Monday, October 16, 2017

FYI: 9th Cir Holds TCPA Claim Not Covered Due to "Invasion of Privacy" Exclusion

The U.S. Court of Appeals for the Ninth Circuit recently held that a liability insurance policy that broadly excluded coverage for invasion of privacy claims also excluded coverage for claims for violations of the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. ("TCPA").

A copy of the opinion is available at:  Link to Opinion

In 2012, a class action complaint was filed against the Los Angeles Lakers for allegedly sending text messages using an automatic telephone dialing system in violation of the TCPA.  The Lakers asked their insurer to defend them against the lawsuit.

The insurance policy required the insurer to pay for losses (with some restrictions) suffered by the Lakers "resulting from any Insured Organization Claim … for Wrongful Acts."  The policy defined "Wrongful Acts" as "any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by" the Lakers.

The policy also contained an exclusion for claims "based upon, arising from, or in consequence of libel, slander, oral or written publication of defamatory or disparaging material, invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, malicious use or abuse of process, assault, battery or loss of consortium."

The insurer determined that the plaintiff had brought an invasion of privacy suit, which was specifically excluded from coverage, and therefore denied coverage and declined to defend the Lakers.

After the insurer's denial of coverage, the Lakers filed a complaint asserting claims for breach of contract and tortious breach of the implied covenant of good faith and fair dealing.

The trial court granted the insurer's motion to dismiss.  In so ruling, the trial court held that the TCPA claims were "implicit invasion-of-privacy claims" that fell squarely within the policy's "broad exclusionary clause." 

On appeal, the Ninth Circuit began its analysis by examining the terms of the policy under California law. 

As you may recall, California courts must "'give[] effect to the mutual intention of the parties as it existed' at the time the contract was executed."  Wolf v. Walt Disney Pictures & Television, 76 Cal. Rptr. 3d 585, 601 (Cal. Ct. App. 2008) (quoting Cal. Civ. Code § 1636).  In addition, courts must give a contract's terms their "ordinary and popular" meaning, "unless used by the parties in a technical sense or a special meaning is given to them by usage."  Palmer v. Truck Ins. Exch., 988 P.2d 568, 652 (Cal. 1999).

Additionally, California courts interpret coverage clauses in insurance contracts "broadly so as to afford the greatest possible protection to the insured."  Aroa Mktg., Inc. v. Hartford Ins. Of the Midwest, 130 Cal. Rptr. 3d 466, 470 (Cal. Ct. App. 2011).  However, courts should interpret "exclusionary clauses … narrowly against the insurer."  Id.

The Laker's insurance policy did not explicitly exclude coverage of TCPA claims.  As a result,  the Ninth Circuit had to determine whether the TCPA claims fell within the exclusion for claims "based upon, arising from, or in consequence of … invasion of privacy." 

Under the text of the TCPA, it is unlawful for any person within the United States, or any person outside the United States if the recipient is within the United States:

to make any call (other than a call made for emergency purposes or made with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice … to any telephone number assigned to a … cellular telephone service … or any service for which the called party is charged for the call ….

47 U.S.C. § 227(b)(1)(A)(iii).

In addition, the Ninth Circuit noted that the TCPA twice explicitly states that it is intended to protect privacy rights.  47 U.S.C. § 227(b)(2)(B)(ii)(I) ("will not adversely affect the privacy rights that this section is intended to protect…"); 227(b)(2)(C) ("the Commission may prescribe as necessary in the interest of the privacy rights this section is intended to protect").

Based on the lack of any other statements expressing an alternative intent, and focusing on the ruling making sections of the TCPA, the Ninth Circuit concluded that the purpose of the TCPA was to protect privacy rights and privacy rights alone.

Next, the Ninth Circuit analyzed the complaint based on its interpretation on the TCPA's goal of protecting privacy. 

The complaint asserted causes of action for negligent violation of the TCPA and knowing/willful violation of the TCPA.  In the Ninth Circuit's view, these two causes of action were unquestionably two invasion of privacy claims, and were excluded under the plain language of the insurance policy. 

