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May 2011

D.C. Court of Appeals formally adopts Iqbal and Twombly

In Mazza v. Housecraft LLC, No. 09-CV-1068 (D.C. April 28, 2011), the D.C. Court of Appeals held that the recent Supreme Court decisions articulating the requirements that a complaint must meet in order to survive a motion to dismiss, i.e. Ashcrof v. Iqbal and Bell Atlantic Corp. v. Twombly, apply in the District of Columbia.

In pertinent part, the Court stated:

The Supreme Court has recently articulated two prongs in determining whether acomplaint is sufficient to survive a motion to dismiss: whether the complaint includes well pleaded factual allegations as an initial matter, and whether such allegations plausibly give rise to an entitlement for relief. In Ashcroft v. Iqbal, — U.S. —, 129 S.Ct. 1937, 173 L.Ed.2d868 (2009), the Court elaborated on Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct.1955, 167 L.Ed.2d 929 (2007). In Iqbal, the Court noted that as an initial matter, Fed. R.Civ. P. 8 (a) “does not require ‘detailed factual allegations [in a pleading],’ but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” 129 S.Ct. at1949 (quoting Twombly, supra, 550 U.S. at 555, 127 S.Ct. 1955). . . . While only the first prong is relevant to our analysis here, we hold that both requirements apply in our jurisdiction. We have not heretofore expressly adopted both of the requirements articulated in Twombly and Iqbal. . . . However, we take this opportunity to recognize thatTwombly and Iqbal apply in our jurisdiction.

 7/5/2011:  The D.C. Court of Appeals issued an order dated June 30, 2011, vacating the Mazza opinion, on the grounds that the case had settled and therefore was moot.  Therefore, the Mazza opinion is no longer binding precedent in the District.  At the same time, the opinion hasn't been "disappeared":  it is still available.

Order compelling arbitration reversed by Maryland appellate court

In Thompson v. Witherspoon, No. 00012 (Md. App. Feb. 1, 2011), the Maryland Court of Special Appeals reversed the trial court's order compelling arbitration.  This was a case in which the signatory to a contract with an arbitration clause had successfully compelled a non-signatory to arbitrate.

Plaintiffs, who were owners and beneficiaries of a $4 million second-to-die life insurance policy purchased by their parents, brought suit against the insurer, Manulife, UBS Financial Services, and the broker who sold the policy, alleging negligent misrepresentation, deceit, conversion, negligence and breach of contract.

The policy was purchased in 1990, but in 2003 the parents established accounts at UBS.  The master account agreement contained an arbitration clause that stated that:

any and all controversies which may arise between UBS PaineWebber, any of UBS PainWebber's employees or agents and Client concerning any account, transaction, dispute or the construction, performance or breach of this Agreement or any other agreement, whether entered into prior to, on or subsequent to the date hereof, shall be determined by arbitration.

In the trial court, UBS and the broker moved to compel arbitration.  The plaintiffs argued that they were neither parties to, nor bound by, the UBS Account Agreements.  They also argued that the parents were never the owners of the Manulife policy, and that their rights in the policy do not flow from their potential status as heirs, beneficiaries, successors or assigns.  The trial court granted the motion to compel arbitration, stating in part that the plaintiffs causes of action were so intertwined with the contractual relationship between the parents and UBS that arbitration must be compelled.

On appeal, the Maryland Court of Special Appeals reversed.  The Court reasoned that the plaintiffs did not derive a "direct benefit" from the contract containing the arbitration clause, because those account agreements did not provide that the insurance policy was to be issued to the plaintiffs, and further, the policy itself was already purchased years before the parents signed the UBS account agreements.  Therefore, the plaintiffs could not be bound to the UBS arbitration clauses by estoppel.

The Court concluded that there was an insufficient factual and legal connection between the claims asserted in the complaint and the ternms of the UBS Agreements for the defendants to invoke the arbitration provisions against the plaintiffs.

This case is based on an unusual fact pattern that is unlikely to be repeated very often.  For the practitioner, the opinion is more important for the approach to the issues.  For example, in reaching its decision, the Court touched on the following important points:

  • It reaffirmed its view that principles of estoppel could permit a non-signatory to a contract with a mandatory arbitration provision to enforce the arbitration clause against a signatory to the agreement when the signatory's claims rely on the written agreement.
  • It reaffirmed that a court's order granting an order to compel arbitration is immediately appealable, even when one of the defendants was not affected by the order compelling arbitration.  An order compelling arbitration, even on directed at some but not all the parties, is an appealable judgment on the question of whether the issues raised in the plaintiff's suit were arbitrable.
  • The Court reaffirmed that, when construing the Maryland Uniform Arbitration Act, the Maryland courts look to federal decisions interpreting the Federal Arbitration Act, and in its opinion cited, and quoted, extensive federal precedent.
  • The Court agreed with the statement that all questions concerning the ambiguity of arbitration clauses must be resolved by the arbitrator, but noted that whether or not a matter is to be compelled to arbitration is an issue for the court, not the arbitrator.




D.C. Court of Appeals reverses dismissal of $6.37 million tax malpractice claim

In Hillbroom v. PricewaterhouseCoopers LLP, No. 10-CV-92 (D.C. April 7, 2011), the D.C. Court of Appeals reversed the dismissal of a lawsuit against a tax attorney and an accounting firm for professional negligence, breach of contract and breach of fiduciary duty. The alleged negligence was the failure to timely file a formal claim for refunds for federal estate taxes paid on an estate worth approximately $353 million. The trial court granted the defendant's motion to dismiss under Rule 12(b)(6) based on statute of limitations grounds. The D.C. Court of Appeals reversed.

The defendants moved to dismiss based on the three year statute of limitations under D.C. Code sec. 12-301, arguing that the period of limitations began to run at the latest by Dec. 10, 2002, when plaintiffs retained new counsel and admittedly were aware that the defendants had missed the tax refun filing deadlines. The trial court agreed with that, and further found that the plaintiffs suffered a separate injury at the same time when they incurred additional litigation expenses.

The Court of Appeals reversed, noting that D.C. precedent contemplates a flexible, case-by-case approach to determining when the period of limitations began to run. Here, the statutory deadlines for filing formal claims for federal estate tax refunds are subject to various exceptions. The Estate had utilized an informal refund claim, for which there is legal authority. The Court therefore reasoned that without reviewing the Refund Claim Memorandum and an expert opinion -- neither of which were in the record -- it could not say "whether the parties might reasonably have regarded the memorandum as comprehensive enough, specific enough, and clear enough to preserve all the claims at issue."

The Court concluded that neither from the face of the Complaint nor from the undeveloped record can it fairly be said that, for statute of limitations purposes, plaintiffs must be charged with knowledge of their injury when the deadlines for filing of the formal refund claims passed.

The Court, however, disagreed with the plaintiffs' argument that their cause of action did not accrue until they settled the refund claim with the IRS. Rather, the Court held that at the latest, the plaintiffs knew or should have known of their injury -- and their cause of action accrued -- when they learned of the IRS's definitive position disputing the allowability of the refund claims not filed by the statutory deadline. However, the appellate record did not show when the IRS asserted its position. That determination must be based on a fuller record.

The Court also found that the retention of new counsel did not necessarily mean that the plaintiffs sustained injury at that time based on the alleged negligence, because it was possible that the new lawyers were charged with completing work that the defendants had not yet performed. The Court found that the record was insufficient on this point as well.

Thus, the end result of the motion to dismiss in this case was that the defendants incurred all the litigation expenses of the motion and the appeal, and now find themselves remanded to the trial court for further proceedings. In the process, plaintiffs' counsel have acquired a blueprint of the intricacies of the statute of limitations defense prior to discovery. This is not to be critical in the least of the defendants or the defense attorneys for choosing to file the motion to dismiss, which after all was initially successful and resolved a multi-million dollar claim.

Rather, this case illustrates the difficult tactical decisions that must be made by the defense as to how and when to file a dispositive motion. One lesson is that in very technical areas of the law, such as tax or patent law, the question of when a cause of action for legal malpractice accrued for limitations purposes should be the subject of early review by an expert in the field, even when there seems to be strong grounds for a motion to dismiss. There is also a risk/benefit analysis that must be made in each case, weighing the liability exposure of the claim, the chances of success of the motion, and in some instances the possibility that disclosure of the defense will lead to a reasonable settlement, against the costs of the motion and subsequent appeal, and the risk that by fully disclosing the theory of defense, if the motion is denied it might make any subsequent depositions less productive for the defense.