Features

• Case Studies
  
  
  
• IN PRACTICE:  How Much is a Paint Job Really Worth?
  
  
  
• Congress Increases Amount in Controversy for Diversity Jurisdiction
  
  
  
• Venue Options for Chapter 11 Filings May Be Limited 
  
  
  
• Alabama Supreme Court Rules Forum Selection Clauses in Contracts Enforceable in Alabama 
  
  
  

Congress Increases Amount In Controversy for Diversity Jurisdiction 

The Federal Courts Improvement Act of 1996 signed by the President on October 9, 1996, has amended 28 U.S.C. § 1332 to increase the minimum "amount in controversy" for diversity cases from $50,000 to $75,000. 

Diversity cases, suits involving parties from two different states, constitute approximately 25 percent of all cases filed in federal court.

Efforts to modify the venue provisions applied to companies filing for reorganization under Chapter 11 of the Bankruptcy Code gained momentum with the National Bankruptcy Review Commission's ("Review Commission") proposal for change. Under 28 U.S.C. § 1408 dealing with bankruptcy venue, corporate debtors are permitted to file bankruptcy petitions in either their state of incorporation or the state in which their principal place of business or their principal assets are located. 

During its December meeting, the Review Commission approved a recommendation that the venue provisions be changed to bar businesses from filing in their state of incorporation unless other significant contacts with that state are present. The revised venue provision will next be included in the Review Commission's report to Congress on suggested Bankruptcy Code reforms. 

The proposed changes are a result of growing complaints by creditors and bankruptcy lawyers that the practice of "forum shopping" -- where companies file Chapter 11 cases based solely on the debtor's incorporation in that stateunfairly hauls them into a jurisdiction, such as Delaware, where they have had no contacts.

Professional Insurance Corporation v. Sutherland, 1997 WL 139482 (March 28, 1997). This case changes the law in Alabama concerning the enforceability of forum selection clauses in contracts. 

The plaintiffs in Sutherland, all independent insurance agents, sued in Montgomery County Circuit Court, claiming breach of contract, interference with business relations, and fraudulent misrepresentation. Each contract sued upon provided that "You agree that any litigation resulting from the violation of the terms and conditions of this contract by You or the Company shall be brought in Duval County, Florida." 

The defendants filed motions to dismiss the complaint arguing that venue was improper under the forum selection clause contained 

in the contracts. The trial court denied the defendants' motion, holding that forum selection clauses are invalid and unenforceable in Alabama. On appeal, the Alabama Supreme Court reversed the trial court decision. 

The Alabama Supreme Court adopted the reasoning of the United States Supreme Court in M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). The United States Supreme Court held in Bremen that forum selection clauses should be enforced unless the opposing party shows enforcement would be "unreasonable." Alabama became the 47th state to follow Bremen when the Alabama Supreme Court held that "forum selection clauses should be enforced so long as enforcing them is neither unfair nor unreasonable under the circumstances." Sutherland, at *3.

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CASE STUDIES

In Re Paul A. Bilzerian, 100 F.3d 886 (11th Cir. Dec. 3, 1996). In this case of first impression in the Eleventh Circuit, the court held that it was not necessary for the debtor to obtain money or property directly, but that the discharge could be excepted if the debtor received benefits from the transaction.  

A fraud case was brought against Bilzerian in the Texas U.S. District Court with an allegation that Bilzerian, by misrepresentations, induced some $20 million to be invested in a limited partnership. In the Texas district court, the jury decided that Bilzerian was guilty of actual fraud and awarded almost $27 million in compensatory damages and over $1 million in punitive damages. Bilzerian then filed Chapter 7 in Florida. The bankruptcy court held that the debtor was entitled to summary judgment because the debtor did not individually obtain any money by reason of the alleged fraud. On appeal, the district court reversed the bankruptcy court stating that 11 U.S.C. § 523(a)(2)(A) requires only that the debtor receive a benefit, which may be indirect as well as direct. Because the receipt of benefit issue was already litigated in the Texas court, the doctrine of collateral estoppel barred relitigating the issue and rendered the debt nondischargeable.  

The Eleventh Circuit affirmed the district court on both issues. It first stated that this was a matter of first impression in the Eleventh Circuit; there was a divergence in the courts as to whether a debtor must personally receive money before the exception to discharge can apply. However, it further stated that three circuit courts had adopted the "receipt of benefits" theory, and that no circuit courts had held otherwise. The Eleventh Circuit, in adopting the "receipt of benefits" theory, said that to hold otherwise would be a dangerous incentive for a sophisticated debtor to evade the nondischargeability provision of § 523 by creating a shell corporation to receive the benefits of the fraud.

