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Posted by on Oct 19, 2017 in Civil, Constitutional Provisions, Tax Law | 0 comments

Nextel v. Commonwealth: Uniformity Clause Bars Flat Cap for Taxes, but Statute is Severable

When paying corporate income tax in Pennsylvania, a corporation is permitted to carry over a net loss from the previous year to reduce the current tax year’s taxable income. However, the amount of deduction the corporation may receive—the amount of “net loss” it may carry over from the prior year—is capped at the greater of 12.5% of its current tax year income, or a flat cap of $3 million.

Nextel’s 2007 deduction from its 2006 net losses was capped at 12.5% of its 2007 income because this was greater than the $3 million flat fee cap. Nextel then brought a refund claim, and subsequently brought suit arguing that the $3 million cap that they did not use in tax year 2007 violated the Uniformity Clause in Pennsylvania Constitution, Article VIII, § 1, and—here’s where it gets tricky—that both caps on net loss deductions must be stricken because the statute was inseverable. Because the calculation they did not use was unconstitutional, the entire statute had to be stricken.

Majority by Todd: The flat cap on carryover funds violates the Uniformity Clause, but is severable from the rest of the statute

The Court agreed with the first, but not the second of Nextel’s arguments, and so Nextel wins, but really loses. Justice Todd’s majority opinion comprehensively considers the Uniformity Clause, discussing its background as a popularly-demanded addition to the “Reform Constitution” of 1874, a reaction to the abusive political power of railroads which allowed them to maneuver the General Assembly to exempt the railroads and their allies from taxes, and incrementally placing larger taxing burdens on the rest of the population to make up for the shortfall.

The Uniformity Clause, which comes into the modern 1968 Constitution unchanged, requires “substantial uniformity, which means as nearly uniform as practicable in view of the instrumentalities with which and subjects upon which tax laws operate.”

Todd wrote that Nextel’s “as-applied” argument against the flat cap is strong because of the numbers: 98.8% of all companies were exempt under the $3 million flat cap, while Nextel and a small handful of other corporate taxpayers were “required to shoulder the entire corporate net income tax burden” because of their greater income. In this respect, Nextel bears a larger burden of the corporate taxation burden in the Commonwealth than other companies. The Court found, therefore, that the tax statute “has created disparate tax obligations between these two classes of similarly situated taxpayers based solely on the value of the property involved.” This disparate treatment violates the Uniformity Clause, and the flat cap must be stricken.

 However, the Court did not agree that the statute was inseverable. Severability is the doctrine that determines when a statute may be left standing even without a portion of the statute stricken as unconstitutional. In other words, if a statute says you may not drive red, blue or green cars on the highway, and the Court finds that the prohibition of red cars is unconstitutional, must the whole statute be stricken, or are blue and green cars still prohibited?

Noting the general policy of Pennsylvania that all statutes are severable, codified by 1 Pa.C.S. § 1925, the Court explored two statutory exceptions to severability, which can both be phrased simply: where the legislature would not have passed the remaining statute in its remaining form, or where the statute simply doesn’t make sense without the stricken provision, the whole statute must fail.

Here, there was no reason to think the two legislative goals served by the corporate “net loss” taxation construct were completely defeated by striking one version of measure. Because the percentage cap was valid, and would likely have been passed by the legislature even if they had known the “flat cap” would be stricken down.

Concurrence by Baer: Nextel’s Challenge should be viewed as both Facial and As-Applied

 Justice Baer’s concurrence, joined by Justices Donohue and Wecht, argues that Nextel’s challenge should have been considered as both an “as-applied” challenge to the statute (which is how Nextel characterized the lawsuit), and a “facial” challenge to the validity of the statute (which Nextel disavowed). “[Nextel’s] challenge necessarily implicates the facial validity” of the statute, and the Court should have considered these implications in its majority opinion. “I write separately to clarify that, in my view, our holding declares the NLC unconstitutional on its face.”

Justice Baer appears to be correct that the majority opinion treats the statute as stricken as to all parties, not just Nextel.

Conclusion: Assorted Thoughts

A few scattered notes on this case.

