Tag: Fifth Circuit

Intra-Class Conflict Dooms Auto Insurance Class Action in Fifth Circuit

Last week the Fifth Circuit issued a short opinion that made an important point that does not arise often in class certification decisions. Class certification failed because the plaintiffs’ proposed theory of liability would benefit only some class members and disadvantage others, who would be overpaid if the plaintiffs’ theory were correct. For that reason alone, the plaintiffs could not adequately represent the class.

Prudhomme v. Government Employees Insurance Company, No. 21-30157, 2022 WL 510171 (5th Cir. Feb. 21, 2022) (per curiam) was similar to another case I recently wrote about—the plaintiffs claimed that their insurer undervalued their vehicles that were deemed total losses, in violation of Louisiana statutes. Sidestepping questions about commonality and predominance, which are usually the focus of class certification decisions, the Fifth Circuit affirmed the denial of class certification because the adequacy of representation requirement was not met. This was because “a portion of the proposed class members received payments above (that is, benefitted from) the allegedly unlawful valuation.” According to the district court opinion, an expert witness opined that approximately one-fifth of the class would have received less on the plaintiffs’ theory than they received from GEICO. While the plaintiffs argued that class members who were overpaid on their theory might still be entitled to some damages under Louisiana law, that would likely create a typicality problem. Class representatives cannot adequately represent a class if they offer “a theory of liability that disadvantages a portion of the class they allegedly represent.”

Look out for this type of issue the next time you are litigating a class action. It might be lurking in your case when you peel back the onion.

Copyright © 2022 Robinson & Cole LLP. All rights reserved.
For more articles about class-action lawsuits, visit the NLR Litigation section.

5th Circuit Rejects Request from United Airlines Employees to Block Company’s COVID-19 Vaccine Mandate

In a decision from the New Orleans-based Fifth Circuit, in a bid to block the company’s COVID-19 vaccine mandate, a divided court rejected an emergency request for an injunction from United Airlines employees. The request came in the wake of a November ruling by a federal judge in Fort Worth, Texas, which also ruled in favor of United Airlines.

United Airlines was the first major air carrier to implement a vaccine mandate and has so far granted about 2,000 exemptions. Its policy would place on unpaid leave any employees who fail to get the COVID-19 vaccine (and who fail to qualify for an exemption). The key question, in this case, is the extent to which United Airlines has accommodated employees’ religious or medical exemptions. The six plaintiffs claim that United Airlines’ policy is a violation of Title VII of the Civil Rights Act of 1964, which, among other things, requires employers to make reasonable accommodations for all aspects of an employee’s religious beliefs, absent “undue hardship on the conduct of the employer’s business.”

While the Fifth Circuit did not rule on the merits, two of the three judges denied the motion for an injunction citing previous decisions but did not offer any additional reasoning. Judge James C. Ho dissented asserting that the mandate placed a substantial burden on one’s religion and calling the harm a “quintessentially irreparable injury, warranting preliminary injunctive relief.” The Fifth Circuit did, however, grant a request from the plaintiffs for an expedited appeal. That hearing and the court’s decision should provide some guidance on the legal constraints and guidelines for COVID-19 vaccine mandates.

This article was written by Nelson Mullins attorneys Mitch Boyarsky and Benjamin Lichtman. For more articles regarding vaccine mandate challenges, please click here.

The Tail of a Dog with Two Hats: Fifth Circuit Upholds “Golden Share” Held by Creditor Affiliate

On May 22, 2018, the United States Court of Appeals for the Fifth Circuit issued its decision in Franchise Services of North America v. United States Trustees (In re Franchise Services of North America), 2018 U.S. App. LEXIS 13332 (5th Cir. May 22, 2018). That decision affirms the lower court’s holding that a “golden share” is valid and necessary to filing when held by a true investor, even if such investor is controlled by a creditor.

The backdrop of mergers and acquisitions leading up to this case need not be retold in detail to understand the holding’s significance, but some context is helpful. Franchise Services of North America, Inc. (“FSNA”), one of North America’s largest car rental companies, filed for chapter 11 bankruptcy without the required consent of its sole holder of preferred stock, Boketo, LLC (“Boketo”). Boketo was a minority shareholder that had invested $15 million in FSNA  making it FSNA’s single largest investor. Boketo is a wholly-owned subsidiary of investment bank Macquarie Capital (U.S.A.) (“Macquarie”), an unsecured creditor of FSNA’s by virtue of an alleged $3 million claim for fees incurred in connection with the aforementioned transactions. When Boketo invested $15 million in FSNA, it required FSNA to re-incorporate in Delaware and add a “golden share” provision to its corporate documents, i.e. Boketo’s affirmative vote of its preferred share was required for certain corporate events, such as filing bankruptcy. Nonetheless, FSNA eventually filed for chapter 11 in the Southern District of Mississippi without seeking Boketo’s consent, fearing that shareholder Boketo—controlled by creditor Macquarie—would not consent to filing.

Macquarie and Boketo filed motions to dismiss the case for a lack of corporate authority under FSNA’s amended corporate charter. In doing so, Macquarie donned two hats—that of a shareholder through Boketo and that of an unsecured creditor with a $3 million claim. FSNA asserted that Macquarie used Boketo as a “wolf in a sheep’s clothing” to equip a creditor with shareholders’ blocking rights under an allegedly unenforceable “blocking provision” or “golden share.” FSNA implied the tail had been wagging the dog—that Macquarie made the $15 million investment through Boketo to avoid the cost and inconvenience of trying to collect some portion of its $3 million claim in FSNA’s bankruptcy. The bankruptcy court denied Macquarie’s motion because case law and public policy forbid a creditor from preventing a debtor’s bankruptcy filing. However, it granted Boketo’s motion, given its status as a voting shareholder. The Fifth Circuit affirmed, and found FSNA’s theory that Macquarie chased $3 million with $15 million “strain[ed] credulity.”

FSNA’s various legal arguments each fell flat. First, FSNA sought a ruling that “blocking provisions” or “golden shares” (similar, but not identical, concepts), in general, are unenforceable under Delaware law. The Fifth Circuit declined to offer such an advisory opinion. Second, FSNA contended that even if Delaware law allowed these types of provisions, federal policy forbids them. This, too, failed to move the court, since the corporate charter did not eliminate FSNA’s ability to file bankruptcy. Instead, it specified which parties’ consent was necessary to authorize a bankruptcy filing, placing the decision with shareholders. Third, because authority to file bankruptcy is a matter of state law, FSNA argued that Boketo could not exercise its blocking right under Delaware law, and that Boketo had owed a fiduciary duty to facilitate the filing. The Fifth Circuit held that Delaware law, flexible by nature, allows a corporate charter to assign rights to shareholders that would ordinarily be assigned to directors/management, but declined to go so far as to determine whether such provision was valid under Delaware law. In addition, the court refuted FSNA’s fiduciary duty argument because only controlling minority shareholders owe fiduciary duties, and here, Boketo was a non-controlling minority shareholder. The court explained that the standard for minority control is a “steep one,” and that courts focus on control of the board—i.e., whether the minority shareholder can exert actual control over the company. While Boketo made a sizeable investment in FSNA, it only had the right to appoint 2 out of 5 directors and therefore could not exert actual control over the board. FSNA pointed to Boketo’s hypothetical ability to prevent bankruptcy as evidence of actual control, but the court distinguished such theoretical control from actual exertion thereof. The court keenly noted that FSNA defeated its own control argument when it filed bankruptcy without Boketo’s consent—if Boketo was a controlling shareholder, then once again the tail must have been wagging the dog.

Franchise Services highlights the potential for a creditor to essentially step into a shareholder’s shoes and assert shareholder rights pursuant to a corporate charter’s blocking provision or “golden share” by virtue of wearing two hats through a parent and subsidiary.

© 2018 Bracewell LLP.

This post was written by Logan Kotler and Jason G. Cohen of Bracewell LLP.

Texas Judge Not Persuaded, Permanently Enjoins DOL’s New Reporting Rule

Stop, Rain, DOL Persuader ruleIn a major victory for the business community, Judge Sam R. Cummings of the U. S. District Court for the Northern District of Texas issued a permanent nationwide injunction blocking the Department of Labor (DOL) from enforcing its new “persuader” rule. National Federation of Independent Business, et al. v. Perez, et al., Case No. 5:16-cv-00066. The rule attempted to expand disclosure requirements by employers and their consultants (including attorneys) related to union-organizing campaigns.

The new rule, which Judge Cummings had preliminarily enjoined prior to its effective date of July 1 of this year, would have greatly increased the reporting requirements under Section 203 of the Labor Management and Reporting Disclosure Act. That section requires employers and their labor relations consultants to disclose the terms (including financial terms) of any arrangement by which the consultant provides services that are intended to directly or indirectly persuade employees concerning their rights to organize a union or to bargain collectively with their employer.

For years, the DOL took the position that no reporting was required unless the consultant had direct contact with employees by way of in-person meetings, telephone calls, letters, or emails. Similarly, no reporting was required if the consultant’s activities were limited to providing sample materials such as speeches, postings, letters to employees, and the like that the employer was free to accept, reject, or modify.

However, the new persuader rule expanded the disclosure requirements to include indirect contact with employees by the consultant, including:

  • Directing, planning, or coordinating the efforts of managers to persuade employees

  • Providing materials such as speeches, letters, or postings that are intended to persuade employees

  • Conducting union avoidance seminars if the consultant assists the employer in developing anti-union strategies

  • Developing personnel policies intended to persuade employees in the exercise of their organizational or collective bargaining rights.

The attorneys general for 10 states as well as various business groups challenged the new rule as infringing on employers’ First Amendment rights and conflicting with the attorney-client privilege. Judge Cummings agreed that the rule is unlawful and should be set aside. Presently, it is unknown if DOL intends to appeal Judge Cummings’ order.

ARTICLE BY Henry W. Sledz Jr. of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

Breaking News: Refusing to Allow an Employee to Rescind His Or Her Voluntary Resignation Can Get You Sued

Here is the scenario. Your employee decides to voluntarily resign. She gives plenty of notice. Before her scheduled end date, the employee provides information relevant to a sexual harassment investigation involving her supervisor. Before the scheduled end date, the employee tries to rescind her employment. The supervisor refuses. Here’s the question: Is the refusal to allow the employee the opportunity to rescind her resignation an “adverse employment action” for purposes of a retaliation claim?

It could be, at least according to the Fifth Circuit Court of Appeals. A similar scenario played out in Porter v. Houma Terreboone Housing Authority. According to the court:

“Just as an at-will employer does not have to hire a given employee, an employer does not have to accept a given employee’s rescission. Failing to do so in either case because the employee has engaged in a protected activity is nonetheless an adverse employment action.”

This is something employers need to be aware of. Remember: thoroughly investigate all work place harassment claims. Also, separate the subject of the investigation from any decisional process regarding the employee’s employment. In a perfect world, the decision-maker would not have any knowledge regarding the employee’s “protected activity.”

Article By Peter T. Tschanz of Barnes & Thornburg LLP

© 2015 BARNES & THORNBURG LLP

Fifth Circuit Rules Employer-Mandated Transit Time May Make Lunch Break Compensable

The Fifth Circuit Court of Appeals, which has jurisdiction over Texas, Louisiana and Mississippi, ruled recently that security guards’ “off-the-clock” meal periods may be compensable when they were required to travel for 10 to 12 minutes from their work stations to get their meals.  Naylor v. Securiguard, Inc., No. 14-60637 (5th Cir. Sept. 15, 2015) available here.

The private security guards in Naylor were required to leave their work sites and travel to other locations for meals or breaks in order to preserve the appearance of the worksite. The court reasoned that a jury could find this mandated transit time predominately benefited the employer, rather than the employee, making it compensable under the Fair Labor Standards Act (“FLSA”).

The court noted that, when this mandated round trip travel time to break areas was only a few minutes in duration, it is “de minimis” and would not transform the 30-minute break to compensable time. However, at some point, employer-mandated travel time during an employee’s lunch break shortens the length of the break enough to make it a compensable “rest” period. Under the FLSA, “rest” periods of 20 minutes or less are generally compensable because they are considered to benefit the employer by rejuvenating the employee. Ten to twelve minutes of transit time cut too much into the “lunch breaks.”

Significantly, the court did not set a bright line rule for the precise number of transit minutes an employer may require away from the work station during a lunch break before the entire break becomes compensable.

The conversion to compensable time may entitle the employees to both compensation for the 30-minute meal periods and resultant weekly overtime once that time is added to other hours worked.

The ruling also raises questions of whether the mandatory transit time rationale applies to breaks required in other contexts, such as offsets to “30-minute” break requirements under collective bargaining agreements or state laws, or to other break activities, such as clothes changing, going through security or reassigning equipment. Providing employees written notice of which break-related activities are required and clearly stating their options to eat meals and engage in other break activities without mandatory transit or other activities that may reduce their meal periods might preclude any such issues.

Article By Robert E. Sheeder, Nancy M. O’Connor & Clayton M. Davis of Bracewell & Giuliani LLP

© 2015 Bracewell & Giuliani LLP

Fifth Circuit Refuses Application of Bright-Line Test in FLSA Seaman Exemption Dispute

Proskauer Law firm

On November 13, 2014, the Fifth Circuit addressed the uncertainty stemming from its decision in Owens v. SeaRiver Maritime, Inc., 272 F.3d 698 (5th Cir. 2001), wherein the Court found that a plaintiff’s unloading and loading of vessels was considered “nonseaman” work subject to the Fair Labor Standards Act’s (“FLSA”) overtime requirements. Subsequent to that decision, plaintiffs have advocated for a broad application of Owens’s rule, and district courts struggled with Owens’s  application to what are often fact-driven cases.

The Fifth Circuit provided necessary clarity in Coffin v. Blessey Marine Services, Inc., No. 13-20144, 2014 WL 5904734 (5th Cir. Nov. 13, 2014), when it reversed the district court on an interlocutory appeal and held that vessel-based crewmembers tasked with loading and unloading vessels are seamen under the FLSA rendering them exempt from the FLSA’s overtime requirements under 29 U.S.C. § 213(b)(6). In so ruling, the Fifth Circuit limited its prior holding in Owens, by finding that the unloading and loading of vessels is not strictly “nonseaman” work, and that each individual and case must be analyzed under a facts-and-circumstances test. Significantly, in dicta, the Court intimated that the Department of Labor’s “twenty percent rule,” which states that an employee loses his seaman status when “nonseaman” work occupies over twenty percent of his time, is also not a bright-line test.

Plaintiffs are tankermen who lived and worked aboard Defendant’s vessels. Though the parties and the court agreed that most of Plaintiffs’ job duties were “seaman” work exempt from the FLSA’s overtime requirements, Plaintiffs filed suit alleging that their job duties related to the loading and unloading of vessels constituted “nonseaman” work for which overtime pay was owed. Plaintiffs and the district court relied on the Fifth Circuit’s prior holding in Owens, and the district court denied Defendant’s motion for summary judgment. The district court and the Fifth Circuit granted Defendant’s interlocutory appeal under 29 U.S.C. § 1292(b).

Following oral argument, the Fifth Circuit issued its decision, which disagreed with Plaintiffs’ and the district court’s interpretation and application of Owens. Importantly, the Fifth Circuit distinguished Owens and emphasized that the analysis under the FLSA’s seaman exemption is a fact-based and flexible inquiry not subject to bright-line, categorical rules. The Court reasoned that the analysis required the consideration of the character of the work performed and the context in which it is performed and not the consideration of where the work is performed or how it is labelled. Unlike in Owens where the plaintiff was a non-crewmember who was not tied to a vessel and who only sought overtime for land-based loading and unloading, the Plaintiffs in this case lived on Defendant’s towboats, and their loading and unloading duties undisputedly affected the seaworthiness of the vessels and were integrated fully with their other seaman duties. Therefore, considering the character and context of the work performed, the Court concluded that the Plaintiffs’ unloading and loading duties were seaman work, thus exempting Plaintiffs from the FLSA’s overtime requirements.  For these reasons, the Court vacated the lower court’s ruling and remanded the matter to enter judgment in favor of Defendant.

