ANALYSIS OF AUGUST 1, 2019 SUPREME COURT OPINIONS

(Posted August 1, 2019) After a one-week hiatus, opinions reappear this morning, as the Supreme Court hands down three published decisions.

Pleading

An interesting procedural issue features prominently in Ferguson Enterprises, Inc. v. F.H. Furr Plumbing, Heating and Air Conditioning, Inc. This is a suit by one business, an HVAC installer, against its supplier. The HVAC company contended that, beginning in 1995, the supplier had made false and fraudulent statements that led the buyer to overpay for HVAC equipment.

The buyer sued in 2013 and the supplier understandably filed a special plea of the statute of limitations, along with a demurrer to other counts. The court sustained the demurrer as to non-fraud claims, but declined to rule on the limitations plea, holding that the court would require evidence to adjudicate it. It granted the buyer leave to amend the other claims, adding that the buyer must restate the fraud claims verbatim in the new pleading. The court told the supplier that it could respond to any new claims by answer.

The buyer did as it was told, filing an amended complaint with new non-fraud claims and identical fraud claims. The supplier dutifully answered but didn’t reassert the limitations plea. The court again sustained the demurrer and set the fraud claims for a jury trial.

That trial took nine days. Nine days! This is one of the chief advantages of an appellate practice; my “trials” are over in thirty or forty minutes, resulting in far less stress and a much happier person when I return home to The Boss each evening. But I digress.

The supplier moved to strike at the appropriate points in the trial, but the court let the jury decide the actual-fraud claims. It refused the supplier’s instruction on due diligence, believing that it had already overruled the special plea. The jury returned a $3 million verdict. The supplier moved the court to set that aside, and the court convened a hearing on that.

During the post-trial hearing, the judge realized his error during the trial; the court had never ruled up-or-down on the special plea. But it ruled that the supplier had waived that plea by not reasserting it after the buyer amended. Adding a belt to those suspenders, the court ruled that the supplier also abandoned the argument by not setting the plea for hearing. It finally ruled that the instruction was incorrect because it placed the burden of proof on the plaintiff, instead of the defense where it belonged. The court entered judgment on the verdict.

The Supreme Court today addresses only two of these three justifications for the judgment. First, it rules that the plea was very much alive despite the supplier’s failure to raise it anew when the buyer repleaded, because of the unique circumstances of the amendment order. The justices note that the trial court had expressly directed the buyer to replead its fraud claim verbatim. It ordered the supplier to respond with an answer and didn’t require it to replead the limitations defense. This meant that the plea was still alive.

When I read this passage in the opinion, it surprised me. I recalled that the effect of filing an amended plea is to nullify the original, and it occurred to me that any previously filed defenses wouldn’t apply to a now-nullified plea. I figured the defendant has to replead or waive its original defenses.

Even apart from the special circumstances that the Supreme Court identifies here, it turns out that I was wrong. Some very old caselaw holds that a defense raised to original pleading still survives the amendment, unless the defendant withdraws it. Power v. Ivie, 7 Leigh (34 Va.) 147 (1836). Despite this, my advice to trial-court pleaders is not to rely on this Alamo-era ruling; if the plaintiff amends, you’re best advised to reassert any defenses that you want to present to the jury. That failure doesn’t cost the supplier here, but as I’m fond of observing, you don’t want to be a test case in an issue of procedural default.

The justice also hold that the failure to calendar the plea for a hearing isn’t a waiver, because the same jury that decides the merits can adjudicate the plea. Imbedded here is an important point. The buyer, not the supplier, had demanded a jury trial, and the buyer argued that to preserve the right to a jury trial on the plea, the supplier had to file its own jury demand. No dice, the justices hold today; under the rules, a single jury demand is sufficient, and an adverse party can reply on his opponent’s jury demand.

The court remands the case for a limited trial on whether the statute of limitations barred all or part of the buyer’s claim. Justice Powell’s opinion for a unanimous court telegraphs that the primary – and maybe the only – issue for that trial will be when the buyer should have learned of the allegedly fraudulent nature of the statements. That fixes the accrual date for the fraud claim, and starts the limitations clock ticking.

Corporations

It’s dismaying to discover the same surname on both sides of the “v” in litigation. One way or the other, it’s almost always a tragedy. Today’s ruling in Knop v. Knop resolves a family dispute over just how much of a family-held corporation the principal’s children owned.

A man we’ll call Dad incorporated a company in 1982. It owned a large tract of land – almost 1,000 acres – in Loudoun County. Back then, the land’s value may have been relatively modest, but if you know today’s Loudoun, you’ll realize that it’s now probably worth a fortune for development purposes.

In 1987, Dad owned about 73% of the shares; his three adult children owned 9% each. The corporate books reflected these certificated ownership shares. For estate-planning purposes, Dad decided to transfer to his children stock in the amount of the maximum annual gift allowance each year for several years. The company issued K-1s to Dad and the children showing their new percentages, and everyone filed tax returns showing the new percentages. But the company issued no new certificates for the extra shares.

Let’s now turn to the modern era, with that fast pace of growth. Dad evidently perceived that a developer might want to turn this parkland into a neighborhood. Preferring to see things remain the way they had been for years, he proposed to sell or donate some of the company’s land to create a scenic easement. His three children, who perceived by then that they each owned almost 15% of the company, disagreed.

This simple disagreement ensures that this happy situation can only end in tears. The children pointed to the company’s bylaws, which required a 90% vote to sell company property. At this point, Dad decided to play hardball.

The Code of Virginia states that if a shareholder owns more than 2/3 of a company’s stock, he or she can convert it to another form. Dad claimed that while he may have meant to give his kids extra stock, he never actually completed those gifts, so he still owned 73%. Flexing that muscle, he took steps to convert the corporation to an LLC, giving himself complete control, including the right to sell land regardless of the 90% threshold.

Having been thus outflanked, the children went to court, seeking a declaratory judgment that they together owned almost 45% of the company and could block the shift to an LLC. At a bench trial, the judge noted that nothing showed an effective transfer of shares, so Dad really did have the power to do what he did. The court expressly rejected a claim that Dad was estopped from maintaining that there was no transfer.

For a gift to be effective, Virginia law requires proof of (1) donative intent and (2) actual or constructive delivery. That means that a stated intent to donate, no matter how clear or forceful, isn’t enough to transfer ownership. On these facts, the Supreme Court notes today, there’s clearly no actual delivery. On the issue of constructive delivery, the court rules today that that doesn’t occur unless the donor surrenders control of the shares. That didn’t happen here, and the kids failed to establish the detriment component of estoppel. The justices accordingly affirm the circuit court’s judgment in Dad’s favor.

Criminal law

The justices finally decide Stoltz v. Commonwealth today by published order. It’s a conviction for use of a computer to solicit a minor. The appellant is an adult who sought a sexual encounter, not expressly directed to juveniles, on a Craigslist page (since terminated by Craigslist’s publisher) devoted to social encounters. When Stoltz got a reply from a 13-year-old girl, he decided to follow it up.

As so often happens, Stoltz was actually communicating with a quite-adult detective, posing as a juvenile. The conversation continued in sufficient length and detail to make Stoltz’s intentions unmistakable. He arranged a meet-up location and traveled there, but found no 13-year-old waiting for him. A subsequent search of his home computer closed the trap.

The primary issue at trial and on appeal was whether the applicable statute is unconstitutional, for either vagueness or overbreadth. In today’s published order, the justices reject both challenges.

On vagueness, the justices rule that there’s nothing vague about the phrase “reason to believe” in the statute, which proscribes use of a computer to solicit a person who the defendant “knows or has reason to believe is a child younger than 15.” That phrase appears in numerous statutes and the court has never found fault with it before.

The court also rules that the statute isn’t overbroad. Its gravamen isn’t speech but the use of a communication system: “The act of using a communications system is the actus reus of the crime, while the purpose of soliciting the child is the mens rea.” The justices thus unanimously affirm Stoltz’s conviction.