First, the majority notes that Pennsylvania was the first state to include a uniform taxation requirement in its constitution. Thus, Pennsylvania’s continued grappling with this provision provides some guidance for other courts on this issue, and for other states considering adopting such a provision.

Second, although the reasons for the delay are not totally clear, this case is being adjudicated ten years after the tax year in question.

Third, the opinion doesn’t discuss Nextel’s standing, or the lack thereof. Nextel sued over a provision that didn’t apply to it in an attempt to strike down the provision that did apply. Another way of dealing with this case might have been to say that Nextel could not prove the whole statute was unconstitutional, and to decline to reach the merits of the issue of flat tax provisions. Alternatively, the Court may have considered that Nextel was burdened by the dichotomy, and that the lighter tax burden of other companies was harming Nextel directly. Regardless, this issue wasn’t discussed.

Finally, Nextel raises an interesting argument that the Court’s refusal to knock down the whole statute disincentivizes others to challenge tax statutes under the constitutional provision. This argument was rejected by the Court—obviously, they can’t just give you a better judgment than the law requires to “incentivize” lawsuits. But the argument offers a practical insight into a major hurdle to Uniformity Clause legislation—who wants to pay to bring these suits? Most individual taxpayers don’t stand to gain enough, and companies under the $3 million threshold certainly wouldn’t bring one. That leaves it to companies like Nextel or major casinos to take up the fight—and if they don’t think it benefits their bottom line, we may be stuck with unconstitutional taxes.

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Posted by on Sep 29, 2017 in Admissibility, Civil, Rules of Evidence | 0 comments

Coughlin v. Massaquoi: No per se Requirement for Corroborating Evidence before BAC is admissible in a civil case

When is blood alcohol content (BAC) admissible in a civil case to prove negligence (including contributory negligence)? In the context of a car accident, the Supreme Court of Pennsylvania has previously held that “the word drinking . . . carries the inevitable connotation of considerable drinking,” Harvey v. Doliner, 399 Pa. 356 (1960), and that courts must be careful to weigh the prejudice resulting from such connotations against the relevance of the evidence under Pennsylvania Rule of Evidence 403. The Superior Court has taken this ruling to mean that BAC is only admissible in a civil negligence case where there is some other, independent evidence of intoxication as a threshold matter to support admissibility of the BAC.

On the night of January 13, 2012, Ummu Massaquoi was traveling southbound on Castor Avenue in northeast Philadelphia (home of the short-lived Liberty County Secessionist Movement) struck Thomas Coughlin, a pedestrian that Massaquoi did not see in an intersection and killed him. The autopsy revealed that Coughlin had a BAC of .313 (for comparison’s sake, with a BAC of .08, it is illegal to drive) and trace amounts of illegal substances in his system. There were no other witnesses to the accident, and no other evidence regarding Coughlin’s drinking or other actions that night.

Coughlin’s estate moved to preclude the admission of BAC on the idea that the introduction of this evidence would prejudice the jury against Coughlin. The trial court denied the motion, and Massaquoi was permitted to put on expert testimony about the effect that a BAC of .313 would have on coordination and judgment. The jury found Massaquoi negligent, but found that her negligence was not the proximate cause of Coughlin’s death.

Majority by Todd: BAC and expert testimony are relevant to contributory negligence of the plaintiff

Justice Debra Todd, writing for the majority, ruled that the admissibility of BAC in a civil case is analyzed just like any other piece of evidence. Pennsylvania Rule of Evidence 402 asks if the evidence is relevant. If it is, then it is analyzed under rule 403: does its relevance outweigh any potential prejudice to the party against whom it is offered?

Considering this two-part analysis, the majority has no trouble ruling that a pedestrian’s blood alcohol level is directly relevant to whether he may have played a part in the negligence that brought about his death. But the word “drinking” carries a high risk of prejudice, as the Supreme Court held in Harvey, and so a trial court should only admit evidence of intoxication if it reasonably shows intoxication.

While recognizing that the mere introduction of BAC at a trial has the potential to confuse the jury, the Supreme Court rejected the standard of the Superior Court in requiring evidence from another source before admitting BAC. Rather, “the admissibility of BAC evidence is within the trial court’s discretion based upon general rules governing the admissibility of evidence and the court’s related assessment of whether the evidence establishes the pedestrian’s unfitness to cross the street.”

