ANALYSIS OF DECEMBER 2, 2021 SUPREME COURT OPINION

 

 

(Posted December 2, 2021) The Supreme Court issues its first published opinion in five weeks today. Ehrhardt v. SustainedMED, LLC involves an indemnity provision buried in a stock-purchase agreement.

Our tale begins 12 years ago, when six individuals contracted to sell their shares in a company called Cyfluent. The sellers told the buyer, SustainedMED, that Cyfluent had contracts with 165,000 doctors and that monthly revenues exceeded $800,000 per month. The buyer was happy to acquire an asset like that for $4.9 million, comprising $2.1 million in cash and notes for the remainder.

The stock-purchase agreement contained indemnity language that obligated the sellers to make the buyer whole in the event of inaccuracies in any pre-sale representations. The provision limited total indemnity to $4.9 million, the amount of the purchase price, subject to a $25,000 deductible.

Alas, Cyfluent was nowhere near as affluent as the sellers had promised. Instead of 165,000 doctors, it had contracts with only about 100. That’s one hundred; not one hundred thousand. The buyer soon figured out that revenues were only a trickle, and the company’s worth was tiny in comparison with what the sellers had indicated.

The buyer then invoked the indemnity provision, indicating that it was using the promissory notes to set off part of its losses and demanding payment for the rest. The sellers refused, so the buyer went to court.

After a bench trial, the court ruled in favor of the buyer, awarding judgment for $2.775 million and declaring that the promissory notes were extinguished. The buyer then filed a claim for its attorney fees and costs. The sellers claimed that their maximum liability for fees was $25,000, because of the $4.9 million cap. The buyer replied that the note extinguishment didn’t count against that cap, so there was plenty of room left for a fee award.

The circuit court took the matter under advisement for what turned out to be a very long time – three years. It then issued an order that granted fees of $972,000 and a smaller costs award. The order didn’t contain any explanation for the ruling.

That brings us to Ninth and Franklin, where the justices consider only one issue: whether the fee award should be capped at $25,000. In a unanimous ruling, the Supreme Court agrees with the sellers that attorney fees are within the indemnity cap, and that the cancellation of the notes counts as compensation, too. The court accordingly reverses the million-dollar award and enters final judgment of $25,000 in fees to the buyer.

As I see it, the court’s ruling here makes perfect sense. I’ve long known that, for example, cancellation of indebtedness is a taxable event to the debtor, and it follows that that should be counted as part of the buyer’s recovery.

The only thing that surprises me about this is that the opinion is published. I have no insider knowledge as to how the court chooses which rulings to publish and which ones come down by unpubs. I’ve assumed that the court almost always publishes those holdings that have broader precedential value, and the ones that contain, say, narrow and unusual facts are decided without publication.

The language in this contract may not be unique, but I doubt that this precise setup is widespread in stock purchases and other contracts containing indemnity provisions. My best guess on this one is that the court publishes the holding that cancellation of indebtedness is indeed part of a plaintiff’s recovery; but that’s not entirely satisfying.

 


NOTE ON APPELLATE COURTS’ HOLIDAY CLOSINGS

 

 

(Posted November 24, 2021) It’s that time of the year, when I can inform you about the holiday-closing schedules of the appellate courts here, and mention how that affects your filing deadlines.

 

State courts

The clerk’s offices of the Supreme Court and Court of Appeals of Virginia will close today at noon and will remain closed the rest of this week, reopening Monday, November 29. By operation of law, all filing deadlines that would fall between today and Sunday are automatically extended unto Monday. Here’s the statutory language:

When the last day for performing an act during the course of a judicial proceeding falls on a Saturday, Sunday, legal holiday, or any day or part of a day on which the clerk’s office is closed as authorized by an act of the General Assembly, the act may be performed on the next day that is not a Saturday, Sunday, legal holiday, or day or part of a day on which the clerk’s office is closed as authorized by an act of the General Assembly.

Code §1-210(B).

There’s more, and this year it has special meaning. The clerk’s offices will also be closed December 23 and 24 for the Christmas holiday, and December 30-31 for New Year’s. This last part is legally significant because of the pending change to an appeal-of-right system. Here’s why:

The upcoming trigger for an appeal that goes straight to the Court of Appeals for that of-right proceeding is the date of filing of the notice of appeal; not the date of entry of the appealable order. Without the court closures, the first trigger day when an appellant could go to the CAV would be December 2. But the closures mean that an appellant who gets an unfavorable appealable order next Tuesday, November 30, can legally file a notice of appeal on Monday, January 3, and get that appeal of right.

Two caveats here: First, if you want to take advantage of this, you must wait until January 3 to file your notice. I normally advocate filing things before the last possible day – I firmly believe that deadline days are for suckers – but here, it’s essential to do so. If you file a notice of appeal in late December for an appealable order that comes down, say, on December 15, you’ve waived your right to go to the CAV.

Second, please keep in mind that you file a notice of appeal in the trial court clerk’s office and not with the appellate Court. I accordingly caution you to check with your local clerk to find out if that office will be open on December 30. If it is, you have to file by the December 30 deadline, even if the appellate courts are closed.

I need to point out a rules quirk. In current appeals to both appellate courts from circuit courts, you file the notice in the circuit court. Rules 5:9(a), 5A:6(a). But in appeals to the CAV, you must also file the notice with the Clerk of the Court of Appeals. Rule 5A:6(c). This CAV rule doesn’t specify a deadline for filing, so I doubt that it’s jurisdictional. That also means that you probably can’t take advantage of this one-time quirk in the admittedly unlikely event that your local court is open on Thursday, December 30.

 

Fourth Circuit

The Fourth has announced that its clerk’s office will be closed tomorrow and Friday for Thanksgiving, with all deadlines kicked over to Monday, November 29. The court hasn’t mentioned anything about any December closings, but history suggests that that office will probably be shuttered for a single day for each holiday: December 24 and 31.

 


WHAT, OH, WHAT SHALL WE DO ABOUT THE PROBLEM CHILD?

 

 

(Posted November 18, 2021) From time to time — not every week or even every month, but on repeated occasions — I get a question from a trial lawyer about the waiver-of-endorsement provisions in Rule 1:13. This is the rule that mandates endorsement by counsel of record of all orders, and then allows the trial judge the discretion to simply ignore the rule:

Drafts of orders and decrees must be endorsed by counsel of record, or reasonable notice of the time and place of presenting such drafts together with copies thereof must be served pursuant to Rule 1:12 upon all counsel of record who have not endorsed them.

Compliance with this Rule … may be modified or dispensed with by the court in its discretion.

The questions I get are surprisingly consistent. They almost always describe a situation where a judge has entered an order without providing advance notice or an opportunity for the lawyers to endorse, or provide input on the contents of, the draft. “The Court dispenses with endorsements of counsel pursuant to Rule 1:13.” Now the aggrieved lawyer wants to know how to object to the order, in a manner that’s sufficient to preserve the objections for appellate review.

It’s trickier than you think. Some judges may expressly permit lawyers to file objections within X days after entry. But given the terrifying ruling several years ago in Brandon v. Cox, filing objections with the clerk of court probably won’t protect you. The record must indicate that the trial judge had the opportunity to rule on objections; not merely that they appear in the record. If the lawyer files objections with the clerk but there’s nothing to show that the judge knew about them, then even timely, meticulous objections could turn out to be useless.

Hence this essay. I figure that multiple lawyers asking the same question — one that doesn’t have an obvious answer — merits discussion and a stab at providing a solution for the problems that arise in such situations.

We’ll start with the easy part. If the objections that you want to append are already in the record — in a motion, brief, or pleading, or in a transcript that someone has filed — and the judge has ruled on them, then you’re safe. Code §8.01-384 provides that you don’t need to repeat your objections, even in endorsements on the final order, once you’ve obtained a ruling. If that’s the case, you don’t need to do anything, because your objections are preserved.

But that’s cold comfort if the judge has inserted a nuance into the order that the lawyers hadn’t anticipated, or has issued a ruling out of the blue that no one saw coming. In that instance, the lawyer has to act.

The first and easiest approach is to contact the clerk or chambers and obtain a hearing date that falls within 21 days after the date when the judge entered the final order. You’ll then file your objections and a hearing notice, along with a letter to the judge, copying the clerk. In that letter, you’ll indicate that you need the court to enter an order ruling on your objections by the 21st day. I recommend that you bring two orders to the hearing. One states that the court has considered your objections and overrules them; the other says that the court agrees with you and orders whatever relief that ruling would entail. The odds are that the judge will enter the first one, but why give up hope?

One note of caution here: Don’t say to the judge, “I’m not asking you to change your ruling; I just want to protect the record.” We learned several years ago in Nusbaum v. Berlin that language like that won’t preserve an issue for appeal. Ask the judge to rule in your favor but say that you’ve brought an order for each possible outcome, and ask the court to enter whichever one fits the judicial ruling. Now you’re protected.

As is inevitable with simple solutions, some cases will produce problems even here. Maybe your judge rides circuit and won’t be back in your jurisdiction for a month. (You can bring your two orders to the next county, leaving a request with chambers that the court enter one or the other. The judge doesn’t have to be sitting in a given county to enter orders for its circuit court.) Maybe your Bad Guy intends to fight you and says that his trial calendar means that he won’t be available for a month. (You can and should ask for a suspending order that allows you time to schedule the hearing on a date that accommodates the rascal.)

Here are a few other ideas:

  • Make a record of your attempts to get the judge to rule in a timely fashion on your objections. That can take the form of a motion to rehear or simply a motion for a written ruling on your objections, as noted above. The caveat on rehearing is that you can’t automatically get a hearing on that, per Rule 4:15(d); only the judge can order that.
  • Be sure to state in writing your objection to the judge’s refusing to allow you an opportunity to get a timely ruling. I also recommend that you object to the judge’s using Rule 1:13 to dispense with endorsements, especially when issuing a ruling that no one anticipated. That may allow you to challenge the practice on appeal.
  • Don’t assume that the clerk of court will follow through on presenting competing orders to the judge. Drop off copies at chambers along with an explanatory letter, mentioning that under Brandon, you need to secure court action within 21 days. You should address your correspondence, with copies of the motions attached, to the judge, delivering it to chambers, with a copy to the clerk of court. Doing this makes it clear that you’ve given the court an opportunity to rule on your motion, which is all that the preservation rules require.
  • If your trial judge isn’t available within 21 days, you can always ask a different judge of the same court to enter a suspending order. Most judges won’t make substantive rulings in another judge’s case; but if you can explain to the court that you’re about to lose a legal right and you just want to preserve the status quo for a short time until Judge X can act, you may get a friendly ear.
  • If you get nowhere with the judge, consider preparing a written statement under Rules 5:11 or 5A:8 that outlines your efforts to get a ruling on the objections. That way, the appellate court can see the efforts you’ve undertaken.
  • You have one other avenue of relief under 8.01-384. That statute separately provides that if you had no opportunity to object to the court’s ruling, then you won’t be held to have waived the issue for review. I advise you to regard this as a last resort, but if the appellate court sees that the judge has slipped in a ruling and then has made himself unavailable for proper preservation, you may well get a favorable appellate reception.

While these ideas may help you to avoid a waiver in this situation, in my opinion the problem is deeper than that. Rule 1:13’s modify-or-dispense provision is a bad idea that the Supreme Court should remove from the rule. This problem child doesn’t deserve a spot in the rulebook. At a minimum, the court should amend the rule to provide that a trial court may not modify or dispense with the notice-or-endorsement requirement when entering a final order.

You think I’m overreacting? Let’s take a hypothetical to illustrate how this problem can go nuclear. Suppose a judge wants to avoid appellate scrutiny on a given case. Perhaps the jurist, in a rash moment, has done something out of anger at or frustration with a lawyer, and fears reversal and remand. (Trial judges don’t like reversals, but they really-most-sincerely hate remands.) Simple solution: The judge drafts and enters a final order that contains language dispensing with endorsement. He next opens a desk drawer, slides the newly entered order inside, and closes it.

Nine weeks later, with the parties waiting patiently for word on the ruling, the judge opens the drawer, removes the order, and hands it to the clerk of court for placement in the file. Under Rule 1:1, the date of entry of an order is the date when the judge actually signs the document. That’s now 63 days past. This means that it’s too late to file a notice of appeal (30 days after entry) and too late for relief under Code §8.01-428 (60 days). The aggrieved party is pretty much helpless; the only theoretical solution I can see is to file an independent action for relief from a judgment, also under §8.01-428. That’s a real long shot.

Perhaps you’ve concluded that I have a hyperactive imagination, or a bad case of paranoia. Maybe. You think I should trust trial judges to do the right thing? I do, almost always; the overwhelming majority of them are conscientious public servants. But the Judicial Inquiry and Review Commission will confirm that a tiny few of them aren’t. And even without the sinister tableau of my hypothetical, some trial judges simply may not know that, in exercising a right that the rules expressly give them, they’re depriving litigants of a meaningful right.

As lawyers, we need to anticipate adverse developments, prepare for them, and be ready to act. This essay should help you if you find yourself in this difficult position. You want the appellate court to understand that you did everything humanly possible to preserve your appellate issue.

A note of thanks: Some of the suggestions above come not just from me; several of my pals in the appellate guild, including Kyle McNew, Monica Monday, and Norman Thomas, offered creative solutions that have gone into this essay. (The sinister hypothetical comes from me alone. Don’t blame them.)