Continuing Guaranty Expires After a Reasonable Time  

William R. Hubbell Steel Corp. v. Epperson, 679 So. 2d 1131 (Ala. Civ. App. 1996). In Epperson, a corporate plaintiff filed suit to collect on a guaranty agreement executed by Epperson, a former Chairman of the Board of Temco. In connection with supplying steel to Temco on open account, Epperson executed a personal guaranty to Hubbell Steel in 1983. Hubbell Steel did not do business with Temco for nine (9) years after the execution of the guaranty agreement. In 1992, Epperson was no longer Chairman of the Board at Temco when it made a purchase from Hubbell Steel on open account. Epperson was not aware that an order had been placed. Upon Temco's failure to pay its trade account, Hubbell Steel filed suit against Epperson under his guaranty agreement.  

The trial court ruled that Epperson was not liable under the guaranty agreement because of the passage of time between the guaranty and the transaction resulting in the debt with Hubbell Steel. On appeal, the Alabama Court of Civil Appeals upheld the trial court decision stating that: "(1) when there is no fixed time for performance stated in a contract, the law presumes that a 'reasonable time' was intended, (2) a guarantee, as other contracts, is complete when the minds of the parties to the guarantee meet in mutual assent, (3) when there is a continuing guarantee, which is unlimited in duration, the period of time for which it is valid must be reasonable, in light of the circumstances of the particular case." Epperson, 679 So. 2d at 1133.

Although the unique facts present in Epperson would not typically arise in most commercial transactions involving a guaranty, this opinion is nonetheless troublesome in light of the fact that many companies extending credit rely on a continuing guaranty agreement and would never think of the agreement being struck down due to a mere passage of time. It is unlikely that this decision would affect a suit on a guaranty executed in connection with the actual lease or loan upon which suit is brought. However, in light of this decision, it may be wise for creditors utilizing a continuing guaranty agreement for a series of credit transactions to establish a monitoring system to assure that its continuing guaranty agreements do not become stale. Because "consideration" is an essential element to the execution of any guaranty, it is advisable to update a stale guaranty in conjunction with an extension of credit, i.e., a new loan, a renewal, refinancing, consolidation or credit sale. 

IN PRACTICE

Alabama Supreme Court Revisits the Case of the $4 Million Paint Job  

BMW of North America, Inc. v. Gore, 1997 WL 233910 (Ala. May 9, 1997). On remand, the Alabama Supreme Court recently took to heart the United States Supreme Court's recommendation that BMW's actions did not warrant the $2 million punitive damage award previously approved by the Alabama Supreme Court.  

In BMW of North America, Inc. v. Gore, 116 S.Ct. 1589 (1996), the United States Supreme Court set out three "guideposts" by which a reviewing court should judge whether a punitive damage award is constitutionally excessive. Those guideposts are "(1) the degree of reprehensibility of the defendant's conduct; (2) the ratio between the plaintiff's award of compensatory damages and the amount of the punitive damages; and (3) the difference between the punitive damages award and the civil or criminal sanctions that can be imposed for comparable misconduct." Gore, 1997 WL 233910 at *1. The Alabama Supreme Court noted that the first two "guideposts" created by the Supreme Court were already encompassed in Alabama's punitive damage review process established by the court in its opinions in Hammond v City of Gadsden, 493 So. 2d 1374 (Ala. 1986) and Green Oil Co. v. Hornsby, 539 So. 2d 218 (Ala. 1989). Accordingly, the Alabama Supreme Court began its review of the punitive damage award with an emphasis on the three guideposts established by the United States Supreme Court.

The court agreed with the United States Supreme Court that the degree of reprehensibility should be the "most important indicium of the reasonableness of a punitive damages award." Id. at *5 (quoting, BMW of North America, Inc. v. Gore, 116 S.Ct. at 1599). The court then briefly discussed all the factors that Alabama courts have previously used under a Hammond - Green Oil review to evaluate reprehensibility. These factors include: duration of the conduct, degree of defendant's awareness its conduct has caused or is likely to cause any hazard, concealment of the hazard, existence and frequency of similar past conduct, whether defendant was guilty of same or similar acts in the past and any efforts to remedy the wrong committed. Gore, at *5. To these, the court added the following two factors provided by the United States Supreme Court in its opinion: (1) "the defendant's awareness of his actions or omissions causing harm; and (2) the quality and quantity of rights of others that were disregarded by the defendant." Id. Upon reconsidering the old and new elements of reprehensibility, the Alabama Supreme Court agreed that BMW's conduct, though reprehensible, was not so reprehensible as to merit punitive damages at 500 times the actual damage suffered by the plaintiff. Interestingly, both the United States and Alabama Supreme Courts commented on the financial status of the "well-to-do plaintiff" as a factor weighing against a finding of great reprehensibility. Id. 