This latter term—the pedestrian’s unfitness to cross the street—is emphasized in the majority opinion. The Court uses this term as a sort of stand-in for the term “relevance.” In other words, proof of drinking, or proof that the pedestrian was a drunk, is prejudicial. Proof that his consumption of alcohol that evening may have made him stagger out into the street negligently is relevant. Where, as in the present case, an expert witness was offered to the jury to explain the effects of alcohol upon the pedestrian’s unfitness to cross the street, the Court found “the probative value of such evidence outweighs its potential for unfair prejudice.”

Concurrence by Donohue: The Majority Opinion should be read in light of the facts

Justice Christine Donohue concurs, writing however that the Court’s opinion “is not tethered to any discussion of the facts of this case,” and that the opinion should not be read broadly. Only where the facts support a finding of intoxication—and not merely where one could speculate from BAC as to the pedestrian’s intoxication—should the trial court admit the evidence.

Dissent by Mundy: Other Evidence of Intoxication Should be Required

Justice Sally Mundy briefly dissents, arguing that independent evidence of intoxication—an eyewitness who saw the pedestrian staggering, “or other evidence of his behavior or demeanor,” should be required before the admission of evidence as to intoxication. Admitting BAC level without solid evidence about what happened “in a poorly lit area at night” only “invites speculation on the part of the jury.”

Conclusion: BAC is just like everything else

The simplest takeaway from this case is that BAC evidence is just like any other kind of evidence in a civil negligence case. It can be admitted if it clears the hurdles of 402 and 403. Although the Court doesn’t explicitly say so here, where the BAC is high, it is more likely to be relevant. Where evidence exists to actual drunkenness, or where evidence shows the party’s response times were slowed, admission of BAC is a virtual lock. And where there is no corroborating evidence, the party seeking admission is not without hope.

The odd part of the majority’s opinion is called out in both the concurrence and the dissent (see footnote 3 of Mundy’s dissent, for example). The majority relies on the expert’s opinion to bolster their conclusion. But why should a jury be less confused just because an expert testified? The underlying evidence challenged was the basis for the expert’s testimony.

Regardless, the Supreme Court of Pennsylvania’s ruling in Coughlin v. Massaquoi clearly puts BAC evidence on part with other types of evidence, and its admissibility rests in the sound discretion of the trial court.

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Posted by on Sep 29, 2017 in Civil, Recusal | 0 comments

Lomas v. Kravitz: Motion for Recusal should be made immediately, if not sooner

The Pennsylvania Supreme Court ruled in Lomas v. Kravitz that a motion for recusal must be made as soon as the facts on which the motion is based come to light, or be forever barred.

James Kravitz breached a contract with Roy Lomas in Montgomery County (home of the largest mall in the United States) and had judgment of more than $200,000 entered against him. Lomas was represented during this time by a lawyer who is now Judge Branca of the Montgomery County Court of Common Pleas. For the next 25 years, Kravitz played cat and mouse with Lomas, leading to a lawsuit alleging Fraudulent Conveyance and attempting to pierce Kravitz’s various corporate veils. The Montgomery CCP entered judgment in Lomas’s favor, yet again, and set a hearing on damages, where Judge Branca testified regarding the reasonableness of his attorneys’ fees.

What should have been a routine line of questions got interesting, however, when Judge Branca revealed on cross-examination that he had an ongoing financial interest in the case in the form of a contingent referral fee, and that he had been in fairly routine communication with Lomas’s current trial counsel. Thirty-nine days later, Kravitz filed a motion to recuse the entire Montgomery CCP bench on the theory that any of them would be inclined to rule in favor of Lomas, given that their fellow Judge Branca stood to benefit from the outcome of the case.

This case’s tortured history includes an en banc split 4-4 at the Superior Court, which opinion was appealed and accepted by SCOPA for review.

Majority by Baer: What took you so long?

