
shareholders determined, but, once fashioned it, would be enforced by the courts until amended by the shareholders.
Nineteenth-century courts made it clear that there was no inherent power of removal as an incident of the corporate
entity; there was [*414] simply the corporate contract. "You must look," held Lord Justice Bowen in Imperial
Hydropathic Hotel Co. v. Hampson, "when you are considering the question of dismissal of a director, to see whether
the articles of association have been complied with." n60
Contractibility extended beyond director appointment and removal to all aspects of the directors' actions. This
article considers the role of contractibility in the context of self-dealing in detail below. Even the duty of care was
viewed as being legitimately contractible. It was common practice in U.K. companies until 1929 n61 to include duty of
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8 N.Y.U. J. L. & Bus. 395, *
care liability waivers in the articles of association, similar to those that are now permitted in Delaware pursuant to
Section 102(b)(7) of the Delaware General Corporation Law. These waivers did not require statutory permission, but
were found by the courts to be enforceable. n62 The courts' determination that they were enforceable in the litigation
arising out of a major insurance fraud resulted in the legislature amending the Companies Acts to render such waivers
void. n63 Statutory action was required to constrain the underpinning contractibility of U.K. company law.
B. The United States: A Public Conception of the Corporation
1. Incorporation as State and Private Action
As discussed above, English company law viewed the incorporated company and its governance structure less as the
product of public action but more as public gloss on existing private activity. This viewpoint contrasted with the
perception of the chartered or statutory company, which was a corporation "in the proper sense of the term" n64 and
which clearly involved the state's direct top-down facilitation of public or private activity.
In contrast, in the United States, the introduction of general corporation statutes was viewed as an extension of the
[*415] power of states to grant corporate charters. n65 Although the granting of individual statutory charters was
relatively commonplace for trading corporations, n66 at least when compared to the United Kingdom, n67 it was a process
widely considered to be infected by corruption, patronage and rent-seeking. n68 General incorporation addressed such
problems by effectively making statutory chartering available on compliance with prescribed formalities. When states
began enacting general incorporation statutes from the mid-1800s, n69 these were viewed as a democratic extension of
statutory chartering, a more readily assessable form of statutory chartering. n70 Accordingly, the legal conception of the
specifically chartered corporation as a creature of legislative action, the statutory grant of a privilege or franchise, n71
naturally applied to the generally incorporated company. In State v. Penn-Beaver Oil Co., Chief Justice Pennewill of the
Delaware Supreme Court observed that "the defendant corporation was organized under the general corporation law of
the state, but its legal status would be [sic] the same if it had been created by a special act of the Legislature." n72 [*416]
This conception is, of course, very well known. Every student of corporate law in the United States is familiar with
Justice Marshall's definition and conception of the corporation set forth in Trustees of Dartmouth College v. Woodward,
n73
a case involving a specifically chartered company. He held that "[a] corporation" was "creature of law," an "artificial
being, invisible, intangible, existing only in contemplation of law. Being the mere creature of law, it possesses only
those properties, which the charter of its creation confers upon it, either expressly or as incidental to its very existence."
While there is much discussion in the U.S. literature on whether the conception of the corporation described by
Justice Marshall evolved and changed during the course of the 19th century, n74 it is clear that the presence of the state as
the creator of the corporation hardly receded during this period. Writing in 1861, Angell and Ames distinguished a
partnership from a corporation by noting that the latter involves confirmation of the coming together of property and
labor by a "special legislative authority;" n75 a corporation is "a body, created by law, composed of individuals." n76
Writing in 1895, Seymour Thompson commenced his analysis of "Creation by Special Charters" by observing that
"nothing less than sovereign power can create a corporation." n77 He commenced the subsequent section on general
incorporation by observing that "a corporation can only be created by or under authority of the sovereign power, which
power is in this country expressed in acts of the legislature." n78 For Cook, writing in 1898, "the state creates the
corporation upon the application of individuals, who are called incorporators. The incorporators then organize the
corporation." n79 Even Victor Morowetz, who is viewed by some commentators as being at the vanguard of late-19th-
century attempts to portray the corporation as an aggregation [*417] of private actors with much in common with a
partnership, n80 could not avoid foregrounding the legislative act central to corporate creation. For Morawetz, a
corporation is formed only when authorized by an act of the legislature. He supports this position with a quotation from
Justice Cowen in Thomas v. Dakin on the distinction between partnerships and corporations:
The difference consists in this: the former are authorized by the general law among natural persons, exercising their
ordinary powers; the latter, by a special authority, usually, if not necessarily, emanating from the legislature, and
conferring extraordinary privileges. n81
As a consequence of viewing general incorporation as a logical extension of statutory chartering, the charter of a
generally incorporated company was viewed both as a legislative act - even though some of the terms of the charter,
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pursuant to the Act, are filled in by the incorporators - and as a compact or contract between the state and the
corporation. Angell and Ames observed in this regard that "private corporations ... are created by an act of the
legislature, which, in connection with its acceptance, is regarded as a compact, and one which, so long as the body
corporate faithfully observes, the legislature is constitutionally restrained from impairing." n82 In the Missouri case of
O'Brien v. Cummings, n83 the Court observed that "the law and the articles of association become, as it were, the compact
between the state and the association, and this constitutes the charter of the body politic." The New Jersey Court of
Chancery [*418] in Ellerman v. Chicago Junction Railways & Union Stockyards Co. n84 held that:
The constitution providing that "the legislature shall pass general laws under which corporations may be organized, and
corporate powers of every nature obtained," and the general corporation act being, as it now stands, passed in obedience
to the mandate of the constitution, the certificate required by that act becomes the charter of the company, and the
equivalent of the former special act of the legislature.
The prominent presence of the state does not, of course, crowd out the idea of the corporation as the aggregation of
business and investor interests and participants, which is a central component of the conception of the American
generally incorporated company. This aggregate component of the corporation is present in the early pre-general
incorporation case law and is hard-wired into the earliest of general incorporation statutes. In the 1841 New York case
of People v. The Assessors of the Village of Watertown, the report refers to the corporation as "a collection of
individuals united in one body under a grant, securing a succession of members without changing the identity of the
body, and constituting the members one artificial person capable of transacting business of some kind like a natural
person." n85 Section 1 of the New York Act of 1848 authorizing the formation of corporations for manufacturing, mining,
mechanical or chemical purposes (as amended in 1851) provides that "any three or more persons may organize and form
themselves into a corporation in the manner specified and required in and by the act." n86 But for commentators of this
period, aggregate is always enveloped in state action. Consider Seymour Thompson's Commentaries on the Law of
Private Corporations in this regard:
[*419]
The most usual conception of a corporation is that it is a collection of natural persons, joined together by their
voluntary action or by legal compulsion, by or under the authority of an act of the legislature, to accomplish some
purpose, pecuniary, ideal, or governmental, authorized by the legislature, under a scheme of organisation and by
methods thereby prescribed or permitted... n87
The fact that the corporation is in some notable respect the product of state action is trivial if not banal within U.S.
corporate legal discourse. However, when juxtaposed with the legal conception of the U.K. company, this focus on the
role of the state is shown to be a distinctive aspect of the conception of the U.S. corporation. In the United States, the
corporation is a different creature than it is in the United Kingdom: in the United States, it is a private entity that is
firmly contained within the orbit of public creation; in the United Kingdom, it is an endogenous private association
assisted by the state provision of entity status in order to address some of the practical difficulties associated with
unincorporated business activity. Accordingly, in contrast to the United Kingdom, neither in the U.S. general
incorporation statutes nor in any 19th-century U.S. commentaries is there any sense of organizational continuity
resulting from the incorporation of large-scale unincorporated business activity. Nor is there any sense of regulatory
continuity with the legal rules and structures governing such unincorporated entities in the United States.
2. Non-Contractibility
Some commentators have argued that early corporate law in the United States was heavily influenced by partnership
law. n88 This is incorrect. At its heart, partnership law is rooted in contract: the provision of default rules that may be
contractually varied by the members. n89 Yet the contractibility of U.S. [*420] corporate law in the 19th century was
significantly attenuated. Of course, the bylaws of the corporation, which provided for "the government of [the
corporation and its] members and officers in the management of its affairs," n90 delegated significant rulemaking
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authority to shareholders, and, in some instances, directors. However, the bylaws were a subordinate constitutional
document responsible primarily for regulating the procedural aspects of corporate activity. n91 Corporation statutes made
it clear that, to the extent the constitution was capable of addressing the core issues of the power and authority of the
board and the obligations of the directors, these issues must be addressed through the certificate and only to the extent
permitted by the statute. Governance was not, as it was in the United Kingdom, left to contract.
Arguably, this stance follows logically, in both the United States and the United Kingdom, from the allocation of
corporate power to the board. In the United Kingdom, corporate power is located with the shareholders, and its
distribution is left to the shareholder contract. It follows then that the rules relating to the exercise of that power should
similarly be subject to the same contract. In the United States, board power was addressed in the statute. n92 The statute
created and empowered the corporation and the board, and it necessarily follows that only the statute could permit
variation of the power distribution and the rules associated with the exercise of power. [*421] Typically, statutes
provided for variation. However, as outlined below, the courts policed the power of variation very restrictively, in many
instances striking down attempted contractual variations of governance rules.
The reasons why courts refused to allow contractibility in relation to certain governance rules, and the reasons why
market participants appear to have been less aggressive than their U.K. counterparts n93 in attempting to contract around
the prevailing rules, are rooted in the idea that the corporation's structure and the power and obligations of the board are
the product of public/state action and therefore cannot be amended without the explicit permission of the state. In the
New Jersey case of Audenried v. East Coast Milling Co., the Chancery Court considered the East Coast Milling
Company's charter amendment, which purported to opt out of the "eminently wise and just" common law rule requiring
the board to take action through collective, real-time board action rather than allowing a decision to be taken by each
director giving separate written consent. n94 The starting point for the Court was the New Jersey Corporation Act and the
extent to which it could be interpreted to allow such adjustments: to what extent had the New Jersey Corporation Act
granted the incorporators who had amended the charter the power to legislate?
The New Jersey Corporation Act, as enacted in 1896 and amended in 1898, contained a provision, which is found
in the same form in Section 102(b)(1) of today's Delaware General Corporation Law, providing that the certificate could
contain provisions "creating, defining, limiting and regulating the powers of the corporation, the directors and the
stockholders; provided, such provision be not inconsistent with this act." n95 [*422] The words "creating" and
"defining" were added in 1898, prior to which, by implication, an amendment that did anything but limit or regulate
powers of the corporation and the directors was not authorized by the statute. n96 A literal reading of this provision would
suggest that a charter provision providing for written board resolutions could clearly fall within the regulation of the
powers of the corporation and the directors. However, the court in Audenried rejected such a broad reading and held,
narrowly, that the provision allows variation of the powers of the corporation, not the method of exercising the power,
which "must conform to settled legal principles." n97 Any ability to contract out of such important principles must,
according to the court, be expressly authorized by the legislature and was "not to be inferred from ambiguous
expressions." n98 For the New Jersey Chancery Court, these rules belonged to a structure of governance provided by the
legislature and designed to enable the corporation to function and to protect the public interest implicated by
incorporation. The fundamental building blocks of this structure are accordingly only alterable by the shareholders with
the legislature's explicit authorization to do so. Vice Chancellor Bergen in Audenried put this position as follows:
The proposition that the stockholders, in assenting to this provision in the articles of association, waived the advantage
and protection they would enjoy under the common law and our corporation act, does not meet the case. Stockholders
may waive an advantage, but [*423] they cannot by waiver ordain a method of corporate action which the law does not
recognize, nor dispense with the aid of a board of directors as a means of corporate action. Such a course is not
sanctioned by our law, and is inconsistent with the twelfth section of our act, which requires that "the business of every
corporation shall be managed by its directors." But we ought not to confine the consideration of this question to the
relationship existing between the stockholders and the directors. The business of the state is to a large extent carried on
by corporations, and their transactions directly and vitally affect the interests of all the people. In committing the
transaction of business so generally to corporations, the Legislature may be presumed to have provided for, and
recognized deliberative meetings of directors as a safeguard to the public interest, which presumption ought not to be
overthrown by a forced construction of the act. The fundamental idea of a business corporation involves an advantage
coming from the aggregation of wisdom, knowledge, and business foresight which results from bringing a large number
of stockholders and directors into a common enterprise. It is their knowledge and wisdom combined, acting as a unit,
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that gives efficiency and safety to the corporate management. I am satisfied that the section of this charter now under
consideration is contrary to the provisions of our corporation act, and that there is no express or implied authority
conferred thereby which will allow a corporation to determine, in its articles of association, that its board of directors
may avoid the performance of their duties in the manner required by the word and spirit of our act and the well-settled
law on that subject. To permit it would ingraft upon the law a vicious and dangerous power, and in the absence of
express legislative authority I am unwilling to sanction it. n99
Audenried shows that the state's interests are necessary considerations when assessing the extent to which incorporators
and shareholders can mold the governance structure of the corporation as set forth in the charter, the statute and the
[*424] existing body of common law and equitable rules - the "settled legal principles" n100 - applicable to the company.
While no attempt is made to define or enumerate the invariable rules falling under the umbrella of "settled legal
principles," it is clear from the case law that the core rules and obligations associated with the exercise of corporate
power and the office of a director fall within this category. These rules are part and parcel of the legislative creation of
the corporation. For example, in his annotated text on the New Jersey Act Concerning Corporations, Corbin observed
that "duties required of an incorporated company are in the nature of conditions annexed to the grant of the franchise."
n101
Writers and judges in this period would have willingly extended this observation to the duties of directors as well as
of corporations. n102
To be clear, such core rules are not strictly invariable but rather variable only pursuant to an enabling permission set
forth in the corporation law and only where, in the absence of the explicit authorization of the legislature to do so, any
variation pursuant to such permission does not vitiate a core governance rule and any protection it grants. Consider, for
example, the Delaware case of State ex rel. Cochran v. Penn-Beaver Oil Co., n103 where a stockholder was denied access
to inspect the corporation's books and records based upon a provision in the charter that modified the stockholder's
common law inspection rights. The starting point for Chief Justice Pennewill of the Delaware Supreme Court, similar to
the New Jersey Chancery Court's starting point in Audenried, was that such a provision would only be legitimate if
authorized by the state through the Delaware General Corporation Law. If valid, "it would be as effective as though the
Legislature had granted it by direct and special act." n104 The portal for answering this question was whether such a
provision fell within the same enabling provision considered in Audienried, namely the power to create, define and limit
the powers of the corporation and the directors, provided that such provisions were not contrary to [*425] the law of
the state. n105 The court held that, had a power of variation been applicable to this common law rule, the court would have
expected the legislature to have granted this power explicitly. The legislature, however, had not done so, and indeed "it
would probably have been difficult, if not impossible, to induce the Legislature to grant such power." n106 Accordingly,
the charter provision was invalid.
Subsequent Delaware decisions have arguably struck a more lenient tone. For example, in Sterling v. Mayflower
Hotel Corp., n107 the Delaware Supreme Court approved a charter provision permitting interested directors to count in a
quorum. For this court, the contractibility of common law rules was permitted by the variation provision, the limits of
this contractibility being set by statutory enactment or "a public policy settled by the common law or implicit in the
General Corporation Law itself." "Public policy" acts here as an opaque receptacle into which a court can place the
corporate legal rules that it deems sufficiently important to be non-contractible. Importantly, it was clear in Sterling, as
in other cases where charter provisions address self-dealing transactions, n108 that the fundamental regulatory protections
that Delaware law applies to self-dealing transactions, namely, at this time, fairness review, cannot be removed through
charter provision.
With regard to the directors' powers and obligations, a closely related strand of argument, which curtails the scope
for contractual variation of such powers and obligations, is the view that the organs of the corporation - the board and
the shareholder meeting - are the product of state action and, as such, power to vary the obligations owed by directors
and to relieve directors of liability for breach of those obligations cannot be exercised by the shareholder body. Only the
state, acting through the legislature or through the courts, can alter the obligations or provide relief from liability for
breach. We see this clearly articulated in New York Dock Co. v. McCollom, n109 [*426] where the Official Referee, in
holding that a director was not entitled to indemnification for his litigation expenses, observed that the director "derives
his powers and authority neither from the stockholders nor from the corporation. His status is sui generis. His office is a
creature of the law." Drawing on an earlier New York case involving a municipal corporation, the court concluded that a
right to indemnification is unavailable because the risk assumed by the director is "exactly like the risk assumed by an
officer of a municipal corporation." n110 Accordingly, indemnification could only be granted by "judicial sanction" (state
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8 N.Y.U. J. L. & Bus. 395, *
action) "based upon equitable considerations" and, by implication, without regard to any indemnification provision in
the charter. n111 It follows from this analysis that any attempt to provide for indemnification for breach, or waiver of
liability for breach, requires an enabling provision in the Statute. That is, indemnification or variation must be permitted
by the state. Indeed, as is well known, such legislative provisions have represented some of the most important
amendments to corporate codes over the past century. n112
The absence of serious discussion about the permissible scope for the shareholders to vary the governance structure
and the obligations of directors through contract in the 19th-century U.S. corporate law texts is striking to a U.K.
corporate lawyer. Discussions about charter amendment are typically taken up with discussions about the scope for the
state to amend the charter and the conditions that determine the validity of such amendments. n113 For U.S. corporate
legal discourse [*427] and corporate lawyers in the 19th century, the contractibility of core governance rules amounted
to a legal non sequitur. It made no sense within the state-based conception of the corporation. Part II of this article
below illustrates that in both the case law and the commentary, there is significant legal borrowing and transplantation
from U.K. case law addressing issues arising from what were in many respects for both jurisdictions sui generis legal
institutions. However, when adopting the English case law, U.S. law filtered out the contractarian mileu of U.K.
company law: the substantive legal rules travelled, but their contractibility did not.
U.S. commentators have argued that different conceptions of the corporation dominated the understanding of the
corporate enterprise at different points during the 19th century, commencing with a move from a state empowerment
entity theory, to a partnership-based theory of the corporation between the early 1880s and the turn of the century, which
in turn was replaced by an organic "real entity" theory of the corporation. n114 Although such conceptual evolution may
have been - and the article takes no position on this - operable in the public, political and constitutional debates about
the corporation in the 19th century and early 20th century, it is not a stage theory of the conception of the corporation
that makes sense of the law's self-conception of the corporation, which maintains a consistent commitment to the state
empowerment conception of the corporation. One need only juxtapose the U.S. corporate texts that are said by some
commentators n115 to represent the high-water mark of the 19th century's partnership conception of the corporation next
to Lindley's Treatise on Company Law as a branch of the Law of Partnerships to realize that the central contractual
component of partnership was missing from the U.S. conception.
III.
The Formation of Corporate Self-Dealing Law
In the 19th century, both in the United States and in the United Kingdom, directors of corporations were readily [*428]
viewed as, or at least labeled, trustees of the corporation. Like trustees, directors performed a representative function.
Indeed, in many early U.S. general incorporation statutes, directors were referred to as "trustees." n116 This analogy to the
trustee enabled the transplantation of fiduciary law to fill in the gaps left by general incorporation statutes in relation to
the expectations and duties of directors.
When any rules are borrowed to address a problem of first impression, across subject areas or across jurisdictions,
the context and background of the legal "transplanter" will affect the types of rules that are borrowed, those that are left
behind, and the ways in which the borrowed rules are interpreted and explored. The concern here is with the 19th-
century corporate lawyers' conception of the corporation and of corporate power. The article asks how the distinctive
conceptual backgrounds of U.K. and U.S. lawyers informed the process of transplanting fiduciary law rules to address
corporate self-dealing and how this background informed 19th-century lawyers' attempts to, as well as their perception
of the need to, tailor fiduciary law to the corporation in a way that was responsive to the instrumental economic needs of
market participants.
A. The Evolution of Self-Dealing Law in the United Kingdom
1. Directors as Trustees
Nineteenth-century English company law naturally looked to trust law to regulate the behavior of directors of both
unincorporated and incorporated companies. Directors were viewed as "in some sense trustees." n117 As Professor Sealy
has [*429] observed, it is often assumed that the application of trustee duties to directors of companies incorporated by
registration flowed from the application of trust law obligations to deed of settlement companies whose directors
literally were trustees, because a deed of settlement company was a legal construction made up of trust law and
contract. However, Sealy has shown that this assumption is incorrect. In most instances, the directors of deed of
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settlement companies, in relation to whom corporate law borrowed from trust law, were different individuals than the
trustees. For Sealy, the application of trust law doctrine to directors of unincorporated and incorporated companies
alike followed logically from the nature of directorial role; quite simply, they were trusted by the shareholders to act on
behalf of the company or entrusted with the management of the company's assets. n118
For the first companies incorporated by registration under the Joint Stock Company Act of 1844, it was unnecessary
to borrow from trust law to address self-dealing contracts as the Act addressed these transactions directly. Section 29 of
the 1844 Act prevented a conflicted director from acting in relation to such transactions and, reflecting the trust law
position to be discussed below, rendered such transactions unenforceable without shareholder approval. This provision,
however, was no longer present in the Joint Stock Companies Act of 1856, leaving the regulation of self-dealing
transactions to rely on the court's adaptation of fiduciary law to the company.
English company law struggled in the 19th century to determine for whom the directors of an incorporated
company were trustees or had trustee-like responsibilities, and to whom they owed their obligations of trust. Today,
U.K. company lawyers acknowledge that directors are appointed by the company [*430] through the shareholders
acting in general meeting, and it follows that the directors' duties of loyalty and care are owed to the company, not to the
shareholders. But this was less clear to 19th-century company law. Logically, obligations are owed by a "trustee" to the
individual who empowers the trustee to act and to any other person who the person who empowers the trustee to act
directs the trustee to act on behalf of. In Charitable Corp. v. Sutton, n119 a case involving a chartered corporation, Lord
Hardwicke, the Lord Chancellor, described directors as "most properly agents to those who employ them in this trust,
and who empower them to direct and superintend the affairs of the corporation." This view was the basis for his
conclusion that the "foundation" of the director's "charge" "[was] of a mixed nature: it partakes of the nature of a public
office, as it arises from the charter of the crown." n120 Applying this logic, it follows that in a U.K. company that is
incorporated by registration, where the directors are empowered by the shareholder body through the corporate contract,
the obligation of trust is owed to shareholders, unless the shareholders direct that it is owed to someone else. In this
regard, Lindley observed:
It is part of the contract into which the members of a company enter, that the management of its concern shall be
confided to a few chosen individuals. But whilst this contract limits the right of each member ... to interfere in the
conduct of its affairs, ... it, if possible, increases the obligation of the directors to observe good faith towards the great
body of shareholders, to attend diligently to their interests and to act within the limits of the authority conferred by
them. Directors are not only agents, but to a certain extent trustees. The duty of directors to shareholders is so to
conduct the business of the company, as to obtain for the benefit of the shareholders the greatest advantages that can be
obtained consistently with the trust reposed in them by the shareholders and with honesty to other people... . Although
it is true that the directors have more power, both for good and for evil, than is possessed by the shareholders
individually, still that power is limited, and accompanied by trust, and is to [*431] be exercised bona fide for the
purposes for which it was given, and in the manner contemplated by those who gave it ... . n121
For Lindley, the obligation or expectation of "trust" imposed on directors arises as a result of the shareholders
empowering the directors to act on their behalf. Note also the very personal nature of the transfer of power from the
shareholders, not to the company or to the "board" but to "a few chosen individuals." The company as an entity is not
present in this discussion of director power. The bilateral relationship between trustee and beneficiary was thereby
easily grafted onto the director and the shareholder.
An early and important example of borrowing from trust law was the self-dealing case of Aberdeen Railway,
which is also a case of considerable importance in 19th-century U.S. corporate law. In Aberdeen Railway, the Aberdeen
Railway Company, a chartered, not a registered company, n122 purchased railway chairs for train tracks from a partnership
called Blaikie Brothers. Mr. Blaikie, one of the partners in Blaikie Brothers, was also a director and chairman in the
company. The company repudiated the contract claiming that the self-dealing nature of the contract rendered it
unenforceable. The House of Lords agreed, holding that the contract was unenforceable regardless of whether or not it
was fair to the company. Lord Cranworth, the Lord Chancellor, held that:
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It is a rule of universal application that no one having such duties to discharge shall be allowed to enter into
engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the
interests of those whom he is bound to [*432] protect. So strictly is this principle adhered to that no question is
allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible
to demonstrate how far in any particular case the terms of such a contract have been the best for the cestui que trust
which it was impossible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to
deal with the estate or interests of those for whom he is a trustee have been as good as could have been obtained from
any other person; they may even at the time have been better. But still so inflexible is the rule that no inquiry on that
subject is permitted.
The English authorities on this subject are numerous and uniform... . The inability to contract depends not on the
subject-matter of the agreement, but on the fiduciary character of the contracting party ... . n123
There are two distinct legal considerations invoked by self-dealing transactions in Aberdeen Railway. The first is the
duty of loyalty - the duty to avoid putting oneself in a position where duty to the company and personal interest conflict
or possibly conflict - an obligation that would be breached only by the self-dealing director. The second is a restriction
on the directors' authority to manage the company that is applicable to the authority of all directors - the powers
delegated to directors are limited by the fiduciary relationship and cannot be deployed to enter into a self-dealing
contract. Lord Cranworth refers to the "inability to contract." Counsel for the partnership argued that, even though Mr.
Blaikie was conflicted and participated in the decision to enter into the contract, he was but one of several directors, the
rest of whom were not conflicted, and, therefore, the contract should be enforceable. Lord Cranworth rejected this claim
through the lens of duty, holding that "it was Mr[.] Blaikie's duty to give to his co-Directors, and through them to the
Company, the full benefit [*433] of all the knowledge and skill which he could bring to bear on the subject." n124 He
could have alternatively held that the directors were not authorized to enter into such a transaction given the "fiduciary
character" of the contracting party. n125
The judgment reads as an absolute prohibition on self-dealing. However, it was clear from the trust authorities
relied upon by the court that the informed consent of the cestui que trust, and by analogy the shareholders, could
authorize a self-dealing transaction or validate a voidable agreement. n126 These self-dealing trust authorities are based
upon a contractual theory of authority that views the strict standard as a default rule. The trustees have no authority to
enter into a self-dealing transaction unless such authority is explicitly provided by the settler or the beneficiaries. n127
That is, the general grant of authority to exercise trust powers is qualified and does not extend to self-dealing
transactions.
2. Contracting Out of Fiduciary Rules
Companies aware of the potential benefits of entering into self-dealing contracts that were fair to the company, yet also
aware of the pitfalls and administrative burdens involved in obtaining shareholder approval for those contracts,
responded to the application of these strict rules of equity by contractually amending their application. Typically,
companies [*434] in their articles of association adopted a variant of the standard constitutional terms imposed on
chartered companies, which provided that a director's office would be vacated if he became directly or indirectly
interested in the contract. n128 The contractual variant provided that the office would only be vacated if the director failed
to disclose the contract and the contract was not approved by the disinterested directors. By implication, such disclosed
contracts approved by the disinterested directors were enforceable and the self-dealing directors were not liable to
account for any profits they made from the transaction. The question for the courts was therefore whether the
demanding obligation of loyalty and the restrictions on authority set forth in Aberdeen Railway could be contractually
varied. As is clear from the above analysis, the view that they could be varied is wholly consistent with the contractual
conception of an English company and, more specifically, with the contractual theory of authority, which underpins both
director and trustee power.
In the leading case of Imperial Mercantile Credit Association v. Coleman, n129 a director of the plaintiff company
purchased debentures at a 5% discount and sold them to the company at a 1.5% discount. The default by the issuer of
the debentures resulted in the collapse of the company. The liquidator sued the directors to account for profits made
from the self-dealing contract. The company, however, had a provision in the articles similar to the constitutional
amendment described above. In reaching his conclusion that the director was not required to account for the profits,
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Lord Hatherley LC sitting in the Court of Appeal was clearly cognizant of the economic policy considerations that
support making the rules on self-dealing contracts less restrictive:
The principle [set forth in Aberdeen Railway] is so firmly established that I should be extremely sorry to say anything
which would in the slightest degree impeach it ... .
However, the question then remains, whether the company cannot stipulate that this is a benefit of which they do
not desire to avail themselves, and if [*435] they are competent so to stipulate, whether they may not think that in large
financial matters of this description it is better to have directors who may advance the interests of the company by their
connection, and by the part which they themselves take in large money dealings, than to have persons who would have
no share in such transactions as those in which the company is concerned. n130
Lord Hatherley held that the provision in the articles amounted to an enforceable contractual variation of the equitable
rule and, as the director had disclosed his interest and the disinterested directors had approved of the transaction, n131 he
was entitled to keep the profit. n132 His deference to a contractual conception of the corporation is explicit and forthright.
Following on from the above quotation he observed:
It is not for me to say which was the wiser or better course of the two, nor do I think that this Court professes to lay
down rules for the guidance of men who are adult, and can manage and deal with their own interests. It would be a
violent assumption if anything of that kind were attempted. It must be left to such persons to form their own contracts
and engagements, and this Court has only to sit here and construe them, and also to lay down certain general rules for
the protection of persons who may not have been [*436] aware of what the consequences would be of intrusting their
property to the management of others where nothing is expressed as to the implied arrangement. n133
By viewing the strict fiduciary rules as default rules that could be amended by the corporate contract, the instrumental
economic need to facilitate contracts between corporations and directors is addressed, while leaving the strict standard
in place in its purity, untouched by that instrumental economic pressure. Indeed, it was clear that the type of contractual
variation set forth in Imperial Mercantile - disclosure and disinterested director approval - was just one example of the
ways that the shareholder body could address self-dealing contracts. They could have, quite legitimately, simply said
that the board had authority to enter into such contracts and such contracts would then have been enforceable without
disclosure. n134 This combination of trust law's fiduciary standards and contractual variation left the courts on the
sidelines with no role to play apart from determining whether the parties had complied with the stipulation in the
articles. There was no need for the courts to explore whether fiduciary law could provide a more flexible standard, as
companies and shareholders were empowered to provide flexibility themselves.
3. Detaching Contractibility
Until 1980, U.K. company law's self-dealing landscape could be accurately and comprehensively summarized by
reference to Aberdeen Railway and Imperial Mercantile. However, although the contractual underpinnings of both the
company and fiduciary law provided a swift and simple response to the instrumental economic need for directors to do
business with the company in the long run, this resulted in arguably sub-optimal regulation of self-dealing transactions
in the United Kingdom. The recurring regulatory diagnosis in the United Kingdom in relation to directors' duties,
typically brought into [*437] focus by a corporate crisis or scandal, has been that (i) company law, formed prior to the
separation of ownership and control, assumes that shareholders are active participants in the corporate contract when, in
reality, due to collective action problems and rational apathy, they are not; (ii) shareholders need to be protected from
the power imbalance created by these collective action problems, which managers can exploit by facilitating their
company's ability to opt out of the strict legal standards that hold managers to account; and (iii) it follows therefore that
the existing substantive rule should be made a mandatory rule. That is, the United Kingdom's repeat regulatory move in
response to crisis has been to remove contractibility. n135 But it has typically done so without any awareness that the
substantive legal rules, which are then rendered mandatory, have been formed in the context of contractibility and may
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have been otherwise but for contractibility. This is the lesson that the United States provides for the United Kingdom, as
explained below.
Today, U.K. company law's self-dealing regulation requires shareholder approval where the transaction value
exceeds the lower of £ 100,000 or 10% of the company's value. n136 Such transactions are known as "substantial property
transactions." These rules, introduced in 1980 following a corporate scandal, n137 are mandatory rules. All shareholders,
including interested shareholders, can vote. However, if the company is listed on the London Stock Exchange, then, in
relation to non-de minimis transactions (0.25% of the company's capitalization), the company is subject to the additional
regulation set forth in the United Kingdom Listing Authority's Listing Rules, n138 which require a disinterested
shareholder vote. n139
[*438] This article's central submission is that, in order to understand the path of self-dealing law in the United
Kingdom and the United States, closer attention needs to be paid to the legal drivers of adaption of fiduciary law to
commercial concerns. Clearly, as the cases evidence, in both jurisdictions adaption took place in a context where
lawmakers were aware of instrumental economic pressures. It may be the case that the benign aspects of such pressures
were over-weighted and that such pressures really represented managerial rent-seeking. However, if such justifications
for taking into account these needs and interests are at all benign, then the United Kingdom's decision to keep the
standard while removing its twin of contractibility is cause for concern. The United States' experience, particularly with
respect to the trajectory of New Jersey law addressed below, suggests that the U.K. self-dealing standard would have
been different but for such contractibility.
B. The Evolution of Self-Dealing Law in the United States
Harold Marsh, in his seminal 1960 article Are Directors Trustees?, n140 articulated a compelling three-stage narrative
about the evolution of self-dealing law in the United States. He showed how in the first stage in the wake of the
introduction of general incorporation, self-dealing law rendered any self-dealing transaction voidable by the corporation
or any shareholder without regard to the actual fairness of the transaction. Commentators in 1880, he observed, would
have been able to state that this was the general rule with confidence. By 1910, however, the rule was modified such
that self-dealing transactions were enforceable if fair and approved by disinterested directors. By 1960, according to
Marsh, the disinterested director approval requirement had disappeared and it could be said, as it can be said today, that
with some assurance that the general rule was that no transaction of a corporation with any or all of its directors was
automatically voidable at the suit of a shareholder, whether there was a disinterested majority of the board or not; but
that the courts would review [*439] such a contract and subject it to rigid and careful scrutiny, and would invalidate
the contract if it was found to be unfair to the corporation. n141
Marsh argued that the transition from voidability to disinterested director approval plus fairness and then to fairness
alone is unexplained in policy terms by the cases. The first transition, he submitted, took place without any attempt to
address the strong policy factors articulated in the circa 1880 cases to the effect that if a director is placed in a position
in which personal interest is in conflict with corporate interest, then "in the majority of cases duty would be overborne
in the struggle." n142 Marsh argued that "one searches in vain in the decided cases for a reasoned defense of this change in
legal philosophy, or for the slightest attempt to refute the powerful arguments which had been made in support of the
previous rule." n143
Although Marsh's view of the evolution of self-dealing regulation is widely accepted in the U.S. corporate legal
debate, n144 it is not correct. This article is not the first to suggest so. Professor Beveridge argued in the 1990s n145 that
Marsh's account was incorrect and that fairness considerations were central to U.S. self-dealing law much earlier than
Marsh had identified. However, Beveridge's views failed to generate significant traction in the academy and were either
rejected, n146 relegated [*440] to a qualifying footnote to Marsh's established position, n147 or forgotten. n148 The case made
by Beveridge is in essence correct but not sufficiently compelling to dislodge the considerable disciplinary investment
in Marsh's position, which fits perfectly with both the contemporary article of faith that fiduciary standards have
progressively declined since the introduction of general incorporation, n149 and the dominant and compelling narrative
that charter competition drives management-friendly solutions in areas of corporate law that have the potential to be
significantly redistributive to managers.
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[*441] The starting point for the key 19th-century U.S. jurisdictions was in many respects identical to that of the
United Kingdom. Directors of companies were viewed as trustees and indeed were often referred to as "trustees" in
general incorporation statutes. n150 Early 19th-century cases in the Supreme Court and in state courts readily relied upon
this analogy, in some instances relying on the English chartered corporation case of Charitable Corp. v. Sutton. n151 This
analogy naturally led to the application and translation of fiduciary law principles addressing relationships between
trustee, trust and beneficiary. Indeed, many of the early corporate self-dealing cases apply the same English trust cases,
as well as U.S. state trust cases that were directly based upon such cases, which formed the bedrock of the United
Kingdom's self-dealing law analyzed above. These cases also often directly relied on some of the key U.K. cases that
translated English trust law principles into the company context, in particular Aberdeen Railway. n152 This initial step in
U.S. regulation of self-dealing appears wholly consistent with the first stage of Marsh's account of the development of
this area of the law: there was indeed a strong strand of authority established in the 1860s and 1870s and affirmed in
multiple cases thereafter - in some jurisdictions until as late as the 1940s - articulating a position that was, or at least can
be read as being, effectively identical to the position taken in Aberdeen Railway.
Fairness review is presented by Marsh as an unexplained legal change of direction from the morally upstanding
starting point of the voidability standard. This section argues that this view is based upon a partial view of the English
and U.S. fiduciary law authorities that were available for borrowing to regulate director conduct. In fact, U.S. corporate
law sampled more broadly from the English fiduciary law pool than did U.K. corporate jurisprudence and, in doing so,
created multiple [*442] paths towards fairness review. In two respects, 18th-and 19th-century non-corporate fiduciary
doctrine contained a fairness-based approach to self-dealing contracts. The first approach involved what this article shall
call remedial fairness. Where contracts have been performed and it is no longer possible to unravel the contract, the law
must unpick the transaction to determine the remedy that the trustee or the corporation should receive. In such
circumstances, the equitable remedy would be an accounting for profits. But what amounts to a profit? If a widget is
sold by the director to the corporation, is profit anything in excess of cost or anything in excess of a market return? If it
is a service that has been consumed by the corporation, is profit anything paid to the director or anything in excess of a
market price for the service? If law's answer is "market return," then a strict rule of voidability becomes a fairness
standard in relation to executed contracts.
The second channel to fairness review contained within fiduciary law is dependent on how trust, trustee and
beneficiary are translated into the corporate context of corporation, board, director and shareholder. As discussed above
and to be further explained below, in the U.K. context, corporate law borrowed from trust law's approach to self-
dealing, which provides for the voidability of interested transactions regardless of their fairness. Through this lens, the
board of directors is the trustee and entering into a transaction with the corporation is analogous to entering into a
transaction with the trust. However, the corporation does not fit perfectly with the trust analogy. The corporation
(through the shareholder meeting) appoints the directors, and the directors act on behalf of the corporation rather than
on behalf of the shareholders. A transaction between the director and the corporation could also, therefore, be
analogized to a transaction between a trustee (in his personal capacity) and the beneficiary, a transaction between an
agent and his principal or a transaction between an attorney and his client, with the corporation as the beneficiary or
client. As the corporation is incapable of acting for itself (without the assistance of the board), this analogy would
require the director to play no role in the board's decision to enter into the contract. Transactions between trustees and
beneficiaries or between attorney and client were treated warily by English and U.S. courts in the 18th and 19th
centuries. However, they were not subject to the strict voidability [*443] rule that was applicable to a self-dealing
transaction between trust and trustee, but rather to fairness-like regulation with respect to both process and price. The
concern about conflict in this context was less acute: the trustee or beneficiary was not acting on both sides of the
transaction, although he was well-placed to exert undue and inappropriate influence on the transaction. Accordingly, a
different fiduciary analogy would open the door to fiduciary law's existing fairness approach.
This section will demonstrate that the story of fairness and strictness in U.S. self-dealing regulation is not about one
being replaced by the other in the 19th century, i.e., the chronological acceptance of fairness coupled with the silent
rejection of the policy positions underpinning the strict rule. Rather, the story of fairness and strictness in 19th-century
U.S. corporate law, in the 1880s and before, is one of their mutual presence. The interesting question, therefore, is not,
as is suggested by Marsh, where fairness review came from and how it came to replace the strict voidability rule. It was
there and available at the inception of U.S. corporate law's regulation of self-dealing when it elected to borrow from
other fiduciary contexts. The interesting question, rather, is what it was about U.S. corporate law that enabled its
development in a very short time frame, as is illustrated below, whereas in the United Kingdom, where in theory it was
equally available, it was not developed at all.
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This section argues that the conception of the U.S. corporation and its understanding of corporate power opened the
door more widely to fiduciary law's fair-dealing approach than the U.K. conception of the company allowed for. Where
the path of fiduciary law's fairness standard was not taken by state courts, the limitations on contractibility for the U.S.
corporation drove litigants and courts to explore remedial fairness in a way that was unnecessary in the United
Kingdom.
To consider this argument in more depth, this section will first examine the development of the law in the 19th
century's most important U.S. corporate law jurisdictions - New Jersey and New York - and then it will turn to
Delaware. Nineteenth-and early 20th-century commentaries on corporate law devote significant attention to self-
dealing. They typically do so, however, with limited regard to the jurisdictional specificity of each state's corporate law.
n153
This is also characteristic of responses [*444] to Beveridge's critique of Marsh. n154 However, 19th-century U.S.
corporate law is characterized by a strong sense of jurisdictional specificity. This jurisdictional specificity generated
different paths of legal evolution and, in the self-dealing context, different paths towards fairness review. In this context,
taking a "U.S. corporate law" viewpoint has the effect of exacerbating an already highly complex body of law,
generating a sense of legal chaos and indeterminacy when, in fact, within the key jurisdictions, the complexity is far less
chaotic and the law far more path-dependent than commentators have acknowledged.
1. New Jersey
a. The Remedial Implications of a Strict Standard
Writing in 1861, Angell and Ames observed that "though the member of the corporation be also one of the trustees of
the corporation, it would seem that this would not incapacitate him from contracting with it; but he may recover against
the corporation for his services rendered under a contract with the other trustees, in a case where there is no evidence of
such gross partiality in the contract as amounts to fraud." n155 Two of the three regulatory strategies deployed in self-
dealing law in the United States can be identified in this statement. First, self-dealing contracts are valid and enforceable
provided that the self-dealing director does not act for the company in entering into the contract - the contract must be
made "with the other trustees." Second, the contract must be fair to the corporation to be enforceable (articulated
through the more demanding language of "gross partiality" and "fraud"). Angell and Ames cited three Vermont cases in
support of this proposition, two of which dealt with religious corporations incorporated to build meeting houses, and the
third of which dealt with a school district. n156 The early New Jersey Chancery case of Stratton v. Allen relied directly on
this passage in Angell and Ames' book in holding that:
[*445]
The mere fact that the creditor was a director of the company does not render the transaction fraudulent. There is
nothing which forbids either the members or directors of a corporation to make contracts with it, like any other
individual; and when the contract is made, the director stands, as to the contract, in the relation of a stranger to the
corporation. n157
Stratton suggests, contrary to Marsh's view, that a disinterested director and fairness standard was established long
before the 20th century. Professor Beveridge, in his critique of Marsh's claim, relies upon Angell and Ames' position and
the cases to which they refer. n158 In fact, this approach found limited traction in the development of New Jersey
corporate law with a very limited number of later cases that relied on this aspect of the case. Although it was affirmed in
the 1878 case of Franklin Fire Insurance Co. v. Martin n159 by the New Jersey Court of Errors and Appeals and, in 1879,
was relied upon at first instance in the important case of Gardner v. Butler, n160 its influence assessed in terms of citations
disappeared thereafter.
The real story of New Jersey self-dealing regulation does not start with Angell and Ames or Stratton but with the
case of Stewart v. Lehigh Valley R.R. Co., n161 an important case relied on by Harold Marsh to demonstrate the state of
the law in the first of his three stages. In this 1875 case, which considered a challenged self-dealing transaction
involving a director of a state chartered canal company, the Court of Errors and Appeals viewed the board as trustees for
the company and directly imported into New Jersey law English corporate and trust law principles governing self-
dealing transactions. In a familiar passage the court held as follows:
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So insidious are the promptings of selfishness and so great is the danger, that it will over-ride duty when brought into
conflict with it, that sound policy requires that such [self-dealing] contracts should not be enforced or regarded... . A
director of a corporation [*446] may have rights not arising out of express contract - such as the right ... to have money
which he has loaned it repaid to him; but where the right is one which must stand, if at all, upon an express contract, and
which does not arise by operation or implication of law, then he shall not hold it against the will of his cestui que trust;
for in the very bargain which gave rise to it, in which he should have kept in view the interest of that cestui que trust,
there intervened before his eyes the opposing interest of himself. The vice which inheres in the judgment of a judge in
his own cause, contaminates the contract; the mind of the director or trustee is the forum in which he and his cestui que
trust are urging their rival claims, and when his opposing litigant appeals from the judgment there pronounced, that
judgment must fall. It matters not that the contract seems a fair one. Fraud is too cunning and evasive for courts to
establish a rule that invites its presence. n162
The claim made by the defendant that the conflict was dissolved if the interested director abstains from the decision
was rejected by the court:
Nor is it proper for one of a board of directors to support his contract with his company, upon the ground that he
abstained from participating as director in the negotiations for and final adoption of the bargain by his co-directors, the
very words in which he asserts his right declare his wrong; he ought to have participated ... . n163
The court cited the leading English self-dealing case of Aberdeen Railway and the New York corporate law cases of
Butts v. Wood n164 and Gardner v. Ogden, n165 which both relied upon Aberdeen Railway and the trust authorities upon
which Aberdeen Railway rested. n166 The court also cited the influential 1816 [*447] New York trust case Davoue v.
Fanning, which imported the same line of English trust cases into New York trust law. n167 Indeed, the structure of the
judgment is almost identical to Aberdeen Railway: a focus on conflicts, a rejection of fairness, and a rejection of board
composition as a means of mitigating the conflict because a director is required to serve and not abstain.
Stewart served as a leading reference point for New Jersey self-dealing law for another 60 years. For example, in
1920 in Busch v. Riddle, the Court of Errors and Appeals referred to the doctrine set forth in Stewart as "uniformly
recognized and repeatedly enforced in this state." n168 In 1939, citing Stewart, the Court of Errors and Appeals observed
that the "complainant was charged with knowledge of the well-established principle of law affecting corporations in
contracting with their officers, which is that such contracts are voidable at the instance of the corporation, its
stockholders or creditors." n169
However, the strict rule articulated in Stewart is only one part of the New Jersey self-dealing story; it represents one
of two strands of self-dealing jurisprudence that co-reside and indeed complement each other. Importantly, these strands
have [*448] more or less identical starting points. The second strand of jurisprudence commenced in 1879 with
Gardner v. Butler, a judgment given four years after Stewart. It is in this strand of cases that the seeds of the
contemporary fairness solution were planted.
In Gardner v. Butler, a corporation formed by statutory charter entered into an agreement with a partnership, in
which its managing director and several other directors were partners. The effect of the agreement was to outsource the
company's paper trading business for a commission of 6% of gross sales. The board resolution entering into the
transaction was "carried" by the votes of the self-dealing directors with only one disinterested director present. At first
instance, the New Jersey Court of Chancery observed that such "arrangements made by paper manufacturing companies
with their directors are by no means unusual" and upheld the arrangement. n170 The validity of the arrangement at first
instance was based on three intersecting rationales. First, following Stratton, a director stands in relation to the company
as a stranger when he transacts with the company. Second, if the rule in Stewart applies, the director is still entitled to
reasonable compensation - a rationale developed in greater depth by the Court of Errors and Appeals. Third, as an
outcrop of the first and second rationales and the instrumental benefits of self-dealing contracts, whilst Stewart may set
forth the general rule, it is subject to exceptions in equity:
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When the cestui que trust comes into equity to avoid the contract, even, it is reasonable that he should be required to
show, as a ground for the action of the court, something more adverse to the contract than [*449] the mere fact that it
was made with a director; for if it shall, as in the case in hand, appear, not only to be fair and just, but actually more
advantageous to the company than any which could be made with a stranger, why should it be set aside to the detriment
of the company? n171
Justice Van Syckle, giving judgment for the Court of Errors and Appeals, affirmed the Chancellor's holding at first
instance and did so in a way that laid a clear track from the strict rule in Stewart to fairness review. The Court strongly
affirmed the strict approach in Stewart as "well settled" law. n172 It then proceeded, following the lead of the Chancellor's
second rationale, to explore the remedial implications of the rule - what would happen if a director entered into a
contract to provide services or to sell assets to the company and the services had been provided or the assets consumed?
In such circumstances what, if anything, would the company be entitled to, and what did it mean to require the director
to account for any profits he has made from the executed voidable transaction? In exploring this issue, the Court relied
hypothetically on the facts of Aberdeen Railway. The Court asked what would have happened in Aberdeen Railway if
the railway chairs had been delivered and accepted:
I apprehend it would not have been held, in any court, that the company could have retained the property and have
refused to pay for it - not the contract price, but what it was reasonably worth... . It may be safely asserted that no
authority can be found which will permit a corporate body to retain property conveyed to it by a director, or to receive
services which he was not bound to render as a director, without paying him a fair equivalent... . The same principle
must apply, whether it is property conveyed or services rendered to the company. The cupidity and avarice of the trustee
is guarded against by giving the cestui que trust the right to repudiate the contract at all times, where it is executory,
and to allow simply a just remuneration, without reference to the contract price, where it is executed. The trustee thus
derives no advantage [*450] from his breach of duty, and the company can suffer no detriment from his service in their
behalf. n173
Applying this logic, the court concluded:
The case resolves itself, then, into this question: Have the directors, whose action is the subject of controversy, retained
for their services more than they are justly and reasonably entitled to? The burden is on them to show what they
reasonably deserve to have, and no unjust exaction will be permitted. n174
In reaching this conclusion, the court directly applied the holding in Stewart that such contracts are voidable without
regard to fairness and cannot be enforced by the breaching director. However, when the court got to the question of
remedies, fairness - understood as it is today as arms-length contracting - entered through the back door. The effect of
the Gardner v. Butler approach is that, for any executed self-dealing transactions, the Stewart substantive standard is
dissolved into a remedial fairness standard: because no one will bring an action to invalidate the contract, and where an
action is brought the court will take no action, unless the terms of the contract are unfair. As the terms of the service
contract in Gardner v. Butler were fair, the self-dealing directors were not liable to account for any profit. Importantly,
as the Court of Errors and Appeals observed, this approach applies beyond the compensation/operational services
context of this case and applies "whether it is property conveyed or services rendered." n175 Note also that the court in
Gardner v. Butler makes a distinction between executory and executed contracts rather than a distinction between, on
the one hand, executory and executed but rescindable contracts and, on the other, executed but non-rescindable
contracts. n176 Many executed self-dealing transactions could in theory be voided and unwound. By relying on the
executory/executed distinction, more space was created [*451] for a remedial fairness approach as it included executed
but rescindable transactions. n177
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In support of this position, the Court of Errors and Appeals in Gardner v. Butler relied on another English case,
Great Luxembourg Railway Co. v. Magnay, n178 where the court held that "when it is said that he cannot make any profit
by the transaction, it is not meant that he is not to have the proper value of the property which is actually taken by the
company." n179 It is of interest in this regard that this case has not to date been cited for this holding in the United
Kingdom. English courts have not explored these remedial issues in the context of corporate self-dealing transactions
although, had they done so, the likely outcome, following Great Luxembourg Railway, would have been identical.
English law did not need to push the remedial implications of the strict voidability rule because contracting out quickly
became standard practice and, as discussed above, was sanctioned by the courts as the logical extension of the
conception of the corporation based on contract. This enabled English law to perform quickly the necessary adjustment
to the economic reality of widespread unapproved self-dealing - an option, which, as explained in Part I and considered
further below, was unavailable in New Jersey.
It is important to stress that while Gardner v. Butler laid the first stones on New Jersey's path to fairness review, it
did so in a way that is wholly consistent with Stewart. Indeed, in some cases, Gardner v. Butler is correctly cited
alongside Stewart in support of the strict approach. n180 The evolution of the Gardner v. Butler approach toward fairness
does not, therefore, require a break with or an explicit rejection of the strict approach, which would require what Marsh
never found, namely, a policy account explaining the shift in approach and the rejection of the policy underlying the
strict approach. The shift to a substantive fairness standard merely requires the recognition that, from a liability
perspective, there is no difference between a [*452] strict rule coupled with a remedial fairness standard and a
substantive fairness standard.
Many of the subsequent cases that follow Gardner v. Butler addressed managerial compensation issues. In this
context, some courts quickly left the niceties of the relationship between the standard applicable to the transaction and
the remedial consequences thereof behind and came to state the substantive standard applicable to these self-dealing
transactions in substantive fairness terms. In Fougeray v. Cord n181 in 1892, the Court of Chancery observed that "the
[directors] are entitled to what their services are reasonably worth, and no more." In Davis v. Thomas A. Davis Co. n182 in
1902, the burden, the Court of Chancery held, is on the directors to show that "what they have done ... merits payment."
Subsequent New Jersey Courts applied the Gardner v. Butler approach beyond the compensation/services context. In
Oliver v. Rahway Ice. Co., a 1903 case involving a stock repurchase from directors of the company, Vice Chancellor
Stevens extended the application of the Gardner v. Butler approach beyond services to property n183 with direct reference
to Justice Van Syckle's analysis of Aberdeen Railway considered above. The court held that the "company must pay for
[the shares] not the contract price, but what at the time of the sale it was reasonably worth." n184 In Marr v. Marr, n185 the
Court of Chancery explicitly extended the Gardner v. Butler approach to loans to the company. Consistent with Gardner
v. Butler, they observed that any entitlement of a contracting party to "reasonable compensation" or for the return of the
loan (including, one must assume, reasonable interest) is not based on the self-dealing contract itself but arises by
operation of law. It is noteworthy, with regard to loans, that Stewart itself suggested such an approach: "[a] director of a
corporation may have rights not arising out of express contract - such as the right ... to have money which he has loaned
it repaid to him." n186 In Stephany v. Marsden in 1908, although the Court does not cite Gardner v. Butler, it applies the
identical [*453] structure of analysis: the affirmation of Stewart coupled with a remedial fairness standard:
Where property has been conveyed to a corporation by a director of the corporation, while the contract under which the
conveyance has been made may be avoided by the corporation, it will be the duty of a court of equity to restore to the
party who made the conveyance such property or values as he has parted with and as have passed to the corporation...
n187
In Tooker v. National Sugar Refining Co. of New Jersey, n188 a case involving a contract to sell to the corporation stock
purchased by a director, the court affirmed Stewart's holding that a conflicted director's recusal from the meeting that
resolved to enter into the self-dealing contract would not validate the contract (indeed it amounted to a "breach of
trust"). n189 The court also observed that the transaction "would also have been voidable under the rule of Gardner v.
Butler ... which denies to a director the right to bargain gain with his company for a price in excess of the real value of
the thing sold." n190 Tooker is particularly interesting as an example of how remedial fairness overreaches to become the
substantive standard. Pursuant to the Stewart and Gardner v. Butler approach, the transaction is voidable, however, if it
has been executed, the director is entitled to his fair due for the service or the property - remedial fairness review
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follows as the courts will not unwind an executed transaction. But in Tooker's understanding of Gardner v. Butler,
voidability becomes a function of the fairness of the transaction.
Aside from Gardner v. Butler, there are other separate, apparently stand-alone, early strands of fairness review.
Stratton has already been mentioned. Another short strand of case law [*454] commenced in 1886 with Wilkinson v.
Bauerle, n191 which involved the sale of the whole company to a director, which certain creditors of the company claimed
had deprived them of their right to recover amounts owed to them. The Court of Errors and Appeals held that it was for
the director to bear the burden of proving that he was acting in good faith and that "the sale produced the full value of
the property," and, if the director failed to do so, the creditors could "compel them to account for the full value of the
property." n192 However, the subsequent reception of this case was primarily confined to the question of whether directors
could divert property to themselves to the detriment of creditors, and, although a limited number of cases drew upon
Wilkinson to support a fairness review approach, n193 they never developed any head of steam. The starting point for
fairness review in New Jersey is clearly Gardner v. Butler.
The fairness approach contained in Gardner v. Butler - ten years prior to the 1889 starting gun for regulatory
competition n194 - and the coexistence of Stewart and Gardner v. Butler represent a direct and powerful challenge to
Marsh's consensus position. The later cases are arguably more consistent with Marsh's position as he argued that, by
1910, the prevalent approach involved a combination of majority disinterested (or non-participating interested director)
board approval plus fairness review. However, although we clearly see remedial fairness in the cases in this period, the
disinterested or non-participating director condition is a regulatory bystander in New Jersey case law. In Gardner v.
Butler, a majority of interested directors participated in the board decision and a majority of disinterested directors was
identified as a relevant factor in only a few subsequent cases, either before 1910 or after. Furthermore, in several of such
cases the key issue is less the legitimacy of the transaction and more the directors' ability to vote and be counted in the
quorum. n195 From 1878 to 1960, New [*455] Jersey law is best characterized as involving the consistent application of
a strict voidability/no fairness substantive standard with a fairness remedial standard. The disinterested director
requirement did not disappear in New Jersey because it was never there. This is unsurprising. The leading voidability
case of Stewart explicitly rejected the disinterested board/non-participating director approach and the fairness standard
was a remedial standard that was not connected to the nature of board approval. As illustrated below, by way of contrast,
the non-participating director was central to New York self-dealing law, which involved a very different path to a
fairness standard and which was a function of the interested director's non-participation.
New Jersey's contemporary common law fairness position is the product of the courts' recognition that a strict
standard plus a remedial fairness approach is the functional equivalent of a fairness standard. The New Jersey courts,
however, took a considerable period of time to make this functional connection. It was not until 1961 in Abeles v.
Adams Engineering Co. n196 that the New Jersey Supreme Court set forth the substantive standard without regard to the
presumption of voidability: "a contract between a corporation and one of its directors, made without approval of the
stockholders, is not enforceable by the director unless it is honest, fair and reasonable." The cases cited in support of
this statement of the law include two 1950s New Jersey cases, Eliasberg v. Standard Oil. Co. n197 and Hill Dredging
Corp. v. Risley. n198 Eliasberg and Hill Dredging both operate formally within the Gardner v. Butler strict substantive
rule/remedial fairness approach, but the strict rule is set forth as a [*456] perfunctory prohibition, which, if not
observed, results in fairness review. n199 Interestingly, Eliasberg relied upon the then recent Delaware jurisprudence
providing for a substantive fairness standard. n200
One might ask why it took so long to convert the fairness remedial standard into the substantive standard. Arguably
this is because it amounted merely to a functional tidying-up of the case law. Given the reference in Eliasberg to the
Delaware cases considered below, it also seems plausible that this move to a substantive fairness standard involved
convergence to the approach taken by what was then the firmly established market leader in corporate law. Importantly,
though, if regulatory competition was the driver of this shift to an explicit fairness standard in New Jersey, it was not, as
outlined above, one of substantive consequence.
b. Barriers to Contractual Solutions
That the seeds of fairness review are found in the very early cases is unsurprising. The courts in the United States and
the United Kingdom were both clearly aware of the instrumental economic pressures to facilitate some self-dealing
contracts. However, from an identical starting point - the application of the English corporate and trust authorities on
self-dealing - the United Kingdom and New Jersey took very different paths to facilitating and regulating self-dealing
contracts. The United Kingdom's contractual conception of the corporation allowed market players to fashion their own
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remedy to the barriers created by the strict voidability rules. The courts in New [*457] Jersey generated an internal
response because the United Kingdom's external contractual one was not available. It is noteworthy that although
Aberdeen Railway played such a central role in the development of New Jersey self-dealing law, there is no reference in
New Jersey case law to the leading U.K. contractibility case of Imperial Mercantile. n201
Although it appears that New Jersey corporations and shareholders may have adopted contractual opt-outs from the
strict rule in their constitutional documents, n202 it is unclear at what point in time this practice commenced. n203 It is also
important to distinguish their adoption from their effectiveness. n204 As discussed in Part I of this article, U.S. courts - in
particular New Jersey courts - imposed significant constraints on contractibility. Prior to 1889, contractual amendment
of directors' powers and obligations was arguably not available at all. Thereafter, although variation was explicitly
permitted by the statute, it was closely policed and restricted. Such constraints were a function of the view that general
incorporation was an extension of statutory chartering and that, accordingly, [*458] the state created the corporation,
the charter could be viewed as a legislative act, and contractibility was a function of the state explicitly permitting
contractibility where the governance rule in question was viewed as important (as a "settled legal principle"). Although
increasing flexibility in relation to contractibility was apparent during the course of the 20th century, as discussed in
Part I, it seems highly unlikely that the earlier cases would have been receptive to contracting out of the voidability
principle, which was clearly viewed as a "settled legal principle" n205 well into the 20th century. n206
Juxtaposing the evolution of U.K. self-dealing regulation with that of New Jersey, which in historical perspective is
the United States' most important corporate law jurisdiction, it is clear that the path of self-dealing law is, in significant
respect, a function of the conception of the corporation.
2. New York
a. Channels of Fiduciary Law
Along with Stewart, the New York case Munson v. Syracuse, Geneva & Corning Railway Co., n207 decided in the fall of
1886, is the standard-bearer of the strict approach to self-dealing providing for the automatic voidability of the
transaction. n208 Munson v. Syracuse involved a petition for specific performance of an executory contract between the
company and its director. Judge Andrews, for the Court of Appeals of New York, held that self-dealing contracts are
"repugnant to the great rule of law which invalidates all contracts made by a trustee or fiduciary, in which he is
personally interested, at the election of the [*459] party he represents." n209 The judgment cited and followed the
holding in Aberdeen Railway. Accordingly, the court "does not stop to inquire whether the contract or the transaction
was fair or unfair," nor did it matter that he was only one of ten participating directors and that the others were
disinterested: "The law cannot accurately measure the influence of a trustee with his associates." n210 Earlier, if less-
celebrated, examples of New York courts expressing similar sentiments include the Court of Appeals judgments in
Barnes v. Brown n211 and Butts and the New York Supreme Court's decision in Cumberland Coal & Iron Co. v. Sherman,
n212
applying Maryland law, all of which relied upon Aberdeen Railway.
One way of telling the story of self-dealing law in New York, and of problematizing Marsh's stage theory, is to
juxtapose the strict approach taken in Munson v. Syracuse next to alternative and apparently contradictory approaches
found in the case law during this period. Indeed, there are several early New York cases that suggested, or explicitly
adopted, a fairness approach to self-dealing. For example, in Gamble v. Queens County Water Co. n213 in 1890, a case
that admittedly is not directly on point as it involves shareholder ratification of a self-dealing transaction between the
director and the company, the court was concerned with the assessment of the "fair value to the company of the property
purchased." In Sage v. Culver, n214 decided in 1895, the New York Court of Appeals held that "when it appears that the
trustee or officer has violated the moral obligation to refrain from placing himself in relations which ordinarily produce
a conflict between self-interest and integrity, there is, in equity, a presumption against the transaction, which he is
required to explain." n215 To "explain" it, the court provided that the director must "show that [the transaction] was fair,
and that no undue advantage has been taken by him of his position, for his own advantage, or the advantage of some
other corporation in which he has an interest." n216 [*460] Sage is probably the most important of all New York self-
dealing cases because, as detailed below, it was relied upon in multiple subsequent cases resulting ultimately in the clear
adoption of the fairness standard.
However, an account of New York self-dealing law that involves identifying a strand of strict self-dealing cases and
a separate and distinctive strand of fairness-based cases misses the key point about the source and evolution of New
York self-dealing law. The same is true of a story that attempts to fit these strands of case law into sequential
chronological boxes. The real story of New York self-dealing law is how English trust and fiduciary law - clearly
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adopted by the New York courts in the early 18th century - with their bilateral relationships of trustee and beneficiary
and attorney and client, are translated into the tri-lateral context of the corporation and its board of directors and
stockholders. From this vantage point, Munson v. Syracuse is consistent with Sage, and fairness review fits with the
strict voidability rule.
English 18th-and 19th-century trust and fiduciary law made a distinction, which it continues to make today,
between regulating the exercise of delegated power and regulating influence. n217 In relation to the exercise of delegated
power, it provided that a fiduciary could not exercise that power in a way that benefits herself. One outcrop of this rule
was that she could not, therefore, enter into a contract with herself. Although in theory the courts could have attempted
to factually assess whether or not the contract represented a loyal, indeed self-sacrificing, exercise of power by the
fiduciary, the courts of equity in the 18th and 19th centuries expressed reservations about the reliability of evidence to
make this determination and the ability of the courts to assess this evidence. n218 Given such evidentiary obstacles, the
courts elected to protect the fiduciary relationship by prohibiting the transactions, regardless of whether or not they were
good for the trust. Accordingly, a trustee was prohibited from entering into a contract in her [*461] personal capacity
to buy trust assets without the unanimous consent of the beneficiaries. The most famous statement of the law in this
regard was made in 1803 by Lord Eldon in Ex Parte Lacey, where he said that the rule is "not[] that a trustee cannot buy
from his Cestui que trust, but[] that he shall not buy from himself." n219
The courts of equity took a less-demanding approach to dealings between the fiduciary and his charge, for example,
dealings between a trustee and a beneficiary unrelated to the trust assets or between attorney and client. Equity would
also countenance a transaction with trust assets where, to use Lord Eldon's words, the fiduciary "shakes off the
obligation, that attaches upon him as trustee." n220 Although such arrangements were subject to the "most guarded
jealousy," n221 they were not prohibited without regard to the terms of the arrangement. This distinction makes sense: in
the former context, the fiduciary wields power on both sides of the transaction, whereas in the latter, she does not
exercise power for the counterparty to the transaction. Although the pre-existing relationship may enable her to exercise
significant influence over the counterparty, the conflict is less acute than when she sits on both sides of a transaction.
Here, the regulatory objective is to ensure that the terms of the transaction are not the product of undue or self-serving
influence by the fiduciary. Lord Eldon's jurisprudence is again central to setting out the English courts' approach. In
Gibson v. Jeyes, n222 an 1802 case brought against a financial advisor by the estate of the advisee, counsel for the
defendant argued "that a trustee ... may, if the agreement is fair, buy of his cestui que trust." n223 Lord Eldon observed:
A trustee may deal with his Cestui que trust but the relation must be in some way dissolved: or, if not, the parties must
be put as much at arm's length, that they agree to take the character of purchaser and vendor; and you must ascertain
whether all the duties of those characters have been performed ... . He who [*462] bargains in a matter of advantage
with a person placing confidence in him, is bound to shew [sic] that a reasonable use has been made of that confidence.
n224
In the 1833 case of Hunter v. Atkins, the Lord Chancellor, Lord Brougham, outlined the standard applicable to such
relationships as follows:
There are certain relations known to the law as attorney, guardian, trustee. If a person standing in these relations to
client, ward, cestui que trust, takes a gift, or makes a bargain, the proof lies upon him that he has dealt with the other
party ... exactly as a stranger would have done, taking no advantage of his influence or knowledge, putting the other
party on his guard, bringing everything to his knowledge which he himself knew. n225
As is evident from these extracts, the courts typically focused on fair process rather than fair price when setting forth
and applying the influence standard. However, in several authoritative early cases the courts expressed the view that the
influence standard required both fair price and fair process. n226 New York fiduciary law in the mid to late 19th century
clearly adopted English law's distinction between power and influence as well as the Lacey and Gibson applicable
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standards. n227 In the New York Court of Appeals case of Cowee v. Cornell, n228 decided in 1878, the court, in considering
the validity of an [*463] agreement between a deceased grandfather and his grandson, observed, citing Hunter, that:
Whenever, however, the relations between the contracting parties appear to be of such a character as to render it certain
that they do not deal on terms of equality but that either on the one side from superior knowledge of the matter derived
from a fiduciary relation, or from overmastering influence, or on the other from weakness, dependence, or trust
justifiably reposed, unfair advantage in a transaction is rendered probable, there the burden is shifted, the transaction is
presumed void, and it is incumbent upon the stronger party to show affirmatively that no deception was practiced, no
undue influence was used, and that all was fair, open, voluntary and well understood. This doctrine is well settled. n229
The principle referred to it must be remembered is distinct from one that would absolutely forbid a trustee or agent
from purchasing the subject of a trust for his own benefit and charging it when so purchased with the trust. That
amounts to incapacity in the fiduciary to purchase of himself. He cannot act for himself at all, however fairly or
innocently, in any dealing to which he has duties as trustee or agent. The reason of this rule is subjective. It removes
from [*464] the trustee, with the power, all temptation to commit any breach of trust for his own benefit. But the
principle with which we are now concerned does not absolutely forbid the dealing; instead, it presumes it unfair and
fraudulent unless the contrary is affirmatively shown.
At the heart of the problem of how to regulate self-dealing contracts between corporations and their directors is the
determination of whether the contract in question involves the exercise of power or of influence by the self-dealing
director. Following the structure of 19th-century fiduciary law, if the transaction involves the exercise of power, then it
is subject to the strict structural loyalty-based approach that prohibits such transactions, regardless of actual loyalty, and
renders them voidable at the corporation's or its shareholders' election. If the transaction involves influence, then the
standard is one of fairness. The fiduciary influence standard is referred to in some of the cases, primarily the non-
corporate cases, as a doctrine of "constructive fraud." n230
There are two difficulties involved in translating these standards from trust and other non-corporate fiduciary
relations to the corporation. First, following the creation of the trust, the trust involves a bilateral relationship between
trustee and beneficiary. The corporation involves a tri-lateral relationship between corporation as an entity and its
constituent parts or organs - the board and the shareholder meeting. This transplantation of the fiduciary standards from
a bilateral to a trilateral relationship creates the following problem: is the corporation the trust, or is it the beneficiary?
Secondly, the relationship of trustee to trust assets and trust power is not easily transplantable to the corporate context.
The trustee holds legal title to the trust's assets. A transaction with trust property is therefore not legally possible
without the trustee's involvement. A director of the corporation does not hold legal title to the corporation's assets, which
is vested in the corporation itself. Furthermore, although directors may be fiduciaries of the corporation, it is the
directors acting collectively as a board, [*465] not the individual directors, that possess and wield corporate power n231
and it is possible for the board to wield power without the actual participation of a director who wishes to enter into a
contract with the company. If the director participates in the board decision to enter into the self-dealing contract, then
power is wielded, the director sits on both sides of the transaction, and the corporation, in the trust analogy, is the trust.
However, if the director does not participate in the transaction, then power is not wielded, although influence may be,
and the corporation looks more like the beneficiary than the trust.
Early U.K. authority dealing with unincorporated companies suggested that the "paralyzing" of the director's role to
enable self-dealing arrangements was not possible. n232 The issue was placed partially in play in Aberdeen Railway,
where the court considered whether the fact that Blaikie "was one of a body of directors" made any difference to the
applicable standard. n233 The court rejected this position, observing that it was the director's duty to give the company the
full benefit of his knowledge and skill. Of course, although in the minority, Blaikie had exercised power, so the Court
was not faced with the situation where the director had abstained or had not attended the meeting. This holding was
subsequently interpreted more broadly in Imperial Mercantile as a general prohibition on any director entering into a
transaction, regardless of whether he participated in the decision or not, as the company had "a right to the entire
services of the director, and to the advice of every director in giving his opinion upon matters brought before the board."
Accordingly, English courts refused to allow directors to dissociate themselves from power to, in Lord Eldon's words,
"shake off the obligation," n234 just as a trustee could not divulge himself of power without revoking his trusteeship. This
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rendered a self-dealing transaction as one that always involved the exercise of director power, regardless of formal
voting participation. The fiduciary influence standard was thereby sidestepped.
[*466] This U.K. approach is consistent with the 19th-century U.K. conception of the incorporated company that
was partially blind towards the entity, where the real participants, as in its "predecessor" unincorporated company, were
the trustee directors and shareholders. That is, the U.K. incorporated company was viewed bilaterally and, therefore, it
was easier to view a director's relationship to corporate power in the same way as a trustee's individual relationship to
trust power. Consider Lindley on board power and the analogy between trust and company:
The property of the company may not be legally vested in the directors [as it would be if it were a trust], but it is
practically under their control; and they are bound to employ it for the purposes for which it is entrusted to them. So the
powers which the directors have, e.g., of calling meetings, electing members of their own board, allotting, transferring
and forfeiting shares, making calls, &c., &c., are reposed in them in order that such powers may be bona fide exercised
for the benefit of the company as a whole; and any exercise of such powers for other purposes is regarded as a breach of
trust, and is treated accordingly. n235
Note that Lindley refers to powers "which the directors have." In a deed of settlement/unincorporated company,
corporate power was delegated to the directors of the company and not, in the first instance, to a board of directors or a
"court of directors." In a deed of settlement company there is no entity or body or organ of that entity, only individual
persons to whom power is delegated. While the deed of settlement would typically provide for the collective exercise of
that power, the power itself resided in each of the directors individually. This required that the deed of settlement
provide that, when some directors were not present, the "court of directors" could act and would "have all the powers
and authorities vested in the directors for the time being, as if all were present." n236 That is, the court of directors brought
together the power vested in each of the individual directors in order for [*467] that power to be exercised collectively.
Consistent with this approach, the delegation of power to directors in an incorporated U.K. company has never typically
been to a board of directors, but rather to "the directors." n237 This is also why English courts sometimes refer to
corporate powers as "fiduciary powers": powers entrusted to fiduciaries, to be exercised in accordance with their
fiduciary duties. n238 Director power was something directors had as a result of being a director and not as a result of
attending and participating in the board meeting. Accordingly, English law's answer to the question posed by the House
of Lords in Aberdeen Railway as to whether the director was "acting in the case now before us" n239 is that participation
is irrelevant because, when the board makes a decision, the powers held by all the directors are exercised. As power is
necessarily exercised, the applicable fiduciary standard is the strict voidability standard, even for the non-participating
self-dealing director.
In contrast, in a New York corporation, power resided not in the directors individually with a mandate to act
collectively but in the board of directors itself. The New York corporation statute for manufacturing companies provided
that the "stock, property and concerns of such company shall be managed by not less than three, nor more than thirteen
trustees." n240 Furthermore, as early as 1829, the corporation laws of New York provided for quorum requirements in
relation to the exercise [*468] of power by the trustees and that "every decision of a majority of the persons duly
assembled as a board, shall be valid as a corporate act." n241 Writing in 1886, Victor Morawetz observed that "the active
management and direction of the affairs of a business corporation are ordinarily vested in a board of directors or
trustees." n242 By 1892, the New York General Corporation Law provided that "the affairs of every corporation shall be
managed by its board of directors [and that] the act of a majority of the directors present at a meeting at which a quorum
is present shall be the act of the board of directors." n243 Power in a 19th-century New York corporation did not reside in
the directors themselves but in the board of directors, which was empowered to exercise corporate power in the absence
of less than a majority of the directors. Directors who did not attend a board meeting at which a decision was made did
not exercise corporate power. As Paul Ames explained in 1887, a director "may be deemed to be relieved of any trust
relation to the stockholders, except so far [sic] as his own individual action may affect the complete exercise of the
power lodged in the whole board." n244 Logically, therefore, the fiduciary standard applicable to such a non-participating
director in a self-dealing transaction would be the Gibson influence standard, i.e., a fairness standard, and the stricter
Lacey power standard would apply to a participating director. Because of the understanding of director empowerment in
a U.K. company, this distinction was not available to U.K. company law, whereas it was logical and arguably correct in
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the New York context. This understanding of board power opened a channel through which the established fiduciary
influence standard could flow into corporate law. n245
[*469] To be clear, this article does not suggest that New York corporate law's understanding of board power is
determinative of the application of the fiduciary influence standard. Rather, this understanding of board and director
empowerment created an opening - a crack in the structure of analysis that drove U.K. law - which provided one means
of being responsive to the instrumental economic pressures to enable self-dealing. Small disconnects in an
argumentative structure may drive different legal paths, though they will not necessarily do so. Indeed, the New Jersey
courts, dealing with corporations with effectively identical understandings of board power to their New York
counterparts, n246 did not take this opening and adopted the United Kingdom's approach to director participation in
holding that the strict voidability rule was applicable even in the absence of director participation. The early decisions of
the Courts of Maryland took the same position. However, even in these jurisdictions, where the influence standard was
rejected, the tension between influence and power existed in a way that it did not in U.K. corporate law. For example, in
1863, the Maryland Court of Appeals in Cumberland Coal & Iron Co. v. Sherman, n247 following the U.K. cases of
Aberdeen Railway and Benson, considered and rejected the influence standard. However, in 1875 in Cumberland Coal
& Iron Co. v. Parish, n248 the Maryland Court of Appeals reiterated the same position and then incongruously held that
the question of voidability hinged on an influence standard, i.e., whether "reasonable use has been made of [the]
confidence." Nor is the claim here that the New York courts were completely closed to the adoption of the U.K. and
New Jersey position. Indeed, in a limited number of cases, which themselves had no impact on the trajectory of New
York law, the New York courts, relying on Sherman, adopted a position that did not depend [*470] upon director
participation. n249 Rather, the claim made here, and argued below, is that, in working out how to regulate self-dealing
transactions, the dominant view in New York from the 1860s to the 1890s bought into fiduciary law's distinction
between power and influence, a distinction made available by the understanding of board and corporate power in a New
York corporation.
Importantly, Harold Marsh and commentators who adopted Marsh's position were aware of this influence strand of
fiduciary law and the analogy of the corporation to the beneficiary. However, it was viewed as both a marginal and
unpersuasive ex-post technical justification and a cover for the unspoken drivers of legal change. n250 Compounding the
sense that this justification was outside of the mainstream legal position, Marsh cited only one 1902 Texas case in
support and suggested that it was the only case that made this connection. n251 However, in New York the influence strand
of fiduciary law is neither marginal nor an ex-post explanation of legal change. It arose, together with the voidability
standard, as a result of the courts' attempts, prior to 1880 and thereafter, to transplant fiduciary law to the context of the
U.S. corporation. The [*471] courts did not, unsurprisingly, consider it necessary to "explain" the application of a
fairness standard because, to them, it did not represent a change in the law.
b. Participating Directors and the Fiduciary Influence Standard
Many of the early New York cases involved directors who participated in the decision to enter into the self-dealing
transaction. As they exercised power, the strict Lacey standard set forth in Aberdeen Railway was applicable. But in
New York, one cannot extrapolate from these cases a generally applicable voidability standard. On the contrary, the
early cases that were held up as the standard-bearers of the strict standard took pains to stress the participation of the
director in the board decision. Underpinning the court's focus on participation was, it is submitted, an awareness that the
applicable standard depended upon whether power was exercised or merely influence exerted. In Butts, for example, the
Court stressed the participation of the defendant in the approved transaction. n252 In Munson v. Syracuse, there is a
pervasive focus on the participation of the director in approving the transaction. The Court observed that "the contract
bound the corporation to purchase, and Munson, as one of the directors, participated in the action of the corporation in
assuming the obligation;" he was "one of ten directors who voted in favor of the contract." n253 The court observed
further that "the law cannot accurately measure the influence of a trustee with his associates... in an action by the trustee
in his private capacity to enforce the contract, in the making of which he participated;" and that a strict rule "weakens
the temptation to dishonesty [in] all transactions in which they assume the dual characters of principal and
representative." n254 Although the judgment has nothing to say about the applicable standard when the director abstains or
recuses himself from the board's decision, it operates within the dual power/influence fiduciary paradigm. Indeed, in
litigation related to Munson v. Syracuse, the Court of Appeals in [*472] Munson v. Magee stressed that Munson's role
in acting for the corporation was central to the voidability decision. n255
The post-Munson v. Syracuse and Butts cases that adopted a strict voidability approach to the facts of the case are
relatively few in number, and those that did adopt a strict standard involved a director who participated in the decision.
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In these cases, the courts identified such participation. For example, in Koster v. Pain, the Court of Appeals observed
that "as in the case of every other trustee or agent, no director can, in acting on behalf of the corporation, reserve or
secure to himself any advantage or benefit." n256
Although the power/influence dichotomy silently structured the most important and influential early cases, in the
[*473] 1880s, only one New York case explicitly toyed with the fiduciary influence fairness standard. This is the case
of Rudd v. Robinson, an 1889 Supreme Court decision where the court juxtaposed a strict voidability rule with the
influence standard, voiding certain transactions and subjecting others - involving loans - to the influence standard. n257
Absence of explicit consideration of this standard in the 1880s could be read as the absence of the standard. This is not
correct - it is clear that the early strict decisions themselves operated within the context of this fiduciary power/influence
paradigm and thereby accepted a role for a fairness standard for self-dealing transactions even though, on the facts of
those cases, as power was exercised, the voidability standard applied.
Responding to Beveridge's observation that in many of the voidability cases the director participated in the
transaction, n258 Cary and Eisenberg argued that although this may be correct, "the opinions did not limit the rule to such
cases." n259 Indeed, in the absence of the above fiduciary context, a literal reading of the cases would identify no explicit
limit. However, with this context, we see that voidability was connected to power, which explains the courts' focus on
participation, and that fairness would have been applicable had power not been exercised.
This fiduciary paradigm also offers an explanation for the apparent disconnect between the cases and leading New
York commentators in this period. Professor Beveridge, in support of his argument that fairness review was established
very early in U.S. self-dealing law, cites Victor Morawetz, a New York attorney, n260 who in 1880 opined that "there is no
impropriety in [*474] a contract between a director and the corporation, if the latter is represented by other agents." In
the 1886 edition of his book, Morawetz observed that a quorate board is empowered to act on behalf of the company
and, provided that the agent (i.e., the director) does not participate, the transaction is sound. However, "even if the
[corporation] was represented by a majority of the board, [the transaction] will always be scrutinized by the courts with
strictness, and will be set aside at the suit of the corporation, upon proof of the slightest unfairness or imposition
practised upon it." n261 In rejecting Beveridge's arguments, Cary and Eisenberg argued that the commentators in this
period went further than the majority of the cases. n262 But they did not. Although one does not find a New York case in
the 1880s that explicitly stated the law in the terms outlined by Morawetz, he understood Butts and Munson v. Syracuse
to be articulations of the existing power/influence fiduciary position, which was consistent with his statement. As
Morawetz observed, "the principle acted upon in these cases is a general principle of the law of agency." n263
Accordingly, fairness review in New York does not, as Marsh demanded, need to be justified as a departure from the
strict voidability rule and the policies underpinning such a rule. It represented to 19th-century New York lawyers an
available stream of fiduciary doctrine that sat alongside the voidability rule and whose applicability was dependent on
the role of the director in relation to the transaction in question.
[*475]
c. Entrenching Fairness Review
It was in the 1890s that the influence doctrine came to the fore in New York. The Court of Appeals decision in Sage, as
noted above, adopted an explicit fairness-based approach rooted in the fiduciary influence standard. n264 The court in
Sage cited, but did not discuss, Gibson and Cowee as authority for the fairness standard. For Sage, fairness review was a
product of the courts viewing self-dealing through equity's lens of influence and not of power. However, it is true that
the rigor of equity's distinction between power and influence was not always maintained in this and subsequent cases
that adopted the influence standard. The court in Sage did not appear to limit its holding to the non-participating
director. Accordingly, if Sage represents a moment of legal change, it is not one that moved from voidability to fairness,
but one that arguably commenced the disconnection of the influence standard from the absence of the exercise of
directorial power.
The source of fairness review in Sage is readily traceable to the fiduciary influence doctrine. However, multiple
other New York cases in the 1880s and 1890s that also adopted the view that self-dealing contracts were permissible
subject to fairness review are not so clearly traceable to the fiduciary influence doctrine. Nevertheless, most of those
cases fit within the non-power paradigm. The implication that these approaches were influenced or formed by that
paradigm is irresistible. For example, in 1880, the New York Court of Appeals in Van Cott held that the ability of
officers of a railroad company to enter into contracts with the corporation "cannot be seriously questioned," provided
that "no special advantage accrued to the defendant from the contract, and [] there is no proof of any fraud ... ." n265 In
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Gamble, referenced above, the Court of Appeals applied a non-participating director/fairness standard. [*476] In 1895
in Strobel v. Brownell, distinguishing Munson v. Syracuse because of the absence of the exercise of power and
following Gamble, the New York Supreme Court held:
Every such contract made by a director of a company with a corporation is looked at with suspicion, and if the
transaction is attacked the burden is upon the agent of the corporation, who has contracted with it, to show that it was
honest and fair in all its parts, and that he has made no more profit out of the contract than any other person might
properly have made. n266
Identifying evolutionary shifts in legal doctrine and attributing time periods within which they took place is a
precarious task. The selection of a date immediately exposes the author to counterclaim based on an alternative set of
cases. The common law is typically very obliging as there are many cases and many mistakes. What this section has
attempted to demonstrate is that the cases from Butts to Sage represent not change but continuity underpinned by
longstanding fiduciary doctrine. This period of continuity continued well into the 20th century. For example, the
judgment of Davids v. Davids in 1909 appears initially to take a firm power-based voidability approach to allegedly
excessive officer salaries but then, possibly influenced by a factual counterclaim that the directors had abstained from
taking part in the decision, suggested that the applicable standard is a Sage fairness-based approach placing the burden
on the directors to prove fairness, which in this case they failed to do. n267 In Globe Woolen Co. v. Utica Gas &
Electricity Co., the trial court upheld an executory contract between corporations with common directors. n268 The court
distinguished the automatic voidability rules applicable where the director acts, citing Butts and Munson v. Syracuse,
from the situation, citing Strobel and Gamble, where the director does not participate. The Court held that, provided
"there being no fraud, conspiracy, bad faith or concealment, a valid contract [*477] may be made between a
corporation and one of its directors." n269 On appeal, Judge Cardozo in the Court of Appeals reversed the New York
Supreme Court's ruling but in so doing applied the same legal framework as the first instance court. The Court of
Appeals held that the strict rule in Munson v. Syracuse did not apply as the director had not participated in the decision
but observed that "a dominating influence may be exerted in other ways than by a vote." n270 Accordingly, the Court held:
There was, then, a relation of trust reposed, of influence exerted, of superior knowledge on the one side and legitimate
dependence on the other. [Citing Sage and Davids.] At least, a finding that there was this relation has evidence to sustain
it. A trustee may not cling to contracts thus won, unless their terms are fair and just. n271
The Court of Appeals invalidated the contracts as the "unfairness is startling." n272 Although Globe Woolen represents a
clear reassertion of the power/influence framework, it represents a high watermark in this regard. Post-1920, although
there were cases that firmly assert the power/influence framework, rendering transactions voidable simply because of
the exercise of power, n273 the Sage fairness standard, together with a disregard for the distinction between power and
influence, came to dominate. n274 In some instances, reference to Sage was left behind, its influence-based fairness
standard detached from the case itself. This is seen most clearly in the first instance judgment in La Vin v. La Vin n275 and
the per curiam affirmation by the Court of Appeals, n276 a decision that Marsh [*478] described as "shamefaced" for
failing to address what he viewed as a departure from the strict rule. n277 However, Sage is commonly cited as authority
for a fairness-based standard that applies regardless of director participation in the board decision. n278 Munson v.
Syracuse was not forgotten during this transition to fairness review n279 regardless of participation, but at worst it was
cited in support of the general fairness standard n280 and at best as support for the position that the distribution of the
burden of proof is dependent upon whether the director participated. n281
This is the unexplained shift in New York case law, which Marsh rightly identified: from non-participating/non-
power wielding director and fairness to just fairness, regardless of whether power or just influence is exercised. It is not
unexplained in common law evolutionary terms because Sage, a Court of Appeals case, appeared to ignore fiduciary
law's prerequisite of non-participation and thereby offered a platform for a fairness-only approach, a platform that the
courts readily adopted by following the rule stated in Sage. n282 But this shift is unexplained, indeed inexplicable, in
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policy terms, for it was clearly not necessary to adjust to the instrumental economic [*479] need for self-dealing. As
discussed in Part I, in the United Kingdom, where companies and shareholders had complete contractual freedom to
fashion self-dealing rules, they typically elected for a disinterested director mechanism, the failure to comply with
which would attract the strict voidability rule. Perhaps, then, regulatory competition or the effects of repeat player
litigation by management - or, more accurately, persistently similar claims made by different managers - has some
explanatory power here. However, the repeat player litigation claim appears unpersuasive when one considers the
parties, and the courts and judges which decided these cases. In none of the cases cited during this transitional period
did the same defendant or the same judge appear twice. Nor are self-dealing defendants archetypal repeat players. n283
Company resources could not be deployed to defend these actions. Indemnification to the extent provided for was, at
this time, of doubtful legality, n284 and the plaintiffs appeared to be well resourced, as they were typically either
significant shareholders suing derivatively or liquidators. Regulatory competition as an explanatory factor is dinted by
the fact that Sage, as early as 1895, appeared to ignore the power/influence distinction. Furthermore, in several of the
20th-century cases, where the fairness standard was adopted and the distinction ignored, the decision itself did not favor
management, suggesting that those judges were not receptive to the claims that New York law needed to adjust in favor
of managers in order to attract re-incorporations. n285 A persuasive explanation is not available. But one cannot disregard
an explanation that discounts politics, pressure groups and rational responses of lawmakers to those pressures and views
legal change as the result of a fair pinch of incompetence in reading the cases and applying the common law method.
[*480]
3. Delaware's Borrowed Goods
The dearth of Delaware self-dealing case law is striking. Delaware has no place in the first two stages of Marsh's
evolution of self-dealing cases because there are no cases. Marsh referred to no Delaware cases before 1948. n286 What is
truly remarkable about Delaware is that it became the leading corporate law state with very little common law. Indeed,
if one was to take 1920 as a cut-off point, it would be very difficult to say anything at all about the effects of charter
competition on corporate law by reference to Delaware law, as there was close to nothing in several key areas of
corporate law that one could say was Delaware law - the statute was largely borrowed directly from New Jersey and
there were hardly any important Delaware cases. The lack of authority clearly creates open space for judges to tailor
solutions to their primary constituencies. However, in the context of the above analysis of New Jersey and New York
self-dealing law, Delaware self-dealing law appears clearly rooted in the approaches formed in other states. It borrowed
from and brought together those approaches. In doing so, it asserts its independence through only limited citation of its
neighbors' cases upon which Delaware law rests.
Delaware law on self-dealing commenced in the 1920s with the important case of Cahall v. Lofland. n287 In this case,
both the Chancery Court and the Supreme Court of Delaware invalidated the payment of remuneration and the issuance
of shares to a corporation's directors. Both courts relied on Du Pont v. Du Pont, a Delaware District Court case applying
New Jersey law, which observed, without citing authority, that "if [the director] acts for himself in matters where his
interest conflicts with his duty, the law holds the transaction constructively fraudulent and voidable at the election of the
corporation." n288 The language of constructive fraud echoes the [*481] power/influence fiduciary dichotomy that was
so influential in New York, although, whereas the term is usually used to refer to the regulation of influence, n289 here it
was connected to the exercise of power. n290 Following this statement, the Chancery Court then proceeded to rely on the
New Jersey case of Gardner v. Butler to understand the application of this rule. It extracts two principles from Gardner
v. Butler: a disinterested director principle and a fairness principle. In Gardner v. Butler, the board resolution was passed
by a majority of interested directors. As observed above, Gardner v. Butler followed Stewart, which viewed interested
director non-participation as irrelevant. Nevertheless, for the Chancery Court in Cahall v. Lofland, the facts of Gardner
v. Butler served as the basis for its holding that majority interested director participation renders the transaction
constructively fraudulent and therefore voidable. The judgment did not articulate the standard of review for transactions
that are approved by a majority of disinterested directors, although the language of constructive fraud implies fairness
review. Secondly, it observed that Gardner v. Butler provided that, although the contract cannot stand if voided, the
director-counterparty to the contract is entitled to his due as it "would be manifestly inequitable to deny [] the trustee a
fair equivalent [therefor]." n291
The Delaware Supreme Court's judgment in Lofland v. Cahall n292 focused on the effects of director participation in
approving the self-dealing contract and affirmed the invalidity of [*482] the self-dealing transactions as constructive
fraud. The court did not explore the standard applicable to a self-dealing transaction with a non-participating director.
However, once again, the focus on participation and the language, if imprecise, of constructive fraud suggest that the
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8 N.Y.U. J. L. & Bus. 395, *
influence fiduciary fairness standard would be applicable to such transactions. Unlike the Chancery Court, the Supreme
Court did not explore Gardner v. Butler remedial fairness, nor did the court refer to authority on self-dealing law apart
from Du Pont, although it did affirm that the authorities considered by the Chancery Court were the leading authorities.
Lofland v. Cahall brought together remedial fairness and the fiduciary influence standard. It arguably applied a
fairness standard whether or not the directors participated in approving the transaction: if the director did not participate,
then it suggested that the fiduciary influence fairness standard applies. But where the director did participate, remedial
fairness applies. Thirty years later in Gottlieb v. Heyden Chemical Corp., n293 the court, citing only the Supreme Court's
judgment in Lofland v. Cahall, n294 set forth the general proposition that, where the majority of directors are interested,
"the burden is upon the directors to prove not only that the transaction was in good faith, but also that its intrinsic
fairness will withstand the most searching and objective analysis."
Delaware itself made no substantive legal contribution to the development of fairness review. This work was done
in New Jersey and New York in the mid-to-late 19th century. The analysis of the limited Delaware self-dealing case law
illustrates that Delaware self-dealing law in the early 20th century was in effect a blank sheet of paper, and Delaware
judges got to choose from the approaches and precedent of leading jurisdictions. Perhaps this vantage point enabled
Delaware to cut through the complexity to see that a remedial fairness standard renders other approaches - a strict
voidability rule or a participation-based fiduciary fairness standard - functionally irrelevant. But Delaware courts did not
alter the nature of the legal standard, whose pro-managerial bias was encoded long [*483] before Delaware gained
corporate legal significance. Of course, this tells us nothing about the application of the standard, or the procedural rules
that structure its application. There is much room to maneuver within "fairness," and there is much room to attract
managers with a signaled favorable approach to application and procedure.
IV.
Conclusion
If one posits two approaches to self-dealing law - a strict voidability approach that enables the company to invalidate
any self-dealing transaction and an approach based upon fairness as measured by a market benchmark - and asks
managers to select their preferred form of regulation, it is highly probable that managers would prefer the latter. Benign
managers would welcome the flexibility inherent in a fairness standard, while the less benign would welcome the
greater scope to enter into self-serving self-dealing arrangements. According to Harold Marsh's account of the evolution
of self-dealing law, the United States originally adopted a strict approach that rejected fairness but moved over time to a
fairness-based approach. According to Marsh, this transition was unexplained by the courts in legal or policy terms.
Juxtaposing the contemporary fairness standard with the historical strict standard, Marsh allowed for the conclusion
that contemporary U.S. corporate law is management-friendly and more so than it used to be. However, the question
remains as to why it has become so receptive to managerial interests. There are two components of the answer that a
contemporary corporate lawyer is likely to give to this question. First, a strict rule was not suitable for carrying out
business activity through the corporate form and, therefore, it needed to be changed to a more suitable standard. The
second component of the answer today would be to explain that managerial pressure is likely to be more acute in this
context than in any other, because, for the self-serving director, self-dealing matters - it is a significantly redistributive
area of the law. Furthermore, state lawmakers, including judges, are likely to be receptive to such pressures as managers
make the reincorporation decision. The conclusion, the question and its answer are reinforced when one looks at self-
dealing law in a comparative perspective. The [*484] United Kingdom commenced with a strict standard, maintained
its strict standard and has not been exposed to the distortive incentive effects of charter competition.
But if, as is argued in this article, self-dealing law in the United States and the United Kingdom resulted from the
adaption of existing fiduciary law to the conception of the corporation in the mid-to-late 19th century, then it follows
that: (i) there is no unexplained shift from a strict rule to a management-friendly standard to explain; (ii) there is no need
to rely upon non-legal pressures and incentives to explain legal change that the courts failed to account for; and (iii) the
United Kingdom's maintenance of the strict standard has nothing to do with allegedly weaker receptivity to
management's interests. That is, of course, not to say that the external context of business activity was not important to
the translation of existing fiduciary law into the business context. Clearly, in both the United States and the United
Kingdom, courts were cognizant of the different role of self-dealing transactions in the corporate form as compared to
the trust context. But law is responsive to these pressures in internally consistent ways - generating responsive solutions
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8 N.Y.U. J. L. & Bus. 395, *
that are legally coherent and consistent. The common law does not, as Marsh's narrative implies, sacrifice its internal
rules and policy commitments to satisfy external business demands.
If there was no shift from strict to flexible standards, then, in the context of self-dealing law, charter competition
has limited explanatory power. Although it is theoretically compelling that, in significantly redistributive areas of
corporate law, state lawmakers are likely to be very receptive to considerable managerial pressure, if, as observed in
New Jersey and New York, fairness coexisted at all times with the strict standard, then there is no shift to a more
management-friendly position for this theory of legal change to explain. Of course, such pressures may manifest
themselves at the margin, for example, in the application of the standard or in the form taken by the procedural rules,
which determine the application of the fairness standard, such as evidentiary standards and burdens of proof. But the
fairness standard, as standard-bearer of the management-friendly bias of U.S. corporate law, is not explained by these
pressures. Rather, it is explained by the core components of the conception of the U.S. corporation: its emphasis on the
public creation of the corporation, its concomitant [*485] restraint on contractibility, and the state's direct
empowerment of the board of directors.
Legal realism teaches that hiding in the mouth of the legal dragon n295 are economic and social policy choices. What
it does not teach is that law is a space where only policy debate takes place and where common law legal outcomes are
only policy choices dressed up to create the effect of legal necessity or inevitability. Delaware's corporate legal style,
born of its remarkable success in the race for corporate charters, even in the absence of an independent corporate legal
engine that one would have assumed propelled such success, plays to this misreading of legal realism. It creates the
impression that Delaware's legal rules have only a perfunctory connection to legal tradition, whereas, in fact, at least in
the self-dealing context, they are rooted in a largely unattributed legal tradition. The dominant narrative of self-dealing
law also plays to this misreading of legal realism. Law apparently ignored legal constraint to make a different, although
unspoken, policy election. In demonstrating that this dominant account of the evolution of self-dealing law is wrong, it
becomes apparent that we need to open the mouth of our contemporary corporate dragon and search for systemic legal
constraint, and we see that, for contemporary corporate law, a significant dose of inevitability was administered at the
inception of general incorporation.
[*486]
Legal Topics:
Business & Corporate LawCorporationsDirectors & OfficersManagement Duties & LiabilitiesCauses of ActionSelf-
DealingBusiness & Corporate LawGeneral PartnershipsManagement Duties & LiabilitiesCauses of ActionGeneral
OverviewGovernmentsFiduciary Responsibilities
FOOTNOTES:
n1. Karl Marx & Friedrich Engels, The German Ideology, in Karl Marx: Selected Writings 102, 111 (Lawrence H. Simon ed., 1994)
("Conceiving, thinking, and the intellectual relationships of men appear here as the direct result of their material behavior. The same applies
to intellectual production as manifested in a people's language of politics, law, morality, religion, metaphysics, etc.").
n2. O. W. Holmes, Jr., The Common Law 1 (1881).
n3. O. W. Holmes, Jr., The Path of Law, 10 Harv. L. Rev. 457, 469 (1897).
n4. See generally Morton J. Horwitz, The Transformation of American Law 1780-1860 (1977); Morton J. Horwitz, The Transformation of
American Law 1870-1960 (1992).
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8 N.Y.U. J. L. & Bus. 395, *
n5. See, e.g., Lucian Ayre Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105
Harv. L. Rev. 1435 (1992); Lucian Bebchuk, Alma Cohen & Allen Ferrell, Does the Evidence Favor State Competition in Corporate Law?,
90 Calif. L. Rev. 1775 (2002); William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L.J. 663 (1974); Daniel
R. Fischel, The "Race to the Bottom" Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 Nw. U. L. Rev. 913
(1982); Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest-Group Theory of Delaware Corporate Law, 65 Tex. L. Rev. 469 (1987);
Mark J. Roe, Delaware's Shrinking Half-Life, 62 Stan. L. Rev. 125 (2009).
n6. See, e.g., Mark J. Roe, Delaware's Competition, 117 Harv. L. Rev. 588 (2003); Mark J. Roe, Delaware's Politics, 118 Harv. L. Rev. 2491
(2005).
n7. See Bebchuk, supra note 5. See also William W. Bratton, Delaware Law as Applied Public Choice Theory: Bill Cary and the Basic
Course After Twenty-Five Years, 34 Ga. L. Rev. 447, 450-452 (2000) ("States pursued suboptimal policies of management accommodation
respecting fiduciary rules and anti-takeover legislation... . I take the middle-ground view of charter competition ... .").
n8. See, e.g., Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance, 52 Stan. L.
Rev 127, 157 (1999) ("Interest groups differ in their ability to mobilize and then exert pressure in favor of legal rules that favor them or
against rules that disfavor them. The more resources and power a group has, the more influence the group will tend to have in the political
process... . The existing corporate ownership structures will affect the resources (and hence political influence) that various players will have
and thus the rules that will be chosen.").
n9. John Armour & David A. Skeel, Jr., Who Writes the Rules for Hostile Takeovers, and Why? - The Peculiar Divergence of U.S. and U.K.
Takeover Regulation, 95 Geo. L.J. 1727 (2007).
n10. Id. But see Harald Halbhuber & David Kershaw, The Power of Ideas in Corporate Law: Evidence from Takeovers (Nov. 2, 2010)
(unpublished manuscript) (on file with the authors) (taking issue with this interpretation of U.S. and U.K. takeover law).
n11. E.g., Lawrence A. Cunningham, Choosing Gatekeepers: The Financial Statement Insurance Alternative to Auditor Liability, 52 UCLA
L. Rev. 413, 414 n.1 (2004) (observing that the fiduciary "sealant decayed during the twentieth century").
n12. For an application of the framework of analysis adopted in this article to takeover law, see Halbhuber & Kershaw, supra note 10.
n13. See James Edelman, The Fiduciary Self-Dealing Rule, in Fault Lines in Equity 107 (Jamie Glister & Pauline Ridge eds., 2012)
(arguing that that self-dealing transactions are void). But see Matthew Conaglen, Fiduciary Loyalty Protecting the Due Performance of Non-
Fiduciary Duties 77-79 (2010) (taking issue with the position articulated by Edelman).
n14. Aberdeen Ry. Co. v. Blaikie, (1854) 1 Macq 461, 461.
n15. Harold Marsh, Jr., Are Directors Trustees? Conflict of Interest and Corporate Morality, 22 Bus. Law. 35, 36 (1966).
n16. Robert Charles Clark, Corporate Law 160 (1986) (referring to the evolution of self-dealing law as a historical puzzle).
n17. See id. at 160-66. See also James D. Cox, Managing and Monitoring Conflicts of Interest: Empowering the Outside Directors with
Independent Counsel, 48 Vill. L. Rev. 1077, 1079 (2003) ("Because conflicts of interests are endemic to the commercial setting that the
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8 N.Y.U. J. L. & Bus. 395, *
corporation calls home, pragmatism prevailed over what was believed unsubstantiated fears of self-interested behavior. Courts seriously
tempered their earlier approaches to conflict of interest transactions.").
n18. See, e.g., Michael J. Whincop, An Economic and Jurisprudential Genealogy of Corporate Law 2 (2001) ("The developments in case
law emanating from the Delaware courts are marked by a conscious sense of consequence. Cases are not always decided as economists
would like, but the courts recognise the importance of their decisions for corporate governance. By contrast, English ... courts retreated from
a cautious pragmatism to a sometimes arid formalism.").
n19. Compare Re D'Jan of London Ltd [1993] B.C.C. 646, with In re Walt Disney Co. Derivative Litig., 907 A.2d 693 (Del. Ch. 2005).
n20. See Geoffrey Miller, Political Structure and Corporate Governance: Some Points of Contrast Between the United States and England,
1998 Colum. Bus. L. Rev. 51, 68-77 (arguing that corporate legal federalism and its absence in the United Kingdom is primary driver of
legal difference in takeover law and derivative action regulation). See generally John Armour, Who Should Make Corporate Law? EC
Legislation versus Regulatory Competition, 58 Current Legal Probs. 369 (2005); William W. Bratton et al., How Does Corporate Mobility
Affect Law Making? A Comparative Analysis, 57 Am. J. Comp. L. 347 (2009), for information on the state of regulatory competition in
Europe.
n21. Typically the starting point for charter competition is identified as 1889 when New Jersey enacted a statute allowing corporations to
own stock in other corporations, or as 1896 when New Jersey adopted what is often viewed as the first modern corporation code. But see
Charles M. Yablon, The Historical Race Competition for Corporate Charters and the Rise and Decline of New Jersey: 1880-1910, 32 J. Corp.
L. 323, 333 (2007) ("In the decade from 1880 to 1889, there was not yet any public recognition that New Jersey, or any other state, had
become a particularly popular state in which to incorporate, although there is evidence of a different perception among knowledgeable
business professionals."). Arguably West Virginia tried the "charter mongering" strategy first in 1888 but to little avail. See Christopher
Grandy, New Jersey and the Fiscal Origins of Modern American Corporation Law 43 (1993) ("Before 1890, ... New Jersey corporate statutes
focused on firms operating within the state."); William W. Bratton & Joseph A. McCahery, The Equilibrium Content of Corporate
Federalism, 41 Wake Forest L. Rev. 619 (2006).
n22. Leonard S. Sealy, The Director as Trustee, 1967 Cambridge L.J. 83, 84.
n23. See Michael Lobban, Corporate Identity and Limited Liability in France and England 1825-67, 25 Anglo-Am. L. Rev. 397, 403-04
(1996).
n24. For a discussion on the pre-general incorporation construction of an 'entity' through trust and contract, see Joshua Getzler & Michael
Macnair, The Firm as an Entity Before the Companies Acts, in Adventures of the Law: Proceedings of the Sixteenth British Legal History
Conference, Dublin, 2003 267 (Paul Brand et al. eds., 2005).
n25. Limited liability for companies incorporated by registration was not introduced until the Limited Liability Act of 1855.
n26. Lord Cranworth, in Oakes v. Turquand, explained that the Companies Acts were a response to the fact that "the ordinary provisions of
the law of this country were ill-adapted to the business of such bodies." [1867] L.R. 2 (H.L.) 325. Gladstone, upon requesting leave from the
House of Commons to move a bill on the Joint Stock Companies, observed that the bill "did not change the course of the law, but rather
accelerated it; because, in the present state of the law, Joint-Stock Companies had, under the pressure of absolute necessity, extorted,
piecemeal, from the courts of law, a recognition of their distinct existence; and, without any strictly statutory title, they had become, to all
intents and purposes, recognized creatures in the eye of the law." 73 Parl. Deb., H.C. (3d ser.) (1844) 1754-58.
n27. 4 & 5 W. & M. 4, c. 94; 1 Nathaniel Lindley, A Treatise on the Law of Partnership, Including its Application to Companies 9 (4th ed.
1878).
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8 N.Y.U. J. L. & Bus. 395, *
n28. This began in 1826 with The Banking Act, 1826, 7 Geo. 4, c. 46, § 4, which enabled joint stock unincorporated banking companies to
appoint a public officer in whose name the bank could sue and be sued.
n29. Sir Nathaniel Lindley, A Treatise on the Law of Companies, Considered as a Branch of the Law of Partnership 2 (5th ed. 1902).
n30. Id. at 8. Note that this book involves the breaking out of the section on companies found originally in Lord Nathaniel Lindley's A
Treatise on The Law of Partnership, Including its Application to Companies (4th ed. 1878). The section in Hansard, the official publication
of the Houses of Parliament, where permission is granted to bring the Joint Stock Companies Bill forward, is sub-headed "The Law of
Partnership." 73 Parl. Deb., H.C. (3d ser.) (1844) 1754-58.
n31. Francis Beaufort Palmer, Company Law: A Practical Handbook for Lawyers and Business Men 5 (5th ed. 1905).
n32. Lindley, supra note 29, at 8 ("Corporations in the proper sense of the term ... must be created either by royal charter or by Act of
Parliament ... , and to them the law of ordinary partnerships has little, if any, application."). See also Nathaniel Lindley, A treatise on the Law
of Companies, Considered as a Branch of the Law of Partnership 8, 57, 102 (5th ed. 1889).
n33. Joint Stock Companies Act, 1844, 7 & 8 Vict., c. 110, § 2.
n34. Id. § 3.
n35. Id. § 7 ("And that such deed must contain a covenant on the part of every shareholder, with a trustee on the part of the company ... to
perform the several engagements in the deed contained on the part of the shareholders ... .").
n36. Palmer, supra note 31, at 1 (referring to the 1862 Act as company law's Magna Carta).
n37. Companies Act, 1862, 25 & 26 Vict., c. 89. The 1862 Act replaced the deed of settlement with the memorandum of association and the
articles of association. The memorandum of association was, prior to 2006, the primary constitutional document (akin to a Delaware
corporation's certificate of incorporation). Today, the memorandum of association is merely a formation document and the primary
constitutional document is the articles of association. See Companies Act, 2006, c. 46,§§8, 18.
n38. Companies Act, 1862, 25 & 26 Vict., c. 89, § 11 ("It shall, when registered, bind the company and the members thereof to the same
extent as if each member had subscribed his name and affixed his seal thereto, and there were in the memorandum contained, on the part of
himself, his heirs, executors, and administrators, a covenant to observe all the conditions of such memorandum, subject to the provisions of
this Act.").
n39. Note that the courts, unsurprisingly, held that the company was also bound as if it had covenanted to observe the terms of the contract.
See, e.g., Wood v. Odessa Waterworks Co., [1889] 42 Ch.D. 636.
n40. A similar provision is found today in § 33(1) of the Companies Act 2006, but it treats the shareholders and the company as
contractually bound.
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8 N.Y.U. J. L. & Bus. 395, *
n41. In 1844, William Gladstone was a minister and President of the Board of Trade. He later served as Prime Minister four times between
1868 and 1894.
n42. 73 Parl. Deb., H.C. (3d ser.) (1844) 1754-58.
n43. References to concession can at times be found particularly when the interests of creditors are concerned. See Ashbury Ry. Carriage &
Iron Co. v. Riche, [1875] L.R. 7 (H.L.) 653.
n44. See, e.g., 1 Seymour D. Thompson, Commentaries on the Law of Private Corporations 55-77 (1895).
n45. Lindley, supra note 29; Palmer, supra note 31. The only context in which the idea of legislative authorization is foregrounded in early
English company law is in relation to the capacity of the company and acts that are ultra vires the company. See Ashbury, L.R. 7 (H.L.) at
653.
n46. On the adoption of limited liability in the United Kingdom, see Marie-Laure Djelic, When Limited Liability Was (Still) An Issue -
Conflicting Mobilizations in Nineteenth Century England (European Grp. for Org. Studies, Working Paper No. 006, 2011).
n47. The Companies Act 1890 enabled the amendment of the memorandum with court approval for one of seven specified reasons.
Companies Act, 1890, 53 & 54 Vict., c. 62, § 27. Prior to 1890 the memorandum could only be altered to increase capital, to decrease capital
in accordance with the Companies Act 1867, to subdivide its shares, or to change its name.
n48. This meant that while capital could be raised, it could not be reduced, and any activity undertaken outside of its stated objects was void
ab initio. See Ashbury, L.R. 7 (H.L.) at 653. The Companies Act 1867 allowed for court controlled capital reductions. See generally David
Kershaw, The Decline of Legal Capital: An Exploration of the Consequences of Board Solvency Based Capital Reductions, in Corporate
Finance in the UK and US 27 (Dan Prentice & Arad Reisberg eds., 2011).
n49. Ashbury, L.R. 7 (H.L.) at 668.
n50. See Michael J. Whincop, An Economic and Jurisprudential Geneology of Corporate Law (2001) (first using the term "contractibility"
to characterize the United Kingdom's approach to corporate law).
n51. Ashbury, L.R. 7 (H.L.) at 668 ("With regard to the articles of association, those articles play a part subsidiary to the memorandum of
association. They accept the memorandum of association as the charter of incorporation of the company, and so accepting it, the articles
proceed to define the duties, the rights and the powers of the governing body as between themselves and the company at large, and the mode
and form in which the business of the company is to be carried on, and the mode and form in which changes in the internal regulations of the
company may from time to time be made").
n52. Joint Stock Companies Act, 1844, 7 & 8 Vict. c. 110, § 27.
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8 N.Y.U. J. L. & Bus. 395, *
n53. Id. It is noteworthy that the deed of settlement did not allow shareholders through the deed of settlement to retain powers of ordinary
management.
n54. Model Articles issued through secondary legislation and known as "Table A Articles" provided for the delegation of corporate power
and authority to the board to manage and direct the company. In the absence of general or specific contrary intent (in relation to particular
articles) on the formation of the company, such model articles would be adopted by the company.
n55. See, e.g., General Corporation Act of New Jersey § 27 (1896) (providing for board and shareholder approval).
n56. Palmer, supra note 31, at 146.
n57. ( 1857) 10 Eng. Rep. 1351, 1354.
n58. Id. at 1358.
n59. Companies Act, 1947, 10 & 11 Geo. 6, c. 47, § 29.
n60. [1882] 23 Ch.D. 1.
n61. See In re Brazilian Rubber Plantations, [1911] 1 Ch. 425.
n62. In re City Equitable Fire, [1925] Ch. 407.
n63. Companies Act, 1929, 19 & 20 Geo. 5, c. 23, § 129.
n64. Nathaniel Lindley, A treatise on the Law of Companies, Considered as a Branch of the Law of Partnership 8 (5th ed. 1889).
n65. See Joseph K. Angell & Samuel Ames, Treatise on the Law of Private Corporations Aggregate (9th ed. 1871) (treating statutory
companies and generally incorporated companies as different exercises of state power).
n66. Id. at 47 ("In no country, indeed, have corporations been multiplied to so great an extent, as in our own; and the extent to which their
institution has here been carried, may very properly be pronounced 'astonishing.'").
n67. Id. at 42 ("It has never been the policy, in England, as in this country, to adopt, as a practice, the conferring of full and unqualified
corporate privileges upon a body of men associated for the purposes of trade. Corporations have occasionally been permitted, in England, to
engross some business to the exclusion of natural persons ... .").
Page 540Page 540
8 N.Y.U. J. L. & Bus. 395, *
n68. James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States 1780-1970, at 9 (1970); Morton J.
Horwitz, Santa Clara Revisited: The Development of Corporate Theory, 88 W. Va. L. Rev. 173, 181 (1985).
n69. See Louis K. Liggett Co. v. Lee, 288 U.S. 517, 549 (1933) (Brandeis, J., dissenting in part) (listing general incorporation statutes). On
the types of statutes for the different industries, see Thompson, supra note 44, at 99-126.
n70. 1 Victor Morawetz, A Treatise on the Law of Private Corporations 17 (2d ed. 1886).
n71. See Angell & Ames, supra note 65, at 2 (explaining that the word "franchise" is used by Blackstone "in its most extensive sense [to be]
expressive of great political rights ... . It is in this sense that the word is applied by Blackstone, when defining a corporation, and not in the
less general ... sense of the exclusive exercise of some right ... .").
n72. 143 A. 257, 259 (Del. 1926).
n73. 17 U.S. 518 (1819).
n74. See Horwitz, supra note 68. See generally John C. Coates IV, State Takeover Statutes and Corporate Theory: The Revival of an Old
Debate, 64 N.Y.U. L. Rev. 806 (1989).
n75. Angell & Ames, supra note 65, at 31.
n76. Id. at 1.
n77. Thompson, supra note 44, at 31.
n78. Id. at 127.
n79. 1 William W. Cook, A Treatise on the Law of Corporations Having a Capital Stock 12 (8th ed. 1923).
n80. See Horwitz, supra note 68, at 182 ("Up until the 1880s, there was a strong tendency to analyze corporation law not very differently
from the law of partnership."). Note that, as addressed in the next section, if at the heart of partnership is contract, the U.S. corporation was
not understood in partnership terms in the 19th century. Note also that, Morawetz's view was not widely held by other commentators. Ames,
writing an extremely complementary review of the second edition of Morawetz's text, observed that "we should have been glad to see some
modification of his fundamental conception of the nature of the corporation." James Barr Ames, Book Review, 1 Harv. L. Rev. 109, 110
(1887).
n81. Morawetz, supra note 70, at 8 n.3 (quoting Thomas v. Dakin, 22 Wend. 109 (N.Y. Sup. Ct. 1839)).
n82. Angell & Ames, supra note 65, at 22 (emphasis in original).

Page 541Page 541
8 N.Y.U. J. L. & Bus. 395, *
n83. 13 Mo. App. 197, 200 (Mo. Ct. App. 1883).
n84. 23 A. 287, 295 (N.J. Ch. 1891) (emphasis added).
n85. 1 Hill 616 (N.Y. Sup. Ct. 1841).
n86. Act of Feb. 17th, 1848, ch. 40, § 1, 1848 N.Y. Laws 54, 54-55, amended by Act of Feb. 7th, 1851, ch. 14, § 1, 1851 N.Y. Laws 16
(emphasis added). The provision bears a close resemblance to the U.K. Companies Act's association clause. See, e.g., Companies Act, 1862,
25 & 26 Vict., c. 89, § 6 ("Any seven or more persons associated for any lawful purpose may, by subscribing their names to a Memorandum
of Association ... form an incorporated company, with or without unlimited liability.") (footnotes omitted).
n87. Thompson, supra note 44, at 3 (emphasis added).
n88. See Horwitz, supra note 68, at 73.
n89. 1 Clement Bates, The Law of Partnership 2-3 (1888) ("Partnership is a contract relation ... . An agreement of partnership, like any other
contract, must be founded on a consideration either of mutual promises or contributions."); Lindley, supra note 27, at 18 ("Partnership is the
result of an agreement to share profits and losses.").
n90. Thompson, supra note 44, at 762.
n91. Act of Apr. 21st, 1896, ch. 185, § 1(VI), 1896 N.J. Laws 277, 278-79 (concerning corporations).
n92. E.g., id. § 12, 1896 N.J. Laws 277, 2781 (concerning corporations) ("The business of every corporation shall be managed by its
directors ... ."); Act of June 21st, 1875, ch. 611, § 10, 1875 N.Y. Laws 755, 757 (concerning the organization and regulation of corporations)
("The business of every corporation ... shall be managed by a board of directors ... ."); Act of Feb. 17th, 1848, ch. 40, § 3, 1848 N.Y. Laws
54, 55 (concerning the formation of corporations for manufacturing, mining, mechanical, or chemical purposes) ("The stock, property and
concerns of such company shall be managed by not less than three nor more than nine, trustees ... ."); Plaquemines Tropical Fruit Co. v.
Buck, 27 A. 1094, 1101 (N.J. Ch. 1893) ("The board of directors is the legal executive, recognized as such, not only in practice and on
principle, but by the statute."); William H. Corbin, The Act Concerning Corporations in the State of New Jersey, Approved April 7, 1875,
With all the Amendments to January 1, 1892, Together With Notes and Forms 9-10, (7th ed. 1892) ("The business of every such company,
shall be managed and conducted by the directors ... .").
n93. This conclusion is based on the limited number of cases addressing the contractibility of core governance rules such as variation of, or
liability waivers for breach of, fiduciary duties.
n94. 59 A. 577, 584 (N.J. Ch. 1904) (citing First Nat'l Bank v. Drake, 11 P. 445, 448 (Kan. 1886); WM. L. Clark & WM. L. Marshall, 3 A
Treatise on the Law of Private Corporations § 677, at 2074 (1901)).
Page 542Page 542
8 N.Y.U. J. L. & Bus. 395, *
n95. Del. Code Ann. tit. 8, § 102(b) (2011), available at http://delcode. delaware.gov/title8/c001/sc01/index.shtml; Act of Apr. 21st, 1896,
ch. 172, § 8, 1896 N.J. Laws 277, 2781, amended by Act of Apr. 19th, 1898, ch. 172, sec. 2, § 8(VII), 1898 N.J. Laws 407, 408. A similar
provision was introduced into the New York Business Corporations Law and enabled amendment to the certificate, which limited the powers
of directors, provided that such amendment "does not exempt [the directors] from any obligation or from the performance of any duty
imposed by law." Act of May 18th, 1892, ch. 691, § 2(9), 1892 N.Y. Laws 2042, 2043 (concerning amendment of corporations law).
n96. See James. D. Dill, The Statutory and Case Law Applicable to Private Companies Under the General Corporation Act of New Jersey
21-22 (2d ed. 1899) (describing the provision as "one of the most important provisions of the Corporation Act" and observing that it carried
"to its logical result the principle laid down in [Ellerman v. Chi. Junc. Rys. & Union Stock-Yards Co., 23 A. 287, 295], that the certificate of
incorporation is equivalent to a special act of the legislature" and amounts to a "delegation to [incorporators] of the lawmaking power of the
Legislature."). Provisions providing for the limitation of the powers of the corporation and the directors were introduced in New Jersey in
1889 and in New York in 1892, prior to which, by implication in relation to the powers of the corporation and the directors, the certificate
was not amendable at all.
n97. Audenried, 57 A. at 584.
n98. Id.
n99. Id. (emphasis added).
n100. Id.
n101. William H. Corbin, The Act Concerning Corporations in the State of New Jersey 8 n.(t) (7th ed. 1892).
n102. See Whalen v. Hudson, 170 N.Y.S. 855 (N.Y. App. Div. 1918), for an example of the invalidation of a self-dealing opt-out.
n103. 143 A. 257 (Del. 1926).
n104. Id. at 259.
n105. Del. Code Ann. tit. 8, § 5, par. 8 (Rev. Code 1915, § 1919) (current version at Del. Code Ann. tit. 8, § 102(b) (2011), available at
http://delcode.delaware.gov/title8/c001/sc01/index.shtml).
n106. Cochran, 143 A. at 260.
n107. 93 A.2d 107, 118 (Del. 1952).
n108. Id. See also Helfman v. American Light & Traction Co. 187 A. 540 (N.J. Ch. 1936).
Page 543Page 543
8 N.Y.U. J. L. & Bus. 395, *
n109. 16 N.Y.S.2d 844, 847 (N.Y. Sup. Ct. 1939) (emphasis added).
n110. Id. at 849 ("When a citizen accepts a public office, he assumes the risk of defending himself against unfounded accusations at his own
expense.") (quoting Chapman v. City of New York, 61 N.E. 108, 110 (N.Y. 1901)).
n111. By implication because there was no charter amendment in this case.
n112. For amendments to the Delaware General Corporation Law allowing corporations to provide for director indemnification, see
generally S. Samuel Arsht & Walter K. Stapleton, Delaware's New General Corporation Law: Substantive Changes, 23 Bus. Law. 75, 77-80
(1967). See also Act of June 18th, 1986, ch. 289, sec. 2, § 102(b)(7), 65 Del. Laws 1986, available at
http://delcode.delaware.gov/sessionlaws/ga133/chp289.shtml (providing for duty of care liability waivers) (codified as amended at Del.
Code Ann. tit. 8, § 102(b)(7) (2011), available at http://delcode.delaware.gov/title8/c001/sc01/index.shtml).
n113. See, e.g., Henry O. Taylor, A Treatise on the Law of Private Corporations §§449-64, 557 (4th ed. 1898).
n114. Coates, supra note 74, at 816-17, 823-25; Horwitz, supra note 68, at 181-83.
n115. Compare Horwitz, supra note 68, and Coates, supra note 74, with Lindley, supra note 27.
n116. Act of Feb. 17th, 1848, ch. 40, § 3, 1848 N.Y. Laws 54, 55 (concerning the formation of corporations for manufacturing, mining,
mechanical, or chemical purposes).
n117. Palmer, supra note 31, at 180-81 ("It is impossible now to dispute the proposition that [directors] are in some sense trustees, that
proposition having been established by a long series of cases.") (citing Charitable Corp. v. Sutton, (1742) 26 Eng. Rep. 642; 2 Atk. 400). The
labeling of directors as trustees took two different guises: the first was simply to call them trustees; the second, and clearly more accurate,
approach was to identify them as trustee-like or, in the English context, as quasi-trustees. Courts were aware that the analogy was a general
one. Consider, for example, Lord Justice Bowen's dicta in Imperial Hydropathic Hotel Co. v. Hampson, [1882] 23 Ch.D. 1 ("When persons
who are directors of a company are from time to time spoken of by Judges as agents, trustees, or managing partners of the company, it is
essential to recollect that such expressions are used not as exhaustive of the powers or responsibilities of those persons, but only as
indicating useful points of view from which they may for the moment and for the particular purpose be considered ... . It is not meant that
they belong to the category, but that it is useful for the purpose of the moment to observe that they fall pro tanto within the principles which
govern that particular class.").
n118. York & Midland Ry. Co. v. Hudson, [1853] 16 Beav. 485 ("The directors are persons selected to manage the affairs of the company
for the benefit of the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely.").
n119. ( 1742) 26 Eng. Rep. 642, 644.
n120. Id.
n121. 1 Nathaniel Lindley, A Treatise on the Law of Partnership, Including its Application to Companies 596-97 (3d ed. 1873) (emphasis
added).
Page 544Page 544
8 N.Y.U. J. L. & Bus. 395, *
n122. In this context, although commentators noted the important conceptual differences between chartered and registered companies, see
supra text accompanying notes 30-32, the limited number of chartered commercial companies came to be treated by 19th-century courts
within the same partnership/contractual paradigm as registered companies. This is unsurprising given that the constitution of chartered
companies was set forth in the Companies Clauses Consolidation Act 1845, an Act heavily influenced by prevailing arrangements in deed of
settlement companies, and which in turn operated as a prototype for the model Table A Articles introduced in 1862.
n123. Aberdeen Ry. Co. v. Blaikie, (1854) 1 Macq 461, 461 (citing Keech v. Sandford, [1726] Sel. Cas. Ch. 61 and Whelpdale v. Cookson,
[1741] 1 Ves. Sen. 9 and noting that "the whole subject was considered by Lord Eldon on a great variety of occasions. It is sufficient to refer
to what fell from that very able and learned judge in Ex parte James (1803) 8 Ves. Jr 337.").
n124. Id. A detailed discussion of the relationship between this holding and the understanding of director power in an English company is
deferred to the section on the evolution of New York self-dealing law.
n125. Id. More recently, Lord Millett LJ observed that "[a] trustee's power of sale does not authorise the trustee to sell the trust property
except to someone with whom he can deal at arm's length." Ingram v. IRC, [1997] 4 All. E.R. 395, 426.
n126. See Ex parte James, [1803] 8 Ves. 337; Ex parte Lacey, [1802] 6 Ves. 625.
n127. See Ex parte James, [1802] 8 Ves. Jun. 338, 351-52 ("The rule is, that a trustee shall not become a purchaser, until he enters into a fair
contract that he may become a purchaser, with those interested... . . It is a question therefore of prudence ... whether [the beneficiaries] will
permit him to buy."); Downes v. Grazebrook, [1817] 3 Mer. 200, 208 ("He continues to be a trustee, he cannot, without the express authority
of his cestui que trust, have anything to do with the trust property as a purchaser. In order to make the sale in the present case a valid
transaction, it is, therefore incumbent on Mr. Grazebrook to shew [sic] that he had such an authority to enable him to become a purchaser at
that sale.") (emphasis added).
n128. Companies Clauses Consolidation Act, 1845, 8 & 9 Vict., c. 16, § 86.
n129. [1871] L.R. 6 Ch. App. 558.
n130. Id. at 565, 567. Counsel for the defendant director submitted that "this company, like other similar companies, chose directors who
could bring them business, and the companies were willing, for the sake of getting that business, to waive the ordinary rules as to directors."
Id. at 564.
n131. The courts held that, where the articles contained a disinterested director voting provision in a separate article from the disclosure
article, compliance with both provisions was necessary to avoid the requirement to obtain shareholder approval. See Costa Rica Ry. Co. v.
Forwood, [1901] 1 Ch. 746. Although most companies' articles contained a disinterested director voting provision, the articles could provide
for disclosure-only to avoid the shareholder approval requirement. See Boulting v. Ass'n of Cinematograph, Television & Allied Technicians,
[1963] 2 Q.B. 606, 636.
n132. Imperial Mercantile, L.R. 6 Ch. App. at 567. Note that the House of Lords reversed the Court of Appeal but only on the basis that the
director's disclosure was insufficient to comply with the provision in the articles. Imperial Mercantile Credit Ass'n v. Coleman, [1873] 6 H.L.
189. It did not challenge Lord Hatherley's conclusion that contractual variation was permissible. See id.
Page 545Page 545
8 N.Y.U. J. L. & Bus. 395, *
n133. Imperial Mercantile, L.R. 6 Ch. App. at 568.
n134. Palmer, supra note 31, at 166 ("These are the rules prima facie applicable to such transactions, but a company is at liberty to waive the
benefit of such rules, and to allow a director to make a contract, or to be interested in a contract, with the company, and the regulations[, i.e.,
the articles,] very commonly make provision accordingly."). See also Boulting, 2 Q.B. at 606.
n135. Consider, for example, the duty of care and liability waivers. See supra text accompanying notes 61-63.
n136. Companies Act, 2006, c. 46,§§190-191.
n137. See Margaret Walters, Substantial Fraud Alleged at L&C, The Times, Jan. 30, 1976, at 23.
n138. Financial Services Authority Listing Rules, 2010, Listing Rule 10. Until October 2009, these rules were mandatory for U.K.
companies. Since 2009, U.K. companies may elect for a "standard listing" in contrast to a "premium listing" to which such rules do not
apply. Most U.K. listing companies have a premium listing.
n139. For transactions below the substantial property transactions threshold, or for listed companies that are de minimis, the contemporary
regime requires disclosure in order to be able to keep the benefit of the transaction without obtaining shareholder approval, but in keeping
the U.K. company law's underlying bias in favor of contractibility, it leaves it open to companies to craft other regulatory solutions.
Companies Act, 2006, c. 46, § 177.
n140. Marsh, supra note 15.
n141. Id. at 43.
n142. Wardell v. R.R. Co., 103 U.S. 651, 658 (1880) (quoting Marsh v. Whitmore, 88 U.S. 178, 183-84 (1974)).
n143. Marsh, supra note 15, at 40.
n144. Clark, supra note 16, at 160-66. See sources cited infra notes 146, 148, which adopt Marsh's view. These articles represent only a
fraction of the articles that adopt Marsh's view.
n145. Norwood P. Beveridge, Jr., The Corporate Director's Fiduciary Duty of Loyalty: Understanding the Self-Interested Director
Transaction, 41 DePaul L. Rev. 655 (1992) [hereinafter Beveridge, Duty of Loyalty]; Norwood P. Beveridge, Interested Director Contracts at
Common Law: Validation Under the Doctrine of Constructive Fraud, 33 Loy. L.A. L. Rev. 97 (1999) [hereinafter Beveridge, Interested
Director Contracts].
n146. There is minimal direct assessment of Professor Beveridge's claim. Those that consider it in more depth have rejected it. For example,
in William L. Cary & Melvin Aron Eisenberg, Cases and Materials On Corporations 650-51 (7th ed. 1995), the claim is considered and
rejected. In the 8th edition there is no consideration of Beveridge's position. See also Victor Brudney, Contract and Fiduciary Duty in
Corporate Law, 38 B.C. L. Rev. 595, 613 n.43 (1997) (adopting Marsh's view but citing Beveridge and noting that "whether or not that
Page 546Page 546
8 N.Y.U. J. L. & Bus. 395, *
implementation was as extensively invoked in restraining corporate management and controllers as Marsh suggested, there is no doubt that it
was pervasive, particularly in industrial states"); Park McGinty, The Twilight of Fiduciary Duties: On the Need for Shareholder Self-Help in
an Age of Formalistic Proceduralism, 46 Emory L.J. 163 (1997).
n147. Solomon v. Armstrong, 747 A.2d 1098, 1115 n.48 (Del. Ch. 1999) ("Marsh's characterization is most likely still viable."); Renee M.
Jones, Rethinking Corporate Federalism in the Era of Corporate Reform, 29 J. Corp. L. 625, 648 n.149 (2004); John H. Langbein,
Questioning The Trust Duty of Loyalty: Sole Interest or Best Interest?, 114 Yale L.J. 929, 959 n.146 (2005); Celia R. Taylor, The
Inadequacy of Fiduciary Duty Doctrine: Why Corporate Managers Have Little to Fear and What Might Be Done About It, 85 Or. L. Rev.
993, 1009 n.81 (2006) (viewing Marsh's position as "widely accepted" although, citing Beveridge, "not free from doubt"); Julian Velasco,
Structural Bias and the Need for Substantive Review, 82 Wash. U. L. Rev. 821, 837 n.56 (2004).
n148. Solomon, 747 A.2d 1098; John C. Coffee, Jr., Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms, 84
B.U. L. Rev. 301, 334 (2004); John C. Coffee, Jr., The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of
Ownership and Control, 111 Yale L.J. 1 (2001); James D. Cox, Managing and Monitoring Conflicts of Interest: Empowering the Outside
Directors with Independent Counsel, 48 Vill. L. Rev. 1077, 1079 (2003); Lawrence A. Cunningham, Choosing Gatekeepers: The Financial
Statement Insurance Alternative to Auditor Liability, 52 UCLA L. Rev. 413, 414 n.1 (2004) (citing Marsh for the observation that the
fiduciary "sealant decayed during the twentieth century"); David W. Deal, Director's Vulnerability to Breach of Fiduciary Duty Claims for
Compensation Decisions: Where Have We Been, Where Are We Now?, 30 Okla. City U. L. Rev. 311, 321-22 (2005); Edwin W. Hecker, Jr.,
Fiduciary Duties in Business Entities, 54 U. Kan. L. Rev 975 (2006); Jennifer G. Hill, Regulatory Responses to Global Corporate Scandals,
23 Wis. Int'l L.J. 367 (2005); Darian M. Ibrahim, Individual or Collective Liability for Corporate Directors?, 93 Iowa L. Rev 929 (2008);
Edward Rock & Michael Wachter, Dangerous Liasons: Corporate Law, Trust Law, and Interdoctrinal Legal Transplants, 96 Nw. U. L. Rev.
651, 668 (2002); David A. Skeel, Jr., Icarus and American Corporate Regulation, 61 Bus. Law. 155 (2005); Leo E. Strine, Jr. et al., Loyalty's
Core Demand: The Defining Role of Good Faith in Corporation Law, 98 Geo. L.J. 629 (2010).
n149. See Cunningham, supra note 11.
n150. See Act of Feb. 17th, 1848, ch. 40, § 3, 1848 N.Y. Laws 54, 55.
n151. ( 1742) 26 Eng. Rep. 642.
n152. ( 1854) 1 Macq 461. See also Benson v. Heathorn, (1842) 62 Eng. Rep. 909; 1 Y. & C.C.C. 326 (cited in Wardell v. R.R. Co., 103 U.S.
651,658 (1880); Cumberland Coal & Iron Co. v. Parish, 42 Md. 597, 605 (1875); Hoffman Steam Coal Co. v. Cumberland Coal & Iron Co.,
16 Md. 456, 492 (1860); Globe Woolen Co. v. Utica Gas & Elec. Co., 121 N.E. 378 (N.Y. 1918); and Hoyle v. Plattsburgh & Montreal R.R.
Co., 9 Sickels 314, 329 (1873)).
n153. See Thompson, supra note 44.
n154. See Cary & Eisenberg, supra note 146, at 651 (referring to cases from Alabama, California, Connecticut, New Jersey, New York and
Maryland in response to Beveridge).
n155. Angell & Ames, supra note 65, at 200.
n156. Id. at 200 n.4.
n157. Stratton v. Allen, 16 N.J. Eq. 229, 232 (N.J. Ch. 1863).
Page 547Page 547
8 N.Y.U. J. L. & Bus. 395, *
n158. See Beveridge, Duty of Loyalty, supra note 145; Beveridge, Interested Director Contracts, supra note 145.
n159. 40 N.J.L. 568 (1878).
n160. 30 N.J. Eq. 702 (1879).
n161. 38 N.J.L. 505 (1875).
n162. Id. at 522-23.
n163. Id. at 523.
n164. 37 N.Y. 317 (1867).
n165. 22 N.Y. 327 (1860).
n166. The English trust cases relied upon in Aberdeen Railway and directly in Butts and Gardner v. Ogden include Keech v. Sanford,
[1726] Sel. Cas. Ch. 61 and Whelpdale v. Cookson, [1747] 1 Ves. Sen. 9.
n167. Davoue v. Fanning, 2 Johns. Ch. 252 (N.Y. Ch. 1816). The New York Chancery Court in Davoue laid particular emphasis on the
House of Lords case, York Buildings Co. v Mackenzie, [1795] 8 Bro. Parl. Cas. 42, a case dealing with an insolvent chartered company.
Davoue, 2 Johns. Ch. at 268. York Buildings was also cited in Stewart, 38 N.J.L. at 523. The court's summary in Davoue of the judgment in
York Buildings bears a close resemblance to the language deployed in Stewart. Compare Davoue, 2 Johns. Ch. at 270 ("That he who is
intrusted with the interest of others, cannot be allowed to make the business an object to himself, because, from the frailty of nature, one who
has power will be too readily seized with the inclination to serve his own interest at the expense of those for whom he is intrusted ... .") with
Stewart, 38 N.J.L. at 522-23.
n168. 114 A. 348, 352 (N.J. 1920). See also Voorhees v. Nixon, 66 A. 192, 193 (N.J. 1907) ("It must be regarded as the settled policy of the
law of this state that express contracts between a corporation and one of its directors are voidable at the instance of the corporation."); Gen.
Inv. Co. v. Am. Hide & Leather Co., 127 A. 529, 535 (N.J. Ch. 1925) ("It is established in Stewart v. Lehigh Valley R. R. Co... . that courts
will not inquire whether a contract such as this seems a fair one. 'Fraud is too cunning and evasive for courts to establish a rule that invites its
presence.' The same case and the many authorities there cited are also an answer to the protestation that the director took no part in the
negotiations under attack." (quoting Stewart, 38 N.J.L. at 523)).
n169. Wiencke v. Branch-Bridge Realty Corp., 4 A.2d 415, 418 (N.J. 1939).
n170. Gardner v. Butler, 30 N.J. Eq. 702, 710 (1879). Judicial awareness of market practice and needs that we see in this case is found more
explicitly in subsequent cases. E.g., Stephany v. Marsden, 71 A. 598, 598 (N.J. Ch. 1908) ("I have observed a tendency of recent years,
arising largely from the extensive and complex dealings and relations of modern trading corporations, to relax this rule; the tendency being,
as I have observed it, to inaugurate the modified doctrine that such contracts should not be deemed voidable at the mere option of the
Page 548Page 548
8 N.Y.U. J. L. & Bus. 395, *
corporation, but that the burden should be imposed upon these seeking to enforce or support such a contract to clearly establish its
fairness."); Robotham v. Prudential Ins. Co. of Am., 53 A. 842, 856 (N.J. Ch. 1903) ("Theoretical rules have to give way to the practical
necessities of business... . Common directors abound, and common directors are better than dummies.").
n171. Gardner, 30 N.J. Eq. at 712.
n172. Id. at 721.
n173. Id. at 722, 724 (emphasis added).
n174. Id. at 725.
n175. Id. at 724.
n176. Id. at 724. As the transaction is voidable according to the strict rule, an executed transaction could, where possible, be unwound. This
would not be possible where the service has been provided, or the product consumed or integrated in the company's activities.
n177. See, e.g., Oliver v. Rahway Ice Co., 54 A. 460, 461 (N.J. Ch. 1903) (refusing to unwind a share buyback from the directors,
comparing the shares to the railway chairs in Aberdeen Railway had they been used).
n178. [1858] 25 Beav. 586. For more recent engagement with this question, see Warman Int'l Ltd. v Dwyer (1995) 182 CLR 544 (Austl.).
n179. Gardner, 30 N.J. Eq. at 723-24.
n180. See, e.g., Baumohl v. Goldstein, 124 A. 118, 121 (N.J. 1924); Hodge v. U.S. Steel Corp., 54 A. 1, 3 (N.J. 1903).
n181. 24 A. 499, 502 (N.J. Ch. 1892).
n182. 52 A. 717, 718 (N.J. Ch. 1902).
n183. Oliver v. Rahway Ice Co., 54 A. 460, 461 (N.J. Ch. 1903). See also Burger v. U.S. Steel Corp., 53 A. 68 (N.J. 1902).
n184. Oliver v. Rahway, 54 A. at 461.
n185. Marr v. Marr, 66 A. 182, 183 (N.J. Ch. 1907).

Page 549Page 549
8 N.Y.U. J. L. & Bus. 395, *
n186. Stewart v. Lehigh Valley R.R. Co., 38 N.J.L. 505, 522 (1875).
n187. Stephany v. Marsden, 71 A. 598, 599 (N.J. Ch. 1908). The Court in Stephany observes that "the general rule ... as established by [the]
Court of Appeals, cannot be said to have been in any way relaxed by that court since it was there first stated in the case of Stewart v. Lehigh
Valley Railroad Company ... and it has since been by that court so repeatedly approved and recognized that [it] must [be] regarded as a fixed
part of the jurisprudence of [New Jersey]." Id. at 598.
n188. Tooker v. Nat'l Sugar Ref. Co. of N.J., 84 A. 10, 15 (N.J. Ch. 1912).
n189. Id.
n190. Id.
n191. Wilkinson v. Bauerle, 7 A. 514 (N.J. 1886).
n192. Id. at 519.
n193. See, e.g., Mitchell v. United Box Bd. & Paper Co., 66 A. 938 (N.J. Ch. 1907); Barry v. Moeller, 59 A. 97 (N.J. Ch. 1904).
n195. Metro. Tel. & Tel. Co. v. Domestic Tel. & Tel. Co., 14 A. 908 (N.J. 1888) (referring to U.S. Rolling Stock Co. v. Atlantic & Great
Western R.R. Co., 34 Ohio St. 450 (1878), suggesting that two companies with overlapping interested directors could enter into a contract
where those directors are in the minority, and holding that an interested director is incapable of acting and counting for the board quorum).
Subsequent New Jersey authority has cited Metropolitan Telephone for the holding. See, e.g., Hill Dredging Corp. v. Risley, 114 A.2d 697
(N.J. 1955); Robotham v. Prudential Ins. Co. of America, 53 A. 842 (N.J. Ch. 1903) (suggesting less onerous rules where the interlocking
directors in two companies are in the minority, but also suggesting that where a director participates on both sides of the transaction, fairness
review is applicable and the role of the director in making the decision may affect who bears the burden of proving fairness).
n196. Abeles v. Adams Eng'g Co., 173 A.2d 246, 255 (N.J. 1961).
n197. Eliasberg v. Standard Oil Co., 92 A.2d 862 (N.J. Super. Ct. Ch. Div. 1952).
n198. Hill Dredging Corp. v. Risley, 114 A.2d 697 (N.J. 1955).
n199. Both Eliasberg, 92 A.2d at 867 and Hill Dredging Corp., 114 A.2d at 712 rely on U.S. Steel Corp. v. Hodge, 53 A. 601 (N.J. Ch.
1902), which clearly affirms Stewart. Having stated the voidability rule, the court in Eliasberg observes that "where there is no stockholders'
approval of a contract or proposal in which a director has a personal interest, the burden is upon the director to completely justify the
transaction." Eliasberg, 92 A.2d at 867. The court in Hill Dredging Corp. cites this statement with approval. Hill Dredging Corp., 114 A.2d at
Page 550Page 550
8 N.Y.U. J. L. & Bus. 395, *
713. The court stated the strict rule that the transaction could not be entered into without shareholder approval, but if it was entered into
without approval, then, quoting Eliasberg favorably and citing Stephany, "the burden is upon the director to completely justify the
transaction." Id. See also Daloisio v. Peninsula Land Co., 127 A.2d 885 (N.J. Super. Ct. App. Div. 1956).
n200. See Gottlieb v. Heyden Chem. Corp., 83 A.2d 595 (Del. Ch. 1951); see also Kerbs v. Cal. E. Airways, Inc., 90 A.2d 652 (Del. 1952).
n201. In no state has Imperial Mercantile been cited to support contractibility. There are a limited number of non-New Jersey references to
the House of Lords judgment, Imperial Mercantile Credit Ass'n v. Coleman, (1873) 6 H.L. 189 (Eng.), which addresses the question of what
constitutes adequate disclosure. There are also a couple of non-New Jersey cases that refer to Lord Hatherley's judgment for other reasons.
There is one New Hampshire case, Ashuelot R.R. Co. v. Elliot, 57 N.H. 397, 422 (1874), and one New York case, Metro. Elevated Ry. Co. v.
Manhattan Ry. Co., 14 Abb. N. Cas. 103, 289-90 (N.Y. Sup. Ct. 1884), that refer to Lord Hatherley's judgment in Imperial Mercantile in
relation to self-dealing, but only as support for the strict voidability rule and not in relation to contractibility.
n202. Marsh, supra note 15, at 45-46, gives a personal account of the drafting of these provisions from when he was a law firm associate.
An example of contracting out language is provided in William Meade Fletcher, Corporation Forms and Precedents§§1031-32 (2d ed. 1928).
n203. There are only very few cases, dating from the 1930s, that consider contractually opting out of the strict rule. This suggests that such
provisions were very rare until later in the 20th century. See the discussion and invalidation of such an opt-out in the New York case, Whalen
v. Hudson Hotel Co., 170 N.Y.S. 855, 858 (App. Div. 1918), which refers to an opt-out as "this most unusual provision" and quotes Herbert
Broom, A Selection of Legal Maxims 289 (8th Am. ed. 1882) ("unusual clauses always excite suspicion.") in the concurrence. Whalen, 170
N.Y.S. at 865 (Woodward, J., concurring).
n204. See William J. Carney, The ALI's Corporate Governance Project: The Death of Property Rights?, 61 Geo. Wash L. Rev 898, 927
(1993) (relying on Marsh and assuming that adoption equals effectiveness).
n205. On the inability to contract out of "settled legal principles" without explicit legislative authority to do so, see Audenried v. East Coast
Milling Co., 59 A. 577, 584 (N.J. Ch. 1904).
n206. Some limited contractibility in relation to the voidability rule is suggested by Hodge v. U.S. Steel Corp., 54 A. 1 (N.J. 1903), which
approved of a bylaw amendment clarifying that self-dealing ratified by a majority of the outstanding shares would be treated as if ratified by
all shareholders, addressing any concerns that a unanimous vote would be required for ratification. Note that this does not alter the legal
principle, but simply the procedural mode of approval. See Whalen, 170 N.Y.S. at 858 for an explicit invalidation of contracting out under
New York law.
n207. Munson v. Syracuse, Geneva & Corning Ry. Co., 8 N.E. 355 (N.Y. 1886).
n208. See Marsh, supra note 15, at 37.
n209. Munson, 8 N.E. at 358.
n210. Id. at 358.
n211. Barnes v. Brown, 80 N.Y. 527 (1880).

Page 551Page 551
8 N.Y.U. J. L. & Bus. 395, *
n212. Cumberland Coal & Iron Co. v. Sherman, 30 Barb. 553 (N.Y. Sup. Ct. 1859).
n213. Gamble v. Queens County Water Co., 25 N.E. 201, 203 (N.Y. 1890).
n214. Sage v. Culver, 41 N.E. 513, 514 (N.Y. 1895).
n215. Id.
n216. Id.
n217. J. C. Shepherd, The Law of Fiduciaries 156 (1981) ( "The basic theoretical distinction between dealings with the corpus and dealings
with the beneficiaries is that, in the former, the fiduciary's power is one of control, while in the latter his power is one of influence.")
(emphasis in original).
n218. See, e.g., Ex parte James, (1803) 32 Eng. Rep. 385; 8 Ves. Jun. 337; Ex parte Lacey, (1802) 31 Eng. Rep. 1228; 6 Ves. Jun. 625.
n219. 31 Eng. Rep. 1228, 1228; 6 Ves. Jun. 625, 626.
n220. Id. at 1228; 6 Ves. Jun. at 626.
n221. Id. at 1228; 6 Ves. Jun. at 626.
n222. Gibson v. Jeyes, (1801) 6 Ves. Jun. 266. See also Coles v. Trecothick, (1804) 9 Ves. 234.
n223. Gibson, 6 Ves. Jun. at 270.
n224. Id. at 277-78.
n225. Hunter v. Atkins, (1834) 47 Eng. Rep. 166, 167; Coop. T. Brough 464, 466-67.
n226. See Thomson v. Eastwood, (1877) 2 App. Cas. 215, 236 (Eng.) ("There is no rule of law which says that a trustee shall not buy trust
property from a cestui que trust, but it is a well known doctrine of Equity that if a transaction of that kind is challenged in proper time, a
Court of Equity will examine into it, will ascertain the value that was paid by the trustee, and will throw upon the trustee the onus of proving
that he gave full value, and that all information was laid before the cestui que trust when it was sold.") (Lord Cairns, L.C.) (emphasis in
original). See also Dougan v Macpherson, [1902] A.C. 197 (affirming the above dicta on value).
Page 552Page 552
8 N.Y.U. J. L. & Bus. 395, *
n227. Note also that the New York courts understood the influence standard through the lens of fair price as well as fair process. See, e.g.,
Whitehead v. Kennedy, 69 N.Y. 462, 466 (1877) (citing Gibson, 6 Ves. Jun. 266). The parties and the courts focused on the issue of fair
price.
n228. 75 N.Y. 91, 99-100 (1878) (internal citations omitted).
n229. Note that the court refers to this doctrine as the doctrine of constructive fraud. The Court cites here Nesbit v. Lockman, 34 N.Y. 167
(1866), 1 Joseph Story, Commentaries on Equity Jurisprudence, as Administered in England and America § 311 (10th ed. 1870), Sears v.
Shafer, 6 N.Y. 268 (1852), Huguenin v. Baseley, (1806) 33 Eng. Rep. 234; 13 Ves. Jun. 105, (1807) 33 Eng. Rep. 526; 14 Ves. Jun. 273,
(1808) 33 Eng. Rep. 722; 15 Ves. Jun. 180, Wright v. Proud, (1806) 33 Eng. Rep. 246; 13 Ves. Jun. 136, Harris v. Tremenheere, (1808) 33
Eng. Rep. 668; 15 Ves. Jun. 34, Edwards v. Myrick, (1842) 67 Eng. Rep. 25; 2 Hare 60, and Hunter v. Atkins, 47 Eng. Rep. 166. For other
cases articulating the influence of the fairness standard, see Judge Andrews' opinion (the same judge who decided Munson v. Syracuse) in
Whitehead v. Kennedy, 69 N.Y. 462, 466 (1877) (citing Gibson v. Jeyes, (1801) 31 Eng. Rep. 1044; 6 Ves. Jun. 266) and the Court of
Appeals' judgment in Fisher v. Bishop, 108 N.Y. 25, 28-29 (1888) ("When this [fiduciary] relation is shown to exist, it imposes the burden of
proof upon the person taking securities, or making contracts inuring to his benefit, to show that the transaction is just and fair, and that he has
derived no unfair advantage from his fiduciary relation.") (citing Gibson, 6 Ves. Jun. 266).
n230. See, e.g., Butler v. Prentiss, 158 N.Y. 49 (1899); Cowee v. Cornell, 75 N.Y. 91; Ten Eyck v. Craig, 62 N.Y. 406 (1875); Rosevear v.
Sullivan, 62 N.Y.S. 447 (App. Div. 1900); Metro. Elevated Ry. Co. v. Manhattan Ry. Co., 14 Abb. N. Cas. 103 (N.Y. Sup. Ct. 1884).
n231. Of course individual directors wield power delegated to them by the board of directors.
n232. Benson v. Heathorn, (1842) 62 Eng. Rep. 909; 1 Y. & C.C.C. 326.
n233. Aberdeen Ry. Co. v. Blaikie, (1854) 1 MACQ 461, 473.
n234. Ex parte Lacey, (1802) 31 Eng. Rep. 1228, 1228; 6 Ves. Jun. 625, 626.
n235. Lindley, supra note 29, at 510 (emphasis added) (footnote omitted).
n236. Benson v. Heathorn, (1842) 62 Eng. Rep. 909; 910 (emphasis added).
n237. For example, the default constitution (the Table A articles) issued pursuant to the Companies Act of 1862 provides that "the business
of the company shall be managed by the directors, who may pay all expenses incurred in getting up and registering the company, and may
exercise all [the] powers of the company." Companies Act, 1862, 25 & 26 Vict., c. 89, § 55 (Eng.). Although the term "board of directors" is
used elsewhere in the articles it is not used in relation to the empowerment of directors or the procedures they have to follow to exercise
power. For example, "the directors may delegate any of their powers to committees consisting of such member or members of their body as
they think fit." Id. § 68 (emphasis added). The Aberdeen Railway Company was a chartered company and its constitution was provided by
the Companies Clauses Consolidation Act of 1845, which also empowers the directors, rather than the board of directors. See Companies
Clauses Consolidation Act, 1845, 8 & 9 Vict., c. 16, § 90 (Eng.).
Page 553Page 553
8 N.Y.U. J. L. & Bus. 395, *
n238. See, e.g., In re Nat'l Provincial Marine Ins. Co., (1870) 5 Ch. App. 559 (Eng.); In re Coalport China Co., (1895) 2 Ch. 404 (Eng.); In
re Cawley & Co., (1889) 42 Ch. D. 209 (Eng.).
n239. Aberdeen Ry. Co. v. Blaikie, (1854) 1 MACQ 461, 473.
n240. § 12 New York Manufacturing Corporation Act of 1848.
n241. Of the General Powers, Privileges and Liabilities of Corporations, Revised Statutes of New York, tit. III, § 6 (1829).
n242. Morawetz, supra note 70, at 477.
n243. N.Y. Gen. Corp. Law § 29 (1892).
n244. Paul K. Ames, May a Director Deal with His Corporation?, 1 Colum. L. Times 193, 193 (1887-88).
n245. Beveridge argued that this standard was, by the mid-1870s, the general U.S. self-dealing fiduciary standard. Beveridge, Interested
Director Contracts, supra note 145, at 103 (citing a casebook on trusts, Jairus Ware Perry, A Treatise on the Law of Trusts and Trustees 248-
49 (2nd ed. 1874)). We show below how this standard percolated through New York self-dealing law. This standard did not play a role in
New Jersey self-dealing law.
n246. Arguably, it is noteworthy that early New Jersey Corporation statutes did not refer to a board, but rather to empowered directors
directly. See John J. Treacy & John Milton, The General Corporation Act of New Jersey (1896). However, the New Jersey courts were
clearly of the view that the board and not individual directors were empowered. See, e.g., Titus v. Cairo & Fulton R.R. Co., 37 N.J.L. 98, 102
(N.J. Sup. Ct. 1874) ("The affairs of corporate bodies are within the exclusive control of their boards of directors, from whom authority to
dispose of their assets must be derived.").
n247. Cumberland Coal & Iron Co. v. Sherman, 20 Md. 117 (1863).
n248. Cumberland Coal & Iron Co. v. Parish, 42 Md. 598, 606 (1875).
n249. See Hoyle v. Plattsburgh & Montreal R.R. Co., 54 N.Y. 314, 328 (1873) ("Nor is it possible to limit the duty of a director of a
corporation, in this respect, to the time while he is acting as a director under any special delegation of power, or is in attendance at meetings
of the board."). Surprisingly, this case is typically cited alongside other authorities supporting the view that the strict standard was dependent
on participation. See, e.g., Globe Woolen Co. v. Utica Gas & Elec. Co., 136 N.Y.S. 16, 21 (N.Y. Sup. Ct.), rev'd 136 N.Y.S. 24 (N.Y. App.
Div. 1912) (citing Hoyle for the proposition that "if the director enters into a contract between himself and his corporation, and assumes to
act for both, his contract is voidable") (emphasis added); Metro. Elevated Ry. Co. v. Manhattan Ry. Co., 14 Abb. N. Cas. 103 (N.Y. Sup. Ct.
1884) ("I think, therefore, that the undoubted rule of law in this state is, that every contract entered into by a director with his corporation
may be avoided by the corporation within a reasonable time, irrespective of the merits of the contract itself."); Merrill v. United Box Bd. &
Paper, 128 N.Y.S. 959 (N.Y. App. Div. 1911).
n250. See Marsh, supra note 15, at 40 ("The only explanation which seems to have been given for this change in position was the technical
one ... ."). See also Clark, supra note 16, at 161 ("At most, they made technical, analogical arguments.").
Page 554Page 554
8 N.Y.U. J. L. & Bus. 395, *
n251. See Marsh supra note 15, at 40 (referring to "the only explanation that seems to have been given" and then quoting from the Supreme
Court of Texas' opinion in Tenison v. Patton, 67 S.W. 92, 95 (Tex. 1902)).
n252. See also Barnes v. Brown, 80 N.Y. 527, 535 (1880) ("He could not act as trustee and for himself at the same time ... .").
n253. Munson v. Syracuse, Geneva & Corning Ry. Co., 8 N.E. 355, 358 (N.Y. 1886) (emphasis added).
n254. Id. at 358.
n255. Munson v. Magee, 55 N.E. 916, 918 (N.Y. 1899) ("The contract of September 14, 1875, was executed by Munson, Case, and Gowen
as individuals, owning and controlling the bonds of the Sodus Bay companies, and then by the Sodus Bay & Corning Railroad Company, by
Munson, its president. No other officer or person executed the contract on behalf of the railroad corporation. It was therefore a case where
Munson, as an individual, stood in the attitude of selling as owner, and purchasing as the president of the corporation, and this, as Judge
Andrews says, the law will not sanction.").
n256. Koster v. Pain, 58 N.Y.S. 865, 866 (N.Y. App. Div. 1899) (emphasis added). See also Jacobson v. Brooklyn Lumber Co., 76 N.E.
1075, 1078-79 (N.Y. 1906) (citing both Butts and Munson v. Syracuse for the proposition that "the courts in this state have frequently
asserted the voidability of acts and votes of corporate officers, when they are affected by private interests"); Merrill v. United Box Bd. &
Paper, 128 N.Y.S. 959, 962 (N.Y. App. Div. 1911) (relying on Munson v. Syracuse and observing that "the plaintiff voted to approve his own
contract"); Miller v. Crown Perfumery Co., 109 N.Y.S. 760, 765 (N.Y. App. Div. 1908) ("This principle flows logically from the fiduciary
relation which exists between an officer of a corporation and the corporation, which prohibits such officer from voting to himself the
property or assets of the corporation, or from taking part in any matter affecting his personal interests.") (citing Butts, 37 N.Y. 317 and
Barnes v. Brown, 80 N.Y. 527). But see Barr v. New York, L.E. & W.R. Co., 26 N.E. 145, 149 (N.Y. 1891) (distinguishing Munson v.
Syracuse on the basis that in Munson v. Syracuse "a director of the defendant corporation was a party to [the agreement], and participated in
the action of the corporation in assuming the obligation."); Strobel v. Brownell, 40 N.Y.S. 702 (N.Y. App. Div. 1895) (distinguishing Munson
v. Syracuse on the basis that, at the time the contract was made, Munson was a director of the purchasing corporation and took part in
making the contract upon which the action was brought); Beers v. N.Y. Life Ins. Co., 20 N.Y.S. 788, 795 (N.Y. Gen. Term 1892) ("[A]
director is at liberty to make a contract with his corporation, so long as he does not, while acting in his own interest, on the one side, also act,
on the other, in the capacity of trustee, so that his interest and his duty might conflict.").
n257. Rudd v. Robinson, 7 N.Y.S. 535, 538 (N.Y. Gen. Term 1889) (following Twin-Lick Oil Co. v. Marbury, 91 U.S. 587 (1875)). Cf.
Hoyle v. Plattsburgh & Montreal R.R. Co., 54 N.Y. 314, 319 (1873) (following Benson v. Heathorn, (1842) 62 Eng. Rep. 909; 1 Y. & C.C.C.
326 and suggesting that such disability was not possible, although the director in this case participated in the decision to auction corporate
assets).
n258. Beveridge, Duty of Loyalty, supra note 145, at 662 ("If we examine the cases cited by Professor Marsh in support of his assertion that
interested director contracts were voidable in spite of fairness, we shall see that the cases were actually concerned with transactions in which
the interested director was active in representing both sides of the deal.").
n259. Cary & Eisenberg, supra note 146, at 651.
n260. Morawetz joined the well-known New York corporate law firm, Cravath, in 1887.
n261. Morawetz, supra note 70, at 495. Morawetz's second edition was reviewed by Professor Ames in the Harvard Law Review. J. B.
Ames, Book Review, 1 Harv. L. Rev. 109, 110 (1887) (referring to Morawetz's treatise as "the best treatise on the subject of Corporations").
Page 555Page 555
8 N.Y.U. J. L. & Bus. 395, *
n262. Cary & Eisenberg, supra note 146, at 651.
n263. Morawetz, supra note 70, at 484-85. See also Henry O. Taylor, A Treatise on The Law of Private Corporations (2d ed. 1888). This text
has strong New York influences, as Taylor was a member of the New York Bar. Although Taylor does not state the rule as clearly as
Morawetz does, his analysis is structured by participation: "A director or other corporate officer can on behalf of his corporation make with
himself no contract that will bind the corporation ... . Accordingly, a resolution of the board of trustees of a corporation carried by the casting
vote of the president ratifying an unauthorised act of his, in which he was personally interested, is void." Id. at 580-81 (emphasis added)
(citations omitted).
n264. Sage v. Culver, 41 N.E. 513 (N.Y. 1896) is a central but largely forgotten case for U.S. commentators. The case attracts only seven
citations from a Westlaw Journals and Reviews search, and only one of those considers Sage in the text of the article. See Claire M.
Dickerson, Interested Directors of New York Corporations and the Burden of Proof, 1988 Colum. Bus. L. Rev. 91, 95-97. See also
Beveridge, Interested Director Contracts, supra note 145, at 121 (citing but not considering the case in detail); Lauren B. Homer, Note, The
Status of the Fairness Test Under Section 713 of the New York Business Corporation Law, 76 Colum. L. Rev. 1156, 1161 (1976).
n265. Van Cott v. Van Brunt, 82 N.Y. 535, 539, 541 (1880).
n266. Strobel v. Brownell, 40 N.Y.S. 702, 705 (N.Y. App. Div. 1895).
n267. See Carr v. Kimball, 139 N.Y.S. 253, 262 (N.Y. App. Div. 1912) (citing Davids v. Davids, 120 N.Y.S. 350 (N.Y. App. Div. 1909), and
Sage, 41 N.E. 513), for a similar degree of schizophrenia about the relationship between power and the applicable standard.
n268. Globe Woolen Co. v. Utica Gas & Elec. Co., 136 N.Y.S. 16 (N.Y. Sup. Ct. 1912).
n269. Id. at 21.
n270. Globe Woolen Co. v. Utica Gas & Elec. Co., 121 N.E. 378, 379-80 (N.Y. 1918).
n271. Id. at 380.
n272. Id.
n273. One of the few of these cases is Hauben v. Morris, 291 N.Y.S. 96 (N.Y. Sup. Ct. 1936).
n274. See Schall v. Althaus, 203 N.Y.S. 36 (N.Y. App. Div. 1924); Blaustein v. Pan Am. Petroleum & Transp. Co., 21 N.Y.S.2d 651 (N.Y.
Sup. Ct. 1940); Cleary v. Higley, 277 N.Y.S. 63 (N.Y. Sup. Ct. 1934). Each of these cases quotes extensively from Sage v. Culver, 41 N.E.
513.
Page 556Page 556
8 N.Y.U. J. L. & Bus. 395, *
n275. La Vin v. La Vin, 128 N.Y.S.2d 518 (N.Y. App. Div. 1954).
n276. La Vin v. La Vin, 121 N.E.2d 620 (N.Y. 1954) (per curiam).
n277. Marsh, supra note 15, at 41.
n278. See, e.g., Everett v. Phillips, 43 N.E.2d 18, 22 (N.Y. 1942) (holding that the dual position of directors did not render the transaction
void but subjected it to fairness review); Kaminsky v. Kahn, 259 N.Y.S.2d 716, 725 (N.Y. App. Div. 1965); Foley v. D'Agostino, 248
N.Y.S.2d 121 (N.Y. App. Div. 1964); Wohl v. Miller, 169 N.Y.S.2d 233, 241 (N.Y. App. Div. 1958) (connecting explicitly actual participation
to fairness review); Schall, 203 N.Y.S. at 39; Strax v. Murray Hill Mews Owners Corp., 809 N.Y.S.2d 759, 763 (N.Y. App. Term 2005)
(Suarez, P.J., dissenting); In re Meyer's Estate, 119 N.Y.S.2d 737, 756 (N.Y. Sup. Ct. 1953) (holding fairness review applicable when a
director is "serving two masters"); Stearns v. Dudley, 76 N.Y.S.2d 106, 125 (N.Y. Sup. Ct. 1947); Bayer v. Beran, 49 N.Y.S.2d 2, 6-7 (N.Y.
Sup. Ct. 1944).
n279. Munson v. Syracuse is regularly cited in the non-corporate context of trusts and wills. See, e.g., In re Estate of Grace, 247 N.Y.S.2d
695, 698 (N.Y. Surr. Ct. 1964); In re Estate of Dickson, 237 N.Y.S.2d 572, 577 (N.Y. Surr. Ct. 1963). There are very few post-Globe-Woolen
Munson v. Syracuse citations in the corporate cases.
n280. Strax, 809 N.Y.S.2d at 763 (citing Sage and Munson v. Syracuase as authorities for fairness review).
n281. Hazzard v. Chase Nat'l Bank of New York, 287 N.Y.S. 541, 570 (N.Y. Sup. Ct. 1936).
n282. Blaustein v. Pan Am. Petroleum & Transp. Co., 21 N.Y.S.2d 651, 713 (N.Y. Sup. Ct. 1940); Cleary v. Higley, 277 N.Y.S. 63, 75 (N.Y.
Sup. Ct. 1934).
n283. For a discussion on repeat players, see Marc Galanter, Why the "Haves" Come Out Ahead: Speculations on the Limits of Legal
Change, 9 Law & Soc'y Rev. 95 (1974).
n285. See, e,g., Schall v. Althaus, 203 N.Y.S. 36 (N.Y. App. Div. 1924); Stearns v. Dudley, 76 N.Y.S.2d 106 (N.Y. Sup. Ct. 1947). Other
cases, of course, would fit in the race-to-the-bottom paradigm. See, e.g., Everett v. Phillips, 43 N.E.2d 18 (N.Y. 1942); Bayer v. Beran, 49
N.Y.S.2d 2 (N.Y. Sup. Ct. 1944).
n286. Marsh cited Blish v. Thompson Automatic Arms Corp., 64 A.2d 581 (Del. 1948) in relation to the discussion of whether an interested
director could be counted for the purpose of determining whether the board is quorate. Marsh, supra note 15, at 42 n.27. He also cited the
earlier Federal case of Hand v. Missouri-Kansas Pipe Line Co., 54 F. Supp. 649 (D. Del. 1944) in relation to board expenses in a proxy fight.
Marsh, supra note 15, at 60 n.88.
n287. Cahall v. Lofland, 114 A. 224 (Del. Ch. 1921).

Page 557Page 557
8 N.Y.U. J. L. & Bus. 395, *
n288. Du Pont v. Du Pont, 242 F. 98, 136 (D. Del. 1917).
n289. For example, in defining constructive fraud, the court in Cowee v. Cornell, 75 N.Y. 91, 99-100 (1878) (citing, among other cases, the
U.K. case of Hunter v. Atkins, (1834) 47 Eng. Rep. 166; 3 Myl. & K. 113) observed that "whenever, however, the relations between the
contracting parties appear to be of such a character as to render it certain that they do not deal on terms of equality but that either on the one
side from superior knowledge of the matter derived from a fiduciary relation, or from overmastering influence, or on the other from
weakness, dependence, or trust justifiably reposed, unfair advantage in a transaction is rendered probable, there the burden is shifted, the
transaction is presumed void, and it is incumbent upon the stronger party to show affirmatively that no deception was practiced, no undue
influence was used, and that all was fair, open, voluntary and well understood."
n291. Cahall, 114 A. at 232 (quoting Gardner v. Butler, 30 N.J. Eq. 702, 724-25 (1879)).
n292. Lofland v. Cahall, 118 A. 1 (Del. 1922).
n293. Gottlieb v. Heyden Chem. Corp., 90 A.2d 660 (Del. 1952).
n294. While Lofland v. Cahall was the only case cited, the court also cited 2 William Meade Fletcher, Cyclopedia of the Law of Private
Corporations § 921 (1917). Gottlieb, 90 A.2d at 663.
n295. Holmes, supra note 3, at 469 ("When you get the dragon out of his cave on to the plain and in the daylight, you can count his teeth
and claws, and see just what is his strength [sic].").
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NOTE: Homebuyer Beware: MERS AND THE LAW OF SUBSEQUENT PURCHASERS
NAME: Joshua J. Card+
BIO:
+ J.D. Candidate, Brooklyn Law School, 2013; B.A., Amherst College, 2008. I would like to thank Professor Christopher Serkin, David De
Gregorio, and the members of the Brooklyn Law Review, for their thoughtful insights and guidance. I would also like to thank my family
and Jaclyn DeMais for their love and support.
LEXISNEXIS SUMMARY:
... In particular, this Note argues that subsequent purchasers of MERS-mortgaged properties will not constitute bona
fide purchasers for value and that MERS's documentation problems pose severe risks to them and to the real estate
market generally. ... V.Risks for Subsequent Purchasers of MERSMortgaged Property While MERS has captured
widespread public attention for its role in the foreclosure crisis, the company's business practices raise equally important
questions for purchasers of MERS-mortgaged properties. ... For example, under New York law, a mortgagee is entitled
to discharge a borrower's obligation upon the borrower's satisfaction of the mortgage debt. ... Therefore, the question
arises whether the recording statutes will protect the subsequent purchaser against prior unrecorded interests.
TEXT:
[*1633]
Introduction
Imagine you are in the market for a new home. You scour local real estate listings, you vet real estate agents, and
you canvas neighborhoods until finally a property grabs your attention. You know this is where you will spend the rest
of your life. So you make the homeowner an offer, he accepts, and you proceed to the closing. Lawyers, real estate
agents, and title insurers all gather around a table. Everything appears to be going smoothly: you distribute your
purchase funds to the seller, he pays his remaining balance on the mortgage, and the owner of his mortgage--a company
named Mortgage Electronic Registration Systems, Inc. (MERS)--discharges the mortgage and removes its lien on the
property. Because your title search revealed that MERS possessed the only outstanding interest against the property, you
are satisfied that the title is free from adverse claims. Accordingly, you close the deal.
Six months pass. You have finally finished moving into your new home. You have met your new neighbors, found
a new favorite restaurant, and enrolled your children into a new school. Moreover, your finances have remained stable,
and you are current on your mortgage payments. As a result, you are perplexed when you return home one day to an
unwelcome surprise: a foreclosure notice. You immediately call your bank in protest, but the bank actually confirms its
receipt of your mortgage payments. In fact, the foreclosure notice is not even from your lender.
You hire a lawyer to represent you, but to no avail. The law is not on your side. Although you performed a title
search and found only MERS's name in the land records, another unrecorded claim existed. As it turns out, MERS held
only "legal title" to the property, while another party actually owned [*1634] the right to the mortgage payments. n1
Accordingly, after the seller tendered the remaining balance to MERS, the company encountered a problem when it
Page 560Page 560
could not determine who was entitled to the funds. MERS later distributed the funds to the wrong individual. As a
result, the true owner retains a claim against the underlying property. You lose your dream home. Worse still, you may
not be alone.
Subsequent purchasers of MERS-mortgaged properties throughout the nation may find themselves in similar
danger. MERS is listed on more than 65 million mortgages, n2 or "approximately 60% of all mortgage loans in the
United States." n3 Moreover, due to documentation errors n4 and "shoddy recordkeeping practices," n5 the likelihood that
MERS cannot identify the true owner of a particular mortgage note is quite substantial. n6 This generates tremendous
risks for subsequent purchasers. For example, under New York law, a discharge of the mortgage without a
corresponding discharge of the mortgage note remains ineffective as against the owner of the note. n7 Therefore, when
MERS discharges a mortgage without knowledge of the note owner's identity and later distributes funds to the wrong
MERS member, the owner of the note can [*1635] redeem his security interest in the property. n8 Even where the
property is conveyed to a subsequent purchaser, courts will refuse to protect that party because he cannot satisfy the
requirements of a bona fide purchaser for value. n9 As demonstrated, this will cause a subsequent purchaser to lose his
property.
These problems could have a devastating effect on the real estate market. n10 As prospective purchasers and title
insurers become aware of these risks, owners of MERS-mortgaged properties will suffer from "clouded title" n11 as
potential buyers begin to avoid their properties. n12 This will affect homeowners' ability to alienate their property, and it
could cause widespread deadlocks in the real estate market--at least to the extent that MERS encounters documentation
problems. n13 Nevertheless, courts can avoid these dangers by utilizing principles of agency law. In particular, if courts
accept MERS's authority to act as an agent for lenders, those lenders would be bound by MERS's discharges and would
lose any claims against the property. n14 Although the adoption of an agency theory might harm some homeowners by
insulating MERS from attack in other areas, n15 it would actually protect the vast majority of homeowners of MERS-
mortgaged [*1636] properties, as well as prospective purchasers of those properties. n16
This note, in Part I, provides a brief overview of the MERS registry and how it operates within the mortgage
finance industry. Part II provides a historical background of the property doctrines affecting MERS and the law of
subsequent purchasers, including law pertaining to mortgages and the recording statutes. Part III discusses modern
developments in mortgage finance by tracing the market's evolution toward mortgage securitization and explaining how
MERS alters the traditional securitization framework. Part IV explores public reactions to MERS, including various
courts' decisions relating to MERS, the company's recent legal battles with county recorders and Attorneys General,
scholarly analysis of MERS, as well as attention MERS has received from the public at large. Part V analyzes the
frequently overlooked problems MERS poses for subsequent purchasers. In particular, this Note argues that subsequent
purchasers of MERS-mortgaged properties will not constitute bona fide purchasers for value and that MERS's
documentation problems pose severe risks to them and to the real estate market generally. Finally, Part VI suggests that
courts can avoid these issues by recognizing MERS's authority to act as an agent for its members.
I. MERS
MERS operates a large, electronic document registry that "tracks ownership interests in residential mortgages." n17
Financial institutions n18 created MERS in response to the perceived inefficiency and costliness of the traditional
recording system, n19 under which lenders were required to [*1637] record changes in mortgage ownership with county
recorders and pay a fee. n20 Indeed, on its website, MERS states that it was "created . . . to streamline the mortgage
process by using electronic commerce to eliminate paper" n21 and that its "mission is to register every mortgage loan in
the United States on the MERS(r) System." n22 Not surprisingly, financial institutions that are active in the mortgage
finance industry find MERS attractive precisely for these reasons: it facilitates the efficient transfer of mortgages and
mortgage notes among numerous parties, n23 and it avoids the costly and often slow process of recording these transfers
with the county clerk. n24
MERS alters the traditional mortgage financing system by permitting "lenders to identify MERS as nominee and
mortgagee for its members' successors and assignees." n25 Once a mortgage is registered with MERS, "the beneficial
ownership interest or servicing rights may be transferred among MERS members" n26 in order to bundle mortgages into
securities more effectively. n27 However, throughout this entire process, "MERS remains the mortgagee of record in local
county recording offices regardless of how many times the mortgage is transferred, thus freeing MERS's members from
paying the recording fees that would otherwise be furnished to the relevant localities." n28 Only [*1638] upon a transfer
to a nonmember n29 or a discharge of the mortgage n30 will the company seek to record any change in mortgage
ownership. Moreover, notwithstanding its constructive claim of ownership with the county recording offices, "MERS
Page 561Page 561
does not lend money, does not receive payments on promissory notes, and does not service loans by collecting loan
payments." n31
II. Property Doctrines Affecting MERS
To fully understand the MERS system, how it operates, and its effects on the real estate market, one must first
understand the property doctrines that provide its foundation.
A. Mortgages
"A mortgage is a conveyance or retention of an interest in real property as security for performance of an
obligation," n32 where the obligation "is almost always a loan of money evidenced by a promissory note." n33 To avoid
confusion, one must distinguish between a mortgage, on one hand, and a mortgage note or promissory note, on the
other. A "mortgage" is a security interest that a lender holds in the underlying property, n34 whereas a "promissory note"
represents a borrower's obligation to repay his loan. n35 Conceptually, mortgage transactions are structured as follows.
First, a lender provides funds to a borrower in order to initiate a property transfer from a third party. n36 Second, the
borrower executes the transfer and obtains title to the property. n37 In exchange for the borrowed funds, the [*1639]
borrower (mortgagor) delivers to the lender (mortgagee) a promissory note and a mortgage. n38
A mortgage is commonly terminated either by foreclosure n39 or through a satisfaction and discharge. n40 Where a
borrower defaults on his obligation to the lender, the lender has the power to redeem his security interest in the property
through foreclosure. n41 By contrast, where a borrower makes "payment at or before maturity," n42 the borrower's payment
will terminate the mortgage. n43 Nevertheless, whether the owner of the mortgage--as opposed to the owner of the
mortgage note--can properly discharge a borrower's debt may prove important to borrowers and their successors in
interest. For example, in New York, a note secured by a mortgage "will not be discharged by payment to the record
holder if . . . the note and mortgage have already been transferred . . . , even though no assignment has been recorded."
n44
Indeed, courts have cautioned that "the satisfaction of the mortgage is not a blanket release of [a borrower's]
obligations under the note." n45 Accordingly, a payment to the wrong individual would be "at [the borrower's] peril." n46
B. Recordation and the Recording Acts
The recording acts were developed "to secure a permanent record of landholding, and to prevent fraudulent
[*1640] claims to lands by concealment of transfers." n47 In large part, the recording acts effectuate these purposes by
providing a "fruitful source[] of notice to a purchaser" n48 or by documenting which landowners have won the "race to
the record." n49 United States jurisdictions emphasize these features of recordation to varying degrees through their
recording statutes. n50 In particular, jurisdictions utilize three variations: race statutes, n51 notice statutes, n52 and race-notice
statutes. n53
Race statutes n54 "protect[] the first purchaser to record." n55 Accordingly, a purchaser's "notice or knowledge of prior
unrecorded claims is irrelevant" to determining his protection under the statute. n56 Simply put, as between two
competing interests in land, "the first to record has priority." n57
By contrast, notice statutes n58 generally protect only those subsequent purchasers who can satisfy the requirements
of a "bona fide purchaser for valuable consideration." n59 A bona fide purchaser is a purchaser "without notice of prior
unrecorded interests that are subject to the recording act." n60 Under this standard, "several kinds of notice . . . may
disqualify a person from . . . protection," n61 including actual notice, constructive notice, and inquiry notice. n62 Actual
notice occurs where the purchaser has "actual knowledge of the prior interest." n63 Constructive notice occurs where "a
reasonable title [*1641] search of the public real estate records would have revealed" a prior interest. n64 Inquiry notice
occurs where a purchaser has "notice of facts which would have caused a reasonable person to make further inquiries."
n65
Pure notice statutes therefore represent the converse of race statutes: a subsequent purchaser must be bona fide, n66 but
he "need not record to qualify for . . . protection." n67
Race-notice statutes n68 occupy an intermediary position between race and notice statutes, combining elements of
both. n69 In particular, race-notice statutes require both that the subsequent purchaser record first n70 and that he represent
a bona fide purchaser for value. n71 So long as a purchaser can satisfy these requirements, the statutes will protect his
interest. n72
III.Modern Mortgage Finance: The Rise of Securitization and MERS
Developments in mortgage finance that have occurred over the last century illustrate why financial institutions
created MERS and how MERS facilitates their businesses. Perhaps the most important development for mortgage
Page 562Page 562
finance has been the creation of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). n73 As a matter of financial policy, Fannie Mae and Freddie Mac both serve
important functions for the mortgage market. n74 First, "they facilitate the flow of capital from areas of the country where
funds are plentiful to places in which mortgage money is in short supply," thereby providing liquidity to local banks. n75
Second, "they move capital investment from other [*1642] sectors of the national economy into the mortgage market."
n76
Finally, they "even out regional differences in interest rates" and "create a means of spreading the risks inherent in
mortgage portfolios that are heavily concentrated in one state or region." n77 Fannie Mae and Freddie Mac accomplish
these goals by purchasing "vast amounts of home loans from savings banks and other lenders" throughout the country. n78
The companies then issue "mortgage-backed securities," n79 which are based on pools of the underlying mortgage loans.
n80
This process requires the cooperation of several different entities. n81 Additionally, prior to the creation of MERS, most
of these transactions were recorded with the county recorder's office. n82 Figure A n83 below represents a securitization
chain where MERS is not involved.
FIGURE A
Figure A et
In the wake of MERS's implementation, financial institutions could execute the securitization process much more
[*1643] quickly. n84 Indeed, some have even suggested that this may have played a role in causing the financial crisis. n85
Nevertheless, speed is not MERS's only advantage for financial institutions. The MERS system also allows its members
to avoid paying recording fees on transfers occurring within the registry. n86 Indeed, county recorders around the country
have begun to file lawsuits against MERS in an effort to recover lost fees. n87 Moreover, financial institutions appear to
lose nothing by utilizing this system. Once a loan enters the MERS system, members authorize MERS to act on their
behalf with respect to the property. n88 Accordingly, financial institutions are able to increase the volume of their business
and reduce costs while also retaining the ability to initiate legal proceedings through MERS. n89 Figure B n90 below
represents a securitization chain where MERS acts as mortgagee of record. [*1644] FIGURE B
Figure B
et
IV. Public Reactions to MERS

MERS has achieved significant notoriety in the wake of the financial collapse. MERS currently finds itself at the
center of a national foreclosure crisis--where approximately one in twenty homeowners faces foreclosure n91 and MERS
is listed on more than 60 percent of mortgages nationwide. n92 As a result, MERS's name has surfaced in thousands of
foreclosure and bankruptcy actions throughout the country. n93 Nevertheless, courts remain divided over the legal status
of MERS's business practices. n94 Some have held that MERS lacks standing to [*1645] pursue foreclosure actions n95 or
bankruptcy stay relief motions. n96 Other courts have ruled to the contrary. n97 This lack of uniformity has created
potentially devastating uncertainty for the mortgage industry.
Recent lawsuits from Attorneys General and county recorders throughout the country have only added to this
uncertainty. In particular, Attorneys General in Delaware and Massachusetts have both filed recent lawsuits against
MERS, alleging "deceptive trade practices" n98 and "deceptive business practices," n99 respectively. Moreover, Nevada's
Attorney General has brought suit against Lender Processing Services, a major "default and foreclosure processor that
works behind the scenes for most large banks," alleging "deceptive foreclosure practices" in the wake of the robo-
signing scandal. n100 Finally, county recorders throughout the United States have mounted legal attacks against MERS by
claiming that the MERS system "bypasses local recording laws" n101 and deprives counties of "millions in property
recording filing fees." n102
Given the current economic climate, it is not hard to understand why MERS has captured such widespread
attention from the public and from publicly elected officials. Although economists declare that the U.S. recession
officially [*1646] ended in June 2009, n103 household incomes have continued to fall by approximately 7 percent, n104
unemployment rates have remained well above equilibrium levels, n105 and foreclosure rates have continued to surge. n106
Many Americans appear to be upset over a crisis that banks caused primarily through their risky business practices. n107
Now that many Americans are facing foreclosure n108 at the hands of those very same institutions, n109 [*1647] they may
view MERS as a symbol of the same overzealous financial culture that contributed to the crisis. n110 Indeed, some have
even advocated confronting MERS directly in quiet-title actions and foreclosure proceedings. n111
Page 563Page 563
V.Risks for Subsequent Purchasers of MERSMortgaged Property

While MERS has captured widespread public attention for its role in the foreclosure crisis, n112 the company's
business practices raise equally important questions for purchasers of MERS-mortgaged properties. As recent events
have shown, failures by financial institutions and MERS to properly document assignments of mortgage notes have
created a risk that neither can determine who owns the note or recreate the chain of title for any particular mortgage. n113
Courts in several states have already held that MERS's inability to produce both the mortgage and the [*1648] note is
fatal to its ability to foreclose. n114 However, MERS's inability to produce the note generates problems that transcend the
foreclosure arena. In particular, it threatens title to MERS-mortgaged properties that are subsequently purchased by
third parties, and it places a cloud on title for existing homeowners whose properties list MERS as the mortgagee of
record.
A. Framing the Issue
MERS raises a host of issues that could pose risks to subsequent purchasers. For example, imagine the following
scenario, represented below by Figure C. n115 A is a homeowner who financed the purchase of his home with a mortgage.
A's lender, Bank Z, provided funds to A in order make the purchase, but in exchange, Bank Z required A to execute two
documents. First, A executed a mortgage on the property to MERS, "solely as nominee for [Bank Z] and [Bank Z]'s
successors and assigns." n116 Second, A executed a promissory note to Bank Z, secured by the mortgage to MERS. After
closing the transaction, MERS recorded its mortgage at the county recorder's office. Subsequently, Bank Z assigned the
note to Bank Y, who then assigned the note to Bank X, who later assigned the note to Bank W. All of these assignments
were executed in order to securitize A's mortgage note, but none were recorded. Instead, the banks utilized MERS to
track their assignments. However, MERS and the relevant banks either lost track of the note or failed to properly
execute their assignments. As a result, the banks suffer from missing or inconsistent paperwork with respect to the note.
Meanwhile, A wanted to sell his home and remained current on his mortgage payments. B demonstrated interest in
A's property and decided to buy it. At the closing, B distributed funds to A, which A tendered to MERS in order to
satisfy the remaining balance on his note. In exchange for A's payment, [*1649] MERS discharged its mortgage on the
property. n117 A then conveyed title to B. However, neither A nor B received any assurance that A's debt was satisfied
from the actual owner of A's note. Instead, both relied on MERS's discharge of the mortgage, in its capacity as
mortgagee of record. Therefore, if MERS fails to distribute the proceeds to the owner of the note, it may be possible that
the owner of A's note has a claim against B's property, which was pledged as security for the note. The viability of any
claims against B's property hinges on two critical questions. First, can MERS properly discharge A's debt obligation
and, in the process, extinguish any future claims by the owner of the note? Second, if MERS cannot properly discharge
A's debt, will courts recognize B's claim to the property as superior to the noteholder's prior unrecorded interest, on the
ground that B is a bona fide purchaser for value? n118
FIGURE C
Figure C
et [*1650]
B. MERS's Ability to Discharge the Debt
As a threshold matter, it is unclear whether MERS can properly discharge the borrower's obligation, given that
MERS holds only an interest in the mortgage. n119 For example, under New York law, a mortgagee is entitled to discharge
a borrower's obligation upon the borrower's satisfaction of the mortgage debt. n120 Importantly for MERS, the relevant
statute defines "mortgagee" as "the current holder of the mortgage of record or the current holder of the mortgage." n121
Therefore, one who holds only the mortgage without a corresponding interest in the note can nevertheless discharge a
mortgage under the statute. n122 Indeed, the statute expressly provides for a discharge of the mortgage even where the
mortgagee cannot produce the note. n123
The inquiry does not end here, however. Notwithstanding MERS's ability to discharge a mortgage for recording
purposes, a question remains as to what legal effect that discharge will have upon the owner of the note. In New York, a
note secured by a mortgage "will not be discharged by payment to the record holder if . . . the note and mortgage have
already been transferred . . . , even though no assignment has been recorded." n124 In other words, a borrower cannot
satisfy his debt by paying the record holder of the mortgage if the record holder has already assigned its interests to a
third party, regardless of the third party's failure to record. n125 To that effect, the New York Court of Appeals has
cautioned that "where a [*1651] party makes . . . a final payment in satisfaction of a bond and mortgage without taking
Page 564Page 564
a satisfaction and without requiring production of the instruments, or receiving some sufficient excuse for their
nonproduction, the payment is at his peril and not good as against an assignee for value under an unrecorded
assignment." n126 At bottom, New York law embodies the principle that a borrower should require his mortgagee to
demonstrate contemporaneous ownership of the mortgage and note before tendering a final payment on the mortgage.
n127
Otherwise, the payment is made "at his peril." n128 This appears to flow from the maxim that "a transfer of the
mortgage without the debt is a nullity." n129 Given that "a mortgage is but an incident to the debt which it is intended to
secure," n130 it follows that the release of a mortgage should remain ineffective as against the owner of the note, who may
not have received the final payment. n131
Where MERS acts as mortgagee of record, these principles bear directly on MERS's ability to properly discharge a
borrower's obligation. Since MERS has no interest in the underlying mortgage note, n132 the company can release only its
interest in the mortgage. However, given that "a transfer of the mortgage without the debt is a nullity," n133 a release of
the [*1652] mortgage without a release of the debt would likewise appear to be a nullity. Under these circumstances, a
borrower's failure to require MERS to "produce and deliver up the instruments which are being paid and satisfied"--in
particular, the mortgage note--could place his payment in jeopardy. n134
Nevertheless, some authority exists n135 to suggest that MERS may have the ability to discharge the borrower's debt
as an agent "for the Lender and Lender's successors and assigns." n136 In MERSCORP, Inc. v. Romaine, n137 the New York
Court of Appeals held that MERS had authority to record discharges "as the nominee for the mortgagee of record or for
the last assignee." n138 Moreover, in an opinion dissenting in part, Chief Judge Kaye also appeared to accept MERS's
agency theory, suggesting that "the use of a nominee as the equivalent of an agent for the lender is apparent, and not
unusual." n139 Nevertheless, Chief Judge Kaye agreed with the majority by stating,
Issues concerning the underlying validity of the MERS mortgage instrument--in particular, whether its failure to
transfer beneficial interest renders it a nullity under real property law, whether it violates the prohibition against
separating the note from the mortgage, and whether MERS has standing to foreclose on a mortgage--are best left for
another day. n140
The extent to which courts will recognize MERS's agency powers beyond the context of the recording statutes
remains to be seen. On one hand, some courts appear to have followed the Court of Appeals' formulation of MERS's
agency authority. n141 In particular, one court has held that "the language of the mortgage appoints MERS as nominee, or
agent, for the lender and its successors and assigns for the purposes set forth therein." n142 [*1653] Accordingly, the
same court found that MERS was entitled "to exercise any and all of the interests granted by the borrower under the
mortgage," including "the right to foreclose and sell the property[,] and to take any action required of the lender." n143
However, other courts appear to have contradicted the Court of Appeals' approach in favor of a more exacting
standard. n144 In particular, one court has refused to find that an agency relationship existed between MERS and its
members by explaining that "the fact . . . MERS is named 'nominee' in the Mortgage is not dispositive of the existence
of an agency relationship and does not, in and of itself, give MERS any 'authority to act.'" n145 Additionally, another court
has held that, "as nominee, MERS's authority was limited to only those powers which were specifically conferred to it
and authorized by the lender." n146 Although the mortgage gave MERS the right "to exercise any or all of those rights,
[granted by the Borrowers to Countrywide] including, but not limited to, the right to foreclose and sell the Property," n147
the court nevertheless insisted that no party can initiate foreclosure without holding both the mortgage and the note at
the time of the action. n148 The implication of these cases is clear. Both suggest that the power to foreclose must be
specifically authorized by the principal and that the language contained in the mortgage provides insufficient
authorization. The same logic would also seem to extend to MERS's ability to discharge the security instrument, which
is another power the mortgage confers upon the mortgagee. n149
Nevertheless, the fact remains that no court has squarely addressed the issue of whether MERS's discharges would
be binding upon the owner of the note, particularly where the owner of the note is unknown n150 and perhaps [*1654]
unknowable n151 to MERS. However, as courts continue to examine MERS's agency authority, they should recognize that
their decisions carry immense implications for subsequent purchasers of MERS-mortgaged properties. In particular,
where the note has been lost or improperly assigned, two dangers emerge. First, MERS may lack the ability to identify
the note's true owner, which precludes the company from recording a proper discharge on behalf of the owner of the
note. n152 Second, MERS may lack the ability to identify all assignees in the chain of title to the note, n153 which means
that MERS cannot rule out the existence of potential claims by unknown assignees to a portion of the note's proceeds.
Under these circumstances, unsatisfied parties to the original mortgage note may have claims against the property, as
security for the note, if those parties do not receive the funds to which they are entitled. n154 Because MERS cannot
Page 565Page 565
determine how to distribute funds where it cannot identify the note's owner, this likelihood does not appear to be
remote.
Accordingly, a subsequent purchaser may be at risk of losing his property when the note's owner attempts to
redeem the security interest, even though he takes the property totally unaware of any prior unrecorded assignees of the
note or any potential claims they might possess. Indeed, when MERS releases its mortgage lien and the borrower then
conveys the property to a third-party purchaser, the third party relies on the fact that all recorded interests appear to have
been satisfied. Therefore, the question arises whether the recording statutes will protect the subsequent purchaser
against prior unrecorded interests. In most jurisdictions, n155 the third party must represent a bona fide purchaser for
value. n156 [*1655]
C. The Recording Acts and Bona Fide Purchasers for Value
1. Race Jurisdiction
In race jurisdictions, n157 the recording acts generally "protect[] the first purchaser to record." n158 Accordingly, a
purchaser's "notice or knowledge of prior unrecorded claims is irrelevant" to determining his protection under the
statute. n159 For example, North Carolina's statute provides that "instruments registered in the office of the register of
deeds shall have priority based on the order of registration as determined by the time of registration." n160 Under this
statute, a subsequent purchaser of a MERS-mortgaged property would be secure in his title to land only if he records his
interest first in the local recorder's office. However, if the true owner of the note beats the subsequent purchaser to
record, the true owner's prior unrecorded interest in the land would prevail. n161
2. Race-Notice Jurisdiction
In race-notice jurisdictions, n162 a subsequent purchaser must satisfy two requirements. First, he must "record [his
interest] before the prior unrecorded claim is recorded." n163 Second, he must be "a purchaser for value without
knowledge or notice of the prior unrecorded claim." n164 This second requirement demands, in other words, that he
represent a bona fide purchaser for [*1656] value. n165 For example, New York's statute provides that "every . . .
conveyance not . . . recorded is void as against any person who subsequently purchases . . . the same real property . . . in
good faith and for a valuable consideration, . . . and whose conveyance . . . is first duly recorded." n166 Of course, New
York courts have supplied these statutory requirements with a judicially-crafted meaning. In particular, courts have
refused to recognize a party's status as a bona fide purchaser where that party possesses one of three features: actual
notice, n167 constructive notice, n168 or inquiry notice. n169 A purchaser has actual notice where he purchases land "with
knowledge of a prior outstanding title by an unrecorded deed." n170 A purchaser has constructive notice based on
documents found within the record and "is presumed to have investigated the title, . . . to have examined every deed or
instrument properly recorded, and to have known every fact disclosed or to which an inquiry suggested by the record
would have led." n171 A purchaser has inquiry notice where he "had knowledge of facts or circumstances that would have
led a reasonably prudent person to make inquiry into a possible defect of title." n172 Finally, courts have also warned that
"a bona fide purchaser or encumbrancer for value is protected in its title unless the deed is void and conveys no title . . .
or it had previous notice of the alleged fraud." n173
In the case of subsequent purchasers of MERS-mortgaged properties, regardless of whether such purchasers could
win the "race to the courthouse," n174 it is unlikely that they could meet the requirements of a bona fide purchaser. First,
the subsequent purchaser does not have actual notice of the existence of the note owner's unrecorded claim to the
[*1657] property. n175 However, the subsequent purchaser may have constructive notice. In particular, a thorough
investigation of the record would have uncovered the fact that MERS recorded a discharge of mortgage in favor of the
borrower, which "so stated" that the mortgage had not been assigned "of record." n176 A thorough investigation of the
record also would have revealed that the note was never produced to accompany MERS's discharge, and that the note's
owner never executed a separate discharge with respect to the note. These observations would have been sufficient to
make the subsequent purchaser suspicious as to the state of his title. n177 Moreover, the subsequent purchaser was aware
of facts that might put him on inquiry as to the state of his title--in particular, that MERS was named on the mortgage.
In light of the recent notoriety MERS has received for its documentation problems, n178 this fact might cause a
"reasonably prudent person to make inquiry into a possible defect of title." n179 Finally, it is also possible that, in some
circumstances, courts will refuse to protect the subsequent purchaser because his deed is void by reason of fraud or
forgery. n180 This may be particularly relevant in MERS's case if there were an allegation of forgery by a robo-signer. n181
Accordingly, a subsequent purchaser of MERS-mortgaged property is unlikely to warrant the protection of a race-notice
recording statute under these circumstances, regardless of whether he records his interest first. [*1658]
Page 566Page 566
3. Notice Jurisdiction
In notice jurisdictions, n182 a subsequent purchaser need only meet the requirements of a bona fide purchaser for
value in order to receive protection. n183 Indeed, an important distinction from a race-notice statute is that, under a pure
notice statute, "one need not record to qualify for . . . protection." n184 Nevertheless, a subsequent purchaser is unlikely to
receive protection from a notice statute under these circumstances. Following a substantially similar analysis to that
outlined above, subsequent purchasers of MERS-mortgaged properties are likely to have constructive notice and inquiry
notice. n185 Moreover, subsequent purchasers may face similar challenges due to robo-signing forgeries. n186 Accordingly, a
notice statute is also unlikely to provide any refuge.
VI. Implications for Subsequent Purchasers
Because recording statutes cannot provide subsequent purchasers of MERS-mortgaged properties with adequate
assurance to title, subsequent purchasers may suffer significant harms. Moreover, given MERS's prevalence in today's
real estate market, n187 courts will inevitably address this issue. Agency theory offers the best solution for all parties in
resolving this conflict.
A. Where MERS Cannot Properly Discharge the Mortgage
MERS's ability to properly discharge a borrower's debt plays a critical role in the real estate market. If courts
follow the common law rule and find that a borrower must receive a discharge from the owner of the note--as opposed
to a discharge from MERS as owner of the mortgage--then the debt will remain effective and the owner of the note will
have [*1659] recourse against the borrower's property. n188 Indeed, this remains true under New York's recording
statutes. n189 As we have seen, this may have disastrous effects for subsequent purchasers under each of the different
recording statutes. n190 In race jurisdictions, subsequent purchasers will face risks unless they can beat the note owner to
the recorder's office. n191 And in the forty-six states n192 that have adopted some form of notice or race-notice statute,
subsequent purchasers face risks that a note owner might seek to enforce his rights against the property on the ground
that purchasers had constructive or inquiry notice of the prior unrecorded claim.
This scenario could have devastating consequences for subsequent purchasers and for the real estate market
generally. First, subsequent purchasers throughout the country could face both economic loss and physical loss of
property as a result of their defective titles. n193 If a prior unrecorded interest remains unsatisfied, that party might pursue
foreclosure against the property to redeem its security interest, n194 leaving subsequent purchasers with nothing. In
essence, they have "purchased [not property but] a lawsuit." n195 However, it is likely that subsequent purchasers would
have obtained title insurance to protect against the risk of defective title. n196 If subsequent purchasers have obtained title
insurance, the title policy would likely insure "against loss or damage . . . sustained or incurred by the insured by reason
of . . . any defect in or lien or encumbrance on the title." n197 This provision includes any liens created by a prior [*1660]
mortgage on the property. n198 Since the subsequent purchaser would suffer a loss when the owner of the prior unrecorded
interest initiates foreclosure proceedings, n199 the title insurer would indemnify this loss and the purchaser would receive
remuneration. n200
Nevertheless, subsequent purchasers are still removed from their homes and businesses, n201 and any
indemnification they receive may fail to account for the subjective value they derived from the property. n202
Homeowners "commonly value their own property in significant ways that the market does not recognize." n203 These
values may include "investments in networks of friends and the development of social capital" n204 as well as "the search
costs of finding shops and services in the new location." n205 Perhaps most significant, however, is the homeowner's
personal attachment to the property n206 and the loss of autonomy he would experience by losing it. n207 Although the
homeowner might receive reimbursement from a title insurer in order to purchase a new home, "the price of a
replacement will not restore the status quo," n208 and "perhaps no amount of money can do so." n209 Therefore, a title
insurer's [*1661] reimbursement of the homeowner may prove inadequate in compensating for his subjective loss. n210
The title insurer has also suffered an economic loss as a result of the defective title. n211 Given the title insurer's
newfound appreciation for the title risks posed by MERS-mortgaged properties, most title insurers will simply refuse to
insure them. n212 When a title search reveals that the owner of the note has not recorded a discharge, the title insurer will
inform the prospective purchaser of the defect and refrain from issuing a policy. n213 To the extent that MERS and its
members cannot produce documentation with respect to the note, the underlying properties will begin to suffer from the
problem of clouded title. n214 Aware of potential defects in the chain of title, title insurers will refuse to issue policies on
the properties, n215 and prospective purchasers will be unwilling to bear the risks of prior claimants. n216 Accordingly, they
will seek to purchase property from another homeowner, and the initial borrower will be unable to alienate his property.
Page 567Page 567
This will have significant adverse consequences for property owners and for the real estate [*1662] market
n217
generally. n218 If purchasers will not bear the risks of defective title and title insurers will not write policies on the
affected properties, buyers and sellers will become stuck as their property loses its alienability. Given that MERS holds
an estimated 65 million mortgages, n219 or approximately 60 percent of mortgages nationwide, n220 this could have a
significant impact on the country's real estate market.
B.Where MERS Can Properly Discharge the Mortgage as Agent
However, if courts find that MERS has authority to act as agent for the original lender and the lender's assigns, n221
many of the problems for subsequent purchasers may disappear. A central principle of agency law is that a principal is
"bound by the acts of its agent." n222 Accordingly, if courts accept MERS's authority to act as agent for lenders, those
lenders would be bound by MERS's discharges to borrowers and would be prevented from bringing any claims against
the property. n223 Where MERS has discharged the mortgage but the note owner fails to receive the proper funds, the
remedy is no longer against the property but instead is against MERS as the note owner's fiduciary. n224 This solution
alleviates any issues for subsequent purchasers since they would now be entitled to rely on MERS's discharge n225 and the
note owner's privity to that transaction. n226 As a result, agency theory removes the cloud on title for owners [*1663] of
MERS-mortgaged properties and breathes liquidity back into the real estate market. n227
Conclusion
The MERS system could have dire effects on subsequent purchasers of MERS-mortgaged properties. Given the
potential for widespread documentation errors and the fact that courts may refuse MERS's authority to discharge a
mortgage without proof of the note, subsequent purchasers could be at risk of surprise foreclosures against their
property--despite their timely mortgage payments. This would have severe effects on the real estate market and on
homeowners' ability to alienate their property. No title bearing MERS's name would be certain.
Nevertheless, courts possess the ability to sidestep these problems. If courts recognize MERS's authority to act as
agent for its members, they can achieve more desirable outcomes. In particular, this solution would alleviate the risks
that subsequent purchasers otherwise face when acquiring MERS-mortgaged properties. It would also remove the cloud
from homeowners' title. Perhaps most importantly, it would hold MERS accountable for its documentation errors and
force the company to internalize the cost of its own mistakes.
Legal Topics:
Contracts LawTypes of ContractsBona Fide PurchasersReal Property LawFinancingMortgages & Other Security
InstrumentsSatisfaction & TerminationGeneral OverviewReal Property LawFinancingMortgages & Other Security
InstrumentsTransfersGeneral Overview
FOOTNOTES:
n1 Sample MOM Mortgage, MERS, at 3 (2001), available at http://www.mersinc.org/MersProducts/forms.aspx?mpid=1 (follow "Sample

Mortgage" hyperlink) ("Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this
Security Instrument . . . .").
n2 Brady Dennis & Ariana Eunjung Cha, In Middle of Foreclosure Chaos, Local Firms Keep Popping Up, WASH. POST (Oct. 8, 2010),
http://www.washingtonpost.com/wp-dyn/content/article/2010/10/07/AR2010100706667.html [hereinafter Dennis & Cha, Foreclosure
Chaos].
n3 Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 539 (App. Div. 2011).
n4 See CONGRESSIONAL OVERSIGHT PANEL, NOVEMBER OVERSIGHT REPORT: EXAMINING THE CONSEQUENCES OF
MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION 48 n.171 (2010) ("Abuses
Page 568Page 568
include misapplying payments, force-placing insurance improperly, disregarding requirements to evaluate homeowners for nonforeclosure
options, and fabricating documents related to the mortgage's ownership or account status." (citations omitted) (internal quotation marks
omitted)); see also Mark Gongloff, Foreclosure Crisis Slams into Banks: After Days of Shrugging Off the Debacle, Financial Markets Start
to Penalize U.S. Banks, WALL ST. J. (Oct. 15, 2010),
http://online.wsj.com/article/SB10001424052748704361504575552380138195848.html.
n5 Tanya Marsh, Foreclosures and the Failure of the American Land Title Recording System, 111 COLUM. L. REV. SIDEBAR 19, 24
(2011), http://www.columbialawreview.org/assets/sidebar/volume/111/19Marsh.pdf.
n6 See CONGRESSIONAL OVERSIGHT PANEL, supra note 4, at 48 (finding that "mortgage companies who filed claims . . . in
bankruptcy cases of homeowners did not attach a copy of the note to 40% of their claims").
n7 See Assets Realization Co. v. Clark, 98 N.E. 457, 458-59 (N.Y. 1912); CIT Grp./Bus. Credit, Inc. v. Walentas, 813 N.Y.S.2d 370, 370
(App. Div. 2006); Signal Fin. of N.Y., Inc. v. Polomaine, 519 N.Y.S.2d 933, 934 (Civ. Ct. 1987); see also 59 C.J.S. Mortgages § 628 (2011);
78 N.Y. JUR. 2D Mortgages and Deeds of Trust § 375 (2011).
n8 See Assets Realization Co., 98 N.E. at 458-59; Walentas, 813 N.Y.S.2d at 370; Polomaine, 519 N.Y.S.2d at 934.
n9 See Curtis v. Moore, 46 N.E. 168, 169 (N.Y. 1897).
n10 See 1 JOYCE D. PALOMAR, TITLE INSURANCE LAW § 1.2 (1994) ("Stability of land titles is critical not only to individual
property owners, but also to society as a whole. . . . Development will not occur if lenders cannot be relatively certain that their real property
collateral will be marketable.").
n11 Robo-Signing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing Before the Subcomm. on Hous. & Cmty.
Opportunity of the H. Fin. Servs. Comm., 111th Cong. 1 (2010) (written statement of Adam J. Levitin, Associate Professor of Law,
Georgetown University Law Center), available at http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf; see 65 AM.
JUR. 2D Quieting Title § 13 (2011) ("A cloud upon title may . . . be defined as . . . an apparent defect in the title that has the tendency, even
in a slight degree, to cast doubt upon the owner's title, and to stand in the way of the full and free exercise of his or her ownership.").
n12 See 1 JOYCE D. PALOMAR, supra note 10, § 1.2 ("Purchasers want assurance that the title is good before they invest money, time,
and care, not damages from the grantor when the title proves to be defective.").
n13 See CONGRESSIONAL OVERSIGHT PANEL, supra note 4, at 46-51 (explaining that lenders' "documentation irregularities" may be
quite "pervasive").
n14 See 2A N.Y. JUR. 2D Agency § 291 (2011) ("A principal is liable on contracts entered into on its behalf by an authorized agent.").
n15 In particular, a court's recognition of MERS's agency relationship with lenders would enable the company to initiate foreclosure actions
on lenders' behalf. See, e.g., Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1188-89 (N.D. Cal. 2009) (internal quotation
marks omitted) (holding that "under California law, a trustee, mortgagee, or beneficiary or any of their authorized agents may conduct the
foreclosure process" and finding that "the Deed of Trust expressly designated MERS as the nominee of the lender and as the beneficiary").
Page 569Page 569
n16 Recent census data reveal that most Americans are current on their mortgage payments, while less than 19 percent are delinquent or
involved in foreclosure. See U.S. CENSUS BUREAU, STATISTICAL ABSTRACT OF THE UNITED STATES: 2012, at 743 tbl.1194
(131st ed. 2011) (estimating that 4.6 percent of residential mortgage loans were in the foreclosure process at year-end in 2010, 5.0 percent
were entering the foreclosure process at year-end 2010, and 9.3 percent were "delinquent 30 days or more").
n17 MERSCORP, Inc. v. Romaine, 861 N.E.2d 81, 83 (N.Y. 2006).
n18 MERS shareholders who "played a critical role in the development of MERS" include Bank of America, CitiMortgage, Inc., HSBC
Finance Corp., Wells Fargo Bank, GMAC Residential Funding Corp., Mortgage Bankers Association, Fannie Mae, Freddie Mac, the
American Land Title Association, and First American Title Insurance Corp. Shareholders, MERS,
http://www.mersinc.org/about/shareholders.aspx (last visited Sept. 23, 2011).
n19 Phyllis K. Slesinger & Daniel McLaughlin, Mortgage Electronic Registration System, 31 IDAHO L. REV. 805, 810 (1995) ("Over the
life of a loan, the current environment is very costly to the industry."); see also Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 535 (App. Div.
2011) ("MERS's implementation followed the delays occasioned by local recording offices, which were at times slow in recording
instruments because of complex local regulations and database systems that had become voluminous and increasingly difficult to
search . . . ." (citation omitted)).
n20 See generally Romaine, 861 N.E.2d at 83 (analyzing the propriety of MERS's business model with respect to avoiding recording fees
traditionally associated with mortgage assignments).
n21 About Us, MERS, http://www.mersinc.org/about/index.aspx (last visited Sept. 22, 2011).
n22 3 JOYCE PALOMAR, PATTON & PALOMAR ON LAND TITLES § 567.50 n.3 (3d ed. 2011).
n23 See Dennis & Cha, Foreclosure Chaos, supra note 2.
n24 See Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System, 78 U. CIN.
L. REV. 1359, 1362 (2010); Christian J. Hansen, Note, Property: Innovations to Historic Legal Traditions--Jackson v. Mortgage Electronic
Registration Systems, Inc., 37 WM. MITCHELL L. REV. 355, 383-85 (2010).
n25 Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 536 (App. Div. 2011).
n26 MERSCORP, Inc. v. Romaine, 861 N.E.2d 81, 83 (N.Y. 2006).
n27 See Slesinger & McLaughlin, supra note 19, at 806-07 (explaining that an express purpose of MERS from its outset was "to reduce
processing costs" for members engaged in pooling and marketing mortgage notes on the secondary market); see also Brady Dennis & Ariana
Eunjung Cha, Loan Chaos May Pose Wider Peril, WASH. POST (Oct. 7, 2010), http://www.washingtonpost.com/wp-
dyn/content/article/2010/10/06/AR2010100607245.html [hereinafter Dennis & Cha, Loan Chaos].
n28 Silverberg, 926 N.Y.S.2d at 536.

Page 570Page 570
n29 See Romaine, 861 N.E.2d at 83 n.4 ("If a MERS member transfers ownership interest or servicing rights in a mortgage loan to a non-
MERS member, an assignment from the MERS member to the non-MERS member is recorded in the County Clerk's office and the loan is
deactivated within the MERS system.").
n30 See Foreclosure & Bankruptcy, MERS, http://www.mersinc.org/Foreclosures/index.aspx (follow "click here" hyperlink for Rules of
Membership, Rule 2 § 8(a)) (last visited Sept. 23, 2011).
n31 Silverberg, 926 N.Y.S.2d at 536.
n32 RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 1.1 (1997).
n33 JOHN G. SPRANKLING, UNDERSTANDING PROPERTY LAW 358 (2d ed. 2008) (emphasis omitted).
n34 See GRANT S. NELSON & DALE A. WHITMAN, REAL ESTATE FINANCE LAW § 1.1 (5th ed. 2007).
n35 See GEORGE LEFCOE, REAL ESTATE TRANSACTIONS 369-70 (1993).
n36 See NELSON & WHITMAN, supra note 34, § 1.1.
n37 See id. § 1.5. Depending on the jurisdiction, the borrower may hold legal title to the property--subject to his satisfaction of the
mortgage--or the lender may hold legal title to the property, which reverts back to the borrower upon satisfaction of the mortgage. See id.
(explaining the distinction between the "title theory" and "lien theory").
n38 See RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 1.1 cmt. a, illus. 1 (1997).
n39 See, e.g., N.Y. REAL PROP. ACTS. LAW § 1301 (McKinney 2009).
n40 See, e.g., id. § 1921(1) ("After payment of authorized principal, interest and any other amounts due . . . , a mortgagee of real
property . . . must execute and acknowledge . . . a satisfaction of mortgage . . . .").
n41 See RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 8.2 (1997).

When an obligation secured by a mortgage becomes due, the mortgagee may either . . . obtain a judgment against any person who is
personally liable on the obligation and, to the extent that the judgment is not satisfied, foreclose the mortgage on the real estate for the
balance . . . or . . . foreclose the mortgage and, to the extent that the proceeds of the foreclosure sale do not satisfy the obligation, obtain a
judgment for the deficiency against any person who is personally liable on the obligation . . . .
Id.
n42 12 THOMPSON ON REAL PROPERTY, SECOND THOMAS EDITION § 101.03(c) (David A. Thomas ed., 2008).
Page 571Page 571
n43 See id.
n44 Assets Realization Co. v. Clark, 98 N.E. 457, 458 (N.Y. 1912).
n45 CIT Grp./Bus. Credit, Inc. v. Walentas, 813 N.Y.S.2d 370, 370 (App. Div. 2006); see Signal Fin. of N.Y., Inc. v. Polomaine, 519
N.Y.S.2d 933, 934 (Civ. Ct. 1987) (holding that "the underlying obligation, as evidenced by the note, survived the Discharge of the
Mortgage"); see also 59 C.J.S. Mortgages § 628 (2009); 78 N.Y. JUR. 2D Mortgages and Deeds of Trust § 375 (2003).
n46 Assets Realization Co., 98 N.E. at 459.
n47 4 AMERICAN LAW OF PROPERTY § 17.5 (A. James Casner ed., 1952).
n48 Id. § 17.17.
n49 Id. § 17.5.
n50 See generally id. (explaining the various recording statutes that states have adopted).
n51 See 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(a).
n52 See id. § 92.08(b).
n53 See id. § 92.08(c).
n54 Race statutes are very uncommon across United States jurisdictions. Only Arkansas, Louisiana, North Carolina, Ohio, and Pennsylvania
have enacted race statutes for mortgages. 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.5, 545 n.63; 11 THOMPSON ON REAL
PROPERTY, supra note 42, § 92.08(a), 158 nn.283-84.
n55 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(a).
n56 Id.
n57 See id.

Page 572Page 572
n58 Notice statutes are far more common than race statutes. Alabama, Arizona, Connecticut, Delaware, Florida, Iowa, Kansas, Kentucky,
Maine, Massachusetts, Missouri, New Hampshire, New Mexico, Oklahoma, Rhode Island, South Carolina, Tennessee, Texas, Vermont,
Virginia, and West Virginia have all enacted notice statutes for mortgages. 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.5, 545
n.63; see also 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(b), 159 n.286.
n59 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.10; see 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(b).
n60 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.09(c).
n61 Id.
n62 Id.
n63 Id.
n64 Id.
n65 Id.
n66 See 4 AMERICAN LAW OF PROPERTY, supra note 47, § § 17.10-17.11; 11 THOMPSON ON REAL PROPERTY, supra note 42, §
92.09(c).
n67 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(b).
n68 Race-notice statutes are the most common recording statute. Alaska, California, Colorado, District of Columbia, Georgia, Hawaii,
Idaho, Illinois, Indiana, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New York, North Dakota,
Oregon, South Dakota, Utah, Washington, Wisconsin, and Wyoming have all enacted race-notice statutes for mortgages. 4 AMERICAN
LAW OF PROPERTY, supra note 47, § 17.5, 545 n.63; see also 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(c), 160
n.288.
n69 See 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(c).
n70 See id.
n71 See id.
n72 See id.

Page 573Page 573
n74 See id.
n75 See id.
n76 See id.
n77 LEFCOE, supra note 35, at 453 n.205.
n78 Id. at 454.
n80 See LEFCOE, supra note 35, at 452.
n81 Id. at 454.
n82 See Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 536 (App. Div. 2011).
n83 This diagram is based on a symposium presentation on Securitization and Governance given by Nancy Wallace. See Nancy Wallace,
Presentation at the U.C. Berkeley Symposium: Private-Label Residential Mortgage Securitization: Recording Innovations and Bankruptcy
Remoteness 7 (Mar. 11, 2011), available at http://www.law.berkeley.edu/files/bclbe/WallaceMERS.pdf.
n84 See Dennis & Cha, Loan Chaos, supra note 27 ("MERS allows big financial firms to trade mortgages at lightning speed . . . .").
n85 See id. (suggesting that "without this system, the business of creating massive securities made of thousands of mortgages would likely
have never taken off").
n86 See Silverberg, 926 N.Y.S.2d at 536 ("MERS delivers savings to the participants in the real estate mortgage industry by allowing those
entities to avoid the payment of fees which local governments require to record mortgage assignments." (citation omitted)).
n87 See, e.g., Complaint at <para> 67, Dallas Cnty. v. MERSCORP, Inc., No. CC-11-06571-E (Tex. Cnty. Ct. Sept. 20, 2011).
Page 574Page 574
n88 See Sample MOM Mortgage, supra note 1, at 3 ("Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for
Lender and Lender's successors and assigns) and to the successors and assigns of MERS, the following described property . . . .").
n89 See, e.g., Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1188-90 (N.D. Cal. 2009).
n90 This diagram is based on a symposium presentation on Securitization and Governance given by Nancy Wallace. See Wallace, supra note
83, at 11.
n91 See U.S. CENSUS BUREAU, supra note 16, at 743 tbl.1194 (estimating that 4.6 percent of residential mortgage loans were in the
foreclosure process at year-end in 2010 and that 5.0 percent were entering the foreclosure process at year-end 2010).
n92 See Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 539 (App. Div. 2011).
n93 See John R. Hooge & Laurie Williams, Mortgage Electronic Registration Systems, Inc.: A Study of Cases Discussing MERS' Authority
to Act, No. 8 NORTON BANKR. L. ADVISOR 1, 8-13 (Aug. 2010) (collecting cases examining MERS's authority to act in foreclosure
proceedings); Sharon McGann Horstkamp, MERS Case Law Overview, 64 CONSUMER FIN. L. Q. REP. 458, 459-75 (2010) (collecting
cases regarding MERS's ability to foreclose); see also MERS LAW DEP'T, MERSCORP, INC. & MORTGAGE ELEC. REGISTRATION
SYS., INC., CASE LAW OUTLINE 8-93 (July 2011), available at http://www.mersinc.org/files/filedownload.aspx?
id=302&table=DownloadFile; MERS LAW DEP'T, MERSCORP, INC. & MORTGAGE ELEC. REGISTRATION SYS., INC., CASE LAW
OUTLINE at 10-76 (Mar. 2011), available at http://www.mersinc.org/files/filedownload.aspx?id=241&table=DownloadFile.
n94 Compare Pantoja, 640 F. Supp. 2d at 1188-89 (holding that "under California law, a trustee, mortgagee, or beneficiary or any of their
authorized agents may conduct the foreclosure process" and finding that "the Deed of Trust expressly designated MERS as the nominee of
the lender and as the beneficiary" (internal quotation marks omitted)), with In re Agard, 444 B.R. 231, 253 (Bankr. E.D.N.Y. 2011) (citing
Steinbeck v. Steinbeck Heritage Found., 400 F. App'x 572, 575 (2d Cir. 2010)) ("The record of this case is insufficient to prove that an
agency relationship exists under the laws of the state of New York between MERS and its members. . . . The fact that MERS is named
'nominee' in the Mortgage is not dispositive of the existence of an agency relationship and does not, in and of itself, give MERS any
'authority to act.'").
n95 See, e.g., Silverberg, 926 N.Y.S.2d at 539.
n96 See, e.g., In re Agard, 444 B.R. at 253.
n97 See, e.g., Pantoja, 640 F. Supp. 2d at 1188-89.
n98 Nathalie Tadena, Delaware Files Complaint Against Mortgage Registry, WALL ST. J. (Oct. 27, 2011),
http://online.wsj.com/article/SB10001424052970203687504577002173640854262.html.
n99 Gretchen Morgenson, Massachusetts Sues 5 Major Banks over Foreclosure Practices, N.Y. TIMES (Dec. 1, 2011),
http://www.nytimes.com/2011/12/02/business/major-banks-face-new-foreclosure-suit.html.
n100 Gretchen Morgenson, From East to West, Foreclosure Horror Stories, N.Y. TIMES (Jan. 7, 2010),
http://www.nytimes.com/2012/01/08/business/mortgage-servicing-horror-stories-fair-game.html?pagewanted=all; see id. ("The complaint,
Page 575Page 575
which came after a 14-month inquiry, contends that [Lender Processing Services] deceived consumers by committing widespread document
execution fraud, misrepresenting its fees and making deceptive statements about its efforts to correct paperwork.").
n101 Ariana Eunjung Cha & Brady Dennis, Aggressive Lobbying Defends Mortgage-Trading System, WASH. POST (Nov. 18, 2010),
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/18/AR2010111806137pf.html.
n102 Alex Ortolani, Mortgage Registry Falls Under Attack over Foreclosure, LAW360 (Dec. 16, 2011, 1:49 PM),
http://www.law360.com/articles/290977/mortgage-registry-falls-under-attack-over-foreclosures.
n103 NAT'L BUREAU OF ECON. RESEARCH, BUS. CYCLE DATING COMM. (Sept. 20, 2010),
http://www.nber.org/cycles/sept2010.pdf ("The Business Cycle Dating Committee of the National Bureau of Economic Research . . .
determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that
began in December 2007 . . . .").
n104 Robert Pear, Recession Officially Over, U.S. Incomes Kept Falling, N.Y. TIMES (Oct. 9, 2011),
http://www.nytimes.com/2011/10/10/us/recession-officially-over-us-incomes-kept-falling.html?r=1.
n105 Compare U.S. DEP'T OF LABOR, BUREAU OF LABOR STATISTICS, USDL-12-0402, THE EMPLOYMENT SITUATION--
FEBRUARY 2012 summary tbl.A (2012), available at http://www.bls.gov/news.release/pdf/empsit.pdf (citing unemployment rates of 8.3
percent nationally in February 2012), and U.S. DEP'T OF LABOR, BUREAU OF LABOR STATISTICS, USDL-12-0012, THE
EMPLOYMENT SITUATION--DECEMBER 2011 summary tbl.A (2011), available at
http://www.bls.gov/news.release/archives/empsit01062012.pdf (citing unemployment rates of 9.4 percent nationally in December 2010),
with Robert Shimer, The Cyclical Behavior of Equilibrium Unemployment and Vacancies, 95 AM. ECON. REV. 25, 27 (2005) (calculating
an average monthly unemployment rate of 5.67 percent between 1951 and 2003); see also CONG. BUDGET OFFICE, THE BUDGET AND
ECONOMIC OUTLOOK: FISCAL YEARS 2008 TO 2017, at 25-26 (2007) (forecasting long-term unemployment rates of 5.0 percent).
n106 See Alex Tanzi, Bloomberg U.S. Mortgage Delinquency, Foreclosure Rates, BLOOMBERG (Oct. 17, 2011) (showing increases in
foreclosure rates between September 30, 2009 and September 30, 2011 from 7.22 percent to 9.13 percent for prime loans, from 11.68 percent
to 13.45 percent for Alt-A loans, and from 16.51 percent to 18.03 percent for subprime loans); Alex Tanzi, Bloomberg U.S. Mortgage
Delinquency, Foreclosure Rates, BLOOMBERG (Oct. 15, 2009) (showing increases in foreclosure rates between September 30, 2007 and
September 30, 2009 from 0.79 percent to 7.22 percent for prime loans, from 1.56 percent to 11.68 percent for Alt-A loans, and from 6.16
percent to 16.51 percent for subprime loans).
n107 See FIN. CRISIS INQUIRY COMM'N, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL
COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES xv-xxviii (2011) (tracing
the origins of the financial crisis to "excessive borrowing" by individuals and financial institutions, "collapsing mortgage-lending standards,"
an overactive mortgage securitization industry, "failures by credit rating agencies" to adequately assess risk, "corporate governance and risk
management" failures, "breakdowns in accountability and ethics," and over "30 years of financial deregulation").
n108 See U.S. CENSUS BUREAU, supra note 16, at 743 tbl.1194.
n109 Even a cursory review of recent foreclosure litigation demonstrates that most major financial institutions have initiated foreclosure
actions against borrowers. See, e.g., Mejia v. GMAC Mortg. LLC, No. CV 11-01140- PHX-FJM, 2012 WL 786328 (D. Ariz. Mar. 9, 2012)
(GMAC); Benford v. CitiMortgage, Inc., No. 11-12200, 2011 WL 5525942 (E.D. Mich. Nov. 14, 2011) (Citi); Vela v. Freddie Mac Loan
Mortg. Corp. (In re Vela), Adversary No. 11-5004, 2011 WL 3439256 (S.D. Tex. Aug. 2, 2011) (Wells Fargo); Matthews v. JPMorgan Chase
Bank, NA, No. 3:11- CV-00972-M, 2011 WL 3347920 (N.D. Tex. Aug. 1, 2011) (JPMorgan Chase); Liu v. Bank of America, No. 08- CV-
3358 (JG), 2010 WL 1702537 (E.D.N.Y Apr. 28, 2010) (Bank of America); DiGiovanni v. BAC Home Loans Servicing, L.P., No. 2 D11-
5265, 2012 WL 832790 (Fla. Dist. Ct. App. Mar. 14, 2012) (Bank of America and Countrywide); HSBC Bank USA, N.A. v. Taher, No.
9320/09, 2011 WL 2610525 (N.Y. Sup. Ct. July 1, 2011) (HSBC).
Page 576Page 576
n110 This is particularly true where many of the most prominent banks "played a critical role in the development of MERS." Shareholders,
MERS, http://www.mersinc.org/about/shareholders.aspx (last visited Sept. 23, 2011) (identifying Bank of America, CitiMortgage, Inc.,
HSBC Finance Corp., Wells Fargo Bank, GMAC Residential Funding Corp., Mortgage Bankers Association, Fannie Mae, and Freddie Mac
as MERS shareholders).
n111 See Christopher Ketcham, STOP PAYMENT! A Homeowners' Revolt Against the Banks, HARPER'S, Jan. 2012, at 29 (chronicling
homeowners' efforts to "attack the banking industry with the fine print of real estate law" by "demanding proof of who really owns their
loan").
n112 See, e.g., Scot J. Paltrow, Facing Criticism, MERS Cuts Role in Foreclosures, REUTERS (July 27, 2011, 4:52 PM),
http://www.reuters.com/article/2011/07/27/us-mers-foreclosure-idUSTRE76Q67L20110727; Michael Powell & Gretchen Morgenson,
MERS? It May Have Swallowed Your Loan, N.Y. TIMES (Mar. 6, 2011), http://www.nytimes.com/2011/03/06/business/06mers.html;
Tadena, supra note 98; Nick Timiraos, Oregon Judge Denies Foreclosure, Challenges MERS, WALL ST. J. DEVS. BLOG (May 26, 2011,
5:03 PM), http://blogs.wsj.com/developments/2011/05/ 26/oregon-judge-denies-foreclosure-challenges-mers/.
n113 See Verified Complaint at 30, Delaware v. MERSCORP, Inc., No. 6987, (Del. Ch. Oct. 27, 2011) (citing Transcript of Hearing at 6-8,
16-17, In re Kemp, 440 B.R. 624, 626 (Bankr. D.N.J. 2010) (No. 08-18700) (Aug. 11, 2009)) ("In a 2009 hearing . . . , an employee for the
Bank of America entity responsible for servicing the securitized Countrywide mortgage loans testified under oath that Countrywide did not
have a practice of delivering original documents such as the note to the Trustee . . . . In addition, the same employee further testified that
allonges are typically prepared in anticipation of foreclosure litigation, rather than at the time the mortgage loans are purportedly
securitized."); see also Gongloff, supra note 4 ("The crisis has been escalating for several weeks, as banks suspend foreclosures across the
country, citing flaws they have uncovered, including faulty or missing documentation. Tales of mismanagement within the foreclosure
process--including so-called robo-signers, who were paid to rubber stamp documents without properly reviewing them--are emerging
daily."); Gretchen Morgenson, Flawed Paperwork Aggravates Foreclosure Crisis, N.Y. TIMES (Oct. 3, 2010),
http://www.nytimes.com/2010/10/04/business/04mortgage.html.
n114 See, e.g., Mortg. Elec. Registration Sys., Inc. v. Sw. Homes of Ark., 301 S.W.3d 1, 3-8 (Ark. 2009); Landmark Nat'l Bank v. Kesler,
216 P.3d 158, 166-69 (Kan. 2009); Mortg. Elec. Registration Sys., Inc. v. Saunders, 2 A.3d 289, 295-97 (Me. 2010); Bank of N.Y. v.
Silverberg, 926 N.Y.S.2d 532, 539 (App. Div. 2011).
n115 This visual representation is intended to provide the reader with a conceptual understanding of the various relationships that might
exist in a common real estate transaction. For the purpose of clarity, many facets of these relationships have been simplified, and extraneous
parties have been omitted. For a more comprehensive visual representation of the mortgage securitization process with MERS, see Wallace,
supra note 83, at 11; see also Powell & Morgenson, supra note 112 (follow "How a Mortgage Moves Through MERS" hyperlink).
n116 Sample MOM Mortgage, supra note 1, at 3.
n117 Depending upon the jurisdiction, MERS's interest in the mortgage may represent legal title to the property or a lien against the
property. See NELSON & WHITMAN, supra note 34, § 1.5 (explaining the distinction between the "title theory" and "lien theory"). Since
New York adopts a lien theory, MERS technically does not convey legal title to the borrower but instead releases its lien on the mortgaged
property. See Barson v. Mulligan, 84 N.E. 75, 78 (N.Y. 1908) ("The mortgagee, having come to be regarded as a mere lienor, has no legal
estate in the land covered by his mortgage . . . .").
n118 See 4 AMERICAN LAW OF PROPERTY, supra note 47, § § 17.10-17.11; 11 THOMPSON ON REAL PROPERTY, supra note 42, §
92.09.
Page 577Page 577
n119 See Sample MOM Mortgage, supra note 1, at 3 ("Borrower understands and agrees that MERS holds only legal title to the interests
granted by Borrower in this Security Instrument . . . ." (emphasis added)); see also Residential Funding Co., LLC v. Saurman, 807 N.W.2d
412, 417 (Mich. Ct. App.) ("MERS, as mortgagee, only held an interest in the property as security for the note, not an interest in the note
itself."), rev'd on other grounds, 805 N.W.2d 183 (Mich. 2011).
n120 N.Y. REAL PROP. ACTS. LAW § 1921(1) (McKinney 2011) ("After payment of authorized principal, interest and any other amounts
due . . . , a mortgagee of real property . . . must execute and acknowledge . . . a satisfaction of mortgage . . . .").
n121 Id. § 1921(9)(a). The statutory definition of "mortgagee" also includes "any person to whom payments are required to be made" or
"their personal representatives, agents, successors, or assigns." Id.
n122 See id.
n123 See id. § 1921(4) ("If the mortgagee has delivered such satisfaction of mortgage in a timely manner and has certified that the note
and/or mortgage are not in its possession as of such date, the mortgagee shall not be liable under this section if the mortgagee agrees to
defend and hold harmless the mortgagor by reason of the inability or failure of the mortgagee to furnish the note or mortgage within the time
period prescribed in this subdivision . . . .").
n124 Assets Realization Co. v. Clark, 98 N.E. 457, 458 (N.Y. 1912).
n125 Id.
n126 Id. at 459; cf. RESTATEMENT (THIRD) OF PROP.: MORTGAGES § 6.4 cmt. c (1997) ("When payment or tender by the person
primarily responsible for the debt has extinguished the mortgage, the payor derives little comfort unless a document can be recorded to clear
the public records of the mortgage lien. . . . In some states it is customary for the mortgagee to provide an endorsement on the public records,
to display the promissory note, marked 'paid,' to the recorder's office personnel, or to return the original mortgage document." (emphasis
added)).
n127 See Assets Realization Co., 98 N.E. at 458-59. It bears mentioning that this principle is analogous to the requirements imposed upon
parties seeking foreclosure in New York. See Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 537 (App. Div. 2011) ("In a mortgage
foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the
underlying note at the time the action is commenced."); U.S. Bank v. Collymore, 890 N.Y.S.2d 578, 580 (App. Div. 2009); Kluge v. Fugazy,
536 N.Y.S.2d 92, 93 (App. Div. 1988).
n129 Merritt v. Bartholick, 36 N.Y. 44, 45 (1867).
n130 Id.
n131 See CIT Grp./Bus. Credit, Inc. v. Walentas, 813 N.Y.S.2d 370, 370 (App. Div. 2006) ("The satisfaction of the mortgage was not a
blanket release of defendants' obligations under the note."); Signal Fin. of N.Y., Inc. v. Polomaine, 519 N.Y.S.2d 933, 934 (Civ. Ct. 1987)
Page 578Page 578
(holding that "the underlying obligation, as evidenced by the note, survived the Discharge of the Mortgage"); see also 59 C.J.S. Mortgages §
628 (2011); 78 N.Y. JUR. 2D Mortgages and Deeds of Trust § 375 (2011).
n132 See Sample MOM Mortgage, supra note 1, at 3 ("Borrower understands and agrees that MERS holds only legal title to the interests
granted by Borrower in this Security Instrument . . . ." (emphasis added)); see also Residential Funding Co, LLC v. Saurman, 807 N.W.2d
412, 417 (Mich. Ct. App.) ("MERS, as mortgagee, only held an interest in the property as security for the note, not an interest in the note
itself."), rev'd on other grounds, 805 N.W.2d 183 (Mich. 2011).
n133 Bartholick, 36 N.Y. at 45.
n135 See MERSCORP, Inc. v. Romaine, 861 N.E.2d 81, 84 (N.Y. 2006).
n136 Sample MOM Mortgage, supra note 1, at 3; see Brief for Petitioners-Appellants at 27, MERSCORP, Inc., v. Romaine, 743 N.Y.S.2d
562 (App. Div. 2002) (No. 2001-04792), 2001 WL 34687001 (citing RESTATEMENT (SECOND) OF AGENCY § l (1958)) ("MERS's
relationship with its member lenders is that of agent and principal. This is a fiduciary relationship, which results from the manifestation of
consent of one person to allow another to act on his behalf and subject to his control, and consent by the other to so act. The principal is the
one for whom action is to be taken, and the agent is the one who acts.").
n137 Romaine, 861 N.E.2d 81.
n138 Id. at 84.
n139 Id. at 87 (Kaye, C.J., dissenting in part).
n140 Id. at 87 n.* (emphasis added).
n141 See, e.g., Deutsche Bank Nat'l Trust Co. v. Pietranico, 928 N.Y.S.2d 818, 829-30 (Sup. Ct. 2011).
n142 Id.
n143 Id. (internal quotation marks omitted).
n144 See, e.g., In re Agard, 444 B.R. 231, 253 (Bankr. E.D.N.Y. 2011); Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 537 (App. Div. 2011);
Bank of N.Y. v. Alderazi, 900 N.Y.S.2d 821, 823-24 (Sup. Ct. 2010).
n145 In re Agard, 444 B.R. at 253.

Page 579Page 579
n146 Silverberg, 926 N.Y.S.2d at 538 (internal quotation marks omitted).
n147 Id. at 534 (alterations in original).
n148 Id. at 537.
n149 See Sample MOM Mortgage, supra note 1, at 3 ("MERS (as nominee for Lender and Lender's successors and assigns) has the right . . .
to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.").
n150 MERS's principal might be unknown to MERS in two ways. First, MERS presumably cannot determine, upon origination of the
mortgage, who will later receive an assignment of the note and on whose behalf MERS will act when discharging the obligation. Therefore,
at the time of origination, the mortgage purports to create an agency relationship between MERS and a class of unknown third parties, one of
whom will later receive the note. Second, MERS may also remain unaware of its principal's identity at the time of discharge, given that
MERS has the apparent authority to discharge the obligation itself and may refrain from investigating the note's ownership.
n151 MERS's principal might be unknowable to the extent that documentation errors preclude MERS from ascertaining the true identity of
the note's owner.
n152 See supra notes 132-34 and accompanying text.
n153 See supra note 113 and accompanying text.
n155 See 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.5, 545 n.63 (demonstrating that nearly every United States jurisdiction
requires some form of notice to a subsequent purchaser).
n156 See id. § § 17.10-17.11; 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.09.
n157 As discussed in Part II, the following jurisdictions have enacted race statutes for mortgages: Arkansas, Louisiana, North Carolina,
Ohio, and Pennsylvania. 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.5, 545 n.63. However, some suggest that North Carolina
"may have become a race-notice state by judicial decision." 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(a) n.283 (citing
Rowe v. Walker, 441 S.E.2d 156 (N.C. Ct. App. 1994) (John, J., dissenting), aff'd, 455 S.E.2d 160 (N.C. 1995)).
n158 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(a).
n159 Id.
Page 580Page 580
n160 N.C. GEN. STAT. § 47-18 (2011).
n161 See 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(a).
n162 As discussed in Part II, the following jurisdictions have enacted race-notice statutes for mortgages: Alaska, California, Colorado,
District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada,
New Jersey, New York, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin, and Wyoming. 4 AMERICAN LAW OF
PROPERTY, supra note 47, § 17.5, 545 n.63; see also 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(c) n.288.
n163 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(c).
n164 Id.; see also J.B. Ames, Purchase for Value Without Notice, 1 HARV. L. REV. 1, 5 (1887) ("If a trustee, in violation of his duty, should
sell the trust property to one who had no notice of the trust, and should deliver the deed in escrow, the defrauded cestui que trust could not
restrain the innocent purchaser from performing the condition, nor could he obtain any relief against him after he had acquired title.").
n165 See 4 AMERICAN LAW OF PROPERTY, supra note 47, § § 17.10-17.11. While a purchase "for value" is required, this note assumes
that all payments made by subsequent purchasers will satisfy this additional requirement. For a discussion of the "for value" requirement, see
11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.09(c).
n166 N.Y. REAL PROP. LAW § 291 (McKinney 2011).
n167 See Todd v. Eighmie, 41 N.Y.S. 1013, 1015-16 (App. Div. 1896).
n168 See HSBC Mortg. Servs., Inc. v. Alphonso, 874 N.Y.S.2d 131, 133 (App. Div. 2009).
n169 See Chen v. Geranium Dev. Corp., 663 N.Y.S.2d 288, 289 (App. Div. 1997).
n170 Eighmie, 41 N.Y.S. at 1015-16.
n171 Fairmont Funding, Ltd. v. Stefansky, 754 N.Y.S.2d 54, 56 (App. Div. 2003).
n172 In re Fitzsimmons, 2008-3420/ H, 2011 WL 4346679, at *3 (N.Y. Sur. Ct. Aug. 10, 2011).
n173 Id.
n174 Kahan Jewelry, Inc. v. Korsinsky, No. 35022/02, 2004 WL 3078700, at *2 (N.Y. Sup. Ct. Aug. 18, 2004).
Page 581Page 581
n175 See Eighmie, 41 N.Y.S. at 1015-16.
n176 N.Y. REAL PROP. LAW § 321(3) (McKinney 2011); see MERSCORP, Inc. v. Romaine, 861 N.E.2d 81, 84-85 (N.Y. 2006).
n177 See Curtis v. Moore, 46 N.E. 168, 169 (N.Y. 1897) ("Defendant was not a bona fide purchaser . . . because the record of the mortgage
was notice to him that the mortgage was outstanding and unsatisfied, and it was no concern of his who happened to be the owner at the time.
In dealing with the property on the assumption that [the record owner] still owned the mortgage, he acted at his peril, and assumed the risk
that [the record owner] might have transferred the mortgage to someone else. He was put upon his inquiry, and it was not enough for him to
examine the record, and see that no assignment of mortgage appeared thereon, but he should have required a satisfaction piece in due form,
or the delivery of the mortgage and the note."); see also HSBC Mortg. Servs., Inc. v. Alphonso, 874 N.Y.S.2d 131, 133 (App. Div. 2009).
n178 See supra notes 4-6, 113 and accompanying text.
n179 In re Fitzsimmons, 2008-3420/ H, 2011 WL 4346679, at *3 (N.Y. Sur. Ct. Aug. 10, 2011).
n180 Marden v. Dorthy, 54 N.E. 726, 728, 730 (N.Y. 1899).
n181 Robo-signing has captured significant public interest around the country and has also garnered recent attention from prosecutors. See
Michael Kraus, Nevada Attorney General Pursuing Criminal Charges Against Robo-signers, TOTAL MORTG. SERVS. (Nov. 18, 2011),
http://www.totalmortgage.com/blog/mortgage-rates/nevada-attorney-general-pursuing-criminal-charges-against-robo-signers/14741.
n182 As discussed in Part II, the following jurisdictions have enacted notice statutes for mortgages: Alabama, Arizona, Connecticut,
Delaware, Florida, Iowa, Kansas, Kentucky, Maine, Massachusetts, Missouri, New Hampshire, New Mexico, Oklahoma, Ohio, Rhode
Island, South Carolina, Tennessee, Texas, Vermont, Virginia, and West Virginia. 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.5,
545 n.63; see also 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(b) n.286.
n183 See 4 AMERICAN LAW OF PROPERTY, supra note 47, § 17.11; 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(b).
n184 11 THOMPSON ON REAL PROPERTY, supra note 42, § 92.08(b).
n185 See supra Part V.C.2.
n187 Bank of N.Y. v. Silverberg, 926 N.Y.S.2d 532, 539 (App. Div. 2011) (noting that MERS is listed on "approximately 60% of all
mortgage loans in the United States").
n188 See Assets Realization Co. v. Clark, 98 N.E. 457, 459 (N.Y. 1912); CIT Grp./Bus. Credit, Inc. v. Walentas, 813 N.Y.S.2d 370, 370
(App. Div. 2006); Signal Fin. of N.Y., Inc. v. Polomaine, 519 N.Y.S.2d 933, 934 (Civ. Ct. 1987); 78 N.Y. JUR. 2D Mortgages and Deeds of
Trust § 375 (2011).
Page 582Page 582
n189 Although section 1921 of the New York Real Property Actions and Proceedings Law protects the borrower from claims by a
mortgagee who cannot produce the note, it does not appear to protect the borrower from claims by the owner of the note, whose security
interest was discharged without his knowledge or assent. N.Y. REAL PROP. ACTS. LAW § 1921(4) (McKinney 2011).
n190 See supra Part V.C.
n192 See supra notes 162, 182.
n193 See, e.g., Curtis v. Moore, 46 N.E. 168 (N.Y. 1897) (affirming judgment of foreclosure against subsequent purchaser based on
purchaser's inferior interest in the property).
n194 See, e.g., id.
n195 See 1 JOYCE D. PALOMAR, supra note 10, § 1.2 ("The basis for making a real property transaction contingent on evidence of clear,
marketable title is the consensus in the law that a buyer should not have to purchase a lawsuit.").
n196 See id. § 5.5 ("The title insurer . . . assumes the risk of loss to the insured by reason of any defect in or lien or encumbrance on the
insured title."); 11 THOMPSON ON REAL PROPERTY, supra note 42, § 93.03(a)(2).
n197 2 JOYCE D. PALOMAR, supra note 10, app. C2.
n198 11 THOMPSON ON REAL PROPERTY, supra note 42, § 93.03(a)(2) ("A mortgage creates a voluntary lien.").
n199 Id. § 93.04(b) ("An actual loss appears most clearly after foreclosure occurs, when a deficiency can subsequently be attributed to a
covered superior lien or defect in title to the mortgage.").
n200 See 1 JOYCE D. PALOMAR, supra note 10, § 10.8 ("The insurer owes . . . a duty to reimburse for actual losses the insured has
incurred because of the title defect.").
n201 See id. § 1.2 (noting that "purchasers of real property expect to be able to build businesses, establish homes, or otherwise improve
their properties" and do not wish to "invest money, time, and care" into their properties if they will be subject to loss).
n202 In large part, I owe many of my thoughts on this subject to Professor Brian Lee, whose notion of an "idiosyncratic premium" in
eminent domain proceedings explores the problem of compensating property owners for subjective value. Brian Lee, Faculty Workshop at
Brooklyn Law School: The Idiosyncratic Premium in Eminent Domain (Sept. 8, 2011).
Page 583Page 583
n203 John Fee, Eminent Domain and the Sanctity of Home, 81 NOTRE DAME L. REV. 783, 790 (2006); see Christopher Serkin, The
Meaning of Value: Assessing Just Compensation for Regulatory Takings, 99 NW. U. L. REV. 677, 700 (2005) ("Sentimental attachments, or
a unique business enterprise, may prevent the market from accurately reflecting the value of property to its owner."); see also Fee, supra, at
793 (explaining that "some business owners, like homeowners, also become personally attached to their business property in ways that the
market . . . does not value").
n204 Lee Anne Fennell, Taking Eminent Domain Apart, 2004 MICH. ST. L. REV. 957, 964.
n205 Id. at 963.
n206 See Margaret Jane Radin, Property and Personhood, 34 STAN. L. REV. 957, 992 (1982) (recognizing "society's traditional connection
between one's home and one's sense of autonomy and personhood").
n207 Id. at 959.
n208 Id.
n209 Id.
n210 See id. ("If a wedding ring is stolen from a jeweler, insurance proceeds can reimburse the jeweler, but if a wedding ring is stolen from
a loving wearer, the price of a replacement will not restore the status quo--perhaps no amount of money can do so.").
n212 Some title insurers have taken this position in the past as a result of lender document irregularities. See David Streitfeld, Company
Stops Insuring Titles in Chase Foreclosures, N.Y. TIMES (Oct. 2, 2010),
http://www.nytimes.com/2010/10/03/business/economy/03foreclose.html ("Old Republic National Title Insurance[] told its agents Friday
that it would not write policies on foreclosed Chase properties until 'the objectionable issues have been resolved,' according to a
memorandum sent out by the firm's underwriting department.").
n213 See generally 11 THOMPSON ON REAL PROPERTY, supra note 42, § 93.05(b) (surveying the title insurer's "duty to search title and
report adverse matters").
n214 See 65 AM. JUR. 2D Quieting Title § 13 (2011).
n215 See supra note 212 and accompanying text.
n216 See 1 JOYCE PALOMAR, supra note 10, § 1.2 ("Purchasers of real property expect to be able to build businesses, establish homes, or
otherwise improve their properties without the risk of having to begin again in another location because someone appears with a superior
claim to the title. Purchasers want assurance that the title is good before they invest money, time, and care, not damages from the grantor
when the title proves to be defective.").
Page 584Page 584
n217 In this regard, it is worth noting the moral hazard concerns that this situation creates. If the borrower has a firm enough belief in the
defunct status of his mortgage note--particularly where the borrower is unable to sell his property--he may be willing to cease payments on
his mortgage altogether, betting on the fact that his lender cannot produce the note in order to pursue foreclosure proceedings. See Ketcham,
supra note 111, at 36 (suggesting that current uncertainty surrounding MERS is "an opportunity to be embraced"). This particular danger
arises in jurisdictions that require the lender to prove ownership of the note prior to foreclosure. See, e.g., Bank of N.Y. v. Silverberg, 926
N.Y.S.2d 532, 537 (App. Div. 2011).
n218 See 1 JOYCE PALOMAR, supra note 10, § 1.2 ("Stability of land titles is critical not only to individual property owners, but also to
society as a whole.").
n219 Dennis & Cha, Foreclosure Chaos, supra note 2.
n220 See Silverberg, 926 N.Y.S.2d at 539.
n221 See, e.g., Deutsche Bank Nat'l Trust Co. v. Pietranico, 928 N.Y.S.2d 818, 829 (Sup. Ct. 2011).
n222 Cange v. Stotler & Co., 826 F.2d 581, 590 (7th Cir. 1987); see 2A N.Y. JUR. 2D Agency § 291 (2009) ("A principal is liable on
contracts entered into on its behalf by an authorized agent."); RESTATEMENT (THIRD) OF AGENCY § 6.02 (2006) ("When an agent
acting with actual or apparent authority makes a contract on behalf of an unidentified principal, . . . the principal and the third party are
parties to the contact.").
n223 See 3 AM. JUR. 2D Agency § 262 (2002) (citations omitted) ("A principal is bound by the act of its agent if the agent acts within the
scope of the agent's authority, whether the authority of the agent is actual or real, or apparent. . . . An agent acting with actual or apparent
authority who enters a contract on behalf of a principal binds the principal but not himself.").
n224 See, e.g., RESTATEMENT (THIRD) OF AGENCY § 8.08 (2006) ("Subject to any agreement with the principal, an agent has a duty to
the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances.").
n225 See supra Parts V.B, V.C.2.
n226 See RESTATEMENT (THIRD) OF AGENCY § 6.02 (2006).
n227 See supra Part VI.A.

Page 586Page 586
2012 U.S. Dist. LEXIS 88946, *
70 of 430 DOCUMENTS
UNITED STATES OF AMERICA, Plaintiff, vs. Clifford Keith Hobbs, Defendant.
Case No. 4:12CR0014AGF
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF

MISSOURI, EASTERN DIVISION
2012 U.S. Dist. LEXIS 88946
June 27, 2012, Decided

June 27, 2012, Filed
SUBSEQUENT HISTORY: Affirmed by, Motion denied by United States v. Hobbs, 2014 U.S. App. LEXIS 495 (8th
Cir. Mo., Jan. 10, 2014)
PRIOR HISTORY: United States v. Hobbs, 2012 U.S. Dist. LEXIS 88925 (E.D. Mo., May 15, 2012)
CORE TERMS: indictment, prosecutor's, recommendation, suppress, arrest, error coram nobis, discovery, venue,
grand jury, interstate commerce, reasons stated, Federal Rules, double jeopardy, grand jury, grand jury proceedings,
probable cause, admissibility, suppression, arraignment, overrule, military, labelled, caption, accuser, phone--, novo,
cell, pro se, document entitled, recommended
COUNSEL: [*1] Clifford Keith Hobbs, also known as Keith, Defendant, Pro se, Silex, MO.
For Clifford Keith Hobbs, also known as Keith, Defendant: Janis C. Good, St. Louis Fed Public Defender, FEDERAL
PUBLIC DEFENDER, St. Louis, MO.
For USA, Plaintiff: Robert F. Livergood, OFFICE OF U.S. ATTORNEY, St. Louis, MO.
JUDGES: AUDREY G. FLEISSIG, UNITED STATES DISTRICT JUDGE.
OPINION BY: AUDREY G. FLEISSIG
OPINION
ORDER
This matter is before the Court on the pretrial motions of Defendant Clifford Keith Hobbs. Defendant is charged in an
indictment with one count of using a facility of interstate commerce to entice a minor to engage in illicit sexual activity.
1
The case is set for trial on September 10, 2012, the trial date having been continued on Defendant's motion. All pretrial
motions were referred to United States Magistrate Judge Mary Ann L. Medler under 28 U.S.C. § 636(b). While
represented by counsel, Defendant filed a Motion to Suppress Statements and Evidence (Doc. No. 39), and the United
States filed a Motion for Determination of Admissibility Pursuant to 18 U.S.C. § 3501 (Doc. No. 25). An evidentiary
hearing was held on Defendant's motion to suppress on April 5, 2012.
1 Defendant, who describes himself as "sui juris," and "a common [*2] man of the Sovereign People," objected to spelling his name in all
capital letters in the caption, asserting that he is not a "corporation." Though asserting that use of capital letters in the caption is irrelevant to
any issue of jurisdiction, the United States nonetheless moved to amend the indictment by interlineation to spell Defendant's name in
uppercase and lowercase letters, which motion the Magistrate Judge granted on January 27, 2012.
Page 587Page 587
2012 U.S. Dist. LEXIS 88946, *
Defendant thereafter filed a pro se Notice of Dismissal of Counsel, which Judge Medler properly treated as a motion.
(Doc. No. 45) Following a hearing on April 23, 2012, at which Judge Medler conducted an extensive colloquy,
Defendant was permitted to proceed pro se, and Assistant Federal Public Defender Sean Vicente was appointed as
stand-by counsel. In his Notice of Dismissal of Counsel, Defendant also raised other issues, including arguments related
to discovery and challenges to the Court's jurisdiction, and the United States responded to these additional issues. The
day after the hearing, Defendant filed a pro se document entitled "Take Judicial Notice and Administrative Notice; in
the Nature of a Writ of Error, Coram Nobis, and a Demand [*3] for Dismissal for Failure to State the Proper
Jurisdiction and Venue." (Doc. No. 48.) The United States responded to this filing, as well. (Doc. No. 55.)
On May 15, 2012, Judge Medler issued a Report and Recommendation ("R&R") (Doc. No. 57) addressing all of the
issues raised by Defendant. Judge Medler recommended that Defendant's motion to suppress be denied. She also
recommended denial of Defendant's claim that his arrest was unconstitutional, his assertion that the case is barred by
double jeopardy, and Defendant's other contentions that the Court lacks jurisdiction. Judge Medler also ordered that
Defendant's request for discovery be denied, and that Defendant's request for grand jury materials be granted in part and
denied in part. In a Supplemental Report and Recommendation ("Supplemental R&R") (Doc. No. 59), filed on May 22,
2012, Judge Medler recommended that the United States' motion to determine admissibility of Defendant's statements
be granted and that Defendant's statement be found to be voluntary. In both the R&R and the Supplemental R&R,
Defendant was advised that he had fourteen days to file written objections to each report and recommendation.
Defendant did not file any [*4] objections or other documents within fourteen days of the initial R&R. On May 31,
2012, Defendant filed, by hand-delivery, a document entitled, "Take Judicial Notice and Administrative Notice; In the
Nature of a Writ of Error, Coram Nobis, of Fraud Upon the Court, Improper Jurisdiction & Venue, and Perjured Oath &
Conflict of Interest" (Doc. No. 61). Although the United States challenges the timeliness of this filing, the Court, to the
extent pertinent, shall treat this as an objection to the R&R, and also deems the filing to be timely as it was filed within
fourteen days of the Supplemental R&R. On June 13, 2012, Defendant filed another document, entitled "Challenge of
Jurisdiction" (Doc. No. 64), to which the United States has responded. In these two filings, Defendant does not
challenge the findings of fact or legal conclusions related to Defendant's motion to suppress. Rather, Defendant seeks
dismissal of the indictment, asserting various challenges to the Court's jurisdiction and the authority of the Court and
prosecutors, some of which were addressed in the R&R.
When a party objects to a Report and Recommendation concerning a dispositive matter, the Court is required to "'make
[*5] a de novo review determination of those portions of the record or specified proposed findings or recommendations
to which objection is made.'" United States v. Lothridge, 324 F.3d 599, 600 (8th Cir. 2003) (quoting 28 U.S.C. § 636(b)
(1)). When a party objects to orders on nondispositive matters, "[t]he district judge must consider timely objections and
modify or set aside any part of the order that is contrary to law or clearly erroneous." Rule 59(a), F. R. Cr. P.
I. Motion to Suppress Evidence

As stated above, Defendant has not challenged the findings of fact or legal conclusions in the R&R with respect to
Defendant's motion to suppress. Nonetheless, because Plaintiff is proceeding pro se, the Court conducted a de novo
review of the motion to suppress evidence and statements, including a full review of the testimony, exhibits, and
arguments presented at the hearings on April 5 and April 23, 2012. Based on that review, the undersigned concludes that
the Magistrate Judge made proper factual findings and correctly analyzed the issues.
For the reasons stated in the R&R, the Court finds that the officers, based on their investigation, including the messages
sent by Defendant and their observation [*6] of Defendant's actions consistent with his messages, had probable cause to
believe Defendant was committing a felony at the time he was stopped and arrested. The Court also agrees with the
recommendations of the Magistrate Judge that the search of Defendant's vehicle at the time of his arrest, and the seizure
of items from Defendant's vehicle, including his cell phone, 2 the condoms, and the receipt for the condoms, was lawful,
and not subject to suppression. Several different grounds authorize the search of the vehicle, including that it was
reasonable for the officers to believe that the vehicle contained "evidence of the offense of arrest," within the meaning
of Arizona v. Gant, 556 U.S. 332, 346, 129 S. Ct. 1710, 173 L. Ed. 2d 485 (2009). Further, the officers were authorized
to conduct and did conduct an inventory search of the vehicle, and the items seized would inevitably have been
discovered during such a search. Because the officers had probable cause to stop and arrest Defendant, his arguments
that the evidence is subject to suppression as the fruit of the unlawful detention also fail.
2 Defendant has not challenged the subsequent search of the cell phone, which was thereafter conducted pursuant to a search warrant.
Page 588Page 588
2012 U.S. Dist. LEXIS 88946, *
II. [*7] Motion to Suppress Statements

For the reasons stated in the R&R and Supplemental R&R, the Court also agrees that any statements by Defendants
were voluntary, and should not be suppressed. The only statement challenged by Defendant was the statement he made
at the scene, following his arrest, in which he stated: "I told her she was too young. I was just going to take her to
dinner." This statement was made after Defendant was advised of his Miranda rights. And though Defendant promptly
invoked his right to counsel, the statement was made spontaneously, and was not in response to any questioning by
Detective Bosley or any other officer. Nor is the statement subject to suppression as the fruit of an unlawful arrest, as
the officers had probable cause to stop Defendant and to arrest him.
Although Defendant nowhere specifically challenges the voluntariness of his statement at the scene, the record reflects
that the statement was voluntary. Prior to making the statement, Defendant was advised of his Miranda rights. At the
time, Defendant, who was then approximately 46 years old, did not appear to be under the influence of drugs or alcohol,
was not subject to any threats or force, appeared [*8] to understand what was transpiring, and understood his Miranda
rights well enough to invoke his right to counsel. As such, Defendant's statement should not be suppressed
III. Discovery Requests

Defendant did not file any objections to the Magistrate Judge's Order denying his request for discovery, 3 including a list
of witnesses, or to the Order granting Defendant's request for grand jury testimony transcripts to the extent of the
prosecutor's offer to produce, and denying the request in all other respects. Even if Defendant had properly preserved
his objections to these orders, the Court finds the Magistrate Judge's rulings are neither contrary to law nor clearly
erroneous, and indeed, properly reflect the applicable law under Rules 16 and 6, respectively, of the Federal Rules of
Criminal Procedure. Accordingly, the Court will not overrule the Magistrate Judge's Orders on these issues.
3 Defendant did not file a formal motion regarding discovery, but stated in his Notice of Dismissal of Counsel his belief that he was untitled
to a list of witnesses and grand jury testimony. (Doc. 45, p. 2.)
IV. Defendant's Notice of Dismissal (Doc. No. 45)

Prior to the issuance of the R&R, Defendant asserted [*9] various arguments for dismissal and challenges to
jurisdiction, which the undersigned has also reviewed de novo. Based on that review, the Court concludes that the
Magistrate Judge correctly analyzed the issues, and the Court therefore adopts Judge Medler's well-reasoned
recommendations and will overrule Defendant's requests for dismissal and challenges to jurisdiction, which are
summarized below:
a. The Court rejects Defendant's contention that the officers lacked authority to arrest Defendant on this indictment. The
indictment was properly returned and the warrant was properly issued and returned. The law does not require the
officers to present a defendant with a copy of the warrant unless the defendant requests same, and there is no evidence
in this record of any such request by Defendant Hobbs.
b. The charge in the indictment is not barred by double jeopardy because the Double Jeopardy Clause does not bar a
federal prosecution of a defendant prosecuted for the same acts in state court. Further, jeopardy had not attached on the
state charges, and Defendant was not charged with the "same offense," within the meaning of Blockburger v. United
States, 284 U.S 299, 304, 52 S. Ct. 180, 76 L. Ed. 306 (1932), in state [*10] and federal court.
c. Defendant's assertion that the Court lacks jurisdiction because he was not in the military, was not a federal employee,
and the crime was not committed on federally owned or controlled property has no merit. The Court has original
jurisdiction of violations of criminal laws of the United States, under 18 U.S.C. § 3231. See United States v. Schumaker,
No. 11-13616, 479 Fed. Appx. 878, 2012 U.S. App. LEXIS 10484, 2012 WL1886481, at *2 (11th Cir. May 24, 2012);
United States v. Hayes, 574 F.3d 460, 471-72 (8th Cir. 2009). And here the indictment properly alleges a violation of 18
U.S.C. § 2422(b).
d. Although the Court understands Defendant's assertions in various portions of his filings that 18 U.S.C. § 2422 is
unconstitutional, for the reasons set forth in the R&R, the Court finds the statute to be constitutional and a proper
Page 589Page 589
2012 U.S. Dist. LEXIS 88946, *
exercise of Congress' power to regulate interstate commerce and instrumentalities of commerce under the Commerce
Clause. See United States v. Trotter, 478 F.3d 918, 920-21 (8th Cir. 2007) (recognizing power of Congress to regulate
computer connected to the internet as instrumentally of interstate commerce). The cases cited by Defendant do not
suggest otherwise. See United States v. Donaldson, No. 4:10-CR-47-01-HLM, 2011 U.S. Dist. LEXIS 99724, 2011WL
3918217, at *2 (N.D. Ga. Sept. 6, 2011) [*11] (rejecting argument that the decision in Bond v. United States, U.S. ,
131 S. Ct. 2355, 180 L. Ed. 2d 269 (2011) required reconsideration of the validity of § 2422); see also United States v.
Louper-Morris, 672 F.3d 539, 562-63 (8th Cir. 2012) (construing Bond as holding that criminal defendants may
challenge statutes as violative of the Tenth Amendment, but holding wire fraud statute to be legitimate exercise of
power under the Commerce Clause). And here, the evidence in the record is undisputed that Defendant used his cell
phone--an instrumentality of interstate commerce--to commit the offense.
V. Defendant's Writ of Error Coram Nobis and Demand for Dismissal (Doc. No. 48)
The Court finds no basis for the arguments asserted in Doc. No. 48, and rejects these arguments for the reasons stated in
the R&R, including Defendant's request for writ of error coram nobis; assertion that F.R.Civ. P. 4(j) applies; demand for
disclosure of the Court's Jurisdiction; argument that the prosecution violates the Eleventh Amendment; objection to the
use of capital letters in the indictment; objection to the Court's reference to the "UNITED STATES [*12] DISTRICT
COURT" in the caption; assertion that jurisdiction depends on the Foreign Sovereign Immunities Act of 1976 (FSIA)
and 28 U.S.C. § 1330; contention that this action is a violation of the Clearfield Trust doctrine; assertion that he is being
fraudulently prosecuted as an "enemy of the State" or an alien enemy resident under 50 U.S.C. § 23; argument that the
1959 Executive Order placed this Court under the jurisdiction of the presidential flag and military or civil jurisdiction;
argument of improper venue and demand that venue be changed to the "Peoples Constitutional Art. III court"; and
assertion that his rights are governed by the Uniform Commercial Code.
VI. Defendant's Writ of Error Coram Nobis, of Fraud Upon the Court (Doc. No. 61)
To the extent Defendant has reasserted the arguments previously raised before the Magistrate Judge, the Court has
treated Defendant's arguments in his May 31 filing as objections; but the Court both overrules the objections and
independently rejects those arguments for the reasons set forth above, and will not further address these arguments. In
this filing, Defendant also asserts several somewhat new arguments, which he asserts demonstrate a lack [*13] of
jurisdiction. After a careful review of the Defendant's filing and the response by the United States, the Court rejects the
new arguments asserted by Defendant, summarized below, as lacking in merit.
a. Alleged Violation of Oath: In paragraphs 1-9, and various other paragraphs of his filing, Defendant asserts that the
prosecutors violated their oaths of office and that they and the Court have allowed perjured testimony by forcing
Defendant to plead without being permitted to face his accuser at his arraignment, by denying Defendant the affirmative
defense of innocence, by not requiring the injured party to come forward and swear, and by violating what Defendant
asserts is the prosecutors' duty to notify the Court that it does not have jurisdiction in this case. The Court rejects these
arguments as having no basis.
As set forth in the response of the United States, there is no requirement, either under the Federal Rules of Criminal
Procedure, or historically, that a defendant be able at his arraignment to face the alleged victim or require the victim or
accuser to swear to the offense. See United States v. Gray, 448 F.2d 164, 167-68 (9th Cir. 1971). Rule 10 of the Federal
Rules of Criminal Procedure [*14] requires only that the defendant receive a copy of the indictment, that the court read
the indictment or advise the defendant of the substance of the charge, and that the defendant be asked to plead to the
indictment. Defendant does not assert that these requirements were not met. The Court also rejects Defendant's
argument that there was some intent to deny him the affirmative defense of innocence; Defendant was permitted to
plead "not guilty" at his arraignment, and the prosecution will bear the burden to prove Defendant's guilt beyond a
reasonable doubt at trial. And inasmuch as Defendant's jurisdictional arguments have no basis, the attorneys cannot have
violated their oaths by not advising the Court to the contrary.
b. Alleged Conflict of Interest: In various paragraphs of his filing, Defendant asserts that the Court and the prosecutors
have a conflict of interest because they are "hired by the government." Because Defendant's arguments amount to
nothing more than an institutional argument of bias that would apply to all judges and prosecutors, and no allegation of
personal bias or conflict is alleged, Defendant's arguments are rejected. See United States v. Bell, 79 F. Supp. 2d 1169,
1173 (E.D. Cal. 1999).
Page 590Page 590
2012 U.S. Dist. LEXIS 88946, *
c. [*15] 27 C.F.R. 72.11: Although his argument is unclear, Defendant appears to assert that crimes that derive from
Congress' power under the Commerce Clause are limited to those defined in 27 C.F.R. § 72.11. The Court disagrees. As
set forth in the plain language of Title 27 of the Code of Federal Regulation, this section simply provides definitions of
terms used in the provisions dealing with the disposition of seized personal property by the Bureau of Alcohol, Tobacco
Tax and Trade Bureau of the Department of the Treasury, and has no application to this case.
d. Foreign Agents: Defendant's assertion that the prosecutors and the Magistrate Judge are "foreign agents," under 8
U.S.C. § 1481, has no basis. Defendant's further argument with respect to Fed. R. Civ. P. 4(j) was properly rejected for
the reasons stated in the R&R, which this Court adopts.
e. Freedom of Information Act: In paragraph 15, Defendant asserts that he is making a request for all documents related
to Clifford Keith Hobbs under the Freedom of Information Act (the "FOIA"). This is not the proper forum or procedure
for such a request. To the extent Defendant wishes to make such a request, he must do so under the procedures [*16] set
forth in the FOIA. Discovery in a criminal prosecution is governed by the Federal Rules of Criminal Procedure and
related case law.
f. Challenges to Grand Jury Proceedings: The Court can find no basis for Defendant's assertion that the 4th, 5th and 6th
Amendments to the constitution require that he be entitled to face his accuser during grand jury proceedings. This
argument is contrary to the language of Rule 6(d) of the Federal Rules of Criminal Procedure, and the case law
pertaining to grand jury proceedings, and is therefore rejected. Defendant's further contention, that he has somehow
been denied the ability to challenge the selection of the grand jury members, also lacks merit. Section 1867(a) of Title
28, United States Code, provides that in criminal cases a defendant may assert the failure to comply with the
requirements for composing the grand jury "before voir dire examination begins, or within seven days after the
defendant discovered or could have discovered, by the exercise of diligence, the grounds therefor. . . ." There is nothing
in this record to suggest that Defendant has been denied this opportunity, nor has Defendant alleged any failure to
comply with the statutory [*17] provisions related to the composition of the grand jury.
g. Other Arguments: The Court is unable to make sense of the remaining arguments asserted by Defendant, primarily in
paragraphs 17 - 24, including Defendant's arguments pertaining to the placement of property of the People into a
"trust"; related to adoption of the gold standard; regarding the Cestui Que Vie Act of 1666; that the undersigned and the
prosecutors are required to be registered as debt collectors; that the prosecutors are using unlawful Tax Warrants to
purchase securities and steal "this Beneficiary's" money; that the prosecuting attorneys are required to file Currency
Transaction Reports; and reference, without further explanation, to the Securities Act of 1933 and the federal money
laundering statute. These arguments appear to have no bearing on this case, and are denied.
VII. Challenge to Jurisdiction (Doc. No. 64)

In his most recent filing, Defendant once again challenges the jurisdiction of this Court, repeating many of the
challenges raised previously, including his assertion that the jurisdiction of the federal courts is limited to military
personnel, federal employees, residents of the District of Columbia, [*18] and offenses committed within the territorial
limits of the District of Columbia. After arguing that both this Court and the prosecuting attorneys are bound by oath to
uphold the Constitution, including the provisions for the separation of powers, Defendant appears to contend that this
Court cannot be a proper Article III Court, and that the prosecutors cannot be proper parties, because both have failed to
recognize the absence of jurisdiction on the grounds Defendant asserts. But the Court finds no merit in Defendant's
arguments that jurisdiction is lacking, or Defendant's numerous assertions that Congress has exceeded its authority in
adopting the criminal statute at issue. As such, Defendant's arguments in paragraph 1-8 of Doc. No. 64 are denied.
In paragraphs 9 and 10 of his filing, Defendant appears to assert that the Assistant United States Attorneys have failed
properly to establish their authority to act as counsel for the United States, apparently contending that there is an
obligation on the part of Assistant United States Attorneys to present copies of their oath of office. The Court notes that
Assistant United States Attorneys sign appointment affidavits, and that their [*19] oath is administered by a judge of
this district court. But the Court is unaware of any requirement that Assistant United States Attorneys prove to
defendants that they are properly appointed or that they carry malpractice insurance, nor has Defendant cited to any
such authority or requirement. Absent any facts suggesting that the attorneys who have publicly entered their
appearances on the record on behalf of the United States are not, in fact, authorized to do so, the Court finds no basis to
impose such a requirement, and Defendant's motion on this ground shall be denied.
Accordingly,
Page 591Page 591
2012 U.S. Dist. LEXIS 88946, *
IT IS HEREBY ORDERED that the Report and Recommendation of United States Magistrate Judge [Doc. #57] is
SUSTAINED, ADOPTED, AND INCORPORATED herein.
IT IS FURTHER ORDERED that the Supplemental Report and Recommendation of United States Magistrate Judge
[Doc. #59] is SUSTAINED, ADOPTED, AND INCORPORATED herein.
IT IS FURTHER ORDERED that Defendant's Motion to Suppress Statements and Evidence [Doc. No. 39] is
DENIED.
IT IS FURTHER ORDERED that Defendant's motions to dismiss in his filing labelled "Notice of Dismissal of
Counsel" [Doc. No. 45], including claims that the Court lacks jurisdiction, that the statute [*20] or his arrest is
unconstitutional, and that the prosecution is barred by double jeopardy, are DENIED.
IT IS FURTHER ORDERED that Defendant's motions to dismiss and other argument raised in Defendant's filing
labelled, "Take Judicial Notice and Administrative Notice: in the Nature of a Writ of Error, Coram Nobis, and a Demand
for Dismissal for Failure to State the Proper Jurisdiction and Venue Pursuant to FRCP Rule 4(j)" [Doc. No. 48] are
DENIED.
IT IS FURTHER ORDERED that Defendant's Requests for Discovery are DENIED, except Defendant's Request for
grand jury transcripts is GRANTED to the extent of the United States' offer to produce grand jury transcripts. [Doc. No.
45]
IT IS FURTHER ORDERED that the United States' Motion for a Determination of Admissibility Pursuant to 18
U.S.C. § 3501 [Doc. No. 25] is GRANTED.
IT IS FURTHER ORDERED that any motions in Defendant's filing labelled "Take Judicial Notice and Administrative
Notice; In the Nature of a Writ of Error, Coram Nobis, of Fraud Upon the Court, Improper Jurisdiction & Venue, and
Perjured Oath & Conflict of Interest" [Doc. No. 61] are DENIED.
IT IS FURTHER ORDERED that Defendant's Challenge of Jurisdiction [Doc. No. 64] is DENIED.
/s/ Audrey G. Fleissig [*21]
AUDREY G. FLEISSIG
UNITED STATES DISTRICT JUDGE
Dated this 27th day of June, 2012.
Page 593Page 593
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
71 of 430 DOCUMENTS
In re: GREGG SAMUEL GIORDANO, Debtor; DATA MOUNTAIN SOLUTIONS,

INC., et al., Plaintiffs vs. GREGG SAMUEL GIORDANO, Defendant
Case No. 10-12456-BFK, Chapter 7, Adversary Proceeding No. 10-01263
UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF

VIRGINIA, ALEXANDRIA DIVISION
472 B.R. 313; 2012 Bankr. LEXIS 1441
March 29, 2012, Decided

March 30, 2012, Entered
CASE SUMMARY:
PROCEDURAL POSTURE: Judgment creditors of Chapter 7 debtor, a company and an individual, filed a complaint
against the debtor to determine, pursuant to 11 U.S.C.S. § 523(a)(2)(A), (a)(4), and (a)(6), the dischargeability of debts
represented by a confirmed arbitration award, as well as post-arbitration award amounts.
OVERVIEW: An arbitrator found that the debtor failed to split proceeds from a government contract with plaintiffs on
a certain percentage basis, awarding a specific amount and any additional amounts that the debtor should have paid to
plaintiffs. The arbitrator also found that the debtor as a director of the company procured two company checks for
payment to a shareholder for the shareholder's stock, but retained a portion of the money for himself. The specific
amount awarded by the arbitrator was excepted from discharge pursuant to § 523(a)(4) because the debtor occupied a
fiduciary position as the manager of the joint venture for purposes of collecting and disbursing the funds from the
contract, the debtor committed a defalcation by refusing to distribute the funds, and the debtor was collaterally estopped
from contesting the amount. The money the debtor retained was also excepted from discharge pursuant to § 523(a)(4)
because he was a fiduciary with respect to the funds and took money that was not his. The unspecified additional
amounts were not excepted from discharge because the court was unable to state with any certainty what the additional
amounts were.
OUTCOME: The court held that a portion of the award was non-dischargeable.
CORE TERMS: shareholder's, gov, arbitration award, arbitrator's, non-dischargeable, plus interest, arbitration,
defalcation, dischargeability, fiduciary, post-arbitration, fiduciary capacity, embezzlement, partner, legal fees, larceny,
bonus, res judicata, preponderance, partnership, notice, bank account, collateral estoppel, joint venture, pre-arbitration,
dischargeable, confirmed, exempt, stock, owed
[HN1] The plaintiffs bear the burden of proof on all issues under 11 U.S.C.S. § 523. The standard of proof is a
preponderance of the evidence.
Civil Procedure > Judgments > Preclusion & Effect of Judgments > Estoppel > Collateral Estoppel
Page 594Page 594
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
[HN2] Collateral estoppel principles apply in 11 U.S.C.S. § 523 dischargeability cases. As well, collateral estoppel
applies in dischargeability cases with respect to arbitration awards.
[HN3] The preclusive effect of a federal court judgment is determined by federal common law. Issue preclusion, or
collateral estoppel, bars the successive litigation of an issue of fact or law litigated and resolved in a valid court
determination essential to the prior judgment, even if the issue recurs in the context of a different claim. In the D.C.
Circuit, a final arbitration award has collateral estoppel and res judicata preclusive effects.
[HN4] For collateral estoppel to apply under District of Columbia law, the following elements must be established: (1)
the same issue must have been contested by the parties and submitted for judicial determination in the prior case; (2) the
issue must have been actually and necessarily determined by a court of competent jurisdiction in that prior case; and (3)
preclusion in the second case must not work a basic unfairness to the party bound by the first determination.
[HN5] For a debt to fall within 11 U.S.C.S. § 523(a)(2)(A)., money, property or services, or an extension, renewal or
refinancing of credit must actually have been obtained by the false pretenses or representations or by means of actual
fraud. To prevail on a claim of actual fraud, the plaintiff must prove four elements: (1) a fraudulent misrepresentation;
(2) that induces another to act or refrain from acting; (3) causing harm to the plaintiff; and (4) the Plaintiff's justifiable
reliance on the misrepresentation. The burden of proof is on the objecting creditor, and the standard of proof is
preponderance of the evidence.
[HN6] Under 11 U.S.C.S. § 523(a)(2)(A), the intent not to perform must be present at the time the future performance is
promised.
[HN7] Among the debts excepted from an individual debtor's discharge are debts incurred through fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny. 11 U.S.C.S. § 523(a)(4). To succeed on a claim of
fiduciary defalcation, a creditor must ordinarily make a two-part showing: (1) that the debt in issue arose while the
debtor was acting in a fiduciary capacity; and (2) that the debt arose from the debtor's fraud or defalcation. A defalcation
need not rise to the level of embezzlement--even an innocent mistake which results in misappropriation or failure to
account is sufficient.
Business & Corporate Law > Corporations > Directors & Officers > Management Duties & Liabilities > Fiduciary
Responsibilities > General Overview
[HN8] Directors are unquestionably fiduciaries of the corporations they serve.
Business & Corporate Law > General Partnerships > Management Duties & Liabilities > Fiduciary Responsibilities
> General Overview
Business & Corporate Law > Joint Ventures > Formation
[HN9] Under Virginia law, a joint venture exists where two or more parties enter into a special combination for the
purpose of a specific business undertaking, jointly seeking a profit, gain, or other benefit, without any actual partnership
or corporate designation. Moreover, in Virginia, joint venturers have a fiduciary relationship among themselves which
begins with the opening of the negotiations for the formation of the syndicate, applies to every phase of the business
which is undertaken, and continues until the enterprise has been completely wound up and terminated. The duties and
obligations of joint venturers are essentially the same as those of partners in a partnership. The Virginia Code expressly
requires partners to abide by their fiduciary duties to the partnership, requiring partners to account to the partnership and
hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the
partnership business or derived from a use by the partner of partnership property. Va. Code Ann. § 50-73.102(B)(1).
Page 595Page 595
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
Business & Corporate Law > Joint Ventures > General Overview
[HN10] A joint venture relationship is sufficient to establish a fiduciary relationship under 11 U.S.C.S. § 523(a)(4),
particularly where the debtor is responsible for managing the venture's funds.
[HN11] For purposes of 11 U.S.C.S. § 523(a)(4), embezzlement is the fraudulent appropriation of property by a person
to whom such property has been entrusted, or into whose hands it has lawfully come. Larceny is defined as the
fraudulent and wrongful taking and carrying away of the property of another with intent to convert such property to the
taker's own use without the consent of the owner.
Bankruptcy Law > Discharge & Dischargeability > Nondischarge of Individual Debts > Malicious & Reckless
Behavior
[HN12] "Willful," as the term is used in 11 U.S.C.S. § 523(a)(6), requires a deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury. The requirement that the conduct be "malicious," however, does not
require that a debtor bear subjective ill will toward, or specifically intend to injure, his or her creditor; it is sufficient that
a debtor's injurious act is done deliberately and intentionally in knowing disregard of the rights of another. The proper
focus is not on the debtor's good intentions, but whether he exercised dominion and control over funds that he knew
belonged to another. The burden of proof is on the objecting creditor, and the standard of proof is preponderance of the
evidence.
Bankruptcy Law > Estate Property > Abandonment > Trustee Action
Bankruptcy Law > Estate Property > Content
[HN13] An asset that is not listed remains an asset of the bankruptcy estate until administered or abandoned by the
trustee. 11 U.S.C.S. § 554(d).
Evidence > Judicial Notice > Adjudicative Facts > General Overview
[HN14] A bankruptcy court may take judicial notice of the debtor's schedules.
COUNSEL: [**1] For Data Mountain Solutions, Inc., Derek McUmber, Frederick S Hill, Jr., Plaintiffs: Dawn C.
Stewart, LEAD ATTORNEY, The Stewart Law Firm, PLLC, Washington, DC.
For Gregg Samuel Giordano, Defendant: Christopher L. Rogan, LEAD ATTORNEY, RoganLawFirm, PLLC, Leesburg,
VA.
JUDGES: Brian F. Kenney, United States Bankruptcy Judge.
OPINION BY: Brian F. Kenney
OPINION
[*318] MEMORANDUM OPINION

This matter came before the Court on the Complaint of Data Mountain Solutions, Inc. ("DMS") and Derek McUmber to
determine the dischargeability of certain debts owed to them by the Debtor, Mr. Giordano, as of the date of the filing of
Mr. Giordano's bankruptcy petition. For the reasons stated below, the Court holds that: (a) $5,000 is non-dischargeable,
pursuant to 11 U.S.C. §§ 523(a)(4) and (a)(6); (b) the amounts of $166,957 payable to DMS, plus interest at 6% from
July 2008, and $120,083 payable to Mr. McUmber, plus interest at 6% from July 2008, are non-dischargeable pursuant
to 11 U.S.C. §§ 523(a)(4) and (a)(6); (c) any additional damages accruing after July 2008 have not [*319] been proven,
and hence, are dischargeable; and (d) the Plaintiffs' claim for their post-arbitration award of attorney's fees are
dischargeable.
The case was tried over [**2] the course of five days in November, December 2011 and January 2012. This
Memorandum Opinion constitutes the Court's findings of facts and conclusions of law under Bankruptcy Rule 7052.
Page 596Page 596
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
Findings of Fact
1. Data Mountain Solutions, Inc. ("DMS") is a West Virginia corporation, originally organized by Mr. Hill and Mr.
Watson.
2. In June 2003, Mr. McUmber was employed by a company known as Web Putty. Web Putty was in danger of running
out of money, and Mr. McUmber was looking for employment and other business opportunities. He was introduced to
Mr. Giordano. On June 2, 2003, Mr. McUmber became a shareholder of DMS.
The DMS Shareholders Agreement

3. On June 2, 2003, the four shareholders of DMS -- Mr. McUmber, Mr. Giordano, Mr. Watson, and Mr. Hill -- entered
into a Shareholders Agreement. Plaintiffs' Exh. 2. Each shareholder initially owned 22,500 shares in the company.
Further, the parties agreed that Mr. Watson and Mr. Hill would hold officer positions within the company, as follows:
President: Frederick S. Hill, Jr.

Vice President: Anthony Watson
Secretary: Anthony Watson
Treasurer: Frederick S. Hill, Jr.
Defendant's Exhibit P.
4. The company's June 2, 2003, Organizing Resolution also acknowledged [**3] that Mr. Watson had loaned $28,406 to
the company. Defendant's Exh. P.
5. The parties agreed that each shareholder would be a Director. Defendant's Exh. M, Shareholders Agreement, ¶ 1(a).
Collectively, the four individuals constituted the company's Board of Directors. Id. Furthermore, under the company's
Bylaws, the Chairman had the ability to cast the deciding vote in order to break any tie votes of the Board. Defendant's
Exh. N, § 2.12.
6. Under the Bylaws, each Director would continue to serve until his successor was elected and qualified. Id. at § 2.3.
However, the same provision does not appear in Section 2.5 relating to the position of Chairman. Accordingly, it was
the view of the company's counsel, Mr. Thompson, that, by the Board Meeting of May 25, 2006 (discussed below),
there was no Chairman to break a deadlock of the Board.
7. Further, under the Shareholders Agreement, each Director would remain a Director as long as the Director was a
shareholder of the company, even if the shareholder owned only one share (a fact which would come to have
significance as the shareholders grew more distant and mistrustful of each other). Defendant's Exh. M, § 1(b).
The Blue Pages and Dot Gov [**4] Contracts

8. In 2003 and 2004, DMS did not have the ability to contract directly with the Government Services Administration
(GSA) because it lacked what is known as a GSA Schedule. Accordingly, DMS teamed up with a company known as
Native Technology, Inc. ("NTI"), which not only had a GSA Schedule, but had the further advantage of being a Section
8(a) minority-owned business enterprise, which enabled NTI to obtain contracts from GSA without competitive bidding.
9. NTI had a contract with GSA for what was known as the Blue Pages contract, which was essentially an online
telephone directory for government agencies. [*320] There were two task orders under the Blue Pages contract, Blue
Pages I and Blue Pages II.
10. On or about January 13, 2003, Mr. Giordano, acting on behalf of a company that he called "Wave Interface/DMS,"
entered into a Teaming Agreement with NTI. Defendant's Exh. A, Teaming Agreement. The Teaming Agreement has an
"Exhibit A" attached to it, which purports to allocate 47 1/2% of the Blue Pages (and any other, future contracts) to
"Wave/DMS" (for our purposes, DMS) for the provision of technical services, and 47 1/2% to Mr. Giordano for Project
Management. Id. at Exhibit A to [**5] Defendant's Exh. A, Teaming Agreement.
11. Mr. Giordano maintains that he disclosed the Teaming Agreement to the other DMS shareholders, and that they were
aware of its terms. However, there is no evidence (e.g., e-mails or correspondence) to support the purported disclosure
of the Teaming Agreement to the other shareholders, and shareholders Hill and McUmber maintain that they did not see
the Teaming Agreement until the parties were engaged in arbitration proceedings and it was produced in discovery. The
Page 597Page 597
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
Court finds that Teaming Agreement was never disclosed to the other shareholders of DMS, was never presented to the
DMS Board for approval, and was not known to the other shareholders of DMS until it was produced in discovery when
the parties later became litigants in arbitration against each other.
12. In May 2004, the GSA awarded NTI a contract known as the Dot Gov contract. In essence, this contract was for the
management and routing of all e-mail traffic under the ".gov" top level domain for the U.S. government, as well as for
State and local governments that used the .gov domain. The Contract was initially for a two-year period, with 3 one-
year option periods. It was set to expire [**6] at the end of 2009, but was extended through February 2011.
13. NTI did not have the ability to perform the requirements of the Dot Gov contract, so it teamed up with DMS for this
purpose. Under the Teaming Agreement between NTI and DMS, NTI was to receive 5% of the revenue from the
contract, and DMS was to receive 95% of the revenue. Defendant's Exh. A. The parties further agreed that Mr.
McUmber and Mr. Giordano would act as contract employees for NTI, and that Mr. McUmber and Mr. Giordano would
receive 1099 income tax statements from NTI. Plaintiffs' Exhs. 8-9 (McUmber and Giordano 1099s). Under this
arrangement, Mr. McUmber and Mr. Giordano would each receive 23% of the revenue of the contract, after the payment
of expenses, and DMS would receive 49%. The revenue was consistently divided among the three parties on that basis
(with the exception of the first two Dot Gov Contract payments) from the inception of the Contract through June 2006.
Plaintiffs' Exhs. 4-9. 1
1 Mr. Giordano and Mr. McUmber needed to be "1099" employees of NTI in order to satisfy federal contracting regulations. These amounts,
together with NTI's 5%, would keep 51% of the revenue in NTI (at least for the sake [**7] of appearances).
14. For purposes of the Dot Gov contract, Mr. McUmber acted as the technical manager, with day-to-day responsibility
for keeping the system up and running, answering help desk calls, and trouble shooting. Mr. Giordano acted as the
project manager, interfacing in meetings with NTI and GSA, picking up the checks from NTI on a monthly basis,
depositing the checks into the company's bank account, and distributing the money to DMS, Mr. McUmber and himself
in the agreed-upon percentages, [*321] 49%, 23% and 23% respectively. The parties -- DMS and Mr. McUmber --
entrusted Mr. Giordano with the responsibility of picking up the checks and distributing the funds in the agreed-upon
amounts.
DMS Re-Acquires Mr. Hill's Shares

15. On May 1, 2004, DMS reacquired 11,250 of Mr. Hill's shares in the company. Defendant's Exh. Q, p. 1.
16. On May 10, 2005, DMS reacquired an additional 3,756 of Mr. Hill's shares in the company. Id at p. 4.
17. The net effect of these two transactions was that Mr. Hill was left with 7,494 shares in DMS.
18. Throughout this period, Mr. Hill became interested in business opportunities unrelated to DMS. By July 2004, he
had resigned as an officer of the corporation. However, [**8] he remained a director of DMS.
Mr. Giordano's Attempt to Gain Control of DMS, and The May 25, 2006, Board Meeting
19. Beginning in early (February or March) 2006, Mr. McUmber and Mr. Hill began to grow dissatisfied with Mr.
Giordano's management of DMS's finances. Specifically, Mr. McUmber and Mr. Hill grew concerned that: (a) it
appeared that critical vendors (Zone Edit and Navisite) were not being paid, and if they terminated their agreements
with DMS, the system could not function; (b) Mr. McUmber noticed that certain payments, totaling $6,000, were
apparently made to family members of Mr. Giordano; (c) Mr. Hill was concerned that the company was not current in
its tax obligations; and (d) Mr. Hill and Mr. McUmber were both concerned that the monthly payments from NTI
weren't being deposited into the company bank account at United Bank.
20. Moreover, the shareholders had discussed, but had never concluded, an agreement for the purchase of Mr. Watson's
shares in DMS. Mr. Watson was embarking on a course of study at Harvard University, and did not have time to devote
to the affairs of DMS. Mr. Watson wanted the company to repurchase his shares. He also wanted control of the
intellectual [**9] property known as Securecabinet, which was owned by DMS, and to which he had devoted his efforts
while at DMS.
Page 598Page 598
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
21. On May 22, 2006, Mr. Hill sent out a proposed Agenda for a Board meeting scheduled for May 25th. Defendant's
Exh. A-Q. The proposed Agenda prompted a number of e-mails among the shareholders as to what was to be discussed
at the meeting. The reacquisition of Mr. Watson's shares in the company was on the Agenda, as was the reacquisition of
Mr. Hill's remaining shares. 2
2 The company had previously tried to reacquire Mr. Watson's shares (Defendant's Exh. R), but the issue of the Securecabinet intellectual
property was never resolved to anyone's satisfaction, and the acquisition transaction was never consummated.
22. Although not formally noticed as such, this Board meeting was a special meeting of the Board, pursuant to Section
2.8 of the Bylaws. Defendant's Exh. N, § 2.8.
23. Mr. Giordano maintained at trial that this was both a Board meeting and a special meeting of the shareholders.
However, Mr. Hill's e-mail of May 22, 2006, and the attached Agenda, both reference only a Board meeting, and not a
shareholders meeting. Defendant's Exh. AQ. Further, other shareholders, notably [**10] Mr. and Mrs. Millheiser,
Luman, Lange and Wheeler, LLP, and Christopher Wheeler, did not have any notice of the meeting as a shareholders
meeting. Another shareholder, [*322] Luman, Lange, Thomas & McMullen, LLP, arguably did have notice because
Mr. Thomas, the company's corporate counsel, attended the meeting. The Court finds that this was a Board meeting
only, and not a shareholder's meeting. This conclusion is bolstered by Mr. Hill's e-mail of April 27, 2006, to Mr.
Thomas, the company's corporate counsel, in which Mr. Hill stated that "I only want Board members present for this
meeting," and that the shareholders would later be brought up to date. Defendant's Exh. X.
24. On May 24, 2006, Mr. Giordano deposited two checks, in the amounts of $21,614 and $43,228, into the company's
bank account at United Bank. Plaintiffs' Exhs. 11-12. These funds represented one month's and two months' revenue
from NTI on the Dot Gov contract, respectively. 3
3 The deposit of three months' worth of checks on the same day confirmed Mr. Hill's suspicions that Mr. Giordano was not depositing
revenue from the Dot Gov Contract into the company bank account at United Bank on a timely basis.
25. On the same day, May [**11] 24th, Mr. Giordano wrote two checks on the company's United Bank account, in the
amounts of $40,000 and $20,000. Plaintiffs' Exh. 14. With the $40,000 check, Mr. Giordano purchased a $35,000
cashier's check, payable to himself. With the $20,000 check, Mr. Giordano purchased a $20,000 cashier's check, payable
to Mr. Watson. Mr. Giordano endorsed the $35,000 cashier's check, and delivered it to Mr. Watson, in an attempt to
purchase 22,499 of Mr. Watson's 22,500 shares in DMS. Plaintiffs' Exh. 15; Defendant's Exh. Y, Watson -- Giordano
Stock Purchase Agreement. Mr. Giordano further delivered the $20,000 cashier's check to Mr. Watson in satisfaction of
Mr. Watson's loan to the company and unpaid expenses. 4
4 According to the testimony of Mr. McUmber, which the Court credits on this issue, Mr. Giordano advised the other shareholders that the
funds were "untraceable." This, the Court finds, was Mr. Giordano's reason for exchanging the two company checks for cashier's checks -- in
Mr. Giordano's view, this would make the funds untraceable to the other shareholders (it did not, of course, it just made it more difficult for
Mr. McUmber and Mr. Hill to trace the funds).
26. Mr. Giordano maintained [**12] at trial that the $40,000 check was a bonus. However, the bonus was not
authorized by the company's Board of Directors, and was unknown to the Board at the time Mr. Giordano withdrew the
funds. Moreover, the Board did not authorize the $20,000 payment to Mr. Watson in satisfaction of his loan and
expenses.
27. The Board of Directors met the next day, on May 25, 2006. At the start of the meeting, Mr. Giordano announced that
he had paid himself a bonus, and that he had acquired Mr. Watson's shares in the company. This, in Mr. Giordano's view,
gave him a majority of shares in the company, owing to the company's prior acquisition of Mr. Hill's 15,006 shares.
Further, the obvious purpose of leaving Mr. Watson with one share was to keep him on the Board as a voting Board
member, so that these actions could be ratified, if necessary. 5
Page 599Page 599
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
5 Mr. Giordano testified that Mr. Watson wanted to keep one share in the company for "sentimental" reasons, and that it was just "fortuitous"
that the retention of one share allowed Mr. Watson to continue to vote as a Director. The Court finds that this statement lacked any
semblance of credibility. The Court finds that the purpose of leaving one share with Mr. [**13] Watson was for the purpose of keeping him
on the Board as a voting member.
28. Needless to say, Mr. Giordano's unilateral payment of the $40,000 bonus [*323] and his attempted purchase of Mr.
Watson's shares were viewed with suspicion and anger by Mr. McUmber and Mr. Hill. Mr. McUmber and Mr. Hill
maintained that: (a) the $40,000 bonus was unauthorized; and (b) Mr. Giordano's attempted acquisition of the Watson
shares violated the DMS Shareholder Agreement.
29. Mr. Giordano attempted to turn the Board meeting into a shareholder's meeting, maintaining that he now owned
60% of the company's shares, and that Mr. Hill and Mr. McUmber owned the remaining 40%, despite the fact that
notice of the meeting had not been sent to all of the shareholders. Mr. Giordano took a vote of the shareholders present,
and announced that he had a 60% majority to ratify his actions. Later, Mr. Giordano purportedly "rescinded" his
purchase of Mr. Watson's shares, and Mr. Watson promised to pay back the $35,000. However, this money was never
repaid by Mr. Watson.
30. Subsequent to the May 25th Board meeting, matters only grew worse among the shareholders. Mr. Giordano, who
was the individual responsible for picking up [**14] the checks from NTI, began to withhold the checks and did not
deposit them into the company's United Bank account. In December 2006, Mr. Giordano opened two bank accounts at
Bank of America in the name of DMS, and began depositing the NTI money there. Plaintiffs' Exh. 40. Mr. Giordano did
not, however, pay any of the company's ongoing monthly expenses out of this bank account. Further, and importantly,
Mr. Giordano began requesting the funds from NTI, and, at Mr. Giordano's request, NTI began paying the contract
proceeds on the basis of 47 1/2% to DMS and 47 1/2% to Mr. Giordano -- the result, according to Mr. Giordano, of his
decision to "go back to" the literal terms of the Subcontract Agreement (Exhibit A to Defendant's Exh. A, Teaming
Agreement) with NTI. Throughout the trial, Mr. Giordano's position was that the consistent payment of the Dot Gov
Contract proceeds on a 49% (DMS), 23% (Giordano) and 23% (McUmber) basis was a matter of his own largesse,
calling it at one point an "at will contribution." This is flatly contradicted by the arbitrator's Modified Final Award,
discussed below, which found an enforceable agreement among these three parties dating back to "at [**15] least May
2004." Plaintiffs' Exh. 22, § 9.
The U.S. District Court Litigation and the Arbitration

31. On September 24, 2006, DMS, Mr. McUmber, and Mr. Hill filed a Complaint in the U.S. District Court in the
District of Columbia against Mr. Giordano and Mr. Watson (as well as against Mr. Thompson, the company's counsel).
Defendant's Exh. E.
32. On May 11, 2007, Mr. Giordano demanded arbitration with the American Arbitration Association, pursuant to the
terms of the Shareholders' Agreement. Defendant's Exh. G.
33. On May 18, 2007, DMS responded with its own demand for arbitration. Defendant's Exh. F. 6
6 The demand for arbitration appears to have been signed on February 26, 2007, but it is file-stamped May 18, 2007.
34. The parties proceeded to arbitration, and on November 14, 2008, the arbitrator issued his Modified Final Award.
Defendant's Exh. B; Plaintiffs' Exh. 22.
35. In the Modified Final Award, the arbitrator determined and ordered the following:
o Mr. Watson was ordered to sell, and the company was ordered to purchase, [*324] the 22,500 Watson shares in DMS. The
purchase price was deemed to have been satisfied in full with the $55,000 in funds taken by Mr. Giordano and paid over to Mr.
Watson [**16] on May 24, 2006.
o Mr. Hill was ordered to sell, and the company to purchase, 15,006 of Mr. Hill's shares, for the purchase price of $51,020, which
Mr. Hill had previously received from the company.
o As a result, the following parties were deemed to be shareholders of the company, in the following share amounts:
Hill 7,494
Giordano 22,500
Page 600Page 600
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
McUmber 22,500
Millheiser 1,000
Luman, et al. 140
Luman, et al. 52
Wheeler 42
o There was a valid agreement between DMS, Giordano, and McUmber, dating back to at least May 2004, in which the three
parties agreed to share the revenue from the Dot Gov contract in the following amounts:
DMS 49%
McUmber 23%
Giordano 23%
o DMS and McUmber had not received the full amount to which they were entitled under this agreement. The arbitrator ordered
Mr. Giordano to pay the following amounts to DMS and Mr. McUmber: (a) "$166,957.19 (representing DMS's portion of the
overpayment to Mr. Giordano through July 2008), plus any additional amounts that Giordano has received that DMS should have
received pursuant to the foregoing percentages plus interest on the total at the rate of six percent (6%) per annum;" and (b)
"$120,083.00 (representing McUmber's portion of the overpayment [**17] to Giordano through July 2008), plus any additional
amounts that Giordano has received that McUmber should have received pursuant to the foregoing percentages plus interest on the
total at the rate of six percent (6%) per annum."
o For reasons that remain unclear, DMS was ordered to pay both its own legal fees, and the legal fees of Mr. Giordano's counsel.
36. The arbitrator's award was confirmed and entered as a final Judgment of the U.S. District Court for the District of
Columbia on January 15, 2010 (hereinafter, the "D.C. Judgment"). Plaintiffs' Exh. 24. The Judgment remains
unsatisfied.
THE NTI Interpleader Action

37. In the meantime, NTI, apparently increasingly concerned with the DMS shareholder disputes, filed an action for
interpleader in the Circuit Court of Fairfax County, Virginia.
38. On July 20, 2007, the Circuit Court of Fairfax County entered a Consent Order of Interpleader, under which the
proceeds of the Dot Gov contract would be paid into the registry of the Court. Defendant's Exh. A-I.
The Giordano Bankruptcy Filing

39. On March 30, 2010, Mr. Giordano filed a voluntary petition under Chapter 7, in this Court.
40. DMS, Mr. McUmber, and Mr. Hill filed a timely Complaint to [**18] determine the dischargeability of the debts
represented by the arbitration award (and thereafter). 7
7 The introduction to the Complaint references Section 727 of the Bankruptcy Code, the general objection to discharge statute. However,
none of the Counts are stated under Section 727. All of the Counts are stated under Section 523, the dischargeability provisions of the Code.
Mr. Hill was dismissed as a Plaintiff by Order of the Court on September 10, 2010. Docket No. 10.
[*325] 41. DMS and Mr. McUmber also filed Proofs of Claim (Claim Nos. 8 and 9, respectively), asserting that DMS
is owed $377,259, and that Mr. McUmber is owed $434,965. Plaintiffs' Exhs. 34-35. The DMS Proof of Claim also
includes $153,116 in post-arbitration, pre-bankruptcy petition legal fees for the collection efforts undertaken by DMS's
attorneys on the arbitration award /U.S. District Court Judgment.
Conclusions of Law
This is an action to determine the dischargeability of debts under Section 523 of the Bankruptcy Code. The Court has
jurisdiction pursuant to 28 U.S.C. § 1334 and the Order of Reference from the United States District Court for the
Eastern District of Virginia, dated August 15, 1984. This is a core proceeding [**19] within the meaning of 28 U.S.C. §
157(b)(2)(I). [HN1] The Plaintiffs bear the burden of proof on all issues under Section 523 of the Code. Grogan v.
Garner, 498 U.S. 279, 291, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991). The standard of proof is a preponderance of the
evidence. Id. 8
Page 601Page 601
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
8 The Defendant maintained at trial that the standard is "clear and convincing evidence" under Count II, the 523(a)(4) Count (fraud or
defalcation while acting in a fiduciary capacity). The Court can discern no reason why a dischargeability action under Section 523(a)(2)(A)
should have a lesser standard of proof than one under Section 523(a)(4), and the Court will apply the preponderance standard to all Counts.
See FNFS, Ltd. v. Harwood (In re Harwood), 637 F.3d 615 (5th Cir. 2011) (applying the preponderance standard to a Section 523(a)(4)
claim); Patel v. Shamrock Floorcovering Servs. (In re Patel), 565 F.3d 963 (6th Cir. 2009) (same). The Supreme Court in Grogan v. Garner
noted that there are no burden of proof distinctions among the various subsections of Section 523. See Grogan v. Garner, 498 U.S. at 287
("Our conviction that Congress intended the preponderance standard to apply to the discharge exceptions is reinforced by the structure of §
523(a), [**20] which groups together in the same subsection a variety of exceptions without any indication that any particular exception is
subject to a special standard of proof"). Accordingly, the Court will apply the preponderance standard to all Counts.
The Supreme Court has made it clear that [HN2] collateral estoppel principles apply in Section 523 dischargeability
cases. Grogan v. Garner, 498 U.S. 279, 284-85, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991). As well, collateral estoppel
applies in dischargeability cases with respect to arbitration awards. See, e.g., Stasz v. Eisenberg (In re Stasz), 352
Fed.Appx. 154 (9th Cir. 2009); Bard v. Appel (In re Appel), 315 B.R. 645 (E.D.N.Y. 2004); Roth v. McCartin (In re
McCartin), No. 10-59014, 2011 Bankr. LEXIS 2286, 2011 WL 2443717 (Bankr. S.D. Ind. June 14, 2011); Tatge v.
Chandler (In re Judiciary Tower Assocs.), 175 B.R. 796 (Bankr. D.D.C. 1994).
[HN3] "The preclusive effect of a federal court judgment is determined by federal common law." Taylor v. Sturgell, 553
U.S. 880, 891, 128 S. Ct. 2161, 171 L. Ed. 2d 155 (2008). Issue preclusion, or collateral estoppel, bars the "'successive
litigation of an issue of fact or law litigated and resolved in a valid court determination essential to the prior judgment,'
even if the issue recurs in the context of a different [**21] claim." Id. at 892 (citing New Hampshire v. Maine, 532 U.S.
742, 748, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001)). In the D.C. Circuit, where this arbitration award was confirmed, a
final arbitration award has collateral estoppel and res judicata preclusive effects. Camp v. Kollen, 567 F.Supp.2d 170,
174 n.6 (D.D.C. 2008) (unconfirmed arbitration award given collateral estoppel effect (citing Century Int'l Arms, Ltd. v.
Fed. State Unitary Enter. State Corp. 'Rosvoorouzheinie', 172 F.Supp.2d 79, 95-96 (D.D.C.2001))); see also Hammad v.
Lewis, 638 F.Supp.2d 70, 74 (D.D.C. 2009) [*326] ("Decisions of an arbitration panel normally provide the type of
finality sought by courts to be protected by collateral estoppel").
[HN4] For collateral estoppel to apply under District of Columbia law, the following elements must be established:
(1) the same issue must have been contested by the parties and submitted for judicial determination in the prior case; (2) the issue
must have been actually and necessarily determined by a court of competent jurisdiction in that prior case; and (3) preclusion in the
second case must not work a basic unfairness to the party bound by the first determination.
Johnson v. Sullivan, 748 F.Supp.2d 1, 10 (D.D.C. 2010) (citing [**22] Martin v. Dep't of Justice, 488 F.3d 446, 454,
376 U.S. App. D.C. 293 (D.C. Cir. 2007)).
In this case, the parties arbitrated many (though not all) of the issues, and the U.S. District Court for the District of
Columbia confirmed the arbitration award. The arbitration award is clear in certain respects, as stated above. See supra
pp. 11-12, ¶ 35. The Court is required to accept, and does accept, these findings as a matter of collateral estoppel. There
has been no showing, however, that the issues relating to the non-dischargeability of the obligations, that is, the fraud-
based issues, were actually litigated in the arbitration. Specifically, the arbitrator made no findings as to whether the
debt was the product of actual fraud, whether the Debtor willfully and maliciously damaged the Plaintiffs' property, or
whether the debt was the product of a defalcation while acting in a fiduciary capacity. It is the task of this Court to
determine whether or not the amounts represented by the arbitration award are dischargeable under Section 523 of the
Bankruptcy Code. Further, it is this Court's obligation to determine, if the arbitration award is found to be non-
dischargeable, the extent to which the award may be non-dischargeable [**23] -- i.e., the amount of damages that may
be non-dischargeable.
I. Count I -- 11 U.S.C. § 523(a)(2)(A) (Money Obtained through False Pretenses, False Representation, or Actual
Fraud).
The Court will first address Count I, the Plaintiffs' claim that the Debtor's debts to them are excepted from discharge as
money and services obtained by "false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). The
Fourth Circuit has stated that, [HN5] "[f]or a debt to fall within this exception, money, property or services, or an
extension, renewal or refinancing of credit must actually have been obtained by the false pretenses or representations or
by means of actual fraud." Nunnery v. Rountree (In re Rountree), 478 F.3d 215, 219 n.1 (4th Cir. 2007) (citing Collier on
Bankruptcy, ¶ 523.08[1][b] (15th ed., rev. 2004)). To prevail on a claim of actual fraud, the plaintiff "must prove four
Page 602Page 602
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
elements: (1) a fraudulent misrepresentation; (2) that induces another to act or refrain from acting; (3) causing harm to
the plaintiff; and (4) the Plaintiff's justifiable reliance on the misrepresentation." Foley & Lardner v. Biondo (In re
Biondo), 180 F.3d 126, 134 (4th Cir. 1999). The burden of proof [**24] is on the objecting creditor, and the standard of
proof is preponderance of the evidence. See supra p. 13; Grogan v. Garner, 498 U.S. 279, 291, 111 S. Ct. 654, 112 L.
Ed. 2d 755 (1991).
A. The $40,000 and the $20,000 Checks.

The Plaintiffs spent an enormous amount of trial time focused on the Debtor's procurement of the two bank checks, in
the amounts of $40,000 and $20,000, and on the Debtor's delivery of the two checks to Mr. Watson in exchange for Mr.
Watson's [*327] stock. The Debtor testified that he paid $35,000 to Mr. Watson for his stock, which came from the first
check, and that he resolved Mr. Watson's loan and expense claims against DMS for $20,000, which came from the
second check. The Debtor acknowledged that he kept the remaining $5,000 from the first check. The Debtor testified
that he did this with the understanding that, after the repurchases of the Hill stock by the company, he and Mr. Watson
would own a majority of the shares in DMS. The so-called "bonus" of $40,000 taken by the Debtor was inarguably an
unauthorized act of which none of the other directors (other than Mr. Watson) had any advance knowledge and of which
they certainly would not have approved. In essence, this was a naked power grab by the Debtor [**25] in derogation of
his fundamental obligations of fairness and disclosure to his co-directors and shareholders. He did it in a surreptitious
way in order to avoid the money being traced. See supra p. 8, n.4. He did it in advance of the Board meeting, not after.
And he did it in such a way as to keep Mr. Watson on the Board, by ensuring that Mr. Watson retained a single share of
the company. See supra p. 9, n.5.
However, at the end of the day, DMS and Mr. McUmber have no claim arising out of the $40,000 and $20,000
transactions other than the $5,000 retained by Mr. Giordano. This is because the arbitrator ruled that $55,000 was to be
credited to the purchase of Mr. Watson's shares by DMS. Defendant's Exh. B, § 3(a) ("The Watson Share Purchase Price
shall be deemed to be paid in full by (i) the US$55,000 received by Watson from DMS funds paid directly or indirectly
via Giordano on or about May 24, 2006, plus accrued interest thereon, and (ii) the transfer of 100% of the shares owned
by DMS in Securecabinet, which transfer occurred no later than fiscal year 2005"). DMS appears to have conceded the
point as, in it its Proof of Claim, it identified only $5,000 as the amount of the Fairfax [**26] Judgment (plus the
arbitration award amounts having to do with the Dot Gov contract funds). Plaintiffs' Exh. 34. With respect to the
$20,000 check, the Court finds that the Debtor's testimony that this amount satisfied Mr. Watson's loan and expenditure
claims is unrebutted.
The Court finds that the remaining $5,000 is not exempt from dischargeability under Section 523(a)(2)(A). Although the
Debtor took this money without the other shareholders and directors knowing it at the time, he made no
misrepresentations at the time. In fact, no one knew of the Debtor's act until the next day at the Board meeting. As well,
DMS and McUmber were not induced to act, or not to act, and they did not rely in any way on any misrepresentations
of the Debtor with respect to the $5,000. The Court cannot find that the Debtor made any misrepresentations, nor any
reliance by the Plaintiffs. The $40,000 check and the $20,000 check (including the $5,000 retained by the Debtor) are
not exempt from dischargeability under Section 523(a)(2)(A). Rather, the $5,000 claim is better addressed under Counts
II and III (11 U.S.C. § 523(a)(4)), and Count IV (11 U.S.C. § 523(a)(6)), below.
B. [**27] The Dot Gov Contract Proceeds.

The Plaintiffs proved at trial (and at the arbitration) that they had an agreement with the Debtor to split the Dot Gov
contract proceeds on a 49% (DMS), 23% (McUmber), 23% (Giordano) basis. The Court accepts the finding of the
arbitrator that there was such an agreement. The Plaintiffs maintain that they were not paid in accordance with these
percentages from July 2006 (following the disastrous Board meeting of May 25th) forward.
[*328] For purposes of Section 523(a)(2)(A), there was an agreement to pay these amounts, but in the future. There
were no statements of existing fact made in support of this agreement. A debt can be held to be non-dischargeable under
11 U.S.C. § 523(a)(2)(A) only if the Debtor made the agreement to split the proceeds without the present intent to
perform that agreement. Structured Invs. Co., LLC v. Dunlap (In re Dunlap), 458 B.R. 301, 333 (Bankr. E.D. Va. 2011)
(" [HN6] [T]he intent not to perform must be present at the time the future performance is promised" (quoting Ocean
Equity Group, Inc. v. Wooten (In re Wooten), 423 B.R. 108, 122 (Bankr. E.D. Va. 2010))). Here, the Court cannot find
that the agreement was made without a present intent [**28] to perform. In fact, the parties all agree that Mr. Giordano
collected the funds from NTI and paid out the proceeds in accordance with the foregoing percentages (49/23/23%) from
Page 603Page 603
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
the inception of the Dot Gov contract through June 2006, with only two exceptions at the outset of the arrangement.
There was no evidence that the Debtor never intended to perform his promises, from the outset of the Dot Gov contract.
Consequently, the amounts awarded by the arbitrator are not exempt from dischargeability under 11 U.S.C. § 523(a)(2)
(A). Rather, these amounts are better addressed under Counts II and III (11 U.S.C. § 523(a)(4)), and Count IV (11
U.S.C. § 523(a)(6)), below.
II. Count II -- 11 U.S.C. § 523(a)(4)(Fraud or Defalcation While Acting in a Fiduciary Capacity).

The Plaintiffs next claim that their claims are excepted from discharge because the debtor committed defalcation while
acting in a fiduciary capacity. [HN7] Among the debts excepted from an individual debtor's discharge are debts
incurred through "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. §
523(a)(4). To succeed on a claim of fiduciary defalcation, "a creditor must ordinarily make a [**29] two-part showing:
(1) that the debt in issue arose while the debtor was acting in a fiduciary capacity; and (2) that the debt arose from the
debtor's fraud or defalcation." Kubota Tractor Corp. v. Strack (In re Strack), 524 F.3d 493, 497 (4th Cir. 2008) (citation
omitted). A defalcation "'need not rise to the level of embezzlement'" -- "even an innocent mistake which results in
misappropriation or failure to account is sufficient." In re Uwimana, 274 F.3d 806, 811 (4th Cir. 2001) (quoting Pahlavi
v. Ansari (In re Ansari), 113 F.3d 17, 20 (4th Cir. 1997)). 9
9 The $20,000 and the $40,000 checks (and the resulting $5,000 liability) are addressed as a part of Count III, below.
A. Was the Debtor a Fiduciary?

The first issue to be determined is whether the Debtor occupied a fiduciary position, visa-vis DMS and Mr. McUmber.
The Court finds that he did. First, with respect to DMS, the Debtor was a director of DMS. [HN8] Directors are
unquestionably fiduciaries of the corporations they serve. Airlines Reporting Corp. v. Ellison (In re Ellison), 296 F.3d
266, 270-71 (4th Cir. 2002) (looking to West Virginia law); Janssens v. Freedom Medical, Inc., Civ. No. JFM-10-2042,
2011 U.S. Dist. LEXIS 46670, 2011 WL 1642575, at *5 (D. Md. 2011) [**30] (the term "fiduciaries" includes directors
and "and others who occupy 'positions of ultimate trust'" (quoting Spinoso v. Heilman (In re Heilman), 241 B.R. 137,
169 (Bankr. D. Md. 1999)); Crockett v. Ferris (In re Ferris), 447 B.R. 516, 523-24 (Bankr. E.D. Va. 2011) (noting that
[*329] "Virginia law is clear that officers and directors of corporations occupy a fiduciary relationship to the
corporation and its stockholders"). 10
10 The Court in Ferris ultimately found that it was unnecessary to decide the issue, because it held the debt to be non-dischargeable on other
grounds.
The Court also finds that the parties -- the Debtor, DMS and Mr. McUmber -- entered into a joint venture under which
the Debtor would act as the manager for purposes of collecting and disbursing the funds from the Dot Gov contract. The
joint venture was separate and distinct from the parties' respective shareholder interests in DMS. The Debtor was solely
responsible for billing NTI on behalf of himself, DMS and Mr. McUmber. The Debtor was, similarly, solely responsible
for collecting the funds from NTI and for disbursing them to DMS and Mr. McUmber. This was more than a contractual
arrangement. It was, both in fact and in [**31] operation, a joint venture among the three.
[HN9] "Under Virginia law, 'a joint venture exists where two or more parties enter into a special combination for the
purpose of a specific business undertaking, jointly seeking a profit, gain, or other benefit, without any actual partnership
or corporate designation.'" Andrews v. Primus Telecomms. Group, Inc., 107 Fed. Appx. 301, 308 (4th Cir. 2004)
(quoting PGI, Inc. v. Rathe Prods., Inc., 265 Va. 334, 340, 576 S.E.2d 438, 441 (2003)). Moreover, in Virginia, "joint
venturers have a fiduciary relationship among themselves which 'begins with the opening of the negotiations for the
formation of the syndicate, applies to every phase of the business which is undertaken, and continues until the
enterprise has been completely wound up and terminated.'" Roark v. Hicks, 234 Va. 470, 475, 362 S.E.2d 711, 714, 4
Va. Law Rep. 1318 (1987) (quoting Horne v. Holley, 167 Va. 234, 239, 188 S.E. 169, 172 (1936) (emphasis in original
Roark v. Hicks opinion). In Roark v. Hicks, the Court held that the duties and obligations of joint venturers are
essentially the same as those of partners in a partnership. Roark v. Hicks, 234 Va. at 475, 362 S.E.2d at 714 (citing
Jackson Company v. City of Norfolk, 197 Va. 62, 67, 87 S.E.2d 781, 785 (1955). [**32] Furthermore, the Virginia Code
expressly requires partners to abide by their fiduciary duties to the partnership, requiring partners "[t]o account to the
Page 604Page 604
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up
of the partnership business or derived from a use by the partner of partnership property . . . ." Va. Code § 50-73.102(B)
(1).
Other courts have held that [HN10] a joint venture relationship is sufficient to establish a fiduciary relationship under
Section 523(a)(4), particularly where the debtor is responsible for managing the venture's funds. See Lewis v. Short (In
re Short), 818 F.2d 693, 695-96 (9th Cir. 1987); Pope v. Kryszak, No. 10-C-1180, 2011 U.S. Dist. LEXIS 108990, 2011
WL 4435368, at *2 (E.D. Wis. Sept. 23, 2011); In re Hanson, No. 11-90361-MM, 2011 Bankr. LEXIS 5217, 2011 WL
6148429, at *7-8 (Bankr. S.D. Cal. Nov. 21, 2011); In re Wisell, No. 811-08163-reg., 2011 Bankr. LEXIS 3112, 2011
WL 3607614, at *11-12 (Bankr. E.D.N.Y. Aug. 16, 2011); In re Mills, 2011 Bankr. LEXIS 5205, 2011 WL 6148662, at
*6-7 (Bankr. D. Mass Dec. 12, 2011); In re Duffy, No. 08-2307, 2010 Bankr. LEXIS 2688, 2010 WL 3260077, at *10
(Bankr. D.N.J. Aug. 18, 2010). 11
11 The Court looks to Virginia law because this was the locus of the parties' transactions. [**33] Mr. McUmber picked up the funds from
NTI in Virginia, deposited them (or not) to a bank in Virginia, and disbursed them (or not) in Virginia. The same result would obtain under
the law of the State of West Virginia, DMS's state of incorporation. "A partner is a trustee for the other partners and for the partnership, he is
the cestui que trust of the other partners. The relationship between partners being fiduciary, the highest degree of good faith between the
partners is required." Mullens v. Wolfe, 120 W.Va. 672, 674, 200 S.E. 37, 38 (1938).
Here, the Court finds that there was a joint venture among the Debtor, DMS, and [*330] Mr. McUmber, which gave
rise to fiduciary duties on behalf of the Debtor, specifically with respect to the funds collected from NTI and the duty to
properly account for and disburse the same to the Debtor's co-venturers, DMS and Mr. McUmber.
B. Did the Debtor Commit a Defalcation?

As noted above, the term defalcation "need not 'rise to the level of embezzlement' -- "even an innocent mistake which
results in misappropriation or failure to account is sufficient." In re Uwimana, 274 F.3d 806, 811 (4th Cir. 2001)
(quoting Pahlavi v. Ansari (In re Ansari ), 113 F.3d 17, 20 (4th Cir. 1997)). [**34] The Court finds that, unquestionably,
the Debtor committed a defalcation while acting in a fiduciary capacity. The Debtor was entrusted with the
responsibility of collecting the funds from NTI and disbursing them to DMS and Mr. McUmber in the agreed
percentages -- 23% (Giordano), 23% (McUmber), and 49% (DMS). This agreement, the arbitrator found, went back to
at least 2004. In 2006, when the Debtor's power play didn't work out and the parties were at a corporate standstill, the
Debtor simply refused to distribute the funds and held on to them. Beginning in July 2006, the Debtor sought to "go
back to the Teaming Agreement," under which: (a) he paid DMS only 47 1/2% (i.e., was 1 1/2% short), and (b) he paid
Mr. McUmber nothing. This was clearly a failure to account and a defalcation of the Debtor's fiduciary duties, both to
DMS and to Mr. McUmber.
C. To What Extent Were the Plaintiffs Harmed by the Defalcation?

The Court finds that the Plaintiffs were harmed by the defalcation of the Debtor. To what extent, though, is a more
difficult question.
i. The Pre-Arbitration Award Amounts.

The arbitrator's award, as confirmed by the U.S. District Court, found that there was an agreement between Mr. [**35]
Giordano, Mr. McUmber, and DMS as to the split of the Dot Gov contract proceeds. The arbitrator further found that
Mr. Giordano had been over-compensated to the detriment of Mr. McUmber and DMS in the specific amounts found in
the award. The arbitration award, as confirmed by the U.S. District Court, is entitled to collateral estoppel effect as to
the specific amounts of the award - $166,957 for DMS, plus interest at 6% from July 2008, and $120,083 for Mr.
McUmber, plus interest at the rate of 6% from July 2008. Defendant's Exh. B, § 9. These amounts, the Court finds, were
the direct result of the Debtor's failure to account for the Dot Gov contract proceeds to his co-venturers, DMS and Mr.
McUmber. The amounts were established in the arbitration, and cannot be questioned here as a matter of collateral
estoppel. To be clear, the Court accepts the specific amounts established by the arbitration award as a matter of
collateral estoppel, but the Court makes its own, independent finding of a failure to account, and a defalcation by the
Debtor while acting in a fiduciary capacity, with respect to these specifically identified amounts, pursuant to 11 U.S.C. §
523(a)(4).
Page 605Page 605
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ii. The Post-Arbitration [**36] Award Amounts.

The post-arbitration amounts are a different story. While the arbitrator used the phrase "plus any additional [*331]
amounts that Giordano has received that [DMS and Mr. McUmber] should have received pursuant to the foregoing
percentages," the arbitrator made no specific findings with respect to these amounts. Defendant's Exh. B, § 9. The
arbitrator's use of the phrase "additional amounts" is too vague for this Court to find that the amounts were actually
determined in the arbitration. It falls to this Court, therefore, to determine whether the Plaintiffs have proven their
damages to be non-dischargeable under 11 U.S.C. § 523(a)(4).
To say that the Plaintiffs' post-arbitration award damage calculations were inconsistent and difficult to follow would be
an understatement. The Plaintiffs relied on Plaintiffs' Exhibits 32 and 33, which were summaries of the amounts claimed
to be owed, as well as Plaintiffs' Exhibits 34 and 35, the DMS and McUmber proofs of claim in this case. The submitted
documents were internally inconsistent, and, in many ways, incomprehensible to the Court. Exhibits 32 and 33 included
amounts that were already awarded in the arbitration award (the 2006, 2007, [**37] and 5/6th's of the 2008 damages
were already in the arbitration award). Moreover, Exhibit 32 includes a reference to the "High System" contract, which
the Court understood was an add-on to the Dot Gov contract. It still isn't clear how the High Systems contract fit in to
the Plaintiffs' damages scenario. Additionally, Exhibits 32 and 33 were just one page summaries of what the Plaintiffs
claimed were owed to them. No support for these amounts -- in particular, bank deposits into a bank account or accounts
controlled by Mr. Giordano -- was ever introduced by the Plaintiffs into evidence. 12
12 Exhibits 32 and 33 were not introduced into evidence at the trial. However, because both parties relied on these Exhibits in their closing
arguments, the Court will admit them into evidence so that the record is complete.
The Proofs of Claim, Plaintiffs' Exhibits 34 and 35, only added to the confusion, since the numbers in the Proofs of
Claim were entirely inconsistent with, and not reconcilable with, the numbers in Exhibits 32 and 33. Although not clear
from the face of Exhibit 32, the Plaintiffs assert that Exhibit 32 should be read to mean the following:
$166,957.19 Arbitration Award
1,422.41 1/6th of 2008 (not previously included in the Arbitration Award) 13
11,804.70 2009
9,620.97 2010 amount of $238,680.85, less $229,059.88 for High System
12,100.79 2011
$201,906.06 TOTAL
13 The [**38] 1/6 is derived from the fact that the arbitration award was in November, so two months of 2008 are not accounted for in the
award.
Plaintiffs' Exhibit 34, the DMS Proof of Claim, on the other hand, shows a total of $184,266.42 (plus interest and legal
fees) due to DMS on the Dot Gov Contract. It is possible that the difference between the Exhibit 32 number and the
Exhibit 34 number may be accounted for by funds received by DMS from the Fairfax County Circuit Court interpleader
action, but this was not explained to the Court, nor were the amounts accounted for or introduced into evidence, in terms
of bank deposits, canceled checks, or the like.
Similarly, Exhibit 33, as explained to the Court, would show the following for amounts due to Mr. McUmber:
$120,083.00 Arbitration Award
21,805.00 1/6th of 2008 (not previously included in the Arbitration Award)
181,005.40 2009
147,521.51 2010 amount of $255,039.41, less $107,517.90 for High System
172,818.09 2011
$643,233.00 TOTAL
[*332] Yet, Mr. McUmber's Proof of Claim shows that $374,852.05 in principal is owed to him. Plaintiffs' Exh. 35.
Again, this might be accounted for by payments made to Mr. McUmber pursuant to the Fairfax County interpleader
Page 606Page 606
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
action, but [**39] it is not clear to the Court how much was paid to Mr. McUmber, or when any such amounts were
paid. The Court is left with irreconcilable numbers between the two sets of Exhibits, and the Court will not speculate as
to what accounts for the differences.
The flaw in the Plaintiffs' evidence on the post-arbitration award amounts is that, in order to prove the amounts of
money paid by the GSA to NTI, the Plaintiffs relied exclusively on evidence that they assert was downloaded from the
GSA's website. Plaintiffs' Exhibits 32 and 33 use these alleged payment amounts as a starting point, and assume that
NTI paid the funds over to Mr. Giordano. There was no showing at the trial, in the form of bank statements, expert
accounting testimony, or other competent evidence, that Mr. Giordano ever actually received these funds from NTI.
Critically, the Plaintiffs did not call Mr. Abbate, NTI's president, to testify (other than with respect to the reading of
portions of Mr. Abbate's deposition testimony into evidence, which was not helpful, and did not discuss the payment of
any funds to the Debtor by NTI). Although the Plaintiffs called Mr. Giordano as an adverse witness in their case in
chief, he [**40] did not testify that he received these funds to the Plaintiffs' detriment. Proof of just how much the
Debtor received in Dot Gov contract proceeds, and thereafter failed to pay over to the Plaintiffs, post-arbitration award,
was utterly lacking. Accordingly, the Court cannot find that Mr. Giordano converted the post-arbitration award funds to
his own use.
The Court is unable to say with any certainty what the amounts were that the Debtor converted to his own benefit, to the
detriment of the Plaintiffs, in the post-arbitration period. Accordingly, the Court finds that any amounts in excess of the
amounts specifically stated in the arbitration award - $166,957 for DMS, plus interest at 6% from July 2008, and
$120,083 for Mr. McUmber, plus interest at the rate of 6% from July 2008 - are not exempt from dischargeability under
11 U.S.C. § 523(a)(4).
III. Count III -- 11 U.S.C. ¶ 523(a)(4) (Embezzlement or Larceny).

In Count III, the Plaintiffs claim that the Debtor is guilty of embezzlement or larceny under 11 U.S.C. § 523(a)(4).
[HN11] Embezzlement is "'the fraudulent appropriation of property by a person to whom such property has been
entrusted, or into whose hands it has lawfully come.'" Direct Capital Group, LLC v. Hadley (In re Hadley), No. 09-
07141-FJS, 2011 Bankr. LEXIS 3194, at *34 (Bankr. E.D. Va. Aug. 19, 2011) [**41] (citing KMK Factoring, L.L.C., et
al. v. McKnew (In re McKnew), 270 B.R. 593, 631 (Bankr. E.D. Va.2001)). Larceny is defined as the "'fraudulent and
wrongful taking and carrying away of the property of another with intent to convert such property to the taker's own use
without the consent of the owner.'" In re Criswell, 52 B.R. 184, 202 (Bankr. E.D. Va. 1985) (quoting In re Graziano, 35
B.R. 589, 594 (Bankr. E.D.N.Y. 1983)). See also Caviness v. Lane (In re Lane), 445 B.R. 555, 565 (Bankr. E.D. Va.
2011).

As noted above, the Court finds that the Debtor was acting in a fiduciary capacity with respect to the NTI funds. See
supra pp. 19-21. The Debtor simply took the $40,000 and the $20,000 when he was not entitled to the funds. His
justification for taking the $40,000, that it was a [*333] bonus approved by him and Mr. Watson, is nothing more than
a post hac rationalization for a wrongful act. The Court found, above, however, that DMS received the benefit of
$55,000 in the form of the purchase of the Watson stock. Modified Final Award, [**42] Defendant's Exh. B, § 3(a);
Plaintiffs' Exh. 22, § 3(a).
Further, as noted above, the Court must accept as unrebutted the testimony of the Debtor, to the effect that the $20,000
was in satisfaction of Mr. Watson's loans to the company and his expenses. See supra p. 24, n.13. This was contested by
the Plaintiffs, but the Plaintiffs submitted no evidence that rebutted Mr. Giordano's testimony in this regard.
Significantly, Mr. Watson never testified. Further, there was unrebutted evidence that Mr. Watson had loaned the
company money from the outset. Defendant's Exh. P, Informal Action by the Board ("[T]he Corporation acknowledges
that Anthony J. Watson has loaned the Corporation the sum of $28,406"). Mr. Giordano testified that he got the
company a "good deal" in settling the Watson loan and expenses for $20,000. No evidence was submitted to rebut this
claim. Accordingly, the Court finds that the $20,000 is not exempt from dischargeability under 11 U.S.C. § 523(a)(4).
The Court finds that the remaining $5,000, however, is non-dischargeable under all three prongs of Section 523(a)(4) --
defalcation while acting in a fiduciary capacity, embezzlement and larceny. First, as noted above, the [**43] Debtor
was a fiduciary with respect to the funds. He took the funds without his co-venturers knowing it, and then attempted to
justify it by claiming that it was approved. Further, the funds were entrusted to him by the Plaintiffs. The Debtor
Page 607Page 607
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
occupied a position of confidence and trust with respect to funds. He simply took money that was not his. Accordingly,
he is guilty of embezzlement and larceny with respect to the $5,000 that he retained.
B. The Dot Gov Contract Proceeds.

Having found that the pre-arbitration award Dot Gov contract proceeds, in the amounts of $166,957 for DMS, plus
interest at 6% from July 2008, and $120,083 for Mr. McUmber, plus interest at 6% from July 2008, are non-
dischargeable as a defalcation while acting in a fiduciary capacity, the Court similarly finds that these amounts were the
product of embezzlement or larceny. Mr. Giordano was entrusted with complete control of these funds by DMS and Mr.
McUmber. Moreover, he asserted possession and control over the funds to the detriment of the Plaintiffs. These amounts
are non-dischargeable, as the product of embezzlement or larceny, under 11 U.S.C. § 523(a)(4).
IV. Count IV -- 11 U.S.C. § 523(a)(6)(Willful and Malicious [**44] Injury to Property).

The Plaintiffs' final claim is that that their claims are excepted from the Debtor's discharge as a "willful and malicious
injury by the debtor to another entity or to the property of another entity." 11 U.S.C. § 523(a)(6). The Supreme Court
explained that [HN12] "willful," as the term is used in § 523(a)(6), requires "a deliberate or intentional injury, not
merely a deliberate or intentional act that leads to injury." Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977,
140 L.Ed.2d 90 (1998) (emphasis in original). The requirement that the conduct be "malicious," however, does not
require that a debtor bear subjective ill will toward, or specifically intend to injure, his or her creditor; it is sufficient that
a debtor's injurious act is done "'deliberately and intentionally in knowing disregard of the rights of another.'" [*334]
First Nat'l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 667 (4th Cir. 1995) (quoting St. Paul Fire & Marine Ins.
Co. v. Vaughn, 779 F.2d 1003, 1010 (4th Cir. 1985)). The proper focus is not on the Debtor's "good intentions," but
whether he exercised dominion and control over funds that he knew belonged to another. First Nat'l Bank v. Stanley (In
re Stanley), 66 F.3d at 668. [**45] The burden of proof is on the objecting creditor, and the standard of proof is
preponderance of the evidence. See supra p. 13; Grogan v. Garner, 498 U.S. 279, 291, 111 S. Ct. 654, 112 L. Ed. 2d 755
(1991).

As noted above, the Debtor issued the $40,000 check as an unauthorized bonus. While DMS obtained the benefit of
$55,000 of the funds (see Modified Final Award, Defendant's Exh. B, § 3(a); Plaintiffs' Exh. 22, § 3(a)), the Debtor
retained $5,000 of the funds for his personal benefit. Under the circumstances, the Court has no hesitancy in concluding
that this was a conversion of the funds. Further, the Court finds that the conversion was willful and malicious. It was
done on the eve of the Board meeting with no notice to the other directors. Moreover, Mr. Giordano attempted to
execute these transactions in a way that would make the funds "untraceable." And, it was done in a way to leave Mr.
Watson on the Board in order to further the Debtor's aims with respect to DMS. The $5,000 is therefore non-
dischargeable under Section 523(a)(6). 14
14 Again, the Court finds that the company received the benefit of the $35,000 (repurchase of Mr. Watson's stock), and the $20,000
(satisfaction of [**46] the Watson loan and expense claim).
B. The Dot Gov Contract Proceeds.

The Court finds that the pre-arbitration award amounts - $166,957 for DMS, plus interest at 6% from July 2008, and
$120,083 for Mr. McUmber, plus interest at 6% from July 2008 -- are non-dischargeable under Section 523(a)(6). There
is no question that the Debtor intentionally refused to pay these amounts over to DMS and Mr. McUmber in knowing
disregard of their rights to the funds. The Debtor's defense was that "he could not have known of the arbitration award"
back in the July 2006 to November 2008 time frame. This much is true, of course, but it is not the arbitrator's award that
made the refusal to pay non-dischargeable; it is the Debtor's willful and knowing refusal to pay the funds over to DMS
and Mr. McUmber. The Debtor asserts that he was "going back to the Teaming Agreement." The Court simply does not
accept this explanation. The Debtor operated under the 49/23/23% agreement for the entire period of the Dot Gov
contract, up until July 2006. He acted not just in derogation of the contractual agreement beginning in July 2006 when
he refused to pay DMS anything more than 47 1/2% and refused to pay Mr. McUmber anything [**47] at all, but he
also acted willfully and maliciously, knowing that they were entitled to these funds. The pre-arbitration award amounts -
Page 608Page 608
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
$166,957 for DMS, plus interest at 6% from July 2008, and $120,083 for Mr. McUmber, plus interest at 6% from July
2008 -- are therefore non-dischargeable under Section 523(a)(6).
With respect to the post-arbitration award amounts, i.e., the Dot Gov contract proceeds after July 2006, again, the Court
cannot tell with any certainty (or even with any educated guesswork) the amount the Debtor is alleged to have received
and not paid over to the Plaintiffs. Accordingly, the Court will find that any amounts alleged to have been received by
the Debtor [*335] post-July 2006 are not exempt from dischargeability under Section 523(a)(6).
V. The Debtor's Defense of Res Judicata.

The Debtor argues that the claims that are now the subject of the Plaintiffs' Complaint were all resolved in his favor in
the arbitration proceeding, and therefore, are res judicata at this point. Specifically, the Debtor asserts that the
Complaint that the Plaintiffs filed in the U.S. District Court, Defendant's Exhibit E, which ultimately went to arbitration,
encompassed the current fraud-based [**48] claims, and that the arbitrator ruled that "any other claims not specifically
addressed herein are denied." Defendant's Exh. B, § 17. However, this completely ignores the fact that the arbitrator
found against the Debtor on the key issues of whether there was an agreement, whether the Debtor breached that
agreement, and whether the Plaintiffs suffered damages as a result. See id. at § 9. It is entirely possible that the
arbitrator, having found an agreement, breach, and resulting damage, simply did not see the need to address the fraud
issues raised in the Complaint.
Further, although a number of the Counts in the Complaint are similar to what is at issue here (see, e.g., Complaint,
Defendant's Exh. E, Count V (Breach of Fiduciary Duties), and Count X (Conversion)), there is no basis for a finding of
res judicata under the Supreme Court's ruling in Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 60 L. Ed. 2d 767
(1979). In Brown v. Felsen, the Supreme Court rejected the Debtor's claim of res judicata where the creditor's claim had
been litigated to a judgment in State court on a contract claim. Id. at 138-139 ("[W]e reject respondent's contention that
res judicata applies here and we hold that the bankruptcy court is [**49] not confined to a review of the judgment and
record in the prior state-court proceedings when considering the dischargeability of respondent's debt"). The Court
specifically rejected the argument that the creditor's claim under Section 17 of the Bankruptcy Act (the predecessor to
the current day Code Section 523) could have been litigated in State court. Id. at 137. The Supreme Court noted that
Bankruptcy Courts are uniquely situated to make determinations of non-dischargeability and that, in the ordinary case,
issues of fraud or conversion need not be submitted to State courts in order to reach a judgment. Id. at 138. Accordingly,
the Debtor's defense of res judicata is rejected.
VI. The Defense of Set-Off for the Legal Fees Paid By Mr. Giordano to his Counsel.
Throughout the trial, the Debtor maintained that he paid his counsel, Mr. Bledsoe, roughly $53,000 in connection with
the arbitration, and that he was entitled to recover those funds pursuant to Section 16 of the arbitrator's Modified Final
Award. However, the Debtor did not list the $53,000 in his Schedule B in this case, nor did he claim an exemption for
these funds on his Schedule C. 15 [HN13] An asset that is not listed remains [**50] an asset of the bankruptcy estate
until administered or abandoned by the Trustee. 11 U.S.C. § 554(d). The $53,000 receivable, if there is one, is owned by
the Chapter 7 Trustee, [*336] not by Mr. Giordano. Mr. Giordano cannot use the Trustee's property to set off his own
non-dischargeable liability. In re White, No. 09-50511, 2011 Bankr. LEXIS 4470, 2011 WL 5509406, at *7 (Bankr. S.D.
Ill. Nov. 9, 2011) (Debtor cannot use claims belonging to the Trustee to set off a non-dischargeable judgment); Parkdale
v. Sims (In re: Sims), 2009 Bankr. LEXIS 4629, 2009 WL 4255555 (Bankr. D. Kan. 2009) (Debtor lacked standing to
assert claim for setoff); Bemas Constr., Inc. v. Dorland (In re Dorland), 374 B.R. 765, 774 (Bankr. D. Colo. 2007)
(same). Accordingly, the Court will not allow a setoff of Mr. Giordano's non-dischargeable liability in the amount
requested ($53,000).
15 Plaintiff's counsel requested, at the beginning of the trial, that this Court take judicial notice of the Debtor's Schedules in bankruptcy, and
the Debtor did not object. Accordingly, the Court takes judicial notice of the Schedules in the bankruptcy case. Fed.R.Evid. 201; In re
Bernick, 440 B.R. 449, 450 (Bankr. E.D. Va. 2010) (indicating that " [HN14] the court may take judicial notice [**51] of the debtor's
schedules").
VII. The Legal Fees Claimed by DMS.

Page 609Page 609
472 B.R. 313, *; 2012 Bankr. LEXIS 1441, **
Finally, the DMS Proof of Claim includes $153,116 in post-arbitration award, pre-bankruptcy petition legal fees
incurred by DMS in seeking enforcement of the D.C. Judgment. Plaintiffs' Exh. 34, p. 2. As noted, the arbitrator did not
award DMS any legal fees as against Mr. Giordano. To the contrary, the arbitrator ordered DMS to pay all of Mr.
Giordano's legal fees in the arbitration. The basis for the claimed legal fees is the Shareholder's Agreement, Plaintiffs'
Exh. 2, §§ 6(a)(v) and 13(c). However, Section 6(a) has to do with the execution of a Note that the corporation may
issue in connection with the redemption of a shareholder's shares Id. at §6(a) ("Payment of the purchase price for the
Seller's Shares, as determined under paragraph 5, shall be made as follows..."). Section 13 obligates the shareholders to
use their best efforts to promote the company's business, not to compete with the company (with a company "which is
engaged in a business similar to that of the Corporation"), and the like.
The problem for DMS is that none of the post-Judgment collection efforts had anything to do with paragraphs 6 or 13 of
the [**52] Shareholder's Agreement. It is abundantly clear that the arbitration award was based on the GSA-NTI Fee
Sharing Agreement, not the Shareholder's Agreement. Defendant's Exh. B, § 9; Plaintiffs' Exh. 22, § 9. The arbitration
award was based on the fact that the parties had agreed on a split of the Dot Gov contract proceeds -- 49% to DMS,
23% to Mr. Giordano, 23% to Mr. McUmber -- and that the Debtor wrongfully withheld the proceeds from the
Plaintiffs. The Shareholder's Agreement, while it may have been the basis for arbitration in the first place, was not the
basis for the arbitrator's award.
Accordingly, the Court finds that the $153,116 in legal fees asserted in the DMS Proof of Claim to be dischargeable.
Conclusion
For the foregoing reasons, the Court rules as follows:
A. Count I will be dismissed.

B. On Counts II and III, the Court determines that the D.C. Judgment is non-dischargeable pursuant to 11 U.S.C. § 523(a)(4) as to:
(a) the $5,000; and (b) the pre-arbitration award amounts, $166,957 for DMS, plus interest at 6% from July 2008, and $120,083 for
Mr. McUmber, plus interest at the rate of 6% from July 2008. The balance of the post-arbitration award amounts and the Plaintiffs'
claim [**53] for attorney's fees are dischargeable.
C. On Count IV, the Court determines that the D.C. Judgment is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6) as to (a) the
$5,000; and (b) the pre-arbitration award amounts, $166,957 for DMS, plus interest at 6% from July 2008, and $120,083 for Mr.
McUmber, plus interest at the rate of 6% from July 2008. The balance of the post-arbitration award amounts and the [*337]
Plaintiffs' claim for attorney's fees are dischargeable.
An appropriate Order shall issue, consistent with the terms of this Memorandum Opinion.
Date: Mar 29 2012
/s/ Brian F. Kenney
Brian F. Kenney
United States Bankruptcy Judge
eod 3/30/2012
Page 611Page 611
845 F. Supp. 2d 1145, *; 2012 U.S. Dist. LEXIS 26072, **
72 of 430 DOCUMENTS
DOUGLAS A. JAMES and EILEEN M. JAMES, Husband and Wife, Plaintiffs, v.

RECONTRUST COMPANY, an Unknown Entity Operating in the State of Oregon,
BAC HOME LOAN SERVICING LIMITED PARTNERSHIP, a Texas Limited
Partnership, MORTGAGE ELECTRONIC REGISTRATION SYSTEM, INC., a
Delaware Corporation, NORTHWEST MORTGAGE GROUP, INC. an Oregon
Corporation, Defendants.
Case No.: 3:11-cv-00324-ST
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON,

PORTLAND DIVISION
845 F. Supp. 2d 1145; 2012 U.S. Dist. LEXIS 26072

February 29, 2012, Filed
PRIOR HISTORY: James v. ReconTrust Co., 2011 U.S. Dist. LEXIS 101139 (D. Or., Aug. 26, 2011)
CASE SUMMARY:
OVERVIEW: Plaintiffs sufficiently stated a claim for relief under Or. Rev. Stat. § 86.735(1) because Mortgage
Electronic Registration System was not a beneficiary within the meaning of the Oregon Trust Deed Act, Or. Rev. Stat. §
86.705(2), but was solely the agent of the noteholder; (2) § 86.735(1) required the recording of all assignments of the
trust deed before a non-judicial foreclosure sale could be held; and (3) such assignments were not recorded, so
defendants had not satisfied § 86.735(1) and could not non-judicially foreclose.
OUTCOME: Motion to dismiss granted in part.
CORE TERMS: trust deed, beneficiary, lender's, mortgage, foreclosure, noteholder, successor, borrower, grantor,
recording, mortgagee, non-judicial, equitable, recorded, nominee, deed, notice, assign, custom, transferred, assigned,
designated, real estate, person named, beneficial interest, promissory, foreclose, real property, successor trustee,
mortgagor
Real Property Law > Financing > Mortgages & Other Security Instruments > Foreclosures > Judicial Foreclosures
Real Property Law > Financing > Mortgages & Other Security Instruments > Foreclosures > Private Power-of-Sale
Foreclosure
Real Property Law > Financing > Mortgages & Other Security Instruments > Transfers > Transfers by Mortgagees
Real Property Law > Financing > State Regulation
[HN1] The Oregon Trust Deed Act requires that the trustee or beneficiary of a trust deed publicly record all
assignments of the trust deed in the county or counties where the underlying real property is located before the trustee
may conduct a foreclosure by advertisement and sale, i.e. a non-judicial foreclosure. Or. Rev. Stat. § 86.735(1). Unless
all such assignments have been publicly recorded, a foreclosure may occur only by using the more cumbersome, but
also more protective, process of a judicial foreclosure under which the foreclosure is supervised by a judge.
Page 612Page 612
[HN2] In Oregon, under the definition of "beneficiary" set forth in the Oregon Trust Deed Act, only an original lender
or a successor to the lender may be a beneficiary under a trust deed.
[HN3] A transfer of a note automatically causes an assignment of the trust deed that is associated with that note.
Foreclosure
Real Property Law > Financing > Mortgages & Other Security Instruments > Transfers > General Overview
[HN4] Or. Rev. Stat. § 86.735(1) requires the public recording in county land records of all assignments of the trust
deed before a non-judicial foreclosure sale may be held.
[HN5] Mortgage Electronic Registration System, when authorized by its principal (or principals) to do so, may act as a
"nominee," or agent, for the lender and the lender's successors and may make assignments of the trust deed both on the
lender's behalf and on behalf of the lender's successors.

[HN6] In Oregon, financed residential real estate transactions are governed by several distinct sources of statutory and
common law. Promissory notes are governed by Article 3 of the Uniform Commercial Code, codified in Or. Rev. Stat.
ch. 73. Oregon permits lenders to secure promissory notes with either a mortgage or a trust deed. Mortgages in Oregon
are largely governed by common law, with some statutory requirements. Or. Rev. Stat. ch. 86 and 88. Trust deeds are
largely governed by the Oregon Trust Deed Act, with mortgage law providing interstitial guidance.
Foreclosure
Real Property Law > Financing > Mortgages & Other Security Instruments > Redemption > General Overview
[HN7] The Oregon Trust Deed Act (OTDA) permits a trustee to foreclose the trust deed and sell the property, without
judicial oversight, at a public sale following advertisement. This is a non-judicial foreclosure. The OTDA also prohibits
a person whose interest the trustee's sale foreclosed and terminated from redeeming the property from the purchaser at
the trustee's sale. 1959 Or. Laws ch. 625 §§ 4, 6, 9, 12; Or. Rev. Stat. §§ 86.735 and 86.770(1).
Foreclosure
[HN8] The Oregon Trust Deed Act (OTDA) represents a well-coordinated statutory scheme to protect grantors
borrowers from the unauthorized foreclosure and wrongful sale of property, while at the same time providing creditors
with a quick and efficient remedy against a defaulting grantor. The OTDA confers upon a trustee the power to sell
property securing an obligation under a trust deed in the event of default, without the necessity for judicial action.
However, the trustee's power of sale is subject to strict statutory rules designed to protect the grantor borrower,
including provisions relating to notice and reinstatement.
Foreclosure
[HN9] The non-judicial foreclosure process created by the Oregon Trust Deed Act (OTDA) is elective by the
beneficiary of the trust deed. Upon breach of the obligation secured, the beneficiary may choose between two methods
of foreclosure: (1) non-judicial disclosure, which involves advertisement and sale of the property; or (2) judicial
foreclosure, which involves following the procedures available to foreclose mortgages on real property. Or. Rev. Stat. §
86.710. The beneficiary may also choose to waive the trust deed and sue solely on the note. A trust deed beneficiary
may elect to sue on the note and thereby waive his priority and security, or he may foreclose on the security and waive
his right to collect a deficiency. Or. Rev. Stat. § 86.735(4).
Page 613Page 613
Foreclosure
Real Property Law > Financing > Mortgages & Other Security Instruments > Redemption > General Overview
[HN10] Under Oregon law, the Oregon Trust Deed Act (OTDA) and mortgage law differ in five principal ways. First, a
loan secured by a trust deed involves three parties, instead of two. The third party is the trustee, who holds the security
instrument, a trust deed, in trust for the benefit of the beneficiary. Or. Rev. Stat. § 86.705(7) (2011). When a loan is
secured by a mortgage, however, the mortgagee, rather than a trustee, holds the security instrument, a mortgage.
Second, the OTDA permits the trustee to foreclose the trust deed without judicial oversight, that is, by a non-judicial
foreclosure. Or. Rev. Stat. §§ 86.735, 86.755. Third, the OTDA does not provide for a right of redemption after the
foreclosure sale. Fourth, the OTDA contains a variety of detailed notice and recording requirements. Or. Rev. Stat. §§
86.735, 86.737, 86.740, 86.745, 86.750. Finally, the OTDA permits the grantor the borrower to cure his or her default
until five days before the foreclosure sale. Or. Rev. Stat. § 86.753.
[HN11] Under both statute and long-standing precedent, Oregon is a lien theory state, rather than a title theory state. In
Oregon, neither a mortgage nor a trust deed conveys legal title to the underlying real property to the mortgagee, the
trustee, or the beneficiary. A mortgage conveys no legal or equitable interest in fee or for life to the mortgagee, but
merely creates a lien which constitutes security for the debt and grants the mortgagee, upon the mortgagor's default, the
right to have the property sold to satisfy the debt. Or. Rev. Stat. § 86.010. Similarly, a trust deed is merely a lien on the
land as security for the payment of the debt.
[HN12] Under the title theory, legal "title" to the mortgaged real estate remains in the mortgagee until the mortgage is
satisfied or foreclosed; in lien theory jurisdictions, the mortgagee is regarded as owning a security interest only and both
legal and equitable title remain in the mortgagor until foreclosure.
[HN13] The Oregon Trust Deed Act creates only a lien or encumbrance on the property and does not pass the title away
from the grantor. The provisions relating to trust deeds do not provide that trust deeds are to be considered as distinct
from mortgages with respect to liens of this nature. Thus, a trust deed is considered a mortgage on real property. A
mortgage of real property creates only a lien or encumbrance and does not abrogate the mortgagor's title to the property.
Civil Procedure > Pleading & Practice > Pleadings > Complaints > General Overview
[HN14] The essential allegations in plaintiffs' complaint must be taken as true and construed in the light most favorable
to the plaintiffs.
Civil Procedure > Judicial Officers > Magistrates > Standards of Review
[HN15] Under the Federal Magistrates Act, the court may accept, reject or modify, in whole or in part, the findings or
recommendations made by the magistrate. 28 U.S.C.S. § 636(b)(1). If a party files objections to a magistrate's findings
and recommendations, the court shall make a de novo determination of those portions of the report or specified
proposed findings or recommendations to which objection is made. Fed. R. Civ. P. 72(b)(3).
Civil Procedure > Judicial Officers > Magistrates > Standards of Review
[HN16] For those portions of a report and recommendation to which neither party has objected, the Federal Magistrates
Act does not prescribe any standard of review: There is no indication that Congress, in enacting the Magistrates Act,
intended to require a district judge to review a magistrate's report. The court must review de novo a magistrate's findings
and recommendations if objection is made, but not otherwise. Although in the absence of objections no review is
required, the Magistrates Act does not preclude further review by the district judge sua sponte under a de novo or any
other standard. Indeed, Fed. R. Civ. P. 72(b), advisory committee's notes recommend that when no timely objection is
filed, the court review the magistrate's findings and recommendations for clear error on the face of the record.
Page 614Page 614
[HN17] A motion to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted
tests the legal sufficiency of a claim. To survive a motion to dismiss, a complaint must contain sufficient factual matter
to state a facially plausible claim to relief.
Civil Procedure > Federal & State Interrelationships > Erie Doctrine
[HN18] When interpreting state law, federal courts are bound by decisions of the state's highest court. Where the state's
highest court has not yet had an opportunity to resolve the questions, the court must predict how the state's highest court
would decide the issues using intermediate appellate court decisions, decisions from other jurisdictions, statutes,
treatises, and restatements as guidance.

[HN19] Under Oregon law, when interpreting a statute a court shall pursue the intention of the legislature if possible.
Or. Rev. Stat. § 174.020(1)(a). The Oregon Supreme Court set forth a three-step methodology for determining the
legislature's intent. First, the court examines the text and context of the statute. Second, the court may examine the
statute's legislative history. Third, if the legislature's intent remains unclear after examining text, context, and legislative
history, the court may resort to general maxims of statutory construction to aid in resolving the remaining uncertainty.
Real Property Law > Financing > Mortgages & Other Security Instruments > Definitions & Interpretation
[HN20] See Or. Rev. Stat. § 86.705(2) (2011).
[HN21] The text of Or. Rev. Stat. § 86.705(2) (2011) establishes three requirements for a person (or entity) to be a
beneficiary under this statute. A beneficiary: (1) must be named or otherwise designated in the trust deed; (2) as a
person for whose benefit the trust deed is given; and (3) must not also be the trustee under the trust deed unless legally
qualified.
[HN22] Or. Rev. Stat. § 86.705(7) (2011) defines trust deed as a deed executed in conformity with Or. Rev. Stat. §§
86.705 to 86.795 that conveys an interest in real property to a trustee in trust to secure the performance of an obligation
the grantor or other person named in the deed owes to a beneficiary.
[HN23] Or. Rev. Stat. § 86.710 states that the trust deed is given to secure a debt to a beneficiary. That statute provides
that transfers in trust of an interest in real property may be made to secure the performance of an obligation of a
grantor, or any other person named in the deed, to a beneficiary.
[HN24] A trust deed's benefit to a beneficiary is that it provides security for the performance of an obligation owed to
that beneficiary.
[HN25] A beneficiary's interest under a trust deed is a lien on the land as security for the payment of the debt.
[HN26] Or. Rev. Stat. § 86.705(2) requires that the beneficiary be a person named or otherwise designated in the trust
deed as a person who receives the benefit of the security that is provided by the trust deed.
[HN27] Where, the trust deed secures a promissory note, the beneficiary of the trust deed is the noteholder. A financed
real estate transaction typically involves two documents: a security instrument and a note. Or. Rev. Stat. § 86.705(2)
defines "beneficiary" in terms of its relation to the security instrument. It does not expressly state that a beneficiary is
also a party to the note.
Page 615Page 615
[HN28] A mortgage or a trust deed may secure obligations other than those evidenced by a note. In cases where the
obligation is not a debt evidenced by a note, the beneficiary is not the noteholder, but could be called the obligee or
creditor.
[HN29] Or. Rev. Stat. §§ 86.705(7) and 86.710 state that the grantor (i.e. the debtor) owes the obligation, that is, the
debt, to the beneficiary. Section 86.705(7) provides that the trust deed secures the performance of an obligation the
grantor or other person named in the deed owes to a beneficiary. The words "owes to a beneficiary" signal that the
beneficiary is the party that receives repayment of the debt. Section 86.710 uses a similar formulation: Transfers in trust
of an interest in real property may be made to secure the performance of an obligation of a grantor, or any other person
named in the deed, to a beneficiary. These statutes envision that the beneficiary is not just the party secured by the trust
deed; it is also the party to whom the grantor owes the debt. In the context of notes, the party to whom the grantor owes
the debt is the noteholder. The note represents and is the primary evidence of the debt.
[HN30] Or. Rev. Stat. § 86.720(1) provides that upon performance of the obligation, the beneficiary shall request that
the trustee convey the interests in the trust deed back to the grantor. The unstated but unambiguous assumption
embedded in this provision is that the grantor owes the obligation to the beneficiary.
[HN31] See Or. Rev. Stat. § 86.720(3).
[HN32] Or. Rev. Stat. § 86.720(3) does not suggest that the beneficiary and the note owner might be different parties.
Instead, the statute contemplates that the beneficiary may not have recorded an assignment of the trust deed, so that an
earlier beneficiary is still the beneficiary of record. It also contemplates that the full satisfaction payment may be made
to an agent of the beneficiary of record, such as a loan servicer. In either instance, the title insurance company or
insurance producer must provide notice to both parties.
[HN33] Or. Rev. Stat. § 86.705 defines the principal terms in the Oregon Trust Deed Act (OTDA), including the three
main parties to a trust deed transaction: the grantor, the trustee, and the beneficiary. The statute does not separately
define lender or noteholder. In fact, the term lender is not used anywhere in the OTDA, except in a model notice to be
sent to grantors. Or. Rev. Stat. § 86.737. The absence of any separate use or definition of lender or noteholder supports
the conclusion that the legislature did not intend that the beneficiary and the lender (or the lender's successor) be
separate and distinct parties.
[HN34] Or. Rev. Stat. § 86.737 describes a notice that must be sent to grantors in the event that the trustee records a
notice of default. Section 86.737(4) governs the telephone numbers that must be included on the notice. It states:
Telephone numbers must be toll-free numbers unless the beneficiary: (a) made the loan with the beneficiary's own
money; and (b) made the loan for the beneficiary's own investment. This provision assumes that the beneficiary is the
same party that made the loan, namely, the lender.
[HN35] The definition of "lender" in Oregon's provisions for lender security, codified in Or. Rev. Stat. ch. 86, includes
beneficiary. Or. Rev. Stat. § 86.205(4) provides: "Lender" means any person who makes, extends, or holds a real estate
loan agreement and includes, but is not limited to, mortgagees and beneficiaries under trust deeds. Although the
definitions in Or. Rev. Stat. § 86.205 are limited to Or. Rev. Stat. §§ 86.205 to 86.275, the legislature's inclusion of
beneficiaries under trust deeds in the definition for lender is further evidence that the legislature understood that a
beneficiary is identical to a lender under the Oregon Trust Deed Act.
[HN36] Or. Rev. Stat. § 86.140 provides: The owner and holder of the promissory note referred to in Or. Rev. Stat. §
86.110 is deemed the personal representative of the mortgagee for the purposes of this section. Or. Rev. Stat. § 86.715
Page 616Page 616
provides: For the purpose of applying the mortgage laws, the grantor in a trust deed is deemed the mortgagor and the
beneficiary is deemed the mortgagee. Section 86.140 requires that the holder must also be the owner in order to be the
beneficiary.
[HN37] The Oregon Trust Deed Act (OTDA) and Oregon case law establish that the beneficiary is a person named or
otherwise designated in the trust deed as the person whose debt is secured by the trust deed. In the context of a note,
the OTDA and Oregon case law demonstrate that this person (i.e. the beneficiary) is the noteholder, or the owner of the
note; in other words, the beneficiary is the lender or the lender's successor.
[HN38] The first part of Or. Rev. Stat. § 86.705(2) states that "beneficiary" means a person named or otherwise
designated in a trust deed. The statute, however, continues: as the person for whose benefit a trust deed is given.

[HN39] Under Oregon's rules of statutory construction, the court may not omit what has been inserted. Statutory
provisions must be construed, if possible, in a manner that will give effect to all of them.
[HN40] The latter part of Or. Rev. Stat. § 86.705(2) has an important meaning. It provides that the beneficiary is the
person for whose benefit the trust deed was given.

[HN41] An interpretation that renders a statutory provision meaningless should give a court pause.

[HN42] The court endeavors to avoid interpreting a statute in a manner which will produce absurd results.

[HN43] An expansion clause does not license the parties to a trust deed to disregard the statutory definitions merely
because they have agreed to do so. Modified definitions are only appropriate when necessary to carry out the
legislature's intent regarding the statutory scheme.

[HN44] An expansion clause means that, in some cases, the circumstances of a case may require the application of a
modified definition of the pertinent statutory terms to carry out the legislature's intent regarding the statutory scheme.

[HN45] An expansion clause has been invoked to arrive at an answer that best comported with the legislative intent of
the scheme as a whole.
[HN46] Pursuant to Or. Rev. Stat. § 86.720(1), the beneficiary is responsible for ordering the trustee to reconvey the
interests described in the trust deed to the grantor on payment of the obligation.
[HN47] Whether a party is a beneficiary is determined by statute, not by contract.
[HN48] Under Oregon law, the provisions of the Oregon Trust Deed Act, including its definitions, form part of the
trust deed agreement between the parties.
Contracts Law > Contract Conditions & Provisions > General Overview
Contracts Law > Contract Interpretation > General Overview
[HN49] The law of the land applicable thereto is a part of every valid contract.
Page 617Page 617
[HN50] Existing laws are read into contracts in order to fix the rights and obligations of the parties.
[HN51] In the event that a provision of the Oregon Trust Deed Act (OTDA) conflicts with a term of the trust deed, the
OTDA provision, rather than the private contract, controls. The incorporation of existing law may act to supersede
inconsistent clauses purporting to define the terms of the agreement. For instance, where a statute regulates the amount
the government is to pay for a particular service, the statute controls despite a contract between the government and the
provider of the service agreeing to a lower rate. If the parties intend to invoke the OTDA to govern their rights and
responsibilities, they may not contract around its definitions.
Governments > Legislation > Statutory Remedies & Rights

[HN52] Under Oregon law, statutory rights may be waived, but only to the extent that they serve no broader public
policy but are directed solely to the protection of the individual who purports to waive them. The Oregon Trust Deed
Act's definitions serve a broad and important public purpose and are not solely for the protection of individual
borrowers.
Foreclosure
[HN53] Or. Rev. Stat. § 86.735(1) provides that a trustee may not conduct a non-judicial foreclosure unless the trust
deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee are
recorded in the mortgage records in the counties in which the property described in the deed is situated.
[HN54] While the Oregon Trust Deed Act does not require the recording of transfers of the note, Oregon law provides
that the transfer of the note necessarily causes an assignment of the security instrument, even if the security instrument
is not formally assigned.
[HN55] Transfer of a note, without any formal transfer of the mortgage, transfers the mortgage.
[HN56] The assignment of a debt carries with it the security for the debt.
[HN57] Assignment of a note secured by a trust deed carries with it a security interest in real property.
[HN58] Or. Rev. Stat. § 86.735(1) does not require the recording of the transfer of the note. It does, however, require the
recording of the assignment of the beneficial interest in the trust deed.
[HN59] The transfer of a note carries with it the security, without any formal assignment or delivery, or even mention of
the latter.
Estate, Gift & Trust Law > Trusts > Trustees > Duties & Powers > General Overview
[HN60] In trust arrangements in Oregon, the trustee typically holds legal title to the subject of the trust and the
beneficiary holds equitable title. When a trust is created, the legal title is vested in the trustee. A trust implies two
estates, one legal, and the other equitable. It also implies that the legal title is held by one person, the trustee, while
Page 618Page 618
another person, the cestui que trust the beneficiary, has the beneficial interest. Under the Oregon Trust Deed Act,
therefore, the trustee holds legal title to the trust deed and the beneficiary holds equitable title to the trust deed.
[HN61] The Oregon Trust Deed Act requires the recording of assignments of both legal and equitable title to the trust
deed. Or. Rev. Stat. § 86.735(1) expressly requires the recording of two separate events. First, the statute requires that
any assignments of the trust deed by the trustee or the beneficiary be recorded. Second, the statute requires that any
appointment of a successor trustee be recorded. The second clause, which requires the recording of any "appointment of
a successor trustee," means the transfer of the trust deed from one trustee to another must be recorded. Because the
trustee holds legal title to the trust deed, this clause addresses the assignment of legal title. The first clause, "assignment
of the trust deed," then, must refer to the assignment of the beneficial interest in the trust deed. If assignment of the
trust deed only referred to assignments of legal title to the trust deed, it would effectively mean the same thing as
appointment of a successor trustee. Oregon courts, however, must attempt to avoid redundancy when interpreting a
statute. Section 86.735(1), therefore, requires the recording of assignments of both legal and equitable title.
[HN62] Where the noteholder is the beneficiary, Or. Rev. Stat. § 86.735(1) requires the recording of an assignment of
the beneficial interest for each transfer of the note.
[HN63] Or. Rev. Stat. § 86.735(1) requires the recording of both legal and beneficial (equitable) assignments.
[HN64] To survive a motion to dismiss, the plaintiffs' complaint must state sufficient factual matter to allow the court to
draw the reasonable inference that the defendant is liable for the misconduct alleged.
Foreclosure
[HN65] Non-judicial foreclosure of one's home is a particularly harsh event. It is reasonable to require that the interest
of the beneficiary is clearly documented in a public record before permitting a foreclosure to proceed without judicial
supervision.
Foreclosure
[HN66] The Oregon legislature has set forth in extensive detail in the Oregon Trust Deed Act (OTDA) how a non-
judicial foreclosure may proceed and the circumstances that are required in order for it to occur. The OTDA represents a
well-coordinated statutory scheme. If the well-coordinated balance of statutory rights and responsibilities contained in
the OTDA are to be altered, that is a matter for the legislature to decide.
COUNSEL: [**1] For Plaintiffs: Terry Scannell, LAW OFFICE OF TERRY SCANNELL, Portland, OR.
For Defendants: Megan E. Smith, Pilar C. French, LANE POWELL PC, Portland, OR.
For Mortgage Electronic Registration System, Inc., Defendant: Robert J. Pratte, FULBRIGHT & JAWORSKI LLP,
Minneapolis, MN.
JUDGES: Michael H. Simon, United States District Judge.
OPINION BY: Michael H. Simon
OPINION
[*1147] OPINION AND ORDER

SIMON, District Judge.
Page 619Page 619
I. INTRODUCTION
In the summer of 2007, Plaintiffs Douglas A. James and Eileen M. James ("Plaintiffs") obtained a loan, secured by a
trust deed, to purchase their home in Clackamas County, Oregon. When Plaintiffs defaulted on their loan three years
later, Defendants ReconTrust Company ("RTC"), BAC Home Loan Servicing L.P. ("BACHLS"), and Mortgage
Electronic Registration System, Inc. ("MERS") began the non-judicial foreclosure process set forth in the Oregon Trust
Deed Act ("ODTA"), Or. Rev. Stat. ("ORS") § 86.705, et seq. Plaintiffs filed suit in state court to stop the foreclosure,
and Defendants removed the case to federal court. Dkt. 1. Defendants then moved to dismiss under Rule 12(b)(6) of the
Federal Rules of Civil Procedure. Dkt. 24. United States Magistrate Judge Janice Stewart issued Findings and
Recommendation [**2] ("F&R"), concluding that this court should grant Defendants' motion. Dkt. 41. Plaintiffs filed
timely objections, Dkt. 48, and Defendants responded. Dkt. 54. Under the Federal Magistrates Act, 28 U.S.C. § 636(b),
this court must review de novo those portions of Judge Stewart's F&R to which Plaintiffs object. Judge Stewart's report
and the parties' objections and responses place before me an issue with which courts have been struggling, both in
Oregon and nationwide.
[HN1] The OTDA requires that the trustee or beneficiary of a trust deed publicly record all assignments of the trust
deed in the county or counties where the underlying real property is located before the trustee may conduct a
"foreclosure by advertisement and sale," i.e. a non-judicial foreclosure. ORS § 86.735(1). Unless all such assignments
have been publicly recorded, a foreclosure may occur only by using the more cumbersome, but also more protective,
process of a judicial foreclosure under which the foreclosure is supervised by a judge.
The primary question presented in this case is whether an entity such as MERS may be a "beneficiary" under the OTDA
if it is neither a lender nor a successor to a lender. If MERS can be a "beneficiary" [**3] under the OTDA in such
circumstances, then any assignments of the trust deed that were not publicly recorded and made only among the
members of MERS (and privately recorded only within the MERS internal database) would not preclude the availability
of a non-judicial foreclosure. If, however, MERS is not a beneficiary under the OTDA, then the existence of any
assignments by a trustee or beneficiary that were not publicly recorded in appropriate county files would preclude a
non-judicial foreclosure.
Plaintiffs contend that, despite the trust deed's explicit declaration that MERS is the beneficiary, the real beneficiary
was first the original lender and then, in turn, each of several successor lenders (or noteholders). As the lender and then
the successor noteholders transferred the note and assigned the trust deed, no party recorded these assignments in the
county records, according to Plaintiffs. Instead, MERS remained listed in the county records as the only beneficiary
until it recorded an assignment to BACHLS, after which BACHLS appointed a new trustee. Plaintiffs argue that, under
these facts, Defendants [*1148] have not satisfied ORS § 86.735(1) and may not non-judicially foreclose.
Defendants [**4] respond that the OTDA permits MERS, as the nominee, or agent, for the lender and its successors, to
be the beneficiary. Defendants add that the trust deed, which was signed by Plaintiffs, expressly names MERS as the
beneficiary. Accordingly, Defendants contend, the lender and successor noteholders did not need publicly to record
assignments of the trust deed because MERS, until its assignment of the trust deed to BACHLS, was always the
beneficiary. The only assignment that is required, Defendants argue, is the assignment from MERS to BACHLS, and
MERS recorded that assignment. Defendants contend, therefore, that they have satisfied ORS § 86.735(1) and a non-
judicial foreclosure may proceed.
The resolution of this case requires statutory interpretation of several provisions of the OTDA and the application of
these provisions to MERS and the underlying loan and security documents, all in the context of Oregon real estate
finance law. Because MERS is a nationwide entity that appears to use standard language in its real estate documents,
some courts have looked for guidance to legal decisions from other states. Care must be taken, however, because
different states have different real estate [**5] laws, including different recording and foreclosure statutes. Also, some
states are "mortgage states," which use mortgages as the principal security instrument for financing real property. Other
states, like Oregon, are "trust deed states," which primarily use deeds of trust and a third-party trustee. Further, some
states, like Oregon, are "lien theory states," while other states are "title theory states." These differences, more fully
explained below, can be outcome determinative in answering a question like the one presented in this case. For these
reasons, a legal analysis from one state might not be fully transferable to another state, even though, facially, it may
appear to be so.
Page 620Page 620
The short answer to the primary question presented in this case is that, [HN2] in Oregon, under the definition of
"beneficiary" set forth in the OTDA, only an original lender or a successor to the lender may be a beneficiary under a
trust deed. Because MERS is neither a lender nor a lender's successor, it is not a beneficiary within the meaning of the
Oregon statute, notwithstanding any contractual agreement among the parties in the loan and related security documents
declaring that MERS is a beneficiary. This [**6] conclusion is based on a statutory interpretation of the OTDA in the
context of Oregon's law of real estate finance. It is, therefore, a conclusion that is specific to Oregon. In addition, the
court finds that under well-established Oregon law, [HN3] a transfer of a note automatically causes an assignment of
the trust deed that is associated with that note. Further, [HN4] ORS § 86.735(1) requires the public recording in county
land records of all assignments of the trust deed before a non-judicial foreclosure sale may be held. Accordingly,
Plaintiffs have sufficiently stated a claim for relief under ORS § 86.735(1).
The court also concludes that [HN5] MERS, when authorized by its principal (or principals) to do so, may act as a
"nominee," or agent, for the lender and the lender's successors and may make assignments of the trust deed both on the
lender's behalf and on behalf of the lender's successors. Finally, the court finds that there is an insufficient factual basis
set forth in the complaint to sustain Plaintiffs' general allegations of unauthorized "robo-signing." Thus, the court
concludes that Plaintiffs have failed to state claims for relief other than claims based on ORS § 86.735(1). Defendants'
[**7] motion to dismiss, therefore, [*1149] is GRANTED in part and DENIED in part, as more fully described below.
Before explaining how I arrive at these conclusions, I offer a brief introduction to both MERS and Oregon's law of real
estate finance.
II. MERS AND OREGON REAL ESTATE FINANCE LAW
A. MERS
In a typical financed residential real estate transaction, the purchaser signs two distinct but related documents. One is a
promissory note, which is evidence of the purchaser's promise to repay the lender the amount of the loan plus interest.
The second is a security instrument, usually a mortgage or a trust deed, which conveys to the lender an interest in the
property in order to secure fulfillment of the repayment promise described in the note. See 59 C.J.S. Mortgages § 204
(2011); G. Nelson and D. Whitman, REAL ESTATE FINANCE LAW § 2.1 (5th ed. 2007).
After a lender has made a loan, it may, and often does, sell both the note and the security instrument on the secondary
market. Such sales are made either to a government-sponsored enterprise, such as the Federal National Mortgage
Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or to a private
institution. These [**8] transfers on the secondary market help supply capital for home loan lending and are "an
important element of national housing policy." G. Nelson and D. Whitman, REAL ESTATE FINANCE LAW § 5.27, pg. 531
(5th ed. 2007). Many notes and security instruments are eventually sold to investment trusts, which bundle them into
pools and issue bonds to investors through a process known as securitization. See id. at § 11.3. The transfer of a security
instrument is called an "assignment." See id. at § 5.27, pg. 530.
Oregon, like many states, permits, and for some purposes requires, the holder of a security instrument publicly to record
assignments in county land records where the property is located. See generally ORS §§ 86.060 (mortgages), 86.735
(trust deeds), 93.710 (mortgages and trust deeds). As the sale of loans and their associated security instruments on the
secondary market increased, recording assignments "became cumbersome to the mortgage industry[.]" Cervantes v.
Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir. 2011).1 To reduce the need for recording assignments, the
industry created MERS. R.K. Arnold, Yes, There is Life on MERS, 11 PROB. & PROP. 32, 33 (Jul./Aug. 1997) (MERS
[**9] "is the result of an industry effort to reduce the need for mortgage assignments")2 MERS does not "originate, lend,
service, or invest in home mortgage loans." Defs.' Mem. in Supp. of Mot. to Dismiss ("Defs.' Mem.") at 4. Instead,
participants in the mortgage market, such as loan originators, servicers, and investors, may become members of MERS.
1 The Ninth Circuit in Cervantes expressly noted that it was not deciding a question that is quite similar to the one presented here. See 656
F.3d at 1044 ("The legality of MERS's role as a beneficiary may be at issue where MERS initiates foreclosure in its own name, or where the
plaintiffs allege a violation of state recording and foreclosure statutes based on the designation.... This case does not present either of these
circumstances and, thus, we do not consider them.") (emphasis added).
2 At the time this article was published, its author, R.K. Arnold, was Senior Vice President, General Counsel, and Secretary of MERS. Id. at
36.
Page 621Page 621
When a member of MERS makes a loan for the purchase of real estate, MERS [*1150] plays two roles. First, MERS is
named in the security instrument as the "nominee"3 of the lender and its successors, and it is listed as "the [**10]
mortgagee or beneficiary of record" in the local land records. Defs.' Mem. at 5. Second, MERS tracks in its internal
database "when the member transfers an interest in a mortgage loan to another MERS member." Id. MERS contends
that under this arrangement, its members no longer need to record assignments that take place exclusively among the
members of MERS. See R.K. Arnold at 33.
3 "Nominee" means a "person designated to act in place of another, usu[ally] in a very limited way" or a "party who holds bare legal title for
the benefit of others or who receives and distributes funds for the benefit of others." BLACK'S LAW DICTIONARY 1149 (Bryan Gamer ed.
2009).
B. Oregon Real Estate Finance Law

[HN6] In Oregon, financed residential real estate transactions are governed by several distinct sources of statutory and
common law. Promissory notes are governed by Article 3 of the Uniform Commercial Code, codified in ORS Chapter
73. Piatt v. Medford Highlands, LLC, 173 Ore. App. 409, 413, 22 P.3d 767 (2001). Oregon permits lenders to secure
promissory notes with either a mortgage or a trust deed.4 Mortgages in Oregon are largely governed by common law,
with some statutory requirements. See ORS Chapters 86 and 88. Trust [**11] deeds are largely governed by the
OTDA, with mortgage law providing interstitial guidance.5
4 Oregon law also recognizes the land sale contract. See generally Security Bank v. Chiapuzio, 304 Ore. 438, 747 P.2d 335 (1987),
superseded by statute on other grounds as stated in Bedortha v. Sunridge Land Co., Inc., 312 Ore. 307, 314 n.4, 822 P.2d 694 (1991). This
lawsuit does not involve a land sale contract.
5 These separate bodies of law each employ their own terminology to describe the parties to a transaction. Generally speaking, if "a
mortgage is employed, the lender is referred to as the mortgagee and the debtor as the mortgagor.... If a trust deed is used, the lender is the
beneficiary and the debtor is the trustor, or grantor." G. Piatt, The Uniform Land Security Interest Act: Vehicle for Reform of Oregon Secured
Land Transaction Law, 69 OR. L. REV. 847, 851 (1990). The terminology employed in the law of mortgages is also interchangeable with
some of the terminology employed in the OTDA. See, e.g., ORS § 86.715 ("For the purpose of applying the mortgage laws, the grantor in a
trust deed is deemed the mortgagor and the beneficiary is deemed the mortgagee.").
Before Oregon adopted the OTDA in 1959, residential real estate [**12] purchases were financed primarily with loans
secured by mortgages. From a lender's point of view, mortgages have two principal drawbacks. First, mortgages may
only be foreclosed through a lawsuit with judicial supervision of the foreclosure process, i.e., a judicial foreclosure.
ORS § 88.010. Second, either the borrower or a junior lien holder may, by statute, redeem the property up to 180 days
after the judicial foreclosure sale. ORS § 18.960, et seq.
The OTDA was intended in part to simplify the foreclosure process. See Minutes, Senate Judiciary Committee (Feb. 19,
1957) (on file at the Oregon State Archives) (discussing S.B. 172, an earlier version of the OTDA). To achieve this
simplification, [HN7] the OTDA permits a trustee to foreclose the trust deed and sell the property, without judicial
oversight, at a public sale following advertisement. This is a non-judicial foreclosure. The OTDA also prohibits a person
whose interest the trustee's sale foreclosed and terminated from redeeming the property from the purchaser at the
trustee's sale. Or. Laws (1959) [*1151] Ch. 625 §§ 4, 6, 9, 12.; see also ORS §§ 86.735 and 86.770(1).
The legislature complemented the new rights that these provisions afforded [**13] to creditors by establishing
additional protections for the borrower. Initially, these additional protections included the appointment of a trustee, a
limitation on trustee fees, the elimination of deficiency judgments, the right to cure a default, and a variety of notice
requirements. See Minutes, Senate Judiciary Committee (Feb. 19, 1957); Minutes, House Judiciary Committee (Apr.
16,1959); Or. Laws (1959) Ch. 625 §§ 2, 4, 6, 10, 13. A law review note written six years after the Oregon legislature
enacted the OTDA observed that to "counterbalance the foreclosure advantages given the creditor, the Oregon statute
sets forth a detailed procedure designed to protect the debtor. The creditor is favored only as long as he follows the
statute." Ronald Brady Tippetts, Note, Trust Deed History in Oregon, 44 OR. L. REV. 149, 150 (1965).
After its passage in 1959, the OTDA continued to balance convenience for creditors with protections for borrowers. In
2003, for example, the legislature established a procedure for interested parties to obtain information from the trustee
before a foreclosure sale, and in 2008 and 2009, the legislature provided additional notice protections for borrowers.
Page 622Page 622
See [**14] Or. Laws (2003) Ch. 251 § 2; Or. Laws (2008) Ch. 19 § 20; Or. Laws (2009) Ch. 864 § 1; ORS §§ 86.737,
86.757. In short, [HN8] the OTDA
represents a well-coordinated statutory scheme to protect grantors [borrowers] from the unauthorized foreclosure and wrongful sale
of property, while at the same time providing creditors with a quick and efficient remedy against a defaulting grantor. [The OTDA]
confers upon a trustee the power to sell property securing an obligation under a trust deed in the event of default, without the
necessity for judicial action. However, the trustee's power of sale is subject to strict statutory rules designed to protect the grantor
[borrower], including provisions relating to notice and reinstatement.
Staffordshire Inv., Inc. v. Cal-Western Reconveyance Corp., 209 Ore. App. 528, 542, 149 P.3d 150 (2006) (emphasis
added).
[HN9] The non-judicial foreclosure process created by the OTDA is elective by the beneficiary of the trust deed.
"Upon breach of the obligation secured, the beneficiary may choose between two methods of foreclosure: (1) non-
judicial disclosure, which involves advertisement and sale of the property; or (2) judicial foreclosure, which involves
following the procedures available [**15] to foreclose mortgages on real property." Kerr v. Miller, 159 Ore. App. 613,
634, 977 P.2d 438 (1999); ORS § 86.710. The beneficiary may also choose to waive the trust deed and sue solely on the
note. See Beckhuson v. Frank, 97 Ore. App. 347, 351, 775 P.2d 923 (1989) ("A trust deed beneficiary may elect to sue
on the note...and thereby waive his priority and security, or he may foreclose on the security and waive his right to
collect a deficiency." (footnote omitted)); ORS § 86.735(4).
[HN10] Under Oregon law, the OTDA and mortgage law differ in five principal ways. First, a loan secured by a trust
deed involves three parties, instead of two. The third party is the trustee, who holds the security instrument -- a trust
deed -- in trust for the benefit of the beneficiary. ORS § 86.705(7) (2011). When a loan is secured by a mortgage,
however, the mortgagee, rather than a trustee, holds the security instrument -- a mortgage. Second, the OTDA permits
the trustee to foreclose the trust deed without judicial oversight, that is, by a non-judicial foreclosure. ORS §§ 86.735,
86.755. Third, the [*1152] OTDA does not provide for a right of redemption after the foreclosure sale. Compare ORS
§ 86.770(1) with ORS § 18.960, et seq. Fourth, the [**16] OTDA contains a variety of detailed notice and recording
requirements. See ORS §§ 86.735, 86.737, 86.740, 86.745, 86.750. Finally, the OTDA permits the grantor [the
borrower] to cure his or her default until five days before the foreclosure sale. ORS § 86.753.
[HN11] Under both statute and longstanding precedent, Oregon is a "lien theory" state, rather than a "title theory"
state.6 In Oregon, neither a mortgage nor a trust deed conveys legal title to the underlying real property to the
mortgagee, the trustee, or the beneficiary. A "mortgage conveys no legal or equitable interest in fee or for life to the
mortgagee, but merely creates a lien which constitutes security for the debt and grants the mortgagee, upon the
mortgagor's default, the right to have the property sold to satisfy the debt." West v. White, 92 Ore. App. 401, 404, 758
P.2d 424, aff'd, 307 Ore. 296, 766 P.2d 383 (1988); see also ORS § 86.010. Similarly, a trust deed "is merely a lien on
the land as security for the payment of the debt."7 Id.; see also Kerr v. Miller, 159 Ore. App. 613, 621, 977 P.2d 438
(1999).
6 [HN12] "Under the title theory, legal 'title' to the mortgaged real estate remains in the mortgagee until the mortgage is satisfied or
foreclosed; in lien theory jurisdictions, [**17] the mortgagee is regarded as owning a security interest only and both legal and equitable title
remain in the mortgagor until foreclosure." RESTATEMENT (THIRD) OF PROPERTY (MORTGAGES) § 4.1 rant, a (1997).
7 From its passage in 1959, until it was amended in 1983, the OTDA provided that the trust deed conveyed legal title to the underlying real
property to the trustee. See Or. Laws (1959) Ch. 635 § 1; Or. Laws (1983) Ch. 719 §§ 1, 2. The Oregon Supreme Court, however, construed
[HN13] the OTDA to create only a lien or encumbrance on the property and not to pass the title away from the grantor. Sam Paulsen
Masonry Co. v. Higley, 276 Ore. 1071, 1075, 557 P.2d 676 (1976) ("The provisions relating to trust deeds ... do not provide that trust deeds
are to be considered as distinct from mortgages with respect to liens of this nature. Thus, a trust deed is considered a mortgage on real
property....A mortgage of real property creates only a lien or encumbrance and does not abrogate the mortgagor's title to the property.").
III. FACTUAL AND PROCEDURAL BACKGROUND
A. Factual Allegations in Plaintiffs' Complaint

[HN14] The essential allegations in Plaintiffs' complaint must be "taken as true and construed in the light most
favorable [**18] to" Plaintiffs. Am. Family Ass'n, Inc. v. City & Cnty. of S.F., 277 F.3d 1114, 1120 (9th Cir. 2002).
According to the complaint, in 2007, Plaintiffs signed a promissory note in favor of Defendant Northwest Mortgage
Page 623Page 623
Group, Inc. ("NWMG"), secured by a trust deed. First Am. Compl. ("FAC") ¶¶ 11, 13. The trust deed names NWMG
as the "Lender" and MERS as the "beneficiary," explicitly stating that "MERS is the beneficiary under this security
agreement." Dkt. 15-1, pg. 1.8 The trust deed, however, also states that "MERS is a separate corporation that is acting
solely as a nominee for Lender and Lender's successors and assigns." Id (emphasis added). MERS is not mentioned in
the note, and MERS did not provide funds for the loan. FAC ¶ 19.
8 Plaintiffs attach several exhibits to their First Amended Complaint. Dkt. 15-1. Exhibit 1 is a copy of the trust deed.
NWMG negotiated the note to Countrywide Mortgage, which became BACHLS. FAC ¶ 15. An investment trust later
purchased the note from BACHLS, but BACHLS continued to hold the note itself, even though it no longer held "any
interest [*1153] in the note or the deed of trust." FAC ¶¶ 16-17, 21. BACHLS assigned the trust deed to "third
parties," and the third [**19] parties ultimately transferred the trust deed to an investment trust. FAC ¶ 20. These
assignments of the trust deed were not recorded in county land records. Id. During these transfers and assignments, the
note and the trust deed became separated, so that BACHLS holds the note, but not the security interest provided by the
trust deed. FAC ¶ 21.
In April 2010, Plaintiffs became delinquent on the loan. FAC ¶ 27. MERS assigned the trust deed to BACHLS, and
BACHLS appointed RTC as the successor trustee. FAC ¶¶ 27, 30. The same signatory, "a so[-]called 'robo-signer,'"
signed both the assignment of the trust deed and the appointment of the successor trustee. FAC ¶¶ 28, 30, 32. RTC
executed a Notice of Default and Election to Sell. FAC ¶ 34.
Plaintiffs filed suit in Clackamas County Circuit Court in February 2011, and Defendants removed the case to federal
court. Dkt. 1. Plaintiffs then filed an Amended Complaint. Dkt. 15. Plaintiffs assert two related claims for relief:
wrongful foreclosure and declaratory relief. In both claims, Plaintiffs contend that because MERS is not the real
beneficiary of their trust deed, Defendants lack authority to foreclose by advertisement and sale, i.e. to non-judicially
[**20] foreclose on Plaintiffs' property. Plaintiffs seek damages, an injunction barring non-judicial foreclosure, and a
declaration of rights and obligations.
B. Defendants' Motion to Dismiss

Defendants moved to dismiss. Dkt. 24. They argue that MERS is a proper beneficiary under the OTDA. Defs.' Mem. at
12-17. They also argue the OTDA does not require lenders, in order to be able to use non-judicial foreclosure, to record
as an assignment of the trust deed every transfer of the note. Defs.' Mem. at 22-31. In other words, even if MERS is not
the beneficiary of the trust deed, Defendants argue that an assignment of a note does not automatically result in an
assignment of the trust deed.
C. Judge Stewart's Findings and Recommendations

In her F&R, Judge Stewart recommended that Defendants' motion to dismiss be granted. Dkt. 41. Judge Stewart
concluded that MERS is a proper beneficiary. She found that MERS could act as "a designated beneficiary and a
nominee for the lender." F&R at 13. She also adopted the reasoning set forth in Beyer v. Bank of America, 800 F. Supp.
2d 1157 (D. Or. 2011). Judge Stewart further noted that other courts had "concluded that MERS may serve as a
beneficiary if the parties [**21] expressly agreed to MERS's role in the Deed of Trust[.]" F&R at 15.
In addition, Judge Stewart concluded that the OTDA did not require a lender to record an assignment of the trust deed
each time it, or one of its successors, transferred the note. "Although a transfer or assignment of the note transfers the
security interest for the protection of the beneficiary, it is not the same act as 'an assignment of the trust deed by the
trustee or the beneficiary' contemplated by ORS [§] 86.735(1)." F&R at 20.
Judge Stewart also addressed Plaintiffs' other claims. She rejected Plaintiffs'" robo-signer" argument, holding that
Plaintiffs' allegations were "conclusory." F&R at 23. She noted that a signatory may "wear two hats" and "[t]hat [the
signatory in this case] did so is insufficient to prove that she lacked authority to sign either or both documents." Finally,
Judge Stewart rejected Plaintiffs' taxpayer argument [*1154] on the grounds that Plaintiffs failed to allege facts "to
establish their standing." F&R at 24.
D. Plaintiffs' Objections and Defendants' Response

Page 624Page 624
Plaintiffs filed timely objections to Judge Stewart's F&R. Dkt. 48. Plaintiffs argue: (1) that MERS does not meet the
OTDA's definition [**22] of "beneficiary;" (2) that ORS § 86.735(1) requires the recording of an assignment of the
trust deed each time the associated note is transferred; and (3) that the assignment from MERS to BACHLS was invalid
because it was signed by an unauthorized "robo-signer." Defendants' response urges this court to adopt Judge Stewart's
F&R. Dkt. 54.
IV. STANDARDS
[HN15] Under the Federal Magistrates Act, the court may "accept, reject or modify, in whole or in part, the findings or
recommendations made by the magistrate." Federal Magistrates Act, 28 U.S.C. § 636(b)(1). If a party files objections to
a magistrate's findings and recommendations, "the court shall make a de novo determination of those portions of the
report or specified proposed findings or recommendations to which objection is made." Id.; Fed. R. Civ. P. 72(b)(3).
[HN16] For those portions of an F&R to which neither party has objected, the Magistrates Act does not prescribe any
standard of review: "There is no indication that Congress, in enacting [the Magistrates Act], intended to require a district
judge to review a magistrate's report[.]" Thomas v. Arn, 474 U.S. 140, 152, 106 S. Ct. 466, 88 L. Ed. 2d 435 (1985); see
also United States, v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir.) [**23] (en banc), cert, denied, 540 U.S. 900, 124 S.
Ct. 238, 157 L. Ed. 2d 182 (2003) (the court must review de novo a magistrate's findings and recommendations if
objection is made, "but not otherwise"). Although in the absence of objections no review is required, the Magistrates Act
"does not preclude further review by the district judge[] sua sponte... under a de novo or any other standard." Thomas,
474 U.S. at 154. Indeed, the Advisory Committee Notes to Rule 72(b) of the Federal Rules of Civil Procedure
recommend that "[w]hen no timely objection is filed," the court review the magistrate's findings and recommendations
for "clear error on the face of the record."
[HN17] A motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted "tests the
legal sufficiency of a claim." Conservation Force v. Salazar, 646 F.3d 1240, 1242 (9th Cir. 2011) (internal quotation
marks and citation omitted). To survive "a motion to dismiss, a complaint must contain sufficient factual matter to state
a facially plausible claim to relief." Shroyer v. New Cingular Wireless Services, Inc., 622 F.3d 1035, 1041 (9th Cir.
2010) (citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009)).
V. DISCUSSION
Plaintiffs' objections [**24] and Defendants' response place before this court questions of state law. [HN18] When
"interpreting state law, federal courts are bound by decisions of the state's highest court." Arizona Elec. Power Co-op.,
Inc. v. Berkeley, 59 F.3d 988, 991 (9th Cir. 1995). The Oregon Supreme Court, however, has not yet had an opportunity
to resolve these questions. This court, therefore, "must predict how the [Oregon Supreme Court] would decide the
issue[s] using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and
restatements as guidance." In re [*1155] Kirkland, 915 F.2d 1236, 1239 (9th Cir. 1990).9
9 The court notes that the Oregon Court of Appeals recently heard oral argument in Niday v. GMAC Mortgage LLC, Oregon Court of
Appeals No. A147430[decision now reported at: 251 Ore. App. 278], which is a case that raises several issues similar to the questions
addressed in this opinion.
A. MERS Is Not a Beneficiary Under the OTDA

Plaintiffs' first objection is to Judge Stewart's recommended finding that MERS satisfies the definition of "beneficiary"
set forth in the OTDA, ORS § 86.705(2) (2011). F&R at 12-17. To resolve whether MERS meets the OTDA definition
of "beneficiary," the court must first interpret the statutory [**25] definition of "beneficiary" under the OTDA and then
determine whether MERS's role in the parties' transaction satisfies that definition.
1. Interpretation of ORS § 86.705(2)

[HN19] Under Oregon law, when interpreting a statute "a court shall pursue the intention of the legislature if possible."
ORS § 174.020(1)(a). In State v. Gaines, 346 Ore. 160, 206 P.3d 1042 (2009), the Oregon Supreme Court set forth a
three-step methodology for determining the legislature's intent. First, the court examines the text and context of the
statute. Id. at 171. Second, the court may examine the statute's legislative history. Id. at 172. Third, if "the legislature's
Page 625Page 625
intent remains unclear after examining text, context, and legislative history, the court may resort to general maxims of
statutory construction to aid in resolving the remaining uncertainty." Id.
Thus, the court begins the task of statutory interpretation by looking to a statute's text and context. [HN20] ORS §
86.705(2) (2011) provides:
"Beneficiary" means a person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given,
or the person's successor in interest, and who is not the trustee unless the beneficiary is qualified to be [**26] a trustee under ORS
86.790(1)(d).10
[HN21] The text establishes three requirements for a person (or entity) to be a beneficiary under this statute. A
beneficiary: (1) must be named or otherwise designated in the trust deed; (2) as a person "for whose benefit the trust
deed is given;" and (3) must not also be the trustee under the trust deed unless legally qualified.
10 Before 2012, the word "Beneficiary" was defined in the OTDA at ORS 86.705(1). In 2011, the Oregon legislature added the phrase
"Affordable housing covenant" to the definitions section of the OTDA, among other minor changes, resulting in the definition of
"Beneficiary" now appearing at ORS 86.705(2). Or. Laws Ch. 712 § 1 (2011) (effective January 1, 2012). The statutory definition of that
word was also slightly changed. In the 2012 definition, the third word was changed from "the" to "a," and the phrase "shall not be" was
changed to "is not." The legislature's amendments to ORS § 86.705 apply to trustee's sales for which notice was sent on or after January 1,
2012. Or. Laws Ch. 712 § 5 (2011). No party in this case has argued that this change was material, and these changes do not appear to this
court to be material to the questions [**27] presented here.
Although the meanings of the first and third qualifications are plain from the text, the meaning of the second is not.
ORS § 86.705(2) does not explain how the trust deed "benefits" a beneficiary and, thus, further analysis is needed to
determine who is a person "for whose benefit the trust deed is given." Other provisions of the OTDA11 show that the
"benefit" of a trust deed is that it secures the repayment [*1156] of the note. [HN22] ORS § 86.705(7) (2011) defines
"trust deed" as "a deed executed in conformity with ORS 86.705 to 86.795 that conveys an interest in real property to a
trustee in trust to secure the performance of an obligation the grantor or other person named in the deed owes to a
beneficiary."12 (Emphasis added.) [HN23] ORS § 86.710 also states that the trust deed is given to secure a debt "to a
beneficiary." That statute provides: "Transfers in trust of an interest in real property may be made to secure the
performance of an obligation of a grantor, or any other person named in the deed, to a beneficiary." (Emphasis added.)
Thus, [HN24] a trust deed's "benefit" to a beneficiary is that it provides security for "the performance of an obligation"
owed to that beneficiary. The Oregon [**28] Court of Appeals has reached the same conclusion: [HN25] A
"beneficiary's interest under a trust deed ... is ... a lien on the land as security for the payment of the debt." West v.
White, 92 Ore. App. 401, 404, 758 P.2d 424, aff'd, 307 Ore. 296, 766 P.2d 383 (1988). Accordingly, [HN26] ORS §
86.705(2) requires that the "beneficiary" be a person "named or otherwise designated in the trust deed" as a person who
receives the benefit of the security that is provided by the trust deed.
11 See State v. Smith, 246 Ore. App. 614, 619, 268 P.3d 644 (2011) ("Context includes other provisions of the statute").
12 The legislature slightly altered the definition of "trust deed" in 2011. It changed some tenses and word order. These changes did not
materially alter the definition. Or. Laws Ch. 712 § 1 (2011) (effective January 1, 2012).
2. The beneficiary is the noteholder (i.e. the lender or its successor)

The OTDA and Oregon case law establish that [HN27] where, as here, the trust deed secures a promissory note, the
beneficiary of the trust deed is the noteholder.13 As described above, a financed real estate transaction typically involves
two documents: a security instrument and a note. ORS § 86.705(2) defines "beneficiary" in terms of its relation to the
security [**29] instrument -- the trust deed. It does not expressly state that a beneficiary is also a party to the note.
Because a trust deed may secure obligations other than a debt evidenced by a note, the legislature may have decided to
express the definition of "beneficiary" in more general terms in order to encompass all possible security arrangements.
13 [HN28] A mortgage or a trust deed may secure obligations other than those evidenced by a note. See G. Nelson and D. Whitman, REAL
ESTATE FINANCE LAW § 2.2 (5th ed. 2007). In cases where the obligation is not a debt evidenced by a note, the beneficiary is not the
Page 626Page 626
noteholder, but could be called the obligee or creditor. Because this case involves a note, however, the term "noteholder" best describes the
party to whom the obligation of the note is owed.
Nonetheless, although the term "beneficiary" is not defined by reference to the note, several provisions of the OTDA
imply that the beneficiary must be the noteholder. This is most evident in ORS §§ 86.705(7) and 86.710, which are the
same statutes that describe the "benefit" of a trust deed. [HN29] These statutes state that the grantor (i.e. the debtor)
owes the obligation -- that is, the debt -- to the beneficiary. [**30] Again, ORS § 86.705(7) provides that the trust deed
secures "the performance of an obligation the grantor or other person named in the deed owes to a beneficiary." The
words "owes to a beneficiary" signal that the beneficiary is the party that receives repayment of the debt. ORS § 86.710
uses a similar formulation: "Transfers in trust of an interest in real property may be made to secure the performance of
an obligation of a grantor, or any other person named in the deed, to a beneficiary." These statutes envision that the
beneficiary is not just the party secured [*1157] by the trust deed; it is also the party to whom the grantor owes the
debt. In the context of notes, the party to whom the grantor owes the debt is the noteholder. See 59 C.J.S. Mortgages §
204 (2011) ("the note represents and is the primary evidence of the debt" (footnotes omitted)).
Other provisions of the OTDA support this conclusion. [HN30] ORS § 86.720(1) provides that upon performance of
the obligation, the beneficiary shall request that the trustee convey the interests in the trust deed back to the grantor.
The unstated but unambiguous assumption embedded in this provision is that the grantor owes the obligation to the
beneficiary.14
14 Defendants [**31] contend that ORS § 86.720(3) "contemplates that the beneficiary and the note owner need not be one and the same by
requiring certain notices be provided to both entities 'if different.'" Defs.' Response to Pl.'s Objections ("RTO") at 9. Defendants
misunderstand the meaning of that statute. [HN31] ORS § 86.720(3) provides:
Prior to the issuance and recording of a release pursuant to this section, the title insurance company or insurance producer
shall give notice of the intention to record a release of trust deed to the beneficiary of record and, if different, the party to
whom the full satisfaction payment was made.
[HN32] This statute does not, as Defendants assert, suggest that the beneficiary and the "note owner" might be different parties. Instead, the
statute contemplates that the beneficiary may not have recorded an assignment of the trust deed, so that an earlier beneficiary is still the
"beneficiary of record." It also contemplates that the full satisfaction payment may be made to an agent of the beneficiary of record, such as
a loan servicer. In either instance, the title insurance company or insurance producer must provide notice to both parties.
Further evidence that the legislature intended [**32] that the beneficiary is the noteholder is found in the absence of a
separate definition for noteholder in the statute. [HN33] ORS § 86.705 defines the principal terms in the OTDA,
including the three main parties to a trust deed transaction: the grantor, the trustee, and the beneficiary. The statute does
not separately define "lender" or "noteholder." In fact, the term "lender" is not used anywhere in the OTDA, except in a
model notice to be sent to grantors.15 See ORS § 86.737. The absence of any separate use or definition of "lender" or
"noteholder" supports the conclusion that the legislature did not intend that the beneficiary and the lender (or the
lender's successor) be separate and distinct parties.16
15 It seems likely that the legislature preferred that a notice sent to grantors employ the simpler and more common term "lender," rather than
the more technical term "beneficiary."
16 Two other provisions in the OTDA suggest that the beneficiary and the lender are necessarily the same party. First, [HN34] ORS §
86.737 describes a notice that must be sent to grantors in the event that the trustee records a notice of default. ORS § 86.737(4) governs the
telephone numbers that must be included on [**33] the notice. It states: "Telephone numbers ... must be toll-free numbers unless the
beneficiary: (a) Made the loan with the beneficiary's own money; [and] (b) Made the loan for the beneficiary's own investment[.]" This
provision assumes that the beneficiary is the same party that "made the loan," namely, the lender. Second, [HN35] the definition of "lender"
in Oregon's provisions for lender security, codified in ORS Chapter 86, includes "beneficiary." ORS § 86.205(4) provides: "'Lender' means
any person who makes, extends, or holds a real estate loan agreement and includes, but is not limited to, mortgagees [and] beneficiaries
under trust deeds[.]" Although the definitions in ORS § 86.205 are limited to §§ 86.205 to 86.275, the legislature's inclusion of
"beneficiaries under trust deeds" in the definition for "lender" is further evidence that the legislature understood that a beneficiary is
identical to a lender under the OTDA.
In addition, the Oregon Court of Appeals, in a different context, has held that the party owning the note is the
beneficiary of the related trust deed. In Lantz v. Safeco Title Insurance Co. of Oregon, 93 Ore. App. 664, [*1158] 763
Page 627Page 627
P.2d 744 (1988), the trustee of a trust deed received a letter [**34] from a person named "Higdon," stating that the note
had been paid in full and "requesting reconveyance of the property covered by the trust deed." Id. at 666. The letter
"was accompanied by the original note and trust deed." Id. The trustee fulfilled the request. The plaintiff, Lantz, sued
the trustee, claiming that she was the personal representative of the true beneficiary, Moore, and that the grantor (i.e. the
debtor) had not paid the money due on the note. Id. at 666-67. Pursuant to ORS § 86.720(1), only the beneficiary may
request that the trustee reconvey the interest in the trust deed to the grantor. The court, therefore, had to decide whether
Higdon or Moore was the proper beneficiary.
The court determined that Moore was the beneficiary. In reaching this conclusion, the court found that although Higdon
had held the note, Moore owned it. By comparing the statutes governing mortgages to the OTDA, the court determined
that the beneficiary is the party who owns the note:
Defendant argues that, because [Higdon] was the holder of the note and trust deed, it was the beneficiary. [HN36] ORS 86.140
provides: "The owner and holder of the promissory note referred to in ORS 86.110 is deemed the [**35] personal representative of
the mortgagee for the purposes of this section." ORS 86.715 provides: "For the purpose of applying the mortgage laws, the grantor
in a trust deed is deemed the mortgagor and the beneficiary is deemed the mortgagee." Defendant contends that those statutes,
construed together, compel the conclusion that the holder is the beneficiary. However, ORS 86.140 requires that the holder must
also be the owner in order to be the beneficiary, and there is no evidence that defendant was the owner.
Id. at 667-68. Although this precedent does not perfectly conform to the factual situation present here, it is, nonetheless,
instructive because it is the Oregon appellate case that comes closest to addressing the relationship between a
beneficiary and a noteholder under the OTDA. This holding is further evidence that under Oregon law, the beneficiary is
the party that owns the note, namely the lender or its successor.
There is another reason to conclude that the beneficiary is the noteholder, or the owner of the note. According to Oregon
case law reaching back more than a century, the note and its security may not be assigned to separate parties. The latter
(i.e. the security) [**36] is merely an "incident" of the former. See West v. White, 92 Ore. App. 401, 404, 758 P.2d 424,
aff'd, 307 Ore. 296, 766 P.2d 383 (1988); U.S. Nat'l Bank of Portland v. Holton, 99 Ore. 419, 427-429, 195 P. 823
(1921) (collecting early Oregon cases). An attempt, therefore, to make one party the noteholder and another the
beneficiary would result in a "nullity." See Schleef v. Purdy, 107 Ore. 71, 78, 214 P. 137 (1923) (the security instrument
cannot "be sold separately from the debt itself, and the transfer of the mortgage, without a transfer of the debt intended
to be secured thereby, is a mere nullity"); see also C. Brown and W. Dougherty, Assignment of Realty Mortgages in
Oregon, 17 OR. L. REV. 83, 84 (1938) ("The debt cannot be assigned to one and the security to another; for, generally
speaking, the security follows the debt.").
Thus, [HN37] the OTDA and Oregon case law establish that the beneficiary is a person named or otherwise designated
in the trust deed as the person whose debt is secured by the trust deed. In the context of a note, the OTDA and Oregon
case law demonstrate [*1159] that this person (i.e. the beneficiary) is the noteholder, or the owner of the note; in other
words, the beneficiary is the lender or the lender's successor.
3. MERS is [**37] not the beneficiary; it is solely the agent of the noteholder
To determine whether, under the OTDA, MERS is the beneficiary of Plaintiffs' trust deed, the court must review the
trust deed to determine whether it names or otherwise designates MERS as the party for whose benefit Plaintiffs
executed the trust deed. The trust deed states on its first page:
(A) 'Security Instrument' means this document, which is dated JUNE 19, 2007[.]
...
(C) 'Lender' is NORTHWEST MORTGAGE GROUP, INC.
(D) 'Trustee' is FIDELITY NATIONAL TITLE COMPANY OF OREGON....
(E) 'MERS' is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for
Lender and Lender's successors and assigns. MERS is the beneficiary under this Security Instrument....
On page three, the trust deed states:

The beneficiary of this Security Instrument is MERS (solely as nominee for Lender and Lender's successors and assigns) and the
successors and assigns of MERS. This Security Instrument secures to Lender: (i) the repayment of the Loan, and all renewals,
extensions and modifications of the Note; and (ii) the performance of Borrower's covenants and agreements under this Security
Instrument and [**38] the Note. For this purpose, Borrower irrevocably grants and conveys to Trustee, in trust, with power of
sale, the following described property [description of the property].
Page 628Page 628
...
Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument,
but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right:
to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any
action required of Lender including, but not limited to, releasing and canceling this Security Instrument.
Trust Deed at 3 (emphasis added).

Plaintiffs' trust deed designates NWMG, rather than MERS, as the true or actual beneficiary. This is evident in three
ways: First, the trust deed states that it "secures to Lender... repayment of the Loan." The benefit of the trust deed (i.e.
the security for performance of the obligation of the note) flows to the lender, not to MERS. Second, the trust deed
provides that MERS is "solely" the nominee (or agent) of the lender. This provision shows that MERS is only an agent
and does not, [**39] itself, enjoy the direct benefit of the trust deed; the direct benefit belongs to the agent's principal,
the noteholder. Finally, the trust deed names NWMG as the lender. Because the lender was the initial noteholder,
NWMG was the initial beneficiary.17
17 Plaintiffs allege that NWMG has since transferred the note. FAC ¶¶ 15-21. Thus, NWMG is no longer the beneficiary and whoever
currently owns the note is the beneficiary. The record does not identify the current owner of the note.
4. Defendants' arguments
Defendants have argued, and other courts have concluded, that MERS is a [*1160] proper beneficiary. There are three
principal arguments advanced for that conclusion: (1) ORS § 86.705(2) should be interpreted broadly; (2) regardless of
the statutory definition of "beneficiary," Plaintiffs contractually agreed to make MERS the beneficiary when they signed
the trust deed, which expressly declares that MERS is the beneficiary; and (3) the OTDA triggers a clause in the trust
deed that grants MERS all of the rights of the lender. Each argument is addressed in turn.
a. ORS § 86.705(2) should be interpreted broadly

Defendants' first argument is that ORS § 86.705(2) permits the parties to the trust deed [**40] to name the beneficiary
of their choice, subject only to the qualification that the beneficiary must not also be the trustee. The OTDA, Defendants
assert, "expressly authorizes the parties to 'name' or 'designate' the beneficiary of their choice in a trust deed." Defs.'
Response to Pl.'s Objections to Judge Stewart's F&R ("RTO") at 9. In support of this interpretation, they note that the
OTDA does not "require that the beneficiary also be the holder of the note." Id. In addition, they argue that ORS §
86.705(2) contains just a single restriction on who may be the beneficiary: the beneficiary "shall not be the trustee
unless the beneficiary is qualified to be a trustee." ORS § 86.705(2).
Several courts have adopted this view. In Burgett v. Mortgage Electronic Registration Systems, Inc., No. 6:09-Cv-
06244-H0, 2010 U.S. Dist. LEXIS 112286, 2010 WL 4282105 *2 (D. Or. Oct. 20, 2010), for example, the court noted
that "the trust deed specifically designates MERS as the beneficiary."18 See also Bertrand v. Suntrust Mortgage, Inc.,
No. 3:09-cv-00857-j0, 2011 U.S. Dist. LEXIS 31442, 2011 WL 1113421 *4 (D. Or. Mar. 23, 2011) (finding that
language of trust deed made MERS the beneficiary regardless of whether MERS is an "economic beneficiary"); Nigro
v. NW Trustee Servs., Josephine County No. 11CV0135 (Or. Cir. Ct. May 11, 2011) [**41] (adopting reasoning in
Bertrand); Somers v. Deutsche Bank Nat'l Trust Co., Clackamas County No. CV11020133 (Or. Cir. Ct. July 6, 2011)
("[I]n bold typeface, MERS is identified as the beneficiary. That MERS and its successors, as the named beneficiary, is
the nominee of the Lender and its successors is not contrary to Oregon law[.]").
18 Although the court in Burgett found that MERS was a beneficiary, it also found that "the subsequent lenders/servicers are also
beneficiaries as holders of the beneficial interest as the principal of MERS[.]" 2010 U.S. Dist. LEXIS 112286, [WL] at *3. The Burgett court
concluded that the "record here does not demonstrate that all the transfers have been recorded," as required by ORS § 86.735(1). Id.
The text of the OTDA, however, does not support this interpretation. Defendants rely on only [HN38] the first part of
ORS § 86.705(2), which states that '"[b]eneficiary' means a person named or otherwise designated in a trust deed... ."
The statute, however, continues: "as the person for whose benefit a trust deed is given[.]" Defendants' interpretation
fails to give effect to the latter part of the definition. [HN39] Under [**42] Oregon's rules of statutory construction, the
Page 629Page 629
court may not "omit what has been inserted." Bolt v. Influence, Inc., 333 Ore. 572, 581, 43 P.3d 425 (2002); see also
Force v. Dep't of Revenue, 350 Ore. 179, 190, 252 P.3d 306 (2011) ("Statutory provisions ... must be construed, if
possible, in a manner that will give effect to all of them." (internal quotation marks and citation omitted)). As explained
above, [HN40] the latter part of ORS § 86.705(2) has an important meaning. It provides that the "beneficiary" is the
person for whose benefit the trust deed was given.
[*1161] Defendants' contention that the OTDA permits the parties to "'name' or 'designate' the beneficiary of their
choice," is not only unsupported by the text of the statute, it is also so broad as to make the actual statutory definition
virtually meaningless. Under Defendants' interpretation, the parties could designate any person to be the beneficiary, no
matter how remote, disinterested, or obscure, so long as the parties have agreed among themselves. The Oregon
Supreme Court would be unlikely to endorse such a broad interpretation. See State v. Cloutier, 351 Ore. 68, 98, 261 P.3d
1234 (2011) ( [HN41] "an interpretation that renders a statutory provision meaningless should give us pause"); [**43]
State v. Garcias, 298 Ore. 152, 690 P.2d 497 (1984) ( [HN42] "court endeavors to avoid interpreting a statute in a
manner which will produce absurd results").
Notwithstanding these reasons why Defendants' interpretation is overbroad, Defendants argue that an expansion clause
in ORS § 86.705 provides that in some circumstances the statutory definition of "beneficiary" may be disregarded. ORS
§ 86.705 introduces the definitions that follow with the phrase, "unless the context requires otherwise." Read with this
expansion clause, ORS § 86.705 provides that "beneficiary" means "a person named or otherwise designated in a trust
deed as the person for whose benefit a trust deed is given," "unless the context requires otherwise." (Emphasis added.)
According to Defendants, the expansion clause demonstrates that "the Oregon legislature...expressly permitted the
parties to designate the beneficiary of their choice, regardless of whether that beneficiary fell within the [l]egislature's
definition of the term[.]" RTO at 10.
[HN43] The expansion clause, however, does not license the parties to a trust deed to disregard the statutory
definitions merely because they have agreed to do so. Modified definitions are only appropriate [**44] when necessary
"to carry out the legislature's intent regarding the statutory scheme." Necanicum Inv. Co. v. Employment Dep't, 345 Ore.
138, 143, 190 P.3d 368 (2008) ( [HN44] the expansion clause means "that, in some cases, the circumstances of a case
may require the application of a modified definition of the pertinent statutory terms to carry out the legislature's intent
regarding the statutory scheme"); see also Astleford v. SAIF Corp., 319 Ore. 225, 232, 874 P.2d 1329 (1994) (noting that
[HN45] the expansion clause has been invoked to "to arrive at an answer that best comported with the legislative intent
of the scheme as a whole").
Defendants' proposed broad definition of "beneficiary" does not comport with the legislative intent behind the OTDA.
Defendants' overly broad interpretation would instead alter the legislature's "well-coordinated statutory scheme" by
permitting a party with no direct economic interest in the loan or the security to assume the carefully balanced statutory
rights and responsibilities set forth in the statute. For example, [HN46] pursuant to ORS § 86.720(1), the beneficiary is
responsible for ordering the trustee to reconvey the interests described in the trust deed to the grantor on payment of the
obligation. [**45] Under Defendants' interpretation, a party with no direct economic interest in, or even knowledge of,
the obligation could hold this responsibility. An interpretation of the OTDA that would permit this sort of arrangement
does not comport with the legislature's intent "to protect grantors from the unauthorized foreclosure and wrongful sale
of property." Staffordshire, 209 Ore. App. at 542.
b. Plaintiffs contractually agreed that MERS is the beneficiary

The second argument advanced by Defendants is that Plaintiffs are contractually [*1162] bound by the trust deed, in
which they expressly agreed that MERS is the beneficiary. Defendants assert that Plaintiffs "agreed MERS would act as
the beneficiary under the Deed of Trust. By signing the Deed of Trust, Plaintiffs expressly authorized MERS to act as
beneficiary in its capacity as nominee (agent) for the lender and the lender's successors are assigns." RTO at 7.
Defendants then argue that the parties' agreement, and not the statute, should govern what party is the proper beneficiary
to the trust deed. Some courts have adopted a view similar to this. See Spencer v. Guar. Bank FSB, Deschutes County
No. 10CV0515ST (Or. Cir. Ct. May 5, 2011) (borrower [**46] designated MERS "the beneficiary when she accepted
the benefit of the loan").
[HN47] Whether MERS is a "beneficiary," however, is determined by statute, not by contract. [HN48] Under Oregon
law, the provisions of the OTDA, including its definitions, form part of the trust deed agreement between the parties.
See Ocean Accident & Guarantee Corp. v. Albina Marine Iron Works, 122 Ore. 615, 617, 260 P. 229 (1927) ( [HN49]
"law of the land applicable thereto is a part of every valid contract"); see also Rehart v. Clark, 448 F.2d 170, 173 (9th
Page 630Page 630
Cir. 1971) ( [HN50] "existing laws are read into contracts in order to fix the rights and obligations of the parties").
[HN51] In the event that a provision of the OTDA conflicts with a term of the trust deed, the OTDA provision, rather
than the private contract, controls. See 11 R. Lord, WILLISTON ON CONTRACTS § 30:24 (4th ed. 1999) (The
"incorporation of existing law may act to supersede inconsistent clauses purporting to define the terms of the agreement.
For instance, where a statute regulates the amount the government is to pay for a particular service, the statute controls
despite a contract between the government and the provider of the service agreeing to a lower rate."). If the parties
intend [**47] to invoke the OTDA to govern their rights and responsibilities, they may not contract around its
definitions. Cf. United States v. Lupton, 620 F.3d 790, 800 (7th Cir. 2010) ("Whether Lupton is considered an 'agent' for
purposes of 18 U.S.C. § 666 is determined by that statute, not by the terms of a private contract. Parties cannot contract
around definitions provided in criminal statutes [.]").
Defendants argue that this court may not disregard the parties' agreement that MERS is the beneficiary unless the court
finds that the trust deed "violates a clear and overpowering Oregon rule of law." RTO at 8 (internal quotation marks
omitted). This is not so. The cases Defendants cite for this proposition address whether contracts are void as contrary to
public policy. See, e.g., Harrell v. Travelers Indem. Co., 279 Ore. 199, 205, 567 P.2d 1013 (1977) (holding that an
insurance contract was not void as contrary to public policy). This court is not holding that the trust deed is void as
contrary to public policy, or for any other reason. The court is holding only that the OTDA, not the contract, controls
which party is the "beneficiary" under the OTDA for the purposes of applying that statute.
Although Defendants [**48] did not advance this specific argument, one might also argue that Plaintiffs agreed to
waive the statutory definition of "beneficiary" when they signed the trust deed. See Clark v. Capital Credit &
Collection Servs., Inc., 460 F.3d 1162, 1170 (9th Cir. 2006) ("as a general rule, 'a party may waive a benefit of a
provision of a statute ... enacted ... for his protection.'" (quotingGlobe Grain & Milling Co. v. De Tweede Northwestern
& Pacific Hypotheekbank, 69 F.2d 418, 422 (9th Cir. 1934))). In response, however, Oregon law would not permit a
waiver in this instance. [HN52] Under [*1163] Oregon law, "[s]tatutory rights may be waived, but only to the extent
that they serve no broader public policy but are directed solely to the protection of the individual who purports to waive
them." In re Leisure, 336 Ore. 244, 253, 82 P.3d 144 (2003). The OTDA's definitions serve a broad and important public
purpose and are not solely for the protection of individual borrowers.
Finally, it is worth noting that some statutes explicitly allow parties to contract around a statute. For example, ORS
Chapter 90 has several provisions that use the phrase: "unless the parties agree otherwise." Neither that phrase nor a
similar one is [**49] present in the OTDA, and this omission should be considered to be purposeful. See generally
State v. Rainoldi, 351 Ore. 486, 268 P.3d 568, (2011) ("such silence may give rise to an inference that, given that the
legislature knows how to include a culpable mental state requirement, the omission of such a requirement was
purposeful").
c. MERS' right to assume the role of lender

Defendants' final argument follows the reasoning advanced in Beyer v. Bank of America, 800 F. Supp. 2d 1157 (D. Or.
2011). In Beyer, the court notes that some courts have held that MERS was the beneficiary under Oregon law because
"MERS is named in the trust deed as the beneficiary." Id. at 1160 (citing, e.g., Bertrand v. SunTrust Mortgage, Inc., No.
09-cv--857-JO, 2011 U.S. Dist. LEXIS 31442, 2011 WL 1113421 (D. Ore. Mar. 23, 2011) and Burgett v. Mortgage
Elec. Registration Sys., Inc., No. 09-cv-6244-HO, 2010 U.S. Dist. LEXIS 112286, 2010 WL 4282105 (D. Ore. Oct. 20,
2010)). The court in Beyer also observes that other courts have held that the noteholders, not MERS, were the
beneficiaries because "they are the ones designated in the trust deed as the persons for whose benefit the trust deed is
given." Id. at 1161 (internal quotation marks and citation omitted) (citing, e.g., U.S. Bank Nat'l Ass'n, N.A. v. Flynn, No.
11-8011 (Or. Cir. Ct. June 23, 2011) [**50] and Hooker v. Northwest Trustee Servs., Inc., No. 10-cv-3111-PA, 2011
U.S. Dist. LEXIS 57005, 2011 WL 2119103 (D. Or. May, 25, 2011)). Beyer, however, declined to adopt either view.
Instead, the decision in that case concludes that even if the noteholder were the person for whose benefit the trust deed
was given, the court would still hold that MERS was the beneficiary under Oregon law for a different reason. Id.
The court in Beyer held that the OTDA triggered a clause in the trust deed that granted MERS the "right to exercise all
rights and interests of the lender." Id. The trust deed in Beyer, like the trust deed here, provides that the borrower
"understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security
Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and
assigns) has the right: to exercise any or all of those interests[.] Id. (emphasis added) (for brevity, this passage will be
referred to as "the law or custom clause"). The court in Beyer states that the trust deed could not comply with law or
Page 631Page 631
custom unless MERS was the beneficiary. [**51] According to the court, the "trust deed repeatedly calls MERS the
beneficiary, a statement which would not comply with law or custom unless MERS's powers were expanded to include
the right to receive payment of the obligation. For this reason, I find the clause triggered[.]" Id. Once the law or custom
clause is triggered, according to Beyer, MERS "has the right to receive payment of the obligation" and becomes the
beneficiary. Id.
For several reasons, I respectfully decline to adopt the reasoning of Beyer. First, Beyer's discussion of the law or custom
clause does not persuade me. The [*1164] court in Beyer interprets this clause to grant "MERS the right to exercise all
rights and interests of the lender." Id. at 1161. But when the clause states that MERS may "exercise any or all of those
interests," the phrase "those interests" only refers back to the interests described earlier in the same sentence: "the
interests granted by Borrower in this Security Instrument[.]" The interests granted by the borrower are set forth in the
trust deed on page three, the same page as the law or custom clause. The trust deed states that the "Borrower
irrevocably grants and conveys to Trustee, in trust, with [**52] power of sale, the following described property[.]"
Construing these descriptions together, the law or custom clause permits MERS, as an agent of the lender, to exercise
the power of sale on property. The phrase "those interests" only refers to the interests granted by the borrower in the
trust deed; it does not refer to rights granted to the noteholder by the note, such as the right to receive payments due on
the loan. The law or custom clause does not, therefore, permit MERS to accept payments on the note and, thus, does not
make MERS either the noteholder or the beneficiary.19 Moreover, elsewhere MERS has expressly admitted that it has no
right to receive payments on the note. See, e.g., Mortgage Elec. Registration Sys. Inc. v. Neb. Dept. of Banking & Fin.,
270 Neb. 529, 704 N.W.2d 784, 787 (Neb. 2005) ("MERS argues that it does not own the promissory notes secured by
the mortgages and has no right to payments made on the notes.'") (emphasis added).
19 The law or custom clause also does not permit MERS to assume the beneficial interest in the trust deed. The clause states that MERS
may, "as nominee for Lender and Lender's successors and assigns," exercise the interests granted by the borrower. [**53] The clause does
not state that MERS may assume the noteholder's right to the security provided by the trust deed. In fact, the clause repeats, and thus
emphasizes, that MERS is "solely" a nominee for, or agent of, the lender.
Further, Beyer's statement that "MERS has the right to receive payment of the obligation," in addition to being
inconsistent with what MERS itself concedes, invites a variety of incongruous applications. Relying on Beyer, a
borrower could start sending her payments to MERS, rather than to the actual noteholder (or its designee, a loan
servicer). Alternatively, MERS could challenge the noteholder's right to receive payment. These scenarios undermine
Beyer's statement that MERS has the right to receive payment on the note and, thus, is a noteholder or beneficiary of the
trust deed.
In addition, in Beyer the "proof' that MERS is the beneficiary seems to be dependent on the premise that MERS must be
the beneficiary. According to the trust deed, the law or custom clause is only triggered if it is necessary for MERS to
have additional rights to comply with local law or custom. Yet, according to Beyer, the only reason why it would be
necessary for MERS to have additional [**54] rights (and to be the beneficiary) is because it is necessary for MERS to
be the beneficiary in order for there to be a non-judicial foreclosure. Stated another way, Beyer relies on the premise that
MERS must be the beneficiary in order to prove the conclusion that MERS is the beneficiary. This reasoning, however,
is not persuasive. See, e.g. Ungar v. Dunkin' Donuts of America, Inc., 531 F.2d 1211, 1225 (3d Cir. 1976) ("The 'proof
assumes the answer rather than proving it.").
The conflict between the provision of the trust deed stating that MERS is the beneficiary and the statutory provisions in
the OTDA need not be resolved by resorting to the law or custom clause. As discussed [*1165] above, the proper
resolution is to decide, as the OTDA directs, what party is named or designated in the trust deed as the person for
whose benefit the trust deed was given, irrespective of what party the trust deed says is the beneficiary. Resolved in
this way, there is no need to presume that MERS must be the beneficiary.
To summarize, this court is unconvinced by the arguments presented that MERS is the beneficiary of the Plaintiffs' trust
deed. MERS did not make the loan to Plaintiffs, and the trust deed [**55] does not secure MERS in the event of
Plaintiffs' default. MERS is nothing more than an agent (or nominee) for the real beneficiary, which is the lender or its
successor.20
20 Plaintiffs also argue that because MERS is not the real beneficiary, it lacked the authority to assign the trust deed to BACHLS. See FAC
¶ 42, paragraphs B-D. The court's conclusion that MERS is not the beneficiary of the trust deed does not, however, establish that MERS
Page 632Page 632
lacked authority to assign the trust deed. The OTDA does not forbid an agent, when acting with authority and on behalf of its principal, the
beneficiary, from making assignments, recording those assignments, appointing a successor trustee, or doing anything else that a beneficiary
(as principal) may do on its own. See RESTATEMENT (THIRD) OF AGENCY §§ 2.01-2.03 (2006). The trust deed expressly states that MERS is
the nominee of the lender and the lender's successors, and Plaintiffs have not alleged any facts showing that MERS was not acting as an
authorized agent for each of the successive beneficiaries. To that extent, Plaintiffs' allegations in FAC 42, paragraphs B-D fail to state a claim
upon which relief may be granted and are dismissed.
B. Recording [**56] Assignments of the Trust Deed

Plaintiffs' second objection is to Judge Stewart's finding that all assignments of the trust deed were recorded. PL's Obj.
at 33; F&R at 17-22. [HN53] ORS § 86.735(1) provides that a trustee may not conduct a non-judicial foreclosure
unless the "trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a
successor trustee are recorded in the mortgage records in the counties in which the property described in the deed is
situated." In their complaint, Plaintiffs allege that their initial lender, NWNG, transferred its interest in Plaintiffs' loan to
Countrywide Mortgage, a predecessor to BACHLS, and that BACHLS later sold the note and assigned the trust deed to
an unnamed investment trust. FAC ¶¶ 15-21. Plaintiffs allege that Defendants failed to record these, and perhaps other,
assignments of the trust deed: The "[d]eed of [t]rust has been assigned multiple times in order to attempt to place it in
an investment trust without the recording of those assignments as required by ORS [§] 86.735(1)." FAC ¶ 42; see also
FAC ¶ 45. This allegation forms a central basis for both of Plaintiffs' claims for relief. If Defendants and [**57] others
have failed to record required assignments of the trust deed, Defendants may not non-judicially foreclose.21
21 This conclusion, however, would not preclude Defendants' right to pursue a judicial foreclosure, which is a foreclosure proceeding
supervised by a judge.
Defendants do not challenge Plaintiffs' allegations that NWMG sold the note to Countrywide Mortgage, and that
BACHLS, Countrywide's successor, later sold the note to an investment trust. Instead, Defendants contend that these
allegations are irrelevant because ORS § 86.735(1) requires parties to record only assignments of the trust deed, not
transfers of the note. RTO at 16. Defendants argue that MERS, not NWMG and its successors, held the beneficial
interest in the trust deed, until it assigned that interest to BACHLS: "MERS remained the [*1166] beneficiary of the
[d]eed of [t]rust, as nominee for the lender and the lender's successors and assigns, from origination until the
assignment to BACHLS." RTO at 16. Defendants conclude, therefore, that they recorded the only assignment of the
trust deed that ORS § 86.735(1) required: the assignment from MERS to BACHLS. RTO at 16.
The court disagrees. As explained above, the noteholder, [**58] not MERS, is the beneficiary of the trust deed. Thus,
NWMG, not MERS, was the initial beneficiary of the trust deed. Furthermore, [HN54] while Defendants are correct
that the OTDA does not require the recording of transfers of the note, Oregon law provides that the transfer of the note
necessarily causes an assignment of the security instrument, even if the security instrument is not formally assigned.
Schleef v. Purdy, 107 Ore. 71, 78, 214 P. 137 (1923) ( [HN55] "transfer of the note, without any formal transfer of the
mortgage, transfers the mortgage"); see also First Nat'l Bank of Oregon v. Jack Mathis Gen. Contractor, 274 Ore. 315,
321, 546 P.2d 754 (1976) ( [HN56] "the assignment of a debt carries with it the security for the debt"); West v. White, 92
Ore. App. 401, 404, 758 P.2d 424, aff'd, 307 Ore. 296, 766 P.2d 383 (1988) (discussing a note secured by a trust deed,
[HN57] assignment of "a note carries with it a security interest in real property" (internal citation omitted)). 22 When
NWMG transferred the note to BACHLS, that transfer automatically and necessarily assigned and transferred NWMG's
beneficial interest in the trust deed to BACHLS. [HN58] ORS § 86.735(1) does not require the recording of the
transfer of the note. It does, however, require the recording of the [**59] assignment of the beneficial interest in the
trust deed.
22 This is the rule not just in Oregon, but almost universally. [HN59] "The transfer of the note carries with it the security, without any
formal assignment or delivery, or even mention of the latter." Carpenter v. Longan, 83 U.S. 271, 275, 21 L. Ed. 313 (1872); see also G.
Nelson and D. Whitman, REAL ESTATE FINANCE LAW § 5.27 (5th ed. 2007) ("The obligation is correctly regarded as the principal thing
being transferred, with the interest in the land automatically attached to it in an extremely important, but subsidiary, capacity.").
Judge Stewart reached a different conclusion in the F&R. She acknowledged Oregon precedent holding that transfers of
a note also assign the trust deed's "security interest" to successive noteholders. F&R 19-20. Judge Stewart held,
Page 633Page 633
however, that the assignment of the trust deed's security interest by the transfer of the note is not "the same act as
assignment of the trust deed by the trustee or the beneficiary contemplated by ORS [§] 86.735(1)." F&R at 20. The
F&R correctly concludes that two parties can hold separate legal and beneficial title to the same trust deed, but then, in
my opinion, incorrectly applies that conclusion [**60] in this case.
MERS claims to hold "legal title"23 to the trust deed, while the noteholder holds "equitable title"24 to that security
interest.25 See Trust Deed at 3 ("MERS holds [*1167] only legal title to the interests granted by Borrower in this
Security Instrument"). In accepting this claim, Judge Stewart relies on the reasoning set forth by the Minnesota Supreme
Court in a case cited by Defendants, Jackson v. Mortgage Elec. Registration Sys., Inc., 770 N.W.2d 487 (Minn. 2009).
"The Jackson court," Judge Stewart wrote, "ultimately and, in this court's view, correctly held that the transfer of the
promissory note, which carries with it the security instrument, is not an assignment of legal title that must be recorded
for purposes of a non[-]judicial foreclosure." F&R at 22.
23 "Legal title" means a "title that evidences apparent ownership but does not necessarily signify fall and complete title or a beneficial
interest." BLACK'S LAW DICTIONARY 1622 (Bryan Garner ed. 2009).
24 "Equitable title" means a "title that indicates a beneficial interest in property and that gives the holder the right to acquire formal legal
title." BLACK'S LAW DICTIONARY 1622 (Bryan Garner ed. 2009).
25 It is important [**61] to note that the discussion that follows concerns title to the security instrument, the trust deed, not title to the
property. As stated in the introduction, a trust deed does not convey legal or equitable title to the property; the borrower retains both until
foreclosure. A trust deed conveys only "an interest in real property." ORS § 86.705(7). This distinction between title to the trust deed and
title to the real property is confusing because the terms "legal title" and "equitable title" are more commonly used to describe title to land (or
water), rather than to describe title to a security instrument. See Klamath Irrigation Dist. v. United States, 348 Ore. 15, 227 P.3d 1145 (2010)
(legal and equitable title to water rights). Nonetheless, as explained below, it is not unreasonable to apply the terms "legal title" and
"equitable title" to trust deeds.
In evaluating this conclusion, however, it is necessary to review in some detail the Minnesota Supreme Court's
reasoning in Jackson and the Minnesota law upon which it is based. The issue in Jackson was, in some ways, similar to
the issue presented here. Minnesota's mortgage laws require the mortgagee to record assignments of the mortgage
before there [**62] may be a non-judicial foreclosure. 770 N.W.2d at 495-96. Furthermore, Minnesota common law,
like Oregon common law, holds that transfer of the note automatically assigns the mortgage. Id. at 494. As here, MERS
was listed on the mortgage as holding "legal title" to the security instrument. Id. at 493. Also, as here, MERS was not
the noteholder. Id. at 492. The question confronting the Minnesota Supreme Court in Jackson, as here, was whether the
noteholder was required to record every assignment of the mortgage made when the note was transferred before a non-
judicial foreclosure may occur. Id. at 495-96.
The court in Jackson held that Minnesota law did not require the noteholder to record assignments of the mortgage that
were made when the note was transferred. Id. at 501. To reach this conclusion, that court found that under Minnesota
law, one party could hold "legal title" to a mortgage and another, distinct party could hold "equitable title" to the same
mortgage. Id. at 500. Transfer of the note, the Jackson court found, only assigned, or transferred, the equitable title. Id.
Minnesota's recording laws, the court also found, did not require the mortgagee to record assignments of equitable
[**63] title, only assignments of legal title: An "assignment of only the promissory note, which carries with it an
equitable assignment of the security instrument, is not an assignment of legal title that must be recorded for purposes of
a foreclosure by advertisement." Id. at 500-01.
The underlying F&R in this case applied the same reasoning, which was urged by Defendants, without recognizing a
critical difference: the Jackson case dealt with mortgages, not trust deeds. Mortgage transactions typically involve just
two parties: a borrower, who is called the mortgagor, and a lender (or the lender's successors), who is called the
mortgagee. In a mortgage transaction, the mortgagor gives the mortgage to the mortgagee and the mortgagee enjoys the
benefit of the mortgage, which is security on the loan. Trust deed transactions, however, introduce a third party: the
trustee. In a trust deed transaction, the borrower (who is analogous to the mortgagor) gives the trust deed (which is
analogous to the mortgage) to the trustee, not to the beneficiary (who [*1168] is analogous to the mortgagee). The
beneficiary enjoys the benefit of the trust deed, but does not hold legal title to the trust deed.
Jackson 's conclusion [**64] that MERS may hold legal title to a mortgage, thus, does not apply to trust deeds in
Oregon. 770 N.W. 2d at 498-99. Although Oregon case has discussed which parties hold legal and equitable title to
trust deeds in the context of the OTDA, [HN60] in trust arrangements in Oregon, the trustee typically holds legal title
Page 634Page 634
to the subject of the trust and the beneficiary holds equitable title. "When a trust is created, the legal title is vested in
the trustee.... 'A trust implies two estates -- one legal, and the other equitable. It also implies that the legal title is held
by one person, the trustee, while another person, the cestui que trust [the beneficiary], has the beneficial interest.'"
Morse v. Paulson, 182 Ore 111, 117, 186 P.2d 394 (1947) (quoting Allen v. Hendrick, 104 Ore. 202, 223, 206 P. 733
(1922)) (emphasis added). Under the OTDA, therefore, the trustee holds legal title to the trust deed and the beneficiary
holds equitable title to the trust deed. Because MERS is neither the trustee nor the beneficiary, it holds no title at all.
According to Jackson, Minnesota law does not require the recording of equitable assignments of a mortgage. Unlike
Minnesota law, however, [HN61] the OTDA requires the recording of assignments [**65] of both legal and equitable
title to the trust deed. ORS § 86.735(1) expressly requires the recording of two separate events.26 First, the statute
requires that "any assignments of the trust deed by the trustee or the beneficiary" be recorded. Second, the statute
requires that "any appointment of a successor trustee" be recorded. The second clause, which requires the recording of
any "appointment of a successor trustee," means the transfer of the trust deed from one trustee to another must be
recorded. Because the trustee holds legal title to the trust deed, this clause addresses the assignment of legal title. The
first clause, "assignment of the trust deed," then, must refer to the assignment of the beneficial interest in the trust
deed. If "assignment of the trust deed" only referred to assignments of legal title to the trust deed, it would effectively
mean the same thing as "appointment of a successor trustee." Oregon courts, however, must attempt to avoid
redundancy when interpreting a statute. State v. Kellar, 349 Ore. 626, 636, 247 P.3d 1232 (2011). ORS § 86.735(1),
therefore, requires the recording of assignments of both legal and equitable title, which is different from the law in
Minnesota [**66] according to Jackson. Further, [HN62] because the noteholder, not MERS, is the beneficiary, ORS §
86.735(1) requires the recording of an assignment of the beneficial interest for each transfer of the note.
26 ORS § 86.735(1) also requires the recording of the trust deed itself, but that is not at issue in this case.
The Minnesota Supreme Court's decision in Jackson shows how Minnesota law dealing with mortgages differs from
Oregon law dealing with trust deeds.27 It [*1169] does not, however, establish that a non-judicial foreclosure in
Oregon may be conducted without the recording of every assignment of the trust deed, whether legal or beneficial
(equitable). [HN63] ORS § 86.735(1) requires the recording of both types of assignments.
27 Even if the present case involved a mortgage rather than a trust deed, it is unlikely that the Minnesota Supreme Court's decision in
Jackson would be applicable here. The Jackson decision is based in part on Minnesota case law holding that the "mortgagee of record does
not lose legal title when the mortgagee transfers interests in the promissory note." 770 N.W.2d at 498. That, however, is not the law in
Oregon. In Barringer v. Loder, 47 Ore. 223, 81 P. 778 (1905), Barringer was the mortgagee [**67] of record for a property purchased by
Hayden. Id. at 224. Barringer indorsed the note to his ex-wife and transferred both the note and the mortgage to her. Id. Neither Barringer
nor his ex-wife recorded an assignment of the mortgage, thus Barringer remained the mortgagee of record. Barringer subsequently sold, even
though he did not possess, the note and mortgage to Loder. Id. at 225. Barringer executed an assignment of the mortgage to Loder, and Loder
recorded the assignment. Id. at 225-26. The court was confronted with question of "who acquired the better title to the note and mortgage in
suit, [Barringer's ex-wife] or Loder?" Id. at 226. The court found that Barringer's ex-wife had acquired both the note and the mortgage and
Loder had "acquired no title." Id. at 230. The court reasoned that indorsement of the note to Barringer's ex-wife assigned the mortgage. Id. at
227-29. The implication in the Court's holding is that by indorsing the note to his ex-wife, Barringer divested himself of all title to the
mortgage, even though he remained the mortgagee of record. Thus, it appears that under Oregon law transfer of the note assigns both legal
and equitable title to the mortgage. This [**68] is different from the law in Minnesota, according to the court in Jackson.
C. Plaintiffs' Other Arguments

Plaintiffs also object to Judge Stewart's finding that Plaintiffs failed to state a claim that a the final assignment of the
trust deed and the appointment of the successor trustee were signed by an unauthorized "robo-signer." PL's Obj. at 36-
37; FAC ¶¶ 28-32; F&R 22-23. [HN64] To survive a motion to dismiss, Plaintiffs' complaint must state sufficient
factual matter to allow "the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged." Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009).
The court agrees that Plaintiffs have not alleged sufficient facts to allow the court to find that there was an improper, or
unauthorized, execution of the assignment of the trust deed or appointment of the successor trustee. The mere fact that
the same person signed both documents does not establish, or even make likely, that the person lacked authority to
execute the documents. As Judge Stewart correctly explained, an agent "can wear two hats on behalf of both BACHLS
Page 635Page 635
and MERS." F&R at 23. Finally, Plaintiffs concede that they have not alleged facts sufficient to establish [**69] that
they have standing on their taxpayer claim. Pl.'s Obj. at 37.
D. Defendants' Equity Argument

In their Response, Defendants renew their argument made before Judge Stewart that Plaintiffs failed to allege that they
could cure their default. RTO at 31-33. Judge Stewart rejected this argument. See F&R at 6-10. Although Defendants
did not file objections to Judge Stewart's F&R, the court has reviewed this issue and adopts Judge Stewart's
recommendation.
VI. CONCLUSION
As Judge Panner stated in Hooker, [HN65] non-judicial "foreclosure of one's home is a particularly harsh event[.]"
Hooker v. Nw. Trustee Servs., Inc., No. 10-3111-PA, 2011 U.S. Dist. LEXIS 57005, 2011 WL 2119103 *6 (D. Or. May
25, 2011). And as Judge Alley observed in McCoy, it is reasonable to require that "the interest of the beneficiary is
clearly documented in a public record" before permitting a foreclosure to proceed without judicial supervision. In re
McCoy, 446 B.R. 453, 458 (Bankr. D. Or. 2011). I agree with both Judge Panner and Judge Alley in those cases.
Moreover, [HN66] the Oregon legislature has set forth in extensive detail in the OTDA how a non-judicial foreclosure
may [*1170] proceed and the circumstances that are required in order for it to occur. See Staffordshire, 209 Ore. App.
at 542 [**70] (the OTDA "represents a well-coordinated statutory scheme"). If the well-coordinated balance of
statutory rights and responsibilities contained in the OTDA are to be altered, that is a matter for the legislature to decide.
Finally, it is important to emphasize that the court's holding in this case applies only to the requirements set forth in the
OTDA to conduct a non-judicial foreclosure, or a "foreclosure by advertisement and sale." Following a default in
payment, Defendants may still initiate a judicial foreclosure on the secured property by filing a lawsuit. If they choose
to do so, such a judicial foreclosure is governed by the law of mortgages, and ORS § 86.735(1) does not apply. Kerr v.
Miller, 159 Ore. App. 613, 634, 977 P.2d 438 (1999) (judicial foreclosure of a trust deed "involves following the
procedures available to foreclose mortgages on real property"). All that this court's opinion holds is that all of the
statutory requirements of the OTDA must be satisfied before a non-judicial foreclosure may proceed under that law.
Defendants' motion to dismiss, Dkt. 24, is GRANTED in part and DENIED in part, as follows: Defendants' motion is
GRANTED as to Plaintiffs' first claim for relief, FAC [**71] ¶ 142, paragraphs (B), (C), and (D), and Plaintiffs' second
claim for relief, FAC ¶ 45, paragraph (D). Defendants' motion is DENIED as to Plaintiffs' first claim for relief, FAC ¶
42, paragraph (A) and Plaintiffs' second claim for relief, FAC ¶ 45, paragraphs (A), (B), (C), and (E).
IT IS SO ORDERED.
Dated this 29th day of February, 2012.
/s/ Michael H. Simon
Michael H. Simon
Page 637Page 637
2012 N.J. Super. Unpub. LEXIS 421, *
73 of 430 DOCUMENTS
IN THE MATTER OF THE INTER VIVOS TRUST, HARRIET D. WEBER,

GRANTOR, DATED JULY 23, 2010
DOCKET No. BER-P-080-11
SUPERIOR COURT OF NEW JERSEY, CHANCERY DIVISION, BERGEN

COUNTY
2012 N.J. Super. Unpub. LEXIS 421
February 10, 2012, Argued

NOTICE: NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE COMMITTEE ON OPINIONS.
PLEASE CONSULT NEW JERSEY RULE 1:36-3 FOR CITATION OF UNPUBLISHED OPINIONS.
CORE TERMS: powers of appointment, irrevocable, revocable, summary judgment, daughter, benefiting, undisputed,
testamentary trust, died, scrivener, decedent's, grandchildren, default, testamentary, settlor, codicils, descendant, estate
plan, probable intent, incorporation, donor, appointment, appoint, trust instruments, absolute discretion, beneficiary,
referenced, accountant, cross-motion, plainly
COUNSEL: [*1] Victor J. Medina, Esq., appearing on behalf of Plaintiff, Martin Hirsch (Medina Law Group LLC).
William E. Andersen, Esq., appearing on behalf of Plaintiff, Martin Hirsch (The Andersen Firm).
Gerald J. Martin, Esq., appearing on behalf of Defendants Claire Lorenz and Sarah Lorenz, (Biebelberg & Martin).
Robert B. Hendler, Esq., appearing on behalf of Defendants Claire Lorenz and Sarah Lorenz, (Law Offices of Robert B.
Hendler).
JUDGES: ROBERT P. CONTILLO, P.J.CH.
OPINION BY: ROBERT P. CONTILLO
OPINION
ROBERT P. CONTILLO, P.J.CH.
Before the court is the motion for summary judgment of the Plaintiff, Martin Hirsch, the Personal Representative of the
Estate of Harriet D. Weber, and Co-Trustee of the Harriet D. Weber Living Trust, dated July 23, 2010 ("2010 Harriet
Revocable Trust"). Martin Hirsch is the brother of the decedent Harriet D. Weber ("Harriet"). Also before the court is
the motion for partial summary judgment filed on behalf of Defendants Claire Lorenz ("Claire") and Sarah Lorenz
("Sarah"). Claire and Sarah are the child and grandchild, respectively, of the decedent Harriet D. Weber. It is the
position of Plaintiff that Claire and Sarah do not benefit from certain Trusts, because Harriet effectively exercised [*2]
powers of appointment to exclude them. It is the position of Claire and Sarah that Harriet failed to effectively exercise
the powers of appointment and that Claire and Sarah are therefore the beneficiaries of certain Trusts that were to be
created in the event the powers were not effectively exercised.
Upon the following findings and conclusions, the court determines that Harriet failed to effectively exercise the power
of appointment granted her in the 1996 Testamentary Trust established by her mother, Gertrude Hirsch, and that the
default provisions of that Trust are triggered. The result is that the remaining principal of that Testamentary Trust is to
be divided into equal shares -- in trust -- for each of Harriet's four (4) grandchildren, Sarah Lorenz included.
Page 638Page 638
With respect to the power of appointment Harriet granted unto herself in the 1993 Irrevocable Trust, disputed issues of
fact relating to the intentions of Harriet preclude granting summary judgment either in favor of Plaintiff or of the
Defendant Claire Lorenz.
I. BACKGROUND1
1 A Timeline of relevant events is annexed as a Rider to this Decision.
Harriet Weber died on August 22, 2010. Her mother, Gertrude Hirsch, died in 2000. Harriet [*3] and her husband, Isaac
Weber, divorced in 1993 or 1994. Isaac -- father of Claire Lorenz, grandfather of Sarah Lorenz -- died in February of
2009. Harriet never remarried. In addition to her daughter Claire and her grandchild Sarah, Harriet is survived by two
sons, Simon M. Weber and Aaron N. Weber, as well as three other grandchildren, and her brother, Plaintiff Martin
Hirsch.
Harriet's relationship with her daughter Claire became strained around the time of the divorce of Harriet and Isaac in
1993 or 1994. It is undisputed that Claire had no contact of any kind with Harriet after 2003. The record also reveals no
contact between Harriet and grandchild Sarah after 2003.
At issue here is whether Harriet effectively precluded daughter Claire and Claire's daughter Sarah from benefiting from
trust assets over which Harriet had powers of appointment. The answer to that question depends upon whether or to
what extent Harriet effectively exercised powers of appointment granted in the two (2) Trusts discussed in detail below:
(a) a 1993 Trust, established by Harriet, and (b) a 1996 Trust, established by Harriet's mother, Gertrude.2
2 First names of the family members are used for clarity and not [*4] out of disrespect.
a. The 1993 Harriet Irrevocable Trust

The Harriet Weber Irrevocable Inter Vivos Trust was executed by Harriet on October 13, 1993 ("the 1993 Harriet
Irrevocable Trust"). That Trust provides for a power of appointment over the assets funded into the Trust. Specifically,
the 1993 Trust provides that upon Harriet's death, the principal of the Trust would pass "... as the Settlor [i.e., Decedent
-- Harriet] shall by Will, specifically referring to this Agreement, appoint ..." (The 1993 Harriet Irrevocable Trust, page
1, paragraph 3).
The 1993 Trust further provides that "... to the extent that said power of appointment is not effectively exercised ... the
then principal of said trust ... shall be divided into shares, per stirpes, for such of Settlor's children, SIMON, AARON
and CLAIRE, are then living ...". (The 1993 Harriet Irrevocable Trust, pages 1 and 2, paragraph 3). Those shares are
then to be held by Trustees in separate Trusts for each such child. (The 1993 Harriet Irrevocable Trust, page 2,
paragraph 3(a)).
It is to be understood, then, that Claire would benefit under the express terms 1993 Harriet Irrevocable Trust in the
event Harriet fails to effectively exercise [*5] the power of appointment rendered unto herself by the aforesaid terms of
that Trust.
b. The 1996 Gertrude Hirsch Trust

Gertrude Hirsch, Harriet's mother, executed her Last Will and Testament on April 1, 1996. Through that Will she created
a Trust ("1996 Gertrude Trust"), which included a share, among others, for Harriet's benefit, and over which Harriet
was granted a power of appointment. The 1996 Gertrude Trust provisions as to Harriet place her share in Trust, with
the Trustees instructed to "... pay the income therefrom in convenient installments to ... Harriet, during her lifetime ...",
and to pay such sums out of principal as the Trustees shall in their absolute discretion determine (Gertrude's Will,
Article Fourth (a)). The Will continues as follows:
Upon HARRIET's death, the then principal of said trust shall pass to such one or more of her descendants, in such shares, equal or
unequal, and subject to such lawful trusts, terms and conditions as my daughter shall by Will appoint. To the extent that said power
Page 639Page 639
of appointment is not effectively exercised (or upon my death, if HARRIET predeceases me), the principal of said trust held (or
intended to be held) during HARRIET's lifetime [*6] shall be divided into as many equal portions as may be necessary to provide
one for each grandchild of HARRIET who is then living...
(Gertrude's Will, Article Fourth (a)).

If Harriet effectively exercised this power of appointment granted under her mother's Will, the principal of the Trust
established by her mother for her (Harriet's) benefit would pass in accordance with Harriet's exercise of the power. But
should Harriet fail to effectively exercise this power of appointment, then Claire Lorenz's daughter Sarah Lorenz, being
one of Harriet's four grandchildren, would be entitled to one fourth thereof, in Trust.
It is said that the 1993 Harriet Irrevocable Trust had principal of approximately $1.7 M at Harriet's death and the 1996
Gertrude Trust approximately $2.1 M.3
3 The Gertrude Trust has two components, one of which is a tax-exempt Generation Skipping Trust. For purposes of this decision, they are
referred to as a single "Gertrude Trust".
If Claire "takes" under the 1993 Harriet Irrevocable Trust, her share (in Trust nevertheless) would be one-third of $1.7
M ($566,666.00).
If Sarah "takes" under the 1996 Gertrude Trust, her share (in Trust nevertheless) would be one-fourth of $2.1 [*7] M
($525,000.00).
And, of course, to the extent Claire and/or Sarah were effectively barred by the effective exercise of the powers of
appointment, they do no benefit at all.
II. CROSS-MOTION FOR SUMMARY JUDGMENT

Claire and Sarah contend that they prevail, because the undisputed material facts establish their entitlement as a matter
of law: Harriet was specifically and expressly required to exercise her powers under both Trusts by Will; she failed to
do so; the default provisions are thereby triggered, whereby Claire, with her two brothers, take equally under the 1993
Harriet Irrevocable Trust, and Sarah, with the three other grandchildren of Harriet, partake equally of Harriet's share
under the 1996 Gertrude Testamentary Trust.
Plaintiff, Martin Hirsch -- Harriet's brother, the Personal Representative of her Estate, and the Co-Trustee of the 2010
Harriet Revocable Trust dated July 23, 2010 --concedes that Harriet exercised neither power in her Last Will and
Testament of July 23, 2010. As to the power of appointment in the 1993 Harriet Irrevocable Trust, it is asserted by
Plaintiff that Harriet was unaware, or forgot, that said Trust still existed. She therefore made no mention of it to her
[*8] estate advisors when her July 23, 2010 Will and the July 23, 2010 Harriet Revocable Trust were created (about a
month before Harriet's death). The court is asked to declare, however, as a matter of law, under various theories
including the doctrine of probable intent, that Harriet always intended to exclude her daughter Claire from in any way
benefiting from her death -- under her Will and under any trust assets over which she may have had power of
appointment. The court is asked to implement this longstanding, unalternable intent -- born of the unhealed rupture
between mother and daughter -- by modifying Harriet's Will to implement Harriet's intent to exercise the 1993 power in
favor of her two sons, excluding Claire utterly. This should be done, argues Plaintiff, to rectify Harriet's mistaken belief
that her 1993 Trust no longer existed. Alternatively, and leading to the same result, Plaintiff argues that the 2010 Harriet
Revocable Trust is a Will -- because it meets all the statutory formalities of same (N.J.S.A. 3B:1-2, 3B:3-2 and 3B:3-3).
Therefore, as a Will, it can be read to effectively exclude Claire, or it can be modified to reflect Harriet's probable intent,
to exclude Claire. [*9] Or in the alternative, the 2010 Harriet Revocable Trust should be read as being a part of
Harriet's Will of that same date -- a single testamentary instrument, thereby rendering effective the exercise of the 1993
power. Alternatively, the court should impose a constructive Trust to effectuate the 1993 power of appointment, to
rectify Harriet's mistaken belief that that 1993 Trust no longer existed. Had Harriet known it existed, she would have
expressly exercised it to exclude Claire, just as she had done in every iteration of her estate plan dating back to 2004.
Lastly, Plaintiff points to the provision in the 2010 Harriet Revocable Trust wherein Harriet appoints the scrivener,
William Andersen, Esq., as "Trust Protector". The Trust Protector is said to have cured, after Harriet's death, any
imperfections in the exercise of at least the 1993 power of appointment.
Page 640Page 640
When, after Harriet's death, Mr. Andersen purportedly learned that the 1993 Harriet Irrevocable Trust was in fact still in
existence -- and held assets in excess of $1.7 M -- he, on December 19, 2010, as Trust Protector, executed an
amendment to the 2010 Harriet Revocable Trust, to specifically exercise Harriet's power of appointment [*10] over the
1993 Trust, in order that the assets would pass in accordance with the assets under the 2010 Harriet Revocable Trust,
i.e., towards the sons Simon and Aaron (in Trust), and away from Claire.
Pursuant to Article Thirteen, Section 18(e) of the 2010 Harriet Revocable Trust, Harriet created a Trust Protector,
whom she empowered to modify or amend the Trust, to, among other things, "...correct a drafting error that defeats my
intent as determined by the Trust Protector in its sole and absolute discretion, following the guidelines provided in this
Agreement...". It is said that Harriet mistakenly told the scrivener/Trust Protector Mr. Andersen that her 1993 Harriet
Irrevocable Trust no longer existed. After her death, it was found to exist, and to hold $1.7 M. The Trust Protector
therefore amended the 2010 Trust to correct this oversight, to exercise the 1993 power, and the court is asked to
validate that correction.4
4 In the pleadings, and in the motion papers, issues were raised regarding testamentary capacity and undue influence as it relates to the Will
and the Trust of 2010. It was stipulated by all counsel at oral argument that, while Harriet was terribly and terminally ill [*11] and would
die in one month, she neither lacked capacity nor was unduly influenced as to her creation of the 2010 Will and Trust. It should be noted that
on February 24, 2011, the day the instant action was filed, the Executor/Co-Trustee Martin Hirsch filed a separate Order to Show Cause and
Verified Complaint under Docket No. P-079-11, seeking to invalidate over $500,000 in transfers by checks drawn on the Decedent's bank
accounts, asserting that such transfers, occurring between June, 2009 and April, 2010, were the product of undue influence exerted over the
Decedent by the Decedent's home health care aide, Dorothy Yap. Yap defaulted and, on December 14, 2011, Default Judgment was entered
against her in the amount of $560,548.00
The cross-motions were argued on February 10, 2012, after which the court reserved decision. Trial is scheduled for
March 26, 2012.
III. THE SUMMARY JUDGMENT STANDARD

Before the court are cross-applications for summary judgment. Discovery has been extensive and is concluded. Each
side seeks judgment establishing whether the 1993 and 1996 Trust powers of appointment were effectively exercised.
Judgment is sought establishing as a matter of law that the testamentary [*12] or trust instruments at issue can or
cannot, should or should not, be amended, or deemed amended, to implement or validate the exclusion of the decedent's
daughter and/or her granddaughter from benefiting from trust assets over which the decedent -- Harriet - had powers of
appointment.
The claims of all parties must be evaluated through the summary judgment standard. R. 4:46-2(c) provides as follows:
(c) Proceedings and Standards on Motions. The judgment or order sought shall be rendered forthwith if the pleadings, depositions,
answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any
material fact challenged and that the moving party is entitled to a judgment or order as a matter of law. An issue of fact is genuine
only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all
legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact.
Application of the summary judgment standard to the extensive record of this case is somewhat complicated by the fact
that counsel neither briefed nor [*13] argued the summary judgment rule, or any relevant case law with respect thereto;
by the fact that Defendants did not file a responding statement to the Plaintiff's "Statement of Uncontested Material
Facts", either admitting or disputing any of the facts in Plaintiff's statement, as required by R. 4:46-2(b); and by the fact
that while Defendants did file a "Statement of Material Undisputed Facts", that Statement was unadorned with any
"...citation to the portion of the motion record establishing the fact or demonstrating that it is uncontroverted" as
required by R. 4:46-2(a).
The court is authorized by the Rule to deem facts which are not contested in rule-compliant fashion to be admitted and
to deny without prejudice motions filed without the required statement of material facts. R. 4:46-2(a). The better course,
though, would appear to be to examine the record, compare it to the parties' respective pleadings and claims, and
ascertain whether to any extent summary judgment may be appropriate. This is particularly desirable as trial is but six
weeks away, and both sides appear to believe that no trial is necessary, because mere application of controlling law to
uncontested facts will [*14] resolve the issues in the case.
Page 641Page 641
IV. HARRIET'S INTENT: THE 1996 POWER OF APPOINTMENT UNDER THE 1996 GERTRUDE HIRSCH
TESTAMENTARY TRUST
A threshold question, upon which much depends, is whether Harriet Weber intended to exclude her daughter, Claire
Lorenz, and Claire's descendant -- Harriet's granddaughter, Sarah Lorenz -- from inheriting from her estate, or, more
specifically, to bar them from in any way benefiting from the principal of any Trusts over which Harriet held a power
of appointment.
I examine first the 1996 Gertrude Hirsch Testamentary Trust. As discussed above, Harriet was a beneficiary of a Trust
established under her mother Gertrude's Will, over which she, Harriet, was given a power of appointment, empowering
her, "by Will", to designate who would accede to the remaining assets of that Trust when Harriet died. Gertrude gave
Harriet that power and further provided that in the event Harriet failed to effectively exercise the power, the Trust
would be divided into three equal shares to be held for Harriet's children -- Simon Weber, Aaron Weber and Defendant
Claire Lorenz.
It is undisputed that Harriet fully intended to bar Claire from benefiting under the 1996 Gertrude Trust. Her [*15]
intentions in this record are clear, and not effectively contested. In her prior Will of June 21, 2004, she expressly
disinherited Claire, as well as Simon, and she exercised her powers of appointment under her 1993 Harriet Irrevocable
Trust, as well as under the 1996 Gertrude Testamentary Trust, in favor of her son Aaron, excluding Claire.
Harriet executed three (3) codicils to the June 21, 2004 Will: on May 25, 2006, August 18, 2006 and December 21,
2006. These three codicils did not alter the provisions of the 2004 Will which disinherited Claire and Simon, (nor
modify the provisions exercising the appointment in the 1993 Harriet Irrevocable Trust and the 1996 Gertrude
Testamentary Trust).
Harriet's intention to exclude Claire was perpetuated in the Last Will and Testament she executed on July 7, 2008. She
expressly makes no provision for Claire. And she readmits the heretofore excluded son, Simon, on equal footing with
son Aaron. She expressly exercised her power of appointment under the 1993 Harriet Irrevocable Trust, and she
expressly exercises her power of appointment under the 1996 Gertrude Trust to favor Trusts under which neither Claire
nor Sarah benefit.
Had Harriet died with [*16] the estate plan established by her Last Will & Testament of July 7, 2008 in place, neither
Defendant -- Claire or Sarah - would have taken or benefited in any respect.
The record is unclear also what may have motivated Harriet to revisit her estate plan one last time before she died. But
revisit it she did, consulting for the first time with Florida estate and trust attorney William Andersen, Esq. in June of
2008. Mr. Andersen had been referenced by Harriet's financial advisor, Mr. Mark Bodkins, of Morgan Stanley. On July
23, 2010, Harriet executed a number of documents, including a Last Will and Testament and the Harriet Weber
Revocable Trust. These were her final testamentary and Trust documents. In Article One of this final Will, Harriet
acknowledges the existence of her daughter Claire, and reiterates just as she has done consistently, in every iteration of
her Will since 2004, that Claire is to take nothing. ("However, for all purposes of this Will, CLAIRE C. WEBER
LORENZ and all of her descendants shall be deemed to have predeceased me".). Article One, Section 2.
In this final Will, Harriet makes no specific reference to the powers of appointment granted her under her 1993 Harriet
[*17] Irrevocable Trust or under the 1996 Gertrude Trust. However, in the simultaneously executed Harriet Weber
Revocable Trust of July 23, 2010, Harriet provides as follows:
Section 4 Exercise of Powers of Appointment

"I hereby exercise the testamentary power of appointment granted to me under subdivision (a) of Article FOURTH of the Last Will
and Testament of my mother, GERTRUDE HIRSCH, and direct that the property subject to said power of appointment shall be
disposed of as provided in the Articles that follow." (Article Seven, Section 4, page 7-4S).
In this 2010 Harriet Revocable Trust, Harriet then proceeds to exercise the power to benefit her sons, Simon and Aaron,
but not Claire and not Sarah. Indeed, in identifying her family members in Article Two of this Harriet Weber Revocable
Trust of July 23, 2010, she states:
I acknowledge the existence of my daughter, CLAIRE C. WEBER LORENZ, and have willfully and with full knowledge chosen
not to provide for her or her descendants. For all purposes of this agreement, CLAIRE C. WEBER LORENZ and all of her
descendants shall be deemed to have predeceased me.
Page 642Page 642
Therefore, all references to "my children" in this agreement are only to AARON N. WEBER and [*18] SIMON M. WEBER, and
all references to "my descendants" are to AARON N. WEBER and SIMON M. WEBER and the descendants of AARON N.
WEBER and SIMON M. WEBER.
The evidence is overwhelming. In unambiguous language dating back to the 2004 Will, the three (3) 2006 codicils, the
2008 Will, the 2010 Will and the 2010 Trust, Harriet Weber made it plain as can be that she wished to bar her daughter
Claire, and Claire's descendant (Sarah), from taking under her Will or from in any way benefiting from the exercise by
Harriet of the power of appointment granted her under the 1996 Gertrude Testamentary Trust. If Harriet's intent
governs, the court will declare that Sarah cannot take under the default provisions of the 1996 Gertrude Testamentary
Trust -- which provide that Harriet's grandchildren -- which would include Sarah - receive the principal of the Trust
upon Harriet's death, if Harriet fails to effectively exercise the power through her (Harriet's) Will.
Sarah argues that the default provision is operative -- the grandchildren of Harriet take -- because Harriet failed to
exercise the 1996 power of appointment in the manner specified by Gertrude in the 1996 Will. In that Will, which
created the power, [*19] Gertrude instructs that to be effective, Harriet must exercise the power through her (Harriet's)
Will. In the instant case, Harriet had provided for the appropriate exercise of the 1996 power in her Will of 2004, the
2006 codicils, and in the 2008 Will, but the 2010 fails to so much as mention the power. Rather, it is the simultaneously
executed 2010 Harriet Revocable Trust which mentions, and purports to exercise, the 1996 power. That is non-
compliant with the specific instruction of Gertrude that, to be effective, the 1996 power must be exercised by Harriet by
her Will, not via a Trust, or otherwise. Furthermore, in her 1996 Will, Gertrude specifically instructed what must
happen should Harriet fail to "effectively exercise" the 1996 power by "Will": the Trust corpus is to be divided in equal
shares among Harriet's grandchildren and placed in Trusts for each of those grandchildren -- Sarah included.
The record does not reflect why Harriet executed a Will which failed to identify or specifically exercise the 1996 power
in accordance with the terms set forth by Gertrude in the 1996 Gertrude Will. The scrivener of the 2010 Will and Trust
indisputably knew of the 1996 power, and that it [*20] derived from Gertrude's 1996 Will. The scrivener was in
possession of a copy of the 2008 Will of Harriet's, which specifically so provides, and which specifically exercises that
power.
So, as to the 1996 power, the issue is not whether Harriet sought to exercise it so as to exclude Claire and Sarah -- she
plainly did so intend. The 2010 Will and 2010 Trust are crystal clear on the subject, as are the prior Wills of Harriet of
2004 and 2008. Rather, the question is whether it was exercised in the manner required, and, if not, whether the court
can, or should, "correct" that, on order that Harriet's undisputed intent is carried out.
V. HARRIET'S INTENT -- THE 1993 POWER OF APPOINTMENT UNDER THE 1993 HARRIET
IRREVOCABLE TRUST
The other power under examination is the 1993 power of appointment which Harriet gave unto herself in her 1993
Harriet Irrevocable Trust. Here, there is substantial evidence, but not conclusive evidence, that Harriet intended to bar
Claire from benefiting in any way from the exercise of that power.
Harriet, in her 2004 Will, the three 2006 codicils, and in the 2008 Will, specifically excluded her daughter Claire from
inheriting any portion of her estate, and specifically [*21] exercised the 1993 power to benefit persons other than
Claire.
Harriet and Claire (and Harriet and Sarah) had no contact after 2003. There was no healing of the rift. No
rapprochement. No one testified to any alleged intention on the part of Harriet to have Claire and Sarah back in her life
or to provide for them in any way in her estate plans. There is some deposition testimony from Harriet's accountant,
David H. Propper, which can be read as characterizing the aged Harriet as being unhappy about having no relationship
with Claire or Claire's child (Dep. of Propper, page 49), and, conceivably, as being unhappy about "having to" "leave
her out" because of their lack of relationship (Propper Dep., page 60-61). But the court is unable to fashion out of these
comments by the accountant a finding -- or even a favorable inference -- that Harriet intended Claire (or Sarah) to
benefit from her estate or from the exercise of the powers. The Defendants are entitled to the legitimate inferences of the
facts, but to conclude so, as the Defendants would have the court do, on the strength of this conversation, would be pure
speculation. Likewise as to the apparent depression which gripped Harriet. [*22] It is said that depression afflicted
Harriet and was possibly attributable to her physical ailments or possibly to the passing of her former spouse. I have no
factual basis upon which to tie the depression to her non-relationship with Claire and Sarah or their exclusion from her
estate plan. That would be pure speculation
Page 643Page 643
The other evidence that Harriet never intended Claire to benefit from the exercise of the 1993 power is that she never --
never -- sought to exercise it in favor of Claire, and only ever sought to exercise it in favor of one or both of her sons.
And there are notations by attorney Andersen (June 12, 2010) in preparation of Harriet's 2010 Estate Plan to the effect
that "the daughter [i.e., Claire] is to be disinherited", and "Harriet wants to exercise her power of appointment on all
three Trusts in to the same Trust for her sons under the same conditions." Likewise, Andersen's handwritten notations
on his copy of Harriet's 2008 Will evidence Harriet's intention regarding the 1993 Power. In the margin of the paragraph
in the 2008 Will wherein Harriet references, and exercise, the 1993 Power, counsel wrote "EXERCISE POWER", as a
'note-to-self' instruction regarding his [*23] preparation of the final, 2010 estate documents.
All of this is fairly overwhelming, unimpeached evidence that Harriet remained steadfast in her determination to
exclude Claire from her estate and from benefiting from exercise by Harriet of the 1993 power of appointment -- from
at least 2004, up through her death in 2010.
However, there is the curious fact that Harriet does not mention, let alone exercise, her 1993 power, in either the 2010
Will or the 2010 Trust. (Unlike the 1996 Gertrude Power, which is mentioned, and sought to be exercised, in the 2010
Trust, though not the 2010 Will). According to scrivener Andersen, and as supported by notes of a meeting with Harriet,
Harriet had told him that the 1993 Trust "no longer existed", and that is why he -- and she -- failed to reference it or
exercise it in the 2010 instruments. It is certainly possible that Harriet misunderstood that the 1993 Trust was still in
full force and effect. She was aged. She was in miserable physical condition. She was but one month from her death.
Maybe she just forgot about it, or misunderstood that it no longer existed. It is plausible. Maybe even likely.
However, currently before the court for disposition is [*24] a cross-motion for summary judgment. For the reasons that
follow, I am unable to find as an uncontested or established material fact that Harriet meant to exercise the 1993 power,
but either forgot the 1993 Trust still existed, or misunderstood the facts somehow. Mindful that non-movant Claire
enjoys the legitimate inferences of the facts, I am left with several inferences that stay my hand. There are facts in the
record which suggest that Harriet was indeed aware of the 1993 power of appointment and the 1993 Trust, right up
until she died. If that is so, then we are left to wonder why she would not disclose it to her new attorney, and why she
would neither reference it, nor exercise it, in either the 2010 Will or Trust. Claire asks the court to infer that that was
intentional on Harriet's part and to infer that Harriet was aware of what her own 1993 Trust plainly provides: that if
Harriet failed to exercise that 1993 power of appointment, Claire would take a share (in trust) equal to that of her
brothers,, Simon and Aaron.
On the one hand, we have scrivener Andersen's deposition testimony, and his notes, and his letter to Claire of December
24, 2010, setting forth that Harriet "confirmed [*25] that no such Trust [i.e., the 1993 Trust] exists", and that she
thought the assets of that Trust had "merged" with her other assets. Andersen says he never saw a copy of the 1993
Harriet Irrevocable Trust till some time after Harriet died. In preparing Harriet's 2010 Will and Trust, he had never had
the benefit of seeing the 1993 Trust; he had never communicated with the attorneys who had prepared the 2008 Will,
which exercised the 1993 power; he had never reviewed Harriet's most recent tax returns, which would have plainly
revealed the continued existence of the Trust, and the substantial income derived yearly therefrom, set forth as a
distinct line item; and he never had spoken to Harriet's accountant, who prepared the returns, who would have disabused
him of any notion that the 1993 Trust was no longer in existence.
Harriet Weber signed her own tax returns. The returns before me -- 2003 through 2009 -- show the 1993 Trust as "UD
HARRIET WEBER FOR SELF" and "UD HARRIET WEBER 10/13/93.." and "UD HARRIET WEBER 10/13/92 FOR
SELF". She derives a substantial income from her 1993 Trusts, as plainly revealed in the separate line item in the
yearly returns. Harriet's accountant Propper testified [*26] in his deposition that Harriet and he met in October 2009
and again on April 16, 2010, to secure her signature on returns which were on extension, and that although she was
bedridden, she was alert and coherent. Propper could not think of any reason why Harriet would have thought that the
1993 Trust no longer existed or had merged with other assets in 2010, when, a couple of months later, in June 2010, she
is said to have so advised Mr. Andersen.
On this record, in the context of this motion, I must give Claire the benefit of the inferences to be taken from these facts:
that Harriet knew that the 1993 Trust was in existence, and that she knew that if that power of appointment was not
exercised effectively, through her Will, the default provision would grant her daughter Claire a share of that Trust
corpus, in trust, co-equal with the shares of her sons, Simon and Aaron. She therefore intended that what happened,
happen: she neither referenced nor exercised her 1993 Irrevocable Trust's power of appointment, nor revealed its
continued existence to the 2010 scrivener of the 2010 Will or 2010 Trust, with the result that Claire would take a share.
Page 644Page 644
A motion for summary judgment is not the [*27] opportunity to look too unforgivingly at the plausibility of this
scenario. This "plan" of Harriet's would seem to depend upon a number of unlikely scenarios: (1) Harriet being
determined to make changes to her estate plan on the eve of her death, where there is no evidence that Harriet was the
driving force behind those changes; (2) Harriet being successful in concealing from the 2010 scrivener that in fact the
1993 still exists, until after she dies, when all that had to be done to discover the truth was for Andersen or Martin to
speak to the New York estate counsel who handled the 2008 Will, or speak to Harriet's accountant -- whose identity the
scrivener knew, or review Harriet's returns. Claire suggests that Harriet did not want to stir up a fuss with her sons, or
possibly with her brother, Martin, so she concealed her plan from them, and that is why she did not make blatant
changes to her Will or Trust documents to expressly include Claire or Sarah. Again, the court is not saying it is
accepting these scenarios, only that inferences from the disputed facts could support them, and that is sufficient to
defeat summary judgment on the intent issue as to the 1993 Trust and the exercise [*28] of the 1993 power of
appointment. There is some evidence from which the fact-finder could conclude she intended not to exercise it, and
meant Claire to benefit by that non-exercise.
VI. SUMMARY OF FINDINGS ON HARRIET'S INTENTIONS

In sum, there is no dispute that Harriet intended to exclude Claire and Sarah from inheriting under her Will or from
benefiting in any way from the Trust established for Harriet's benefit under the 1996 Gertrude Will. She exercised the
1996 power of appointment in her 2010 Trust, specifically to exclude them. The question is whether her exercise of that
power was effective.
As to the 1993 power created under the 1993 Harriet Irrevocable Trust, there is substantial evidence -- though not
conclusive -- that Harriet intended to bar Claire and Sarah, from benefiting from the 1993 Harriet Irrevocable Trust, or
from the exercise or non-exercise of the 1993 power. There is some evidence Harriet knew of this 1993 Trust's
existence, and, inferentially, knew of its provisions and so decided not to disclose its continued existence to her new
attorney, thereby triggering the default provision whereby that Trust corpus falls to Harriet's three children, in Trust --
Claire included.
VII. [*29] NEITHER THE 1993 POWER OF APPOINTMENT NOR THE 1996 POWER OF APPOINTMENT
WERE EXERCISED IN ACCORDANCE WITH THE REQUIREMENTS OF, RESPECTIVELY, THE 1993
HARRIET IRREVOCABLE TRUST OR THE 1996 GERTRUDE TESTAMENTARY TRUST
Plaintiff relies upon the 2010 Will and 2010 Harriet Weber Revocable Trust as the means by which the 1993 and 1996
powers of appointment were effectively exercised. I find that neither power was exercised in accordance with the
documents that created them.
In Harriet's 1993 Irrevocable Trust, Harriet provided for a power of appointment over the assets funded into the Trust.
Specifically, the 1993 Trust provides that upon Harriet's death, the principal of the Trust would pass "... as the Settlor
[i.e., Decedent -- Harriet] shall by Will, specifically referring to this Agreement, appoint ...". (The 1993 Harriet
Irrevocable Trust, page 1, paragraph 3). (Emphasis added). The 1993 Trust further provides that "... to the extent that
said power of appointment is not effectively exercised ... the then principal of said trust ... shall be divided in to shares,
per stirpes, for such of Settlor's children, SIMON, AARON and CLAIRE, are then living ...". (The 1993 Harriet
Irrevocable Trust, [*30] pages 1 and 2, paragraph 3). Those shares are then to be held by Trustees in separate Trusts
for each such child (The 1993 Harriet Irrevocable Trust, page 2, paragraph 3(a)).
The 1993 power of appointment was not referenced in or exercised by Harriet's 2010 Last Will & Testament.
Accordingly, it was not exercised, as required the 1993 Trust Agreement which she created, "by Will, specifically
referring to this Agreement...".
Likewise, the 1996 power of appointment was not referenced in or exercised by Harriet's Last Will & Testament (2008).
Accordingly, it was not exercised, as required by Gertrude's 1996 Will, "by Will". The 2010 Harriet Revocable Trust
does specifically reference the 1996 power of appointment and purports to exercise it. But the power must be exercised
by Will, not by Trust, and for that reason the purported exercise of the power of appointment is at variance with the
requirements of the instrument which created the power.
Plaintiff seeks to avoid these conclusions by various arguments, discussed below, none of which are persuasive.
a. 1996 Power of Appointment: Deeming the Trust to be a Will

Page 645Page 645
Plaintiff contends that Harriet's 2010 Revocable Trust can be deemed a Will under [*31] N.J.S.A. 3B:3-2, and thus the
power was effectively exercised "by Will" as required by the 1996 Gertrude Will. It is true that the 2010 Trust was
signed by Harriet, and that two persons signed as witnesses to her signing, as is required of Wills. N.J.S.A. 3B:3-2(a)(1),
(2) and (3). The problem with the theory is that Harriet that day also executed her Last Will and Testament, a separate
document, which she acknowledged to be her Will. She cannot have two (2) Wills, both operative. Merely calling the
2010 Trust a Will does not make it so -- Harriet had one Will, and the Trust is not it or part of it. And there is no
competent evidence before the court that Harriet actually intended the Trust to be her Will, or to be part of her Will, as
provided by N.J.S.A. 3B:3-3.
In a related argument, Plaintiff contends that the 2010 Harriet Revocable Trust and the 2010 Will should be read
together as one single testamentary instrument. Under N.J.S.A. 3B:3-10, "any writing in existence when a will is
executed may be incorporated by reference if the language of the will manifests this intent and describes the writing
sufficiently to permit its identification." Likewise, N.J.S.A. 3B:4-2 states that a will [*32] may devise property to the
trustee of a trust "if the trust is identified in the testator's will, and its terms are set forth in a written instrument, other
than a will....". Plaintiff contends that these statutory provisions support a finding that Harriet's Will and her Revocable
Living Trust should be read together as a testamentary disposition, by which she effectively exercised the 1996 power
of appointment. Plaintiff concedes that the statute does not apply to the present case, but argues that it is evidence of the
intent of the legislature that "... a Will and a Trust work together." (Plaintiff Opposition Brief, p. 16). The court
acknowledges that truism, but that acknowledgment does not serve to transform the Revocable Trust into Harriet's Last
Will and Testament, nor make it part and parcel of her Will. I note, in addition, that the 2010 Trust is revocable, hence
modifiable at any time up to Harriet's death perhaps (even thereafter, if the court sustains the Trust Protection provision,
discussed below).
The exercise of the power of appointment via the 2010 Trust is effective, in Plaintiff's view, even though the 2010 Will
does not mention the 1996 power, because the Will is [*33] a pour-over will, by which Harriet provided that "All of my
property of whatever nature and kind, whoever situated, shall be distributed to the Trustees of the Harriet Weber Living
Trust, dated July 23, 2010 ...". (Article Two of Will of July 23, 2010).
The 2010 Will directive that "All of my (Harriet's) property of whatever nature and kind ... shall be distributed to the
Trustees of the Harriet Weber Living Trust, dated July 23, 2010 ..." does not serve to convey to the Trust the 1996
power of appointment as that power was not an asset that belonged to Harriet. It was a power of appointment over
assets of a trust.
b. Incorporation By Reference
The statutory provision allowing documents to be incorporated by reference in a party's Last Will and Testament
(N.J.S.A. 3B:3-10) provides no support to Plaintiff's cause in this case. Per that provision, "...any writing in existence
when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes
the writing sufficiently to permit its identification." Had the 2010 Will incorporated by reference a document by which
Harriet exercised the 1996 power (or the 1993 power, for that matter), I would [*34] have little difficulty concluding
that Harriet exercised the power "by Will", as required by the terms of the instrument that created the power (Gertrude's
1996 Will, Harriet's 1993 Revocable Trust). This is because the incorporated document is incorporated as a part of the
Will, which speaks at death. But Harriet's Will does not purport to achieve a comparable incorporation and, in any
event, is not effective in exercising the power via incorporation or otherwise.
Article Two of the 2010 Will ("Distribution of My Property") has two (2) sections. The first section reads as follows:
Section 1, Pour-Over to My Revocable Living Trust. All of my property of whatever nature and kind, wherever situated, shall be
distributed to the Trustees of the HARRIET WEBER LIVING TRUST, dated July 23, 2010, that I created and signed on July 23,
2010, prior to signing this will, to be administered in accordance with its terms as may be from time to time hereafter amended.
Harriet cannot bequeath the assets to anyone, because they do not belong to her. Gertrude transferred title to those
assets, to the testamentary Trust created when she died, just as title to certain of Harriet's assets were transferred [*35]
to the inter-vivos, irrevocable Trust Harriet created back in 1993. So, Section One of Article Two of Harriet's 2010 Will
does not "bequeath" the power, nor bequeath the assets subject to the power.
Section 2 of Article Two Harriet's 2010 Will, which contains the "incorporation by reference" language upon which
Plaintiff relies, reads as follows:
Page 646Page 646
Section 2. Alternate Disposition. If the above-described trust (i.e. the 2010 Harriet Revocable Trust) shall not be in existence at
the time of my death, or if for any reason a court of competent jurisdiction shall declare the trust to be ineffective for disposition of
the assets of my estate, I give and devise said residue of my estate to the Successor Trustees named in said trust instrument, to be
held, managed and distributed in the manner described in the trust instrument for the period beginning with the date of my death,
giving effect to all terms of the trust now in effect; and for those purposes I incorporate by reference the trust instrument as it now
exists in this will.
This "alternate disposition" governs certain eventualities. The provision "if [*36] the above-described trust shall not be
in existence at the time of my (Harriet's) death...", is inapplicable. No one contends that the 2010 Harriet Revocable
Trust was not in existence when Harriet died. Likewise, the next contingency is not posited as having occurred: "...or if
for any reason a court of competent jurisdiction shall declare the trust to be ineffective for disposition of the assets of
my estate...". The disposition of assets of Harriet, or of her estate, is unaffected by these proceedings: assets of Trusts
are implicated, not assets of Harriet.
Only if either of the above-described non-occurring events occurred would the incorporation of the Trust into the Will
occur: "...for those purposes I incorporate by reference the trust instrument as it now exists in this will". Accordingly,
the incorporation by reference provision of the probate code provides no basis for relief to the Plaintiff.
c. Doctrine of Probable Intent

As to the exercise of the 1996 power of appointment, Plaintiff contends that the court should implement the undisputed
intention of the decedent, Harriet Weber, to disinherit Claire and Sarah, by invocation of the doctrine of probable intent.
N.J.S.A. 3B:3-33.1 [*37] gives legislative effect to the doctrine, both as to Wills and to Trusts:
a. The intention of a testator as expressed in his will controls the legal effect of his dispositions, and the rules of construction
expressed in N.J.S. 3B:3-34 through N.J.S. 3B:3-48 shall apply unless the probable intention of the testator, as indicated by the will
and relevant circumstances, is contrary.
b. The intention of a settlor as expressed in a trust, or of an individual as expressed in a governing instrument, controls the legal
effect of the disposition therein and the rules of construction expressed in N.J.S. 3B:3-34 through N.J.S. 3B:3-48 shall apply unless
the probable intent of such settlor or of such individual, as indicated by the trust or by such governing instrument and relevant
circumstances, is contrary...
Here, it is undisputed that Harriet specifically disinherited Claire under her 2010 Will, and attempted in her 2010
Revocable Trust to exercise the 1996 Gertrude power of appointment to expressly prevent Claire from benefiting from
the assets controlled by that power. Should the court not simply implement the undisputed intention of Harriet in this
regard?
Counsel for Claire argue against it. [*38] Because the 2010 Will and 2010 Trust lack any ambiguity, Claire contends
that no resort may be had to extrinsic evidence to vary the plain terms of those documents. The court disagrees. Once, as
here, evidence establishes the probable intent of the testator (Harriet), the court may not refuse to effectuate that intent
by indulging in a merely literal reading of the instrument. In Re Estate of Payne, 186 N.J. 324, 335, 895 A.2d 428
(2006). Undisputed intent should generally be implemented, despite the lack of ambiguity in the instrument.
The court's hand is stayed however, by the following countervailing, dominant considerations. The 1996 power of
appointment was granted to Harriet by her mother, Gertrude, in the testamentary trust established by Gertrude in her
Will of April 1, 1996. It was Gertrude -- settlor of that Trust -- who specified that the power of appointment must be
exercised by Harriet "by Will" and in no other articulated fashion. And Gertrude specified, as she was empowered as the
donor of the power to do, what would happen in the event that, and to the extent that, the power of appointment was not
"effectively exercised". In the event that the power of appointment was not "effectively [*39] exercised", the default
provision governs, whereby Harriet's then living grandchildren take (in trust) -- including Sarah Lorenz. (Gertrude
Hirsch Will, April 1, 1996, Article Fourth (a)).
In other words, Gertrude, as donor of the power, specified how the power had to be exercised (by Harriet, by Harriet's
Will), and specified what would happen as to any remaining principal of the Trust to the extent Harriet failed to
"effectively exercise" the power: the principal would flow, in trust, to Harriet's then living grandchildren.
What Plaintiff is asking the court to do is to override the unambiguous intention of Gertrude Hirsch in establishing the
testamentary Trust, and power of appointment, for Harriet's benefit -- both as to how that power is to be exercised, and
Page 647Page 647
what to do if it was not so exercised, or was otherwise not "effective". I have no evidence or law before me to suggest
that I could, or should, modify these provisions in Gertrude's Will. Even though Harriet plainly intended to exclude
Claire, and Sarah, she failed to do so in the required manner (by Will), and the consequences of that failure were
expressly anticipated by, and provided for, by the donor of the power, Gertrude. [*40] The court is unable to override
these provisions directly, and will not do so indirectly by modifying Harriet's Will or Trust to manufacture a compliant
exercise of the power.
When N.J.S.A. 3B:3-33.1(b) is read with Gertrude in mind, this result is mandatory:
The intention of a settlor (i.e. Gertrude) as expressed in a Trust, or of an individual as expressed in a governing instrument,
controls the legal effect of the dispositions therein and the rules of construction expressed in N.J.S.A. 3B:3-34 through N.J.S.A.
3B:3-48 shall apply unless the probable intent of such settlor or of such individual, as indicated by the Trust or by such governing
instrument and relevant circumstances, is contrary.
Gertrude's intent governs, and cannot be collaterally attacked, and undone, by judicial correction of Harriet's ineffective
exercise of the 1996 power of appointment.
Plaintiff refers the court to Cueman v. Broadnax, 37 N.J.L. 508 (1874), and quotes the following language from that
opinion.
Reference to the instrument creating the power is only important as evidence of the intention to execute, and any words indicating
an intention to exercise a power will have that operation. The primary question [*41] is, did the cestui que trust intend to execute
the power by the writing in question, so that her estate in the premises should pass to and vest in her appointee? Her intention is
clearly evinced by the words used, "having a separate estate which is held in trust for me, I do direct that the person holding in
trust for me the premises upon which we now reside shall convey the same to Peter C. Bogart." The rule is well settled that
although in executing a power it is regular to refer to it expressly and usual to recite it, yet it is not necessary to do this if the act
shows that the donee had in view the subject matter of the power.
Id. at 513.
In Plaintiff's view, since Harriet clearly expressed an intention to exercise the 1996 power -- in the 2010 Trust -- the
court should give operation to that intent, regardless of the technical deficiencies pointed out by Defendants.
A careful reading of that venerable opinion, however, reveals why Plaintiff cannot succeed in overriding Gertrude's
Will, notwithstanding the clear intent of Harriet to bar Claire from benefiting thereunder, as expressed in her 2010
Trust.
In Cueman, the court referred to the exercise of a power of appointment as "... the [*42] mere exercise of the power to
designate the persons who are to take the beneficial use of the estate". Id.. at 512. In affirming the exercise of a power of
appointment, the court in Cueman began by emphasizing the fundamental point that "it is not questioned, that the power
must be exercised in precise compliance with the directions of the instrument by which it was created; but where a
power is given generally, without defining the mode by which it must be exercised, it may be exercised either by deed
or will". (Emphasis added). Id. at 512. That Harriet failed to exercise the power in compliance -- precise or otherwise --
with the directions of the instrument by which it was created -- Gertrude's Will -- is the hurdle beyond which Plaintiff's
cause cannot pass.
The Court in Cueman determined that, because the instrument creating the power failed to specify the mode by which it
must be exercised -- Will or deed -- it need only be in writing to be effective -- "... a simple note in writing would be a
good exercise of the power". Id. The Court next considered the impact of the fact that the exercise of the power of
appointment was made without reference to the instrument by which the power [*43] was created. The failure to
reference the document by which the power was created, in the document by which the power was exercised (in precise
compliance with the directions of the instrument by which the power was created) was found to be without
consequence. It is in this context that the court determined that "reference to the instrument creating the power is only
important as evidence of the intention to execute it, and any words indicating an intention to exercise a power will have
that operation." Id. at 513. It follows, then, the Cueman is authority for the proposition that a power of appointment
must be exercised in precise compliance with the directions of the instrument in which the power was created -- here,
Gertrude's Will -- and that, had that instrument been silent as to how it must be exercised (which in our case, it was not),
it could have been exercised in any writing, and would have been effective even if that writing did not reference the
document that created the power -- i.e., Gertrude's Will.
Page 648Page 648
Plaintiff urges the court to implement the probable -- indeed undisputed -- intent of Harriet with respect to the 1996
power of appointment and deem that power exercised so as [*44] to bar Claire from benefiting. The task here is not
divining Harriet's intent. Her intent is clear and undisputed. But that intent, however clear and undisputed, cannot
override the clear and undisputed instructions of the person who created the power, and funded the very Trust at issue --
Gertrude -- who instructed Harriet -- and this court -- how the power had to be exercised ("by Will"), and what must
happen in the event Harriet failed to "effectively exercise" that power: the principal is to be divided in to equal shares --
in Trusts -- for Harriet's surviving grandchildren
Having determined that the power of appointment was not effectively exercised, and that the court is without authority
to render it effectively exercised, summary judgment as to the 1996 power of appointment shall be rendered in favor of
Defendants, and Plaintiff's cross-motion for summary judgment on this issue will be denied.
d. The 1993 Power of Appointment

Turning now to the 1993 power of appointment. This power was created by Harriet in the 1993 Harriet Revocable
Trust. It was not exercised, or referenced, in her 2010 Will or 2010 Trust. I have substantial evidence, in the motion
record, that Harriet meant to utterly [*45] exclude Claire from benefiting in any way from her passing -- either from
taking under Harriet's Will, or benefiting from the assets controlled by Harrier under Harriet's 1993 power of
appointment. All of her Wills and codicils dating back to 2004 affirm that intention, clearly and emphatically. Harriet
and Claire had no contact whatsoever after 2003. They were perfectly estranged from 2004 up to and including Harriet's
date of death, August 22, 2010. But, for some reason, Harriet failed to account for the 1993 power in the 2010 Will and
2010 Trust she executed, with new counsel, the month before she died. I have evidence before me that she thought the
1993 Harriet Irrevocable Trust no longer existed, and therefore there was no need to exercise the power in the eve-of-
death instruments. I have evidence she may have thought that Trust had "merged" with her personal assets. I have
suggestions she may have forgotten about it. But I have other evidence that seems to suggest she did know of the 1993
Trusts continued viability (set forth in detail above). Claire is entitled to the favorable inferences in the disputed factual
record, i.e., that Harriet was aware of her 1993 Trust's continued [*46] existence and chose not to exercise the 1993
power of appointment, knowing the result of that non-exercise would be that Claire would benefit via the default
provision.
Plaintiff has not demonstrated conclusively that he is entitled to summary judgment with respect to the exercise of the
1993 power of appointment. Nor have Defendants demonstrated entitlement to judgment that it was not exercised and
that the default provision must be enforced. Harriet's intent in this regard is very much at issue and cannot be resolved
on the papers. The cross-motions for summary judgment as to the 1993 Power will be denied.
e. Trust Protector
With respect to the exercise of the 1993 Harriet Power, Plaintiff places additional reliance upon the provision in
Harriet's 2010 Revocable Trust which created the office of "Trust Protector". (Article Thirteen, Section 18, page 13-
12). The scrivener of Harriet's 2010 Will and Trust, Mr. Andersen, was designated the Trust Protector, with expansive
powers to amend the Trust after Harriet's passing. The function of the Trust Protector is
... to protect the financial resources controlled and governed by the trust and the interests of the beneficiaries as the Trust Protector
[*47] deems, in its sole and absolute discretion, to be in accordance with my intentions expressed in this agreement or in a separate
writing as provided in this section.
Id.
According to Article Thirteen, Section 18(d), "Statement of Trustmaker's Intentions",
...The powers of amendment granted to the Trust Protector in this section shall be construed to give effect to my intentions. I
specifically recognize and contemplate that the exercise of any such power of amendment may advantage one or more beneficiaries
and disadvantage other beneficiaries...
Harriet authorized the Trust Protector to exercise the following powers pursuant to Article Thirteen, Section 18(e) to
modify or amend:
Page 649Page 649
1. The trust provisions to reflect tax or other legal changes that affect trust administration;
2. The trust provisions to correct ambiguities that might otherwise require court construction;
3. The trust provisions to correct a drafting error that defeats my intent as determined by the Trust Protector in its sole and
absolute discretion, following the guidelines provided in this Agreement;
4. The financial powers of my Trustee;
5. The power to remove a Trustee;
6. The withdrawal rights granted under this agreement; and
7. [*48] The termination of the Trust, either by extending or shortening the termination date.
(Emphasis added)
Plaintiff contends that Harriet told Mr. Andersen in June of 2010 that her 1993 Harriet Irrevocable Trust "no longer
existed" because it "merged with her personal assets", and for that reason the 2010 Trust contains no reference to the
1993 power of appointment, or the 1993 Harriet Irrevocable Trust. Plaintiff also contends that it was not until some
time after Harriet died that Mr. Andersen first was given a copy of the 1993 Harriet Irrevocable Trust Agreement,
reviewed a copy of that document, and learned that it in fact was in full force and effect. To correct this purported
mistake of Harriet's, a document was executed by Mr. Andersen, as Trust Protector, and by Plaintiff Martin Hirsch and
Morgan Stanley Trust Company, as Trustees, entitled "First Amendment to the Harriet Weber Living Trust" (i.e., the
2010 Harriet Revocable Trust). This document was executed December 19, 2010, some four (4) months after Harriet's
death. It refers to decedent's "oversight" as the reason the power of appointment over the Trust Agreement of 1993 was
not exercised. It purports to exercise that power, [*49] to provide for the exercise of the 1993 power in the same
manner provided in the 2010 Harriet Revocable Trust as to the 1996 power.
Plaintiff's counsel refer to the ability to appoint a Trust Protector as settled New Jersey law, yet the court finds no New
Jersey case permitting it or even discussing it. As presently constituted, the probate code in New Jersey does not
accommodate the office, by name or function. The court declines at this time to address the propriety of the utilization
of Trust Protectors, in name or function, in New Jersey trust and estate practice. There is no reason to do so, as the
underlying predicate of the exercise of that 1993 power -- Harriet's alleged oversight -- remains to be factually
determined. I would not likely permit a Trust Protector to do what I determined Harriet specifically elected not to do. If
it is determined that Harriet did not disclose the 1993 Trust or power of appointment to the 2010 scrivener -- and future
Trust Protector -- Mr. Andersen, because she wanted the default protections to be triggered upon her death5, then I
would not be likely to validate an effort by the Trust Protector to undermine and reverse Harriet in that regard, after
[*50] her death.6
5 Again, I express no opinion on the prospects of that claim being ultimately persuasive.
6 Plaintiff does not claim that the Trust Protector has or could salvage the ineffective exercise of the 1996 Gertrude power. That sort of
power would be truly pernicious: surely Gertrude Hirsch would not abide a total stranger, months after Harriet's passing, purporting to
determine in his "sole and absolute discretion" what to do with the assets of Gertrude, placed in Trust, by Gertrude, encumbered by
Gertrude's specific instruction on how the power of appointment over those assets had to be exercised and how the assets would pass if the
power -- Harriet's power -- was not effectively exercised.
Accordingly, the court declines to sustain or invalidate the purported exercise of the 1993 power, by the Trust Protector,
in the context of these cross-applications for summary judgment.
VIII. Summary
The court has determined that the 1996 power was not effectively exercised by Harriet, despite the undisputed evidence
in the record that she intended to do so. Her intent cannot trump the instructions of the donor of the power -- Gertrude --
as to how the 1996 power was to be exercised, nor as to what [*51] would happen to the assets of that Trust in the
event that Harriet did not effectively exercise the power.
The 1993 power, by contrast, was created by Harriet, who set forth how she (Harriet) was to exercise the power and
what would happen to that Trust's assets in the event the power was not effectively exercised. Concerns that donee
intent would override donor intent are not at play. The donor is the donee. The question of whether the 1993 power can
be made to be properly exercised must await a determination of Harriet's intentions.
Orders accompany this Decision. Trial remains scheduled for March 26, 2012.
Page 650Page 650
ROBERT P. CONTILLO, P.J.Ch.
RIDER TO COURT'S DECISION INIMO INTER VIVOS TRUST, HARRIET WEBER, GRANTOR, DOCKET NO.
P-080-11 FEBRUARY 23, 2012
HARRIET WEBER TIMELINE

1993 Harriet Irrevocable Trust October 13, 1993
1996 Gertrude Hirsch's Testamentary Trust April 1, 1996
Harriet and Isaac Weber divorce 1993-1994
Harriet & Claire relationship strains 1993-1994
Death of Gertrude Hirsch 2000
Last contact between Harriet & Claire 2003
(or Sarah)
2004 Harriet Last Will & Testament July 21, 2004
Codicil May 25, 2006
Codicil August 18, 2006
Codicil December 21, 2006
Isaac Weber (Harriet's ex-spouse) dies February 7, 2009
2010 Harriet Revocable Living Trust July 23, 2010
Death of Harriet Weber August 22, 2010
First Amendment to Harriet's 2010 Revocable
Living Trust, executed by Trust Protector
William E. Andersen, as Trust Protector, and
Martin Hirsch and Morgan Stanley Trust
Company, as Trustees, amending Trust to
Exercise 1993 Power of Appointment December 19, 2010
Page 652Page 652
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
74 of 430 DOCUMENTS
BDM INVESTMENTS, KENNETH W. KING, JR., LEAH L. KING and RICHARD

A. MU, Plaintiffs, v. LENHIL, INC.; LENNON HILLS, LLC; GLENN
HOLLINGSWORTH; EDWIN L. BURNETT, III; VIABLE CORP.; GARY
LAWRENCE; PAM LAWRENCE; LAWRENCE SALES & MARKETING GROUP,
LLC; KEITH MEYERS; MEYERS APPRAISAL SERVICES, LLC; DANIEL
HILLA, III; ALTON LENNON; MARTIN J. EVANS and HOMEPLACE REALTY
ASSOCIATES, INC., Defendants.
11 CVS 449
NORTH CAROLINA SUPERIOR COURT, BRUNSWICK COUNTY
2012 NCBC 7; 2012 NCBC LEXIS 7
January 18, 2012, Decided
SUBSEQUENT HISTORY: Summary judgment denied by, Summary judgment granted, in part, summary judgment
denied, in part by BDM Invs. v. Lenhil, Inc., 2014 NCBC LEXIS 6 (2014)
Summary judgment granted by, Claim dismissed by BDM Invs. v. Lenhil, Inc., (2014)
CASE SUMMARY:
OVERVIEW: In an action by investors to recover damages and to rescind a purchase contract investing in residential
lots in a development, the investors joined every individual or entity involved in the purchase as defendants. The
allegations, read broadly, were insufficient to justify keeping several defendants in the case, so they were dismissed
pursuant to N.C. R. Civ. P. 12(b)(6) and (c). Defendants' counterclaim for defamation failed to state a claim because the
defamation claim was barred by the absolute privilege attendant to statements made in the course of judicial
proceedings.
OUTCOME: Defendants' motions granted in part and denied in part. The investors' motion granted.
CORE TERMS: conspiracy, misrepresentation, partnership, certificate, fiduciary duties, statute of limitations, unjust
enrichment, appraisal, fiduciary relationship, constructive, malpractice, venture, survive, deed, purchase agreement,
doing business, punitive, causes of action, discover, partner, unfair, fraud claims, citation omitted, discovery, deceptive,
licensed, abetting, aiding, negligent misrepresentation, trade practices
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Motions to Dismiss
[HN1] On a motion to dismiss, the facts are taken from the pleadings as well as documents they incorporate, construed
favorably to the moving party with reasonable inferences not inconsistent with the facts alleged, but without being
bound by unwarranted legal conclusions. The court does not make findings of facts in connection with motions to
dismiss as such motions do not present the merits, but only determine whether the merits may be reached. However, it is
appropriate for the court to state facts accepted from the pleadings that are relevant to the legal determinations the court
is called upon to make. Documents referenced in and attached to pleadings can be considered on a motion to dismiss
without converting a N.C. R. Civ. P. 12(b)(6) motion into a motion for summary judgment.
Page 653Page 653
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Civil Procedure > Pretrial Judgments > Judgment on the Pleadings

[HN2] The appropriate inquiry on a N.C. R. Civ. P. 12(b)(6) motion to dismiss is whether, as a matter of law, the
allegations of the complaint, treated as true, are sufficient to state a claim upon which relief may be granted under some
legal theory, whether properly labeled or not. The standard of review for a N.C. R. Civ. P. 12(c) motion is the same. The
function of Rule 12(c) is to dispose of baseless claims or defenses when the formal pleadings reveal their lack of merit.
Where the court also can construe the plain and unambiguous language of a contract to determine if it has been
breached, judgment on the pleadings may be appropriate.
Business & Corporate Law > General Partnerships > Management Duties & Liabilities > Causes of Action >
Partnership Liabilities
[HN3] When property is owned by a partnership, the partnership is the real party in interest for purposes of pursuing a
civil action pertaining to the partnership property. The individual partners may not sue in their own name, unless (1) a
plaintiff alleges an injury separate and distinct to himself, or (2) the injuries arise out of a special duty running from the
alleged wrongdoer to the plaintiff. Under the special duty exception, the duty owed by the wrongdoer to the individual
partner must be different from the duty owed to the partnership.
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Affirmative Defenses > Statutes of
Limitations > General Overview
Civil Procedure > Summary Judgment > Motions for Summary Judgment > General Overview
[HN4] Whether a statute of limitations defense should be resolved by a N.C. R. Civ. P. 12(b)(6) motion or must await a
N.C. R. Civ. P. 56 motion for summary judgment depends on whether the facts necessary to adjudicate the defense are
demonstrated by the complaint itself or whether additional evidence must be considered. A statute of limitations can be
the basis for dismissal on a N.C. R. Civ. P. 12(b)(6) motion if the face of the complaint discloses that plaintiff's claim is
so barred.
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Affirmative Defenses > Statutes of
Limitations > General Overview
Contracts Law > Defenses > Statutes of Limitations
[HN5] North Carolina law provides a three year statute of limitations for claims based on negligence, gross negligence,
conversion, breach of contract, and breach of implied duty of good faith and fair dealing. N.C. Gen. Stat. § 1-52 (2011).
When the plaintiffs discover the harm is generally irrelevant because under § 1-52, the statute begins to run when the
claim accrues; for breach of contract, the claim accrues upon the breach.

Contracts Law > Types of Contracts > Contracts Under Seal
[HN6] N.C. Gen. Stat. § 1-47(2) (2011) provides that an action upon a sealed instrument or an instrument of
conveyance of an interest in real property, against the principal thereto must be filed within ten years of execution. § 1-
47(2). By its own terms, § 1-47(2) applies only to sealed instruments and instruments conveying an interest in real
property. § 1-47(2).

Contracts Law > Types of Contracts > Contracts Under Seal
[HN7] While an executed contract with the term "seal" in brackets is sufficient to overcome the three year statute of
limitations applicable to breach of contract actions, N.C. Gen. Stat. § 1-52 (2011), the statement logically applies only to
a claim against the party whose signature was under seal.
Real Property Law > Deeds > General Overview

Real Property Law > Purchase & Sale > Contracts of Sale > General Overview
[HN8] An instrument of conveyance is a document which actually conveys an interest in real property, while a contract
such as a purchase agreement merely evidences a promise to convey real property at a later date upon the satisfaction of
certain conditions. A conveyance of land can only be by deed. The word "deed" ordinarily denotes an instrument in
writing, signed, sealed, and delivered by the grantor, whereby an interest in realty is transferred from the grantor to the
grantee. A purchase agreement is not a deed and it does not convey an interest in real property; it merely evidences
intent to convey the property to the purchaser at the closing by general warranty deed.
Page 654Page 654
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Contracts Law > Types of Contracts > Implied-in-Law Contracts

[HN9] A claim for unjust enrichment is an equitable claim based on a theory of quasi or implied contracts. If there is a
contract between the parties, the contract governs the claim, and the law will not imply a contract. In such cases, an
action for breach of contract, rather than unjust enrichment, is the proper cause of action.
Torts > Business Torts > Fraud & Misrepresentation > Actual Fraud > Defenses
Torts > Business Torts > Fraud & Misrepresentation > Constructive Fraud > Defenses
Torts > Business Torts > Fraud & Misrepresentation > Negligent Misrepresentation > Defenses
Torts > Procedure > Statutes of Limitations > Accrual of Actions > Discovery Rule
[HN10] The statute of limitations for claims of negligent misrepresentation, fraud, and constructive fraud is three years.
N.C. Gen. Stat. § 1-52(5), (9) (2011). However, a claim for negligent misrepresentation does not accrue until two events
occur: first, the claimant suffers harm because of the misrepresentation, and second, the claimant discovers the
misrepresentation.
Torts > Business Torts > Fraud & Misrepresentation > Constructive Fraud > Defenses
[HN11] A cause of action alleging fraud is deemed to accrue upon discovery by the plaintiff of facts constituting the
fraud. Where a person is aware of facts and circumstances which, in the exercise of due care, would enable him or her to
learn of or discover the fraud, the fraud is discovered for the purposes of the statute of limitations. "Discovery" is
defined as actual discovery or the time when the fraud should have been discovered through the exercise of due
diligence. Whether a plaintiff has exercised due diligence is ordinarily an issue of fact for a jury, but failure to exercise
due diligence may be determined as a matter of law where it is clear that there was both capacity and opportunity to
discover the mistake. Where a confidential relationship exists between the parties, failure to discover the facts
constituting the fraud may be excused. When it appears that by reason of the confidence reposed, the confiding party is
actually deterred from sooner suspecting or discovering the fraud, he is under no duty to make inquiry until something
occurs to excite his suspicions.
Torts > Malpractice & Professional Liability > Professional Services

Torts > Procedure > Statutes of Limitations > Accrual of Actions > Occurrence of Tort
[HN12] See N.C. Gen. Stat. § 1-15(c) (2011).

Torts > Procedure > Statutes of Limitations > Accrual of Actions > Occurrence of Tort
[HN13] North Carolina courts construe N.C. Gen. Stat. § 1-15(c) to provide that the statute of limitations begins to run
when the services sought by the plaintiff have been completed or are no longer necessary.

[HN14] To take advantage of the longer four year statute of repose under N.C. Gen. Stat. § 1-15(c) (2011), the plaintiffs
must allege: (1) the existence of economic or monetary loss not readily apparent at the time of its origin; (2) that such
damage was discovered or should have reasonably been discovered two or more years after the date when the services
sought by the plaintiffs were completed or were no longer necessary; and (3) that suit was commenced within one year
from the date of discovery. § 1-15(c).
Torts > Intentional Torts > Breach of Fiduciary Duty > General Overview
[HN15] Breach of fiduciary duty is a species of negligence or professional malpractice.
Torts > Malpractice & Professional Liability > Attorneys
Torts > Procedure > Statutes of Limitations > General Overview
[HN16] Fraud by an attorney is not within the scope of professional services and cannot be malpractice within the
meaning of N.C. Gen. Stat. § 1-15(c) (2011).
Page 655Page 655
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Business & Corporate Law > Corporate Names > Fictitious Names > Registration Requirements
Business & Corporate Law > Unincorporated Associations
[HN17] An unincorporated association may sue in its own name, without naming any of the individual members
composing it, but only if the association alleged in its compliant the specific location of the recordation required by
N.C. Gen. Stat. § 66-68 (2011). N.C. Gen. Stat. § 1-69.1 (2011).
[HN18] See N.C. Gen. Stat. § 66-68 (2011).
[HN19] Unlike statutes dealing with foreign corporations doing business in North Carolina, N.C. Gen. Stat. § 66-68
(2011) does not include its own definition of "doing business."
[HN20] A technical failure to comply with N.C. Gen. Stat. § 66-68 (2011) can lead to dismissal.
[HN21] The existence of the fiduciary duty depends in the first instance on there being a fiduciary relationship between
the parties. North Carolina recognizes certain de jure fiduciary relationships which arise as a matter of law because of
the nature of the relationship, such as attorney and client, broker and principal, executor or administrator and heir,
legatee or devisee, factor and principal, guardian and ward, partners, principal and agent, trustee and cestui que trust.
De facto fiduciary relationship with accompanying duties may additionally arise when there has been special confidence
reposed in one side who in equity and good conscious is bound to act in good faith and with due regard to the interest of
the one reposing confidence, and it extends to any possible case in which a fiduciary relationship exists in fact, and in
which there is confidence reposed on one side, and resulting domination and influence on the other. Such relationships
require an intense factual inquiry and the standard is demanding. Only when one party figuratively holds all the cards--
all the financial power or technical information, for example--have North Carolina courts found that the special
circumstance of a fiduciary relationship has arisen.
Civil Procedure > Remedies > Constructive Trusts

[HN22] To recover on a claim to impose a constructive trust, there must be facts and circumstances (1) which created
the relation of trust and confidence, and (2) which led up to and surrounded the consummation of the transaction in
which defendant is alleged to have taken advantage of his position of trust to the hurt of plaintiff. There is some
authority stating that a plaintiff must also allege that the defendant sought to benefit himself by his misconduct, and that
the plaintiff was injured by that misconduct. However, there is also an argument that once the fiduciary relationship has
been demonstrated, the burden is on the defendant to prove fair and open dealing, such that a defendant's failure to
benefit personally from an asserted breach of duty is more in the nature of an affirmative defense.
Civil Procedure > Pleading & Practice > Pleadings > Heightened Pleading Requirements > Fraud Claims
[HN23] To state an actionable claim for fraud, the complaint must allege with particularity (1) that defendant made a
false representation or concealment of a material fact; (2) that the representation or concealment was reasonably
calculated to deceive him; (3) that defendant intended to deceive him; (4) that plaintiff was deceived; and (5) that
plaintiff suffered damage resulting from defendant's misrepresentations or concealment.
[HN24] To state an actionable claim for fraudulent inducement, the compliant must allege with specificity: (i) that the
defendant made a false representation or concealed a material fact he had a duty to disclose; (ii) that the false
representation related to a past or existing fact; (iii) that defendant made the representation knowing it was false or made
it recklessly without knowledge of its truth; (iv) that defendant made the representation intending to deceive the
plaintiff; (v) that plaintiff reasonably relied on the representation and acted upon it; and (vi) plaintiff suffered some
injury.
Page 656Page 656
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Torts > Business Torts > Fraud & Misrepresentation > Negligent Misrepresentation > Elements
[HN25] The tort of negligent misrepresentation occurs when a party justifiably relies to his detriment on information
prepared without reasonable care by one who owed the relying party a duty of care.
[HN26] A fraud claim is subject to more exacting pleading requirements than are generally demanded by our liberal
rules of notice pleading. Pleadings meet the requirements of N.C. R. Civ. P. 9(b) when they allege the time, place and
content of the fraudulent representation, identity of the person making the representation and what was obtained as a
result of the fraudulent acts or representations. Allegations of fraud may be made upon information and belief only
when the matters are particularly within the defendants' knowledge, and facts are stated upon which belief is founded.
Antitrust & Trade Law > Trade Practices & Unfair Competition > State Regulation > Claims
[HN27] To state a claim for unfair and deceptive trade practices, a plaintiff must allege: (1) an unfair and deceptive act
or practice; (2) in or affecting commerce; and (3) which proximately causes actual injury. Where an unfair or deceptive
trade practice claim is based upon the alleged misrepresentation by the defendant, the plaintiff must show actual
reliance on the alleged misrepresentation in order to establish that the alleged misrepresentation proximately caused the
injury of which plaintiff complains.
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Affirmative Defenses > Estoppel
[HN28] The essential elements of equitable estoppel are (1) conduct on the part of the party sought to be estopped
which amounts to a false representation or concealment of material facts; (2) the intention that such conduct will be
acted on by the other party; and (3) knowledge, actual or constructive, of the real facts. To assert the defense, a plaintiff
must have (1) a lack of knowledge and a means of knowledge as to the real facts in question; and (2) relied upon the
conduct of the party sought to be estopped.
Real Property Law > Purchase & Sale > Contracts of Sale > Enforceability > General Overview
[HN29] With respect to land transactions, reliance is not reasonable if a plaintiff fails to make any independent
investigation unless the plaintiff can demonstrate: (1) it was denied the opportunity to investigate the property, (2) it
could not discover the truth about the properties condition by exercise of reasonable diligence, or (3) it was induced to
forego additional investigation by the defendant's misrepresentations.
Contracts Law > Types of Contracts > Implied-in-Law Contracts

[HN30] To establish a claim for unjust enrichment, the plaintiffs must allege: (1) a measurable benefit was conferred on
the defendant; (2) the defendant consciously accepted the benefit; and (3) the benefit was not conferred gratuitously. A
key element is that a benefit inure to the defendant. Without enrichment, there can be no unjust enrichment and
therefore no recovery on an implied contract.
Torts > Procedure > Multiple Defendants > Concerted Action > Civil Conspiracy > Elements
[HN31] A conspiracy is defined as an agreement between two or more individuals to do an unlawful act or to do a
lawful act in an unlawful way. The common law action for civil conspiracy is for damages caused by acts committed
pursuant to a conspiracy rather than for the conspiracy, i.e., the agreement, itself. Thus, to create civil liability for
conspiracy there must have been an overt act committed by one or more of the conspirators pursuant to a common
agreement and in furtherance of a common objective. Although civil liability for conspiracy may be established by
circumstantial evidence, the evidence of the agreement must be sufficient to create more than a suspicion or conjecture
in order to justify submission of the issue to a jury.
Business & Corporate Law > Joint Ventures > General Overview
Torts > Vicarious Liability > Joint Ventures
[HN32] Claims of joint enterprise, joint venture, and joint adventure do not constitute independent causes of action in
North Carolina; these claims form the basis of an agency relationship whereby one party's conduct may be imputed to
another. A joint enterprise is an alliance between two (2) or more people in pursuit of a common purpose. Parties may be
said to be engaged in a joint enterprise when there is a community of interest in the objects or purposes of the
undertaking, and an equal right to direct and govern the movement of each with respect thereto. A joint venture exists
when there is: (1) an agreement, express or implied, to carry out a single business venture with joint sharing of profits,
and (2) an equal right of control of the means employed to carry out the venture. Facts showing the joining of funds,
Page 657Page 657
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
property, or labor, in a common purpose to attain a result for the benefit of the parties in which each has a right in some
measure to direct the conduct of the other through a necessary fiduciary relation, will justify a finding that a joint
venture exists. To constitute a joint adventure, the parties must combine their property, money, efforts, skill, or
knowledge in some common undertaking. The contributions of the parties need not be equal or of the same character,
but there must be some contribution by each coadventurer of something promotive of the enterprise.
[HN33] It is uncertain whether North Carolina now recognizes a claim for aiding and abetting a breach of fiduciary
duty. If a claim for aiding and abetting does lie, the primary party and the aiding and abetting party must have the same
level of culpability or scienter for the breach. An aiding and abetting a breach of fiduciary duty claim applies only to
third parties who do not stand in a fiduciary relationship with the alleged victim, but who provide substantial assistance
towards accomplishing the alleged breach.
Torts > Damages > Punitive Damages > Conduct Supporting Awards
[HN34] Pursuant to N.C. Gen. Stat. § 1D-15(a) (2011), punitive damages may be awarded only if the claimant proves
that the defendant is liable for compensatory damages and that an aggravating factor such as fraud, malice, or willful or
wanton conduct was present and related to the injury for which compensatory damages were awarded. § 1D-15(a).
Torts > Damages > Punitive Damages > Conduct Supporting Awards
[HN35] See N.C. Gen. Stat. § 1D-15(a) (2011).
Torts > Intentional Torts > Defamation > Defenses > Privileges > Absolute Privileges
[HN36] As a general rule, statements made by a party or an attorney during the course of a judicial proceeding,
including allegations set forth in a pleading, are privileged and cannot form the basis of a defamation claim. While
statements and pleadings and other papers filed in a judicial proceeding are not privileged if they are not relevant or
pertinent to the subject matter of the action, the question of relevancy or pertinency is a question of law for the courts,
and the matter to which the privilege does not extend must be so palpably irrelevant to the subject matter of the
controversy that no reasonable man can doubt its irrelevancy or impropriety. If it is so related to the subject matter of
the controversy that it may become the subject of inquiry in the course of the trial, the rule of absolute privilege is
controlling.
Civil Procedure > Pleading & Practice > Defenses, Demurrers & Objections > Motions to Strike > General Overview
[HN37] N.C. R. Civ. P. 12(f) states that upon motion of one of the parties, a judge may order stricken from any pleading
any insufficient defense or any redundant, irrelevant, immaterial, impertinent, or scandalous matter. Whether to grant a
movant's request to strike such material is within the court's discretion. That being said, matter should not be stricken
from a pleading unless it has no possible bearing upon the litigation. If there is any question as to whether an issue may
arise, the motion to strike should be denied.
COUNSEL: [**1] Bowden & Laws, PC by Edwin W. Bowden for Plaintiffs BDM Investments, Kenneth W. King, Jr.,
Leah L. King, and Richard A. Mu.
Hodges & Coxe, P.C. by C. Wes Hodges, II and Sarah Reamer for Defendants Lenhil, Inc., Lennon Hills, L.L.C., Edwin
L. Burnett, III, Viable Corp., and Daniel Hilla.
Toll & Potter, PLLC by Samuel B. Potter for Defendant Glenn Hollingsworth.
Cranfill Sunmer Hartzog, LLP by Richard T. Boyette for Defendant Gary Lawrence.
Nexsen Pruet, PLLC by R. Daniel Boyce for Defendants Pam Lawrence and Lawrence Sales & Marketing Group,
L.L.C.
Kurt B. Fryar, Attorney at Law by Kurt B. Fryar for Defendant Alton Lennon.
Baker, Jones, Daly & Carter PA by Ronald G. Baker for Defendants Martin J. Evans and Homeplace Realty Associates,
Inc.
Page 658Page 658
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
JUDGES: Gale, Judge.
OPINION BY: Gale
OPINION
ORDER
[*1] THIS MATTER is before the Court on a collection of motions attacking the pleadings. Defendants have a series
of motions based on Rules 8, 9, and 12 of the North Carolina Rules of Civil Procedure ("Rule(s)") challenging or
seeking to strike portions of the Second Amended Complaint. Plaintiffs move to dismiss one counterclaim pursuant to
Rule 12(b)(6) ("Plaintiffs' Motion"). The Defendants' motions are GRANTED in part and DENIED in part. [**2]
Plaintiffs' Motion is GRANTED.
Gale, Judge.
I. INTRODUCTION
[*2] Plaintiffs seek to recover damages and to rescind a purchase contract by which they invested in residential lots to
be developed as a part of the Lennon Hills development in Brunswick County, North Carolina. Plaintiff BDM
Investments ("BDM") is a partnership whose partners, the individual Plaintiffs, are all licensed North Carolina
attorneys. Plaintiffs contend that each Defendant engaged in a conspiracy calculated to induce the purchase by fraud.
Defendants challenge the fraud claims for lack of specificity and for lack of reasonable reliance. Plaintiffs contend that
they are excused from proving reliance because their purchase was induced by Defendant Glenn Hollingsworth
("Hollingsworth") with whom they enjoyed a fiduciary relationship. Plaintiffs seek to impute Hollingsworth's liability to
individual members of the conspiracy.
[*3] Initially, Plaintiffs joined as Defendants essentially every individual or entity that had anything to do with or was
necessary to complete the purchase in the Lennon Hills development. Several defendants were dismissed between the
time of the original Complaint and the filing of the Second Amended [**3] Complaint. Plaintiffs' Second Amended
Complaint has twenty (20) causes of action. Each rests on broad allegations, many of which are alleged only on
information and belief. Plaintiffs contend that they should be allowed to pursue discovery based on their broad
allegations and should be expected to further narrow their claims only after such discovery. Defendants contend that
Plaintiffs have not alleged and cannot allege sufficient particularity to allow the broad claims to proceed. The various
motions require the Court to grapple with defining an appropriate dividing line that affords Plaintiffs the pleading
liberality demanded by the Rule 12(b)(6) standards while at the same time drawing reasonable limits to avoid imposing
the unfair burden and expense of litigation upon those whose fault for the failed real estate transaction is based on
supposition rather than reasonable assertion of fact. That task is made even more difficult in this case where: (1) the
genesis of the conspiracy is alleged to have arisen because of harms directed at and suffered by persons who are neither
plaintiffs in this action nor have been alleged to have any connection to the Plaintiffs; and (2) the case [**4] arises in
the context of licensed attorneys who invested several hundreds of thousands of dollars with little or no due diligence.
[*4] The Court concludes that some claims should proceed toward discovery, but the allegations, even broadly read,
are insufficient to justify keeping certain Defendants in the case. Further, the claims should be narrowed for those
Defendants who remain. The defamation counterclaim against the Plaintiffs should be dismissed.
II. PROCEDURAL BACKGROUND

[*5] Plaintiffs filed their Complaint in the Brunswick County Superior Court on February 28, 2011. The matter was
designated as a Complex Business Case by Order of Chief Justice Sarah Parker dated April 8, 2011 and assigned to the
undersigned by Order dated April 14, 2011. Motions attacked the initial Complaint. The Second Amended Complaint
was filed on August 8, 2011.
[*6] Prior to filing their Second Amended Complaint, Plaintiffs voluntarily dismissed Wells Fargo & Company; Wells
Fargo Bank, N.A.; Wells Fargo Financial Mortgage, L.L.C.; Wachovia Corporation; Wachovia Bank, N.A.; Wachovia
Mortgage Corporation; Wachovia Affordable Housing Corporation; Exit Realty 1st, LLC; Exit Realty and Associates,
Page 659Page 659
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Inc.; Exit Realty Seaside, [**5] LLC; Kelly K. Johnson; Rosalind Johnson; and Flo Smith. Plaintiffs later voluntarily
dismissed Nicholas R. Frank and Nick Frank who had been included in the Second Amended Complaint.
[*7] Defendants Lenhil, Inc. ("Lenhil"), Lennon Hills, LLC ("Lennon Hills"), Edwin L. Burnett, III ("Burnett"), Viable
Corp. ("Viable"), and Daniel Hilla ("Hilla") have asserted a defamation counterclaim. Plaintiffs' Motion attacking that
claim was timely filed on July 22, 2011.1
1 The Court has indicated that motions addressed to the initial Complaint will be deemed as having also been addressed to the Second
Amended Complaint.
[*8] Following several Answers and pre-answer motions,2 the Court determined it should address the common issues
on a consolidated basis. To that end, the Court directed that all motions based on the pleadings be filed by a date certain
and that the Defendants prepare a consolidated brief, supplemented by individual briefs only where necessary.
2 To date, every named Defendant has either filed an Answer or pre-answer motion to dismiss with the exception of Keith Meyers and
Meyers Appraisal Services, LLC, whom Plaintiff has not yet served. This Order will not address claims asserted against the [**6] unserved
Defendants.
[*9] On or before September 30, 2011, each of the named Defendants submitted motions pursuant to Rules 8, 9, and
12. Specifically, Defendants Alton Lennon ("Lennon"), J. Martin Evans ("Evans"), Homeplace Realty Associates Inc.
("Homeplace"), Hollingsworth, Pam Lawrence, Lawrence Sales & Marketing, LLC ("Lawrence S&M"), and Gary
Lawrence seek to dismiss all claims against them pursuant to Rule 12(b)(6) and to have certain portions of the Second
Amended Complaint stricken pursuant to Rule 12(f). Defendants Lenhil, Lennon Hills, Burnett, Viable, and Hilla have
similar motions but additionally assert a Motion for Judgment on the Pleadings pursuant to Rule 12(c).
[*10] These various motions have been fully briefed, the Court heard extensive oral arguments, and the motions are
ripe for disposition.
III. STATEMENT OF FACTS

[*11] [HN1] The following facts are taken from the pleadings as well as documents they incorporate,3 construed
favorably to the moving party with reasonable inferences not inconsistent with the facts alleged, but without being
bound by unwarranted legal conclusions. The Court does not make findings of facts in connection with motions to
dismiss as such motions do "not present [**7] the merits, but only [determine] whether the merits may be reached."
Concrete Serv. Corp. v. Investors Group, Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986). However, it is
appropriate for the Court to state facts accepted from the pleadings that are relevant to the legal determinations the
Court is called upon to make.
3 Documents referenced in and attached to pleadings can be considered on a motion to dismiss without converting a 12(b)(6) motion into a
motion for summary judgment. See Brackett v. SGL Carbon Corp., 158 N.C. App. 252, 255, 580 S.E.2d 757, 759 (2003); Tomlin v. Dylan
Mortgage, Inc., 2000 NCBC 9, fn. 1 (N.C. Super. Ct. 2000), http://www.ncbusinesscourt.net/opinions/2000%20NCBC%209.htm.
A. The Parties
[*12] Plaintiff BDM is a general partnership organized and existing under the laws of the State of North Carolina for
the purpose of owning office facilities and holding certain other real estate. (Second Am. Compl. ("2nd Am. Compl.")
¶¶ 1, 3.) BDM filed a Certificate of Assumed Name in Onslow County, North Carolina on April 15, 1993, the county in
which their law firm and the individual partners practice. (2nd Am. Compl. ¶ 3.) There is no allegation that Plaintiffs
have [**8] filed an assumed name certificate in Brunswick County. There is also no allegation by Defendants that such
a certificate has not been filed.
[*13] Plaintiffs Kenneth W. King ("Kenneth King") and Leah L. King ("Leah King") are licensed North Carolina
attorneys and are citizens and residents of New Hanover County, North Carolina. Plaintiff Richard A. Mu ("Mu") is a
Page 660Page 660
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
licensed North Carolina attorney and a citizen and resident of Onslow County, North Carolina. The Kings and Mu are
the sole BDM partners and are collectively referred to as the "Individual Plaintiffs."
[*14] Defendants Hilla, Hollingsworth,4 and Lennon are citizens and residents of New Hanover County, North
Carolina. Defendants Burnett, Pam Lawrence, and Gary Lawrence are citizens and residents of Brunswick County,
North Carolina. Gary Lawrence is a licensed North Carolina attorney. Defendant Evans is a citizen and resident of
Pender County, North Carolina and a licensed North Carolina real estate broker.
4 Defendant Hollingsworth passed away during the pendency of this litigation. A motion to substitute a new party is pending.
[*15] Defendant Homeplace is a corporation organized and existing under the laws of the State of North Carolina
doing [**9] business in Pender County, North Carolina. Evans owns and operates Homeplace.
[*16] Defendant Lawrence S&M is a limited liability company organized and existing under the laws of the State of
North Carolina doing business in Brunswick County, North Carolina. Pam Lawrence owns and operates Lawrence S&M
and is Gary Lawrence's wife.
[*17] Defendants Lenhil and Lennon Hills are corporations organized and existing under the laws of the State of North
Carolina doing business in Brunswick County, North Carolina. Lenhil and Lennon Hills develop and sell real property,
including tracts of land and homes in residential subdivisions. Defendants Burnett and Hilla are Lenhil's sole
shareholders. Defendants Burnett and Lennon are Lennon Hills's sole shareholders.
[*18] Defendant Viable is a corporation organized and existing under the laws of the State of North Carolina doing
business in Brunswick County, North Carolina. Burnett and Lennon are Viable's sole shareholders.
[*19] Lenhil, Lennon Hills, Viable, Burnett, and Hilla are collectively referred to as the "Lennon Hills Defendants."
B. Background Factual Allegations Related to the Lennon Hills Property 5
5 Further particular facts pertinent to individual claims are presented [**10] in the analysis of those claims.
[*20] The Second Amended Complaint recites at length allegations of alleged wrongdoing perpetrated by at least some
of the Defendants on non-party Charles Green ("Green").6 Plaintiffs allege that these facts led Hollingsworth and those
with whom he conspired to obtain needed funds by inducing Plaintiffs to execute their lot purchase agreement in
December 2006. In substance, those allegations include:
(a) In 1995, Defendant Lennon was a licensed North Carolina attorney who Green retained to provide real estate investment advice.
(2nd Am. Compl. ¶¶ 25-26.) Pursuant to Lennon's advice, Green acquired a twenty-five percent (25%) interest in Leland
Development, a real estate development company managed by Viable and a company called Leland Ventures. Leland Development
later purchased a 199 acre tract in Brunswick County, North Carolina ("Leland Tract"). (2nd Am. Compl. ¶¶ 36-37.) On May 26,
2005, Leland Development transferred all of its real estate by two (2) deeds to The Pastures, an entity owned and operated by
Viable, Burnett, and Lennon. (2nd Am. Compl. ¶ 39.) Thereafter, The Pastures sold the Leland Tract in two (2) pieces to Hilla
through Kardan Holdings, [**11] an entity operated by Hilla and Hilla Building, Inc. for a total of $3,172,000.00. Lennon, Burnett,
and Viable failed to disclose the transaction to Green, falsely represented that Leland Development had sold the entire Leland Tract
for $1,958,422.00, and transferred $487,105.00 to Green as consideration for his twenty-five percent (25%) interest in the
company. (2nd Am. Compl. ¶¶ 41-36.) The Pastures then used $850,000.00 of the sales proceeds concealed from Green to purchase
the Lennon Hills property. (2nd Am. Compl. ¶ 47.) The Pastures transferred the Lennon Hills property to Lennon Hills, L.L.C., and
Lennon Hills, L.L.C. transferred the property to Lenhil on November 22, 2006. Lenhil, Hilla, and Burnett then borrowed
$2,650,000.00 from BB&T using the Lennon Hills property as collateral, and Lennon filed a deed of trust on the property in his
name and on behalf of Lennon Hills, L.L.C. in the amount of $15,000,000.00. (2nd Am. Compl. ¶¶ 51-52.)
(b) In 1999, Lennon recommended that Green purchase an eight (8) acre tract in Brunswick County, North Carolina ("Cedar Greens
Tract"). In connection with the sale, Lennon misappropriated approximately $30,000.00 of the purchase price. (2nd [**12] Am.
Compl. ¶¶ 28-30.) Later that year, Lennon misappropriated approximately $50,000.00 in connection with the sale of two (2)
Brunswick County lots held by Lennon as trustee for Green. (2nd Am. Compl. ¶¶ 31-32.)
(c) Also in 1999, Lennon sold Green a ten percent (10%) share of the Fish Factory restaurant located in Brunswick County, North
Carolina. In 2006, Lennon and Burnett allegedly concealed material facts in connection of the sale of the Fish Factory causing
Green to receive less than full value for his interest in the company. (2nd Am. Compl. ¶¶ 53-58.)
Page 661Page 661
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
6 It is evident that the basis for those allegations are findings of fact issued in a disciplinary proceeding brought against Alton Lennon by the
North Carolina State Bar. The transcript of that proceeding is attached as Exhibit D to Plaintiffs' Brief in Opposition to Defendant Alton
Lennon's Motions to Strike and Dismiss.
[*21] Plaintiffs assert that these circumstances led the Defendants to conspire to obtain funds from Plaintiffs in order to
generate funds to avoid having Green present claims based on wrongs he had discovered. Plaintiffs allege that they
closed their purchase in December 2006, while also adopting the findings of the [**13] State Bar in the disciplinary
proceeding which recite that Green did not learn of the fraud allegedly perpetrated upon him until sometime in 2007.
(2nd Am. Compl. ¶¶ 59-60.).
[*22] Plaintiffs' Second Amended Complaint also alleges wrongs perpetuated on another non-party. They allege that
Defendants also fraudulently induced purchases in February of 2007 by a dental practice known as T&T Partnership and
used the sales proceeds from that transaction to pay Green. (2nd Am. Compl. ¶ 61.)
C. Factual Allegations Related to the Plaintiffs' Purchase

[*23] Plaintiffs Kenneth King and Mu retained Hollingsworth in the early 1990s in his capacity as a certified public
accountant to serve as their personal and business financial advisor. (2nd Am. Compl. ¶¶ 65-66.) In 2001, Hollingsworth
began providing the same services to Leah King. (2nd Am. Compl. ¶ 68.) In that role, Hollingsworth regularly prepared
Kenneth and Leah King's tax returns and provided financial advice on personal matters and on matters related to BDM
and the law firm of Brumbaugh Mu & King.7 (2nd Am. Compl. ¶¶ 65, 68, 70.)
7 The Individual Plaintiffs are all partners in the law firm of Brumbaugh Mu & King, a partnership apparently separate and [**14] distinct
from Plaintiff BDM.
[*24] In 2004, Hollingsworth informed Kenneth King that he had sold his accounting business and had secured a real
estate license. (2nd Am. Compl. ¶ 71.) He told Kenneth King that he would still be serving his client's financial interests
by including select clients in favorable investment opportunities. (2nd Am. Compl. ¶ 71.)
[*25] Plaintiffs allege that Hollingsworth continued to occupy a position of special trust and confidence as a result of
his prior position as their trusted financial advisor. They contend that Hollingsworth and the other Defendants conspired
to take advantage of that trust and confidence when fraudulently inducing them to purchase the Lennon Hills lots.8
8 Plaintiffs separately assert that Lawrence had fiduciary duties as Plaintiffs' closing attorney. However, the central allegation regarding the
conspiracy is that Hollingsworth was able to induce the purchase, that he chose and directed Gary Lawrence as the closing attorney because
of Gary Lawrence's relationship with the developers, and that Plaintiffs did not deal directly with Gary Lawrence until the purchase was
closed.
[*26] In the fall of 2006, Hollingsworth contacted Kenneth King and presented [**15] him with an "unbelievable
opportunity." (2nd Am. Compl. ¶ 73.) Hollingsworth explained that he was contacting favored clients and close
associates to solicit their participation in the purchase of certain real estate located in the Lennon Hills development in
Brunswick County, North Carolina. (2nd Am. Compl. ¶ 73.) Hollingsworth told Kenneth King that he had personally
invested his own funds in a substantial number of the Lennon Hills lots and represented that Lenhil and Lennon Hills
would repurchase any lots acquired by the Plaintiffs at a higher price within twelve (12) months of purchase. (2nd Am.
Compl. ¶¶ 75-76.)
[*27] Hollingsworth advised Kenneth King that the Lennon Hills lots would be sold in ten (10) lot groups at
$85,000.00 per lot for a total purchase price of $850,000.00. (2nd Am. Compl. ¶ 77.) Kenneth King agreed to purchase
ten (10) lots and informed Hollingsworth that any purchase would be made through BDM. (2nd Am. Compl. ¶¶ 78, 85.)
[*28] Plaintiffs allege that Hollingsworth had dominion and control over the transaction. They assert that they relied
entirely on Hollingsworth who told Kenneth King that he would personally select the specific ten (10) lots for sale to
Page 662Page 662
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
BDM and take [**16] all necessary steps to consummate the transaction, including arranging financing in the form of a
ninety percent (90%) loan with BDM paying a down payment of only ten percent (10%) of the purchase price. (2nd Am.
Compl. ¶¶ 80-82.) The loan terms were to include an "interest only" repayment obligation in the first year with Lenhil
and Lennon Hills paying all of the first year's interest. (2nd Am. Compl. ¶ 82.) Hollingsworth reiterated that Lenhil and
Lennon Hills would repurchase the lots from BDM at a profit within twelve (12) months so that the favorable interest
only financing with no cost to the Plaintiffs was only necessary for one (1) year. (2nd Am. Compl. ¶ 82.) The repurchase
provision was not, however, referenced in the purchase contract or the closing documents.
[*29] On December 5, 2006, BDM signed a Home Site Purchase Agreement ("Purchase Agreement") with Lenhil and
Lennon Hills for the purchase of ten (10) lots in the Lennon Hills subdivision. (2nd Am. Compl. ¶ 87.) Plaintiffs were
presented with a layout of the subdivision on which Hollingsworth noted the specific lots that he had selected for the
Plaintiffs to purchase, which plot Plaintiffs now claim had not been recorded [**17] in the Brunswick County Register
of Deeds. (2nd Am. Compl. ¶ 87.) Plaintiffs were instructed to make and made an earnest money down payment of
$30,000.00 to secure their right to purchase the lots. (2nd Am. Compl. ¶ 87.)
[*30] BDM's $30,000.00 earnest money down payment was placed on deposit with Gary Lawrence who served as an
escrow agent for the land sale transaction. (2nd Am. Compl. ¶ 88.) Gary Lawrence's position as escrow agent was
clearly disclosed on the first page of the Purchase Agreement. (2nd Am. Compl. Ex. B at 1.) At Hollingsworth's
direction, Gary Lawrence later served as BDM's closing attorney. (2nd Am. Compl. ¶ 88.) The closing documents
referred to in the Second Amended Complaint reveal clearly that Gary Lawrence was both escrow agent and closing
attorney, an act Plaintiffs now allege was malpractice, although they also contend that they were not aware of
Lawrence's prior relationship with Hollingsworth and the Lennon Hills development, and contend that his dual role
constituted an incurable conflict of interest that was not discovered until well after the Plaintiffs closed on the Lennon
Hills lots and within the applicable statute of limitations. (2nd Am. Compl. ¶ 88.)
[*31] [**18] Shortly after signing the Purchase Agreement, Hollingsworth called Kenneth King and informed him that
Cooperative Bank, Hollingsworth's initial selected lender, was "moving slowly" in providing financing on the
previously promised terms. (2nd Am. Compl. ¶ 89.) Hollingsworth later secured financing from Wachovia. Plaintiffs
never met with or requested to meet with or speak to any potential lenders. (2nd Am. Compl. ¶ 89.) Plaintiffs allege that
they have now learned that Cooperative Bank declined to extend financing because the loan terms sought by
Hollingsworth requiring a ten percent (10%) down payment and a ninety percent (90%) loan were inappropriate for the
sale of undeveloped lots and outside the scope of accepted lending principles, as a result of which the FDIC had directed
Cooperative Bank not to make loans for undeveloped lots on such terms. (2nd Am. Compl. ¶ 90.)
[*32] Hollingsworth later contacted Kenneth King advising him of a problem with the appraisal. (2nd Am. Compl. ¶
91.) Hollingsworth told King that the selected appraiser intended to charge $400.00 per lot to inspect the ten (10) lots in
bulk. (2nd Am. Compl. ¶ 91.) Hollingsworth said the price was "excessively high" and [**19] then secured Keith
Meyers and Meyers Appraisal Services, LLC who agreed to appraise all ten (10) lots for a total fee of $2,000.00. (2nd
Am. Compl. ¶ 91.) Plaintiffs contend that the bulk appraisal of undeveloped lots is a violation of regulatory
requirements. Despite never seeing the appraisal before the closing, Plaintiffs contend that they relied on its contents in
deciding whether to purchase the Lennon Hills lots.9 (2nd Am. Compl. ¶ 91.) Plaintiffs did not participate or seek to
participate in the appraisal process in any way. (2nd Am. Compl. ¶ 91.)
9 Plaintiffs do not allege that they contracted for these appraisals or that they were contracted for on anyone's behalf other than the lender.
See Allran v. Branch Banking & Trust, No. 10-CVS-5482, 2011 NCBC LEXIS 20, 2011 WL 2652133, at *5 (N.C. Super. Ct. July 6, 2011);
See also Camp v. Leonard, 133 N.C. App. 554, 559, 515 S.E.2d 909, 913 (1999). The Court need not here address the question of whether
the Plaintiffs have any claim against the appraiser who has not been served or against the lender which is not a Party.
[*33] Plaintiffs allege that the Defendants desired for the first appraiser to value each lot at $85,000.00, but when the
appraiser refused [**20] because there were no "comparables" for the lots upon which to base such a valuation, the
Defendants orchestrated their own comparables by selling several single lots to three (3) individual lot purchasers at
$85,000.00 per lot. (2nd Am. Compl. ¶¶ 92-93.) The individual lots were sold to Terry Hollingsworth, Barbara Grela,
and William K. Rucker, all of whom have previous relationships with one or more of the Defendants.10 (2nd Am. Compl.
¶¶ 94-96.) Once the "comparables" were obtained, Defendants contacted Keith Meyers who agreed to appraise the lots
in bulk at a price of $85,000.00 per lot. (2nd Am. Compl. ¶ 97.) Plaintiffs allege there were no further single lot sales
after the Defendants created the "comparables" necessary to establish the $85,000.00 lot price. (2nd Am. Compl. ¶ 98.)
Page 663Page 663
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
10 Terry Hollingsworth is the brother of Defendant Hollingsworth; Barbara Grela allegedly has a long-standing business relationship with
Gary and Pam Lawrence; and William Rucker is alleged to have a longstanding business relationship with "the defendants." (2nd Am.
Compl. ¶¶ 94-96.) Plaintiffs assert that the sales, established by public records of which the Court can take judicial notice, were sold [**21]
at the $85,000.00 contract price and were not legitimate sales. The Defendants counter that should the Court accept matters from the public
record, that same public record would also demonstrate that borrowed funds were used to consummate the purchases, and as a result of
which the Court should conclude the sales were legitimate sales for an appraiser to consider. The Court elects not to consider either of these
allegations upon a motion to dismiss, and therefore accepts, for purposes of these motions only, that Plaintiffs have adequately alleged that
the appraisals were inflated. Obviously, if Defendants are correct, Plaintiffs will have to contend with these proof problems in later
responding to motions for summary judgment.
[*34] After Hollingsworth completed all of the paperwork related to the sale, he scheduled a meeting with Kenneth
King in a parking lot where a "closing" of sorts occurred. (2nd Am. Compl. ¶ 101.) No attorneys appeared at the closing
and only Hollingsworth and Kenneth King were present. (2nd Am. Compl. ¶ 101.) Plaintiffs do not allege that they met
with or asked to meet with their closing attorney. In fact, Plaintiffs contend they only later learned that Gary Lawrence
[**22] was the closing attorney. They also contend that he should have been present at the closing. (2nd Am. Compl. ¶
101.) Plaintiffs also allege that documents essential to the closing were notarized by Chantel L. Lane, indicating that
Kenneth King had signed those documents before a notary when in truth he had not. (2nd Am. Compl. ¶ 101.) There is
no allegation that Plaintiffs questioned the atypical closing process at the time. (See 2nd Am. Compl. ¶ 101.)
[*35] At the parking lot closing, Kenneth King provided Hollingsworth with a check for $63,526.48 representing the
closing costs and the remainder of the ten percent (10%) down payment. (2nd Am. Compl. ¶ 104.)
[*36] The HUD Settlement Statement ("Settlement Statement") for the purchase, which Kenneth King signed,
identifies commission payments to Lawrence S&M and Viable in the amount of $42,500.00 each. 11 Plaintiffs allege they
were led to believe that the $85,000.00 represented a standard ten percent (10%) real estate sales commission which was
to be split between two (2) realtors. Plaintiffs now allege, on information and belief, that the payment to Viable was
either a secret payment made to Hollingsworth as a commission for selling the ten (10) [**23] lots to Plaintiffs, a
kickback payment to Lenhil, Lennon Hills, Burnett, Hilla, and/or Lennon to be used to pay the first year's interest
payment on the BDM loan, or simply a means of improperly funneling money to the various Defendants. (2nd Am.
Compl. ¶ 108.) Plaintiffs contend that they were unaware of Pam Lawrence's interest in Lawrence S&M and her
marriage to Gary Lawrence, although there is also no allegation that Plaintiffs ever inquired about a possible
relationship between them. Plaintiffs further assert that Gary Lawrence failed to disclose the commission paid to
Lawrence S&M, allege on information and belief that Lawrence S&M performed no services entitling it to a
commission, and believe that the funds were passed to Lawrence S&M as a means of improperly funneling funds to
members of the Defendants' conspiracy to take advantage of the Plaintiffs. (2nd Am. Compl. ¶¶ 111-112.)
11 The record does not make clear what documents Kenneth King received in the closing package or in March 2007 when he received a
signed copy of the fully executed Settlement Statement.
[*37] During all relevant times, Gary Lawrence was a tenant in a building owned by Viable and/or Burnett and
Lennon, and based [**24] on his prior relationship with Viable, Gary Lawrence knew Viable was not a licensed realtor
or agency entitled to a commission for the sale. (2nd Am. Compl. ¶ 114.) Again, although it appears plainly on the
Settlement Statement, Plaintiffs contend that Gary Lawrence failed to disclose the commission paid to Viable. (2nd Am.
Compl. ¶ 114.)
[*38] When receiving the Settlement Statement, Kenneth King and BDM discovered that a payoff of a first mortgage
owed to BB&T in the amount of $347,632.49 had been extracted from the loan proceeds/purchase price paid by BDM.
(2nd Am. Compl. ¶ 105.) Plaintiffs contend that Hollingsworth should have informed them that the Lennon Hills lots
were encumbered by a first mortgage. (2nd Am. Compl. ¶ 105.)
[*39] Plaintiffs also allege Lennon filed a lien on the Lennon Hills development in the amount of $15,000,000.00 in
the Brunswick County Register of Deeds. (2nd Am. Compl. ¶ 107.) Plaintiffs allege they did not learn of this lien until
much later when preparing for the filing of their Complaint.
[*40] To date, Plaintiffs allege that they have expended more than $300,000.00 by making payments on the loans on
the "nearly worthless" Lennon Hills lots. (2nd Am. Compl. ¶ 124.) [**25] Plaintiffs now assert that they would have
Page 664Page 664
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
never purchased the ten (10) lots had they known about the extensive misrepresentations, conflicts of interest, hidden
shared interests, conspiracies, banking violations, appraisal violations, and other information now known. (2nd Am.
Compl. ¶ 123.) Plaintiffs still owe the entire $765,000.00 principal balance of the Wachovia loan. (2nd Am. Compl. ¶
124.)
IV. STANDARD OF REVIEW FOR MOTIONS TO DISMISS OR JUDGMENT ON THE PLEADINGS 12
12 The Court separately addresses the Rule 12(f) standard of review when discussing the motion to strike after its analysis of the 12(b)(6)
motions.
[*41] [HN2] The appropriate inquiry on a motion to dismiss is "whether, as a matter of law, the allegations of the
complaint, treated as true, are sufficient to state a claim upon which relief may be granted under some legal theory,
whether properly labeled or not." Crouse v. Mineo, 189 N.C. App. 232, 237, 658 S.E.2d 33, 36 (2008); Harris v. NCNB
Nat'l Bank of N.C., 85 N.C. App. 669, 670-71, 355 S.E.2d 838, 840-41 (1987); see Sutton v. Duke, 277 N.C. 94, 102-03,
176 S.E.2d 161, 166 (1970). The standard of review for a Rule 12(c) motion is the same. A-1 Pavement Marking, LLC
v. APMI Corp., 2008 NCBC 13 ¶ 35 (N.C. Super. Ct. Aug. 4, 2008), [**26]
http://ncbusinesscourt.net/opinions/2008_NCBC _13.pdf. The function of Rule 12(c) "is to dispose of baseless claims or
defenses when the formal pleadings reveal their lack of merit." Ragsdale v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d
494, 499 (1974). Where "the Court also can construe the plain and unambiguous language of a contract to determine if it
has been breached, judgment on the pleadings may be appropriate." Praxair, Inc. v. Airgas, Inc., 1999 NCBC 5 ¶ 5 (N.C.
Super. Ct. May 26, 1999), http://ncbusinesscourt.net/opinions/ 1999%20NCBC%205.htm.
V. ANALYSIS OF THE MOTIONS TO DISMISS AND FOR JUDGMENT ON THE PLEADINGS
A. Defendants' Motions to Dismiss

[*42] Defendants' motions ask that the Second Amended Complaint be dismissed in its entirety, asserting that: (1) the
Individual Plaintiffs' claims should be dismissed for lack of standing as the claims must be brought solely by the
partnership; (2) all claims are time-barred by the statute of limitations; (3) BDM is foreclosed from asserting any claims
due to its failure to file a Certificate of Assumed Name in Brunswick County pursuant to N.C.G.S. § 66-68; and (4)
Plaintiffs' remaining claims lack factual allegations sufficient to withstand [**27] scrutiny under Rules 12 (c) and 12(b)
(6).13
13 Defendants move to dismiss the legal malpractice claim against Gary Lawrence based on the statute of limitations, but do not otherwise
test the legal sufficiency of the claim by the current motions.
1. The Individual Plaintiffs Lack Standing

[*43] Defendants assert that the Individual Plaintiffs lack standing to pursue individual claims because they have not
alleged an injury separate and distinct from that suffered by BDM.
[*44] [HN3] "[W]hen property is owned by a partnership, the partnership is the real party in interest for purposes of
pursuing a civil action pertaining to the partnership property." Ron Medlin Constr. v. Harris, 364 N.C. 577, 704 S.E.2d
486, 491, 2010 N.C. LEXIS 1079 (2010) (citing Roller v. McKinney, 159 N.C. 319, 320-21, 74 S.E. 966, 966-67 (1912)
and Godwin v. Vinson, 251 N.C. 326, 327, 111 S.E.2d 180, 181 (1959) (per curiam)). The individual partners may not
sue in their own name, Energy Investors Fund, L.P. v. Metric Constructors, Inc., 351 N.C. 331, 337, 525 S.E.2d 441,
445 (2000), unless "(1) a plaintiff alleges an injury 'separate and distinct' to himself, or (2) the injuries arise out of a
'special duty' running from the alleged wrongdoer to [**28] the plaintiff." Id. at 335 (analogizing the relationship of
partners and the partnership to corporate shareholders and the corporation). Under the special duty exception, the duty
owed by the wrongdoer to the individual partner must be different from the duty owed to the partnership. Gaskin v. J.S.
Procter Co., LLC, 196 N.C. App. 447, 675 S.E.2d 115 (2009).
Page 665Page 665
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*45] The Second Amended Complaint fails to allege an injury suffered by any Individual Plaintiff that is separate and
distinct from the injury suffered by BDM and contains no allegations sufficient to establish a special duty running from
the Defendants to the Individual Plaintiffs.
[*46] The Individual Plaintiffs' claims should then be DISMISSED.
2. The Partnership Has Failed to State Claims Against Pam Lawrence, Lawrence S&M, Evans, and Homeplace
[*47] Plaintiffs seek to impose liability on Pam Lawrence, Lawrence S&M, Evans, and Homeplace, relying on the
broad conclusory assertion that they were part of the conspiracy because they benefited from the transaction. However,
the Second Amended Complaint does not allege any underlying factual predicate adequate to tie them to the conspiracy.
[*48] At oral argument, Plaintiffs admitted that Pam Lawrence did [**29] not make any actionable misrepresentations
in connection with the sale to BDM, but they believe liability should be imposed based on her awareness of how the lot
transaction unfolded and her participation in the sales proceeds. Without a predicate act tying Pam Lawrence to the
alleged conspiracy, all claims against her and Lawrence S&M should be DISMISSED.
[*49] Plaintiffs have likewise failed to allege a factual basis for imposing liability upon Evans and Homeplace. There
are no allegations that Evans made any specific misrepresentations in connection with the sale to BDM. In fact,
Plaintiffs' allegations indicate that Hollingsworth concealed his allegedly improper commission from Evans,
Homeplace, and the Exit defendants. (2nd Am. Compl. ¶ 110.) Plaintiffs' claims against Evans and Homeplace should
be DISMISSED.
3. Some But Not All Claims Against Remaining Defendants Are Barred by the Statute of Limitations 14
14 This section of the Memorandum addresses the limitations period that controls claims stated against the Defendants individually. As noted
in a subsequent section, there are factual disputes as to whether a ten (10) year limitation period must be applied to breach of fiduciary
claims [**30] against Hollingsworth and, therefore, to conspiracy claims grounded on that breach.
[*50] Defendants assert that Plaintiffs' claims for negligence, gross negligence, civil conspiracy, conversion, breach of
contract, breach of the covenant of good faith and fair dealing, and unjust enrichment are time-barred by the applicable
three (3) year statute of limitations. They likewise contend that Plaintiffs' claims for fraud, negligent misrepresentation,
and constructive fraud are barred because the Plaintiffs should have discovered facts giving rise to those claims more
than three (3) years before filing this lawsuit.
[*51] [HN4] Whether a statute of limitations defense should be resolved by a Rule 12(b)(6) motion or must await a
Rule 56 motion for summary judgment depends on whether the facts necessary to adjudicate the defense are
demonstrated by the complaint itself or whether additional evidence must be considered. "A statute of limitations can be
the basis for dismissal on a Rule 12(b)(6) motion if the face of the complaint discloses that plaintiff's claim is so
barred." Reunion Land Co. v. Village of Marvin, 129 N.C. App. 249, 250, 497 S.E.2d 446, 447 (1998) (citation omitted).
a. Plaintiffs Concede [**31] that the Negligence, Gross Negligence, Conversion, and Breach of Contract Claims
Against All But Lenhil Are Time-Barred
[*52] [HN5] North Carolina law provides a three (3) year statute of limitations for claims based on negligence, gross
negligence, conversion, breach of contract, and breach of implied duty of good faith and fair dealing. N.C. GEN. STAT. §
1-52 (2011). When Plaintiffs discover the harm is generally irrelevant because under G.S. § 1-52, "the statute begins to
run when the claim accrues; for breach of contract, the claim accrues upon the breach." Miller v. Randolph, 124 N.C.
App. 779, 781, 478 S.E.2d 668, 670 (1996).
[*53] Defendants assert that the harm against BDM was complete by March 1, 2007, the date on which Plaintiffs
closed the lot purchase. Plaintiffs filed this action on February 28, 2011, almost four (4) years later.
[*54] In Plaintiffs' Brief in Response to Defendants' Consolidated Brief Supporting Motions Related to Plaintiffs'
Second Amended Complaint ("Pls.' Resp. Br.") and during oral argument, Plaintiffs conceded that their claims for
negligence, gross negligence, and conversion are barred by the statute of limitations. They should then be DISMISSED.
Page 666Page 666
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*55] Plaintiffs likewise concede [**32] that their claims for breach of contract and the implied duty of good faith and
fair dealing are time-barred against all Defendants except the Lennon Hills Defendants. These claims should then be
DISMISSED. As to the Lennon Hill Defendants, Plaintiffs contend that the contract action is ten (10) years because the
claims are based on instruments signed under seal. That claim is separately discussed below.
b. The Contract Claims Against the Lennon Hills Defendants Are Not Governed By A Ten Year Limitations
Period and Should Be Dismissed and Quasi-Contract Claims Are Barred Because They Arise From the Contract
[*56] Plaintiffs seek the protection of the ten (10) year statute of limitations for documents under seal provided by G.S.
§ 1-47.2. The Lennon Hills Defendants advocate for application of the three (3) year statute of limitations in G.S. § 1-
52(1) for actions "[u]pon a contract, obligation or liability arising out of contract, express or implied . . ." N.C. GEN.
STAT. § 1-52(1) (2011).
[*57] [HN6] G.S. § 1-47.2 provides that an action "[u]pon a sealed instrument or an instrument of conveyance of an
interest in real property, against the principal thereto . . . ." must be filed within ten (10) years [**33] of execution. N.C.
GEN. STAT. § 1-47(2) (2011). By its own terms, G.S. § 1-47(2) applies only to "sealed instrument[s]" and instruments
conveying an "interest in real property." N.C. GEN. STAT. § 1-47(2) (2011). The Purchase Agreement does not satisfy
either criterion.
[*58] Plaintiffs have not alleged or established that the Purchase Agreement was, in fact, signed under seal. The copy
of the Purchase Agreement attached as Exhibit B to the Second Amended Complaint includes the term "SEAL" next to
the Purchaser's signature line but no similar notation accompanies the Seller's signature line. [HN7] While an executed
contract with the term "SEAL" "in brackets is sufficient to overcome the three (3) year statute of limitations applicable
to breach of contract actions," Biggers v. Evangelist, 71 N.C. App. 35, 39, 321 S.E.2d 524, the statement logically
applies only to a claim against the party whose signature was under seal, which here was only the purchaser and not the
seller. Further, Plaintiffs have failed either to attach an executed copy of the contract or to allege that Lenhil or Lennon
Hills signed the contract under seal or affixed to it a corporate seal. Accordingly, the Purchase Agreement [**34] is not
properly considered a "sealed instrument" within the meaning of G.S. § 1-47(2).
[*59] Further and independently, the Purchase Agreement is not an "instrument of conveyance of an interest in real
property" within the meaning of G.S. § 1-47(2). [HN8] An instrument of conveyance is a document which actually
conveys an interest in real property, while a contract, such as the Purchase Agreement, merely evidences a promise to
convey real property at a later date upon the satisfaction of certain conditions.
[*60] "A conveyance of land can only be by deed." New Home Bldg. Supply Co. v. Nations, 259 N.C. 681, 683, 131
S.E.2d 425, 427 (citing Ward v. Gay, 137 N.C. 397, 49 S.E. 884 (1905)). "The word 'deed' ordinarily denotes an
instrument in writing, signed, sealed, and delivered by the grantor, whereby an interest in realty is transferred from the
grantor to the grantee." Gifford v. Linnell, 157 N.C. App. 530, 532, 579 S.E.2d 440, 442 (2008) (citation omitted). The
Purchase Agreement is not a deed and it does not convey an interest in real property; it merely evidences intent to
convey the property to BDM "[a]t the closing . . . by general warranty deed." (See 2nd Am. Compl. Ex. B ¶ 6.)
[*61] Plaintiffs' contract [**35] based claims are governed by the three (3) year statute of limitations set forth in G.S.
§ 1-52(1). The claim for breach of contract against the Lennon Hill Defendants is then time-barred. It follows that
Plaintiffs' claim for breach of the implied duty of good faith and fair dealing arising from that contract is also time-
barred. These claims should be DISMISSED.
[*62] [HN9] A claim for unjust enrichment is an equitable claim based on a theory of quasi or implied contracts. Atl.
& E. Carolina Ry. Co. v. Wheatly Oil Co., 163 N.C. App. 748, 753, 594 S.E.2d 425, 429 (2004). "[I]f there is a contract
between the parties [,] the contract governs the claim[,] and the law will not imply a contract." Booe v. Shadrick, 322
N.C. 567, 571, 369 S.E.2d 554, 554 (1988); see Delta Envtl. Consultants, Inc. v. Wysong & Miles Co., 132 N.C. App.
160, 165, 510 S.E.2d 690, 694 (1999) (indicating that "[i]t is well established that if there is a contract between the
parties, the contract governs the claim and the law will not imply a contract . . . [In such cases] an action for breach of
contract, rather than unjust enrichment, is the proper cause of action").
[*63] It then follows that any unjust enrichment claim [**36] against the Lennon Hills Defendants should be
DISMISSED.
c. Factual Issues Preclude Dismissing Plaintiffs' Claims for Misrepresentation, Fraud, Civil Conspiracy, and
Unjust Enrichment Against Some Defendants
Page 667Page 667
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*64] Plaintiffs contend their claims for negligent misrepresentation, fraud, and constructive fraud are not barred by
the three (3) year statute of limitations because they did not discover the alleged wrongdoing until well after the closing
and that the actions are timely when measured from the date of discovery. They further assert that their claims for civil
conspiracy and unjust enrichment survive because they are predicated on the underlying acts of fraud, constructive
fraud, and negligent misrepresentation.
[*65] [HN10] The statute of limitations for claims of negligent misrepresentation, fraud, and constructive fraud is
three (3) years. N.C. GEN. STAT. § 1-52(5) (2011) (negligent misrepresentation); N.C. GEN. STAT. § 1-52(9) (2011)
(fraud). However, a claim for negligent misrepresentation "does not accrue until two events occur: first, the claimant
suffers harm because of the misrepresentation, and second, the claimant discovers the misrepresentation." Barger v.
McCoy Hillard & Parks, 346 N.C. 650, 666, 488 S.E.2d 215, 224 (1997). [**37] [HN11] "A cause of action alleging
fraud is deemed to accrue upon discovery by the plaintiff of facts constituting the fraud." Carlisle v. Keith, 169 N.C.
App. 674, 683, 614 S.E.2d 542, 548 (2005). "Where a person is aware of facts and circumstances which, in the exercise
of due care, would enable him or her to learn of or discover the fraud, the fraud is discovered for the purposes of the
statute of limitations." Jennings v. Lindsey, 69 N.C. App. 710, 715, 318 S.E.2d 318, 321 (1984) (citations omitted).
"'Discovery' is defined as actual discovery or the time when the fraud should have been discovered through the exercise
of due diligence." Spears v. Moore, 145 N.C. App. 706, 708, 551 S.E.2d 483, 485 (2001). "Whether a plaintiff has
exercised due diligence is ordinarily an issue of fact for a jury . . . [but] failure to exercise due diligence may be
determined as a matter of law . . . where it is 'clear that there was both capacity and opportunity to discover the
mistake.'" Id. at 708-09 (quoting Huss v. Huss, 31 N.C. App. 463, 468, 230 S.E.2d 159, 163 (1976)). "Where a
confidential relationship exists between the parties, failure to discover the facts constituting the fraud may be excused."
[**38] Kaylor v. Fox, No. COA01-1272, 2008 N.C. App. LEXIS 1154, at *5 (2008) (citing Small v. Dorsett, 223 N.C.
754, 761, 28 S.E.2d 514, 518 (1944)). "[I]t is generally held that when it appears that by reason of the confidence
reposed the confiding party is actually deterred from sooner suspecting or discovering the fraud, he 'is under no duty to
make inquiry until something occurs to excite his suspicions.'" Id. (citing Vail v. Vail, 233 N.C. 109, 116-17, 63 S.E.2d
202, 208 (1951) (quotations omitted)).
[*66] Plaintiffs allege that they could not have discovered and did not discover the fraud and misrepresentations of the
Defendants until well after March 1, 2007. (2nd Am. Compl. ¶¶ 105, 106, 107, 147, 149.) Defendants present an
argument that has some force that Plaintiffs' position is belied by the fact that that many of the Defendants' alleged
misrepresentations concern matters disclosed in the Settlement Statement or in documents which were publicly
available at the Brunswick County Register of Deeds. The arguments gain more strength because the Individual
Plaintiffs are licensed attorneys who apparently paid very little attention or concern to the details of the transaction. But,
ultimately, [**39] there is disputed evidence of what the Plaintiffs discovered or should have discovered. These issues
may ultimately have to be revisited upon summary judgment but they cannot be resolved at this stage of the
proceedings. If it ultimately proves that Plaintiffs should reasonably have been on notice well before March 1, 2007 that
they had a claim for misrepresentation, dismissal of the claims on limitation grounds may be warranted even though
Plaintiffs did not discover the full extent of the misrepresentations until a later point in time. 15 Plaintiffs' claims for
negligent misrepresentation, fraud, and constructive fraud survive the present motions against Defendants who are not
being dismissed on other grounds. Likewise, Plaintiffs' claims against those Defendants for civil conspiracy and unjust
enrichment survive.
15 Defendants emphasize that, at a minimum, Plaintiffs should have been on notice that something was awry when the developers did not
repurchase the lot one (1) year after closing as promised. Plaintiffs respond that this event is not unusual considering the change in the
economic climate. Even so, if this were the first notice of wrong, the action was started within three [**40] (3) years thereafter.
d. The Legal Malpractice Claim against Gary Lawrence Which Includes the Breach of Fiduciary Duty Claim Is
Time-Barred While the Fraud Claim Against Him Survives
[*67] Gary Lawrence moves to dismiss claims against him based on the four (4) year statute of repose and the three (3)
year statute of limitations set forth in G.S. § 1-15(c).
[*68] Pursuant to G.S. § 1-15(c),
[HN12] a cause of action for malpractice arising out of the performance of or failure to perform professional services shall be
deemed to accrue at the time of the occurrence of the last act of the defendant giving rise to the cause of action: Provided that
Page 668Page 668
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
whenever there is . . . economic or monetary loss . . . not readily apparent to the claimant at the time of its origin, and the . . . loss . .
. or damage is discovered or should reasonably be discovered by the claimant two or more years after the occurrence of the last act
of the defendant giving rise to the cause of action, suit must be commenced within one year from the date discovery is made:
Provided . . . that in no event shall an action be commenced more than four years from the last act of the defendant giving rise to
the cause of action . . .
N.C. GEN. STAT. § 1-15(c) [**41] (2011).

[*69] [HN13] North Carolina courts have construed G.S. § 1-15(c) to provide that the statute of limitations begins to
run when the services sought by the plaintiff have been completed or are no longer necessary. See McGahren v. Saenger,
118 N.C. App. 649, 456 S.E.2d 852, disc. rev. denied, 340 N.C. 568, 460 S.E.2d 318 (1995) (holding that the statute of
limitations for legal malpractice claim arising out defective deed accrued upon the attorney's delivery of the deed to the
plaintiff, despite plaintiff's failure to discover the defect until some time later).
[*70] The Second Amended Complaint indicates that the services sought by Plaintiffs were complete at least by March
30, 2007, the end of the month of closing and the date on which Gary Lawrence sent the general warranty deed. (2nd
Am. Compl. ¶ 117.) [HN14] To take advantage of the longer four (4) year statute of repose, Plaintiffs must allege: (1)
the existence of economic or monetary loss not readily apparent at the time of its origin; (2) that such damage was
discovered or should have reasonably been discovered two (2) or more years after March 30, 2007; and (3) that suit was
commenced within one (1) year from the date of discovery. N.C. GEN. STAT. § 1-15(c) [**42] (2011).
[*71] Plaintiffs do not specifically allege the date on which the alleged malpractice was discovered, or whether suit
was filed within one (1) year of that discovery. Plaintiffs aver that they were unable to discover the alleged conflicts of
interest, ethical bars, misrepresentations, negligence, and other wrongful acts of Gary Lawrence until sometime after the
lot transaction closed. (2nd Am. Compl. ¶¶ 105, 106, 107, 147, 149.)
[*72] However, Plaintiffs' allegations demonstrate that at least one basis on which they contend malpractice occurred
was apparent no later than March 30, 2007. Specifically, Plaintiffs aver that Gary Lawrence committed malpractice
because "[a]t no time did anyone associated with defendants . . . ever advise plaintiffs that defendant [Gary] Lawrence
was occupying the unlawful and unethical position of plaintiffs' closing attorney while also acting as the escrow agent
for the parties to the land transaction." (2nd Am. Compl. ¶ 88.) The Purchase Agreement signed by Kenneth King on
December 6, 2006 unambiguously states that "[a]ll earnest money paid by [Plaintiffs] hereunder shall be held in an
escrow account controlled by Gary Lawrence, as escrow agent." (2nd Am. [**43] Compl. Ex. B.) Plaintiffs further
allege that the malpractice included Gary Lawrence's failure to attend the parking lot closing. Obviously, Kenneth King
knew that Lawrence did not attend the closing, although they also allege that they did not know he was the closing
attorney until receiving his March 30, 2007 correspondence enclosing the deed. Plaintiffs allege that "[a]t no time did
defendant[ ] Gary Lawrence . . . ever reveal . . . that Pam Lawrence was closely connected to the Lennon Hills
subdivision and would be receiving a commission in connection with plaintiffs' lot purchases" and that "Gary Lawrence
never disclosed to plaintiffs that he was disbursing $42,500.00 of the purchase price to defendant Viable." (2nd Am.
Compl. ¶¶ 111, 114.) The Settlement Agreement, signed by Kenneth King as of March 1, 2007, and also signed by Gary
Lawrence, clearly discloses a $42,500.00 commission payment to both "Lawrence Sales and Marketing" and "Viable
Corp." (2nd Am. Compl. Ex. C.)
[*73] While Plaintiffs may not have known every fact which they have now discovered and which they claim
constitutes malpractice within two (2) years of March 30, 2007, Plaintiffs' own allegations in the Second Amended
[**44] Complaint demonstrate that certain facts on which they base their claim were readily apparent "at the time of the
occurrence of the last act of [Gary Lawrence] giving rise to the cause of action[.]" N.C. GEN. STAT. § 1-15(c) (2011).
[*74] Because [HN15] "[b]reach of fiduciary duty is a species of negligence or professional malpractice[,]" Plaintiffs'
breach of fiduciary claim against Gary Lawrence is included in the malpractice claim and is also barred by the three (3)
year statute of limitations. See Heath v. Craighill, Rendleman, Ingle & Blythe, P.A., 97 N.C. App. 236, 244, 388 S.E.2d
178, 183 (1990) (citing Childers v. Hayes, 77 N.C. App. 792, 795, 336 S.E.2d 146, 148 (1985)). The Second Amended
Complaint and the documents it incorporates demonstrate that Plaintiffs are not entitled to the four (4) year statute of
repose in G.S. § 1-15(c). Plaintiffs' claim for legal malpractice against Gary Lawrence, and the fiduciary duty claim it
encompasses are then DISMISSED.
[*75] Although the fiduciary duty claim against Gary Lawrence may be merged into the action for professional
malpractice, the action grounded on fraud is not. [HN16] "Fraud by an attorney . . . is not within the scope of
'professional services' [**45] . . . [and] cannot be 'malpractice' within the meaning of [G.S. § 1-15(c)]." Sharp v.
Page 669Page 669
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Teague, 113 N.C. App. 589, 592, 439 S.E.2d 792, 794, review improvidently granted, 339 N.C. 730, 456 S.E.2d 771
(1995). As discussed below, the fraud claims survive the motions to dismiss.
4. It is Premature to Decide Whether the Action Should Be Dismissed Because of BDM's Failure to Allege the
Filing of a Certificate of Assumed Name in Brunswick County
[*76] Defendants move to dismiss all claims in the Second Amended Complaint because Plaintiffs did not plead that
the partnership filed a Certificate of Assumed Name ("Certificate") in Brunswick County pursuant to G.S. § 1-69.1 and
G.S. § 66-68. Plaintiffs contend alternatively that BDM is not subject to this statute or, if the statute applies, Plaintiffs
substantially complied with the statute's purposes. The Court finds that there are factual issues which preclude a
determination at this time whether Plaintiffs are subject to or have satisfied the statutory requirements.
[*77] As an initial matter, the Court notes that the defense raised does not attack the real estate transaction itself or the
fact that title was transferred to the Partnership. The defense relates [**46] only to whether BDM has the right to access
the courts to assert claims based on the real estate it purchased.
[*78] Plaintiffs first assert that the statute does not apply to BDM because it "does not engage in any business of any
sort other than to hold real estate." (2nd Am. Compl. ¶ 3.)
[*79] [HN17] "An unincorporated association may sue in its own name, without naming any of the individual
members composing it, but only if the association alleged in its complaint the 'specific location of the recordation
required by G.S. 66-68.'" Cherokee Home Demonstration Club v. Oxendine, 100 N.C. App. 622, 625, 397 S.E.2d 643,
645 (1990) (quoting N.C. GEN. STAT. § 1-69.1 (2011)). Oxendine recognized that title had passed and had vested in the
association, but held that the association could not bring suit based on its title.
[*80] G.S. § 66-68 provides in pertinent part:
[HN18] (a) [**47] . . . before any person or partnership engages in business in any county in this State under an assumed name or
under any designation, name or style other than the real name of the owner or owners thereof, . . . such . . . partnership . . . must file
in the office of the register of deeds of such county a certificate giving the following information:
(1) The name under which the business is to be conducted; and
(2) The name and address of the owner, or if there is more than one owner, the name and address of each.
(b) If the owner is a . . . partnership, the certificate must be signed and duly acknowledged by . . . each general partner.
(c) Whenever a general partner withdraws from or a new general partner joins a partnership, a new certificate shall be filed.
N.C. GEN. STAT. § 66-68 (2011).

[*81] [HN19] Unlike statutes dealing with foreign corporations doing business in North Carolina, G.S. 66-68 does not
include its own definition of "doing business."16
16 Cf. G.S. 55-15, which requires a foreign corporation to obtain a certificate of authority in order to maintain litigation in the North
Carolina courts if it is doing business in the State. That statute defines "doing business," and includes a specific [**48] provision that the
passive holding of title to real estate does not alone constitute doing business requiring that a certificate of authority be obtained. See N.C.
GEN. STAT. §§ 55-15-01, 55-15-02 (2011).
[*82] In an effort to comply with the mandates of G.S. § 1-69.1 and 66-68, Plaintiffs allege:
[BDM] did in fact prepare and file in the County of Onslow, State of North Carolina, the Certificate attached hereto as Exhibit A.
Plaintiff BDM filed the subject Certificate on January 1, 1993, and said Certificate was recorded with the Register of Deeds' Office
in Onslow County, North Carolina on Book 1104, Page 694, at 9:26 a.m. on the 15th day of April,, (sic) 1993.
(2nd Am. Compl. ¶ 3.)

[*83] The statutory language is such that if BDM was "doing business" in Brunswick County, the Certificate filed in
Onslow County would not be sufficient to satisfy the statutory requirements because: (1) the Certificate attached as
Exhibit A was filed in Onslow County instead of Brunswick County where the property is located; (2) Leah L. King is
not a signatory to the Certificate; and (3) a new certificate was not filed when Clay A. Brumhaugh and Cheryl J. Leone
withdrew as general partners or when Leah L. King was [**49] admitted.
Page 670Page 670
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*84] Plaintiffs contend that passively holding title to real property is not "doing business" within the meaning of the
statute. If it is ultimately determined that the activities associated with negotiating and closing the real estate investment
constitutes "doing business," it is not clear at this time whether those activities occurred in Brunswick County or in
Onslow County where a Certificate had been filed.
[*85] As to Plaintiffs' argument that they complied with the statute's purposes, the statute is designed to assure that
persons doing business with the unincorporated association are aware of with whom they are dealing. See Price v.
Edwards, 178 N.C. 493, 101 S.E. 33 (1919). At least Hollingsworth appears to have been well acquainted with the
Partnership and may likely have been specifically aware of who were its individual members. At the same time,
[HN20] a technical failure to comply with the statute can lead to dismissal. See Oxendine, 100 N.C. App. 622, 397
S.E.2d 643.
[*86] The Court concludes that there are factual issues that have not been sufficiently established to develop the record
on which issues under G.S. § 1-69.1 and 66-68 should be resolved. Accordingly, Defendants' motions [**50] to dismiss
on this ground are DENIED.
5. While Individual Claims Survive Against Only Hollingsworth and Gary Lawrence, Plaintiffs Have Adequately
Stated Claims for Conspiracy and Joint Venture to Which Other Defendants Are Tied
a. Plaintiff Has Stated a Claim for Breach of Fiduciary Duty Against Hollingsworth
[*87] The fiduciary duty claim against Defendant Hollingsworth is particularly significant to the theories of joint and
several liability. Plaintiffs seek to impose liability on other members of the alleged conspiracy with whom they did not
deal and upon whom they did not directly rely by tying the conspirators to the breach of duties by Hollingsworth with
whom they did deal directly. Plaintiffs contend that claims against all conspirators survive because the wrongs give rise
to a constructive trust based on Hollingsworth's breach of fiduciary duties, and that the claims are therefore governed
by a ten (10) year statute of limitations. See Babb v. Graham, 190 N.C. App. 463, 480, 660 S.E.2d 626, 637 (2008), disc.
review denied, 363 N.C. 257, 676 S.E.2d 900 (2009) (indicating that claims for breach of fiduciary duty that rise to the
level of constructive fraud are subject to a ten (10) [**51] year statute of limitations).
[*88] Defendants claim that Plaintiffs have not stated an actionable claim for breach of fiduciary duty, asserting that
(1) any de jure fiduciary relationship of accountant and client terminated in 2004 when Hollingsworth sold his
accounting practice; and (2) Plaintiffs have failed to sufficiently plead the existence of the level of domination and
control necessary to support a de facto fiduciary relationship.
[*89] [HN21] The existence of the fiduciary duty depends in the first instance on there being a fiduciary relationship
between the parties. Dalton v. Camp, 353 N.C. 647, 651, 548 S.E.2d 704, 707 (2001) (citation omitted). North Carolina
recognizes certain de jure fiduciary relationships which arise as a matter of law because of the nature of the relationship,
"such as attorney and client, broker and principal, executor or administrator and heir, legatee or devisee, factor and
principal, guardian and ward, partners, principal and agent, trustee and cestui que trust." Abbitt v. Gregory, 201 N.C.
577, 598, 160 S.E. 896, 906 (1931). De facto fiduciary relationship with accompanying duties may additionally arise
when:
there has been special confidence reposed in one side [**52] who in equity and good conscious is bound to act in good faith and
with due regard to the interest of the one reposing confidence . . ., [and] 'it extends to any possible case in which a fiduciary
relationship exists in fact, and in which there is confidence reposed on one side, and resulting domination and influence on the
other.'
Dalton, 353 N.C. at 650-51, 548 S.E.2d at 707-08. Such relationships require an intense factual inquiry and the standard
is demanding. "Only when one party figuratively holds all the cards--all the financial power or technical information,
for example--have North Carolina courts found that the 'special circumstance' of a fiduciary relationship has arisen."
Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 347-48 (4th Cir. 1998).
[*90] Plaintiffs first contend that a de jure fiduciary relationship with Hollingsworth continued based on
Hollingsworth's position as Plaintiffs' former accountant. The Court concludes the de jure relationship ended when
Hollingsworth retired from the accounting profession and that Plaintiffs' claim survives only if they adequately plead a
de facto fiduciary relationship.
Page 671Page 671
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*91] Plaintiffs assert that after selling his accounting [**53] business, "Hollingsworth told Mr. King that
Hollingsworth would still be serving his clients financial interests by including select clients in favorable investment
opportunities" (2nd Am. Compl ¶ 71); "King, in reliance on the . . . fiduciary relationship that had existed with
defendant Hollingsworth for many years, believed that defendant Hollingsworth would be acting in plaintiff King's best
interest in all respects related to matters of personal and business financial nature, including investments" (2nd Am.
Compl ¶ 71.); "all of the defendants created a relationship of trust and confidence with plaintiffs relative to plaintiffs'
decision to purchase 10 lots in the Lennon Hills subdivision" (2nd Am. Compl. ¶ 126); and Hollingsworth instructed
Kenneth King that he would handle everything related to the lot purchases including "personally select[ing] the specific
ten (10) lots for sale to BDM" and "tak[ing] all necessary actions to complete BDM's investment in terms of paperwork
and arranging the necessary financing." (2nd Am. Compl. ¶¶ 80-81.) Though the words "domination and influence" are
not specifically used, the allegations repeatedly assert that Hollingsworth withheld or limited [**54] the flow of
information to the Plaintiffs throughout the entire transaction. (See, e.g., 2nd Am. Compl. ¶¶ 88-91, 99, 105, 106, 108.)
[*92] Defendants again assert that the Plaintiffs are licensed attorneys who did little to protect their own interests and
did not reasonably cede the control or dominion to Hollingsworth necessary to support a fiduciary relationship. Again,
however, the Court concludes that those arguments must await summary judgment or trial. The allegations when
accepted as true are adequate to state a claim against Hollingsworth for breach of fiduciary duty. Hollingsworth's motion
should then be DENIED unless the claim is time-barred. That depends upon whether Plaintiffs have also stated an
actionable claim for a constructive trust, thus entitling Plaintiffs to a ten (10) year limitations period.
b. Plaintiffs Have Stated An Actionable Claim For Constructive Trust Against Hollingsworth
[*93] [HN22] To recover on a claim to impose a constructive trust, there must be "facts and circumstances '(1) which
created the relation of trust and confidence, and (2) [which] led up to and surrounded the consummation of the
transaction in which defendant is alleged to have taken advantage of his position [**55] of trust to the hurt of
plaintiff.'" Terry v. Terry, 302 N.C. 77, 85, 273 S.E.2d 674, 679 (1981). There is some authority stating that a plaintiff
must also allege that the defendant sought to benefit himself by his misconduct, Barger v. McCoy Hillard & Parks, 346
N.C. 650, 667, 488 S.E.2d 215, 224-25 (1997), and that the plaintiff was injured by that misconduct. White v.
Consolidated Planning, Inc., 166 N.C. App. 283, 294, 603 S.E.2d 147, 156 (2004), disc. review denied, 359 N.C. 286,
610 S.E.2d 717 (2005). However, there is also an argument that once the fiduciary relationship has been demonstrated,
the burden is on the defendant to prove fair and open dealing, such that a defendant's failure to benefit personally from
an asserted breach of duty is more in the nature of an affirmative defense. Orr v. Calvert, No. 242A11, 365 N.C. 320,
720 S.E.2d 387, 2011 N.C. LEXIS 989, at *1 (2011) (adopting dissenting opinion in Orr v. Calvert, 713 S.E.2d 39, 2011
N.C. App. LEXIS 1163 (2011)). Even so, Plaintiffs have alleged Hollingsworth personally benefitted to Plaintiffs'
detriment.
[*94] The Court concludes that Plaintiffs have adequately stated a claim for constructive fraud against Hollingsworth
that survives a motion to [**56] dismiss.
[*95] The limitations period for claims based on a constructive trust is ten (10) years. See Babb, 190 N.C. App. at 480,
660 S.E.2d at 637.
[*96] Accordingly, the claim for constructive trust against Hollingsworth survives and his motion to dismiss that claim
should be DENIED.
c. Plaintiffs' Individual Fraud Based Claims Should Be Dismissed Except As to Hollingsworth and Gary
Lawrence
1. Plaintiffs Must Satisfy the Rule 9(b) Pleading Requirement

[*97] Defendants contend that (1) Plaintiffs' fraud, fraud in the inducement, and negligent misrepresentation claims
should be dismissed for failure to comply with the Rule 9(b) specificity requirement; and (2) that Plaintiffs' fraud, fraud
in the inducement, negligent misrepresentation, unfair and deceptive trade practices, and equitable estoppel claims
should be dismissed for lack of reasonable reliance.
[*98] [HN23] To state an actionable claim for fraud, the complaint must allege with particularity "(1) that defendant
made a false representation or concealment of a material fact; (2) that the representation or concealment was reasonably
calculated to deceive him; (3) that defendant intended to deceive him; (4) that plaintiff was deceived; and (5) that
Page 672Page 672
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
plaintiff [**57] suffered damage resulting from defendant's misrepresentations or concealment." Claggett v. Wake
Forest Univ., 126 N.C. App. 602, 610, 486 S.E.2d 443, 447 (1997).
[*99] [HN24] To state an actionable claim for fraudulent inducement, the compliant must allege with specificity:
(i) that the defendant made a false representation or concealed a material fact he had a duty to disclose; (ii) that the false
representation related to a past or existing fact; (iii) that defendant made the representation knowing it was false or made it
recklessly without knowledge of its truth; (iv) that defendant made the representation intending to deceive the plaintiff; (v) that
plaintiff reasonably relied on the representation and acted upon it; and (vi) plaintiff suffered some injury.
Harton v. Harton, 81 N.C. App. 295, 298-99, 344 S.E.2d 117, 119-20 (1986).
[*100] [HN25] "The tort of negligent misrepresentation occurs when a party justifiably relies to his detriment on
information prepared without reasonable care by one who owed the relying party a duty of care." Raritan River Steel
Co. v. Cherry, Bekaert & Holland, 322 N.C. 200, 206, 367 S.E.2d 609, 612 (1988) (internal citations omitted).
[*101] [HN26] A fraud claim is "subject to more exacting [**58] pleading requirements than are generally demanded
by our liberal rules of notice pleading." Chesapeake Microfilm, Inc. v. E. Microfilm Sales & Serv., Inc., 91 N.C. App.
539, 542, 372 S.E.2d 901, 903 (1988) (citation omitted). Pleadings meet the requirements of Rule 9(b) when they allege
the "time, place and content of the fraudulent representation, identity of the person making the representation and what
was obtained as a result of the fraudulent acts or representations." Bob Timberlake Collection, Inc., v. Edwards, 176
N.C. App. 33, 39, 626 S.E.2d 315, 321 (2006) (quoting Terry, 302 N.C. at 85, 273 S.E.2d at 678 (1981)) (quotations
omitted). In Perkins v. Health Markets, Inc., this Court stated that "allegations of fraud may be made upon information
and belief only when the matters are particularly within the Defendants' knowledge, and facts are stated upon which
belief is founded." Perkins v. Health Markets, Inc., 2007 NCBC 25, ¶ 60 (N.C. Super. Ct. July 30, 2007),
http://www.ncbusinesscourt. net/opinions/2007%20NCBC%2025.pdf (citing Breeden v. Richmond Comm. College, 171
F.R.D. 189, 197 (M.D.N.C. 1997)).
[*102] The vast majority of those allegations upon which the fraud claims are [**59] based relate to
misrepresentations allegedly made by Hollingsworth and omissions of Gary Lawrence.
[*103] The Court concludes that the Second Amended Complaint adequately alleges the "time, place and content of
the fraudulent representation" made by Hollingsworth and Gary Lawrence and identifies "what was obtained as a result
of the fraudulent acts or representations." (2nd Am. Compl. ¶¶ 73, 75, 76, 80, 82, 88, 89, 91, 93, 94, 95, 96, 97, 98, 101,
105, 107, 108, 111, 112, 113, 114, 115, 116, 117.)
[*104] In contrast to claims against Hollingsworth and Lawrence, the Court concludes that the Second Amended
Complaint does not allege the "time, place and content of the fraudulent representations" or omissions attributable to the
other Defendants. Accordingly, the fraud claims against the Defendants other than Hollingsworth and Gary Lawrence
are DISMISSED to the extent that they assert individually actionable fraud claims against them.
2. Plaintiffs Lack of Reasonable Reliance Does Not Bar the Fraud Claims Against Hollingsworth and Gary
Lawrence or the Unfair and Deceptive Trade Practices Claim Against Hollingsworth
[*105] To the extent that claims against Hollingsworth and Lawrence arise from fiduciary relationships, [**60]
Plaintiffs may be excused from showing reasonable reliance. Kaylor, 2008 N.C. App. LEXIS 1154, at *5 (2008) (citing
Small v. Dorsett, 223 N.C. 754, 761, 28 S.E.2d 514, 518 (1944)); see Vail, 233 N.C. at 116-17, 63 S.E.2d at 208; see
also Jennings, 69 N.C. App. at 716-17, 318 S.E.2d at 321. The Court has dismissed individual fraud claims against other
Defendants. The issue of reasonable reliance must also be considered for claims for unfair and deceptive trade practices
and equitable estoppel.17
17 Plaintiffs do not allege claims for unfair and deceptive trade practices and equitable estoppel against Gary Lawrence.
[*106] [HN27] To state a claim for unfair and deceptive trade practices under Chapter 75, a plaintiff must allege: (1)
an unfair and deceptive act or practice; (2) in or affecting commerce; and (3) which proximately causes actual injury.
Poor v. Hill, 138 N.C. App. 19, 27, 530 S.E.2d 838, 844 (2000); see also Strickland v. Lawrence, 176 N.C. App. 656,
665, 627 S.E.2d 301, 307 (2006). "Where an unfair or deceptive trade practice claim is based upon the alleged
misrepresentation by the defendant, the plaintiff must show 'actual reliance' on the alleged misrepresentation in order to
Page 673Page 673
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
establish [**61] that the alleged misrepresentation 'proximately caused' the injury of which plaintiff complains." Sunset
Beach Dev., LLC v. Amec, Inc., 196 N.C. App 202, 211, 675 S.E.2d 46, 53 (2009) (citing Tucker v. Blvd. at Piper Glen
LLC, 150 N.C. App. 150, 154, 564 S.E.2d 248, 251 (2002); see Hospira Inc. v. AlphaGary Corp., 194 N.C. App. 695,
702, 671 S.E.2d 7, 13 (2009); see also Forbes v. Par Ten Group, Inc., 99 N.C. App. 587, 601, 394 S.E.2d 643, 651
(1990), cert. denied, 328 N.C. 89, 402 S.E.2d 824 (1991) (indicating that to prevail under Chapter 75, a plaintiff must
show that he detrimentally relied upon a statement or misrepresentation and he suffered actual injury as a proximate
result).
[*107] [HN28] The essential elements of equitable estoppel are "(1) conduct on the part of the party sought to be
estopped which amounts to a false representation or concealment of material facts; (2) the intention that such conduct
will be acted on by the other party; and (3) knowledge, actual or constructive, of the real facts." White v. Consol.
Planning, Inc., 166 N.C. App. 283, 305, 603 S.E.2d 147, 162 (2004) (citations omitted). To assert the defense, a plaintiff
must have "(1) a lack of knowledge and a means [**62] of knowledge as to the real facts in question; and (2) relied
upon the conduct of the party sought to be estopped." Id.
[*108] As previously discussed, Plaintiffs have not alleged that they relied on any representations by Defendants other
than Hollingsworth and Gary Lawrence. Independent individual claims for unfair and deceptive trade practices and
equitable estoppel against Defendants other than Hollingsworth and Gary Lawrence are DISMISSED.
[*109] [HN29] With respect to land transactions, the Court of Appeals has stated that:
"reliance is not reasonable if a plaintiff fails to make any independent investigation" unless the plaintiff can demonstrate: (1) "it was
denied the opportunity to investigate the property," (2) it "could not discover the truth about the properties condition by exercise of
reasonable diligence," or (3) "it was induced to forego additional investigation by the defendant's misrepresentations."
Sunset Beach, 196 N.C. App at 209, 675 S.E.2d at 52 (citation omitted).
[*110] Plaintiffs' own allegations make clear that neither Kenneth King nor other Plaintiffs ever requested to
participate in the financing, the conduct of the appraisal, or any other aspect of the lot purchase transaction. (2nd [**63]
Am. Compl. ¶¶ 89, 91.) Nevertheless, Plaintiffs allege that they could not, "in the excise of due diligence, have
discovered the existence of the numerous fraudulent misrepresentations and conflicts of interest and improper
relationships. Plaintiffs were induced to forego any investigation or inquiry by the nature of the false and misleading
misrepresentations and concealment of material facts undertaken by the defendants." (2nd Am. Compl. ¶ 149.)
Essentially, they assert that they were entitled to and did rely exclusively on Hollingsworth as a fiduciary and on Gary
Lawrence as a closing attorney, such that they bear no responsibility for their failures to discover what could have been
discovered through reasonable independent investigation. That is significant because many of the facts upon which
Plaintiffs now rely were matters of public record existing at the time of the lot purchase.
[*111] Again, while the Court recognizes the strengths of arguments directed at the Plaintiffs who are licensed
attorneys, at this stage, the Court must accept Plaintiffs' allegations as true. As such, Defendants' motions with respect to
the fraud, fraud in the inducement, negligent misrepresentation, and [**64] equitable estoppel claims against
Hollingsworth and Gary Lawrence based on lack of reliance are DENIED.
[*112] Defendants' motion with respect to the unfair and deceptive trade practice claim against Hollingsworth based on
lack of reliance is DENIED.
3. Plaintiffs Have No Actionable Claim for Unjust Enrichment Except As Against Hollingsworth
[*113] Plaintiffs claim that Hollingsworth, Viable, and Pam Lawrence received undisclosed commissions to which
they were not legally entitled, leading to an actionable claim of unjust enrichment. The Court has dismissed claims
against Viable and Pam Lawrence on statute of limitations grounds.
[*114] A claim for unjust enrichment is an equitable claim based on a theory of quasi or implied contracts. Atlantic
and East Carolina Ry. Co., 163 N.C. App. at 753, 594 S.E.2d at 429. "[I]f there is a contract between the parties [,] the
contract governs the claim[,] and the law will not imply a contract. Booe, 322 N.C. at, 571, 369 S.E.2d at 554; see Delta
Envtl. Consultants, Inc, 132 N.C. App. at 165, 510 S.E.2d at 694 (indicating that "[i]t is well established that if there is a
contract between the parties, the contract governs the claim and the law will not imply a contract [**65] . . . [In such
cases] an action for breach of contract, rather than unjust enrichment, is the proper cause of action").
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2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*115] [HN30] To establish a claim for unjust enrichment, Plaintiffs must allege: (1) a measurable benefit was
conferred on the defendant; (2) the defendant consciously accepted the benefit; and (3) the benefit was not conferred
gratuitously. Progressive American Ins. Co. v. State Farm Mutual, 184 N.C. App. 688, 695-96, 647 S.E.2d 111, 116
(2007). A key element is that a benefit inure to the defendant. "Without enrichment, there can be no 'unjust enrichment'
and therefore no recovery on an implied contract." Greeson v. Byrd, 54 N.C. App. 681, 683, 284 S.E.2d 195, 196 (1995).
[*116] The Second Amended Complaint alleges that Hollingsworth used his fiduciary relationship with the Plaintiffs to
gain an undisclosed commission of $42,500.00 on the sale of the Lennon Hills lots. (2nd Am. Compl. ¶¶ 108, 170.)
Accepted as true, and viewed in tandem with the allegations of other misconduct by Hollingsworth, Plaintiffs have
stated a claim against Hollingsworth for unjust enrichment. Defendants' motion with respect to the unjust enrichment
claim against Hollingsworth is DENIED.
[*117] Plaintiffs' unjust [**66] enrichment claim against Gary Lawrence is predicated upon the commission paid to
Pam Lawrence through Lawrence S&M and his provision of legal services to BDM. Those claims are being dismissed.
Therefore, Plaintiffs' unjust enrichment claim against Gary Lawrence is DISMISSED.
d. The Plaintiffs Have Stated A Claim For Civil Conspiracy That Survives the Motion to Dismiss, And Have
Adequately Tied Some But Not All Defendants To The Alleged Conspiracy
[*118] All independent individual claims are being dismissed except those that have survived against Hollingsworth
and Gary Lawrence. The issue then becomes whether Plaintiffs have adequately pled a conspiracy on behalf of which
Hollingsworth and Gary Lawrence may be concluded to have acted to further its purposes. If so, the Court must then
determine whether Plaintiffs have made adequate allegations tying the individual Defendants to that conspiracy.
[*119] [HN31] A conspiracy has been defined as:
"an agreement between two or more individuals to do an unlawful act or to do a lawful act in an unlawful way." The common law
action for civil conspiracy is for damages caused by acts committed pursuant to a conspiracy rather than for the conspiracy, i.e., the
agreement, [**67] itself. Thus, to create civil liability for conspiracy there must have been an overt act committed by one or more
of the conspirators pursuant to a common agreement and in furtherance of a common objective. Although civil liability for
conspiracy may be established by circumstantial evidence, the evidence of the agreement must be sufficient to create more than a
suspicion or conjecture in order to justify submission of the issue to a jury.
Dickens v. Puryear, 302 N.C. 437, 456, 276 S.E.2d 325, 337 (1981) (emphasis in original). "When a cause of action lies
for injury resulting from a conspiracy, 'all of the conspirators are liable, jointly and severally, for the act of any one of
them done in furtherance of the agreement.'" Neugent v. Beroth Oil Co., 149 N.C. App. 38, 53, 560 S.E.2d 829, 838
(2002) (citations omitted).
[*120] Plaintiffs again rest on very broad allegations. Plaintiffs contend that during some time not specifically alleged,
the "defendants conspired and/or entered into an agreement to improperly entice plaintiffs into purchasing and financing
10 lots in the Lennon Hills subdivision" by "their actions, misrepresentations and concealment of material facts and
conflicts of interest [**68] and improper relationships . . ." (2nd Am. Compl. ¶ 170.)
[*121] Plaintiffs contend that in furtherance of the alleged conspiracy, Hollingsworth, Lenhil, Lennon Hills, Burnett,
Hilla, Viable, Gary Lawrence, Lawrence S&M, Pam Lawrence, Keith Meyers, and Meyers Appraisal Services, LLC
agreed that Hollingsworth would (1) entice former clients to purchase lots in the Lennon Hills development; (2)
convince established national lenders to extend financing based on unfavorable and detrimental terms; (3) locate an
appraiser willing to place an arbitrary valuation on the lots; (4) orchestrate the improper sale of "comparables" to
establish a market value for the lots; (5) misrepresent his own financial interest in Lennon Hills; and (6) "refrain from
providing plaintiffs with a truth and lending statement, a good faith estimate of loan and closing costs, an appraisal of
the lots, or other documentation that might have made plaintiffs less likely to purchase the Lennon Hills lots" all in
return for an undisclosed commission. (2nd Am. Compl. ¶ 170(a)-(x).)
[*122] Though many of the allegations are broad and conclusory, read liberally the Second Amended Complaint
alleges that Hollingsworth, Gary Lawrence, Lennon, [**69] and the Lennon Hills Defendants had a pre-existing
relationship involving various real estate developments and entered into an elaborate agreement pursuant to which
Hollingsworth and Gary Lawrence misrepresented or concealed numerous material facts relevant to BDM's purchase of
the Lennon Hills lots because of the need to generate funds.
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2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*123] As noted in the Introduction to this Order, the Court is concerned about a Court allowing any disappointed
plaintiff in this or any other case involving a failed real estate development to join every player in the overall transaction
based on broad allegations with scant factual support that each player is liable for some wrong in the transaction, and
then await the narrowing of the case to only those against whom liability may reasonably be expected to be proven
based on discovered facts. At the same time, the Court must fairly apply the liberal standards that govern motions to
dismiss. Here, even though the Court might have some skepticism whether BDM will ultimately be able to sustain its
burden of proof, the Court concludes that Plaintiffs have adequately alleged a conspiracy, and that Hollingsworth, Gary
Lawrence, Lennon, Lenhil, Lennon Hills, [**70] Burnett, Hilla, and Viable were members of that conspiracy. See
Neugent v. Beroth Oil Co., 149 N.C. App. 38, 560 S.E.2d 829 (2002); see also GoRhinoGo, 2011 NCBC 38, ¶ 35.
However, the Court further concludes that Plaintiffs have not adequately alleged facts that justify the conspiracy claim
moving forward as to other Defendants.
[*124] Defendants' motions with respect to the civil conspiracy claims against Hollingsworth, Gary Lawrence,
Lennon, Lenhil, Lennon Hills, Burnett, Hilla, and Viable are DENIED. The conspiracy claims against Plaintiffs have
failed to tie Pam Lawrence, Lawrence S&M, Evans, and Homeplace to the conspiracy and the conspiracy claims against
them are DISMISSED.
e. Plaintiffs' Claims For Liability By Reason of Joint Enterprise, Joint Venture, or Joint Adventure Survive to the
Same Extent As the Conspiracy Claim
[*125] Like conspiracy, [HN32] claims of joint enterprise, joint venture, and joint adventure do not constitute
independent causes of action in North Carolina; these claims form the basis of an agency relationship whereby one
party's conduct may be imputed to another. Pike v. Wachovia Bank & Trust Co., 274 N.C. 1, 10-11, 161 S.E.2d 453, 461
(1968).
[*126] A joint enterprise is an alliance [**71] between two (2) or more people in pursuit of a common purpose.
Slaughter v. Slaughter, 93 N.C. App. 717, 720, 379 S.E.2d 98, 100 (1989). "Parties may be said to be engaged in a joint
enterprise when there is a community of interest in the objects or purposes of the undertaking, and an equal right to
direct and govern the movement of each with respect thereto." Id.
[*127] "A joint venture exists when there is: (1) an agreement, express or implied, to carry out a single business
venture with joint sharing of profits, and (2) an equal right of control of the means employed to carry out the venture."
Rifenburg Constr., Inc. v. Brier Creek Assocs., LP, 160 N.C. App. 626, 632, 586 S.E.2d 812, 817 (2003) (emphasis in
original). According to our Supreme Court:
Facts showing the joining of funds, property, or labor, in a common purpose to attain a result for the benefit of the parties in which
each has a right in some measure to direct the conduct of the other through a necessary fiduciary relation, will justify a finding that
a joint venture exists.
To constitute a joint adventure, the parties must combine their property, money, efforts, skill, or knowledge in some common
undertaking. The contributions [**72] of the parties need not be equal or of the same character, but there must be some
contribution by each coadventurer of something promotive of the enterprise.
Cheape v. Town of Chapel Hill, 320 N.C. 549, 561, 359 S.E.2d 792, 799 (1987) (citation omitted).
[*128] To establish these claims, Plaintiffs allege:
The defendants entered into an express or implied agreement to carry out a single and joint business enterprise and/or venture in
which the defendants would earn a profit at the expense of the plaintiffs, all as set forth in the preceding paragraphs and causes of
action. The defendants engaged in this joint enterprise and/or venture for a common purpose - to sell the lots to the plaintiffs and
earn a profit therefrom. Each defendant had an equal right to control the means of carrying out the joint enterprise and/or venture,
and each defendant combined his effort, property, resources to carry the joint enterprise and/or venture forward.
(2nd Am. Compl. ¶ 199.)

[*129] Although the current broad allegations of control and joint profit rest on a slim factual reed, accepted as true,
the allegations of the Second Amended Complaint sufficiently state causes of action against Hollingsworth, Gary
Lawrence, [**73] Lennon, Lenhil, Lennon Hills, Burnett, Hills, and Viable for joint enterprise, joint venture, and joint
adventure. Defendants' motions with respect to those claims should be DENIED. These claims against Pam Lawrence,
Lawrence S&M, Evans, and Homeplace are DISMISSED.
Page 676Page 676
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
f. The Court Defers Ruling on the Merits of the Aiding and Abetting a Breach of Fiduciary Duty Claim
[*130] [HN33] It is uncertain whether North Carolina now recognizes a claim for aiding and abetting a breach of
fiduciary duty. While not resolving the question whether any such claim will be recognized, this Court recognized that if
a claim for aiding and abetting does lie, the primary party and the aiding and abetting party must have the same level of
culpability or scienter for the breach. Sompo Japan Insurance Inc. v. Deloitte & Touche, 2005 NCBC LEXIS 1, 2005
WL 1412741, *4 (N.C. Super. Ct. June 10, 2005) (indicating "[w]hat is clear from all the cases and the Restatement is
that there is not a lower level or culpability or scienter for aiding and abetting than for the underlying tort").
[*131] Having allowed the conspiracy and joint venture claims to move forward, the Court elects to defer any
dispositive ruling on the claim for aiding and abetting. However, [**74] the aiding and abetting claim survives only as
to those Defendants against whom the conspiracy and joint venture claims survive. No such claim lies against
Hollingsworth because an aiding and abetting a breach of fiduciary duty claim "applies only to third parties who do not
stand in a fiduciary relationship with the alleged victim, but who provide substantial assistance towards accomplishing
the alleged breach." Battleground Veterinary Hosp., P.C. v. McGeough, 2007 NCBC 33 ¶ 70 (N.C. Super. Ct. Oct. 19,
2007), http://www. ncbusinesscourt.net/opinions/101907%20Order%20Webpage.pdf. Plaintiffs' aiding and abetting a
breach of fiduciary duty claim against Hollingsworth is DISMISSED.
g. Plaintiffs Have No Actionable Claim for Violation of the North Carolina Residential Mortgage Fraud Act
[*132] Plaintiffs cannot maintain a claim for violation of the North Carolina Residential Mortgage Fraud Act ("Act")
because the Act did not exist when the lot transaction occurred.
[*133] The legislative history for the Act indicates that it was introduced to the legislature on March 14, 2007, signed
into law on July 4, 2007, and made applicable only to offenses committed after December 1, 2007. 2007 Bill Tracking
NC [**75] H.B. 817; 2007 N.C. ALS 163, *2; 2007 N.C. Sess. Laws 163; 2007 N.C. Ch. 163.
[*134] The lot transaction in this case closed on March 1, 2007, prior to the enactment of the Act. Accordingly,
Plaintiffs' claim for violation of the Act is DISMISSED.
h. The Court Defers Ruling on the Issue of Whether Punitive Damages May Be Imposed Against Conspirators
Who Undertook Affirmative Acts In Furtherance of the Conspiracy
[*135] [HN34] Pursuant to G.S. § 1D-15(a), punitive damages may be awarded "only if the claimant proves that the
defendant is liable for compensatory damages and that" an aggravating factor such as fraud, malice, or willful or wanton
conduct "was present and related to the injury for which compensatory damages were awarded." N.C. GEN. STAT. § 1D-
15(a) (2011).
[*136] G.S. § 1D-15(c) provides:
[HN35] Punitive damages shall not be awarded against a person solely on the basis of vicarious liability for the acts or omissions
of another. Punitive damages may be awarded against a person only if that person participated in the conduct constituting the
aggravating factor giving rises to the punitive damages, or if, in the case of a corporation, the officers, directors, or managers of the
corporation participated in or [**76] condoned the conduct constituting the aggravating factor giving rise to the punitive damages.
N.C. GEN. STAT. § 1D-15(c) (2011).

[*137] The Court is not presently aware of any North Carolina case which specifically addresses the issue of whether
punitive damages may be imposed upon co-conspirators who did not themselves undertake the acts upon which the
punitive damages claim rests. The theory would be that imposing punitive damages on them does not constitute
vicarious liability but direct liability because participation in the conspiracy necessarily means that the conspirator
"participated in the conduct constituting the aggravating factor giving rise to the punitive damages." That inquiry
presents mixed questions of law and fact. The Court defers deciding the issue of whether the claim for punitive damages
may be sustained against one or more conspirators or joint venturers. However, the punitive damages claims, like other
claims, should be DISMISSED as against Pam Lawrence, Lawrence S&M, Evans, and Homeplace.
B. Plaintiffs' Motion To Dismiss

[*138] On July 1, 2011, the Lennon Hills Defendants filed a counterclaim for defamation arising out of allegations in
the Second Amended Complaint detailing [**77] Lennon Hills' purported involvement in the fraud suffered by Green.
Page 677Page 677
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
Plaintiffs' Motion seeks to dismiss the counterclaim pursuant to Rule 12(b)(6) because the defamation claim is barred by
the absolute privilege attendant to statements made in the course of judicial proceedings.
[*139] [HN36] As a general rule, statements made by a party or an attorney during the course of a judicial proceeding,
including allegations set forth in a pleading, are privileged and cannot form the basis of a defamation claim. Scott v.
Statesville Plywood & Veneer Co., Inc., 240 N.C. 73, 76, 81 S.E.2d 146, 148 (1954). In articulating the standard by
which courts should address defamatory statements in pleadings, the North Carolina Supreme Court stated:
[w]hile statements and pleadings and other papers filed in a judicial proceeding are not privileged if they are not relevant or
pertinent to the subject matter of the action, the question of relevancy or pertinency is a question of law for the courts, and the
matter to which the privilege does not extend must be so palpably irrelevant to the subject matter of the controversy that no
reasonable man can doubt its irrelevancy or impropriety. If it is so related to the subject [**78] matter of the controversy that it
may become the subject of inquiry in the course of the trial, the rule of absolute privilege is controlling.
Scott, 240 N.C. at 76, 81 S.E.2d at 149 (citations omitted). Thus, for the counterclaim to survive the Plaintiffs' Motion,
the Lennon Hills Defendants must prove that the subject allegations are "palpably irrelevant to the subject matter" of the
lawsuit.
[*140] The Lennon Hills Defendants assert the legal conclusion that "[t]he defamatory statements published by the
Plaintiffs in their Compliant have no relevance or pertinence to the subject matter of the Plaintiffs' Complaint." (Am.
Answer, Affirmative Defenses, Mot. to Dismiss, Mot. to Strike, Countercl. of Defs. Lenhil, Inc., Lennon Hills, L.L.C.,
Viable Corp., Edwin L. Burnett, III, & Dan Hilla ("Countercl.") ¶ 4.)
[*141] The Court cannot rule, however, as a matter of law, that the allegations related to the Lennon Hills Defendants
are "so palpably irrelevant" to the subject matter of the lawsuit.
[*142] The Lennon Hills Defendants' counterclaim for defamation is DISMISSED.
C. Defendants' Motions to Strike

[*143] Defendants move pursuant to Rule 12(f) to strike from the Second Amended Complaint (1) any allegations
related [**79] to fraudulent conduct directed to Green and T&T Partnership; and (2) any claims or allegations against
Keith Meyers, Meyers Appraisal Services, LLC, Nicholas R. Frank, and the Wachovia related Defendants. While the
Parties referred to other matters, the Court decides this motion based solely on the allegations in the Second Amended
Complaint.18
18 Plaintiffs offered a timeline with supporting documentation from public records and the Parties submitted opposing briefs on whether it
should be considered. The Court has chosen not to review either the timeline or its support. The Court believes the allegations of the Second
Amended Complaint itself are adequate to illuminate well enough the respective arguments on the motion to strike.
a. Standard of Review
[*144] [HN37] Rule 12(f) states that upon motion of one of the parties, a "judge may order stricken from any pleading
any insufficient defense or any redundant, irrelevant, immaterial, impertinent, or scandalous matter." Whether to grant a
movant's request to strike such material is within the Court's discretion. See Broughton v. McClatchy Newspapers, Inc.,
161 N.C. App. 20, 25, 588 S.E.2d 20, 25 (2003). That being said, "matter should not be stricken [**80] [from a
pleading] unless it has no possible bearing upon the litigation." Shellhorn v. Brad Ragan, Inc., 38 N.C. App. 310, 316,
248 S.E.2d 103, 108 (1978). If there is any question as to whether an issue may arise, the motion to strike should be
denied. Id.
b. The Allegations Related to Green and T&T Partnership Should Not Be Stricken Despite Questions Regarding
Whether They Ultimately May Prove to Be Probative or Relevant
[*145] In substance, Plaintiffs contend that while serving as Green's attorney and trusted financial advisor, Lennon
engaged in an elaborate scheme to defraud Green. (2nd Am. Compl. ¶¶ 25-32.) Thereafter, Lennon, Viable, and Burnett
used $850,000.00 of the money defrauded from Green to acquire the Lennon Hills tract. (2nd Am. Compl. ¶¶ 39-47.) In
2007, Green allegedly discovered the scheme and began to make demands for monetary reimbursement. (2nd Am.
Compl. ¶¶ 59-60).
Page 678Page 678
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
[*146] Plaintiffs do not assert claims on behalf of Green and T&T Partnership. Rather, they aver that the allegations
regarding them provide relevant background evidence. Plaintiffs theorize that pressure from Green served as
Defendants' underlying motivation to induce T&T Partnership's purchase of ten (10) lots [**81] in the Lennon Hills
development and to organize and set in motion the conspiracy against BDM.
[*147] At this stage in the litigation, the Court cannot say, as a matter of law, that the allegations related to Green and
T&T Partnership are altogether irrelevant and immaterial to the Plaintiffs' claims. The Court again notes, however, that
Plaintiffs' supposition is suspect considering that their purchase appears to have preceded Green's discovering claims he
might have. Ultimately, this inconsistency may justify limitations on Plaintiffs' proof or arguments, but at this time,
Defendants' motion to strike is DENIED.
c. The Allegations Related to Meyers, Meyers Appraisal Services, LLC, and the Wachovia Related Defendants
Should Not Be Stricken, But the Allegations Against Nicholas R. Frank Should Be
[*148] The Second Amended Complaint contains numerous allegations detailing wrongful conduct undertaken by
Meyers, Meyers Appraisal Services, LLC, Nicholas R. Frank ("Frank"), and the Wachovia related Defendants.
[*149] Although each were initially named as Defendants in this action, Plaintiffs have (1) failed to properly serve
Meyers and Meyers Appraisal Services, LLC; (2) voluntarily dismissed the Wachovia related [**82] Defendants; and
(3) voluntarily dismissed Frank.
[*150] The allegations related to Meyers, Meyers Appraisal Services, LLC, and the Wachovia related Defendants
arguably may be relevant background for the fraud allegations. The Defendants are alleged to have impugned the
appraisal process and Plaintiffs take exception to the process by which financing was obtained from the Wachovia
related Defendants. The Court will not strike them at this time.
[*151] There is, however, no discernable relevance to the allegations against Frank. Defendants' motions to strike
allegations of the Second Amended Complaint related to Nicholas R. Frank are GRANTED. Their motions to strike are
otherwise DENIED.
[*152] The Court is prepared to restrict discovery on these marginal allegations if necessary.
VI. CONCLUSION
[*153] The Defendants' motions are GRANTED as follows:
1) All claims asserted by the Individual Plaintiffs, and those claims are hereby DISMISSED;
2) All claims against Pam Lawrence and Lawrence S&M, and those claims are hereby DISMISSED;
3) All claims against Evans and Homeplace Realty, and those claims are hereby DISMISSED;
4) As against all other Defendants, all claims for negligence, gross negligence, conversion, breach [**83] of contract,
and breach of the implied covenant of good faith and fair dealing, and those claims are hereby DISMISSED;
5) The legal malpractice claim against Gary Lawrence, including the breach of fiduciary duty claim, and those claims
are hereby DISMISSED;
6) The constructive fraud claims against Defendants other than Hollingsworth, and those claims are hereby
DISMISSED;
7) The fraud, fraud in the inducement, and negligent misrepresentation claims against Defendants other than
Hollingsworth and Gary Lawrence, and those claims are hereby DISMISSED;
8) The unfair and deceptive trade practice claims against Defendants other than Hollingsworth, and those claims are
hereby DISMISSED;
9) The equitable estoppel and unjust enrichment claims against Defendants other than Hollingsworth, and those claims
are hereby DISMISSED;
10) The aiding and abetting a breach of fiduciary duty claim against Hollingsworth, and that claim is hereby
DISMISSED;
Page 679Page 679
2012 NCBC 7, *; 2012 NCBC LEXIS 7, **
11) The claim for violation of the North Carolina Residential Mortgage Fraud Act, and that claim is hereby
DISMISSED.
[*154] The Defendants' motions with respect to the following claims are DENIED:
1) The issue of whether a Certificate of Assumed Name was or should have [**84] been filed in Brunswick County;
2) The breach of fiduciary duty claim against Hollingsworth;
3) The constructive fraud claim against Hollingsworth;
4) The fraud, fraud in the inducement, and negligent misrepresentation claims against Hollingsworth and Gary
Lawrence;
5) The unfair and deceptive trade practice claim against Hollingsworth;
6) The equitable estoppel claim against Hollingsworth;
7) The unjust enrichment claims against Hollingsworth, Viable and Lenhil;
8) The civil conspiracy claims against Hollingsworth, Gary Lawrence, Lennon, Lenhil, Lennon Hills, Burnett, Hilla,
and Viable;
9) The joint enterprise, joint venture, and joint adventure claims against Hollingsworth, Gary Lawrence, Lennon,
Lenhil, Lennon Hills, Burnett, Hilla, and Viable.
[*155] The Court defers ruling on Defendants' motions as related to the following claims as against Hollingsworth,
Gary Lawrence, Lennon, Lenhil, Lennon Hills, Burnett, Hilla, and Viable:
1) The aiding and abetting a breach of fiduciary duty claim except as against Hollingsworth;
2) The punitive damages claim.
[*156] The Defendants' motions to strike is DENIED except as related to the allegations of misconduct by Frank,
which allegations shall be stricken;
[*157] The Plaintiffs' [**85] Motion is GRANTED.
[*158] Pursuant to BCR 17, the Parties shall conduct their Case Management Meeting on or before Wednesday,
February 1, 2012 and submit their Case Management Report to the Court on or before Thursday, February 16, 2011. The
Court will then convene a Case Management/Status Conference at 10:00 a.m. on Thursday, February 23, 2012. The
Conference shall be by teleconference absent a request by mutual consent that it be held in person, in which event, it
will be held at the Business Court in Greensboro.
IT IS SO ORDERED, this 18th day of January, 2012.
Page 681Page 681
84 Va. Cir. 105, *; 2012 Va. Cir. LEXIS 4, **
75 of 430 DOCUMENTS
IN RE MULTI-CIRCUIT CHURCH PROPERTY LITIGATION
CIVIL CASE NUMBERS: CL 2007-248724, CL 2006-15793, CL 2006-15792, CL

2007-556, CL 2007-1625, CL 2007-1235, CL 2007-1236, CL 2007-1237, CL 2007-1238,
CL 2007-5249, CL 2007-5250, CL 2007-5364 CL 2007-5686, CL 2007-5685, CL 2007-
5683, CL 2007-5682, CL 2007-5684, CL 2007-5902, and CL 2007-5903.
CIRCUIT COURT OF FAIRFAX COUNTY, VIRGINIA
84 Va. Cir. 105; 2012 Va. Cir. LEXIS 4
January 10, 2012, Decided
SUBSEQUENT HISTORY: Related proceeding at Falls Church v. Protestant Episcopal Church in the United States,
2012 Va. LEXIS 185 (Va., Oct. 26, 2012)
PRIOR HISTORY: Protestant Episcopal Church v. Truro Church, 280 Va. 6, 694 S.E.2d 555, 2010 Va. LEXIS 62
(2010)
CASE SUMMARY:
PROCEDURAL POSTURE: On remand from the Supreme Court of Virginia, the court sought to resolve declaratory
judgment actions filed by plaintiffs, a hierarchical church and its diocese, against defendants, seven dissident local
churches, the local churches' amended counterclaims, and a question described regarding one local church's endowment
fund. The action was related to the local churches' separation from the hierarchical church and attempt to retain
property.
OVERVIEW: The court found plaintiffs had a contractual and proprietary interest in each of the local churches that a
separate polity did not possess. When the court considered the applicable statutes, deeds, constitution and canons of the
hierarchical church and the diocese, the course of dealings between the parties, and applied "neutral principles of law"
analysis, it was clear that the hierarchical church and the diocese had contractual and proprietary interests in the real and
personal property of each of the local churches. Through the direct involvement of the diocese, its bishop and its
personnel, plaintiffs had pervasive and controlling involvement in the churches and their properties. There was no
support in the evidence for the notion that they should reasonably have expected to repay the individual congregations.
The facts were at least as compelling as the facts in Norfolk Presbytery and Green and required the court to reach a
similar judgment. The amended counterclaims were found to be without merit. The court also found that the vestry
entitled to elect the directors of the endowment fund was the congregation recognized by the diocese.
OUTCOME: Judgment was granted for the church and the diocese in their declaratory judgment actions and, among
other relief, all real property conveyed by 41 deeds, as well as all personal property acquired by the polity up to the
filing date of the declaratory judgment actions (on or about January 31, 2007 or February 1, 2007) was to be promptly
conveyed to the diocese. The congregations' amended counterclaims were denied in their entirety.
CORE TERMS: church, diocese, congregation, episcopal, canon, deed, bishop, vestry, diocesan, denomination, church
property, religious, protestant, hierarchical, rector, proprietary interest, principles of law, chapel, parcel, endowment,
worship, conveyance, mission, conveyed, convention, discipline, annual, personal property, ecclesiastical, polity
Page 682Page 682
Constitutional Law > Bill of Rights > Fundamental Freedoms > Freedom of Religion > Free Exercise of Religion
[HN1] A State is constitutionally entitled to adopt "neutral principles of law" as a means of adjudicating a church
property dispute.
[HN2] In a "neutral principles of law" analysis as a means of adjudicating a church property dispute, a trial court must
(and, at a minimum, may) consider the course of dealings between the parties.
[HN3] At the core of the "neutral principles of law" methodology as a means of adjudicating a church property dispute
is the requirement that the court give full consideration to each of the factors and determine whether the plaintiffs have
proven that they have a proprietary interest in the property at issue.
Business & Corporate Law > Nonprofit Corporations & Organizations > General Overview
Real Property Law > Ownership & Transfer > General Overview
[HN4] The starting point in a "neutral principles of law" approach to a church property dispute is a fair consideration of
the applicable and pertinent statutes.
Estate, Gift & Trust Law > Personal Gifts > Lifetime Gifts
Estate, Gift & Trust Law > Wills > Bequests & Devises
[HN5] See Va. Code Ann. § 57-7.1 (2011).
[HN6] In Virginia, church property may be held by trustees for a local congregation, not for the general church.
[HN7] See Va. Code Ann. § 57-9 (2011).
[HN8] Va. Code Ann. § 57-9(A) (2011), especially when viewed in comparison to the division requirements applicable
to a congregational church, Va. Code Ann. § 57-9(B), reflects a recognition that hierarchical churches in their
organization and structure are different than congregational churches and that a Virginia statute designed to address
divisions within a church may properly reflect that recognition.
[HN9] See Va. Code Ann. § 57-15 (2011).
[HN10] Va. Code Ann. § 57-15 is construed to require that a church property transfer may be ordered only upon a
showing that this is the wish of the duly constituted church authorities having jurisdiction in the premises. Under
predecessor statutes only the congregation's wishes were to be considered in a proceeding to authorize a church property
conveyance, but § 57-15 contemplates that the general church, or a division thereof, or certain ecclesiastical officials
may be the proper parties to approve such a property transfer. In determining the proper party to approve the property
transfer, the trial court must look to the organizational structure of the church.
Page 683Page 683
[HN11] In the case of a super-congregational church, Va. Code Ann. § 57-15 requires a showing that a church property
conveyance is the wish of the constituted authorities of the general church.
[HN12] In Virginia it is the right of a majority of the members of a divided congregation to control the use of the church
property if the church, in its organization and government, is a church or society entirely independent of any other
church or general society. Va. Code Ann. § 57-9.
[HN13] Va. Code Ann. § 57-15 establishes a statutory framework for consideration of property transfers when churches
(either autonomous or hierarchical) are involved. If it is determined: (1) that a local church is part of a hierarchy; and (2)
that the general church has a contractual or proprietary interest in the property at issue based upon the deeds before the
Ccourt and the constitution governing the relationship between that local church and that general church, then § 57-15
recognizes that a church property conveyance cannot occur without proof that the general church has approved the
conveyance.
Civil Procedure > Remedies > Injunctions > Permanent Injunctions
[HN14] Hierarchy of a church organization does not automatically equate with a proprietary interest. However, where a
hierarchical church has established its proprietary interest in local church property, Va. Code Ann. § 57-15 will afford it
relief, including the possibility contemplated in Norfolk Presbytery v. Bollinger of a permanent injunction against a
proposed conveyance.
Business & Corporate Law > Corporations > Formation > Corporate Existence, Powers & Purpose > Powers >
General Overview
Real Property Law > Purchase & Sale > General Overview
[HN15] See Va. Code Ann. § 57-16.1 (2011).
[HN16] When used in reference to religious entities, the term "polity" refers to the internal structural governance of the
denomination.
General Overview
[HN17] When a local church that incorporates is a constituent member of a supercongregational church, Va. Code Ann.
§ 57-16.1 (2011) in effect provides that it cannot acquire, encumber, or dispose of its real or personal property except in
accordance with the laws, rules, and polity of the denomination and diocese to which the local church belongs. To hold
otherwise would be to hold that the General Assembly, by enacting § 57-16.1, essentially created a mechanism by which
a hierarchical church could become a congregational church by the simple act of incorporation. To put it another way:
while the statute does not provide a denomination or a diocese more control over a constituent member that
incorporates, it ensures that the act of incorporation will not result in a denomination or diocese having less control over
a constituent member.
General Overview
[HN18] Va. Code Ann. § 57-16.1 (2011) ensures that when a local church which is a member of a hierarchy acts to
incorporate, its new form as an incorporated entity does not relieve it of its obligation to continue to comply with the
laws, rules, and ecclesiastical polity of its hierarchy with regard to the acquisition, encumbrance, and disposition of
church property.
Page 684Page 684
[HN19] In a hierarchical church, the laws and canons of a local church necessarily include the governing rules of the
hierarchical church.
[HN20] A proprietary right is a right customarily associated with ownership, title, and possession. It is an interest or a
right of one who exercises dominion over a thing or property, of one who manages and controls.
Contracts Law > Remedies > Equitable Relief > Quantum Meruit
[HN21] To state a cause of action for unjust enrichment, a counter-plaintiff must allege: (1) that he conferred a benefit
on the counter-defendant; (2) that the counter-defendant knew of the benefit and should reasonably have expected to
repay the counter-plaintiff; and (3) that the counter-defendant accepted or retained the benefit without paying for its
value.
Contracts Law > Remedies > Equitable Relief > Quantum Meruit
Estate, Gift & Trust Law > Trusts > Constructive Trusts
[HN22] Constructive trust is not a cause of action but, rather, a remedy against unjust enrichment, usually after an act
of fraud, or breach of confidence or duty.
Business & Corporate Law > Corporations > General Overview

[HN23] See Va. Code Ann. § 57-10.
HEADNOTES
A court of law can resolve property disputes involving land owned by churches as long as it applies neutral principles of
law that have no religious content.
When a local church which is a member of a hierarchy acts to incorporate, its new form as an incorporated entity does
not relieve it of its obligation to continue to comply with the laws, rules, and ecclesiastical polity of its hierarchy with
regard to the acquisition, encumbrance, and disposition of church property.
COUNSEL: [**1] David Booth Beers, Esq., Goodwin Procter, LLP, Washington, D.C.; Heather H. Anderson, Esq.,
Heather H. Anderson, P.C., Arlington, Virginia, Mary E. Kostel, Esq., Special Counsel, The Episcopal Church, c/o
Goodwin Procter, LLP Washington, D.C., for The Protestant Episcopal Church in the United States of America.
Bradfute W. Davenport, Jr., Esq., George A. Somerville, Esq., Brian D. Fowler, Esq., Andrea M. Sullivan, Esq.,
Nicholas R. Klaiber, Esq., Troutman Sanders, LLP, Richmond, Virginia; Mary C. Zinsner, Esq., Troutman Sanders, LLP,
McLean, Virginia, for the Protestant Episcopal Church in the Diocese of Virginia.
Gordon A. Coffee, Esq., Gene C. Schaerr, Esq., Steffen N. Johnson, Esq., Andrew C. Nichols, Esq., Winston & Strawn,
LLP, Washington, D.C., Counsel for Truro Church, Church of the Epiphany, Church of the Apostles, The Church at The
Falls -- The Falls Church and associated individuals.
George O. Peterson, Esq., Tania M. L. Saylor, Esq., Michael Marr, Esq., Peterson Saylor, PLC, Fairfax, Virginia, for
Truro Church and associated individuals.
Mary A. McReynolds, Esq., Mary A. McReynolds, P.C., Washington, D.C., for St. Margaret's Church, St. Paul's Church,
Church of the Epiphany, [**2] Church of the Apostles, St. Stephen's Church and associated individuals.
E. Andrew Burcher, Esq., Walsh, Colucci, Lubeley, Emrich & Walsh, P.C., Prince William, Virginia, for St. Margaret's
Church and St. Paul's Church.
R. Hunter Manson, Esq., Reedville, Virginia, for St. Stephen's Church and associated individuals.
Page 685Page 685
Scott J. Ward, Esq., Timothy R. Obitts, Esq., Dawn W. Sikorski, Esq., Gammon & Grange, P.C., McLean, Virginia;
James A. Johnson, Esq., Paul N. Farquharson, Esq., Scott H. Phillips, Esq., Tyler O. Prout, Esq., Semmes, Bowen &
Semmes, P.C., Baltimore, Maryland, for The Church at The Falls -- The Falls Church and associated individuals.
Thomas C. Palmer, Jr., Esq., Brault, Palmer, Grove, Steinhilber & Robbins, LLP, Fairfax, Virginia, for certain trustees of
The Church at The Falls -- The Falls Church.
E. Duncan Getchell, Jr., Esq., Stephen R. McCullough, Esq., Office of the Attorney General, Richmond, Virginia, for
the Commonwealth of Virginia ex rel. Kenneth T. Cuccinelli, in his official capacity as Attorney General.
JUDGES: Randy I. Bellows.
OPINION BY: Randy I. Bellows
OPINION
[EDITOR'S NOTE: The following court-provided text does not appear at this cite in Va. Cir.].
[*none] LETTER OPINION OF THE COURT REGARDING THE COMPLAINTS FILED BY THE
PROTESTANT EPISCOPAL CHURCH IN THE UNITED STATES OF AMERICA AND THE [**3]
PROTESTANT EPISCOPAL CHURCH IN THE DIOCESE OF VIRGINIA AND THE AMENDED
COUNTERCLAIMS FILED BY THE CANA CONGREGATIONS
[*105] I. INTRODUCTION
On June 10, 2010, the Virginia Supreme Court remanded Protestant Episcopal Church in the Diocese of Virginia v.
Truro Church, 280 Va. 6, 694 S.E.2d 555 (2010), to the Circuit Court, as follows:
Accordingly, we hold that the circuit court erred in ruling that the CANA Congregations' petitions were properly before the court
under Code §57-9(A).
By granting the CANA Congregations' Code §57-9(A) petitions, the circuit court ruled that this "obviate[d] the need to address the
merits of the Declaratory Judgment Actions filed by the Episcopal Church and the Diocese and thus render[s] them legally moot."
In light of our holding that the circuit court erred in granting the Code §57-9(A) petitions, the control and ownership of the property
held in trust and used by the CANA Congregations remains unresolved. Accordingly, the declaratory judgment actions filed by
TEC and the Diocese, and the counterclaims of the CANA Congregations in response to those suits, must be revived in order to
resolve this dispute under principles of real property and contract law.
[*106] For these reasons, we will [**4] reverse the judgment of the circuit court and remand with directions to dismiss the CANA
Congregations' Code §57-9(A) petitions. We will further direct the circuit court to reinstate the declaratory judgment actions filed
by TEC and the Diocese and the counterclaims of the CANA Congregations to those actions, and conduct further proceedings
thereon consistent with the views expressed in this opinion.
Id. at 29-30 (footnotes and citations omitted).

Pursuant to this remand, the Court conducted the trial of the declaratory judgment actions over the course of 22 days
during April, May and June 2011, and took testimony from over 60 witnesses. On June 2, 2011, the Court set a post-trial
briefing schedule, permitting each side to file up to 600 pages of argument in three rounds of briefings. Both sides filed
comprehensive and thorough post-trial briefings, with each side using up approximately 500 of its allotted 600 pages. 2
The Court, having thoroughly reviewed the thousand pages of post-trial briefings and the record of this matter and the
applicable case law, is now prepared to rule. This Letter Opinion sets out the Court's rulings and the basis for these
rulings. As further described below, [**5] the parties are to prepare a Final Order in accordance with this Letter
Opinion.
2 A total of nine principal post-trial briefs have been filed by the parties. For clarity and simplicity sake, the briefs will be referred to in this
opinion as follows:
o CANA CONGREGATIONS' CORRECTED OPENING POST-TRIAL BRIEF (CANA BRIEF #1 A)

Page 686Page 686
o CANA CONGREGATIONS' (CORRECTED) PROPOSED FINDINGS OF FACT FOR THEIR OPENING POST-
TRIAL BRIEF (CANA BRIEF #1B)
o CANA CONGREGATIONS' POST-TRIAL OPPOSITION BRIEF (CANA BRIEF #2)
o CANA CONGREGATIONS' CORRECTED POST-TRIAL REPLY BRIEF (CANA BRIEF #3)
o THE EPISCOPAL CHURCH'S FIRST POST-TRIAL BRIEF (TEC BRIEF #1)
o POST-TRIAL OPENING BRIEF FOR THE EPISCOPAL DIOCESE OF VIRGINIA (DIOCESE BRIEF #1)
o POST-TRIAL RESPONSE BRIEF FOR THE EPISCOPAL CHURCH AND THE EPISCOPAL DIOCESE OF
VIRGINIA (TEC/DOV BRIEF #2)
o THE EPISCOPAL CHURCH'S THIRD POST-TRIAL BRIEF (TEC BRIEF #3)
o POST-TRIAL REPLY BRIEF FOR THE EPISCOPAL DIOCESE OF VIRGINIA (DIOCESE BRIEF #3)
II. BACKGROUND OF LITIGATION AND PROCEDURAL HISTORY
A. BACKGROUND OF LITIGATION
The genesis of this litigation has already been set out in detail in the Court's Letter Opinion on the Applicability of
Virginia Code §57-9(A), dated April 3, [**6] 2008, see In re Multi-Circuit Episcopal Church Prop. Litig., 76 Va. Cir.
785 (2008), as well as in the Virginia Supreme Court's opinion in this case. The Virginia Supreme Court, in its opinion
on the applicability of §57-9(A), described the background of the litigation as follows:
[*107] At the 2003 General Convention of TEC, three major points of controversy arose: the Convention's confirmation of the
election of Gene Robinson, a homosexual priest, as a bishop of one of the dioceses of TEC; the adoption of a resolution permitting
the blessing of same-sex unions; and the rejection of a resolution concerning the "historic formularies of the Christian faith."
Following the 2003 General Convention, Peter James Lee, the bishop of the Diocese, who had supported the confirmation of
Robinson as a bishop, received "hundreds of letters" opposing these actions taken by the General Convention. Additionally, several
congregations opposed to the actions of the General Convention stopped paying pledges owed to the Diocese and TEC, placing the
funds in escrow. As a result, Bishop Lee became concerned that the dissident congregations would "attempt to create a parallel
province."
In response to the discord [**7] within the Diocese, in 2004 a "Reconciliation Commission" was formed "to find ways to bring
about some peaceful conflict resolution." Despite this effort, dissent concerning the actions of the 2003 General Convention
continued, and in 2005 Bishop Lee created a new commission "to give attention to this rising threat of division in the Diocese." The
following year, the commission promulgated a "Protocol for Departing Congregations." Under this protocol, the Diocese initiated
procedures for congregations to conduct votes "regarding possible departure from the Diocese," and several congregations initiated
procedures under the protocol to separate from the Diocese. However, Bishop Lee subsequently advised leaders of the dissident
congregations that due to a change in leadership in TEC, separation of congregations had become a matter of concern to the
national church, and that a vote to separate would not be binding on the Diocese or TEC.
Nonetheless, between December 2006 and November 2007, 15 congregations voted to separate from the Diocese. As a result, 22
members of the clergy associated with these congregations were deposed, or removed, from their pastoral duties in the Diocese by
Bishop [**8] Lee. Congregations in other dioceses of TEC also took similar action to separate from their dioceses over the
controversies arising from the 2003 General Convention. These congregations, as well as newly formed congregations of former
members of TEC, began seeking to affiliate with other polities within the Anglican Communion in order "to be a part of the
worldwide church."
The Church of Nigeria is a province of the Anglican Communion and governs the Anglican churches in the Federal Republic of
Nigeria, a former British colony. In 2005, the Convocation of Anglican Nigerians in America was established as a mission of the
Church of Nigeria to provide oversight for expatriate Nigerian congregations in [*108] the United States. In 2006, the Church of
Nigeria changed the name of this mission to the Convocation of Anglicans in North America ("CANA") and began accepting
former TEC congregations. In 2006, the Anglican District of Virginia ("ADV") was formed as a district of CANA. By 2007, CANA
included 60 congregations in eighteen states and 12,000 members, of which 10,000 were in congregations previously affiliated with
dioceses of TEC.
280 Va. at 15-16 (footnotes and citations omitted).

To the above, [**9] the Court would add the following facts:
o On January 18, 2007, the Standing Committee of the Diocese advised Bishop Lee of the names of the Clergy associated with the
CANA Congregations who the Diocese stated "have abandoned the communion of the Episcopal Church." PX-COM-0253-001
o On January 22, 2007, Bishop Lee, in a document entitled "NOTICE OF INHIBITION" notified The Presiding Bishop of The
Episcopal Church, Rev. Katharine Jefferts Schori, and others, that "[u]nder the provisions of Title IV, Canon 10 of the Constitution
and Canons of the Episcopal Church, the Standing Committee of the Diocese of Virginia has determined that [21 named] priests
Page 687Page 687
canonically resident in the Diocese of Virginia, have abandoned the communion of the Protestant Episcopal Church in the United
States of America [and that Bishop Lee had] affirmed such determination." Bishop Lee then stated the following:
Acting in accordance with the provisions of Title IV, Canon 10, Section 1, have inhibited the clergy listed above
from exercising their priestly ministry, including officiating in the Diocese of Virginia for six (6) months from
this date, and from participating in the councils of this Church and Diocese. [**10] Unless, within six (6)
months they shall fulfill the canonical requirements and transmit a retraction of their actions, they will be
removed from the ordained ministry of the Church, under the provisions of Title IV, Canon 10.2
PX-COM-0254-001.
o Also on January 22, 2007, Bishop Lee as President of the Executive Board of the Diocese signed a resolution declaring the
property of each of the seven churches to have been abandoned. See PX-TRU-0510 (Truro), PX-FALLS-0788 (The Falls Church),
PX-APOST-0477 (Church of the Apostles), PX-EPIPH-0283 (Church of the Epiphany), PX-STMARG (St. Margaret's), PX-
STPAUL-0764 (St. Paul's), and PX-SSH-0485 (St. Stephens). Each of the resolutions stated, in part, the following:
(1) The Executive Board regards the real and/or personal property heretofore and formerly owned or used by the
Congregation of [the [*109] named church], a Church of The Episcopal Church in the Diocese of Virginia for
purposes for which religious congregations are authorized to hold property under the provisions of the Code of
Virginia, as abandoned property because such real and personal property has ceased to be so occupied or used by
such Congregation.
(2) The Executive Board accordingly [**11] declares the real and/or personal property of [the named church]
abandoned.
(3) The Executive Board hereby resolves to take charge and custody of such real and/or personal property.
(4) The Executive Board hereby directs the Trustees of [the named church] to transfer all such real and/or
personal property to the Bishop forthwith.
Id.
o On August 1, 2007, Bishop Lee, in a document entitled "NOTICE OF REMOVAL" notified The Presiding Bishop of The
Episcopal Church, Rev. Katharine Jefferts Schori, and others, that in accordance with the provisions of Canon IV, 10.2 of the
Constitution and Canons of the Episcopal Church, that with the "advice and consent" of the Standing Committee of the Diocese,
certain named clergy, each of whom had been named in the January 22, 2007 Notice of Inhibition were "released from the
obligations of ordained ministry and, for causes which do not affect their moral character, are deprived of the rights to exercise the
gifts and spiritual authority conferred in Ordination." PX-COM- 0275-001.
B. PROCEDURAL HISTORY
The instant litigation began with the filing of the §57-9(A) petitions between December 2006 and July 2007 by nine
congregations in the five circuit courts [**12] which had jurisdiction over the property. 3 TEC and the Diocese
intervened in the cases and also filed declaratory judgment actions against the CANA Congregations. 4
3 The nine congregations were as follows: Truro Church (Fairfax), The Church at the Falls -- The Falls Church (Arlington), Church of the
Apostles (Fairfax), Church of the Epiphany (Fairfax), St. Margaret's Church (Woodbridge), St. Paul's Church (Haymarket), St. Stephen's
Church (Northumberland County), Church of the Word (Prince William County), and Church of Our Saviour (Loudon County).
4 Individuals associated with the congregations, including former Episcopal Church rectors and vicars, vestry members and property
trustees, were also sued.
On or about January 31, 2007, the Diocese filed a complaint in the Circuit Court of Arlington County against The
Church at the Falls -- The Falls Church, and three separate complaints in the Circuit Court of Fairfax County against
Truro Church, Church of the Apostles, and Church of The Epiphany, [*110] respectively. On or about the same date,
the Diocese also filed a complaint in the Circuit Court of Northumberland County against St. Stephen's Church. On or
about February 1, 2007, additional complaints [**13] were filed in the Circuit Court of Prince William County against
St. Margaret's Church and St. Paul's Church. 5
5 Complaints against other churches were filed as well, but they are no longer a part of this litigation and not further described.
Page 688Page 688
The Diocese's complaint against each of the congregations sought six forms of relief: (1) entry of a judgment that there
has been an improper trespass, conversion, alienation and use of the real and personal property of the church; (2) affirm
the trust, proprietary and contract rights of the Diocese; (3) restrain and enjoin individual defendants from further use
and occupancy of the property; (4) direct and require the trustees of the property to convey and transfer the legal title to
such property to the Diocesean Bishop; (5) direct and require individual defendants to convey and transfer control of
such property to the Diocesean Bishop; and (6) order an accounting of the use of the real and personal property. 6
6 A three-judge panel appointed by the Virginia Supreme Court under the Multiple Claimant Litigation Act, Virginia Code §§ 8.01-267.1, et
seq., consolidated all these cases in the Circuit Court of Fairfax County.
On or about February 9, 2007, [**14] TEC filed a single complaint in the Circuit Court of Fairfax County against Truro
Church, Church of the Apostles, Church of the Epiphany, The Church at The Falls -- The Falls Church, St. Margaret's
Church, St. Paul's Church, St. Stephen's Church, Christ the Redeemer Church, Church of the Word, Church of Our
Saviour at Oatlands, and Potomac Falls Church. 7
7 Four of the congregations initially sued by TEC -- Christ the Redeemer Church, Church of the Word, Church of Our Saviour at Oatlands,
and Potomac Falls Church -- are no longer a part of this litigation.
TEC's complaint sought five specific forms of relief: (1) a declaration that each parish's real and personal property is
held for the benefit of an Episcopal congregation or entity and must be used for the Church's ministry and mission; (2) a
declaration that the defendants may not divert, alienate or use the parishes real or personal property except in
accordance with the constitution and canons of TEC and the Diocese; (3) issuance of a preliminary and permanent
injunction ordering defendants to stop diverting, alienating or using the parishes real or personal property, except as
provided by the Constitution and Canons of TEC and the [**15] Diocese; (4) order an accounting of all real and
personal property held by each parish; and (5) order the relinquishment of control of the real and personal property to
the diocesean bishop.
Counterclaims and amended counterclaims were subsequently filed by the CANA Congregations. 8 Specifically, the
amended counterclaims, which were filed individually against TEC and the Diocese in January 2011, each sought the
same relief: (1) a declaration that each of the properties at issue were in the sole and exclusive ownership of their
respective congregation, free and clear of any claim of right or interest by TEC or the Diocese; (2) a claim for unjust
enrichment/quantum meruit, if the Court should determine that TEC or the Diocese had rights to the individual church's
real or personal property that were "superior or otherwise" to the rights of the CANA Congregation; and (3) a request
for imposition of a constructive trust on TEC or the Diocese, if the Court should determine that TEC or the Diocese had
rights to the individual church's real or personal property that were "superior or otherwise" to the rights of the CANA
Congregation.
8 On February 8, 2011, this Court granted the CANA Congregations' [**16] motion for leave to amend, and the amended pleadings were
[*111] deemed filed.
Also before the Court is a single question regarding The Falls Church Endowment Fund. All parties agree that the sole
question before the Court is "which Vestry is the Vestry of The Falls Church, Episcopal Church, which has the authority
to elect the Directors of the Endowment Fund." (See DIOCESE Brief #1 at 80; see also Falls Church's Post-Trial Reply
Brief Regarding the Endowment Fund.) Previously, this Court rejected the CANA Congregations' assertion that the
Endowment Fund was subject to The Falls Church's §57-9 petition, and stated that the matter would be resolved in this
declaratory judgment action. See In re Multi-Circuit Episcopal Church Prop. Litig., 76 Va. Cir. 976, 986 (2008).
In this Letter Opinion, the Court resolves the Declaratory Judgment actions filed by TEC and the Diocese against the
seven CANA Congregations, the CANA Congregations amended counterclaims, and the question described above
regarding The Falls Church Endowment Fund.
III. SUMMARY OF RULINGS

Page 689Page 689
In this Letter Opinion, the Court makes three principle rulings:
1. TEC and the Diocese have a contractual and proprietary interest in each of the [**17] seven Episcopal churches that are the
subjects of this litigation. Specifically, the Court finds for TEC and the Diocese in their Declaratory Judgment actions and, among
other relief, orders that all real property conveyed by the 41 deeds, as well as all personal property acquired by the churches up to
the filing date of the Declaratory Judgment actions (on or about January 31, 2007 or February 1, 2007) are to be promptly conveyed
to the Diocese. (Additional instructions are provided at the conclusion of this Letter Opinion.)
2. The CANA Congregations' Amended Counterclaims are denied in their entirety. Specifically, the Court finds that the CANA
Congregations, in that they are not Episcopal Congregations, do not possess either contractual or proprietary interests in the
property of the seven Episcopal Churches at issue.. They are, therefore, enjoined from further use or control of these [*112]
properties and must promptly relinquish them to the Diocese. Moreover, the Court finds no merit in the CANA Congregations'
claims for unjust enrichment, quantum meruit, and constructive trust and grants TEC's and the Diocese's motions to strike these
claims.
3. The vestry empowered to elect directors [**18] to the Falls Church Endowment Fund is the vestry recognized by the Diocese as
the Episcopal vestry of The Falls Church, that is to say, the Continuing Congregation.
IV. DESCRIPTION OF THE PARTIES
A. PLAINTIFFS AND COUNTER-DEFENDANTS
1. THE PROTESTANT EPISCOPAL CHURCH IN THE UNITED STATES OF AMERICA ("TEC") 9
9 The following brief description of the Protestant Episcopal Church in the United States of America is taken from the Court's prior letter
opinion of April 3, 2008, except that, to avoid confusion, the Court has replaced the short-hand reference used in the opinion to refer to the
denomination ("ECUSA") with the short-hand reference used in this opinion to refer to the denomination ("TEC"). 76 Va. Cir. 785, 789-90
The Protestant Episcopal Church in the United States of America ("TEC") is "a constituent member of the Anglican
Communion." 10 [*113] It considers itself to be "a Fellowship within the One, Holy, Catholic, and Apostolic Church, of
those duly constituted Dioceses, Provinces, and regional Churches in communion with the See of Canterbury, upholding
and propagating the historic Faith and Order as set forth in the Book of Common Prayer." TEC's governing body is the
[**19] General Convention, which consists of the House of Bishops and the House of Deputies. Essentially, the General
Convention is a bicameral legislature, in that "[e]ither House may originate and propose legislation, and all acts of the
Convention shall be adopted and be authenticated by both Houses." Each TEC bishop has a "seat and a vote in the
House of Bishops," while the House of Deputies is composed of a mix of "ordained persons," Presbyters, Deacons, and
laypeople. The House of Bishops elects TEC's Presiding Bishop, which is TEC's "Chief Pastor and Primate," by
majority vote. TEC is further subdivided into either Dioceses, or Missions. Each Diocese chooses its Bishop or Bishop
Coadjutor according to "rules prescribed by the Convention of that Diocese," while Bishops of Missionary Dioceses are
"chosen in accordance with the Canons of the General Convention." Dioceses are grouped into geographical Provinces,
except that, pursuant to TEC's Constitution, "no Diocese shall be included in a Province without its own consent." Each
Province has a Synod, which has its own House of Bishops and House of Deputies.
10 The Anglican Communion is described in the same opinion as follows: ". . . . [**20] a 'family of churches . . . shar[ing] a kind of
historical relationship, one with another . . . understanding and seeing [their] common ancestry in the Church of England through the See of
Canterbury.' It is 'a family of . . . 38 . . . regional and national churches that share a common history of their understanding of the Church
catholic through the See of Canterbury,' and 'a way by which . . . Anglicans say [they] are related to, [they] have a historic relationship with
the Archbishop of Canterbury.' The Anglican Communion has also been described as 'a widely diverse international society of churches.' In
the Lambeth Commission on Communion's 2004 Windsor Report, it formally referred to itself as that part of the Body of Christ which
shares an inheritance through the Anglican tradition, that is, from the Church of England, whose history encompasses the ancient Celtic and
Saxon churches of the British Isles, and which was given fresh theological expression during the period of the Reformation in the sixteenth
and seventeenth centuries.... The core structures of the Anglican Communion include the Archbishop of Canterbury, who is known as the
Anglican Communion's 'focus of unity,' along [**21] with three 'Instruments of Communion,' that are also known as 'Instruments of Unity.'
These are: 1.) the Lambeth Conference; 2.) Anglican Consultative Council [hereinafter "ACC"); and 3.) the Primates' Meeting." Id. at 792-
93.
Page 690Page 690
The Virginia Supreme Court, in Protestant Episcopal Church in Diocese of Virginia v. Truro Church, 280 Va. at 14-15
(footnote omitted), provided the following additional description of TEC:
TEC consists of 111 geographic dioceses with over 7000 congregations and over 2 million members. The highest governing body
of TEC is the triennial General Convention, which adopts TEC's constitution and canons to which the dioceses must give an
"unqualified accession." Each diocese in turn is governed by a Bishop and Annual Council that adopts the constitution and canons
for the diocese. Each congregation within a diocese in turn is bound by the national and diocesan constitutions and canons. The
Protestant Episcopal Church in the Diocese of Virginia ('the Diocese') is one of the diocese within TEC.
There is no dispute in this litigation that TEC is a hierarchical church. 11 Id. at 12-14.
11 A "hierarchical church" is a church "such as Episcopal and Presbyterian churches, that [**22] are subject to control by super-
congregational bodies." 280 Va. at 13 (footnote omitted); see also Baber v. Caldwell, 207 Va. 694, 698, 152 S.E.2d 23 (1967). The term
"hierarchical" includes "super congregational" and "connectional" churches. Reid v. Gholson, 229 Va. 179, 188, 327 S.E.2d 107 (1985). Reid
provides the following description of a "hierarchical" church:
[*114] Hierarchical churches may, and customarily do, establish their own rules for discipline and internal government.
They may, and frequently do, establish internal tribunals to decide internal disputes arising in matters of discipline and
internal government. These tribunals may be guided by a body of internally-developed canon or ecclesiastical law,
sometimes developed over a period of centuries. The decisions of such tribunals may be promulgated as matters of faith
and are entirely independent of civil authority. One who becomes a member of such a church, by subscribing to its
discipline and beliefs, accepts its internal rules and the decisions of its tribunals. For that reason, the civil courts will treat
a decision by a governing body or internal tribunal of a hierarchical church as an ecclesiastical determination
constitutionally immune from judicial [**23] review. To do otherwise would precipitate the civil court into the 'religious
thicket' of reviewing questions of faith and doctrine even when the issue is merely one of internal governance, because in
such churches the resolution of internal government disputes depends upon matters of faith and doctrine.
Id. at 188-189 (citation omitted). As a part of the hierarchy, there are three dioceses affiliated with TEC in Virginia, of which the "Diocese of
Virginia" is one. The "Diocese of Virginia" consists of 38 counties in the northern and central parts of the Commonwealth. 280 Va. at 15.
2. THE PROTESTANT EPISCOPAL CHURCH IN THE DIOCESE OF VIRGINIA ("THE DIOCESE") 12
12 All but the first sentence of the following description is taken from this Court's April 3, 2008 opinion. See 76 Va. Cir. 785, 790-91
The Diocese is an unincorporated religious body or association in Virginia and a constituent part of TEC. The Diocese's
Constitution states that "[t]he order, government, and discipline of the Protestant Episcopal Church in the Diocese of
Virginia shall be vested in the Bishop, and in the Council of the Diocese . . . ." The Council is comprised of the "Clerical
order" and the [**24] "Lay order," The Clerical order is composed of "the Bishop or Bishops and all other ministers
canonically resident in the Diocese of Virginia," while the "Lay order consist[s] of both the "Lay Delegates," and the
"Lay members ex officio." The Lay Delegates consist of delegates from each church, as chosen by its Vestry. The Lay
members ex officio include "the Lay members of the Standing Committee, the Lay members of the Executive Board,
the Chancellor, the Presidents of the Regions, the President of the Episcopal Church Women of the Diocese, and five lay
persons, not over 21 years of age at the time of election, to be elected on or before May 1 as Youth Delegates by five of
the Regional Councils designated on an annual [*115] rotating basis by the Standing Committee." The Council
conducts annual meetings.
In addition to the Bishop, officers of the Diocese include a Secretary, Treasurer, Chancellor, and a Registrar. The
Diocese's Constitution also mandates that a Standing Committee and an Executive Board "conduct . . . the affairs of the
Diocese." The Standing Committee "consist[s] of twelve members, six of the Clerical order, and six of the Lay order,"
while the Executive Board consists of "[o]ne [**25] member elected by each Regional Council," and "[t]he Bishop, the
Bishop Coadjutor if there be one, and the Suffragan Bishops if there be such." The Diocese of Virginia is divided into
Regions, of which every Church in the Diocese is a member. Each Region has its own Regional Council. At the local
level, each Church within the Diocese has a Vestry, which consists of three (3) to twelve (12) members who are elected
by the Church's adult communicants. The Church's head pastor, known as the Rector, presides at Vestry meetings, and is
Page 691Page 691
in fact elected by the Church's Vestry, with "the advice of the Bishop and in compliance with General Convention
Canon III. 17."
B. DEFENDANTS AND COUNTER-PLAINTIFFS
1. The Falls Church

The Falls Church, located in Falls Church, Virginia, was founded in or around 1732 and, therefore, is the only church
before the Court that existed before TEC and the Diocese came into existence. In 1746, John Trammole conveyed a
two-acre parcel to the Vestry of Truro Parish for a churchyard, upon which the original sanctuary was built. By 1798,
The Falls Church was no longer functioning as an Episcopal congregation but, by 1819, there is evidence of a
functioning congregation [**26] at The Falls Church that sought to participate in activities of the Diocese. In 1836, The
Falls Church was admitted to the Diocese as a separate and distinct church. From 1837 to 1861, The Falls Church had
an organized congregation. With the coming of the Civil War, the church suffered substantial disruption and building
damage, which was repaired by the United States Army following the war. The church was formally reorganized and a
vestry was elected on November 27, 1873. The church has been continually in existence since then.
2. St. Paul's Church

St. Paul's, which is located in Haymarket, Virginia, began in or around 1832. In 1834, the historic church, which was
previously a district courthouse, was consecrated. Except for a period of disruption during the Civil War, the church has
been continually in existence to the present,
[*116] 3. Truro Church

Truro Church, which is located in Fairfax, Virginia, was founded in 1843 by Rev. Richard Templeton Brown, who was
then the Rector of The Falls Church. Until 1934, it was known as Zion Protestant Episcopal Church but the name was
changed to Truro by the congregation and vestry in that year. The congregation disbanded during the Civil War but
partially [**27] re-formed as early as November 1866, when initial trustees were appointed. The Congregation of Zion
Church erected a frame building around 1872 and the congregation has been in continued existence since then.
4. St. Stephen's Church

St. Stephen's, which is located in Heathsville, Virginia, came into existence in 1874, with the deeding of property for the
purpose of erecting a "house for divine worship." Initially, the church was called Emmanuel P.E. Church, but the church
was consecrated in 1881 as St. Stephen's Church. Since then, the original church building has been continuously used as
a church.
5. Church of the Apostles

Church of the Apostles, which is located in Fairfax, Virginia, was formed as a mission of the Diocese in 1968. In June
1969, the congregation purchased a parcel of land on Pickett Road in Fairfax, Virginia from the Diocese. Because the
congregation had not achieved parish status, legal title remained in the Diocesan Missionary Society until Apostles was
granted parish status at the 1970 Annual Council of the Diocese. A worship space was built on the property in 1980.
Church of the Apostles has been in continual existence since it was formed as a mission in 1968.
6. St. [**28] Margaret's Church

St. Margaret's, which is located in Woodbridge, Virginia, grew out of the Diocese's program for church planting in the
early 1960's. On October 6, 1963, St. Margaret's held its first worship service in a middle school classroom. On January
28, 1965, St. Margaret's was admitted to the Diocese as a Mission and, on January 24, 1971, St. Margaret's was admitted
to the Diocese as a church. St. Margaret's has been in continual existence since it was formed as a mission in 1965.
7. Church of the Epiphany

Church of the Epiphany, which is located in Herndon, Virginia, was founded in 1986 as a mission of Truro Church and
that same year was [*117] admitted by the Diocese of Virginia as a mission. It held its first worship service on
February 1, 1986 at a local public school. On January 30, 1987, the Diocese of Virginia admitted the Church of the
Page 692Page 692
Epiphany as a church. In August 1987, the Church of the Epiphany acquired the property upon which its church would
be built. Ground-breaking took place in March 1988 and the church was consecrated on April 23, 1989. Church of the
Epiphany has been in continual existence since it was formed as a mission in 1986.
V. NEUTRAL PRINCIPLES OF LAW LEGAL [**29] STANDARD
A. KEY U.S. AND VIRGINIA SUPREME COURT CASES
1. PRESBYTERIAN CHURCH IN UNITED STATES V. MARY ELIZABETH BLUE HULL MEMORIAL

PRESBYTERIAN CHURCH, 393 U.S. 440, 89 S. Ct. 601, 21 L. Ed. 2d 658 (1969)
Hull involved a church property dispute which arose when two local churches in Savannah, Georgia, withdrew from a
hierarchical general church organization, specifically the Presbyterian Church in the United States. As the Supreme
Court described the situation confronting Georgia courts:
In 1966, the membership of the local churches, in the belief that certain actions and pronouncements of the general church were
violations of that organization's constitution and departures from the doctrine and practice in force at the time of affiliation, voted to
withdraw from the general church and to reconstitute the local churches as an autonomous Presbyterian organization. The ministers
of the two churches renounced the general church's jurisdiction and authority over them, as did all but two of the ruling elders. In
response, the general church, through the Presbytery of Savannah, established an Administrative Commission to seek conciliation.
The dissident local churchmen remained steadfast; consequently, the Commission acknowledged [**30] the withdrawal of the
local leadership and proceeded to take over the local churches' property on behalf of the general church until new local leadership
could be appointed.
The local churchmen made no effort to appeal the Commission's action to higher church tribunals -- the Synod of Georgia or the
General Assembly. Instead, the churches filed separate suits in the Superior Court of Chatham County to enjoin the general church
from trespassing on the disputed property, title to which was in the local churches. The cases were consolidated for trial. The
general church moved to dismiss the actions and cross-claimed for injunctive relief in its own behalf on the ground that civil courts
were without power to determine whether the general church had departed from its tenets [*118] of faith and practice. The motion
to dismiss was denied, and the case was submitted to the jury on the theory that Georgia law implies a trust of local church
property for the benefit of the general church on the sole condition that the general church adheres to its tenets of faith and practice
existing at the time of affiliation by the local churches. Thus, the jury was instructed to determine whether the actions of [**31] the
general church 'amount to a fundamental or substantial abandonment of the original tenets and doctrines of the [general church], so
that the new tenets and doctrines are utterly variant from the purposes for which the [general church] was founded.' The jury
returned a verdict for the local churches, and the trial judge thereupon declared that the implied trust had terminated and enjoined
the general church from interfering with the use of the property in question. The Supreme Court of Georgia affirmed. [The Supreme
Court of the United States] granted certiorari to consider the First Amendment questions raised.
Id. at 442-444. In determining that the First Amendment would not permit a civil court to adjudicate ecclesiastical
issues, the Supreme Court set out some of the guiding principles for resolution of a church property dispute in a civil
court:
o "It is of course true that the State has a legitimate interest in resolving property disputes, and that a civil court is a proper forum
for that resolution. Special problems arise, however, when these disputes implicate controversies over church doctrine and
practice." Id. at 445.
o "[T]he civil courts [have] no role in determining ecclesiastical [**32] questions in the process of resolving property disputes."
Id. at 447 (emphasis in original).
o "Thus, the First Amendment severely circumscribes the role that civil courts may play in resolving church property disputes. It is
obvious, however, that not every civil court decision as to property claimed by a religious organization jeopardizes values protected
by the First Amendment. Civil courts do not inhibit free exercise of religion merely by opening their doors to disputes involving
church property. And there are neutral principles of law, developed for use in all property disputes, which can be applied without
'establishing' churches to which property is awarded. But First Amendment values are plainly jeopardized when church property
litigation is made to turn on the resolution by civil courts of controversies over religious doctrine and practice. If civil courts
undertake to resolve such controversies in order to adjudicate the property dispute, the hazards are ever present of inhibiting the
free development of religious doctrine and of implicating secular interests in matters of purely ecclesiastical concern. Because of
these hazards, the First Amendment enjoins the employment [**33] of organs of government for essentially religious purposes,
Abington School District v. Schempp, 374 U.S. 203, 83 S. Ct. 1560, 10 L. Ed. 2d 844 (1963); the Amendment therefore [*119]
commands civil courts to decide church property disputes without resolving underlying controversies over religious doctrine. Id. at
449 (Emphasis Added).
o "The Georgia courts have violated the command of the First Amendment. The departure-from-doctrine element of the implied
trust theory which they applied requires the civil judiciary to determine whether actions of the general church constitute such a
'substantial departure' from the tenets of faith and practice existing at the time of the local churches' affiliation that the trust in
favor of the general church must be declared to have terminated. This determination has two parts. The civil court must first decide
whether the challenged actions of the general church depart substantially from prior doctrine. In reaching such a decision, the court
Page 693Page 693
must of necessity make its own interpretation of the meaning of church doctrines. If the court should decide that a substantial
departure has occurred, it must then go on to determine whether the issue on which the general church has departed holds [**34] a
place of such importance in the traditional theology as to require that the trust be terminated. A civil court can make this
determination only after assessing the relative significance to the religion of the tenets from which departure was found. Thus, the
departure-from-doctrine element of the Georgia implied trust theory requires the civil court to determine matters at the very core of
a religion -- the interpretation of particular church doctrines and the importance of those doctrines to the religion. Plainly, the First
Amendment forbids civil courts from playing such a role." Id. at 449-50.
2. MARYLAND AND VIRGINIA ELDERSHIP OF CHURCHES OF GOD V. CHURCH OF GOD AT

SHARPSBURG, INC., 396 U.S. 367, 90 S. Ct. 499, 24 L. Ed. 2d 582 (1970)
This case began in the Circuit Court of Washington County, Maryland, after a religious denomination called the General
Eldership of the Churches of God in North America, filed suit against two congregations to prevent them from
withdrawing from the Maryland & Virginia Eldership (which was one of the Elderships in the General Eldership) and to
determine which of the two factions involved in the litigation should control the respective churches, their property, and
their corporations. [**35] Ultimately, the Maryland Circuit and appellate courts held for the local congregations, based
on the determination that "so far as the use and control of property of the local congregation is concerned," the Church
of God had a congregational (as opposed to a hierarchical) polity. Maryland and Virginia Eldership of the Churches of
God. v. Church of God at Sharpsburg, Inc., 249 Md. 650, 241 A.2d 691, 699 (1968). After Hull came down in 1969, the
Supreme Court of the United States remanded the case back to the Maryland Court of Appeals to reconsider its decision
in light of Hull. The Maryland Court determined that it had anticipated Hull in its decision and that its handling of the
case [*120] properly applied "neutral principles of law" and did not involve resolution of doctrinal issues as in Hull.
When the case returned to the Supreme Court of the United States, they dismissed the appeal for want of a substantial
federal question. In its entirety, the per curiam opinion reads as follows:
In resolving a church property dispute between appellants, representing the General Eldership, and appellees, two secessionist
congregations, the Maryland Court of Appeals relied upon provisions of state statutory law [**36] governing the holding of
property by religious corporations, upon language in the deeds conveying the properties in question to the local church
corporations, upon the terms of the charters of the corporations, and upon provisions in the constitution of the General Eldership
pertinent to the ownership and control of church property. Appellants argue primarily that the statute, as applied, deprived the
General Eldership of property in violation of the First Amendment. Since, however, the Maryland court's resolution of the dispute
involved no inquiry into religious doctrine, appellees' motion to dismiss is granted, and the appeal is dismissed for want of a
substantial federal question.
396 U.S. at 367-68 (footnotes and citations omitted). Justice Brennan, in his concurrence, explained that a State could
comply with the prescripts of Hull in a variety of ways and that a State "may adopt any one of various approaches for
settling church property disputes so long as it involves no consideration of doctrinal matters, whether the ritual and
liturgy of worship or the tenets of faith." Id. at 368 [**37] (Emphasis in Original). Justice Brennan then went on to list
three methodologies a State might adopt:
First, Justice Brennan referenced the approach of Watson v. Jones, 80 U.S. 679, 20 L. Ed. 666 (1872), enforcing the
property decisions made within a church of congregational polity by a majority of its members or by such other "local
organism as it may have instituted for the purpose of ecclesiastical government," and within a church of hierarchical
polity by the highest authority that has ruled on the dispute at issue, unless "express terms" in the "instrument by which
the property is held" condition the property's use or control in a specific manner. 396 U.S. at 368-69. Justice Brennan
warned, however, that "the use of the Watson approach is consonant with the prohibitions of the First Amendment only
if the appropriate church governing body can be determined without the resolution of doctrinal questions and without
extensive inquiry into religious polity." Id. at 370.
Second, Justice Brennan references the approach called "neutral principles of law, developed for use in all property
disputes," citing Hull. Id. "Under the 'formal title' doctrine, civil courts can determine ownership by studying deeds,
[**38] reverter clauses, and general state corporation laws. Again, however, general principles of property law may not
be relied upon [*121] if their application requires civil courts to resolve doctrinal issues." Id. He cites as an example a
provision in a deed or a denomination's constitution for reversion of local church property to the general church upon a
finding of departure from doctrine. Id.
Third, Justice Brennan references the possibility of "passage of special statutes governing church property arrangements
in a manner that precludes state interference in doctrine." Id. He warns, however, that "[s]uch statutes must be carefully
Page 694Page 694
drawn to leave control of ecclesiastical polity, as well as doctrine, to church governing bodies." Id. (citation and
footnote omitted).
3. NORFOLK PRESBYTERY v. BOLLINGER, 214 Va. 500, 201 S.E.2d 752 (1974)
In July 1972, a congregation in Hampton, Virginia, called Grace Covenant Presbyterian Church, which was a member
of the Norfolk Presbytery and The Presbyterian Church in the United States, voted to sever its connection with the
denomination and become an independent and autonomous church. In September of the same year, the Trustees of
Grace Covenant filed a petition with the [**39] circuit court seeking permission to convey the real estate they held for
Grace Covenant (which was used for a church, an elementary school and a parsonage) to The Mary Atkins Christian
Day School. The proceeding was ex parte and the trial court, after noting that "the transfer of property was 'the wish of
the congregation' and that the congregation was 'the governing body of said church', directed the Trustees to effectuate
the property transfer." Id. at 501.
Norfolk Presbytery filed a timely motion to set aside the order or, alternatively, to intervene. According to the
subsequent Virginia Supreme Court opinion:
[t]he motion for leave to intervene alleged that Grace Covenant was a duly constituted church of and subject to the jurisdiction,
government and discipline of The Presbyterian Church in the United States, a supercongregational body. The motion further alleged
that the action of the congregation in undertaking unilaterally to withdraw, with its property, from the parent church was contrary to
ecclesiastical law; that Norfolk Presbytery was the first ecclesiastical court having direct jurisdiction over Grace Covenant; that the
Presbytery had a proprietary interest, as well as [**40] a jurisdictional and pastoral interest, in Grace Covenant and its property,
which would be denied without due process of law if the order of September 22, 1972, became final. . ." Id.
The trial court denied Norfolk Presbytery's motion, and the case was appealed to the Virginia Supreme Court.
The Virginia Supreme Court, in a decision that construed Hull and Maryland & Virginia Eldership Churches of God and
set out the elements [*122] of a "neutral principles of law" analysis, reversed, and held that the Norfolk Presbytery's
motion to intervene should have been granted so that the Presbytery could present "whatever evidence it had tending to
establish its interest in the Grace Covenant property." Id. at 503. This case warrants extended discussion because it,
along with Green v. Lewis, 221 Va. 547, 272 S.E.2d 181 (1980), are the two principle Virginia Supreme Court decisions
on this subject.
First, the Court construed Virginia Code §57-15 "to require that a church property transfer may be ordered only upon a
showing that this is the wish of the duly constituted church authorities having jurisdiction in the premises." 214 Va. at
502. Where a "supercongregational church" was involved, "we hold that Code §57-15 requires [**41] a showing that
the property conveyance is the wish of the constituted authorities of the general church." 13 Id. at 503.
13 §57-15 is discussed in greater detail in the "Statutes" section, below.
Second, the Court addressed the consequence of a finding that the general church had a "proprietary interest" in the
local church's property. In that event, "the [trial] court's approval of the conveyance sought by the Trustees would
unlawfully deprive the Presbytery of this property interest," and the Presbytery would be "entitled to a permanent
injunction against the conveyance by the Trustees to the Day School." Id. If, on the other hand, "the Presbytery is unable
to establish a proprietary interest in the property, it will have no standing to object to the property transfer." Id. (citation
omitted).
Third, the Court addressed each party's contention that, regardless of statutory provisions, the constitutional principle of
separation of church and state compelled a ruling in its favor. The Trustees of the local church argued that judicial
review of the congregation's decision to become autonomous "would abridge the congregation's right to free exercise of
religion and would establish the Presbytery [**42] as a state supported church." Id. The Presbytery argued the reverse:
a ruling in the local congregation's favor "would be an impermissible establishment of the local church and a prohibited
interference in the ecclesiastical law of the general church." Id. The Virginia Supreme Court "reject[ed] both of these
contentions, for there is no constitutional prohibition against the resolution of church property disputes by civil courts,
provided that the decision does not depend on inquiry into questions of faith or doctrine." Id. (citations omitted).
Fourth, the Court observed that it was not bound by the holding of Watson v. Jones, where "it was held that those who
unite themselves with a hierarchical church do so with an implied consent to its government and take title to local
Page 695Page 695
church property subject to an implied trust for the general church." Id. at 504. The Court noted that Watson was based
on federal law and, in any event, "did not hold that the implied trust doctrine was the only constitutional rule for
resolving church property disputes." Id.
[*123] Fifth, the Court reviewed the holding of the Supreme Court in Hull, and noted that, "in Hull, the Supreme Court
acknowledged that civil courts [**43] may properly adjudicate disputes over church property. The First Amendment
requires only that such disputes be adjudicated according to 'neutral principles of law, developed for use in all property
disputes', and which do not involve inquiry into religious faith or doctrine." Id. (citation omitted). Significantly, the
Court stated that "[w]e do not construe Hull as requiring that courts apply neutral principles of law by considering only
the record title to church property." Id. at 505. The Court then turned to the Supreme Court's decision in the Maryland
& Virginia Eldership of Churches of God case, where it dismissed the appeal of the Maryland decision upholding a
multi-faceted approach to the "neutral principles of law" analysis. The Court then held "that it is proper to resolve a
dispute over church property by considering the statutes of Virginia, the express language in the deeds and the
provisions of the constitution of the general church." Id.
Sixth, the Virginia Supreme Court noted that "[a]s express trusts for supercongregational churches are invalid under
Virginia law no implied trusts for such denominations may be upheld." Id. at 507. This did not mean, however, "that
our [**44] civil courts are powerless to prevent a hierachical church from being deprived of contractual rights in church
property held by trustees of a local congregation." Id. It then concluded:
Norfolk Presbytery made sufficient allegations to be entitled to file its petition as an intervenor in order to have a determination
made whether it had a proprietary interest in the property of Grace Covenant which could not be eliminated by unilateral action of
the congregation. To this end the language of the deeds and the constitution of the general church should be considered by the trial
court in the application of neutral principles of law. As Norfolk Presbytery cannot rely on the implied trust theory, because of our
statutes, it has the burden of proving that the Trustees of Grace Covenant have violated either the express language of the deeds or a
contractual obligation to the general church.
Id.
4. JONES V. WOLF, 443 U.S. 595, 99 S. Ct. 3020, 61 L. Ed. 2d 775 (1979)
Once again, the Supreme Court of the United States addressed a Georgia case involving a dispute over the ownership of
local church property following a "schism" in a local church affiliated with a hierarchical organization, specifically the
Presbyterian Church in the [**45] United States.
First, the Supreme Court noted that Georgia's approach to church property litigation has "evolved" since Hull was
handed down in 1969. Id. at 599. [*124] Prior to Hull, noted the Court, the "Georgia Supreme Court resolved [a church
property] controversy by applying a theory of implied trust, whereby the property of a local church affiliated with a
hierarchical church organization was deemed to be held in trust for the general church, provided the general church had
not 'substantially abandoned' the tenets of faith and practice as they existed at the time of affiliation." Id. Because the
Supreme Court in Hull reversed and found that Georgia "would have to find some other way of resolving church
property disputes that did not draw the state courts into religious controversies," Georgia subsequently abandoned its
implied trust theory "in its entirety," after concluding that it could not survive without the "departure-from-doctrine"
element. Id. at 599-600. In its place, the Georgia Supreme Court adopted the "neutral principles of law" method for
resolving church property disputes. In Georgia, that meant that "[t]he court examined the deeds to the properties, the
state statutes [**46] dealing with implied trusts, and the Book of Church Order to determine whether there was any
basis for a trust in favor of the general church." Id. at 600. (citation omitted).
Second, the Supreme Court reviewed prior case law establishing the limitations placed on a civil court by the First
Amendment in resolving a church property issue: "Most importantly, the First Amendment prohibits civil courts from
resolving church property disputes on the basis of religious doctrine and practice. Serbian Orthodox Diocese v.
Milivojevich, 426 U.S. 696, 710, 96 S. Ct. 2372, 49 L. Ed. 2d 151 (1976) (other citations omitted). As a corollary to this
commandment, the Amendment requires that civil courts defer to the resolution of issues of religious doctrine or polity
by the highest court of a hierarchical church organization." 443 U.S. at 602 (citations omitted). "Subject to these
limitations, however, the First Amendment does not dictate that a State must follow a particular method of resolving
church property disputes." Id. The Court then cited Justice Brennan's concurrence in Maryland & Virginia Churches,
396 U.S. at 368, for the proposition that "a State may adopt any one of various approaches for settling church property
disputes [**47] so long as it involves no consideration of doctrinal matters, whether the ritual and liturgy of worship or
the tenets of faith." 443 U.S. at 602.
Page 696Page 696
Third, the Supreme Court noted that the "'neutral principles of law' approach is consistent with [these] constitutional
principles" and that the "primary advantages of the neutral-principles approach are that it is completely secular in
operation, and yet flexible enough to accommodate all forms of religious organization and polity." Id. at 602-03. In
particular, said the Court:
The method relies exclusively on objective, well-established concepts of trust and property law familiar to lawyers and judges. It
thereby promises to free civil courts completely from entanglements in [*125] questions of religious doctrine, polity, and practice.
Furthermore, the neutral-principles analysis shares the peculiar genius of private-law systems in general -- flexibility in ordering
private rights and obligations to reflect the intentions of the parties. Through appropriate reversionary clauses and trust provisions,
religious societies can specify what is to happen to church property in the event of a particular contingency, or what religious body
will determine [**48] the ownership in the event of a schism or doctrinal controversy. In this manner, a religious organization can
ensure that a dispute over the ownership of church property will be resolved in accord with the desires of the members.
Id. at 603-04.
Fourth, the Court warned that even the "neutral principles of law" approach was not "wholly free of difficulty." Id. at
604. For example, in Georgia, the approach requires a civil court to examine religious documents, such as a church
constitution, for language of trust in favor of the denomination. "In undertaking such an examination, a civil court must
take special care to scrutinize the document in purely secular terms." Id. And "where the deed, the corporate charter, or
the constitution of the general church incorporates religious concepts in the provisions relating to the ownership of
property," and the interpretation of the document would require the civil court to resolve a religious controversy, "then
the court must defer to the resolution of the doctrinal issue by the authoritative ecclesiastical body." Id. (citation
omitted).
Fifth, the Court noted that the problems of religious entanglement should be gradually eliminated as religious [**49]
organizations come to recognize their obligation to structure their relationships so as not to require civil courts to
resolve religious issues.
Sixth, the Supreme Court held that [HN1] a State is "constitutionally entitled" to adopt neutral principles of law as a
means of adjudicating a church property dispute. In addition, the Supreme Court rejected the notion that "the First
Amendment requires the States to adopt a rule of compulsory deference to religious authority in resolving church
property disputes, even where no issue of doctrinal controversy is involved." Id. at 605.
Seventh, the Supreme Court noted that under the neutral principles approach, "the outcome of a church property dispute
is not foreordained. At any time before the dispute erupts, the parties can ensure, if they so desire, that the faction loyal
to the hierarchical church will retain the church property. They can modify the deeds or the corporate charter to include
a right of reversion or trust in favor of the general church. Alternatively, the constitution of the general church can be
made to recite an express trust in favor of the denominational church. The burden involved in taking such steps will be
minimal. And the [**50] civil courts will be bound to give effect to [*126] the result indicated by the parties, provided
it is embodied in some legally cognizable form." Id. at 606 (footnote omitted)
Eighth, the Supreme Court addressed the circumstances of the controversy before it, which had as a factor
distinguishing it from prior cases a division between a majority of local congregation members who wished to withdraw
from the denomination and a minority of local congregation members who wished to maintain the affiliation. The Court
stated that "[i]f in fact Georgia has adopted a presumptive rule of majority representation, defeasible upon a showing
that the identity of the local church is to be determined by some other means, we think this would be consistent with
both the neutral-principles analysis and the First Amendment." Id. at 607. "Most importantly," added the Court, "any
rule of majority representation can always be overcome, under the neutral-principles approach, either by providing, in
the corporate charter or the constitution of the general church, that the identity of the local church is to be established in
some other way, or by providing that the church property is held in trust for the general [**51] church and those who
remain loyal to it. Indeed, the State may adopt any method of overcoming the majoritarian presumption, so long as the
use of that method does not impair free-exercise rights or entangle the civil courts in matters of religious controversy."
Id. at 607-08 (footnote omitted).
Finally, the case was remanded to the Supreme Court of Georgia for it to determine what the law of Georgia was
regarding majority rule. The Court noted that there was some "indications" in the record that under Georgia law the
process of identifying the faction that represents the local church involves considerations of religious doctrine and polity
and that Georgia law requires "that 'church property be held according to the terms of the church government,' and
provides that a local church affiliated with a hierarchical religious association 'is part of the whole body of the general
Page 697Page 697
church and is subject to the higher authority of the organization and its laws and regulations.'" Id. at 608 (citations
omitted). This suggested to the Supreme Court the possibility that the "identity" of the local church named in the deeds
"must be determined according to the terms of the Book of Church Order, which [**52] sets out the laws and
regulations of churches affiliated with [the denomination]." Id. at 609. The Court concluded:
Such a determination, however, would appear to require a civil court to pass on questions of religious doctrine, and to usurp the
function of the commission appointed by the Presbytery, which already has determined that petitioners represent the "true
congregation" of the [local] church. Therefore, if Georgia law provides that the identity of the [local] church is to be determined
according to the "laws and regulations" of the [denomination], then the First Amendment requires that the Georgia courts give
deference to the presbyterial commission's determination of that church's identity.
[*127] Id. (footnotes omitted).

After the Supreme Court issued Jones, TEC decided to avail itself of the Supreme Court's suggestion that a
denomination might amend its governing documents to recite an express trust in favor of the denomination. The
General Convention adopted a canon (now Canon I.7(4)), called either the "Dennis Canon" or the "1979 Trust Canon,"
which provides:
Sec. 4. All real and personal property held by or for the benefit of any Parish, Mission or Congregation is held in trust [**53] for
this Church and the Diocese thereof in which such Parish, Mission or Congregation is located. The existence of this trust, however,
shall in no way limit the power and authority of the Parish, Mission or Congregation otherwise existing over such property so long
as the particular Parish, Mission or Congregation remains a part of, and subject to this Church and its Constitutions and Canons.
Sec. 5. The several Dioceses may, at their election, further confirm the trust declared under the foregoing Section 4 by appropriate
action but no such action shall be necessary for the existence and validity of the trust.
TEC-18-2, Tr. 1214. The Annual Council of the Diocese of Virginia adopted a parallel canon, current Diocesan Canon
15.1, in 1983. PX-COM-222. 14 See also TEC Brief #1 at 13.
14 For the reasons stated in the Statutes section of this opinion, the Court concludes that neither the Dennis Canon nor Diocesan Canon 15.1
had their intended effect in the Commonwealth, given the fact that the Commonwealth did not validate denominational trusts.
5. GREEN v. LEWIS, 221 Va. 547, 272 S.E.2d 181 (1980)

On October 11, 1977, the congregation of a Chesterfield County church called "Lee Chapel, African Methodist
Episcopal [**54] Zion Church" decided to separate itself from its parent organization, the American Methodist
Episcopal [A.M.E.] Zion Church. At a meeting held on November 20, 1977, the congregation adopted a resolution to
become an independent Methodist Episcopal Church free of its former affiliation with the A.M.E. Zion Church in
Virginia and the A.M.E. Zion Church in America. The resolution also stated that "all decisions concerning the Lee
Chapel Methodist Episcopal Church and its property and all of its affairs shall be lawfully made by its local membership
and congregation, through their duly elected officers or trustees." Id. at 550. Thereafter, Wesley J. Green, pastor of Lee
Chapel, sought an injunction against certain members of the church to prevent them from entering or using the premises
of Lee Chapel in a manner contrary to the wishes of the proper officials of the A.M.E. Zion Church. The trial judge
[*128] granted a temporary injunction but subsequently dissolved it on motion of members of the congregation who
petitioned to intervene. Ultimately, the trial found that the general church "had failed to establish that it had a
proprietary interest in the property of Lee Chapel and decreed that [**55] the trustees of the local congregation and the
congregation should enjoy the ownership, control, and use of the real and personal property in controversy to the
exclusion of the general church." Id. at 548-549.
The issue before the Virginia Supreme Court in Green was essentially the same one before the Virginia Supreme Court
in Norfolk Presbytery, i.e., whether the general church had a contractual or proprietary interest in the local church
property. Green is particularly significant for two reasons.
The first reason is that Green gives a trial court guidance on the types of evidence that a trial court might rely upon in
performing the "neutral principles of law" analysis. In the course of the opinion, the Virginia Supreme Court noted the
following pertinent facts:
(1) The A.M.E. Zion Church "is a hierarchical church composed of local pastors, deacons, elders, presiding elders, and
bishops, whose duties are specified in the Discipline." 15 Id. at 549.
Page 698Page 698
15 The Court noted that the "rules, regulations, and doctrines, governing and controlling the operation of the church are found in 'The
Doctrines and Discipline of the African Methodist Episcopal Zion Church,' revised in May 1972, and hereinafter [**56] referred to as 'the
Discipline.'" 221 Va. at 549.
(2) "The structure of the A.M.E. Zion Church and its general plan of operation are not unlike that of other
supercongregational or hierarchical churches." Id. Specifically, the Court took note of the following eight aspects of the
Church: (a) It has a "home mission" department, which makes grants and loans to local churches; (b) it has a publishing
house in Charlotte, North Carolina, which provides literature for local churches and Sunday Schools and publishes the
Discipline and hymnals; (c) the Church operates as college and two junior colleges and makes scholarships available for
students to attend these colleges; (d) the church also runs a seminary which trains its pastors; (e) the church does
missionary work in foreign countries; (f) the church is financed by assessments paid by members of local churches to
the general church; (g) pastors are appointed by the bishops and a local congregation could not refuse to accept a pastor;
and (h) guidelines for worship are set forth in the Discipline and are followed by local pastors. Id.
(3) The local church property consisted of a one acre lot conveyed by deed in 1875 to the "Trustees of the [**57]
A.M.E. Church of Zion for the purpose of erecting an A.M.E. Church of Zion to be known as Lee Chapel." Id. at 549. 16
16 CANA argues that if the denomination had not been the grantee in the deed, the denomination "would not have gotten to first base in
establishing a proprietary interest." CANA Brief #1A at 23. The Court disagrees. First, given the fact that denominational trusts are not
recognized in Virginia, the deed must necessarily be read as a deed by which the trustees hold the [*129] property on behalf of the local
church itself. Thus, naming the denomination as grantee gave the denomination no greater or lesser rights. Second, Norfolk Presbytery
makes it clear that a Court applying "neutral principles of law" does not look just at the record title holder.
(4) Lee Chapel was constructed on the deeded property and operated continuously as an A.M.E. Zion Church until
October 1977, when the controversy arose. The original church building burned down in 1939 and was replaced by the
present building, which was a church that had been used and abandoned by another church. The Virginia Supreme Court
noted: "All labor incident to the removal of the building to the Lee Chapel site was performed [**58] by the local
membership. No funds of the A.M.E. Zion Church, state or national, were used incident to the reconstruction of the
church or to pay for any improvements subsequently made thereon." Id. at 550.
(5) Until the controversy erupted, all pastors of Lee Chapel were installed by the Annual Conference and their
appointment accepted by the congregation of Lee Chapel. Id.
(6) The local church owes no funds, assessments or other monies to the denomination or its Annual Conference. Id.
(7) It was unknown whether the original church had ever been formally dedicated. As to the present church, evidence
was presented that it was never dedicated. A witness testified that in the A.M.E. Zion Church, "dedication of property
was not required because it regarded a dedication as a ceremonial matter, more spiritual in nature than legal." Id. at 551.
The Court rejected the claim made by Lee Chapel members that the fact that there was never a formal dedicatory
ceremony meant that the church never became a member of the denomination: "[W]e conclude that 100 years of
continuous service in the church by the pastors supplied Lee Chapel by the A.M.E. Zion Church constitutes an adequate
dedication of the [**59] property for its intended spiritual and ecclesiastical purposes." Id. at 554.
(8) At the meeting in October 1977, when Lee Chapel voted to withdraw from the general church, 64 of 70 active
members were present. Id. at 551.
(9) As to the reasons why Lee Chapel moved to disaffiliate from A.M.E. Zion Church, various members of the
congregation noted that they had become "thoroughly disenchanted with the hierarchy" and "with those who operated
the church above the level of the congregation." Id. Specifically, they complained that the general church had failed to
lend any financial assistance during a $12,000 remodeling project; they objected to the levied assessments that the local
congregation was required to meet; and they claimed that "the assessments were out of line, excessive, and beyond the
financial ability of the congregation." Id. One quoted witness, who said it was his understanding that the church and its
property belonged to the people in the community, complained that the benefits the general church [*130] now claimed
it provided to Lee Chapel "all fade away when it comes down to getting any results from the affiliation." Id. at 552.
Page 699Page 699
(10) The trial court also heard from the Presiding [**60] Elder, who testified that he did receive complaints from Lee
Chapel about the assessments but stated that both the clergy and laity had the opportunity to "speak pro or con, to ask
that it be changed, or whatever they want to ask about it." Id. at 552. He also indicated that a representative of the Lee
Chapel had approached him about funds to make improvements and he advised him that the local church could make an
application for assistance, that the local church could even direct the application directly to the Presiding Elder and that
he would "see that they got it," but that Lee Chapel had never applied for assistance. Id.
(11) The Virginia Supreme Court stated that, until October 1977, Lee Chapel operated in a manner not unlike any other
small church in a rural area with a limited congregation that is part of a supercongregational denomination. Their
"frustrations" were "not uncommon." Id.
(12) The Virginia Supreme Court summarized the hierarchical nature of the church as follows:
Concerning the status of Lee Chapel, a reference to the original deed discloses that Lee Chapel has been an A.M.E. Zion Church for
more than 100 years. The grantors conveyed the property to "Trustees of [**61] the A.M.E. Church of Zion." The conveyance was
for the purpose of erecting an A.M.E. Church of Zion (to be known as Lee Chapel), not a church of some other denomination, or an
independent church. And that is what occurred. The church was organized, the building was constructed, and it functioned as an
A.M.E. Zion Church until October 1977. It became and was an integral part of the supercongregational or hierarchical structure of
the A.M.E. Zion Church. The general church supplied the ministers and provided the organization and structure which is necessary
if a church is to function and to fulfill its mission. A Sunday School was organized, and its materials were furnished by the general
church. Hymnals and other literature were provided. Baptisms, marriages, and funerals were conducted from the church's
Discipline. Revival services were held. The central church, of which Lee Chapel was a part, conducted world missions and sent
missionaries abroad. Colleges were founded, scholarships provided, and loans and grants made available when, in the discretion of
the general church, they were needed. And the members of Lee Chapel, by payment of their assessments and in numerous other
supportive [**62] ways, contributed to this state, national and international ecclesiastical organization, and they presumably
benefitted from the association, spiritually and otherwise.
[*131] Id. at 553-54.

The second reason why Green is particularly significant is because of a number of general statements in the opinion that
provide a trial court guidance as to the "neutral principles of law" method of resolving church property disputes.
Specifically, the Virginia Supreme Court noted the following:
(1) "In determining whether the AME Zion Church has a proprietary interest in the Lee Chapel property, we look to our
own statutes, to the language of the deed conveying the property, to the constitution of the general church, and to the
dealings between the parties." Id. at 555.
(2) The Court also defined what constituted a proprietary right: "A proprietary right is a right customarily associated
with ownership, title, and possession. It is an interest or a right of one who exercises dominion over a thing or property,
of one who manages and controls." Id.
(3) The Court made it clear that it was not within the scope of a "neutral principles of law" analysis to determine
whether or not the grievances of the membership [**63] of a local church were valid. The issue now before the Court
"is legal, not ecclesiastical, and involves an order of the court below, vesting title and ownership of the property in
controversy in the trustees of the local congregation of Lee Chapel, upon the premise that the A.M.E. Zion Church has
no proprietary interest therein." Id. at 552.
(4) The Court reviewed §57-9 and §57-15, with regard to the distinction between independent churches and those that
are part of a supercongregational hierarchy. It quoted the language in Norfolk Presbytery that construes §57-15 to
require "that a church property transfer may be ordered only upon a showing that this is the wish of the duly constituted
church authorities having jurisdiction in the premises.... [The statute] now contemplates that the general church, or a
division thereof, or certain ecclesiastical officials may be the proper parties to approve such a property transfer." Id. at
553 (citation omitted). It also noted that in both Norfolk Presbytery and Baber v. Caldwell, 207 Va. 694, 152 S.E.2d 23
(1967), the Court "pointed out the distinctions, enunciated in Code §57-9, between an autonomous congregation and
one which is part of a supercongregational [**64] or hierarchical denomination where a determination of property
rights is involved." 221 Va. at 553. It noted that, in Norfolk Presbytery, the Court had held "that in the case of a
supercongregational church Code §57-15 'requires a showing that the property conveyance is the wish of the constituted
authorities of the general church.'" Id. (citation omitted).
(5) As to the fact that the deed at issue did not include a provision that the property was held in trust for the national
church, the Court stated that "[t]he addition of a trust clause to the deed would have provided the A.M.E. Zion Church
Page 700Page 700
with no additional or further interest in the Lee Chapel property." Id. at 554. The Court noted that the property was
"already held by the trustees for that church and no other," and, as stated in Norfolk Presbytery, [*132] "express trusts
for supercongregational churches are invalid under Virginia law," as are implied trusts. Id. at 554-55. 17
17 The Discipline of the A.M.E. Zion Church required that a trust clause be incorporated in all conveyances of churches and parsonages to
the A.M.E. Zion Church, providing that the property is held in trust for the national church. The requirement is waived, however, [**65] for
deeds, like the 1875 deed at issue in this case, that pre-dated the adoption of the current Discipline. As to the deeds previously executed, the
Discipline also stated that the absence of a trust clause did not relieve a local church of its responsibilities to the denomination, "provided
that the intent and desire of the founders and/or the later congregations and boards of Trustees is shown by any or all of the following
indications: (a) the conveyance of the property to the trustees of the local African Methodist Episcopal Zion Church or any of its
predecessors: (b) the use of the name, customs, and policy of the African Methodist Episcopal Zion Church in such a way as to be thus
known to the community as a part of this denomination: (c) the acceptance of the pastorate of ministers appointed by a bishop of the African
Methodist Episcopal Zion Church, or employed by the presiding elder of the district in which it is located." 221 Va. at 554.
Given the foregoing, the Virginia Supreme Court concluded that A.M.E. Zion Church did have a proprietary interest in
the property of Lee Chapel, concluding its opinion as follows:
Here the A.M.E. Zion Church is the grantee in the deed, the property [**66] having been conveyed to trustees of that church to
establish an A.M.E. Zion Church thereon. The provisions of this deed have remained unchanged since 1875, and since that time we
find that the name, customs, and policies of the A.M.E. Zion Church have been used in such a way that Lee Chapel is known,
recognized, and accepted to be an A.M.E. Zion Church. All religious services and ceremonies conducted by the pastors of that
church have followed its Discipline. The literature used by the church and by the Sunday School came from the publishing house of
the A.M.E. Zion Church. The various conferences to which the membership of Lee Chapel's congregation sent delegates were all
organized and held under the direction of the A.M.E. Zion Church.
It is reasonable to assume that those who constituted the original membership of Lee Chapel, and who established the church in the
manner directed by the grantors in the deed, and those members who followed thereafter, united themselves to a hierarchical
church, the A.M.E. Zion Church, with the understanding and implied consent that they and their church would be governed by and
would adhere to the Discipline of the general church. And para. 437(1) [**67] of the Discipline requires that all property transfers
be approved by the bishop.
[*133] The fact that the general church has made no loans or grants for the benefit of Lee Chapel and that, in fact, it may have
refused to contribute to the remodeling program of the local church, is not dispositive. A proprietary interest or a contractual
obligation does not necessarily depend upon a monetary investment. The contractual obligation which the A.M.E. Zion Church
assumed has its genesis in the 1875 deed. From that time until October 1977, when the congregation sought to disassociate itself
from the general church, the A.M.E. Zion Church had assumed its responsibility, fulfilled its obligation, and exercised dominion,
control, and supervision over Lee Chapel, albeit not always in accordance with the wishes of all the members of the local church.
We find from the language of the deed involved, the Discipline of the A.M.E. Zion Church, and the relationship which has existed
between the central church and the congregation over a long period of years, that the A.M.E. Zion Church does have a proprietary
interest in the property of Lee Chapel, and that its interest in the church property cannot be eliminated [**68] by the unilateral
action of the congregation. The Discipline of the A.M.E. Zion Church requires that all property transfers be approved by the bishop
of the district of the Annual Conference, and such approval has not been given.
Id. at 555-56 (footnote omitted).
6. THE PROTESTANT EPISCOPAL CHURCH IN THE DIOCESE OF VIRGINIA v. TRURO CHURCH, 280 Va.
6, 694 S.E.2d 555 (2010)
The instant case was appealed upon this Court's decision holding that the disaffiliating congregations had properly
invoked §57-9(A). The Virginia Supreme reversed, ruling that the disaffiliating congregations had proven the existence
of a division within TEC and the Diocese, but had failed to prove that by affiliating with CANA or the Anglican District
of Virginia ("ADV") that it had joined a "branch" of TEC or the Diocese. 18 While the bulk of the opinion relates
specifically to the §57-9(A) litigation, there are a number of statements made by the Court that are directly germane to
this declaratory judgment action:
18 The Court found that "while CANA is an 'alternative polity' to which the congregations could and did attach themselves, we hold that,
within the meaning of Code §57-9(A), CANA is not a 'branch' of either TEC or the Diocese [**69] to which the congregations could vote to
join following the 'division' in TEC and the Diocese as contemplated by Code §57-9(A)." 280 Va. at 28. The Court explained the "branch"
requirement as follows: "While the branch joined may operate as a separate polity from the branch to which the congregation formerly was
attached, the statute requires that each branch proceed from the same polity, and not merely a shared tradition of faith." Id. at 28-9. The
Page 701Page 701
Court also found that this Court "erred in its holding that there was a division in the Anglican Communion for purposes [*134] of the
application of Code §57-9(A) in these cases." Id. at 22.
(1) The Court noted at the outset that "[t]hese appeals arise from a dispute concerning church property between a
hierarchical church and one of its diocese in Virginia and a number of the diocese's constituent congregations." 280 Va.
at 12.
(2) The Court reviewed the structure of TEC: "The highest governing body of TEC is the triennial General Convention,
which adopts TEC's constitution and canons to which the dioceses must give an 'unqualified accession.' Each diocese in
turn is governed by a Bishop and Annual Council that adopts the constitution and canons [**70] for the diocese. Each
congregation within a diocese in turn is bound by the national and diocesan constitutions and canons. The Protestant
Episcopal Church in the Diocese of Virginia ('the Diocese') is one of the dioceses within TEC." Id. at 15 (footnote
omitted).
(3) The Court reviewed the denomination's and dioceses' control over its priests: "Priests of TEC are 'canonically
resident' within a specific diocese and may not function as priests in any other diocese of TEC without the permission of
the local bishop. Similarly, a priest ordained by a diocese of TEC may not function as a priest for one of the other
regional or national churches that participate in the Anglican Communion without permission from the local authority of
that church." Id.
(4) The Court found that the evidence presented by the CANA Congregations "clearly establishes that a split or rupture
has occurred within the Diocese and, given the evidence of similar events in other dioceses of TEC, the split or rupture
has occurred at the national level as well." Id. at 27. And, significantly, the Court found that "[t]here was not, nor could
there be, any serious dispute that, until the discord resulting from the 2003 General [**71] Convention, the CANA
Congregations were 'attached' both to TEC and the Diocese because they were required to conform to the constitution
and canons of TEC and the Diocese." 19 Id.
19 The parties disagree as to what significance this Court should attach to the Virginia Supreme Court's statements that: (1) "Each
congregation within a diocese in turn is bound by the national and diocesan constitutions and canons;" and (2) "The CANA Congregations
were 'attached' both to TEC and the Diocese because they were required to conform to the constitution and canons of TEC and the Diocese."
The Diocese argues that they are the governing "law of the case." Diocese Brief #1 at 40. The CANA Congregations argue that they were
just a "passing reference." CANA Brief #3 at 59. This Court does not agree that these were merely "passing reference[s]." Nevertheless, the
Court does not need to reach the "law of the case" question because the evidence before the Court clearly supports [*135] the conclusion,
and the Court so finds, that the Congregations were, indeed, "bound" by the national and diocesan constitutions and canons, and were,
indeed, required to "conform" to them.
(5) Finally, the Court ordered reinstatement [**72] of the declaratory judgment actions and counterclaims, to be
resolved "under principles of real property and contract law." Id. at 29.
B. OTHER CIRCUIT COURT DECISIONS

There are two Circuit Court decisions, one in 1977 and one in 1979, which this Court has found helpful in deciding the
instant case, and which warrant extended discussion. Both cases involve TEC and one of its Virginia diocese and both
cases involve factual circumstances similar to the instant case. Because both cases were decided after the Supreme
Court of the United States handed down Hull and Maryland & Virginia Eldership of the Churches of God, 20 and after
the Virginia Supreme Court handed down Norfolk Presbytery, both cases apply the "neutral principles of law" method to
resolve a church property dispute between the denomination and a local congregation.
20 The 1979 case also had the benefit of the Jones decision, issued four months earlier.
1. DIOCESE OF SOUTHWESTERN VIRGINIA OF THE PROTESTANT EPISCOPAL CHURCH IN THE

UNITED STATES OF AMERICA v. KATHRYN BUHRMAN, 5 Va. Cir. 497 (1977) (Stephenson, J.)
Buhrman involved a suit "brought by the Diocese of Southwestern Virginia of the Protestant Episcopal Church in the
United [**73] States of America, a trustee of St. Andrew's Episcopal Church of Clifton Forge, Virginia, and by twelve
members of St. Andrew's against the remaining four trustees of the church and the Parish Rector to obtain a judicial
Page 702Page 702
determination of the status of St. Andrew's Parish real and personal property." Id. at 497. The property at issue were two
parcels of real property in the City of Clifton Forge. On one parcel was the church and parish house and on the other
was the rectory. Id. There were two deeds involved in the litigation. The first deed, dated November 6, 1893, was to the
church and parish house parcel. It stated that it was "for the erection of a church building to be used as a place of
worship by the Episcopal congregation of Clifton Forge Parish." Id. at 497-98. The second deed, dated January 16,
1905, was to the rectory parcel and it had no stated purpose but it was to "certain named persons as Trustees of St.
Andrew's Episcopal Church of Clifton Forge, Virginia." Id. at 498.
St. Andrew's was a unit of the Diocese of Southwestern Virginia, which in turn is a constituent part of TEC. According
to then-Judge Roscoe B. Stephenson, Jr., St. Andrew's "[t]hroughout its history" has [**74] always been [*136] a part
of TEC, although it was connected to different TEC dioceses within the Commonwealth at various points in its history.
Id. Prior to 1974, St. Andrew's was a mission of TEC and the Diocese and gained parish status in January 1974. 21
21 In connection with its formal petition to the Diocese to be be advanced to parish status, the members of St. Andrew's promised and
declared that the "[p]arish shall be forever held under the Ecclesiastical Authority of the Diocese of Southwestern Virginia, and in
conformity with the Constitution and Canons of the Diocese of Southwestern Virginia, the authority of which we do hereby recognize." 5 Va.
Cir. at 499. In the same writing, the members did "solemnly engage and stipulate that all real estate consecrated as a church or chapel, of
which the said Parish is or may become possessed, shall be secured against alienation from the Protestant Episcopal Church in the Diocese
of Southwestern Virginia, unless such alienation is in conformation with its Canons." Id. at 499.
The controversy giving rise to the litigation arose out of resolutions passed by a "substantial" number of the members of
St. Andrew's in October 1976 formally withdrawing [**75] itself from TEC, effective in December 1976, and a letter
from the Rector of the Parish dated December 12, 1976, in which he resigned from the TEC ministry. Since the end of
December 1976, the members who withdrew from St. Andrew's and the resigned rector (until his death) "have continued
to use, control and possess the real and personal property of St. Andrew's." Id. at 500. Further, "[c]hurch officials and
lay members of The Episcopal Church, including the complainants, have been precluded from using these properties for
the furtherance of The Episcopal Church and its activities." Id.
On December 16, 1976, the Standing Committee of the Diocese requested the Bishop "to advise the rector, wardens and
trustees of St. Andrew's" that unless the October 1976 resolutions adopted by the local congregation were rescinded, the
use of the parish's property by the local congregation and its minister "would constitute use of said property for
purposes unrelated to the purposes of the Episcopal Church or Diocese," and would thereby constitute "abandonment of
said property" or "alienation" of the property without court approval and the written consent of the Bishop and Standing
Committee in violation [**76] of the Church's and Diocese's canons. Id. On January 15, 1977, the Diocese's Executive
Board adopted a resolution declaring the property abandoned or illegally alienated, and called upon the Trustees of St.
Andrew's to transfer the title and possession of the property to the Diocese. On May 5, 1977, a committee of the
Diocese wrote the Trustees, Rector and Wardens of St. Andrew's requesting that the parish property be vacated and that
its trustees convey the property to the Diocese. The defendants failed to comply with this request and the litigation
ensued.
After determining that under Norfolk Presbytery it was proper to resolve the dispute by considering the statutes of
Virginia, the express language in [*137] the deeds and the provisions of the constitution of the general church, the
Court noted the following:
First, the Court observed that from its beginning St. Andrew's was a "component" of TEC, and that it has been part of a
hierarchical or supercongregational church organization. "Because of this it is, and always has been, subject to the
ecclesiastical authority and to the Constitutions and Canons of both The Episcopal Church and the Diocese." Id. at 502-
03.
Second, the Court considered [**77] two statutes of the Virginia Code, as follows: "By statute, Code §§57-8 and 57-13,
the legal title (as opposed to the beneficial ownership) to all property of a local church (whether the church be
independent or a unit of a supercongregational organization) is held by local church trustees who are appointed by the
circuit court. Section 57-13 provides that 'any one or more members of any church diocese or religious congregation
may, in his or their names, on behalf of such church diocese or congregation, commence and prosecute a suit in equity
against any such trustee to compel him to apply such real or personal estate for the use or benefit of the church diocese
or congregation, as his duty shall require." 5 Va. Cir. at 503.
Page 703Page 703
Third, the Court examined the deeds at issue -- in particular, noting that one deed stated that the conveyance was "for
the erection of a church building to be used as a place of worship by the Episcopal Congregation of Clifton Forge
Parish" and that the other deed was made to named "Trustees of St. Andrew's Episcopal Church of Clifton Forge,
Virginia" -- and stated that "[i]t is evident that the designated cestui que trust 22 in each deed was a unit or component
[**78] of The Protestant Episcopal Church in the United States of America within the then existing diocese. It cannot be
successfully questioned that the abbreviated and commonly accepted name for that church is and always has been 'The
Episcopal Church.' Therefore, a reasonable interpretation of these deeds leads inescapably to the conclusion that the
trustees cannot hold title to the subject property for persons or groups who are withdrawn from and not under the
authority of The Episcopal Church." Id. (footnote omitted).
22 According to Black's Law Dictionary (Ninth Edition), the definition of "cestui que trust" is "[o]ne who possesses equitable rights in
property" and "beneficiary."
Fourth, the Court considered the evidence related to the provisions of the "constitution of the general church," after first
noting that the Virginia Supreme Court in Norfolk Presbytery gave that phrase "a rather broad meaning which included
contractual rights of the various levels and units within a supercongregational church." Id. at 504. On this issue, the
Court noted that at the time the congregation sought parish status, it expressly promised the Diocese that the parish
would always be held under the ecclesiastical [**79] authority of the Diocese and in conformity with its constitution
and canons and that all consecrated property would be secured [*138] against alienation from the Diocese, unless in
conformity with the Diocese's Canons. 23 Significantly, the Court stated that even without these "express promises,
however, the contractual rights of the Diocese in the subject property are implicit in the Constitution and Canons of The
Episcopal Church and in the Constitution and Canons of the Diocese." Id. at 505. These provisions, noted the Court, are
"binding" on all units of TEC, including the parish. The Court then proceeded to cite various provisions of the canons
and constitution, such as the provision preventing alienation of property without permission of the Diocese and the
provision declaring that every congregation within the Diocese was "bound equally by every rule and Canon which
shall be framed by any Council, acting under this Constitution." Id. at 506. The Court stated that such constitutional and
canonical provisions "are what gives The Episcopal Church its hierarchical character, and this supercongregational
characteristic is the reason that the Diocese has a proprietary interest in the subject [**80] property." Id.
23 One of the ways in which the CANA Congregations seek to distinguish the instant case from that of Buhrman is to argue that the CANA
Congregations, "by contrast, made no such agreements, pledges, or representations." CANA Brief #3 at 51. The Court disagrees. There is a
wealth of evidence before the Court -- see the "course of dealings" section of this opinion, below -- which demonstrates the congregations'
"agreements, pledges, or representations," as manifested by vestry oaths, vestry minutes, vestry handbooks, local church constitutions,
innumerable acknowledgements of fidelity to TEC's and the Diocese's Constitutions and Canons, and other documents. Moreover, Judge
Stephenson makes it clear in his opinion that such "express promises" were not necessary to his finding that the Diocese had contractual
rights in the local church's property.
Fifth, the Court cited the Diocesan Canon regarding the Executive Board's power to declare property to be "abandoned"
and to direct the trustees holding legal title to the property to transfer it to the Diocese's trustees. It then noted that, in
fact, the Executive Board had declared St. Andrew's property to have "been abandoned within [**81] the context of
church law, and it is most doubtful if that determination is subject to review by this court." Id. at 507 (citations omitted).
Even if the property was not deemed abandoned, noted the Court, it was being used by "those who no longer claim
allegiance" to TEC, contrary to the express promise made by the Congregation that the property would be "secured
against alienation" from the Diocese. Id. The Court added that such use also violated the Diocesan Canon that prevented
alienation without the consent of the Bishop. Id.
Judge Stephenson concluded his opinion as follows:
By whatever term the defendants' actions are called (be it abandonment, alienation or something else), it is undisputed that the local
church [*139] trustees who have withdrawn from The Episcopal Church claim to hold title to the subject property for those
persons who have likewise withdrawn from The Episcopal Church. Moreover, they have expressly renounced the control and
authority of The Episcopal Church. Their appointment as trustees was for the purposes of a church which they have since
renounced, and they have placed the St. Andrew's property beyond the reach, use and control of those parishioners who have
remained [**82] loyal to The Episcopal Church as well as the Diocese to which St. Andrew's belongs.
Page 704Page 704
The Court holds, therefore, that the withdrawn trustees, having violated the express language of the deeds and their contractual
obligations to the general church, have no further right or interest in the subject property, that neither they nor the others who have
renounced The Episcopal Church have any proprietary or possessory rights in said property. Until such time as other trustees, loyal
to The Episcopal Church, can be appointed, the lone remaining trustee, being one of the complainants, shall hold title to said
property for the sole benefit of St. Andrew's as a unit of The Protestant Episcopal Church in the United States of America as
contemplated by and in accordance with the deeds and the constitution of that church.
Id. at 508 (citation omitted).
2. DIOCESE OF SOUTHWESTERN VIRGINIA OF THE PROTESTANT EPISCOPAL CHURCH IN THE

UNITED STATES OF AMERICA v. WYCKOFF, unpublished opinion (Amherst County, Nov. 16, 1979) (Koontz, J.)
Wyckoff, like Buhrman, also involved TEC, as well as a Virginia diocese of TEC, and a local congregation which had
decided to leave TEC. In this case, the departing congregation, [**83] called Ascension Episcopal Church, in Amherst,
Virginia, voted to renounce their allegiance to the Diocese and affiliate with the Anglican Catholic Church. Then-Judge
Lawrence L. Koontz, Jr. reached a similar result to that of Judge Stephenson in Buhrman.
There were two properties at issue in Wyckoff, one conveyed by deed in 1847 and one conveyed by deed in 1860. The
1847 deed stated, in pertinent part, that on the property conveyed "preparations are now being made to erect a new brick
church for the use and benefit of the Protestant Episcopal Church," the conveyance being "upon this special trust and
this special confidence, however, that they the said (grantees) and the survivor of them and the heirs and assigns of them
and the survivor of them shall and will forever have and hold the said piece or parcel of land with all the improvements
and appurtenances thereunto belonging for the use and benefit of the Protestant Episcopal Church as they the said
(grantees) and the survivor of them and the heirs and assigns of them and the survivor [*140] of them shall deem most
likely to promote the interest of said church...." Wyckoff at 2. The 1860 deed said that the property conveyed was for
"the [**84] same use and for the same purposes and upon the same conditions and upon the same trusts" as in the 1847
deed described above. Id. at 2-3.
In ruling for the Diocese, Judge Koontz applied the same "neutral principles of law" method used in Norfolk Presbytery,
and noted that the recent United States Supreme Court decision in Jones "does not change but rather affirms this
[neutral principles of law] approach as one valid means of resolving church property disputes." Id. at 5. In the course of
his decision, Judge Koontz noted the following:
First, he observed that the church had been used continuously for Protestant Episcopal Church services for over one
hundred years. Moreover, the Ascension Episcopal Church had "remained loyal" to the Ecclesiastical Authority and its
constitution.
Second, the Court noted that it is "well settled under the law of this Commonwealth that trusts created by language in
deeds purporting to convey property to named individual trustees for indefinite beneficiaries are invalid. Furthermore,
such trusts expressed or implied for general hierarchical churches are invalid." Id. at 4 (citations omitted). The type of
language in the deeds cited above, Judge Koontz held, [**85] "create a conveyance of the property for the use of the
local congregation." Id. (citation omitted).
Third, Judge Koontz turned to the significance of the congregational vote to leave the Episcopal Diocese and join the
Anglican Catholic Church. "It is obvious and uncontested that members of the congregation had the right to withdraw
from the Episcopal Church and to transfer their allegiance to any other church. It is also obvious that in so doing even a
majority could not thereby require the minority to transfer their allegiance or be put out of existence as a church
entity. . . . The result, nevertheless, is that the protestant congregation of Ascension Episcopal Church, Amherst while
perhaps reduced in number still existed as it had prior to the vote." Id. at 4-5.
Fourth, Judge Koontz found that using the neutral principles of law approach, "this Court has found no provision of the
constitution or canons of the general church or the diocese which permit a vote of even the majority of the local
congregation to alienate the real property of the church without the written consent of the Bishop acting with the advice
and consent of the Standing Committee of the Diocese. In fact, Canon [**86] 21 expressly prohibits such alienation."
Id. at 6.
Fifth, Judge Koontz noted that while §57-9 did provide for a method to address a division within a hierarchical church,
the vote of the congregation was not taken in accordance with the requirements of the statute. (He also noted that, in any
event, §57-9 might not be applicable to these deeds, both of which predated the passage of the statute; nor was he
satisfied that [*141] a division had occurred as contemplated by the statute.) "The net result, therefore, based on the
Page 705Page 705
constitution and canons of the church and the state statutes is that the effect of the congregational vote in May, 1978 on
the title to the real property in question was that title remained exactly where it was prior to the vote, that is, in the
trustees for the benefit of the local protestant episcopal congregation." Id. at 7.
Finally, Justice Koontz concluded as follows:
The result of the May, 1978 congregational vote did not and could not extinguish that part of the Protestant Episcopal congregation
known as Ascension Episcopal Church, Amherst remaining loyal to the Diocese of Southwestern Virginia and the National
Episcopal Church. The vote may well have indicated that [**87] fifty-nine members of that congregation transferred their
allegiance to the Anglican Catholic Church which is unquestionably a separate entity. Nothing, however, has occurred under neutral
principles of law to transfer the title and control of the property in question from the beneficial use of the remaining congregation
of the Ascension Episcopal Church, Amherst as represented by the complainants herein.
For these reasons, the primary prayer of the complainants will be granted and the present trustees will be directed and required to
hold the property in question for the sole use and benefit of the congregation of Ascension Episcopal Church, Amherst as a unit of
the Episcopal Church subject to the canonical authority of the Diocese of Southwestern Virginia. [Respondents] will be enjoined
from further use and occupancy of the property.
Id. at 7-8.
C. GENERAL DISCUSSION REGARDING NEUTRAL PRINCIPLES OF LAW

The parties are in sharp disagreement on a number of issues related to the "neutral principles of law" approach. Each is
discussed in turn:
1. In a "neutral principles of law" analysis, should a court consider the "course of dealings" between the local
church and the general church?
The [**88] CANA Congregations argue that the "course of dealings" between the parties is not a proper consideration
in a "neutral principles of law" analysis, largely because it was not stated as one of the factors under consideration in
Norfolk Presbytery. The Court finds, however, that under the Virginia Supreme Court's subsequent holding in Green,
[HN2] a trial court must (and, at a minimum, may) consider the "course of dealings" between the parties. While it could
be argued that Green established "course of [*142] dealings" evidence as an additional factor in the "neutral principle
of law" analysis, it makes more sense to simply view "course of dealings" evidence as instructive to understanding the
hierarchical nature of the polity in practice as well as in theory, and each parties' awareness of, and agreement to, the
rules governing a supercongregational church.
CANA argues, however, that the only reason the Court in Green considered "course of dealing" evidence was to
determine if the congregation in Green had manifested its intent to be legally bound by a denominational proprietary
interest by engaging in specific conduct indicating their connection to the denomination. (CANA Brief #1A at 83.) The
problem [**89] with this argument is that the Virginia Supreme Court never said this; nor did it even imply this; and its
review of the evidence does not suggest it is the case.
2. In examining the general church's governing documents, is the Court limited in its consideration to the
constitution of the denomination and diocese, or should the Court also consider the canons and any other governing
documents that may exist?
CANA argues that this Court may only consider the Constitution of TEC and the Constitution of the Diocese because
Norfolk Presbytery used the word "constitution," 24 rather than "constitution and canons." The Court disagrees. As Judge
Stephenson said in Buhrman, the Virginia Supreme Court in Norfolk Presbytery gave the reference to "constitution" a
"rather broad meaning." 5 Va. Cir. at 504. This Court views the reference to "constitution" to require an examination of
the governing laws of the church, which most certainly includes both the Constitution of TEC and the Diocese, as well
as their Canons.
24 The word "constitution" appears in Norfolk Presbytery with a lower-case "c".
CANA argues, however, that canons are different than constitutions, because canons are enacted "without the [**90]
standstill periods or two-reading requirements that apply to constitutional changes." (CANA Brief #1A at 2, 39-45.)
Page 706Page 706
Even if true, there is no basis upon which this Court could or should conclude that canons are entitled to less weight
than constitutions. CANA asks this Court to parse the manner in which the denomination amends its constitution versus
amending its canons, and conclude that "[o]nly constitutional provisions may create a trust interest." TEC and the
Diocese state that for the Court to do this would infringe on their First Amendment rights. The Court does not need to
resolve that question, because the Court concludes that there is no basis in the "neutral principles of law" analysis for a
Court to ignore canonical provisions because the Court believes it would have been fairer or more equitable to
accomplish a canonical objective by constitutional amendment.
[*143] 3. In a "neutral principles of law" analysis, are the deeds "first among equals" when considering the other
factors?
CANA argues that "[d]eeds are generally the predominant consideration in real property disputes and according them
such weight here is consistent with both the Virginia Supreme Court's mandate that this [**91] Court apply normal
principles of 'real property' law and the fact that 'neutral principles' are principles 'developed for use in all property
disputes.'" (CANA Brief #3 (emphasis in original) (citations omitted). The Court does not agree. There is no suggestion
in Norfolk Presbytery or Green that in the resolution of a church property dispute that this Court should accord the
deeds "predominant" weight over, for example, the constitution of the general church. Rather, [HN3] at the core of the
"neutral principles of law" methodology is the requirement that the Court give full consideration to each of the factors
and determine whether the plaintiffs have proven that they have a "proprietary" interest in the property at issue.
4. In a case where the trial court finds that the general church has a contractual or proprietary interest over local
church property, does that mean that control and ownership of the local church property necessarily transfers from
the trustees of the local church to the diocese? In other words, does the local congregation retain a proprietary
interest to prevent a transfer to the diocese? Does that question turn on whether the local congregation has
disaffiliated from [**92] the denomination and/or on whether the diocese, under its canons, has declared the
property abandoned?
Whether or not it is possible to hypothesize a scenario under which both a hierarchical denomination and a local
disaffiliated congregation would have competing "proprietary interests" in local church property, that is not the case
now before the Court. The CANA Congregations are not Episcopal Congregations. Their rectors are not Episcopal
rectors. Their vestries are not Episcopal vestries. 25 Therefore, they have no contractual or proprietary interest in these
Episcopal Churches. 26 As Judge Stephenson said in Buhrman, 5 Va. Cir. at 508: "The Court holds, therefore, that the
withdrawn trustees, having violated the express language of the deeds and their contractual obligations to the general
church, have no further right or interest in the subject property, that neither they nor the others who have renounced The
Episcopal Church have any proprietary or possessory rights in said property."
25 The Rector of an Episcopal church must be an Episcopal priest, TEC Canon III.9(3)(a)(3), and the Vestry of an Episcopal church must be
composed of Episcopalians. Diocesan Canon 11.4.
26 Thus, this [**93] Court rejects the premise of the CANA Congregations' claim, at Page 77 of CANA Brief #2, that it is entitled to
compensation for improvements it made to the church properties. In support of that argument, CANA asserts that the Virginia Supreme Court
in Green "did not state that the denomination's [proprietary] interest extinguished the [proprietary] interest of the congregation," nor did the
Court in Green state that "the congregation's interest could be extinguished without compensating it for the improvements it had made to the
property." Id. While it is undoubtedly true that the Court in Green did not make these statements, it is equally true [*144] that CANA's
assertions depend on a finding that the CANA Congregations hold a "proprietary" interest in Episcopal church properties, which this Court
has found they do not.
As to the "abandonment" resolution by the Diocese, it must first be stated that the resolution did not "extinguish" 27 the
CANA Congregations' "interest" in the seven church properties, for the CANA Congregations are not in authorized
possession of Episcopal church property and, therefore, have no "interest" in the properties capable of being
extinguished. And while it is [**94] true that the Executive Board's January 22, 2007 resolution declaring the seven
church properties to have been abandoned was the canonical predicate for the Executive Board's instruction to the
trustees to transfer the property to the Bishop, that obviously did not happen. At this point, any conveyances that take
place will occur pursuant to the instant declaratory judgment actions, and the orders that will ultimately issue. More to
the point, this Court's determination that TEC and the Diocese have a proprietary interest in the seven church properties
Page 707Page 707
does not depend on the Executive Board's "abandonment" resolution, nor is that a condition precedent to the Court's
determination.
27 See this statement from CANA Brief #2 at 78: "[TEC and the Diocese] may not be required to pay to acquire a proprietary interest, [but]
nothing in Green absolves them of the duty to compensate the Congregations, should they wish to extinguish the Congregations' interest in
the property." The fallacy in this statement is the presumption, which this Court rejects, that the CANA Congregations possess an "interest"
in Episcopal church property.
5. In determining whether a denomination or diocese has a "contractual" [**95] or "proprietary" interest in a

constituent member's local church property, must the court apply traditional concepts of contract law, such as the
requirement of consideration, mutuality of remedies in the event of breach, and so on?
CANA argues that TEC and the Diocese cannot have a contractual interest in the properties because they did not
provide "consideration" for them. (CANA Brief #1A at 55.) CANA also argues that there cannot be an enforceable
contract where the plaintiff fails to establish the requirements of mutual obligation and mutual remedy. (Id. at 58.)
CANA also makes a related argument that its claim that TEC and the Diocese breached their spiritual obligations to the
CANA Congregations is unenforceable in a [*145] civil court under First Amendment precepts and, hence, where there
is no remedy for breach there can be no enforceable contract. (Id. at 63.)
TEC and the Diocese argue that these concepts were not considered by the Virginia Supreme Court in Norfolk
Presbytery or Green and, therefore, are not part of the "neutral principle of law" analysis. The CANA Congregations
argue, correctly, that the fact that a party in unrelated litigation may not have made a particular argument [**96] does
not prevent a party in the instant litigation from making the same argument in this case. The Court agrees with that
proposition. Nevertheless, the Court does not find the claims to be meritorious.
VI. NEUTRAL PRINCIPLES OF LAW ANALYSIS
A. STATUTES
[HN4] The starting point in a "neutral principles of law" approach to a church property dispute is a fair consideration of
the applicable and pertinent statutes. See, generally, Norfolk Presbytery, 214 Va. at 505 ("We hold that it is proper to
resolve a dispute over church property by considering the statutes of Virginia, the express language in the deeds and the
provisions of the constitution of the general church."); and Green, 221 Va. at 555 ("In determining whether the A.M.E.
Zion Church has a proprietary interest in the Lee Chapel property, we look to our own statutes, to the language of the
deed conveying the property, to the constitution of the general church, and to the dealings between the parties.").
Obviously, it is not necessary that a statute be dispositive to be pertinent and, in this case, the Court finds that there are
four statutes warranting discussion, Virginia Code §§57-7.1, 57-9, 57-15, and 57-16.1.
1. Virginia Code §57-7.128
28 Virginia Code §57-7.1(2011) [**97] reads as follows:
§ 57-7.1. [HN5] What transfers for religious purposes valid

Every conveyance or transfer of real or personal property, whether inter vivos or by will, which is made to or for the
benefit of any church, church diocese, religious congregation or religious society, whether by purchase or gift, shall be
valid.
Any such conveyance or transfer that fails to state a specific purpose shall be used for the religious and benevolent
purposes of the church, church diocese, religious congregation or religious society as determined appropriate by the
authorities which, under its rules or usages, have charge of the administration of the temporalities thereof.
[*146] No such conveyance or transfer shall fail or be declared void for insufficient designation of the beneficiaries in
any case where the church, church diocese, religious congregation or religious society has lawful trustees in existence, is
capable of securing the appointment of lawful trustees upon application as prescribed in § 57-8, is incorporated, has
created a corporation pursuant to § 57-16.1, or has ecclesiastical officers pursuant to the provisions of § 57-16.
Page 708Page 708
Not surprisingly, both sides have focused considerable attention on [**98] whether the Virginia Code now permits
trusts for denominations and the dioceses of those denominations. TEC and the Diocese acknowledge that historically
Virginia statutes did not validate trusts for general churches. (See Diocese Brief #1 at 39.) They assert, however, that
this changed in 1993, when the General Assembly repealed §57-7 and enacted §57-7.1. They argue that §57-7.1 "should
be construed as validating trusts for denominational churches," and that "[s]uch a trust is stated by TEC's Dennis
Canon and Diocesan Canon 15.1." (See Id. at 41.) The CANA Congregations, in contrast, argue that neither §57-7.1, nor
its predecessors, legalize denominational trusts and point to 14 Virginia Supreme Court decisions in support of their
position. (See CANA Brief 1A at 14-16.)
This Court has previously had occasion to rule on this matter. In its Letter Opinion of June 27, 2008, 76 Va. Cir. 884,
894, the Court held that "57-7.1 did not change the policy in Virginia, which is that [HN6] church property may be held
by trustees for the local congregation, not for the general church." 29 While the issue arose in a different context, 30 the
matter was fully briefed and decided. Among other matters, the [**99] Court noted that the Virginia Supreme Court in
Trustees of Asbury United Methodist Church v. Taylor & Parrish, Inc., 249 Va. 144, 152, 452 S.E.2d 847, (1995) held
that "Code §57-7.1 validates transfers, including [*147] transfers of real property, for the benefit of local religious
organizations." The Court also noted that Clause 3 of the 1993 Act which enacted §57-7.1 states that it is "declaratory of
existing law."
29 This policy has a long pedigree in Virginia. See, generally, Hoskinson v. Pusey, 73 Va. 428, 431 (1879)("The deed is the same in
substance as the deed in Brooke v. Shacklett, 54 Va. 301, and the construction must be the same. According to that construction, the
conveyance is not for the use of the Methodist Episcopal Church in a general sense. Such a conveyance in this state would be void.");
Norfolk Presbytery, 214 Va. at 507 ("As express trusts for super-congregational churches are invalid under Virginia law no implied trusts
for such denominations may be upheld."); and Reid 229 Va. at 187 ("Because of this strong tradition, we have, for instance, refused to adopt
the 'implied trust' theory in favor of hierarchical churches.").
30 TEC and the Diocese had argued that the Court had to make a [**100] preliminary determination of church property ownership before
embarking on a §57-9 analysis. The Court found that position to be without merit "because §57-7.1 did not change long-established
precedent in Virginia regarding trusts for general hierarchical churches." See 76 Va. Cir. at 893.
While TEC and the Diocese invite the Court to revisit this matter and, more particularly, to hold that the Virginia Code
does recognize trusts for denominations and their dioceses, the Court declines to do so. Put simply, the Court believes
its prior decision on this issue was correct. 31 Nevertheless, several additional points should be noted with regard to § 57-
7.1.
31 In particular, the Court is not persuaded by the argument put forward by TEC and the Diocese that the Commonwealth must recognize
denominational trusts because §57-7.1 and §57-14 both refer to property held by trustees for church dioceses. As the CANA congregations
note in their response brief: "[S]ome property, such as ecclesiastical residences, can be held in trust for a diocese, and that has been true
since 1962.... Accordingly, plaintiffs are wrong to suggest that the Court's reading of §57-7.1 'render[s] meaningless' the law's [**101]
reference to 'diocese.'" (See CANA Brief #2 at page 11.)
First, TEC and the Diocese argue that "[i]f §57-7.1 does not allow church property to be held in trust for the Diocese, . .
. it is unconstitutional." (See Diocese Brief #1 at 41.) While it is true that the Court might need to reach and address the
constitutional issue if its construction of §57-7.1 was in any sense determinative of the matters before it, that is not the
case. As stated above, the Court finds on the record before it that the evidence and law clearly favor TEC and the
Diocese. Thus, whether or not a construction of §57-7.1 in favor of denominational trusts or a holding regarding the
constitutionality of §57-7.1 might provide an alternative or additional basis to grant TEC and the Diocese the relief they
seek, that does not warrant addressing these issues.
Second, the CANA congregations argue that if this Court were to find that the Dennis Canon or Diocesan Canon 15.1
did give TEC and the Diocese a trust interest in the church properties, plaintiffs' claims would be barred by the United
States and Virginia Constitutions. CANA states: "Granting their canons legally dispositive weight would violate not
only principles [**102] of free exercise and disestablishment, but also the Contracts Clause (as applied to pre-1993
conveyances), basic notions of due process, and the Equal Protection Clause." (CANA Brief #1A at 123.) To the extent
that CANA's Constitutionality argument is based solely on concerns regarding the Dennis Canon and Diocesan Canon
Page 709Page 709
15.1, the Court obviously does not need to reach the issue because the Court has not found that these Canons establish
valid trust interests in the Commonwealth. To the extent that CANA's argument is broader than this, in other words, to
the extent that CANA is arguing that this Court cannot base a finding of a contractual or proprietary interest by
considering and giving weight to any portion of the Constitution and Canons of TEC and the Diocese, this Court rejects
[*148] CANA's claim of unconstitutionality. In this Letter Opinion, this Court applies Norfolk Presbytery and Green,
which in turn are based on United States Supreme Court precedent that permits the resolution of church property
disputes through the application of "neutral principles of law." Those "neutral principles of law" are not limited to "the
neutral default rules of state property law," as CANA appears [**103] to argue they should be. (Id. at 135.) They also
include consideration of the constitution and canons of the denomination (Norfolk Presbytery and Green), and the
"course of dealings" between the parties. When applied in accordance with governing precedent, this Court does not
find any constitutional infirmity.
Third, the CANA Congregations argue that even if §57-7.1 legalizes denominational trusts, such trusts cannot be found
to exist with regard to deeds that predate the 1993 effective date of the statute. The CANA Congregations also argue that
the manner in which TEC and the Diocese purported to establish their trust interest, i.e., through the Dennis Canon and
Diocese Canon 15.1, was flawed and ultimately ineffective. The Court, having concluded that trusts for denominational
churches remain invalid in Virginia, sees no reason to further address these issues.
Fourth, the Diocese argues that even if this Court concludes that denominational trusts remain invalid even after 1993,
this Court should nevertheless rely on the Dennis Canon and Diocesan Canon 15.1 as a "partial expression of the
contractual relationships among the parties." (See Diocese Brief #3 at 14.) To the extent the Diocese [**104] is
suggesting that this Court should consider the Dennis Canon and Diocesan Canon 15.1 in the context of that portion of
the "neutral principle of law" analysis related to the constitution of the church, the Court is not persuaded it should do so
given its finding that neither canon actually accomplished the objective of establishing denominational trusts in the
Commonwealth. However, to the extent the Diocese is suggesting that the interaction of the parties regarding these
canons could be considered in the context of that portion of the "neutral principle of law" analysis related to "course of
dealings" between the parties, the Court agrees that this interaction can be considered and given such weight as the
Court deems warranted. 32
32 For example, in notes to a financial statement, Church of Epiphany stated that the church "is a constituent part of the Episcopal Church,
U.S.A., and the Episcopal Diocese of Virginia. The canons of the Episcopal Chburch U.S.A. and the Diocese of Virginia require the real
property of all Episcopal parishes to be held in trust for the national church and the Diocese even though the individual churches hold legal
title for all other purposes." PX-EPIPH-048-040.
Fifth, [**105] the Diocese argues that the Virginia Supreme Court in its remand of this matter, implicitly: (1)
recognized that §57-7.1 changed the law of the Commonwealth by validating denominational trusts; (2) rejected the
CANA Congregations assertions that §57-7.1, even if it validated denominational trusts, could not be applied
retroactively to property acquired prior to [*149] 1993; and (3) rejected the CANA Congregations assertions that, even
if denominational trusts were now valid in principle, TEC and the Diocese had not gone about acquiring their trusts in
a proper manner. (See Diocese Brief #3 at 15.) All this is based on the following paragraph at the conclusion of the
remand:
In light of our holding that the circuit court erred in granting the Code § 57-9(A) petitions, the control and ownership of the
property held in trust and used by the CANA Congregations remains unresolved. Accordingly, the declaratory judgment actions
filed by TEC and the Diocese, and the counterclaims of the CANA Congregations in response to those suits, must be revived in
order to resolve this dispute under principles of real property and contract law. See, e.g., Code § 57-7.1; Trustees of Asbury United
Methodist Church v. Taylor & Parrish, Inc., 249 Va. 144, 452 S.E.2d 847 (1995); [**106] Green v. Lewis, 221 Va. 547, 272 S.E.2d
181 (1980); Norfolk Presbytery v. Bollinger, 214 Va. 500, 201 S.E.2d 752 (1974).
280 Va. at 29 (emphasis added). This Court cannot assume or infer from this reference to §57-7.1 that the Virginia
Supreme Court implied that they had reached any of the judgments attributed to them by the Diocese. The Court does
assume and infer from this reference to §57-7.1 that the Virginia Supreme Court intended this Court to consider the
applicability of §57-7.1 in its "neutral principles of law" analysis, which it has done.
2. Virginia Code § 57-933

Page 710Page 710
33 Virginia Code §57-9 (2011) reads as follows:
§ 57-9. [HN7] How property rights determined on division of church or society

A. If a division has heretofore occurred or shall hereafter occur in a church or religious society, to which any such
congregation whose property is held by trustees is attached, the members of such congregation over 18 years of age may,
by a vote of a majority of the whole number, determine to which branch of the church or society such congregation shall
thereafter belong. Such determination shall be reported to the circuit court of the county or city, wherein the property held
in trust for such congregation [**107] or the greater part thereof is; and if the determination be approved by the court, it
shall be so entered in the court's civil order book, and shall be conclusive as to the title to and control of any property held
in trust for such congregation, and be respected and enforced accordingly in all of the courts of the Commonwealth.
[*150] B. If a division has heretofore occurred or shall hereafter occur in a congregation whose property is held by
trustees which, in its organization and government, is a church or society entirely independent of any other church or
general society, a majority of the members of such congregation, entitled to vote by its constitution as existing at the time
of the division, or where it has no written constitution, entitled to vote by its ordinary practice or custom, may decide the
right, title, and control of all property held in trust for such congregation. Their decision shall be reported to such court,
and if approved by it, shall be so entered as aforesaid, and shall be final as to such right of property so held.
The fact that the CANA Congregations did not meet the statutory requirements of §57-9(A) in the instant case does not
render the statute irrelevant. [**108] As the Diocese notes in its reply brief: "Code §57-9 is no longer directly at issue,
but its careful distinction between hierarchical and congregational churches remains relevant." (See Diocese Brief #3 at
18.) Indeed, it is precisely because of the CANA Congregations inability to meet the additional branch-attachment
requirement applicable only to churches that are part of a hierarchical denomination that the Virginia Supreme Court in
Protestant Episcopal Church in Diocese of Virginia v. Truro Church, 280 Va. 6, 694 S.E.2d 555 (2010) ordered that the
congregations §57-9(A) petitions be dismissed upon remand. 34
34 Similarly, the construction given the word "branch" by the Virginia Supreme Court in that decision -- that "the [§57-9(A)] statute requires
that each branch proceed from the same polity, and not merely a shared tradition of faith,"-- is also significant, because it excludes from the
reach of the statute any situation where a local church departs from one polity and affiliates with a wholly unrelated polity. 280 Va. at 28-9.
TEC argues that the criteria for considering a Virginia statute as part of the "neutral principles of law" analysis is not
whether the statute by its own application alone [**109] establishes the hierarchical church's proprietary or contractual
interest in local church property. (See TEC Brief #3 at 17) Rather, argues TEC, "the inquiry under Green is whether the
general statutory climate supports finding a proprietary interest" and whether "Virginia statutes are hospitable to the
proposition that a hierarchical church may have an interest in local church property." (Id. at 17-8). While TEC does not
cite §57-9 as evidence in support of this proposition (which is certainly not surprising given their previous constitutional
challenge to §57-9), it must nevertheless be noted that [HN8] §57-9(A), especially when viewed in comparison to the
division requirements applicable to a congregational church, see §57-9(B), reflects a recognition that hierarchical
churches in their organization and structure are different than congregational churches [*151] and that a Virginia
statute designed to address divisions within a church may properly reflect that recognition.
3. Virginia Code §57-1535
35 Virginia Code §57-15 (2011) reads as follows:
§ 57-15. [HN9] Proceedings by trustees or members for similar purposes, exception for certain transfers
A. The trustees of such a church diocese, congregation, [**110] or church or religious denomination, or society or branch
or division thereof, in whom is vested the legal title to such land held for any of the purposes mentioned in § 57-7.1, may
file their petition in the circuit court of the county or the city wherein the land, or the greater part thereof held by them as
trustees, lies, or before the judge of such court in vacation, asking leave to sell, encumber, extend encumbrances, improve,
make a gift of, or exchange the land, or a part thereof, or to settle boundaries between adjoining property by agreement.
Upon evidence being produced before the court that it is the wish of the congregation, or church or religious denomination
Page 711Page 711
or society, or branch or division thereof, or the constituted authorities thereof having jurisdiction in the premises, or of the
governing body of any church diocese, to sell, exchange, encumber, extend encumbrances, make a gift of, or improve the
property or settle boundaries by agreement, the court shall make such order as may be proper, providing for the sale of
such land, or a part thereof, or that the same may be exchanged, encumbered, improved, or given as a gift, or that
encumbrances thereon be extended, and [**111] in case of sale for the proper investment of the proceeds or for the
settlement of such boundaries by agreement.
When any such religious congregation has become extinct or has ceased to occupy such property as a place of worship, so
that it may be regarded as abandoned property, the petition may be filed either by the surviving trustee or trustees, should
there be any, or by any one or more members of such congregation, should there be any, or by the religious body which by
the laws of the church or denomination to which the congregation belongs has the charge or custody of the property, or in
which it may be vested by the laws of such church or denomination. The court shall either (i) make a decree for the sale of
the property or the settlement of boundaries between adjoining properties by agreement, and the disposition of the
proceeds in accordance with the laws of the denomination and the printed acts of the church or denomination issued by its
authority, embodied in book or pamphlet form, shall be taken and regarded as the law and acts of such denomination or
religious body or (ii) at the request of the surviving trustees and after notice in accordance with law to all [*152]
necessary [**112] parties, make such order as may be proper providing for the gift of such property to any willing local,
state or federal entity or to a willing private, nonprofit organization exempt from taxation under § 501 (c) (3) of the
Internal Revenue Code, provided the court finds that (a) the property includes a historic building or landmark so
designated by the Commonwealth and (b) the purpose of such gift is historical preservation of the property.
The court may make such order as to the costs in all these proceedings as may seem proper.
B. As an alternative to proceeding under subsection A, (i) the trustees of a church or religious body that incorporate may
transfer the title to the real and personal property of the church or religious body held by them to the incorporated church
or religious body; and (ii) the trustees of a church or religious body that do not incorporate under subdivision (i) hereof
may transfer title to the real and personal property of the church or religious body held by them to a corporation created
pursuant to § 57-16.1 without, in either instance, obtaining court permission if the transfer is authorized in accordance
with the church's or religious body's polity. If [**113] no petition seeking to set such a transfer aside is filed within one
year of the recordation of the trustees' deed transferring title to the real estate, or the date of the transfer of any personal
property, it shall be conclusively presumed that the transfer was made in accordance with the church's or religious body's
polity insofar as a good faith purchaser or lender is concerned.
C. No transfer made pursuant to subsection A or B shall operate as a transfer for purposes of a provision contained in any
note or deed of trust that purports to accelerate an indebtedness upon a transfer of title. Any such transfers of real estate
shall be entitled to the exemptions set forth in § 58.1-811.
D. Any transfer of real or personal property made pursuant to subsection B, and any similar transfer made pursuant to
subsection A after April 23, 2002, shall be deemed to assign to the incorporated church or religious body, or the
corporation created pursuant to § 57-16.1, as the case may be, the beneficial interest in every policy of insurance of every
kind, type, and description, relating to the property transferred, contemporaneously with the transfer, and the transferee
shall have all of the rights [**114] and obligations of the transferor relating thereto.
The significance of §57-15 to the instant litigation lies in the following excerpt from the statute: "Upon evidence being
produced before the court that it is the wish of the congregation, or church or religious denomination or society, or
branch or division thereof, or the constituted authorities thereof having jurisdiction in the premises, or of the governing
body of any [*153] church diocese, to sell, exchange, encumber, extend encumbrances, make a gift of, or improve the
property or settle boundaries by agreement, the court shall may such order as may be proper." (emphasis added).
To underscore the importance of this passage, this Court need do no more than quote the following language from
Norfolk Presbytery:
We construe [HN10] Code §57-15 to require that a church property transfer may be ordered only upon a showing that this is the
wish of the duly constituted church authorities having jurisdiction in the premises. Under predecessor statutes only the
congregation's wishes were to be considered in a proceeding to authorize a church property conveyance, but Code §57-15 now
contemplates that the general church, or a division thereof, or certain [**115] ecclesiastical officials may be the proper parties to
approve such a property transfer. In determining the proper party to approve the property transfer, the trial court must look to the
organizational structure of the church. See Code §57-9, which recognizes a distinction between an autonomous congregation and
one which is part of a supercongregational. or hierarchical denomination in providing for the determination of property rights upon
a division of a church or congregation. [HN11] In the case [*154] of a super-congregational church, we hold that Code §57-15
requires a showing that the property conveyance is the wish of the constituted authorities of the general church.
214 Va. at 502-03 (footnote and citation omitted) (emphasis added). 36 This holding could not be clearer, nor its
implications. 37 As the Diocese states in its reply brief: "Needless to say, the Congregations have not carried their burden
of proving that it is the wish of TEC and Diocese that the properties be transferred to the CANA Congregations, which
Page 712Page 712
is precisely the relief that they seek in the first prayer for relief in their Amended Counterclaims." (See Diocese Brief #3
at 12-3.)
36 The evolution of the statute is, itself, [**116] significant. As the Virginia Supreme Court details at footnote 2 of the Norfolk Presbytery
opinion, the statute initially required only congregational approval as a basis for a court order authorizing a property conveyance. In 1904,
the statute was amended to require proof that the proposed conveyance was "the wish of said congregation, or church or religious
denomination or society, or branch or division thereof." 214 Va. at 503. In 1924, the statute was further amended to add the phrase "or the
constituted authorities thereof having jurisdiction in the premises." Id. Finally, in 1962, language relating to a church diocese was added.
37 See also Green, 221 Va. at 552-53, which reaffirmed this holding: "It is well settled [HN12] in Virginia that it is the right of a majority of
the members of a divided congregation to control the use of the church property if the church, in its organization and government, is a church
or society entirely independent of any other church or general society. Code §57-9. Baber v. Caldwell, 207 Va. at 695. ...In both [Baber and
Norfolk Presbytery] we pointed out the distinctions, enunciated in Code §57-9, between an autonomous congregation and one which is part
[**117] of a supercongregational or hierarchical denomination where a determination of property rights is involved. We held that in the case
of a supercongregational church Code §57-15 'requires a showing that the property conveyance is the wish of the constituted authorities of
the general church.'"
The parties disagree on the proper interpretation of both §57-15 and Norfolk Presbytery. CANA argues that §57-15 is
only relevant where the denomination has already established its proprietary interest in the property at issue; absent such
proof, argues CANA, Norfolk Presbytery stands for the proposition that the denomination has no standing to object to
the conveyance of the property. The Diocese argues that CANA is confusing the jurisdictional issue of standing with the
substantive requirement in §57-15 that, where a supercongregational church is involved, a church cannot obtain circuit
court approval for a conveyance of church property without proof that it is the wish of the constituted authorities of the
general church. 38
38 TEC makes a slightly different (but related) point in its reply brief: In Norfolk Presbytery's discussion regarding standing, it was referring
only to standing to object [**118] to a transfer under §57-15; it was not addressing "under what circumstances a hierarchical church might
have standing to pursue a declaratory judgment action to enforce its interest in local church property, much less about whether and when a
hierarchical church would have standing to assert the identity of its own leaders." See TEC Brief #3 at 40.)
The Court does not agree entirely with either parties' interpretation of Norfolk Presbytery's reference to §57-15. Under
Norfolk Presbytery, the significance of [HN13] §57-15 is that it establishes a statutory framework for consideration of
property transfers when churches (either autonomous or hierarchical) are involved. If it is determined: (1) that a local
church is part of a hierarchy; and (2) that the general church has a contractual or proprietary interest in the property at
issue based upon the deeds before the Court and the constitution governing the relationship between that local church
and that general church 39, then §57-15 recognizes that a church property conveyance cannot occur without proof that
the general church has approved the conveyance. 40
39 Norfolk Presbytery did not address the relevance of "course of dealing" evidence to [**119] the proprietary interest analysis. The parties
disagree whether "course of dealing" evidence is a proper consideration in every "neutral principles of law" analysis or only under the
circumstances of Green. As stated above, the Court does consider "course of dealing" evidence a proper consideration in a "neutral principle
of law" analysis. Moreover, as described below, the Court has fully evaluated the "course of dealing" [*155] evidence presented in this
litigation and concludes that it supports its finding that the denomination and diocese have proprietary interests in the properties at issue. It
should be emphasized, however, that even if the Court did not consider the "course of dealing" evidence in the instant case, it would not
change the Court's ultimate conclusion.
40 The Diocese notes that during the §57-9 litigation, the CANA congregations expressed a similar understanding of §57-15, quoting from
CANA Congregations' Reply Memorandum of Law on Scope of Hearing on Congregational Determinations Pursuant to Va. Code §57-9
(filed August 31, 2007) at 8: "Section 57-15's requirement of denominational approval ... applies in cases such as Norfolk Presbytery and
Green, where one or more congregations [**120] break away from a supercongregational church ... without joining any branch." (See
Diocese Brief #3 at 11-2.) In other words, in a case involving a supercongregational church (as here), where §57-9 has been determined to be
inapplicable (as here), the requirement of denominational approval applies.
One more point must be emphasized. TEC and the Diocese appear to be arguing that if a church is deemed
"hierarchical" or "supercongregational," it is a fortiori a church with a contractual or proprietary interest in local church
property. In support of that proposition, TEC and the Diocese rely on the language in Norfolk Presbytery that states: "In
Page 713Page 713
the case of a supercongregational church, we hold that Code §57-15 requires a showing that the property conveyance is
the wish of the constituted authorities of the general church." 214 Va. at 503. But if it were true that hierarchy =
proprietary interest, without more, why would the Virginia Supreme Court have held that a trial court must examine the
constitution of the general church (as in Norfolk Presbytery) or the constitution of the general church and "course of
dealing" evidence (as in Green). One possibility, of course, is that such an [**121] examination is necessary to
determine if a church is truly hierarchical. But in Green that issue was conceded, 41 and yet the Virginia Supreme Court
undertook the entire neutral principles of law analysis. The better answer, to this Court, is that a local church might, at
least in theory, be part of a hierarchy, yet be empowered with complete authority and autonomy over local church
property. That is the reason why, in this Court's opinion, the Virginia Supreme Court in Norfolk Presbytery found both
that Norfolk Presbytery had a right to intervene in the proposed property conveyance at issue and that Norfolk
Presbytery might ultimately fail to establish its proprietary interest in the property at issue. Similarly, in Green, the
Virginia Supreme Court defined a "proprietary right" in terms that, to this Court, mean more than proof that a local
church was part of a hierarchy. 42
41 See, e.g., this language from Green: "There is little conflict in the evidence. Appellees do not deny that Lee Chapel has been an A.M.E.
Zion Church and through the years has been a part of that hierarchical organization." 221 Va. at 551.
42 In Green, the Supreme Court stated the following:
[*156] In determining whether [**122] the A.M.E. Zion Church has a proprietary interest in the Lee Chapel property,
we look to our own statutes, to the language of the deed conveying the property, to the constitution of the general church,
and to the dealings between the parties. A proprietary right is a right customarily associated with ownership, title, and
possession. It is an interest or a right of one who exercises dominion over a thing or property, of one who manages and
controls.
Id. at 555.
Therefore, this Court concludes that [HN14] hierarchy does not automatically equate with a proprietary interest. 43
However, where a hierarchical church has established its proprietary interest in local church property, §57-15 will afford
it relief, including the possibility contemplated in Norfolk Presbytery of a permanent injunction against a proposed
conveyance.
43 There are circumstances where the resolution of this issue could be outcome determinative. However, the present case does not present
such a circumstance, because this Court concludes that TEC and the Diocese have carried their burden of proof under either theory, i.e., if all
they are required to do is prove that they and the local churches are part of a hierarchical church, [**123] they have certainly done so; and if
they must also prove that there is substantial added indicia to prove their contractual or proprietary interest, they have done that as well.
4. Virginia Code §57-16.1

In the wake of Falwell v. Miller, 203 F. Supp. 2d 624 (W.D. Va. 2002), the General Assembly enacted §57-16.1,
permitting Virginia churches to incorporate. The parties disagree as to the significance of §57-16.1 in the neutral
principles of law analysis. To understand their disagreement, it is necessary to begin with the words of the statute:
[HN15] Whenever the laws, rules, or ecclesiastic polity of an unincorporated church or religious body provide for it to create a
corporation to hold, administer, and manage its real and personal property, such corporation shall have the power to (i) acquire by
deed, devise, gift, purchase, or otherwise, any real or personal property for any purpose authorized and permitted by the laws, rules,
or ecclesiastic polity of the church or body, and not prohibited by the law of the Commonwealth and (ii) hold, improve, mortgage,
sell, and convey the same in accordance with such law, rules, and ecclesiastic polity, and in accordance with the law of the
Commonwealth.
Va. Code §57-16.1 [**124] (2011).

[*157] The CANA Congregations argue that the reference in the statute to a "church or religious body" is intended to
be a reference to a local church only, not to a denomination or diocese. CANA notes that other provisions of Title 57
specifically reference "denominations" or "dioceses" and, therefore, the fact that §57-16.1 does not do so must mean
Page 714Page 714
that it was intentionally excluded by the legislature. See CANA Brief #2 at 6-7.) Thus, argues CANA, §57-16.1 "does
not grant the denomination a proprietary interest." Id. at 10.
TEC and the Diocese do not suggest that §57-16.1 by itself grants the denomination a proprietary interest, but they do
argue that it supports the assertion that "[m]odern Virginia statutes embody ... a policy of respect for the autonomy of
churches, and for the governance and property arrangements made by churches, whatever they may be." (See TEC/DOV
Brief #3 at 12.) Specifically, TEC and the Diocese assert the following:
Section 57-16.1 does not refer only to "rules" of a "church or body." It refers, twice, to "the laws, rules, or ecclesiastic polity" of an
unincorporated church or religious body. The Episcopal Church and the Diocese are unincorporated churches [**125] or religious
bodies. The "ecclesiastic polity" of the Episcopal Church is undeniably hierarchical. And the "laws" and "rules" of a member of any
hierarchical institution include the laws and rules -- here the Constitutions and Canons -- of each higher level of the hierarchy, here
the Diocese and TEC. In the context of a hierarchical church, the "laws" and "rules" of each subordinate institution necessarily
include the laws and rules of superior levels in the hierarchy, and indeed each of the local churches in these cases expressly
incorporated those rules in their own governing documents.
(See Diocese Brief #3 at 13-14 (citations and footnotes omitted).) This Court agrees that the phrase "church or religious
body" includes a denomination or diocese. But even if that were not the case, there is no question that when that local
church is part of a hierarchical denomination, the "laws, rules, or ecclesiastic polity of the church or body" necessarily
include and incorporate the rules, laws, and polity of the denomination of which they are a constituent member. 44
44 The use of the term "polity" in the statute is significant. As the Virginia Supreme Court noted in Protestant Episcopal Church in Diocese
of Virginia v. Truro Church, 280 Va. at 12, [**126] (citation omitted), [HN16] "When used in reference to religious entities, the term 'polity'
refers to the internal structural governance of the denomination."
But CANA argues the following: §57-16.1 also states that the church must act "in accordance with the law of the
Commonwealth" and since the law of the Commonwealth does not validate denominational trusts, any argument that
the corporate articles for the CANA Congregations were [*158] invalid because they do not specify that the
Congregations' property is held in trust for plaintiffs "would be unavailing." See CANA Brief #2 at 9.)
This Court agrees that the Commonwealth does not validate denominational trusts. But, in this Court's view, that is not
the significance of §57-16.1. Rather, it is this: [HN17] when a local church that incorporates is a constituent member of
a supercongregational church, §57-16.1 in effect provides that it cannot acquire, encumber, or dispose of its real or
personal property except in accordance with the laws, rules, and polity of the denomination and diocese to which the
local church belongs. To hold otherwise would be to hold that the General Assembly, by enacting §57-16.1, essentially
created a mechanism by which a hierarchical [**127] church could become a congregational church by the simple act
of incorporation. To put it another way: while the statute does not provide a denomination or a diocese more control
over a constituent member that incorporates, it ensures that the act of incorporation will not result in a denomination or
diocese having less control over a constituent member.
This is far from an academic discussion. Each of the seven CANA Congregations incorporated in either 2006 or early
2007, 45 at a time of profound discord between the local churches and the Diocese and TEC. Regardless of what may
have been the other consequences of incorporation -- and what is cited in CANA Brief #1A includes the following: (1)
"to gain the advantages of the corporate form" (see ¶98); and (2) "as a matter of sound business practice" (see ¶266) --
one consequence that the congregations could not realize given the language of §57-16.1 is to separate themselves from
the obligations and responsibilities of being members of a hierarchical church.
45 See CANA Brief #1B at 20, ¶98 (The Falls Church), at 45, ¶ 266 (St. Paul's), at 85, ¶ 537 (Truro), at 90, ¶574 (St. Stephen's), at 108, ¶
686 (St. Margaret's), at 126, ¶ 803 (Church [**128] of the Apostles), and at 134, ¶ 867 (Church of the Epiphany).
Thus, [HN18] §57-16.1, although not explicitly referencing denominations and dioceses, ensures that when a local
church which is a member of a hierarchy acts to incorporate, its new form as an incorporated entity does not relieve it of
its obligation to continue to comply with the laws, rules, and ecclesiastical polity of its hierarchy with regard to the
acquisition, encumbrance, and disposition of church property.
D. Deeds
Page 715Page 715
1. The Specific Deeds at Issue 46
46 The Court counts 41 deeds at issue, as does TEC and the Diocese. CANA, however, counts 42 deeds at issue.
[*159] a. The Falls Church

The Falls Church was founded in or around 1732 when the vestry of Truro Parish made plans to establish a church,
engaged a minister to preach, and entered into a contract to construct the church building. (DX-FALLS-0060; 2008-
TECEDV-066.) The Falls Church was one of two congregations in Truro Parish, according to the testimony of the
Diocese's expert witness, Professor Edward Bond. (Tr. 925) In 1746, John Trammole conveyed a two-acre parcel to the
Vestry of Truro Parish for a churchyard, upon which the original sanctuary was built. (DX-FALLS-0002; DX-FALLS-
0060.) [**129] In 1765, the colonial legislature divided Truro Parish into Fairfax Parish and Truro Parish, and the two-
acre Trammole property became part of the new Fairfax Parish. See 76 Va. Cir. at 987. 47 Construction of a brick church
on the two-acre parcel was completed in 1769. (DX-FALLS-0060) Thus, The Falls Church came into existence prior to
the creation of TEC in 1789. Similarly, The Falls Church came into existence prior to the creation of the Diocese;
indeed, The Falls Church was one of the congregations that founded the Diocese. (Tr. 1109) 48
47 On December 19, 2008, this Court issued a letter opinion resolving a number of remaining issues in the §57-9 litigation. One of those
issues was TEC's and the Diocese's claim that the true legal successor in connection with the Trammole two-acre parcel was not The Falls
Church but, rather, Christ Church, Alexandria. The Court rejected this claim, holding that the vestry of The Falls Church was the legal
successor of the vestry of Truro Parish as to the two-acre parcel, and holding, therefore, that the two-acre parcel was subject to The Falls
Church's §57-9(A) petition. At ¶ 39 of the CANA Brief #1B, CANA notes: "This Court has already concluded [**130] [in its December 19,
2008 Letter Opinion] that plaintiffs, the Diocese of Virginia, and The Episcopal Church have acknowledged and admitted that defendant The
Falls Church, and no other entity, is the owner of this two-acre parcel." The purpose of this note is to make it clear that, in citing these
admissions in connection with the §57-9(A) litigation, the Court was neither judging their relevance in connection with the instant litigation
or suggesting that either the Diocese or TEC had conceded the ultimate issue now before the Court as to whether they hold a proprietary
interest in the property in question. Simply put, the Court referenced the Diocese's and TEC's admissions as evidence rebutting their claim
that the two-acre parcel should not be subject to The Falls Church's §57-9(A) petition because the property was actually owned by Christ
Church, Alexandria.
48 According to a grant application prepared by TFC in December 1983, the Rev. David Griffith, who was chosen as rector of Fairfax Parish
(Christ Church, Alexandria and The Falls Church) in 1779, "was, by 1783, one of the leaders in the effort to transform the Anglican parishes
in Virginia into a new diocese and to initiate [**131] a Protestant Episcopal Church in the United [*160] States of America as the
successor to the Church of England in the new nation, independent of governmental establishment. On Easter Monday, 1785, the Fairfax
parish vestry, meeting at The Falls Church, declared itself conformants to the 'Doctrine, Discipline and Worship of the Protestant Episcopal
Church.' Since then The Falls Church has been a church of the Protestant Episcopal Church in the United States of America, the Diocese of
Virginia." See Restoration of the Falls Church (DX-FALLS-068-015-016.)
By 1798, The Falls Church was no longer functioning as an Episcopal congregation. (Tr. 929). (See also CANA Brief
#1B at 12-13, 58-63.) From 1819 forward, there is evidence of a functioning congregation at The Falls Church that
sought to participate in activities of the Diocese. Id. at ¶¶ 64, 68. In 1836, The Falls Church petitioned the Diocesan
convention, which admitted The Falls Church "as a separate and distinct church," pursuant to Diocesan Canon XII,
enacted in 1815. 76 Va. Cir. at 988. (footnote and citation omitted.) The Falls Church's first parochial report was printed
in the Journal of the Annual Council of the Diocese in 1837. (PX-COM-073-014.) [**132] From 1837 to 1861, The
Falls Church had an organized congregation. With the coming of the Civil War, the church suffered substantial
disruption and building damage. (DX-FALLS-0060.) According to a history written by Senior Warden Charles A.
Stewart that was completed in 1941, see PX-FALLS-053, "[t]he old building ... was restored [by the Federal
government] within twelve months after the war closed and turned over to the Bishop in February, 1866." (PX-FALLS-
053-195, -205.) The church was formally reorganized and a vestry was elected on November 27, 1873. (DX-FALLS-
060-064; DX-FALLS-201-002; PX-FALLS-044-045.)
There are eleven deeds in connection with The Falls Church:
The first deed is dated March 20, 1746, and it concerns the two-acre Trammole parcel that was conveyed to "the vestry
of the said parish of Truro in Fairfax county." (DX-FALLS-002.) This was in exchange for 50 shillings paid by the
Page 716Page 716
Vestry. Id. This was the parcel upon which the original church building and vestry house of The Falls Church was built
in the 18th Century.
The second deed is dated December 16, 1852 and is to "Trustees of the Episcopal Church, known and designated as the
'Falls Church' in Fairfax County, of the [**133] County of Fairfax in the State of Virginia.'" (DX-Falls-003, 003A.)
The third deed is dated October 1, 1918 is to "Trustees for the Falls Church Episcopal Church." (DX-FALLS-004.)
The fourth deed is dated October 29, 1953 and is to "Trustees of The Falls Church." (DX-FALLS-005.) This deed
concerns the rectory property at 1008 Broadmont Terrace in Falls Church. (Tr. 2441.)
The fifth deed is dated February 27, 1956 and is to "Trustees of The Falls Church, Falls Church, Virginia." (DX-FALLS-
006.)
[*161] The sixth deed is dated September 15, 1956 and is to "Trustees of THE FALLS CHURCH, Falls Church,
Virginia." (DX-FALLS-007.)
The seventh deed is dated August 30, 1963 and is to "Trustees of THE FALLS CHURCH (Episcopal)." (DX-FALLS-
008.)
The eighth deed is dated December 15, 1986 and is to "THE TRUSTEES OF THE FALLS CHURCH (EPISCOPAL)."
(DX-FALLS-009.)
The ninth deed is dated October 31, 1996 and is to "THE TRUSTEES OF THE FALLS CHURCH (EPISCOPAL)."
(DX-FALLS-010.)
The tenth deed is dated January 3, 2000 and is to "TRUSTEES, of The Falls Church (Episcopal)." The Congregation
paid $1.65 million for this property. (DX-FALLS-011.)
The eleventh deed is dated December 1, 2005 and is to "TRUSTEES OF THE FALLS [**134] CHURCH
(EPISCOPAL), a Parish Church of the Protestant Episcopal Church in the Diocese of Virginia." (DX-FALLS-012.)
b. St. Paul's Church

There are five deeds at issue in connection with St. Paul's, not including a lost deed from 1830, which led to the
appointment of a special commissioner in 1993 to convey the 1830 property to the trustees of the church, which is
further described below.
The first deed is dated January 18, 1900, and it is to certain named "trustees, to be held as a Rectory for the use and
benefit of St. Paul's P.E. Church, Haymarket, Virginia." (DSTP-297-04320, DSTP-297A-04321A.) Later in the same
deed, the church is referred to as "St. Paul's Protestant E. Church of Haymarket, Va." By this deed, St. Paul's purchased
for $525 a parcel on which a frame house originally used as a Rectory was built. (DSTP Exs. 297, 297A.) In 1926, the
vestry of St. Paul's adopted a resolution authorizing it to borrow $2,000 to fund repairs to the Rectory. (DSTP Ex. 9-
00671.) And in 1975, the Vestry replaced the Rectory roof. (DSTP Ex. 12-01406.) The building is now used for offices
and meetings. (Tr. 1807.)
The second deed is dated April 21, 1904, and it is to certain named "trustees of St. [**135] Paul's Episcopal Church at
Haymarket, Va." (DSTP-293, 293A.) In consideration of support given the grantors by the St. Paul's women's auxiliaries
for "a number of years" and $5, the grantors conveyed to the church certain property with a frame house. Id. The
property is used as the Parish Hall and also houses the St. Paul's School. (Tr. 1808-1809.)
The third deed is dated July 28, 1993, and it is to "Trustees of St. Paul's Episcopal Church of Haymarket, Virginia."
(DSTP 294.) This deed concerns the historic church, which was built originally in 1801 as a district courthouse. (PX-
STPAUL 596.) According to St. Paul's 1996 parish profile, the church building "was deeded to the Episcopal church in
1830 and became St. Paul's three years later." (PX-STPAUL 108.) (The deed itself is [*162] lost, according to a
petition filed by "trustees of the religious congregation of St. Paul's Episcopal Church" under Virginia Code §57-17,
which allows conveyances where there is "no deed of record," reciting possession since 1830.) Diocesan Bishop
William Meade consecrated the building in 1834 as St. Paul's Episcopal Church. (PX-COM 071.) Except for a period
during the Civil War, it has been used ever since as [**136] an Episcopal Church. (PX-STPAUL-005, 596; Tr. 984-85.)
Over the years, the Congregation of St. Paul's expended various sums of money on remodeling and repairs. See CANA
Brief #1B at 42-3, ¶ ¶ 242-47.) Much of the construction work was performed by members of the congregation. Id. In
July, 1993, St. Paul's trustees sought the appointment of a special commissioner authorized to convey to them the
Page 717Page 717
historic church parcel on the grounds that St. Paul's had been in continuous and undisputed possession of the parcel
since the 1830's. Id. That conveyance was accomplished by the deed dated July 28, 1993.
The fourth deed is dated February 19, 1998, and it is to certain named "Trustees of St. Paul's Episcopal Church of
Haymarket, Virginia." The deed concerns a vacant parcel of land behind the original Rectory, for which St. Paul's paid
$50,000. (DSTP Ex. 295.)
The fifth deed is dated September 22, 1999, and it is to certain named "Trustees of St. Paul's Episcopal Church of
Haymarket, Virginia." (DSTP-296.) St. Paul's paid $209,900 for an improved parcel containing a frame house named
the Meade House after one of the 19th century residents of the house. (Id.; Tr. 1810.) Meade House is now rented
[**137] to a third party not associated with St. Paul's. (Tr. 1810.)
c. Truro Church
Truro Church was founded in 1843 by Rev. Richard Templeton Brown, who was then the Rector of The Falls Church.
(CANA Brief #1B at 55, ¶ 18.) It was previously known as Zion Protestant Episcopal Church but the name was changed
by the congregation and vestry to Truro Church in 1934. Id. at fn. 15. According to CANA, the congregation disbanded
during the Civil War but partially re-formed as early as November 1866, when initial trustees were appointed. (CANA
Brief #2 at 56, ¶325.) The Congregation of Zion Church erected a frame building around 1872, and the congregation has
been in continued existence since then. Id. at ¶¶ 327-28. The 1872 structure was used by the congregation of Zion
Church up through early 1934, (PX-TRU-0187-001.) when the "historic chapel" was completed. (DX-TRU-146.0050.)
There are eleven deeds in connection with Truro: 49
49 The Court does not discuss here the two Instruments of Donation that Truro executed in 1934 and 1974. (PX-TRU-003-001; PX-TRU-
004-001.) These instruments are associated with the consecration of Truro's "Historic Chapel" (1934) and the consecration of Truro's Main
Sanctuary [**138] (1974). [*163] (Id.; see also PX-TRU-369.) TEC and the Diocese argue that they are valid and enforceable but, even if
not, "they show that Truro accepted that its property must be used for the mission and ministry of the Episcopal Church and the Diocese" and
"strongly support the Diocese's claims of proprietary and contractual rights." (Diocese Brief #1 at 110-12.) The CANA Congregations argue
that "such documents are literally part of TEC's liturgy and have only symbolic significance" and that they are not "legally cognizable."
(CANA Brief #2 at 56-61.) Because neither TEC nor the Diocese assert that they were recorded as deeds, they are not further discussed in
this section; however, they are discussed below in the "Course of Dealings" section of this opinion.
First, there is a deed (called the "Rumsey Deed") dated December 3, 1874, 50 to "Trustees for Zion Protestant Episcopal
Church ... To have & to hold ... forever but upon the following purposes, uses, trusts & conditions & none other -- that
is to say, for the use of the members & congregation of the Protestant Episcopal Church of the Diocese of Va.
worshipping & to worship in the building on said lot known as & called 'Zion Church,' [**139] subject to the
Constitution, canons & regulations of the Protestant Episcopal Church of the Diocese of Va." (DX-TRU001.) 51 The
property conveyed by the 1874 deed is a one-half acre parcel where the "historic chapel" now sits. (Tr. 1637.) With the
exception of a small grant from a Diocesan fund toward the construction of the 1872 structure, nearly all costs of
improvements to the real property of Truro were funded by the congregation. (CANA Brief #1B at 66, ¶¶406-08.)
50 No recorded deed was introduced into evidence for any parcel of property held by the Trustees of Zion Church prior to 1874. (CANA
Brief #1B at 55, ¶ 321.)
51 This deed purports to be a replacement deed from William T. Rumsey, but no prior deed is recorded. Id. at ¶ 333.
Second, there is a deed (called the "Simpson Deed") dated December 1, 1882 to "trustees of Zion Protestant Episcopal
Church ... In trust nevertheless to be held by [the trustees] for the sole use and benefit of the said Zion Protestant
Episcopal Church, with power in said trustees, with consent of the vestry of said church, to charge, encumber, sell and
convey said property." (DX-TRU002, TRU002a.) This deed concerns a seven acre parcel known as the "Simpson
[**140] Property." The structures that currently sit on this parcel are the Main Sanctuary 52 and the Gunnell House.
(CANA Brief #2 at 59, ¶ 338.) According to CANA, the Main Sanctuary was not completed until 1959, but the Gunnell
House was built in 1835. Id. at 1339. 53
Page 718Page 718
52 The Main Sanctuary was completed in 1959. In order to finance construction of the Main Sanctuary, the Trustees filed a petition in Circuit
Court in November 1957 seeking to encumber property in the amount of $250,000. Then-Circuit Court Judge Harry L. Carrico entered an
order approving the petition upon finding that it was "the desire of the members of the congregation" to encumber the property. In December
1957, Truro Church requested permission of the Board of the Department of Christian Stewardship to borrow the funds necessary to build
the new church building. The Board [*164] approved the request, noting that it was approving the request to incur the debut "for the
specific purpose of erecting a church on property now owned by that church." (CANA Brief #1B at 69-70, ¶¶ 431-42.)
53 In 1908, 1913 and 1921, portions of the original seven acre parcel were sold to John W. Rust, pursuant to petitions filed in the Circuit
Court. (CANA [**141] Brief #2 at ¶341-42.) CANA notes in its argument that neither the Diocese nor TEC joined in the petition, and no
evidence was introduced that either was consulted about the sale, nor about a sale of property in 1939, and another sale of property in 1960.
Id. at ¶¶ 343-56. In 1960 and 2002, there were other sales of property, again pursuant to petition, and CANA notes that neither the Diocese
nor TEC joined in the petition. Id. at ¶¶365-68, 396-99.
Third, there is a deed (called the "Kirkpatrick Deed") dated May 19, 1952 to "Trustees of Truro Episcopal Church."
(DX-TRU006.) The Parish Hall, constructed in 1952 with congregational funds and a loan, is partially on this property
and partially on the Rumsey deed property conveyed in 1874. (CANA Brief #1B at 68-9, ¶¶ 424-30.)
Fourth, there is a deed dated July 3, 1956 to "Trustees for Truro Episcopal Church." (DX-TRU007.) According to
CANA, this is where the education building currently sits. (CANA Brief #2 at 62, ¶ 364.) CANA acknowledges that
there is evidence that Truro Church sought permission from the Diocese to encumber property for the 1965 loan, but
notes that no evidence was submitted regarding any approval by the Diocese. (CANA [**142] Brief #1B at 71, fn. 27.)
Fifth, there is a deed dated January 4, 1982 to "TRUSTEES for TRURO EPISCOPAL CHURCH." (DX-TRU008.) This
property currently serves as a parking lot. (Tr. 1657.)
Sixth, there is a deed dated March 15, 1987 to "Trustees of Truro Episcopal Church." (DX-TRU011.) This deed
concerned the International Christian Ministry Building, which Truro purchased for $1.4 million. CANA notes that
neither the Diocese nor TEC were parties to the contract to purchase the building. (CANA Brief #1B at page 63, ¶380.)
The property is located across the street from Truro's main campus and is used as an office building. Id. at ¶381.
Seventh, there is a deed dated April 26, 1991 to "Trustees for TRURO EPISCOPAL CHURCH, FAIRFAX VA." The
deed provided "[t]he principal dwelling house on the Property shall be used and occupied as a rectory or dwelling for
members of the clergy of Truro Episcopal Church." This deed retained a life estate for the grantor, which life estate was
conveyed in the deed dated July 30, 1992. (DX-TRU012.) The deed also states that: "In the event that within 35 years
from the date of this deed Truro Church shall cause or allow the dwelling house to be demolished or shall [**143]
cease to [*165] use the principal dwelling house as a rectory or residence for the benefit of clergy of Truro Church,
title to the property shall revert to the estate of the Grantor and shall be distributed in accordance with her last will and
testament." Id.
Eighth, there is a deed dated March 2, 1992 to "TRUSTEES for Truro Episcopal Church." (DX-TRU009.) CANA notes
that the deed was based on a contract of sale to sell a parcel of property to Truro Church that was executed by Truro's
senior warden and that neither the Diocese nor TEC was a party to the contract. CANA Brief #1B at 64, ¶¶ 387-90,)
Ninth, there is a deed dated July 30, 1992, to "Trustees for TRURO EPISCOPAL CHURCH, FAIRFAX, VA., conveying
the life estate retained in the April 26, 1991 deed. (DX-TRU013.)
Tenth, there is a deed dated May 31, 2001 to "TRUSTEES FOR TRURO EPISCOPAL CHURCH." (DX-TRU010.) The
purchase price for the property was $ 1.25 million, financed by a promissory note executed by Truro's Rector and Senior
Warden. CANA notes that neither the Diocese nor TEC was an obligor under the promissory note and did not contribute
money toward the purchase. CANA Brief #1B at 65, ¶¶ 392-95.
Eleventh, there is a deed dated December [**144] 13, 2006 consisting of a Quitclaim Deed of Gift from Trustees of
Christ the Redeemer Episcopal Church to "Truro Church" (PX-TRU-001-040), replaced by a December 21, 2006 deed
of correction to "TRURO CHURCH by its trustees." (DX-TRU015.) 54
54 This property was the subject of footnote 12 of the Virginia Supreme Court's decision in Protestant Episcopal Church in Diocese of
Virginia v. Truro Church, 280 Va. 6, 694 S.E.2d 555, which reads in part as follows: "The Diocese has also assigned error to the circuit
courts' determination that it lacked jurisdiction to reconsider an order entered in a prior proceeding approving the transfer of property from
Christ Redeemer Church to Truro Church. While we agree with the circuit court that the Diocese was attempting to bring an improper
collateral attack on a final judgment, it is nonetheless evident that as the property is held for the benefit of Truro Church, the ultimate
determination of ownership and control of that property will be resolved in the proceedings on the declaratory judgment actions."
Page 719Page 719
d. St. Stephen's Church

There are eight deeds in connection with St. Stephen's:
The first deed is dated November 20, 1874, and followed the appointment in October 1874 [**145] of nine individuals
to serve as trustees of the Protestant Episcopal Church in Northumberland County. The deed is to certain named
individuals as "trustees duly legalized and appointed by the Circuit Court," such property to be held:
[*166] In trust nevertheless and for the sole use and benefit of the religious society and congregation known as the Protestant
Episcopal Church for the purpose of erecting a house for divine worship and such other houses as said congregation may need, And
said church or house for divine worship when so built shall be used and enjoyed by said religious society or congregation according
to the laws and canons of said church not inconsistent with the laws and constitution of Virginia....
(DSTS-005-031, 015-098-099.) St. Stephen's Church dates from this point in time, when "[a] renewed interest in an
Episcopal Church for Northumberland prompted the purchase of land in 1874 for the purpose of erecting a house of
divine worship,'" which initially was known as Emmanuel P.E. Church. (PX-SSH-149-005; National Register of
Historic Places nomination, DSTS Ex. 15.) The "house for divine worship" was built over a period of several years at a
cost of about $1,100, funded largely [**146] by the congregation. (CANA Brief # 1B at 87, ¶551.) On April 30, 1881,
Bishop Francis M. Whittle consecrated the building as St. Stephen's Church. (PX-COM-118-047, -051; PX-SSH-002-
026; Tr. 994-96.) Since completion in or about 1881, the original church building has been continuously used as a
church. CANA Brief #1B at ¶553. Over time, St. Stephen's has expended various sums of money to modify and repair
the church and to build a new parish hall. Id. at ¶554-56. Other than $1,000 contributed by Bishop Peter Lee out of his
Discretionary Fund, the costs of the parish hall, and renovations and repairs have been paid by the congregation and its
supporters. (Id.; see also Tr. 3686.)
Unlike almost all of the other deeds before the Court, the 1874 deed contains additional and explicit language regarding
the intended use of the deeded property. The CANA Congregation, in fact, filed a separate post-trial brief regarding the
1874 deed. In that brief, CANA argues as follows: (1) the language in question does not constitute an enforceable
restrictive covenant; (2) if it does constitute a restrictive covenant, it has no continuing force because the purpose of the
covenant has been substantially [**147] met; (3) if it does constitute a restrictive covenant, it has been nullified by
inconsistent uses in the form of six conveyances out of the 1874 deed parcel; (4) in any event, neither TEC nor the
Diocese has asked the Court to find the language to constitute a restrictive covenant.
In support of its argument that the quoted language above does not constitute a restrictive covenant, CANA asserts that
the reference in the deed to the "Protestant Episcopal Church" is "manifestly language of identification only and, as
such, cannot fairly be read to restrict the use of the property solely by those affiliated with a particular denomination."
(St. Stephen's Church Post-Trial Brief Re Its 1874 Deed at 7 (citations omitted).) Further, CANA argues that since a
1874 deed could only be a [*167] conveyance to a local congregation, and not to a denomination (see Brooke v.
Shacklett, 54 Va. 301, and Hoskinson v. Pusey, 73 Va. 428), the language's reference to "religious society and
congregation" can only be a reference to the local church itself. (St. Stephen's Church Post-Trial Brief Re Its 1874 Deed
at 7.) Thus, argues CANA, the language quoted above only obligated St. Stephen's to build a church and [**148] to use
it in accordance with "the congregation's own governing rules." Id. at 8 (emphasis in original). In other words, argues
CANA, "the language of the 1874 Deed cannot fairly be read to mean that the property must be used by a congregation
attached to The Episcopal Church." Id. Finally, CANA argues that the quoted language is much less specific and explicit
than that used in Brooke, Hoskinson, or Finley v. Brent, 87 Va. 103, 12 S.E. 228.
The Court disagrees. Even if the reference to "religious society or congregation" is a reference to the local church and
not to the Diocese or the denomination, that local church is clearly identified as an Episcopal church and the language
states that the church "shall be used and enjoyed by said religious society or congregation according to the laws and
canons of said church not inconsistent with the laws and constitution of Virginia." (DSTS-005 (emphasis added).)
[HN19] In a hierarchical church, the "laws and canons" of a local church necessarily include the governing rules of the
hierarchical church. Therefore, the Court rejects CANA's argument that the language in St. Stephen's 1874 deed is a
"purely descriptive reference to the local congregation and with no [**149] direction that the property be used for the
worship of members of a particular denomination." (St. Stephen's Church Post-Trial Brief Re Its 1874 Deed at 8-9, fn.
6.) Rather, the Court reads this deed as manifesting the intent by the grantor that the property be used for the worship of
members of The Episcopal Church.
Page 720Page 720
CANA also argues in the alternative, i.e., if the language is held to be enforceable it was satisfied when the church was
completed, and in any event, the language has been "nullified" by various conveyances and easements granted over
time. The Court finds neither of these arguments to be persuasive. In particular, the Court notes that the obligations
under the deed were not completed when the church was completed. Rather, the language quoted above also required
that the "house for divine worship when so built shall be used and enjoyed by said religious society or congregation
according to the laws and canons of said church not inconsistent with the laws and constitution of Virginia." (DSTS-
005-031, 015-098-099.) In short, the language of the deed contemplates both construction and use; and the specific use
contemplated was by an Episcopal church subject to the "laws and [**150] canons" of the church. 55
55 The Diocese also makes the argument that at the time the deed in question was executed in 1874, TEC had adopted (in 1868 and 1871) its
anti-alienation canon for consecrated property, which made clear that such property was protected from removal from the Church to another
denomination. (TEC Brief #3 at 31.)
[*168] The second deed is dated August 27, 1957, and it is to "Trustees of Saint Stephens Parish of the Protestant
Episcopal Church, Northumberland County, Virginia, for the use and benefit of Saint Stephens Protestant Episcopal
Church of Heathsville, Virginia." (DSTS-006-033.) The deed was for a 2.5 acre parcel encompassing the church
cemetery and a frame house. (DSTS Exs. 6, 53; Tr. 3677.) The property cost St. Stephen's $9,250. Id. Subsequently, St.
Stephen's expended $12,977 to remodel the house so that it could be used as a parish house. (DSTS Ex. 53-01010; Tr.
3677.) The project was funded with funds on hand, a $12,000 loan secured by the deed to the parcel, and a $3,500
contribution from the Diocese. (DSTS Ex. 53-01009-10; Tr. 3677.) The frame house is now used as the Thrift Shop. (Tr.
3676.)
The third deed is dated January 12, 1967, and it is to "Trustees [**151] of Saint Stephens Parish of the Protestant
Episcopal Church of said county and state, for the use and benefit of Saint Stephens Protestant Episcopal Church of
Heathsville, Virginia." (DSTS-007-040.) St. Stephen's purchased the property for $1,200 for the purpose of building a
new rectory. (PX-SSH-17;DSTS Ex. 7; Tr. 3678.) St. Stephen's vestry authorized the church to borrow $15,000 from a
bank to build the new rectory. (DSTS Ex. 90-01428.)
The fourth deed is dated April 14, 1967, and it is to "Trustees of Saint Stephens Parish of the Protestant Episcopal
Church, Northumberland County, Virginia, for the use and benefit of Saint Stephens Protestant Episcopal Church of
Heathsville, Virginia." (DSTS-008-042.)
The fifth deed is dated December 21,1967, and it is to "Trustees of Saint Stephen's Parish of the Protestant Episcopal
Churches of Northumberland County, Virginia." (DSTS-009-044.)
The sixth deed is dated October 18,1972, and it is to "Trustees of St. Stephens Protestant Episcopal Church, Heathsville,
Virginia." (DSTS-010-046.)
The seventh deed is dated April 1, 1996, and it is to "TRUSTEES OF ST. STEPHENS PARISH OF THE
PROTESTANT EPISCOPAL CHURCH, P.O. BOX 609, Heathsville, Virginia [**152] 22473." (DSTS-011-048.) 56
56 The CANA Congregations describe the 1967, 1972, and 1996 deeds as follows: "Between 1967 and 1996, St. Stephen's acquired four
small parcels of property for the purpose of founding out its existing land. In 1967, it acquired through two gifts two separate strips of land.
In 1972, St. Stephen's acquired another small strip of land adjacent to its rectory parcel. In 1996, St. Stephen's acquired the fourth small
parcel near the church parcel. Neither TEC nor DVA [Diocese of Virginia] contributed funds for the acquisition of any of these four small
parcels." CANA Brief #1B at 86, ¶¶545-46 (citations omitted).)
The eighth deed is dated November 20, 1998, and it is to "Church Trustees of St. Stephen's Episcopal Church." (DSTS-
012-053). St. Stephen's [*169] purchased the land for $40,000, which is used for overflow parking and other outdoor
activities. According to CANA, there is no evidence that either TEC or the Diocese contributed to the acquisition of this
parcel. (CANA Brief #1B at 89, ¶¶ 567-69 (citations omitted).
e. Church of the Apostles

There are three deeds at issue in connection with the Church of the Apostles:
Page 721Page 721
The first deed is dated April 20, 1971 and is by [**153] and between the "Diocesan Missionary Society of Virginia
(formerly known as Trustees of The Diocesan Missionary Society of Virginia, a Virginia Corporation)" and certain
named "Trustees for The Church of the Apostles, Fairfax County, Virginia." The deed is signed by Bishop Samuel B.
Chilton. (Apostles Ex. 033.0001.) The property involved is commonly called the "Pickett Road" property and had been
acquired by the Diocese in 1958. (PX-APOST-0289-002.)
The second deed is dated November 17, 1999, and it is to certain named "Trustees for Church of the Apostles
(Episcopal)." The property involved is commonly called the "Spencer" property. (Apostles Ex. 034.0001.)
The third deed is dated May 8, 2001 and is to certain named "Trustees of the Church of the Apostles (Episcopal)." The
property involved is commonly called the "Swart" property. (Apostles Ex. 035.0001.)
The background associated with these deeds is as follows:
Church of the Apostles was formed as a mission of the Diocese in 1968, "through planning and coordination between
the Diocese and Truro Episcopal Church and after receiving the requisite approvals from the Diocese's Board of
Missions and leadership of existing Episcopal churches [**154] in the area." (Diocese Brief #1 at 161.) Apostle's first
service was held in a local elementary school in March 1968. Id.
On October 27, 1968, the congregation approved purchase of a parcel of land on Pickett Road in Fairfax, Virginia from
the Diocese. (PX-APOST-0311.) Apostles paid the Diocese $11,983 for the property in June 1969. (Tr. 3067-3071; PX-
APOST-0319A; PX-APOST-320.) Because the congregation had not achieved parish status, legal title remained in the
Diocesan Missionary Society until Apostles was granted parish status at the 1970 Annual Council of the Diocese. The
Diocesan Missionary Society transferred the parcel to Apostles' trustees by deed in April 1971, as described above.
This deed demonstrates how closely the Diocese and a mission church worked together to provide the land for
construction of a church. First, the property was owned by the Diocese well before the Church of the Apostles existed,
even as a mission. Second, the Diocese held onto the property until Church of the Apostles was granted parish status at
the Diocese's 1970 [*170] Annual Council and could name its own trustees. 57 Third, the property was conveyed by
deed directly from the Diocesan Missionary Society [**155] to the Trustees of the Church of the Apostles, in a deed
signed by the Bishop. While it is true, that Church of the Apostles paid for the property, that does not undermine the
clear record that the property was conveyed by the Episcopal Diocese to an Episcopal church for the purpose of
providing a place upon which to build an Episcopal church sanctuary.
57 See this excerpt at page 162 of Diocese Brief #1:
As Apostles recognized, and as the Diocese's Chancellor explicitly told Apostles, the appropriate time for a transfer to
locally-appointed trustees was after achieving parish status. See PX-APOST-311 -002 ("The phrase 'within the legal
provisions of Cannon [sic] law' was used to authorize having legal title remain in the Dioceses Missionary Society [sic]
until the Church of the Apostles can attain a status permitting us to name our own trustees.").
A worship space was built on the property in 1980. (Apostles Ex. 013.0032-34.) The construction was paid for by
Apostles' membership. (Apostles Ex. 013.0032-27.) They also paid for an expansion to the sanctuary in 1988. (Tr.
3097.) Both the second and third deeds involve adjacent properties on Braddock Road, in Fairfax County. The
properties [**156] were to be the site of a new church to replace the Pickett Road facility and were purchased without
contribution of funds from TEC or the Diocese. (Tr. 3135, 3172.) Apostles were unable to sell the Pickett Road property
(Apostles Ex. 144) nor to build a new church on the Braddock Road properties. (Tr. 3175.) Apostles attempted
unsuccessfully to sell some 20 acres of excess land on Braddock Road. (Apostles Exhibits 76, 148.)
f. St. Margaret's Church

There are two deeds at issue in connection with St. Margaret's Church:
The first deed is dated June 19, 1972 and is by and between "The Right Reverend Robert F. Gibson, Jr., Bishop of the
Diocese of Virginia" and "Trustees of St. Margaret's Church, Dettingen Parish, Prince William County, Woodbridge,
Virginia." (DSTM-042-00323-00328.) In addition to the land itself, the real estate conveyed included a church, parish
house and rectory. The deed notes that the property conveyed upon which sits the church and parish house is the same
Page 722Page 722
property conveyed by deed from Glebe Properties, Inc., dated July 26, 1963, to Bishop Gibson (which deed appears in
the exhibits as DSTM-005-00031-33) and that the property conveyed upon which sits the rectory is [**157] the same
property conveyed by deed from "Marumsco Village, Incorporated," dated January 7, 1964, to Bishop Gibson.
[*171] The trustees agree in the deed to assume the balances due on two deeds of trust from Bishop Gibson: (1) in the
original amount of $70,000, securing a note to the "Prince William Savings and Loan Association (now Perpetual
Savings & Loan Association)," with a remaining balance of $51,306.21; and (2) in the original amount of $18,250,
securing a note to the "Prince William Savings and Loan Association (now Perpetual Savings & Loan Association),"
with a remaining balance of $15,011.87.
The deed also states the following:
Section 3 of Canon IV of the Canons of the Protestant Episcopal Church in the Diocese of Virginia in effect at the time of the
conveyance of the aforesaid property to the party of the first part continues in full force and effect as of the date of this conveyance
and provides as follows:
Section 3. The Bishop, or the Ecclesiastical Authority, of the Diocese is hereby authorized to administer the
affairs of the Diocese in connection with the establishment of churches under the provisions of the Canons, and
as such shall have power to acquire by deed, devise, gift, [**158] purchase, or otherwise, any real property for
use in the missionary work of the Diocese or for use as Diocesan headquarters or offices for the administration
of the affairs of the Diocese. Property so acquired shall be held and transferred in accordance with the provisions
of Section 57-16, Code of Virginia, 1950, as from time to time amended.",
and the party of the first part is the Bishop of the Diocese as of the date of this conveyance.
(DSTM-042-327.)
The second deed is dated February 13, 2004, and it is to "ST. MARGARET'S EPISCOPAL CHURCH by its [named]
Trustees."
The following points should be noted about St. Margaret's:
St. Margaret's grew out of the Diocese's "program for church planting" in the early 1960's. (PX-STMARG-1119-004.)
"In September 1963, the Diocese inquired of the Woodbridge members of St. Martin's Episcopal Church in Triangle and
Pohick Episcopal Church in Fairfax if there was interest in starting a new parish in Woodbridge. During the first week
in October a small group met with [Suffragan] Bishop [Samuel] Chilton in a furniture store." Id.
On October 6, 1963, St. Margaret's held its first worship service in a middle school classroom. (DSTM Exs. 6,7; PX-
STMARG-1119-0004; [**159] Tr. 3899:20-3900:1.) "The Venerable W. Leigh Ribble, Archdeacon of the
Diocese....was conducting the Eucharist." (PX-STMARG-285-001.)
On January 28, 1965, St. Margaret's was admitted to the Diocese as a Mission (PX-COM Ex. 204-33; Tr. 3900:7-8) and
on January 24, 1971, St. Margaret's was admitted to the Diocese as a church. (PX-COM Ex. 210-63; Tr. 3900:2-6.)
[*172] The first deed concerns what is called the "Church Hill Drive Property" upon which presently sits the church
and related properties at issue. According to the CANA Congregations' brief, the property was initially owned by Ethel
Wigglesworth, the grandmother of a St. Margaret's parishioner, who donated a 10 acre parcel of land for the
construction of a church. "Because St. Margaret's was not at that point organized legally to receive real property, the
transaction was structured so that Ms. Wigglesworth conveyed the land to Glebe Properties, Inc. a Diocese of Virginia
corporation, which, on July 26, 1963, conveyed to the Bishop of the Diocese the 10-acre parcel now located at 13900
Church Hill Drive in Woodbridge." (CANA Brief #1B at 104, ¶656; DSTM Ex. 48.)
While the land was still owned by the Bishop, ground was broken for a sanctuary. [**160] (PX-STMARG-1119-004.)
Funds for construction of the sanctuary and related start-up expenses were arranged by the Diocesan Missionary
Society, which in January and February 1964, borrowed from Perpetual Savings and Loan $18,250 and $70, 000,
respectively. (DSTM Ex. 390-00263; TR. 3901:12-21.) (These are the same loans referenced in the deed described
above.) Additional start-up funds were borrowed from the Diocesan Missionary Society, with promissory notes dated
September 16, 1964 ($28,450), December 4, 1964 ($4,000), and April 10, 1968 ($17,200). On November 12, 1968, St.
Margaret's signed a consolidated promissory note. (DSTM Ex. 12.) Between 1974 and 1975, St. Margaret's did
additional construction on the property, which was funded with cash and an additional $20,000 loan from the Diocesan
Page 723Page 723
Missionary Society. (DSTM Ex. 26.) By 1998, St. Margaret's had paid off all six of the DMS loans. (DSTM Ex. 125,
38, 371-02201; Tr. 3930:16-20.)
In 1998 or 1999, St. Margaret's built a new parish hall, which was paid for by the congregation and by a loan from a
bank, secured by a mortgage on the Church Hill Drive parcel. The mortgage has been paid off. (DSTM Ex. 520, 336,
48-00491; Tr. 3904, 3905:2-9, [**161] 3930:21-3931:9:)
The second deed involves what is called the "Cross Lane Property." This is a 40-acre parcel on the Prince William
Parkway, upon which St. Margaret's plans to relocate the church. St. Margaret's closed on the property on February 13,
2004 and paid $500,000 plus $13,000 in closing costs, for which the "congregation paid cash." (CANA Brief #1B at
102-07, ¶¶ 667-70.) St. Margaret's gave the Diocese first right of refusal regarding the sale of the original Church Hill
Drive property, where the present church is located. After St. Margaret's received an offer to purchase the Church Hill
Drive property from a builder (which was contingent upon securing rezoning of the property within 12 months), St.
Margaret's communicated the offer to the Diocese so that the Diocese could decide whether to exercise its first right of
refusal, which it declined to exercise. Id. at ¶¶673-75. After the builder failed to meet the zoning contingency, St.
Margaret's completed the rezoning approval process itself. Id. at 676. St. Margaret's expended considerable sums of
money in obtaining the [*173] rezoning of the Church Hill Drive Property and obtaining site planning approval for the
Cross Lane Property. [**162] The site planning approval process for the new property has cost St. Margaret's over one
million dollars and was financed by St. Margaret's with cash on hand and a construction loan. Id. at 677. Including the
purchase price of the Cross Lane property, the total cost expended on the effort to move St. Margaret's has been "about
$2.7 million." Id. at 679.
This first deed is particularly significant because it demonstrates the pervasive involvement of the Diocese in the
acquisition of church property and in support of its development. First, the Diocese was actively involved in the
formation of the church in 1963. Second, the Diocese took ownership of the donated property and held it for almost ten
years until it could be conveyed to the church itself. Third, the church was constructed while the property remained in
the possession of the Diocese. Fourth, it was the Diocesan Bishop who actually conveyed the property to St. Margaret's.
Fifth, the Diocesan Missionary Society provided substantial loan support on six different occasions that permitted both
the construction of the church's core facilities and helped St. Margaret's with its start-up costs. Sixth, the 1972 deed
itself quotes from [**163] one of the Diocesan canons, authorizing the Bishop "to acquire by deed, devise, gift,
purchase, or otherwise, any real property for use in the missionary work of the Diocese...," which both demonstrates the
authority of the canons, and the canonical requirement that property acquired be used "in the missionary work of the
Diocese." Seventh, other official documents demonstrate St. Margaret's own perception over time that the Diocese had
an ownership interest in the church. 58
58 Specifically, there is a Deed of Easement dated March 14, 1983, which refers collectively to St. Margaret's Rector, Trustees, and Senior
Warden and the Diocesan Bishop as "St. Margaret's Episcopal Church" and "Grantors" and states that the "Grantors warrant that they [we]re
the true and lawful owners of the premises described herein." (PX-STMARG-546-001, 003.) In addition, notes the Diocese, there are other
official records of St. Margaret's that recognize the Diocese's ownership interest in the property at issue, specifically three documents: (1) an
application for waiver of provisions of County Design and Construction Standards Manual dated May 1, 1987, which describes "Owner's
Name" as "Episcopal Diocese of [**164] Virginia, Department of Missions/Trustees of St. Margaret's Episcopal Church and the owner's
address as that of Diocesan headquarters," (PX-STMARG-583-001); (2) a 1988 special use permit listing "Owner" as "Episcopal Diocese of
Virginia -- Department of Missions," (PX-STMARG-595); and (3) a church profile prepared in or around 2003, which states in part: "Three
trustees hold title to St. Margaret's property in the name of the diocese." (PXSTMARG-670-013, 015.)
Against the above, the CANA Congregations make a number of points: First, it was St. Margaret's own parishioners
who provided the labor in some [*174] of the construction done at the church. (CANA Brief #1B at 105, ¶664.)
Second, loans from the Diocesan Missionary Society were at market rates. Third, all loans were repaid. Fourth, the
deeds contain no explicit restrictive covenant requiring that the property be used for Episcopal Church purposes. Fourth,
since the property was conveyed to St. Margaret's trustees in 1972, they have always held the property for the benefit of
St. Margaret's, Fifth, St. Margaret's own resources were used to fund the acquisition of the second parcel and also
funded the land development and improvements to [**165] both parcels. Finally, CANA notes that neither the
congregation nor vestry of St. Margaret's ever voted to convey a property, trust, or contract interest to TEC or the
Diocese.
The Court is not persuaded that any of these points undermine the clear indication that the deeded properties were
conveyed with the clear intent that the properties be used for Episcopal church purposes.
Page 724Page 724
g. Church of the Epiphany

There is one deed at issue in connection with Church of the Epiphany. On August 25, 1987, Glebe Properties, Inc.,
deeded the property to "Trustees of the Church of the Epiphany (Episcopal)." (DCOE Ex. 497-2643.)
The following points should be noted about this deed:
First, according to the Diocese, Glebe Properties, Inc., was a corporation of "certain prominent Northern Virginia
Episcopalians," 59 who decided to give Church of the Epiphany a 5.2 acre site in a large residential community for a new
church building. See Diocese Brief #1 at Page 176.)
59 The CANA Congregations describe Glebe Properties, Inc. as a Diocese of Virginia corporation. (CANA Brief #1B at page 104, ¶656.)
Second, the property was not sold to the Church at fair market value. According to CANA, it had an assessed value
[**166] of $153,900, (see CANA Brief #1B at 132, ¶851) but was given to the church "without cost to us now with the
agreed understanding that our Parish would become firm financial supporters of the Diocesan efforts to secure
additional land, and develop new congregations." (DCOE Ex. 520.) Thus, the land was acquired "at no cost to the
parish." (PX-EPIPH-039-003.)
Third, once the parcel was conveyed to it, the church borrowed $730,000 from George Mason Bank. Significantly, the
church also sought and received financial assistance from the Diocese, specifically a $500,000 loan from the Diocesan
Missionary Society to fund construction of a first phase of its new church and related expenses. (DCOE Ex. 483-02568,
-02570; Tr. 2080; see also CANA Brief #1B at 132, ¶ 852.) The construction loan from the Diocesan Missionary
Society was secured by a mortgage and fully repaid. (DCOE Ex. 483-02568,-02570.) Ground-breaking occurred on
March 27, 1988 (see DCOE Ex. 458-2296) and Bishop Lee visited the building site at his December 1988 Episcopal
visit. (See DCOE Ex. 61-398.) Bishop Lee [*175] then returned to dedicate and consecrate the church on April 23,
1989. (PX-EPIPH Ex. 3-003; PX-EPIPH Ex. 86.)
In summary then, [**167] valuable property was deeded to the Church of the Epiphany --which was described in the
deed as an Episcopal church -- at no cost to the church with the explicit understanding that in return the Church would
financially support the Diocese's efforts in the future to obtain additional land and develop new Episcopal
congregations. After acquisition of the land, the Diocesan Missionary Society loaned the church one-half million dollars
to partially fund the construction. Bishop Lee visited the site and then, after the church construction was complete, he
dedicated and consecrated the church.
2. General Discussion Regarding the Deeds

There are several general points the Court should make with regard to the deeds at issue in this case:
a. The CANA Congregations assert generally that the deeds before the Court are to the congregations and that they are
the "legal title holders." (CANA Brief #2 at 19.) The Court does not agree. With the exception of the earliest deed before
the Court, which predates the existence of TEC or the Diocese, every deed is to trustees of the church itself. This is
significant because CANA uses some very charged language, such as "forfeiture," (see CANA Brief #2 at 16) [**168]
to describe the effect of ordering the conveyance of the properties to the Diocese. It would only be a "forfeiture" if the
CANA Congregations were the legal owners of the property. It is true, of course, that the CANA Congregations now
control the properties but control does not equal ownership, and the CANA Congregations do not own the properties
and, hence, the issue before the Court is not whether to "forfeit" them. 60
60 As TEC and the Diocese put it: "[The CANA Congregations] are not the 'entity' --the local Episcopal church to whose trustees the
property was deeded. They are a current local majority of individuals who claim the right to take the local church entity and its property out
of the Church and the Diocese for use in another denomination." TEC/DOV Brief #2 at 22.)
b. The vast majority of deeds before the Court make explicit reference to the Episcopal character of the church. Of the
41 deeds, this Court counts 33 that refer explicitly to the churches being Episcopal churches or make other reference to
their Episcopal character. (And even as to those deeds that do not use the word Episcopal, the deeds were to trustees of
Page 725Page 725
"a local church that was at the time of the conveyance [**169] indisputably an Episcopal church." (TEC Brief #3 at
23.)) The CANA Congregations argue, however, that the reference in a deed to the Episcopal character [*176] of a
church merely serves to identify the church and can be attributed no deeper meaning or significance. 61 The Court
disagrees with this "Yellow Pages" argument. 62 When a deed refers to the Episcopal character of a church, that is not
merely a reference to the location of the church, or its proper name, but rather an indication "that the designated cestui
que trust in each deed was a unit or component of The Protestant Episcopal Church in the United States of America
within the then existing diocese." Buhrman, 5 Va. Cir. at 503, This Court agrees, therefore, with Judge Stephenson that
"a reasonable interpretation of these deeds leads inescapably to the conclusion that the trustees cannot hold title to the
subject property for persons or groups who are withdrawn from and not under the authority of The Episcopal Church."
Id. 63
61 See, e.g., the CANA Congregations' characterization of language in the 1874 St. Stephen's Church deed. The deed reads in part; ".... In
trust nevertheless and for the sole use and benefit of the religious [**170] society and congregation known as the Protestant Episcopal
Church." (DSTS Exs. 5, 15-00098-00099.) In St. Stephen's Church Post-Trial Brief Re Its 1874 Deed at 9, fn. 6, the CANA Congregation
asserts that the language identifying the congregation as the "Protestant Episcopal Church" is a "purely descriptive reference to the local
congregation and with no direction that the property be used for the worship of members of a particular denomination." See also this
argument from The Falls Church's Opening Post-Trial Brief Regarding The Falls Church Endowment Fund, at 6: "....the Articles and Bylaws
[of the Endowment Fund] demonstrate that these terms [Episcopal Church and Protestant Episcopal Church] are not a restriction but rather a
description; that is, they identify the legal entity that was using the name 'The Falls Church' in 1976." (emphasis in original)
62 CANA Brief #1A at 37: "[I]t merits emphasis that deed language identifying a congregation as 'Episcopal' or 'Lutheran' or 'Catholic'
serves to distinguish such congregations from others bearing similar names. One need only thumb through the Yellow Pages to see that
churches of different denominations often bear the same name (e.g., [**171] "St. Paul's Church")."
63 CANA also argues that Davis v. Mayo, 82 Va. 97 (1885), "disposes" of the argument that there is some significance in the use of the word
Episcopal in the deeds. (CANA Brief #1A at 35.) The Court disagrees. Davis involved a completely different situation, not involving
religious entities, nor a denominational reference in a deed. CANA relies upon this sentence from Davis at 105: "The property was not
conveyed upon condition that the beneficiaries in the deed should retain the then name of their division, or that they should associate
themselves with, or become subject to, the orders and regulations of the Grand Division, or any other body; and, consequently, they were left
free to change the name of their division whenever they might see fit to do so." As TEC and the Diocese note, that language might be
applicable if the issue was the 1934 change from Zion to Truro. (see TEC/DOV Brief #2, at 21.) Here, the CANA Congregations, by [*177]
dropping Episcopal from their name, by disaffiliating from the Episcopal denomination and affiliating with CANA, did something of a
wholly different character than simply change names. In other words, for the very same reason that a church [**172] affiliating with a new
denomination would drop the name of its old denomination, the presence of that old denomination in the name of the church as it appears in
the deeds is significant.
c. As to several of the deeds, it is significant that the grantor of the deed is itself the Diocese or the Diocesan Missionary
Society (Church of the Apostles 1971 deed and St. Margaret's 1972 deed) or from an entity closely associated with the
Diocese (Church of Epiphany's 1987 deed from Glebe Properties.) And there are other compelling and explicit
indications in several of the deeds as to their intended purpose.
For example, in the Truro 1843 Rumsey Deed, the Deed states:
Trustees for Zion Protestant Episcopal Church.... To have & to hold.... forever but upon the following purposes, uses, trusts &
conditions & none other -- that is to say, for the use of the members & congregation of the Protestant Episcopal Church of the
Diocese of Va. worshipping & to worship in the building on said lot known as & called "Zion Church," subject to the Constitution,
canons & regulations of the Protestant Episcopal Church of the Diocese of Va. (DX-TRU001.)
A second example is the 1874 St. Stephen's Deed, which states:
In [**173] trust nevertheless and for the sole use and benefit of the religious society and congregation known as the Protestant
Episcopal Church for the purpose of erecting a house for divine worship and such other houses as said congregation may need, and
said church or house for divine worship when so built shall be used and enjoyed by said religious society or congregation according
to the laws and canons of said church not inconsistent with the laws and constitution of Virginia. (DSTS-005-031, 015-098-099.)
d. CANA argues that it is significant that TEC and the Diocese did not require the Deeds at issue in this case to include,
or to be modified to include, reversionary clauses or restrictive covenants to ensure their perpetual use as Episcopal
churches, as opposed to churches of a different denomination or for some other purpose. (See, e.g., CANA Brief #1 at
25.) 64 [*178] But the fact that TEC and the Diocese could have done more (including titling property in the name of
Page 726Page 726
the Bishop (CANA Brief #1A at 24)) does not mean that what was actually done regarding the deeds was inadequate.
These deeds explicitly deed property to trustees on behalf of constituent members of the Episcopal denomination.
[**174] The CANA Congregations are not constituent members of the Episcopal denomination; by contrast, one of the
Plaintiffs in this case is the Episcopal denomination itself. 65 The fact that TEC and the Diocese did not do what
Methodists do (CANA Brief #1A at 29), or what Presbyterians do (CANA Brief #1A, at 30), or what Lutherans do
(CANA Brief #1A at 31), or what Baptists do (CANA Brief #1A at Page 31), does not diminish the significance of the
fact that these deeds explicitly conveyed property to constituent members of the Episcopal denomination.
64 But, as TEC and the Diocese note, "silence is hardly a one-way proposition -- the property also was not conveyed, for example, to 'the
congregation of Truro Church, regardless of what denomination it might affiliate with.'" TEC/DOV Brief #2 at 21, fn. 19.)
65 Moreover, it certainly would not be credible to argue that TEC's or the Diocese's failure to insist on reversionary clauses, or similar
provisions, is somehow a reflection of their intent. For that intent is plainly demonstrated by the adoption of the Dennis Canon, and
subsequently of Diocesan Canon 15.1, almost immediately after the Supreme Court stated in Jones that "the constitution of [**175] the
general church can be made to recite an express trust in favor of the denominational church" as a means to insure that "the faction loyal to
the hierarchical church will retain the church property." Jones, 443 U.S. at 606. That this Court now concludes that these Canons were
unsuccessful in achieving their stated objective, due to the invalidity of denominational trusts in the Commonwealth, does not diminish this
clear indication of TEC's and the Diocese's intentions.
e. The CANA Congregations similarly note that none of the deeds at issue contain an express trust on behalf of TEC or
the Diocese. The Court does not find this to be significant, given the undisputed fact that at least until 1993,
denominational trusts were deemed invalid. See, e.g., the Virginia Supreme Court's statement in Green that "[t]he
addition of a trust clause to the deed would have provided the A.M.E. Zion Church with no additional or further interest
in the Lee Chapel property," in part because the property was "already held by the trustees for that church and no other,"
and in part because express trusts for supercongregational churches are invalid under Virginia law, as are implied
trusts. Green, 221 Va. at 554-55. [**176] And the fact that this Court has now held that denominational trusts continue
to be invalid in the Commonwealth certainly provides additional support for the proposition that requiring a deed to
reflect an express trust for TEC or the Diocese would have been a hollow and unavailing exercise in the
Commonwealth.
f. TEC argues that, in construing a deed, the Court first "looks to see if the instrument on its face discloses what the
grantor intended regarding the conveyed property in the particular circumstances presented," and cites [*179] Camp v.
Camp, 220 Va. 595, 598, 260 S.E.2d 243 (1979) for the proposition that "[i]f the language [of the deed] is explicit and
the intention is thereby free from doubt, such intention is controlling." (TEC Brief #3 at 28.) If, however, the deeds do
not contain such express language, the Court looks at "the surrounding circumstances" to surmise the grantor's
intentions. See, e.g., Schultz v. Carter, 153 Va. 730, 151 S.E. 130 (1930). TEC then argues that none of the deeds contain
express language addressing the present situation. In other words, none of the deeds explicitly address the grantor's
intentions in the event a congregation votes to renounce its affiliation with TEC and affiliate [**177] with a different
denomination.
In an effort to evaluate the "surrounding circumstances" that existed at the time these deeds were executed, TEC
analyzed the 41 deeds in chronological order, breaking them down into eight time periods.
The first time period had just one deed in it, the 1746 deed regarding The Falls Church, which TEC argues is "neutral"
on the intent of grantor issue. 66
66 TEC makes the point, however, that "even though this deed does not dispose of the issues in this case, it is the Church's view that the
property conveyed by this deed, and all of the property described herein, became subject to the Church's and the Diocese's governing
documents, under Green, by virtue of the totality of the relationship between the local church and the Church and the Diocese." (TEC Brief
#3 at 30, fn. 8.) This Court agrees. As the Virginia Supreme Court said in Green on a related issue: "The appellees say that the church, when
rebuilt in 1939, was never formally dedicated and therefore the new structure never became an A.M.E. Zion Church. We disagree. Assuming
that there never was a formal dedicatory ceremony following the conveyance in 1875, we conclude that 100 years of continuous services
[**178] in the church by the pastors supplied Lee Chapel by the A.M.E. Zion Church constitutes an adequate dedication of the property for
its intended spiritual and ecclesiastical purposes." Green, 221 Va. at 554. Here, The Falls Church was a constituent member of TEC and the
Diocese, subject to their Constitutions and Canons, for more than 200 years.
The second time period has one deed in it, and TEC notes no pertinent surrounding circumstances.
Page 727Page 727
The third time period covers the two 1874 deeds, one involving Truro and one involving St. Stephen's. TEC notes that
by the time these deeds were executed, TEC had adopted, in 1868 and 1871, its anti-alienation canons for consecrated
property. TEC also notes that one of its expert witnesses, Dr. Robert Bruce Mullen, testified that shortly after the
adoption of the anti-alienation canon but before 1874, nearly 100 congregations left the Church to join another
denomination, and each of those churches left its property behind, including Virginia congregations. (TEC Brief #3 at
31.) TEC also notes that by this point in time, the Virginia Supreme Court had issued Brooke v. Shacklett, 54 Va. 301
(1856). And, notes TEC, there [*180] was language in Brooke protecting [**179] the property interests of a
denomination. 67 "In light of these circumstances," argues TEC, "any reasonable grantor would have understood that
property conveyed to a local Episcopal church could not be removed from the denomination without the larger church's
consent." (TEC Brief #3, at 31.)
67 The pertinent language from Brooke, at 321, is the following:
If at any time before the division of the church a controversy had arisen among the members of the society at Salem
church-house, in respect to the occupancy of the house -- each party under the lead of a preacher claiming its exclusive
use for purposes of worship -- the dispute must have been determined by enquiring, not which of the two parties
constituted a majority, or represented the wishes of a majority, of the members of the society, but which of the two
preachers had been appointed and assigned to the society in accordance to the laws of the church; which of the two parties
was acting in conformity with the discipline of the church, and submitting to its lawful government.
The fourth time period covers three deeds in the time period of 1882 to 1904. In addition to the circumstances existing
at the time of the 1874 deeds, TEC notes [**180] that the Virginia Supreme Court had reiterated its Brooke holding in
Hoskinson v. Pusey, 73 Va. 428, 440 (1879).
The fifth time period covers one 1918 deed involving The Falls Church. TEC notes that by this time, TEC had adopted
its "rector" canon (1904), "which provides that the rector of a local church -- someone required to be an Episcopal priest
and thus having declared an oath of conformity with the Church's rules -- is entitled to use and control local church
property and must do so in accordance with the Church's rules and the Bishop's direction, (TEC-09-2) and the Diocese
had adopted its abandonment canon (1906), empowering diocesan representatives to take charge of local church
property that those representatives declared to be abandoned, PX-COM-144-168.)" TEC Brief #3 at 34.)
The sixth time period covers 13 deeds from 1952 to 1972. TEC notes that in addition to the canons described above,
TEC "had adopted (in 1916 and 1919) canons mandating business methods to be followed by local Episcopal churches,
including requiring the insurance of local church property, (TEC-10-2-3; TEC-11-2-4); the Diocese had adopted (in
1938) a canon regulating local churches' ability to incur debt, [**181] (PX-COM-177-032); and the Church and the
Diocese had each adopted (in 1940) canons regulating the alienation of unconsecrated property, (TEC-13-2-3; PX-
COM-179-036.)" (TEC Brief #3 at 35.)
The seventh time period covers a 1982 Truro deed. In addition to all the foregoing, TEC notes that by this point in time,
the Virginia Supreme Court had issued Norfolk Presbytery and Green, the United States Supreme Court [*181] had
issued Jones and two Virginia trial courts in Buhrman and Wyckoff had resolved disputes over the control of local TEC
churches in favor of the denomination. In addition, notes TEC, the denomination had adopted the Dennis Canon at this
point.
The final time period concerns 19 deeds from 1986 to 2006. To the foregoing, TEC adds the fact that the Diocese had
adopted its Trust Canon. (PX-COM-222-105-06.) 68 TEC also notes that during this time period, "courts around the
country found overwhelmingly in favor of the larger Church and loyal Episcopalians in disputes over local Episcopal
church property." (TEC Brief #3 at 38.)
68 In this context, the Court gives limited significance to TEC's adoption of the Dennis Canon and the Diocese's adoption of Canon 15.1,
given its finding that neither [**182] Canons were effective in validating denominational trusts.
TEC concludes -- and this Court agrees -- that "under these circumstances, any reasonable grantor would have
understood that property conveyed to a local Episcopal church at that time could not be removed from the denomination
Page 728Page 728
without the larger church's consent, and that the local church to which he or she was conveying property was bound to
use, maintain, and control the property in accordance with the Church's and the Diocese's rules and ensure that property
it acquired be used for the mission of The Episcopal Church and for no other denomination." Id.
C. CONSTITUTION AND CANONS OF CHURCH

From the evidence and argument presented in the trial of this matter, the Court finds as follows: 69
Structure of TEC and the Diocese

(1.) TEC is a hierarchical church, and the Diocese of Virginia is a diocese of a hierarchical church.
(2.) TEC is composed of three levels in descending order of authority: TEC's General Convention; geographically-defined dioceses,
including the Diocese of Virginia; and local congregations, called parishes or churches. See TEC Const. Art. I (describing the
General Convention), TEC Const. Art. V (describing dioceses [**183] and parishes); TEC Canon I.13 (describing parishes);
Diocesan Canon 10.1 70 (describing local churches).
(3.) The governing documents of TEC is its Constitution, its Canons, and the Book of Common Prayer. The General Convention,
which is composed of representatives from the Church's dioceses, adopts and amends the governing documents of the church. See
TEC Const. Preamble (adoption and amendment of Constitution); TEC Const. Art I (composition of General Convention); Const.
Art. X (amendment of Book of Common Prayer); [*182] TEC Const. Art. XII (amendment of Constitution); and TEC Canon V.1
(amendment of canons).)
(4.) New dioceses must promise "unqualified accession" to the Church's Constitution and Canons. (TEC Const. Art V.)
(5.) The Diocese of Virginia, in its Constitution Preamble, "acknowledges the authority and power of the General Convention....as
set forth in the Constitution and Canons adopted thereby."
(6.) The Diocesan Constitution also provides that "[e]very Congregation within the Diocese..., however called, shall be bound by
the Constitution and the Canons adopted in pursuance hereof." (Diocesan Const. Art. XVII.)
(7.) The Canons of the Diocese require that a congregation petitioning [**184] the Diocese to be granted status as a "church" must
"acknowledge the jurisdiction of the Bishop or Ecclesiastical Authority of the Diocese of Virginia." (Diocesan Canon 10.1.)
(8.) The failure of a church to meet that requirement may result in it being reduced to mission status. (Diocesan Canon 10.6.)
(9.) Each diocese, including Virginia's, is governed by a legislative body. In Virginia, that legislative body is called the "Annual
Council." Each diocese has an ecclesiastical and administrative leader, called the Diocesan Bishop. See TEC Const. Art. II
(discussing Bishop); TEC Const. Art. V.1; and TEC Canon I.10(4) (discussing Diocesan Conventions).)
(10.) The Diocesan Bishop is elected by the Diocesan Convention (the "Annual Council" in Virginia) and his or her selection must
be consented to by a majority of the leadership of the other dioceses. (TEC Const. Art. II; TEC Canon III.11(3)-(4).)
(11.) Each diocese's convention elects a "Standing Committee" that acts as the "Ecclesiastical Authority" in the absence of a
Diocesan Bishop and that shares authority with the Bishop over certain matters prescribed by TEC's and the Diocese's canons.
(TEC Const. Art. IV.)
(12.) The Annual Council of [**185] the Diocese of Virginia is composed of representatives from the Diocese's churches and other
congregations. (Diocesan Const. Art. III; Diocesan Canon 2.)
(13.) The Annual Council adopts and amends the Diocese's Constitution and Canons. (Diocesan Const. Art. I, XIX, Diocesan
Canon 30, which supplement but may not be inconsistent with TEC's Constitution and Canons. TEC Const. Art. V.)
(14.) The Diocese also has an Executive Board, made up of elected representatives from geographical areas of the Diocese and the
Bishops of the Diocese, which is responsible for the business of the Annual Council between its meetings. Diocesan Canon 7.5.)
(15.) Each church is part of the diocese in which it is located. (TEC Canon I.13.1.)
(16.) In order to achieve church status, in addition to making the acknowledgements described above, a congregation must have a
"vestry," [*183] which is a governing body of lay persons and its ecclesiastical and administrative leader, as well as a "rector,"
who is a priest of TEC elected by the vestry in consultation with the Bishop. (TEC Canons I.14, and III.9(3); and Diocesan Canons
10.3, and 12.1.)
(17.) The rector has control over a parish's physical property, while the vestry [**186] retains control over all other parish property.
(TEC Canons III.9(5)(a), 1.14(2).)
(18.) A vestry may adopt by-laws so long as they are not inconsistent with TEC's canons or the Canons of the Diocese. (Diocesan
Canon 11.10.)
(19.) A church with no functioning vestry is deemed "inactive," and its authority is assigned to the Executive Board. (Diocesan
Canon 9.3.) The Bishop, with the advice and consent of the Standing Committee, may reduce a church's status to that of a mission
if the church becomes unable to satisfy the requirements of church status for any other reason, including the failure to make the
acknowledgements described above. (Diocesan Canon 10.6.)
Page 729Page 729
(20.) All clergy, as a condition of ordination, must subscribe to a "Declaration of Conformity," affirming that they will "conform to
the Doctrine, Discipline, and Worship of the Episcopal Church." (TEC Const. Art. VIII; TEC-38-513,-526, -538.)
(21.) Vestry members are required by TEC's Canons to "well and faithfully perform the duties of that office in accordance with the
Constitution and Canons of [the] Church and of the Diocese." (TEC Canon I.17(8).)
(22.) Every person chosen to serve on a vestry in the Diocese must subscribe to [**187] a "declaration and promise" stating that "I
do yield my hearty assent and approbation to the doctrines, worship and discipline of The Episcopal Church." (Diocesan Canon
11.8.) 71
Non-Property Rules of TEC and the Diocese

(23.) The Church's Constitution requires that the Book of Common Prayer "shall be in use" throughout TEC, and allows for
deviation by way of "special forms of worship" only pursuant to the "rubrics," or special instructions, of the Prayer Book and with
the Bishop's permission. (TEC Const. Art. X; see also TEC Canon II.3.)
(24.) The Church's Canons specify the process to be followed by dioceses and local churches in the development and ordination of
the Church's priests and deacons and sets out substantive standards that ordinands must meet. (TEC Canons III.2, III.5-6, III.8, and
III. 15.) Under TEC's Canons, only a priest who has met these qualifications may become the rector of an Episcopal church. (TEC
Canon III.9(3)(a)(3).)
[*184] (25.) TEC's Canons establish the process by which a local church may elect a new rector, including the requirement that
the church "promptly notify" the Bishop that the church needs a rector, prohibiting the local church from electing a rector without
[**188] first notifying the Bishop of the nominee's identity and allowing time for the Bishop to respond, and requiring that the
Bishop be "satisfied that the person so elected is a duly qualified Priest" before that person may take office. (TEC Canon III.9(3)(a)
(1-3).)
(26.) TEC's Constitution and Canons provide detailed procedure for the disciplining of clergy, prescribing also the standards of
conduct. (TEC Const. Art. IX; TEC Canons IV.1-16.) These provisions make clergy subject to discipline for violating the
Constitutions or Canons of TEC or its dioceses, violating the ordination oath, and abandonment of the communion of the Church.
(TEC Canons IV.1(1)(e)-(h), IV.9, IV. 10.)
(27.) TEC's Canons require every church to provide its diocese an annual report in the form specified by the Executive Council.
(TEC Canon I.6(1); see also Diocesan Canon 16.1, 16.2 (requiring an annual "parochial report").)
(28.) TEC's Canons also govern aspects of church life, prescribing for example which translations of the Bible shall be used in
worship, (TEC Canon II.2), and imposing rules regarding marriage, divorce, and remarriage. (TEC Canons I.18, I.19.)
(29.) TEC's Canons forbid a rector from resigning without [**189] the consent of the vestry and bar a vestry from removing a
rector against his or her will, except under prescribed conditions, each of which require the action of the Bishop. (TEC Canon
III.9(13)(Dissolution of the Pastoral Relation); see also Diocesan Canon 28 (Relationships Among Clergy and Congregations.).)
(30.) Diocesan Canons prescribe in detail the manner in which a church of the diocese conducts its affairs, including prescribing:
the size of the vestry, the requirement that vestry members be elected annually, the length of a vestry member's term, the
prohibition against consecutive terms, the requirement that the rector preside at vestry meetings, the qualifications for vestry
members ("confirmed adult communicants in good standing of the [Episcopal] church,") who can vote in a vestry election, the
manner in which a vestry election is conducted, how vestry meetings are to begin, the "declaration and promise" that each newly-
elected vestry member must make before taking office; how vestry member vacancies are filled, and how often the vestry must
meet. (See Diocesan Canons 11.2 to 11.12.)
(31.) Additionally, the Diocesan Canons set out the duties of vestry members, including [**190] its obligation to annually review
the rector's compensation in keeping with published guidelines of the Diocese, and to advise the Diocese by a certain date each year
what percentage of its income it will contribute to the Diocese, and to provide for the appointment of trustees to hold church
property, and to establish a "Finance Committee" to advise the rector, vestry, and treasurer in financial matters; and, as to [*185]
wardens, or the elected leaders of the vestry, to oversee the operation and maintenance of church property, and collect the offerings.
(See Diocesan Canons 12.3-12.7, and 25.2.)
(32.) The Diocesan Canons also require that the wardens "possess a copy of the current General Convention and Diocesan
Constitutions and Canons for the information and guidance of the Rector, vestry, and congregation." (Diocesan Canon 12.7.)
(33.) Churches in the Diocese are required to participate in the Diocesan health insurance plan, unless the Executive Board grants
them an exemption. (Diocesan Canon 31.1, 31.2.)
(34.) Both TEC's and the Diocese's Canons require churches to contribute to the Church Pension Fund on behalf of their clergy.
(TEC Canon I.8, Diocesan Canon 5.)
(35.) The Diocese prescribes [**191] how and where local church endowment and other permanent funds may be deposited or
invested. Diocesan Canon 13.2.
(36.) The Diocese requires that each church's treasurer be bonded. (Diocesan Canon 13.3.)
(37.) The Diocese requires the vestry to conduct an annual audit of all accounts exceeding $500. (Diocesan Canon 13.4.)
(38.) The Diocese requires the provision of workers' compensation insurance for all employees. (Diocesan Canon 13.5(c).)
Page 730Page 730
(39.) The Diocese requires fire and casualty insurance as well as comprehensive liability insurance, and prescribes the minimum
amounts of coverage. (Diocesan Canon 13.5.)
Property Rules of TEC and the Diocese72

(40.) From its beginning, TEC has required Bishops to visit their parishes "for the purpose of examining the state of [the] church."
(TEC-01-33.) For example, Bishop Meade of Virginia regularly commented on the physical condition of the churches in the
Diocese in his annual address to the Diocese in the 1830's. (Tr. 1189-1190.)
(41.) In 1799, TEC included in its Prayer Book a "Form of Consecration of a Church or Chapel." (TEC-33-01,09; Tr. 1192.)
[*186] (42.) In 1868, the General Convention adopted a Canon (now Canon II.6) prohibiting parishes from encumbering [**192]
or alienating "consecrated" property, without the Diocese's consent. (TEC-04-1, 2; Tr. 1193.) The same Canon provided that no
church would be consecrated until the Bishop was satisfied that it was "fully paid for, and.... free from lien or other incumbrance."
(TEC-04-2.) Similarly, Diocesan Canon 15.2 requires diocesan consent for the alienation or encumbrance of consecrated church
property. 73
(43.) In 1871, the General Convention required that consecrated property be "secured ... from the danger of alienation from those
who profess and practice the doctrine, discipline, and worship of the ... Church." (now TEC Canon II.6; TEC-05-42-43; Tr. 1197.)
This Canon was adopted to "prevent.... the alienation of church buildings to parties, congregations, or corporate bodies, no longer
in accordance with the doctrine, discipline, or worship of the [Church]." (TEC-39-1.)
(44.) In 1904, the General Convention adopted a Canon (now Canon III.9(5)(a)), providing that the rector be entitled to control
parish property "[f]or the purpose of [his or her] office," and "subject to the [Church's] Book of Common Prayer, [its Constitution
and] Canons...and the godly counsel of the Bishop." (TEC-09-2; Tr. [**193] 1206.)
(45.) In 1916 and 1919, the General Convention adopted a Canon entitled "On Business Methods in Church Affairs" (now Canon
I.7), governing the management of parish property, including the requirement that all buildings be adequately insured. (TEC-10-2-
3; TEC-11-2-4; Tr. 1208.)
(46.) In 1940, the General Convention adopted a canon (now Canon I.7(3)), expanding the requirement of diocesan consent for
alienation or encumbrance of real property to cover unconsecrated parish property. This Canon allowed diocese to prescribe a
condition other than diocesan consent for transactions involving unconsecrated property. (TEC-13-3.)
(47.) The Diocese requires churches seeking to alienate or encumber unconsecrated real property to secure "the consent of the
congregation in a meeting called for that purpose." (Diocesan Canon 15.2)
(48.) The Diocese also requires that where a church's property in not held by "duly constituted Trustees," the Executive Board
"shall" take steps to "recover or secure" the property. (Diocesan Canon 15.3)
(49.) The Diocese further requires that where church property has ceased being used by a "congregation of the Episcopal Church in
the Diocese," the Executive Board may [**194] declare the property "abandoned" and "shall [*187] have the authority to take
charge and custody thereof," including selling the property or transferring it to the Bishop. (Diocesan Canon 15.3.) And, in fact, on
various occasions, the dioceses in Virginia have declared local church property to be "abandoned," and Virginia courts have
enforced these determinations. (See, e.g., PX-COM-295 to PX-COM-307.)
(50.) Churches in the Diocese may not incur debt of certain specified amounts without the consent of the Bishop and the Standing
Committee. (Diocesan Canon 14.1.) The Bishop and Standing Committee must approve the church's plan for debt repayment. Id.
69 See TEC Brief #1, at pages 5-19.
70 Unless otherwise noted, whenever the Court refers to "Diocesan Const." or "Diocesan Canon" it is referring to the Diocese of Virginia.
71 The "discipline" of the Church "refers to the constitution, the canons, the rubrics, and the ordinal of the Book of Common Prayer." (Tr.
231 (Bishop Jones); accord, PX-COM-001-164.)
72 As stated earlier in this opinion, in 1979, following the Supreme Court's decision in Jones v. Wolf, the General Convention adopted the
Dennis Canon (now TEC Canon I.7(4)), which provided that all [**195] real and personal property held by or for the benefit of any parish,
mission or congregation was held in trust for TEC and the diocese in which it was located. The Diocese adopted a parallel Canon (Diocese
Canon 15.1) in 1983. (PX-COM-222-105-06.) Because this Court has concluded that the Commonwealth of Virginia does not validate
denominational trusts, the trust canons are not considered in this section of the Opinion.
73 The CANA Congregations argue that anti-alienation and debt canons cannot create proprietary rights because they "do not purport to
affect ownership...." (CANA Brief #2 at 29.) That misses the point of TEC's and the Diocese's reliance on these Canons. To use the language
of Green, 221 Va. at 555, canons such as these give the Diocese "right[s] customarily associated with ownership," "dominion," and "control,"
i.e., the right to prevent property from being sold or encumbered.
Page 731Page 731
The foregoing 50 references to the Constitution and Canons of TEC and the Diocese -- as significant as they are -- are
only some of the ways that a local Episcopal church is subject to the denominational hierarchy. Other examples include:
regular visitations to each church and mission in the Diocese [**196] by the Bishops; the role of the Bishop at
"Initiatory Rites" (confirmation and reception), which only a Bishop may perform; the Bishop's obligation to review
church records and inspect its properties; the power of the Bishop to appoint the vestry of a mission; the Bishop's
control over the entire process of ordination, from "aspirant" to "postulant" to "candidate" to "deacon" and, finally, to
"priest;" and the requirement that clergy obtain authorization from the Diocesan Bishop to remarry a previously
divorced person or to allow a lay person to deliver the sacrament of communion. (See Diocese Brief #1 at 9-12.)
And while it is certainly true that the disposition of a dispute of this nature does not depend on a determination as to
whether the Diocese obtains more from a local church than the church obtains from the Diocese, 74 it must nevertheless
be observed that the Diocese does provide tangible benefits to a local church. Beyond any spiritual benefits a local
church might receive, there are secular benefits like assistance in the recruitment of clergy, the provision of "supply
priests" as temporary clergy at congregations, assistance in the preparation of parish profiles, investigating [**197]
clergy recruited from other dioceses, the preparation of clergy compensation guidelines, the provision of help with the
preparation of audits and parochial reports, serving as a resource for advice in areas like taxes and insurance, providing
mandatory sexual misconduct training, providing educational programs, providing human resources assistance,
providing the Church Pension Fund for a church's clergy, providing group health and dental insurance, providing
investment management services through the Diocesan Trustees of the Funds, and providing loans to churches through
the Diocesan Missionary Society. (Diocese Brief #1 at 12-14.)
74 See, e.g., this statement by the Virginia Supreme Court in Green, 221 Va. at 556: "The fact that the general church has made no loans or
grants for the benefit of Lee Chapel and that, in fact, it may have refused to contribute to the remodeling program of the local church, is not
dispositive. A proprietary interest or a contractual obligation does not necessarily depend upon a monetary investment."
[*188] The foregoing provides compelling evidence that TEC is a hierarchical church and that its dioceses, including
the Diocese of Virginia, exercise control, supervision, [**198] and authority over each Episcopal local church and
parish. That control, supervision, and authority absolutely extends to matters related to property, even when one
excludes from consideration the trust canons.
In Green, the Virginia Supreme Court defined a "proprietary right" as follows: [HN20] "[a] proprietary right is a right
customarily associated with ownership, title, and possession. It is an interest or a right of one who exercises dominion
over a thing or property, of one who manages and controls." 221 Va. at 555. TEC's and the Diocese's Constitution and
Canons demonstrate pervasive dominion, management, and control over local church property, in a manner normally
associated with ownership, title, and possession. To cite just a few examples:
(1.) Consecrated property cannot be sold without the Bishop's permission, nor can it be encumbered without the consent
of the Diocese, nor can a church be consecrated until the Bishop is satisfied that it is fully paid for and free from
encumbrances;
(2.) Unconsecrated property can only be sold in accordance with procedures established and authorized by the Diocese
pursuant to authority granted the Diocese by TEC's Canons;
(3.) Bishops must visit [**199] their parishes to examine the state of the church;
(4.) In multiple ways, local churches are bound to act in accordance with the laws of the denomination: dioceses must
promise "unqualified accession" to TEC's Constitution and Canons; every congregation in the Diocese of Virginia is
"bound" by the Diocesan Constitution and Canons; and a congregation petitioning for church status must
"acknowledge" the jurisdiction of the Diocesan Bishop or Ecclesiastical Authority of the Diocese;
(5.) A church that fails to meet its requirements may be reduced by the Diocese to mission status; a church with no
functioning vestry is deemed "inactive" and its authority is assigned to the Diocese's Executive Board; where a church's
property is not held by "duly constituted Trustees," the Executive Board must step in to "recover or secure" the property;
and where church property has ceased being used by a "congregation of the Episcopal Church in the Diocese," the
Executive Board may declare the property "abandoned" and take custody and charge of it;
(6.) By TEC's Canons, it is the Rector of a local church -- an individual who is ordained by a Bishop, and who has, as a
condition of ordination, subscribed to [**200] a "Declaration of Conformity" in which he or she affirms that he or she
Page 732Page 732
will "conform to the Doctrine, Discipline, and Worship of the Episcopal Church," and who cannot become Rector of a
local church without the Diocesan Bishop being satisfied that the person selected by the local church is a duly qualified
Priest, and who cannot be removed [*189] from office by the vestry against his or her will, except under prescribed
conditions, each of which require the action of the Bishop -- who has control over a parish's physical property, and
whose control is subject to the Constitution and Canons of the church; and
(7.) By TEC's Canons, it is the Vestry of a local church -- a group of parishioners each of whom must be in the "good
standing of the [Episcopal] church, and each of whom has subscribed to a "declaration and promise" stating that "I do
yield my hearty assent and approbation to the doctrines, worship, and discipline of The Episcopal Church," and each of
whom are required by TEC's Canons to "well and faithfully perform the duties of that office in accordance with the
Constitution and Canons of [the] church and of the Diocese," and whose substantive duties and methods of operations
are prescribed [**201] by Diocesan Canons -- who has control of all other parish property. 75
75 CANA argues that the vestry and rector canons "add nothing to [TEC's and the Diocese's] claim of a proprietary interest." (CANA Brief
#2, at 32.) The Court disagrees. The Rector and the Vestry control the property of a church and the Canons establish the obligations, duties,
authorities, and responsibilities of the Rector and Vestry. Moreover, it is only the Bishop as the Ecclesiastical Authority that can involuntarily
change local church leadership. (Diocese Brief #1 at 95; see also Diocesan Canon 28 (Neither the vestry nor the rector can unilaterally
discharge a rector, and they are to submit any such significant problems to the Bishop).)
D. COURSE OF DEALINGS EVIDENCE

Most of the facts in this section are common to all seven churches. 76
(1.) It is undisputed that before December 2006 (and, for Church of the Epiphany, January 2007), each of the churches before the
Court were constituent members of TEC and the Diocese. (Of course, it is the position of TEC and the Diocese, with which this
Court agrees, that the churches remain Episcopal churches today, even if the Congregations now in possession of those churches
[**202] are no longer in the Episcopal Church.)
(2.) Each of the churches became a local church of TEC and the Diocese in accordance with the rules of the Diocese, in some cases
by petitioning the Diocese for recognition as a church and in other cases by signifying, by various means, its acceptance of the
authority of TEC and the Diocese.
(3.) Each of these churches were known in the community as Episcopal churches, using the names and symbols of denominational
affiliation, including street signs to point the public in the direction of an Episcopal church.
(4.) Each of these churches have vestry manuals that acknowledge that the churches are bound by the rules of TEC and the Diocese.
[*190] (5.) Each of these churches have sought consent from the Diocese to encumber or alienate real property or incur debt.
(6.) Each of these churches were served by a Rector who was an ordained Episcopal priest, a Rector who made at his or her
ordination the Declaration of Conformity to the Doctrine, Discipline, and Worship of the Church. Further, at each of these churches,
the Diocese has been involved in the selection of one or more of its Rectors.
(7.) Each of these churches used the Episcopal Church's Book of Common [**203] Prayer.
(8.) The vestry members of each of these churches, upon taking office, have sworn to uphold the doctrine, worship, and discipline
of the Church.
(9.) Each of these churches used the Episcopal Church Hymnal. Some used Episcopal Sunday School materials or other Episcopal
hymn books.
(10.) Each of these churches followed the Canons of the Constitution and Diocese with respect to property, generally obtaining
consent when required.
(11.) Each of these churches organized themselves as required by Canon, electing vestries, selecting wardens, and administering the
canonical oath described above.
(12.) Each of these churches elected and sent lay delegates, and their clergy, to the Diocese's Annual Council.
(13.) Each of these churches recognized the authority of the Diocesan Bishop and other Bishops of the Diocese, received official
visitations from Bishops of the Diocese, and presented individuals to those Bishops for confirmation or reception into TEC.
(14.) Each of these churches submitted annual parochial reports through the Diocese to TEC.
(15.) Each of these churches contributed financially to the support of the Diocese.
(16.) Each of these churches contributed to the Church Pension Fund [**204] on behalf of their clergy.
(17.) Each of these churches obtained health insurance through the Diocese, as required, or obtain exemptions from the Diocese.
(18.) Each of these churches obtained consent from the Diocesan Bishop as required in certain ecclesiastical matters.
(19.) Each of these churches were regularly represented at the Diocese's Annual Council.
(20.) In various ways, each of these churches acknowledged the authority of TEC and the Diocese, such as by applying to the
Diocese for a license for a lay Eucharistic minister, or seeking permission from the Bishop of the Diocese to officiate at a wedding
of a divorced person.
Page 733Page 733
76 See Diocese Brief #1 at 23-25; and TEC Brief #1 at pages 15-18.)
In addition to the foregoing, there is some "course of dealing" evidence unique or particular to individual churches.
[*191] As to The Falls Church, the Court would note the following additional facts:
o On at least two occasions, Diocesan Bishops vetoed the employment of clergy at TFC, and the church complied.
o The Diocesan Bishop made numerous visits to TFC over the years. Bishops of the Diocese, or other Bishops acting on behalf of
the Diocese or at his invitation, have visited TFC in every year between [**205] 1934 and 2005.
o In January 1988, Bishop Lee wrote TFC's Vestry regarding TFC's plans for a new church building. The letter states in part that "In
the Episcopal Church, all church property is held in trust for the diocese." (PX-FALLS-349.) In another letter to TFC in July 1990,
Bishop Lee stated: "it is well to remember that the property which the vestry plans to mortgage in this plan is held in trust for the
Episcopal Church and the Diocese of Virginia." (DX-FALLS-035-002.)
o TFC has been represented by one or more lay or clerical delegates at the Annual Council for the 100 year period from 1909-2010.
o Vestry members subscribed to the oath or declaration prescribed by Diocesan Canons, in at least each of the following years:
1874, 1876, 1877, 1880, 1889, 1890, 1894, 1899, 1902, 1908-1910, 1912-1915, 1918-1921, 1924, 1930, 1933, 1935, 1937, 1939-
1942, 1944-1962, 1964-1968, 1970-1980, 1983, and 1999.
As to St. Paul's, the Court would note the following additional facts:
o In 1834, Bishop William Meade consecrated the former courthouse that is now St. Paul's sanctuary as St. Paul's Episcopal
Church.
o In August 1984, St. Paul's celebrated its 150th anniversary as an Episcopal church. The [**206] Presiding Bishop, John M. Allin,
sent greetings.
o St. Paul's has provided Episcopal ministry to a number of communities in northern Virginia. An October 1, 1987 letter from its
Rector to Bishop Lee enclosed a brochure stating: "St. Paul's is a renewed parish of the Diocese of Virginia (Bishop Peter James
Lee), serving Haymarket, Gainesville, Buckland, Catharpin, Waterfall, Hickory Grove, Thoroughfare, and surrounding
communities within historic Haymarket Parish (1832)." (PX-STPAUL-107-003.)
o A letter dated August 27, 1990, from the Diocese to St. Paul's Senior Warden certifies to Post Office officials in connection with
St. Paul's bulk mailing permit "that St. Paul's has been an established church and parish of the Diocese of Virginia (Episcopal) since
1833." (PX-STPAUL-115.)
o In 1961, in accordance with Diocesan Canons, St. Paul's requested and received permission from the Diocese to incur
indebtedness to build a parish house. They did so again in 1968.
o When Grace Chapel had fallen into disrepair and become a safety hazard, St. Paul's obtained approval from the Diocese to
deconsecrate it and tear it down.
o In 1892, the vestry consulted with the Diocesan Bishop regarding a request [**207] by pastors of other denominations to use the
church for services. The vestry expressed concern that such use might "go in opposition to the Canons or the wishes of our Bishop."
(PX-STPAUL-007.)
As to Truro Church, the Court would note the following additional facts:
o Truro's 1998 Vestry Handbook, (PX-TRU-028), instructs vestry members [*192] to "have a thorough understanding of the
functions and operations of the Protestant Episcopal Church in the United States, the Diocese of Virginia, and Truro Episcopal
Church." Toward that end, Vestry members are "strongly encouraged" to "read, or at a minimum, review, the Constitution and
Canons for The Episcopal Church."
o Truro started four mission churches in the Diocese, pursuant to Diocesan canons and processes.
o When Truro lacked a Rector, the Diocesan Bishop assigned or approved a deacon or priest-in-charge. When it needed to hire
clergy, Truro obtained guidance from the Diocese, and used the resources of TEC and the Diocese. At various points in time, the
Bishop assigned and subsidized the costs of deacons and licensed clergy to assist Truro's Rectors.
o Since 1844, Bishops of the Diocese have regularly visited Truro.
o Bishops of the Diocese have [**208] consecrated Truro buildings on four separate occasions.
o Truro members have served as Diocesan deputies or alternates at TEC's General Conventions.
o Truro members have participated actively in Diocesan governance and have served in numerous leadership capacities, including
the service by one member as Chancellor of the Diocese for several years.
o In 1934 and 1974, Truro executed and delivered to the Bishops "Instrument[s] of Donation" in connection with the consecration
of new church buildings. These instruments are optional. They state, in part, that the instruments (i) "appropriate and devote [the
buildings] to the worship and service of Almighty God.... according to the provisions of the Protestant Episcopal Church in the
United States of America, in its Ministry, Doctrine, Discipline, Liturgy, Rites and Usages, and by a Congregation in communion
with said Church, and in union with the Convention thereof in the Diocese of Virginia," (ii) request that the Bishop "take the said
building under his spiritual jurisdiction;" (iii) "relinquish all claim to any right of disposing of said building, or allowing of the use
of it in any way inconsistent with the terms and true meaning of this [**209] Instrument of Donation, and with the consecration;"
and (iv) "certify ... that said building and ground are secured from danger of alienation from those who profess the Doctrine,
Discipline and Worship of the said Church, except as provided by laws and canons in such case applicable." Both instruments were
signed by the Rector and Register of the Vestry. While the parties dispute the legal enforceability of these Instruments of Donation,
their significance to the Court is not based on the presumption that they are legally enforceable transmittals of title but, rather, that
Page 734Page 734
they demonstrate the understanding of the parties that Truro Church's property was to be used for the "mission and ministry" of
TEC and the Diocese. (Diocese Brief #1 at 111.)
As to St. Stephen's, the Court would note the following facts:
o On April 30, 1881, Bishop Whittle consecrated its building as St. Stephen's Church.
o Bishops of the Diocese have visited St. Stephen's regularly and preached and/or confirmed, received, reaffirmed and/or baptized
one or more members in many years.
o The church and its leaders were aware of the Constitution and [*193] Canons of TEC and the Diocese, and complied with them
regarding incurring [**210] debt and encumbering property.
o Like the other six churches, St. Stephen's obeyed canonical rules regarding the vestry, wardens, meetings, and the duties and
prerogatives of Rectors.
o Rector Jeffrey Cerar's prepared remarks for the 2003 Annual Meeting stated, in part, as follows: "Given the canons of the
Episcopal Church and the Diocese of Virginia, we cannot just change our sign and no longer be Episcopalians." (PX-SSH-334)
o St. Stephen's had a policy governing use of the parish house, which incorporated "Episcopal Church Policy on Serving of
Alcoholic Beverages at a Local Parish" and required parish house users to sign a form stating, "If alcoholic beverages are to be
served, I have read and will comply with the Episcopal Church policy and St. Stephens policy." (PX-SSH-280.)
o The Senior Warden's Annual Report in 2004 contained a lengthy criticism of the actions of the 2003 General Convention but
nevertheless noted that "[t]wo person control over church collections was instituted in compliance with National Church
Guidelines." (PX-SSH-254.)
o St. Stephen's received financial assistance from both the Diocese and the Diocesan Missionary Society. St. Stephen's also made
financial contributions [**211] to the Diocese.
o Even though St. Stephen's was opposed to the 1979 Book of Common Prayer, it accepted the mandate to use the book in its
services.
o St. Stephen's Rector described the General Convention as "our national governing body" and as "the legislative body of our
denomination...." (PX-SSH-334; PX-SSH-174.)
o In the minutes of the vestry meeting in February 2005 (PX-SSH-137), it was reported that the Rector explained to the vestry the
meaning of the term "doctrines and discipline" of the Episcopal Church that is a part of the vestry oath: "'Discipline' refers to the
Constitution and canons of the Episcopal Church and the Diocese of Virginia, by which we are bound as a member of ECUSA."
As to St. Margaret's, the Court would note the following facts:
o As set forth in more detail in the deeds section, supra, St. Margaret's Episcopal Church grew out of the Diocese's "program for
church planting" in the early 1960's and began as an organized mission of the Diocese.
o When the vestry of St. Margaret's held its organizational meeting, it had the assistance of a Diocesan representative from the
Department of Missions, who provided substantial assistance in St. Margaret's early years. See [**212] Diocese Brief #1 at 143, fn.
46.)
o There are numerous references in St. Margaret's records to the distribution of and instruction concerning TEC's and the Diocese's
Constitution and Canons.
o The vestry minutes for May 2003 recorded the appointment of individuals "to serve as trustees of St. Margaret's Episcopal
Church, in accordance with the Constitution and Canons of the Protestant Episcopal Church in the United States of America and the
Constitution of St. Margaret's Episcopal Church." (PX-STMARG-261.)
o St. Margaret's complied with canonical rules regarding the sale or encumbrance of property, including the rules requiring the
consent of the Diocesan Bishop [*194] and Standing Committee.
o St. Margaret's recognized the controlling authority of TEC's and the Diocese's Constitution and Canons. See, e.g., PX-STMARG-
601 ("No action of the Stewardship Commission shall be authorized if it does not conform with National and Diocesan Canons");
PX-STMARG-677 (Notes to Financial Statements, stating: "St. Margaret's Episcopal Church is guided and directed by the
Constitution and Canons of the Protestant Episcopal Church of the Diocese of Virginia").)
o St. Margaret's received startup gifts from other [**213] Episcopal churches.
o St. Margaret's received substantial assistance from the Diocese when it needed to locate and employ a new rector or priest-in-
charge. In addition, Bishops of the Diocese visited St. Margaret's and installed its rectors.
o According to St. Margaret's First Annual Report to the Parishioners, dated September 30, 1980, the vestry approved a church
constitution "delineating purpose, organization, responsibility, and leadership of the church, under the authority of the Constitution
and Canons of the Protestant Episcopal Church in the Diocese of Virginia." (PX-STMARG-516.)
o There are various versions of St. Margaret's Constitution in the record, from 1980, 1982, 1986, 1995, 1999, and 2003. Each
version begins: "St. Margaret's Episcopal Church in Woodbridge, Virginia is guided and directed by the Constitution and Canons of
the Protestant Episcopal Church in the Diocese of Virginia."
o The 1995, 1999, and 2003 church Constitutions also describe the purpose of "Parish Organization" as "[t]o comply with the
Constitution and Canons of the Protestant Episcopal Church in the Diocese of Virginia...." and provide, further, that "[n]o
amendment contrary to canon law will be permitted [**214] to take effect." (PX-STMARG-698, 700, and 701.)
o St. Margaret's written Policies and Procedures state in their first paragraph: "No policy, procedure, or amendment thereto may be
adopted which conflicts with St. Margaret's Constitution, the Constitution and Canons of this Diocese, or the Constitution and
Canons of the Episcopal Church." (PX-STMARG-718, 719, and 724.) Similar provisions appeared in the By-Laws of St.
Margaret's Day School, approved by the Vestry in 1966.
o In every year between 1963 and 2006, a Bishop of the Diocese visited St. Margaret's.
Page 735Page 735
o The vestry oath was routinely taken by incoming vestry members. A Check List for Vestry Nominees (PX-STMARG-450)
included the requirement that vestry members "subscribe to the canonically required vestry declaration."
As to Church of the Apostles, the Court would note the following facts:
o As further described in the deeds section, supra, Church of the Apostles was formed as a mission of the Diocese in 1968, through
planning and coordination between the Diocese and Truro church.
o The deeds section, supra, also set forth the assistance provided by the Diocese in the formation and establishment of Church of
the Apostles.
o In 1985, the [**215] Church called the Rev. David Harper, a New Zealand priest. Bishop Lee accepted a letter dimissory for him,
issued a formal call to him "subject to the [*195] requirements of the Canons of The Episcopal Church," and installed him as
Rector in 1986.
o In "Submitted Questions and Rector's responses" for a congregational meeting in February 2004, Rector Harper acknowledged
the Diocese's interest in the church's property: "[p]arishes hold title to their buildings in trust for the diocese, which is the real
owner. Should a parish violate the canons in a way that brings it into conflict with the diocese....the diocese might very well claim
its rights to own, occupy, and use the property, including the church's assets, by suing the church." (PX-APOST-033.)
o The Church understood that it needed Diocesan approval for certain transactions regarding real property and repeatedly sought
such permission, including seeking approval to sell and encumber property.
o Apostles purchased copies of the Canons and, from 1985 through 2006, when Rev. Harper was Rector, he always had a copy of
the Canons.
o The Vestry handbook verified that the vestry would follow the Canons.
o The Church submitted parochial reports to [**216] the Diocese in every year from 1987 to 2005.
o The Church donated money to the Diocese in every year from 1968 to 2003. Apostles acknowledged that it had a "responsibility
to tithe to the next higher authority." (Apostles_Ex_013.012.)
As to Church of the Epiphany, the Court would note the following facts:
o Epiphany began through the efforts of the Diocese and Truro and began worshipping in 1986.
o In 1986, Epiphany petitioned the Annual Council for admission as a church under the Constitution and Canons of the Diocese.
The petition stated that the congregation was "a group of people which acknowledge and accept the doctrine, worship, and
discipline of the Protestant Episcopal Church and the jurisdiction of the Bishop or Ecclesiastical Authority of the Diocese of
Virginia." (PX-EPIPH-001.)
o Bishop Lee installed Epiphany's first rector, the Rev. Reardon, on February 1, 1987.
o As stated in the deed section, supra, the land upon which the Church was to be constructed was acquired from Glebe Properties at
no cost to the parish.
o Bishop Lee consecrated the church on April 23, 1989.
o Since its beginning, Epiphany was aware of its obligation to adhere to the Constitution and Canons of the Diocese. [**217] A
document signed by Rev. Reardon sometime during his tenure states that "[t]he Bylaws of The Church of the Epiphany (a non-
profit organization), are the Constitution and Canons of the Episcopal Church in the U.S.A. and the Constitution and Canons of the
Diocese of Virginia." (PX-EPIPH-014.)
o New By-Laws were adopted in May 2001 that state that Epiphany "is a constituent part of the Diocese of Virginia of [the
Episcopal Church] and is subject to the Canons of the Protestant Episcopal Church in the Diocese of Virginia." (PX-EPIPH-002.)
o Article VIII of the By-Laws, Id., concerns "Parish Property" and provides:
8.01 Ownership and Use: All Parish property assets and funds shall be owned and held by the Parish in trust for
the uses purposes [*196] and the benefit of the Diocese of Virginia of the Protestant Episcopal Church in the
United States of America.
8.04 Dissolution: In the event of dissolution of the Parish, all property assets and funds of the Parish and Parish
corporation shall be distributed exclusively for exempt purposes to the Diocese of Virginia of the Protestant
Episcopal Church in the United States of America.
o The notes to Epiphany's financial statement dated December 31, 2002, [**218] state: "the Church is a constituent part of the
Episcopal Church, U.S.A. and the Diocese of Virginia require the real property of all Episcopal parishes to be held in trust for the
national church and the Diocese even though the individual churches hold legal title for all other purposes." (PX-EPIPH-048.)
E. NEUTRAL PRINCIPLES OF LAW CONCLUSION

The Court concludes that TEC and the Diocese have carried their burden of proving that they have a contractual and
proprietary interest in the seven Church's properties at issue. In coming to this conclusion, the Court has carefully
considered the factual and legal arguments tendered by the CANA Congregations on these issues. Many of their
arguments are addressed elsewhere in this opinion. Others are addressed here:
Page 736Page 736
(1) CANA argues that it was the CANA Congregations and not TEC and the Diocese that fulfilled the responsibilities
"customarily associated with ownership, title, and possession," and who "exercise[d] dominion" over, and
"manage[d] and control[led]," the properties. See Green, 221 Va. at 555. (CANA Brief #1A at 2.)
It is undoubtedly true that the Episcopal congregations who held stewardship over these properties for generations
largely [**219] (but not exclusively) paid for the land and the buildings on the land out of congregant funds,
maintained the properties with congregant funds and their own labors, and preserved and improved the properties over
time. But that does not diminish at all the reality that TEC and the Diocese, through their Constitutions and Canons, and
through the direct involvement of the Diocese, its Bishop and its personnel, had pervasive and controlling involvement
in these churches and their properties. The power and authority that TEC and the Diocese held to forbid alienation of
property, to forbid encumbrance of property, to declare property abandoned and to take it over, to require oaths and
affirmances of fidelity to Constitutions and Canons containing numerous property provisions, to discipline and even
authorize removal of a Rector in control of property, to inspect the property, to require annual reports, to require audits
and other financial systems, are all indicia of dominion, management, and control.
[*197] (2) CANA argues that the CANA Congregations had the power to exclude third parties from access to their
property, including Diocesan representatives. (CANA Brief #1A at 2.)
That is true, but [**220] it must be evaluated in the context of the pervasive control which TEC and the Diocese
exercised over the seven churches.
(3) CANA argues that the Congregations exercised autonomy over their personal property, making contributions and
withholding contributions as they chose. Id.
The Court does not agree at all that the Congregations were truly autonomous with regard to their real and personal
property. When a denomination delegates or assigns authority to a local congregation, or reserves to a local
congregation certain powers, the exercise of that authority by that congregation does not constitute "autonomy." Thus, if
the Congregations had the power to withhold contributions, it was because the Constitutions and Canons of TEC or the
Diocese did not compel such contributions. What is directly at odds with this assertion of "autonomy" is the
indisputable fact that each Congregation within TEC and the Diocese was obligated to obey the Constitution and
Canons of TEC and the Diocese and to act only in accordance with these governing documents. The powers these local
churches exercised are not proof that the churches existed outside or beyond the hierarchy; rather, they are merely proof
of [**221] the way in which the hierarchy chose to organize and structure itself.
Although the CANA Congregations certainly do not deny the undeniable fact that these seven churches were a part of a
hierarchical denomination for decades and, in some cases for centuries, at every turn throughout their post-trial
pleadings they portray themselves as if they were an independent congregational-type church, free from hierarchy in
every pertinent respect. Their assertions of independence and autonomy, however, are contradicted by the overwhelming
body of evidence before this Court.
(4) CANA argues that TEC's own annotations to their Constitution and Canons indicate that the property Canons
are ineffective as a means of preventing alienation of property. Id. at 4.
TEC and the Diocese challenge whether any statement made in these annotations can be legally attributed to TEC or the
Diocese as admissions. More to the point, however, is this: It is for the Court -- not the annotators -- to determine the
legal significance attached to the Constitution and Canons as part of the "neutral principles of law" analysis. For
example, this Court has [*198] concluded that neither the Dennis Canon nor Diocesan Canon 15.1 creates [**222] a
denominational trust in the Commonwealth.
(5) CANA argues that neither TEC nor the Diocese made any material contribution toward the improvement of these
church properties and the land was acquired almost entirely without help from TEC or the Diocese.
The CANA Congregations are correct that it is the Episcopal church congregations, rather than TEC or the Diocese, that
largely paid for the properties and the improvements upon them. As Green makes clear, however, that does not control
the proprietary interest analysis. Indeed, if it were true that any proprietary interest claim asserted by a general church
could be defeated by proof that a local congregation paid for the property in question, or for most of the property in
question, or, for that matter, simply paid more than the general church paid, a Court would not need to apply a "neutral
principles of law" analysis to the controversy but, rather, simply apply its calculator and give judgment to the party who
Page 737Page 737
spent the most. That is not the law. And, while one can hypothesize that circumstances could exist in which a court
conducting a "neutral principles of law" analysis might conclude that some language in a deed, or in the terms [**223]
of the constitution of the general church, or in the course of dealings between the parties, established that they had, in
fact, defined their relationship in a way that attached dispositive significance to who spent the most amount of money,
here there is nothing in the deeds, the Constitutions or Canons of TEC and the Diocese, or in the course of dealings
between the parties, to suggest that is the case.
(6) CANA argues that if the Court does consider "course of dealing" evidence, it cuts in the CANA Congregations
'favor. The CANA Congregations assert that they "not only exercised dominion over the properties at issue by
purchasing, designing, building, improving, maintaining, mortgaging, zoning, leasing, managing, insuring,
possessing, using, and worshiping at them [but they] gave tens of millions of dollars to the Diocese, receiving a
pittance in return. 77 They selected their own rectors and staff. They chose their own Sunday school curricula,
education materials, and forms of worship. They designed their own liturgies. They set their own service schedules.
They secured copyrights and licenses for their worship music. They ran their own day schools. They designed and
carried out [**224] their own ministries and outreach. They operated their own youth programs. And they
commissioned their own missionaries -- all with little or no involvement of TEC or the Diocese. To be sure, the
Congregations used Episcopal hymnals and the Book of Common Prayer (materials for which they paid standard
rates), were occasionally visited by Episcopal bishops, respected [*199] Diocesan standards for incurring debt, and
received occasional spiritual input from denominational bishops." (CANA Brief #1A at 89.)
77 Elsewhere, the CANA Congregations describe the denomination's contributions to the local churches as the "proverbial drop in the
bucket." (CANA Brief #3, at 68.)
Thus is portrayed the denomination and the Diocese as essentially uninvolved bystanders in the life of the church, their
biggest contribution to the CANA congregations being to provide some hymn and prayer books and occasionally visit.
Yet this portrayal is wholly at odds with the lengthy recitation that precedes this section, which is itself only a small
sampling of almost 140 pages of detailed, documented indications of active involvement and participation in the life of
these churches, and the understanding and acceptance of those [**225] churches that they were part of a hierarchical
denomination and subject to its laws. (See Diocese Brief #1 at 56-194.) Put simply, the Court finds far more persuasive
TEC's and the Diocese's presentation on the course of dealings between the parties.
To be clear, the Court does not doubt that the congregations that held these churches over the years actually managed
the churches on a day-to-day basis and contributed most of the funds used to buy land, build sanctuaries and parish
houses and rectories, maintain them, and improve them. Nor does the Court doubt that the local congregations ran these
churches on a daily basis. Neither TEC nor the Diocese has claimed otherwise. (See CANA Brief #1A at fn. 52 and 53.)
Nor does the Court doubt CANA's chart indicating that since 1950, the seven churches contributed a total of $11.97
million to the Diocese. (CANA Brief #1A at 105-06. The salient point, however, is that none of this is inconsistent with
a hierarchical or connectional polity.
If CANA is correct, no hierarchy could have a proprietary interest based on "course of dealing" testimony, because the
circumstances CANA is focusing upon -- the local congregation's day to day management of [**226] the local church,
the local congregation's purchase of land and the construction of church buildings, and the local congregation's making
of contributions to its diocese -- are not at all inconsistent with a supercongregational polity. And, more to the point,
none of this evidence undermines the compelling evidence offered and accepted by this Court that TEC's and the
Diocese's course of dealings with the seven congregations strongly support their assertion of a contractual and
proprietary interest.
(7) CANA argues that the CANA Congregations' "affiliation with TEC and the Diocese was more of a burden than a
benefit." (CANA Brief #1A at Page 121.)
That this is a sincere expression of the CANA Congregations' view is hardly to be doubted, given their disaffiliation
from TEC and the Diocese. Nevertheless, it is not the province of a civil court to evaluate the "pluses [*200] and
minuses" of denominational affiliation, in general, or as applied to a particular denomination.
Page 738Page 738
(8) CANA disputes the Diocese's assertion that vestries are agents for the church. Rather, CANA argues that "[a]
closer analogy" of the relationship between the denomination and a local congregation is that between a
"franchisor [**227] and a franchisee." Thus, "McDonalds may dictate the restaurant's accounting practices,
layout, menu, promotions, prices, employee uniforms, employee training, and placement of the golden arches," and
a "franchisee [that] fails to do business in a prescribed manner ... may be enjoined from continuing to operate in
any manner that suggests an affiliation with the franchise, "but that does not mean "a disaffiliating franchisee will
forfeit any land it purchased with its own money in furtherance of the franchise relationship. " (CANA Brief #2 at
35-36.)
This analogy is not apt at any level. The nature of the relationship between a hierarchical denomination, its diocese, and
a local congregation is not analogous to that between a hamburger company and a hamburger outlet. The contributions
made by a diocese to a local church, especially one which begins as a diocesan mission, and the contributions made by a
local church to its diocese, is not analogous at any level to the fast food industry or its franchisees. The constitutional
and canonical requirements for serving as a rector or a member of a vestry, and the requirements governing the
alienation and encumbrance of consecrated and unconsecrated [**228] properties, and the role that lay leaders in a
congregation may play in the governance of the Diocese and even of the denomination, simply do not compare to the
business of running a McDonald's franchise. While it is true that "placement of the golden arches" may be no more
complicated than the placement of a street sign announcing the presence of an Episcopal Church, what lies behind that
sign is infinitely more complex.
***
When this Court considers the applicable statutes, deeds, the Constitution and Canons of TEC and the Diocese, and the
course of dealings between the parties, and applies "neutral principles of law" as established by United States and
Virginia Supreme Court precedent, it is clear -- indeed, to this Court, it is overwhelmingly evident -- that TEC and the
Diocese have contractual and proprietary interests in the real and personal property of each of these seven churches.
Simply put, the facts here are at least as compelling as the facts in Norfolk Presbytery and Green and therefore require
this Court to reach a similar judgment. Similarly, the facts here are at least as compelling as the facts before Judge
Stephenson and Judge Koontz in Buhrman and Wyckoff and warrant [**229] this Court in reaching the same result.
[*201] The CANA Congregations suggest that a ruling for the denomination would be to defer to the hierarchy "with a
vengeance." This Court disagrees. Rather, the finding here that TEC and the Diocese have a contractual and proprietary
interest in the property of these Episcopal churches is no more than a recognition that, while the CANA Congregations
had an absolute right to depart from TEC and the Diocese, they had no right to take these seven Episcopal churches
with them. 78
78 In light of this Court's determination that TEC and the Diocese have contractual and proprietary interests in the church property at issue,
the Court does not need to address TEC's and the Diocese's alternative "identity" approach to the resolution of church property disputes.
(TEC describes the identity approach as one that focuses on "who is the local church" and, in the case of a dispute involving a local church
that is part of a hierarchical denomination, resolves it by finding that the congregants who remain loyal to the denomination are entitled to
retain control of church property. (TEC Brief #1 at Page 47.) In support of this proposition, TEC cites Brooke, Hoskinson, and [**230]
Finley and notes that "when faced with the question, 'Who is the local church?' the Supreme Court of Virginia has consistently and
repeatedly answered: 'Those persons remaining loyal to the hierarchical denomination.'" (TEC Brief #1, at 49.))
VII. AMENDED COUNTERCLAIMS OF CANA CONGREGATIONS

The amended counterclaims, which were filed individually against TEC and the Diocese in January 2011 each sought
the same relief: (1) a declaration that each of the properties at issue were in the sole and exclusive ownership of their
respective congregation, free and clear of any claim of right or interest by TEC or the Diocese; (2) a claim for unjust
enrichment/quantum meruit, if the Court should determine that TEC or the Diocese had rights to the individual church's
real or personal property that were "superior or otherwise" to the rights of the CANA Congregation; and (3) a request
for imposition of a constructive trust on TEC or the Diocese, if the Court should determine that TEC or the Diocese had
rights to the individual church's real or personal property that were "superior or otherwise" to the rights of the CANA
Congregation.
This Court has already determined that TEC and the Diocese have contractual [**231] and proprietary interests in the
church properties and that the trustees must promptly convey the properties to the Diocese and the CANA
Page 739Page 739
Congregations must promptly relinquish control over the properties to the Diocese. In such an event, the Amended
Counterclaims seek recovery for unjust enrichment/quantum meruit and imposition of a constructive trust. TEC and the
Diocese moved to strike these Counterclaims but the Court took the motions under advisement in order to permit the
CANA [*202] Congregations to fully present their evidence. The Court now orders that these Counterclaims be
striken.
A. Unjust Enrichment/Quantum Meruit Counterclaim

[HN21] To state a cause of action for unjust enrichment, the counter-plaintiff must allege: (1) that he conferred a
benefit on the counter-defendant; (2) that the counter-defendant knew of the benefit and should reasonably have
expected to repay the counter-plaintiff; and (3) that the counter-defendant accepted or retained the benefit without
paying for its value. Schmidt v. Household Fin. Corp., 276 Va. 108, 116, 661 S.E.2d 834 (2008).
The CANA Congregations' evidence fails on all three elements. First, the Court agrees with the Diocese that "[t]he
unjust enrichment counterclaims [**232] ask the Court to hold that its own adjudication, applying the law of the
Commonwealth, would be unjust -- a contradiction and indeed an absurdity." (Diocese Brief #1 at page 49.) Second,
these seven churches were, and remain, Episcopal churches that are part of the Episcopal hierarchy. These churches no
more "unjustly enriched" the Diocese or TEC than the Diocese or TEC "unjustly enriched" the seven churches. The fact
that the Episcopal congregations that held stewardship over these churches purchased property with congregants' funds,
constructed churches with congregants' funds, improved these churches with congregants' funds, maintained these
churches with congregants' funds, and made substantial contributions to the Diocese over the years with congregants'
funds, in no way constitutes an "unjust enrichment." Indeed, this point is obvious when one considers the second
element of an unjust enrichment claim, i.e., that the defendant knew of the benefit and should reasonably have expected
to repay the plaintiff. There is no support in the evidence for the notion that TEC or the Diocese should "reasonably
have expected to repay" the individual congregations.
The Court also finds no merit [**233] in CANA's assertion that after disaffiliation the CANA Congregation unjustly
enriched TEC or the Diocese. From 2007 forward, the CANA Congregations have had the use and control of these
seven churches over the strenuous objection of TEC and the Diocese, as manifested not only by the resolution declaring
the property to be abandoned, not only by their unsuccessful effort to direct the trustees of the properties to convey them
to the Diocese, but by the filing of the instant litigation itself. If proof of unjust enrichment requires that a defendant
know of the benefit received and should reasonably have expected to repay it, the proof here is utterly lacking.
In short, before disaffiliation, the congregations were constituent members of TEC and the Diocese; whatever
contributions they made are not subject to recovery on a claim of unjust enrichment. After disaffiliation, any financial
outlays made by the congregations for maintenance, upgrades, improvements, etc., on properties which this Court now
holds should not [*203] have remained in the possession of non-Episcopal congregations in the first place, and
remained in their possession for the past five years over the vociferous objection of [**234] TEC and the Diocese, are
not subject to an unjust enrichment claim. 79
79 The Court would also note the assertion by TEC and the Diocese that no court considering a church property dispute has ever granted an
unjust enrichment claim. (TEC/DOV Brief #2 at 101.)
Having rejected CANA's unjust enrichment claim, the Court need not address the various arguments related to the
proper value to place on such a claim, including those arguments related to property appraisals, valuation dates,
maintenance and improvement costs, replacement value, and fair market value.
B. Constructive Trust Counterclaim

[HN22] Constructive trust is not a cause of action but, rather, a remedy "against unjust enrichment, usually after an act
of fraud, or breach of confidence or duty." Pair v. Rook, 195 Va. 196, 213, 77 S.E.2d 395 (1953). Here the Court finds
no unjust enrichment and there is no basis for consideration of a constructive trust.
VIII. FALLS CHURCH ENDOWMENT FUND

Page 740Page 740
This Court has previously had two occasions upon which to address issues related to the Falls Church Endowment
Fund. 80 In the Court's Letter Opinion of October 17, 2008, see In Re: Multi-Circuit Episcopal Church Property
Litigation, 76 Va. Cir. 975 (2008), the Court provided [**235] this brief description of the Fund:
The Endowment Fund is a non-profit corporation, organized in 1976, whose "main purpose" is "to further the ministry and outreach
of the Christian Church." (Articles of Incorporation of the Endowment Fund at Page 1.) The Articles provide that the membership
of the Corporation is comprised of two classes. Class A members are individuals serving as the vestry of TFC [The Falls Church].
Class B members are members of the parish who are eligible to vote for the vestry at TFC's annual meeting. According to the
Articles, Class A members -- i.e., the vestry of TFC --have the duty of electing Directors of the Endowment Fund.
Id. at 975. 81 The sole question before the Court is which vestry -- that of the CANA congregation or that of the
Episcopal "continuing congregation" recognized by the Episcopal Diocese of Virginia -- has the power and duty to elect
the directors of the Fund.
80 See 76 Va. Cir. 975; see also 76 Va. Cir. at 986. The question before the Court in these two decisions was whether the Fund was subject to
The Falls Church's §57-9(A) petition. The Court summarized the position of the parties as follows:
The Diocese and TEC argue that because the Endowment [**236] Fund is a corporation, because it is a distinct legal
entity from TFC, because its Directors are appointed by the vestry of TFC rather than by its trustees, and because TFC
cannot have a 'personal property' interest in a charitable non-profit entity, there is no basis for a finding that its property is
subject to TFC's 57-9(A) petition. TFC does not dispute a number of these assertions. It agrees that the Endowment Fund
is a corporation, that it has a distinct legal existence, that its assets are not property held by TFC's trustees, that its
directors are not elected by TFC's trustees, and that it is indeed a charitable non-profit entity. TFC asserts, however, that it
does have a 'personal property' interest in the Endowment fund that brings the Endowment Fund within the scope of its
57-9(A) petition.
76 Va. Cir. 975. The "personal property" interest asserted by TFC was the power of the vestry to appoint the Endowment Fund's Directors.
On December 19, 2008, the Court ruled that the power to appoint Directors to [*204] a charitable, non-stock, non-profit corporation is not a
'personal property' interest. 76 Va. at 986. Therefore, the Court held that the Endowment Fund was not subject to The [**237] Falls Church's
§57-9(A) petition and would be reserved for resolution in the Declaratory Judgment actions. Id.
81 Specifically, the Endowment Fund's Articles of Incorporation provide, in part, "Membership shall be comprised of Class A and Class B
members, as described below: A. Class A members shall be those individuals who are members of the vestry of The Falls Church, Episcopal
Church. B. Class B members shall be those members of the parish who are defined as eligible to vote for the vestry at each of the annual
meetings of The Falls Church." (DX-FALLS-367-002.) The By-Laws of the Endowment Fund are also instructive. Article I §2 of the By-
Laws provides, "None but members of The Falls Church, Protestant Episcopal Church, Falls Church, Virginia, shall be members of the
Board of Directors." Article I §3 of the By-Laws provides, in part, "The Directors shall be elected by the vestry of The Falls Church,
Episcopal Church, as set forth in Articles of Incorporation." (PX-FALLS-368-001.) (See Diocese Brief #1 at 79-80.)
TEC and the Diocese's position is that the issue has been resolved by the fact that the Annual Council of the Diocese has
seated the delegates elected by the Vestry of The [**238] Falls Church (Episcopal) at every meeting of Annual Council
since 2007, and that "a civil court may not second-guess or review that decision." See Diocese Brief #1 at 80.)
The Falls Church makes six arguments in support of the position that it is the CANA congregation whose vestry now
has authority to appoint the Endowment Fund's directors: (1) The Endowment Fund has historically been funded
primarily by contributions from TFC and its congregants; [*205] (2) The Endowment Fund has consistently been
described as one method of donating to The Falls Church or supporting its ministry; (3) The Falls Church's annual
reports have described the Endowment fund as "formed in 1975 to administer bequests to The Falls Church" and as a
way to contribute to The Falls Church; (4) The Endowment Fund's audited annual financial statements for the years up
to 2006 were consolidated with The Falls Church's annual audited financial statements; (5) In The Falls Church
consolidated audited financial statements, the Endowment Fund was "treated" as a "subsidiary" and a "ministry" of The
Falls Church and the Endowment Funds' assets were treated as assets of the consolidated operation; and (6) Even with
the vote to disaffiliate [**239] imminent, the five directors of the Endowment Fund in November 2006 voted
unanimously to recommend to the vestry of The Falls Church the reappointment of two directors, thus acknowledging
that vestry's control over the appointment of directors.
The Court does not find any of CANA's arguments persuasive, for several reasons:
First, this Court has already determined that it is the Diocese -- not the CANA Congregation -- that has control and
ownership over The Falls Church. In other words, it is the Diocese that owns the church whose vestry is charged with
appointing the Endowment Fund's directors.
Page 741Page 741
Second, to the extent that the CANA brief makes it clear that the Endowment Fund is closely linked to and associated
with The Falls Church --even to the point of noting that the church's consolidated audited financial statements "treat[]
the fund as a subsidiary and a ministry of The Falls Church," The Falls Church's Opening Post-Trial Brief Regarding the
Falls Church Endowment Fund at 3 -- it would make little sense to hold that the Diocese controls and owns The Falls
Church but it is the CANA Congregation that controls and owns this closely-related entity.
Third, the Court rejects The Falls Church's [**240] assertion that the multiple references in the governing documents of
the Endowment Fund to "The Falls Church, Episcopal Church" and "The Falls Church, Protestant Episcopal Church"
are merely a description identifying the church, rather than a substantive reference to its character as a constituent
member of the Episcopal Church. In fact, these references make it clear that the vestry that is authorized to elect
directors is an Episcopal Church vestry, not a vestry of a different denomination. Since it is beyond dispute that the
CANA Congregation is no longer a member of the Episcopal denomination, its' vestry no longer has the authority to
elect the Endowment Fund's directors.
Fourth, the bylaws of the Endowment Fund are explicit as to who may serve as directors: "None but members of The
Falls Church, Protestant Episcopal Church, Falls Church, Virginia, shall be members of the Board of Directors." The
CANA Congregation is not a Protestant Episcopal Church; its vestry is not a vestry of a Protestant Episcopal Church. To
hold that it [*206] is the CANA Congregation that has the authority to elect the Endowment Fund's directors would
essentially be to hold that the CANA Congregation may elect [**241] the Endowment Fund's directors so long as they
do not select any of their own members.
Therefore, the Court finds that it is The Falls Church (Episcopal) -- the congregation recognized by the Diocese as The
Falls Church's Episcopal congregation -- whose vestry has the power, authority, and duty to elect Directors to the
Endowment Fund.
One more point should be stated regarding this matter. In making this decision, the Court categorically rejects The Falls
Church's assertion that to rule for the Diocese is to "exalt semantics over substance." 82 In the §57-9 litigation, this Court
was persuaded by the CANA Congregations -- over the strenuous objections of TEC and the Diocese -- that a major
division had occurred within The Episcopal Church. 83 The Falls Church congregation disaffiliated from The Episcopal
Church precisely because of this major division and it became a CANA Congregation as a direct consequence of this
major division. Thus, and contrary to The Falls Church's assertion in its opening brief on the Endowment Fund, it is not
"exalt[ing] semantics over substance" to attribute significance to a "particular name" and a "particular affiliation." What
this Court previously described [**242] as the "profound and wrenching" decision of each of these congregations to
renounce their affiliation with TEC and to affiliate with CANA cannot under any conceivable construct be termed a
matter of "semantics." Indeed, it is just the opposite, for the Court's decision attributes dispositive significance to the
fact that, while the CANA Congregation is still called "The Falls Church," it is no longer an Episcopal entity.
82 The Concluding paragraph of The Falls Church's Opening Post-Trial Brief Regarding The Falls Church Endowment Fund, at Page 10,
reads as follows:
At heart, the conflict here is over whether the purpose of the vestry of The Falls Church in establishing the Fund in 1976
was to ensure that the Fund supported and was controlled by a specific congregation -- The Falls Church -- or by any
congregation (including one that did not yet exist at that time) so long as the congregation had a particular name and a
particular affiliation. To adopt the second perspective would exalt semantics over substance and contravene the governing
documents of the Fund and thirty years of actual practice by the Fund and The Falls Church. TFC respectfully submits
that the first perspective correctly [**243] focuses on the continuity of the church -- TFC is the same church that
originally established the Fund in 1976 and must continue to exercise the same right to appoint directors that it exercised
for more than thirty years.
83 Much of the §57-9(A) litigation concerned whether, in fact, there was a division within TEC and the Diocese of such dimension as to
permit invocation of §57-9(A). The Court concluded as follows:
[I]t blinks at reality to characterize the ongoing division within the Diocese, ECUSA, and the Anglican Communion as
anything but a division of the first magnitude, especially given the involvement of numerous churches in states across the
country, the participation of hundreds of church leaders, both lay and pastoral, who have found themselves "taking sides"
against their brethren, the determination by thousands of church members in Virginia and elsewhere to "walk apart" in the
language of the Church, the creation of new and substantial religious entities, such as CANA, with their own structures
[*207] and disciplines, the rapidity with which the ECUSA's problems became that of the Anglican Communion, and the
consequent impact -- in some cases the extraordinary impact -- on its provinces [**244] around the world, and, perhaps
most importantly, the creation of a level of distress among many church members so profound and wrenching as to lead
Page 742Page 742
them to cast votes in an attempt to disaffiliate from a church which has been their home and heritage throughout their
lives, and often back for generations. Whatever may be the precise threshold for a dispute to constitute a division under
57-9(A), what occurred here qualifies.
76 Va. Cir. 785, 872.
IX. CONCLUSION
For the reasons stated above, the Court finds for TEC and the Diocese in the Declaratory Judgment actions and against
each of the seven CANA Congregations. The trustees of the churches must, therefore, promptly convey the properties to
the Diocese and the CANA Congregations must promptly relinquish control over the properties to the Diocese. Further,
the Court finds the Amended Counterclaims to be without merit and grants TEC's and the Diocese's Motions to Strike
the claims for unjust enrichment, quantum meruit, and constructive trust. Further, the Court finds that the Vestry
entitled to elect the directors of the Falls Church Endowment Fund is the Falls Church Episcopal congregation
recognized by the Diocese.
It remains to determine [**245] the disposition of the personal property of the seven churches. Virginia Code §57-10
provides as follows:
[HN23] When personal property shall be given or acquired for the benefit of an unincorporated church or religious body, to be
used for its religious purposes, the same shall stand vested in the trustees having the legal title to the land, to be held by them as the
land is held, and upon the [*208] same trusts or, if the church has created a corporation pursuant to §57-16.1, to be held by it as
its land is held, and for the same purposes.
Thus, the disposition of the personal property of these churches follows the disposition of the real property of these
churches, that is to say, it must also be turned over to the Diocese. There is a significant caveat to this, however, and it
arises from the fact that there came a point in time when it was absolutely clear that a contribution or donation or the
payment of membership dues to one of the seven congregations was not a contribution to an Episcopal congregation.
Therefore, the personal property acquired by the CANA congregations after this point in time should remain with the
CANA congregations. There are four possible points in time which the Court [**246] has considered:
First, the Court has considered using as a point of demarcation the various points in time when the congregations made
varying arrangements to withhold contributions from the Diocese. 84 Putting aside the accounting difficulties in applying
these various dates to the various circumstances, and whether it would even be possible to account for the individual
choices of parishioners where they were given the opportunity to designate, there is a much more dispositive objection
to using this as the point of demarcation: Whatever may have been the level of discord and disenchantment with TEC
and the Diocese, each of the seven churches in 2003, 2004, 2005, and through most of 2006 remained Episcopal
churches, constituent members of the Diocese and TEC.
84 According to CANA, "all of the CANA Congregations curtailed or terminated their donations to the Diocese in response to the actions of
the denomination at its 2003 General Convention." (CANA Brief #1A at 159.) Congregants were given the opportunity to designate that no
portion of their title should go to the Diocese; or the congregation stopped giving money to the Diocese entirely; or the congregation
established a congregation [**247] only fund. Id. at fn. 120.
Second, the Court has considered using as the point of demarcation the date upon which each of the CANA
Congregation voted to disaffiliate pursuant to §57-9(A)(December 2006-January 2007). (Alternatively, the Court could
use the date when each congregation filed its §57-9(A) petition.) Here, too, there are significant problems: first, it has
now been conclusively determined that §57-9(A) is inapplicable to these proceedings; second, it is not the act of taking
a vote, or even the filing of a petition, that renders a decision to affiliate with a different denomination final and
conclusive -- rather it is the Court's approval of the petition. That did not come until January 8, 2009, and in any event
was reversed by the Virginia Supreme Court.
Third, the Court has considered using as the point of demarcation the Diocese's January 22, 2007 Notice of Inhibition,
or January 22, 2007 resolution determining the properties to have been abandoned, or the [*209] August 1, 2007
Notice of Removal. While arguments could be made in support of each of these dates, especially the January 22, 2007
resolution declaring the properties to be abandoned, they do not have the public notice [**248] character of the fourth
possibility, which is the one this Court adopts.
Page 743Page 743
This fourth possibility, which this Court adopts as the point of demarcation, is the filing date of the Declaratory
Judgment actions by the Diocese against each congregation on either January 31, 2007 (involving five of the
congregations) or February 1, 2007 (involving the two remaining congregations). After this date, no contribution made,
no donation made, no dues paid by a congregant, could reasonably have been made with the understanding that the
money was going to Episcopal congregations. (While the seven churches, for the reasons stated in this opinion, never
lost their character as Episcopal churches, the Court's focus here is on the actions taken by -- and the Declaratory
Judgment actions filed against -- the CANA congregations.)
Therefore, the Court orders that all personal property acquired by the congregations before January 31, 2007 or
February 1, 2007 (depending on the congregation) shall be conveyed to the Diocese and all liquid personal property
(e.g., contributions and donations of money) acquired after these dates shall remain with the CANA Congregations. As
to tangible personal property acquired [**249] by the CANA Congregations after these dates, they shall be conveyed to
the Diocese unless the CANA Congregations can establish that they were purchased solely with funds acquired after
these dates or were donated to the CANA Congregations after these dates. 85
85 As to the argument that the CANA Congregations should not have to convey to the Diocese funds on hand as of January 31, 2007 because
such funds were used to maintain the church facilities since then, the Court would note the obvious fact that the CANA Congregation had the
use of the property since that point in time as well.
TEC and the Diocese seek an accounting as part of their requested relief. To the extent an accounting is necessary to
implement the Court's orders, an accounting is ordered.
/s/ Randy I. Bellows
Randy I. Bellows

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Page 1

CITY OF PHILADELPHIA, TRUSTEE UNDER THE WILL OF STEPHEN

No. 102 MAP 2011

SUPREME COURT OF PENNSYLVANIA

622 Pa. 581; 81 A.3d 24; 2013 Pa. LEXIS 2547

May 9, 2012, Argued

PRIOR HISTORY: [***1]

Evidence > Procedural Considerations > Burdens of Proof > Allocation

Governments > Local Governments > Administrative Boards

Estate, Gift & Trust Law > Trusts > Administration

Governments > Local Governments > Administrative Boards

Constitutional Law > Bill of Rights > State Application

Governments > Local Governments > Administrative Boards

Estate, Gift & Trust Law > Trusts > Administration

Governments > Local Governments > Duties & Powers

Governments > Local Governments > Property

Governments > Local Governments > Property

Governments > Local Governments > Administrative Boards

Governments > Local Governments > Administrative Boards

Governments > Local Governments > Property

OPINION BY: CASTILLE

33 Pa. 9, 1859 WL 8661 at **9-10.

74 U.S. 1, [WL] at *1 (syllabus).

74 U.S. at 15 (citations omitted).

64 Pa. 169, 1870 WL 8678 at *12 (citations omitted).

13 The citation to Ogontz apparently referenced the following analysis:

353 U.S. at 231.

15 The current legislation reads as follows:

[**41] II. The Litigation Below

612 Pa. 481, 31 A.3d 654 (Pa. 2011).

III. The Parties' Arguments

IV. Immunity From Local Real Estate Taxation

A. Decisional Law Background

[*628] A. The Girard Trust and College

V. Exemption From Local Taxation

CONCUR BY: SAYLOR

Mr. Justice Baer joins this concurring opinion.

SANDY N. WEBB, Plaintiff, v. GREEN TREE SERVICING, LLC, Defendant.

Civil Action No. ELH-11-2105

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

2013 U.S. Dist. LEXIS 140205

September 30, 2013, Decided

COUNSEL: [*1] Sandy N. Webb, Plaintiff, Pro se.

JUDGES: Ellen Lipton Hollander, United States District Judge.

OPINION BY: Ellen Lipton Hollander

A. Facts Alleged in the Amended Complaint

B. Undisputed Material Facts15

A. Summary Judgment Standard

1. Request for Admissions

The effect of an admission is specified in Fed. R. Civ. P. 36(b):

2. Hearsay, Relevance, and Authentication

C. Tortious Interference with Business Relationships

D. Breach of Contract and Trespass to Land

(A) Late Charge for Overdue Payments

(C) Notice of Default

An Order implementing my rulings follows.

In Re: DAVID TODD LEONARD and MICHELLE LEIGH LEONARD,

CASE NO. 09-20190, CHAPTER 7, ADV. NO. 09-6043

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS

2013 Bankr. LEXIS 4045

September 26, 2013, Decided

NOTICE: FOR ELECTRONIC PUBLICATION ONLY

Estate, Gift & Trust Law > Trusts > Creation

Estate, Gift & Trust Law > Trusts > Creation