As to this second guidepost, both the United States Supreme Court and the Alabama Supreme Court refused to draw a bright line mathematical test for determining the reasonableness of punitive damage awards. In explaining its refusal to adopt a universal ratio, the Alabama Supreme Court stated:  

Although it is difficult to determine case by case what ratio of punitive damages to compensatory damages is excessive, we reject the easy answer of adopting one ratio that would apply to all and would therefore give a wrongdoer precise notice of the penalty that his misconduct might incur. To do so would frustrate the purpose of punitive damages, which is to punish and deter a defendant's misconduct. A ratio that could be deemed reasonable in many cases might well be insufficient in cases where the defendant has reaped great profit from its conduct, or where its conduct is particularly reprehensible.Id. at *7.

Guidepost Three: 
Sanctions for Comparable Misconduct  

The significance of consumer fraud legislation proposed earlier this year by Attorney General Bill Pryor is highlighted by the Alabama Supreme Court's evaluation of the third guidepost. Under the third guidepost, state courts are required to compare the punitive damages awarded against the civil or criminal penalty that could have been imposed against the defendant for comparable conduct. The Alabama Supreme Court noted that the maximum sanctions under Alabama's current Deceptive Trade Practices Act is a "meager" two thousand dollars. Id. The court reasoned that because the statutory penalty is so low, there is really no basis for comparing the statutory penalty with any large punitive damages award. Specifically, the court noted that in the instant case, the maximum statutory penalty did not even exceed the profit BMW hadrealized on the sale of the automobile to the plaintiff. Accordingly, it seems this third guidepost will be of little use in similar fraud cases until the statutory and criminal penalties for fraud are increased.  

"[A] punitive damage award that exceeds ten percent of a 'defendant's net worth' could suggest that the award should be reduced."

Having evaluated all three of the guideposts mandated by the United States Supreme Court, the Alabama Supreme Court next looked at the factors previously utilized under Alabama's Hammond - Green Oil review. The factors briefly discussed by the court included whether the profit realized by BMW on the sale of the automobile to the plaintiff was removed, the financial position of BMW, the costs of the litigation, criminal sanctions and other pending civil actions. The court noted that these additional factors were either irrelevant or did not support a $2 million punitive damage award. The court noted that a large award is not justified simply because the defendant can pay the award. In expounding on this principle, the court suggested that a punitive damage award that exceeds ten percent of a "defendant's net worth could suggest that the award should be reduced." Gore, at *8. Since net worth can be manipulated, it will be interesting to see how this ten percent "suggested" benchmark may be applied by the courts.

After reconsidering the punitive damages award under the Hammond - Green Oil standards and the guideposts set forth by the United States Supreme Court, the court concluded that a two million dollar award of punitive damages was "grossly excessive." The court went on to compare the Gore award with the punitive damages awarded in two other automobile fraud cases. In German Auto, Inc. v. Tamburello, 565 So. 2d 238 (Ala. 1990), the plaintiff was awarded punitive damages in a ratio of five to one, and in American Automotive Company v. Boyd, 475 So. 2d 835 (Ala. 1985), the jury returned a general verdict for compensatory and punitive damages in the amount of $65,000.00. Comparing these two cases to the facts presented in Gore, the Alabama Supreme Court remitted the plaintiff's total damages to the sum of $50,000, which is a ratio of approximately 11 1/2 to 1.

Justice Gorham Houston, joined by Chief Justice Perry Hooper and Associate Justice Hugh Maddox, drafted a concurring opinion in which he advocated a 3 to 1 ratio for the award of punitive damages with a requirement that jury awards exceeding the 3 to 1 bench mark would require special justification to withstand court review. In particular, these justices would require, as special justification to go beyond a 3 to 1 ratio, that certain categories of reprehensible conduct be present or that the conduct be punishable by substantial civil or criminal sanctions.  

Justice Houston described two categories of reprehensible conduct that could provide "special justification." The first category of reprehensible conduct would include endangering the health and safety of others. The second category of reprehensible conduct would include economic harm resulting from intentional misrepresentation, as defined under the Alabama Code, coupled with either repetitive conduct despite prior punishment, or a substantial number of similar misrepresentations. Absent reprehensible conduct, additional special justification to exceed a 3 to 1 ratio could be found if civil and criminal sanctions for similar misconduct involve substantial monetary fines or imprisonment.  

Though not the majority opinion, this proposal advocated by Justices Houston, Hooper and Maddox could be revisted in the event the composition of the court changes in 1998 when three of its members are up for reelection.  

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The Commercial Law Alert is published by the law firm of Wallace, Jordan, Ratliff & Brandt, L.L.C. for the benefit of our clients. It is intended solely to be informational and does not constitute legal advice as to any specific situation. "No representation is made that the quality of legal services performed is greater than the quality of legal service performed by other lawyers."