ARTICLE BY

Nicole A. Eichberger
Lindsey H. Chopin
OF
Proskauer Rose LLP

Don’t be Late, for That Very Important [Bar] Date!

The National Law Review recently published an article by Renée M. Dailey and Chrystal J. Szeto of Bracewell & Giuliani LLP regarding Bar Dates:

On March 13, 2012 the Queen of Hearts in the Fifth Circuit Court of Appeals showed no sympathy for the White Rabbit’s plight and denied a creditor’s appeal of an order disallowing its late filed proof of claim in the DHL Master Land Holding LLC bankruptcy case.1

The bank-creditor (the “Bank”) received its invitation to DHL’s chapter 11 proceeding in February of 2010, but did not notify its counsel of the matter until “late May, early June” and directed them to focus on DHL’s non-debtor affiliates as co-debtors on obligations owed to the Bank.

The White Rabbit finally arrived to see the Queen a full 42 days after the June 2, 2010 Bar Date. Realizing its tardiness, the Bank filed a motion to permit the late filing, claiming its counsel was responsible and that it should not be beheaded for counsel’s mistake. The Bank also claimed that its lateness would not prejudice the debtor since it had been aware of the Bank’s claim since the start of the bankruptcy proceeding. The creditors’ committee objected to the Bank’s motion on the grounds that the Bank failed to show excusable neglect, and, after considering the evidence, the bankruptcy court denied the Bank leave to file a late claim. The bankruptcy court pointed to the fact that the Bank had notice of the proof of claim bar date well in advance of the deadline and had failed to inform its counsel when it hired them just days before the date in question. On appeal, the district court affirmed, finding no abuse of discretion in the bankruptcy court’s decision.

The Bank further appealed to the circuit court, claiming that the district court erred in affirming the bankruptcy court’s finding that inadvertence did not constitute “excusable neglect.” The Fifth Circuit disagreed. After considering all of the relevant factors, including the danger of prejudice to the debtor, length of the delay and potential impact to the proceedings, the reason for the delay, and whether the movant acted in good faith, the Fifth Circuit confirmed the “off with their heads!” approach of the lower courts and denied the Bank’s appeal.

As with all entertaining stories, there is a valuable underlying lesson. Here the looking glass is clear: the bankruptcy court is no Mad Hatter’s eternal tea party, and time does not stand still when filing proofs of claim.

________________________

1 In re DLH Master Land Holding, 2012 U.S. App. LEXIS 5248 (5th Cir. Mar. 13, 2012).

© 2012 Bracewell & Giuliani LLP

Unsecured Creditors Beware! The Western District of Texas Bankruptcy Court Declares an Unsecured Creditor Cannot Have Its Cake (Unsecured Claim) and Eat It Too (Post-Petition Legal Fees)

Recently posted in the National Law Review an article by Evan D. Flaschen, Renée M. Dailey, Mark E. Dendinger of Bracewell & Giuliani LLP about the issue of whether an unsecured creditor can recover post-petition legal fees under the Bankruptcy Code:

Bankruptcy courts have long debated the issue of whether an unsecured creditor can recover post-petition legal fees under the Bankruptcy Code. In the recent decision of In re Seda France, Inc. (located here(opens in a new window)), Justice Craig A. Gargotta of the United States Bankruptcy Court for the Western District of Texas denied an unsecured creditor’s claim for post-petition fees. In doing so, the Court has once again left the unsecured creditor with a bad taste in its mouth by declaring that an unsecured creditor seeking post-petition fees is asking permission to have its cake (a claim for principal, interest and pre-petition legal fees under applicable loan documents) and eat it too (a claim for post-petition legal fees).

Proponents of the view that an unsecured creditor cannot recover post-petition legal fees point to section 506(b) of the Bankruptcy Code, which allows as part of a creditor’s secured claim the reasonable attorneys’ fees and costs incurred during the post-petition period, and note the Bankruptcy Code is silent on anunsecured creditor’s right to post-petition legal fees. Essentially, the argument is since Congress provided for post-petition fees for secured creditors, it could have explicitly provided for post-petition fees for unsecured creditors but chose not to. Proponents of the alternative view cite the Second Circuit decision United Merchants and its progeny, where those courts refused to read the plain language of section 506(b) as a limitation on an unsecured creditor’s claim for recovery of post-petition legal expenses. The theory is that while the Bankruptcy Code does not expressly permit the recovery of an unsecured creditor’s claim for post-petition attorneys’ fees, it does not expressly exclude them either. The basic tenant is that if Congress intended to disallow an unsecured creditor’s claim for post-petition legal fees it could have done so explicitly.