Therefore, the Ninth Circuit held that the trial court properly concluded that the claims asserted in the complaint were excluded from coverage under the policy.

Finally, the Lakers argued that the insurer had a duty to defend, even if the policy did not require the insurer to indemnify costs incurred from the lawsuit, because the plaintiff asserted that he suffered multiple harms, not just an invasion of privacy.  The Lakers also argued that the complaint sought "recovery of economic injury" and explicitly swore off "any recovery for personal injury," and therefore the plaintiff did not seek relief for invasion of his privacy, which is generally a form of "personal injury." 

Essentially, the Lakers argued that the insurer had a duty to defend because the policy potentially entitled them to indemnity for other claims.

The Ninth Circuit rejected this argument and held that "a TCPA claim is an invasion of privacy claim, regardless of the type of relief sought."  As such, these claims were excluded under the terms of the policy.  Moreover, the Laker did not identify what other claims this set of facts could support.

Accordingly, the Ninth Circuit affirmed the dismissal of the complaint.

The dissent disagreed with the majority opinion, point out that "[w]hen Congress defines a cause of action based on specific and unambiguous statutory elements, what matters is what the statute says – not what motivated enactment of the statute."

Under the plain terms of the TCPA, statutory damages may be recovered when a plaintiff can prove: "(1) the defendant called a cellular telephone number; (2) using an [ATDS]; (3) without the recipient's prior express consent."  Mayer v Portfolio Recovery Assocs., LLC, 707 F.3d 1036, 1043 (9th Cir. 2012) (citing 47 U.S.C. § 227(b)(1)).

The dissent accused the majority of ignoring the elements of the claim, focusing instead on the misconception that Congress only enacted the TCPA to prevent invasion of privacy, yet nothing in the elements of a TCPA claim says anything about "privacy."

The dissent further disagreed the majority's interpretation of the TCPA, pointing out that that "[t]he TCPA specifically addresses public safety concerns, provides redress for economic injury, and protectives businesses from ATDS calls."  Thus, in the dissent's view, not all TCPA claims are privacy claims.

The dissent concluded that because the plaintiff only sought recovery based on an alleged violation of the TCPA, and expressly disavowed claims based on invasion of privacy, the insurer had a duty to defend the Lakers.

Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon


Wednesday, October 11, 2017

FYI: 9th Cir Limits Subsequent Good-Faith Transferee Exception in Bankruptcy Fraudulent Transfer Actions

The U.S. Court of Appeals for the Ninth Circuit recently held that a debtor corporation's sole shareholder ("Sole Shareholder") and third parties who sold real property and services to the Sole Shareholder could be liable for fraudulent transfers. 

In so ruling, the Ninth Circuit held that the third parties were initial transferees of the debtor corporation's funds because the Sole Shareholder paid the third parties with checks directly from a corporate account, even though the third parties did not have a pre-existing relationship or an ongoing relationship with the Sole Shareholder, his family, or any of his businesses.

A copy of this opinion is available at:  Link to Opinion

As you may recall, the Bankruptcy Code makes a distinction between initial and subsequent transferees when it comes to the recovery of fraudulent transfers. 

The trustee and the debtor's creditors may recover the property (or its value) from "(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any [subsequent] transferee of such initial transferee."  11 U.S.C. § 550(a). 

The trustee and creditors, however, may not recover the property or its value from a subsequent transferee if that transferee accepted the property "for value …, in good faith, and without knowledge of the voidability of the transfer."  Id. at § 550(b)(1).

In 2002, the Sole Shareholder of the debtor corporation opened a separate corporate account and deposited certain vendor rebates into that account over a ten-year span.  The Sole Shareholder concealed the separate account from the debtor corporation's general ledgers and later attempted to conceal its existence from the bankruptcy court. 

The Sole Shareholder used the separate account for personal expenses.  The Sole Shareholder purchased real property from real property sellers ("Sellers") and design services from an interior designer ("Interior Designer").  The Sole Shareholder made these purchases using corporate checks drawn on the separate account.  Neither the Sellers nor the Interior Designer had a pre-existing relationship or an ongoing relationship with the Sole Shareholder, his family, or any of his businesses.