Judge Max Baer writes for the 4-1 majority and notes that it is well settled in Pennsylvania law that a motion for recusal “requires a party seeking recusal or disqualification to raise the objection at the earliest possible moment, or that party will suffer the consequence of being time barred.” (quoting Goodheart v. Casey, 523 Pa. 188 (1989)). Recusal decisions are reviewed by appellate courts on an “abuse of discretion” basis, and will only be reversed “where the law is overridden or misapplied, or the judgment exercised is manifestly unreasonable, or the result of partiality, prejudice, bias or ill will, as shown by the evidence or the record.” (quoting Zappala v. Brandolini Prop. Mgmt., Inc., 589 Pa. 516 (2006).

Declining to set the precise moment at which trial counsel should have moved for recusal, the majority holds that his failure to so motion 1) immediately during cross-examination upon learning of the grounds for recusal, 2) at the close of the hearing, or 3) within the 30 days granted by the trial court for review of certain documents, fails the required timeliness standard. In addition, though unstated by the Court, one senses the length of time this matter has dragged on suggests that trial counsel had plenty of time to discover the facts that would have given him grounds for a motion of recusal.

Dissent by CJ Saylor: I would adopt the federal rules

Chief Justice Saylor dissents, arguing that the case presents “an appearance of impropriety,” and that the submission of trial counsel’s motion was not late. The Chief Justice says a motion for recusal should be made with “care and good faith,” and should only be offered in rare circumstances by counsel. The Chief Justice further suggests adoption of the federal rules’ 4-part test to determine the appropriateness of recusal. The majority responds to this latter point in their final footnote, stating, “we are circumspect to adopt and apply a new test in this case, particularly when the parties offer no advocacy in this regard.”

Conclusion: Recusal is always a long-shot

A few clean-up notes: Justices Donohue and Wecht did not participate in the case, and with a Superior Court judge’s non-participation, that makes three judges who did not participate in the case. Unfortunately for Kravitz, the one judge who will still be participating is the trial judge below, and there may be no place more uncomfortable for a litigant than standing before the judge that you attempted to force recusal on.

Recusal is always a long-shot. The Supreme Court’s opinion makes clear in this case that it will only reverse for a clear abuse of discretion, the highest standard of appellate review in Pennsylvania. Judges also may be circumspect to question each other, and such motions are generally disfavored. But when the motion is appropriate, it must be made immediately and without delay to avoid forfeiture.

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Posted by on Sep 29, 2017 in Civil, Insurance | 0 comments

Rancosky v. Washington Nat’l Ins. Co: Terletsky standard prevails for bad faith claims

The Pennsylvania Supreme Court adopted the Superior Court’s Terletsky v. Prudential Property & Cas. Ins. Co. standard for determining bad faith, ruling that no evidence of ill-will is required, nor is there a heightened leval of malice necessary for a finding of punitive damages under the 42 Pa.C.S. § 8371.

LeAnn Rancosky purchased a cancer treatment insurance policy from Washington National Insurance Company (which presumably has no connection to the baseball team that shares its name). A provision of the policy provided that, if she ever became disabled due to cancer, she could cease paying premiums on the policy and still collect the benefits of the policy, provided she submitted several documents. She did become so disabled, and submitted the documents, and stopped paying premiums (as permitted by the policy). Unbeknownst to Rancosky, her doctor made an error on a form, erroneously setting her disabled date to several months after she was disabled and ceased paying premiums.

Months went by, and Washington National failed to respond to multiple inquiries on her claim status. Rancosky gave Washington National multiple opportunities to speak with her doctor, employer and any other third party necessary to confirm her status. Finally, Washington National simply denied her ongoing treatment on the basis that she had ceased paying premiums, despite the policy language allowing her to take this course of action. Rancosky filed a “bad faith” claim under § 8371, which reads as follows:

Actions on insurance policies

In an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

(1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.

(2) Award punitive damages against the insurer.

(3) Assess court costs and attorney fees against the insurer.

Id. A major dispute in this case is a major point of contention in most bad faith claims: must a plaintiff prove the insurance company had a motive of self-interest or ill-will to prevail in her claim, or is a showing of disregard of a duty under the contract sufficient?

 Majority by Baer: Terletsky Standard Prevails

The majority, speaking by Justice Max Baer, finds that the plain language of the statute had precious little to say about the standard of ill-will required. Relying on a past SCOPA case that ruled that the bad faith statute was a “delayed legislative response to this Court’s 1981 decision in D’Ambrosio v. Pennsylvania Nat’l Mut. Cas. Ins. Co., 494 Pa. 501 (1981),” the Court reiterated that the best way to divine legislative intent in regards to the bad faith statute was to look at the Supreme Court case that declined to recognize bad faith under Pennsylvania law.

The majority opinion is written as a comprehensive examination of bad faith law, taking lengthy detours through the first opinions to recognize bad faith as a right of action in tort under California law, and the subsequent refinements of the standards of proof in a Wisconsin case. Ultimately, however, Justice Baer points back to SCOPA’s own caselaw, examining the denial of a common law right of action in D’Ambrosio, and the calls in that case for the legislature to consider passing a right of action where SCOPA felt it unwise to act.

Ultimately, the statute passed, and was interpreted by the Superior Court as early as 1992 to include a two part test. In order to recover in a bad faith action, the plaintiff must present clear and convincing evidence 1) that the insurer did not have a reasonable basis for denying benefits under the policy, and 2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis. Thus, the proof of an insurance company’s motive of self-interest or ill-will, which the Defendant in this case demanded, is not a prerequisite to prevailing in a bad faith claim under § 8371, but may be relevant to satisfying the second prong. Furthermore, the Court ruled, evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient to prove this second prong.

Secondly, the Court turned to the question of punitive damages, which usually require a heightened level of proof of recklessness under Pennsylvania law. Recognizing that the statute placed the three remedies on par with one another, the Court ruled that the General Assembly intended punitive damages to be equally available as a remedy. Indeed, though the majority does not mention it, even the positioning of punitive damages between the other two remedies demonstrates that the legislature did not view it as an extraordinary remedy.

Concurrence by Wecht: Evidence of Ill-will is rare

Justice Kevin Wecht concurs in the result, but notes that the inability to find evidence of ill-will will be common. “[S]uch strains of overt malfeasance often will be lacking and, in any event, will seldom be susceptible to establishment by competent proof of record.”

Concurrence by CJ Saylor: But direct evidence is always rare

Chief Justice Thomas Saylor writes the second concurrence, which is unusual in itself as the concurrences are normally placed in order of seniority. Presumably because the Chief Justice did not join the opinion in full, his thoughts come last. Noting his general approval of the holding, the Chief Justice adds two helpful insights. Observing that “inferences regarding intent are legitimately and regularly drawn from circumstantial evidence (including actions and inaction) in other contexts, including in the criminal law,” the Chief Justice would find that circumstantial evidence can be used, but that a finding of some sort of ill-will and recklessness should be required for a finding of bad faith. His second observation is that punitives generally require a proof of “malice,” and that federal constitutional jurisprudence under the due process clause is implicated where punitive damages come into play.

Conclusion: Bad Faith is a two-part test

The law doesn’t change in this area, but it is confirmed. For a quarter century, Pennsylvania has lived under a two-part analysis of bad faith, and that analysis remains. But the test is now confirmed by the Commonwealth’s highest court, and there will be no further concerns that the law could change tomorrow. If any fault is to be found in this opinion, it is the excessive reliance on other sources. Incorporating by reference an opinion from Wisconsin (but not all of it), and insistently attributing to the General Assembly the motive of responding to a Supreme Court case from ten years earlier without any supporting documentation, the Court takes a fairly straight-forward statutory analysis case and imbues it with a load of scholarly references that make this area of law a bit muddy. Regardless, the test for bad faith is now clear, and overall, this opinion is a welcome clarification.

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Posted by on Apr 9, 2017 in Civil, Family Law | 0 comments

In re Adoption of LBM and ADM: A Child and His Counsel

A child’s legal interests are not the same as his best interests, and in proceedings for the Termination of Parental Rights, the child has a statutory right to counsel for the former, even if he already has a guardian ad litem for the latter. The holding in this case, which arises out of a Child and Youth Services (“CYS”) petition in Franklin County (home of John Brown’s Hideout), was a 5-2 decision upholding a child’s right to an attorney in Termination of Parental Rights proceedings to advocate for the child’s “preferred outcome” in the litigation.

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