In Seda, Aegis Texas Venture Fund II, LP (“Aegis”) timely filed a proof of claim in Seda’s Chapter 11 bankruptcy case claiming its entitlement to principal, interest and pre-petition attorneys’ fees under its loan documents with Seda as well as post-petition attorneys’ fees for the duration of the case. Aegis made various arguments in support of the allowance of its post-petition legal expenses including: (1) the explicit award of post-petition fees to secured creditors under section 506(b) does not mean that such a provision should not be implicitly read into section 502(b) (i.e., unim est exclusion alterius (“the express mention of one thing excludes all others”) does not apply), (2) the United States Supreme Court decision in Timbers does not control as Timbers denied claims of anundersecured creditor for unmatured interest caused by a delay in foreclosing on its collateral, (3) the right to payment of attorneys’ fees and costs exists pre-petition and it should be irrelevant to the analysis that such fees are technically incurred post-petition, (4) because the Bankruptcy Code is silent on the disallowance of an unsecured creditor’s post-petition attorneys’ fees, these claims should remain intact, and (5) recovery of post-petition attorneys’ fees and costs is particularly appropriate where, as in Seda, the debtor’s estate is solvent and all unsecured creditors are to be paid in full as part of a confirmed Chapter 11 plan.

The Seda Court rejected Aegis’ arguments and held that an unsecured creditor is not entitled to post-petition attorneys’ fees even where there is an underlying contractual right to such fees and unsecured creditors are being paid in full. With respect to Aegis’ argument on the proper interpretation of sections 506(b) and 502(b), the Court cited the many instances in the Bankruptcy Code where Congress expressed its desire to award post-petition attorneys’ fees (e.g., section 506(b)), and found that Congress could have easily provided for the recovery of attorneys’ fees for unsecured creditors had that been its intent. Regarding Aegis’ argument that Timbers does not control, the Court held that in reaching its decision on the disallowance of a claim for unmatured interest the Timbers Court found support in the notion that section 506(b) of the Bankruptcy Code does not expressly permit post-petition interest to be paid to unsecured creditors. The SedaCourt held this ruling should apply equally to attorneys’ fees to prohibit recovery of post-petition fees and expenses by unsecured creditors. The Court further held that section 502(b) of the Bankruptcy Code provides that a court should determine claim amounts “as of the date of the filing of the petition,” and therefore attorneys’ fees incurred after the petition date would not be recoverable by an unsecured creditor. In response to Aegis’ argument that non-bankruptcy rights, including the right to recover post-petition attorneys’ fees should be protected, the Seda Court noted that the central purpose of the bankruptcy system is “to secure equality among creditors of a bankrupt” and that an unsecured creditor’s recovery of post-petition legal fees, even based on a contractual right, would prejudice other unsecured creditors. The Court held this is true even in the case where the debtor was solvent and paying all unsecured creditors in full. The Court noted that a debtor’s right to seek protection under the Bankruptcy Code is not premised on the solvency or insolvency of the debtor and, therefore, the solvency of the debtor has no bearing on the allowance of unsecured creditors’ post-petition legal fees.

Seda is the latest installment in the continued debate among the courts whether to allow an unsecured creditor’s post-petition attorneys’ fees. The Seda Court is of the view that an unsecured creditor cannot recover post-petition legal fees for the foregoing reasons, most notably that the Bankruptcy Code is silent on their provision and public policy disfavors the recovery of one unsecured creditor’s legal expenses incurred during the post-petition period to the prejudice of other unsecured creditors. Depending on the venue of the case, there will undoubtedly be many more instances of unsecured creditors seeking recovery of their post-petition attorneys’ fees in a bankruptcy case until the Supreme Court definitively rules on the issue. Until then, keep asking for that cake . . . .

© 2011 Bracewell & Giuliani LLP