In 2012, the corporation filed for bankruptcy.  The unsecured creditor's committee ("Committee") sought to avoid certain transfers made from the separate account, including the payments to the Sellers and the Interior Designer.  The bankruptcy court found that the Sellers and Interior Designer were subsequent transferees entitled to the safe harbor under § 550(b)(1). 

The trial court reversed the bankruptcy court's decision and found that the Sellers and Interior Designer were strictly liable to the Committee because they qualified as "initial transferees" of the fraudulent payments.  The Bankruptcy Appellate Panel affirmed the trial court's decision.

The Ninth Circuit began its analysis by noting that it had adopted the dominion test for determining who is a transferee for purposes of Section 550.  Under the dominion test, a transferee is one who has dominion over the money or other asset.  The dominion test turns on whether the recipient of funds has legal title to them and whether the recipient has the ability to use the funds as he sees fit.  The Ninth Circuit explained that the test focuses on whether the recipient of funds has legal title to them because dominion strongly correlates with legal title and dominion is akin to legal control.

The Ninth Circuit then observed that courts have taken two approaches when applying Section 550 to fraudulent transfers involving the misappropriation of corporate funds by company directors, officers, or other insiders. 

Under the majority approach (which the Ninth Circuit follows), a principal of a debtor corporation who misappropriates company funds to satisfy personal obligations is not an initial transferee because the mere power of a principal to direct the allocation of corporate resources does not amount to legal dominion and control, which is required for initial-transferee status.

In contrast, under the minority approach, corporate principals may be strictly liable as initial transferees when they misuse company funds for personal gain.  Under this "two-step transaction" approach, the debtor company is deemed to have made the initial transfer to the corporate principal, thus making him or her strictly liable as the initial transferee.

The Ninth Circuit explained the merits of the majority approach.  The Ninth Circuit pointed out that the "flow of funds" matters and that receipt of the transferred property is a necessary element for that entity to be a transferee under section 550.  The Ninth Circuit found that simply directing a transfer, i.e., such as directing a debtor to transfer funds, is not enough. 

In addition, the Court reasoned, section 550(a)(1)'s structure indicates that a principal does not become an initial transferee simply by using his or her control over corporate assets to effect a fraudulent transfer because section 550 imposes strict liability on both initial transferees and any beneficiaries of the fraudulent transfers. Thus, the Ninth Circuit held that section 550 indicates that initial transferees and beneficiaries are separate persons. 

Finally, the Ninth Circuit found that the alternative approach (under which every agent or principal of a corporation is deemed the initial transferee when he or she effected a transfer of property in his or her representative capacity) both misallocates the monitoring costs that section 550 seeks to impose and deprives the trustee of a potential source of recovery for creditors.  The Ninth Circuit observed that recovery from an embezzling principal would be difficult, thus Congress also made the first recipient of those funds liable to returning them.

The Ninth Circuit then held that the Sellers and the Interior Designer were initial transferees because legal control over the funds had never passed from the Corporation to the Sole Shareholder.  Recall that the Sole Shareholder had paid the Sellers and the Interior Designer using checks drawn on the Corporation's account, albeit a concealed, separate account.

Thus, the Ninth Circuit found that section 550 allowed the trustee to recover funds from the Sellers and the Interior Designer as initial transferees and from the Sole Shareholder as the beneficiary.

Judge Nguyen dissented from the majority's opinion.  Judge Nguyen suggested that the Ninth Circuit should abandon its dominion test, in favor of the control test used by other circuits.  Under the control test, courts "view the entire transaction as a whole to determine who truly had control of the money." In addition, Judge Nguyen argued that the debtor corporation did not have legal title to the funds prior to the transfer as a matter of state law.  Judge Nguyen argued that under state law, the Sole Shareholder converted corporate funds by transferring them into his personal account, making him the initial transferee.

Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon