ANALYSIS OF DECEMBER 29, 2022 SUPREME COURT OPINIONS
(Posted December 29, 2022) “There is no doubt that Marley was dead. This must be distinctly understood, or nothing wonderful can come of the story I am going to relate.”
These lines appear near the opening of A Christmas Carol, Dickens’s wonderful holiday tale. It seems fitting to invoke them, because the Supreme Court of Virginia provides three hauntings (published opinions) this morning.
The First of the Three Spirits
Criminal law
The rule of lenity haunts us first, in Morgan v. Commonwealth. It’s a prosecution for carrying a concealed weapon while intoxicated. The statute in issue here is a cousin of the basic proscription of carrying a concealed weapon.
“There is no doubt that the weapon was concealed. This must be distinctly understood.” Morgan, who possessed a concealed-carry permit, was stopped for erratic driving one day here in my sunny home town of Virginia Beach. He immediately reported to the investigating officer that there was a handgun in the car, holstered and inside a zipped bag.
The officer eventually charged the driver with DUI and added other charges, including the one at stake here. At trial, the driver argued unsuccessfully that he wasn’t carrying the weapon; it was inside the bag and unavailable for use or surprise. That defense harks back over a century to a 1909 case in which a defendant was convicted of carrying a concealed weapon that was “encased in a scabbard that was concealed within a saddlebag.” The Supreme Court reversed that conviction, holding that the statute didn’t reach a weapon thus secured.
In 1979, the justices modified the holding of the saddlebags case, ruling that a pistol inside a woman’s purse was indeed a carried concealed weapon. After all, the owner could merely reach into the purse, grab the gun, and shoot right through the bottom of the purse. That set of Robes added that the saddlebags case could be factually distinguished, but in case of any conflict, it was overruled.
That brings us to the 21st Century. After a conviction at trial and an affirmance in the Court of Appeals, the justices – to my surprise – reverse and enter a final judgment of acquittal. Noting a difference in the language of this statute and the general prohibition of concealed-carrying, the court rules that there are two possible interpretations of the Code. When that happens, the rule of lenity dictates that a close call goes to the defendant, because we don’t want to punish people for violating ambiguous criminal statutes. The SCV rules today that the General Assembly didn’t intend to reach this conduct, based on the specific wording that it chose to enact.
The Second of the Three Spirits
Taxation
The second spirit has haunted us before: The litigants in Isle of Wight County v. International Paper Company last appeared two years ago in an appeal that resulted in a remand, a trial judge’s worst nightmare. Today they return, hungry for more.
This, my loyal readers may recall, is a dispute over machinery and tools taxes for a large paper factory. The county assessed the machinery and tools at $139 million. In a prior challenge, the company obtained tax relief of $2.4 million for tax years 2012-14, and the county had to provide other M&T taxpayers with comparable relief.
This left the county with a real fiscal problem. Its solution was to jack up the tax rate – not the assessment values, but the ad valorem multiplier – for M&T taxes for the 2017 tax year only. The rate went from $1.75 per $100 of value to $4.25 per $100.
A jolt like that – perhaps combined with the knowledge that the county could in the future impose another short-term rate hike to raise funds – might foreseeably inspire some of the county’s large taxpayers to seek a friendlier home for their operations. The decisionmakers there accordingly fashioned a one-time tax-relief program to ease the burden of the new higher tax rate. This program allowed a credit to those taxpayers affected, capping their tax increase at the amount of the tax refund they had just received. In other words, they county designed the program to be tax-neutral for those taxpayers.
It didn’t work; International Paper sued and, after the circuit court struck its evidence, got that reversal and remand in 2020. In that reversal, the justices ruled that the company made out at least a prima facie case for relief.
On remand, the court conducted a hearing in which the county adduced almost no evidence; just an admission that the company owned machinery and tools that were subject to taxation. Deciding the case on the merits, the learned judge held that the company had rebutted the presumption of correctness and had shown that the tax was not uniform. He had evidence in the record to back that up, too; today’s opinion notes that International Paper paid an effective tax rate of $3.94 per $100, while another taxpayer’s rate was $2.76. The court ordered a refund of the entire tax payment of almost $6 million for that tax year.
Swallowing hard, the county petitioned for a second writ. The spirits of Christmas were merciful, and the justices agreed to revisit the dispute.
Today’s ruling will haunt the county – the Supreme Court holds that the circuit judge had ample grounds to find a lack of uniformity. It rejects the county’s fallback request to invalidate only the tax relief program and leave the $4.24 tax rate intact. In doing so, the court agrees with the company that the tax increase and the tax-relief program were “interrelated and serve complimentary purposes.” They were enacted in tandem and they work together. That means that the entire framework falls.
There’s one final nightmare for the county. In the Supreme Court, the county’s amici asked the justices, in the event they agreed with the circuit court, to impose at least the old $1.75 tax rate. The county’s lawyer echoed this request in oral argument. But he had to admit that he hadn’t made that request either at trial or in appellate briefing. That means that this ultimate fallback position is defaulted under Rule 5:25, and the county gets zero M&T tax dollars from International Paper’s $139 million worth of equipment for that tax year.
Now you see why I described it as a nightmare: The sudden loss of nearly $6 million has to be devastating for a rural county like Isle of Wight. In this litigation, the county chose to roll the dice, hoping to enhance its odds of a large payday by not inviting the courts to “compromise” on a lesser figure. The dice came up snake eyes this morning.
The Third of the Three Spirits
Subrogation
[I’ll confess that I’m tempted, out of a desire to be faithful to Dickens, not to provide any commentary here, to be like the third spirit in A Christmas Carol – mute and terrifying. But I can’t leave you to just read the opinion for yourself and deduce the scary parts, so I’ll go ahead and analyze it.]The Uniform Commercial Code. There; I’ve said it, and have no doubt petrified some of my readers who grew to despise the UCC while in law school. But despite the minor-chord music that’s playing in the back of your mind, today’s ruling in Arch Insurance Company v. FVCbank is reasonably simple and easy to understand. Fear not; walk with me as we explore the snowy landscape of bank deposits.
The dramatis personae here include a subcontractor, its bank, and a surety company. The contractor set up accounts with the bank for three significant construction projects. The bank agreed to extend an $8 million credit line for the contractor’s operations, and extended payments accordingly. The agreement required the contractor to deposit its project receipts into something called a cash management account. Daily, the bank would grab (the technical banking term is “sweep”) the funds in this account to pay down the credit-line debt. The contractor granted a security interest to the bank over all of its deposits.
The next year, the contractor separately agreed with the surety company for payment and performance bonds for the contractor’s work. The contractor agreed that the surety would be subrogated to any of its claims in the event the surety had to bail it out of financial trouble.
If there were no ensuing financial trouble, we wouldn’t be having this conversation now; would we? The contractor ran into trouble and the surety agreed to deposit almost $4 million into the bank to help the struggling principal. The contractor asked the bank to accept the payment in trust, to protect the surety, but the bank never agreed to that. When things finally got bad enough, the bank swept $2.5 million to pay down its loans.
The contractor and the surety sued, claiming conversion and unjust enrichment. At trial in circuit court, the surety offered an expert witness in tracing the deposits. The court sustained the bank’s objection as to relevance and eventually dismissed the two claims, entering final judgment for the bank.
On appeal, the surety implored the Supreme Court, just as Ebenezer begged Jacob Marley’s ghost, “Speak comfort to me.” The court answers today, just as Marley did back then, “I have none to give.” The court affirms both trial-court rulings. The analysis in today’s 19-page opinion looks complex, but it really comes down to a simple principle: The bank had a perfected security interest in all of the deposits, so it acted well within its rights in sweeping the funds. The surety can rise no higher in its rights than its principal, and as Justice Mann’s opinion points out, “Regardless of the bonded or nonbonded character of Dominion’s funds, Arch only obtained Dominion’s right to the deposit accounts – a right Dominion had already signed away.”
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In Dickens’s tale, a reformed Ebenezer observes that “The Spirits have done it all in one night. They can do anything they like. Of course they can. Of course they can.” The Robes today match that feat, doing it all in one morning for these three sets of litigants. With these rulings, there are only six unresolved appeals from among the 14 argued in the November session.
Will the court again clear its merits docket completely before the convening of the next session on January 10? I wouldn’t bet on that, as there’s only one more opinion day before then. But if you believe in Christmas miracles, who knows?
