The Acquired Immunity Doctrine – Will the Nebraska Supreme Court Take the Next Step and Adopt the Entire Doctrine?

The acquired immunity doctrine is an affirmative defense that may be available to state construction contractors that are sued by a third party for alleged construction plan design defects.  Here is the scenario: The Nebraska Department of Transportation (“Department”) contracts with a road contractor to remove and replace part of a state highway.  The Department designs the construction plans and requires the contractor to follow the plans as designed.  Part of the construction plans include a traffic control plan.  The traffic control plan complies with the Manual on Uniform Traffic Control Devices (“MUTCD”).  Traffic control is subcontracted to a traffic control manager.  The traffic control subcontractor has no discretion to deviate from the traffic control plan and must set up all traffic devices at the required locations as the Department orders. The subcontractor sets up the traffic devices as the traffic control plan requires.  

Subsequently, a third party is injured in the construction zone and alleges that additional or different traffic devices should have been used on the project.  The Department retains its sovereign immunity because: 1) the Department’s choice of devices was discretionary, and a matter of engineering judgment; and, 2) under Nebraska’s State Tort Claim Act, the Department retains its sovereign immunity for “Plans for Construction of or improvement to highways.” See Neb. Rev. Stat. §§ 81-8,219 (9) & (11) (Reissue 2014). Yet, the subcontractor is sued for the traffic plans’ alleged design defects even though the Department designed the plan and is immune from liability. Can the subcontractor raise the Department’s sovereign immunity as an affirmative defense?  The answer is “yes,” and the defense is called the “acquired immunity doctrine.”  

The acquired immunity doctrine “provides that a contractor who performs its work according to the terms of its contract with a governmental agency, and under the governmental agency’s direct supervision, is not liable for damages resulting from its performance.” Lopez v. Mendez, 432 F.3d 829, 833 (8th Cir. 2005) (citing Smith v. Rogers Group, Inc., 348 Ark. 241, 72 S.W.3d 450, 455 (2002)) (emphasis added). “Thus, if damages result from the contractor’s performance of a construction contract with the state, ‘and the damages result from something inherent in the design and specifications required by the public agency, the contractor is not liable unless he is negligent or guilty of a wrongful tort.’” Lopez, 432 F.3d at 833 (quoting Guerin Contractors, Inc. v. Reaves, 270 Ark. 710, 606 S.W.2d 143, 144 (1980)). “The purpose of the doctrine is to protect an ‘innocent contractor who has completely performed the work to the government’s plans and specifications.’” Lopez, (quoting Smith, 72 S.W.3d at 456).

The Nebraska Supreme Court has not yet adopted the acquired immunity doctrine.  But the Supreme Court has adopted the immunity’s fundamental concept. That is, the Supreme Court has said “where a construction contractor follows plans and specifications supplied by the owner which later prove to be defective or insufficient, [the contractor] is not responsible to the owner for loss or damage resulting therefrom as a consequence of the defectiveness or insufficiency of such plans and specifications.” Lindsay Mfg. Co. v. Universal Sur. Co., 246 Neb. 495, 506-07, 519 N.W.2d 530, 539-40 (1994); see also Langel Chevrolet-Cadillac, Inc. v. Midwest Bridge & Constr. Co., 213 Neb. 283, 287, 329 N.W.2d 97, 100-01 (1983) (citations omitted); Central Neb. Pub. Power & Irr. Dist. v. Tobin Quarries, Inc., 157 F.2d 482, 485-86 (8th Cir. 1946) (applying Nebraska law); State v. Commercial Cas. Ins. Co., 125 Neb. 43, 50, 248 N.W. 807, 808-09 (1933).

This is the acquired immunity doctrine. Furthermore, although the Nebraska’s State Tort Claims Act excludes independent contractors from the term “state agency,” “the acquired-immunity doctrine creates an exception to this rule.” See Neb. Rev. Stat. § 81-8,210(1); see also Lopez, 432 F.3d at 833. The reason for the exception “is to protect an ‘innocent contractor who has completely performed the work to the government’s plans and specifications.’” Lopez, 432 F.3d at 833 (quoting Smith, 72 S.W.3d at 456).  In fact, other jurisdictions with tort claims acts like Nebraska’s Act and that have the same “state agency” exclusion for contractors as Nebraska’s Act, still have adopted the acquired immunity doctrine to protect innocent contractors that follow the state’s construction plans. See id. at 833-34 (discussing the acquired immunity doctrine under Arkansas law); see also McLain v. State, 563 N.W.2d 600, 605 (Iowa 1997); Fraker v. C.W. Matthews Contracting Co., Inc., 272 Ga. App. 807, 614 S.E.2d 94 (2005); Garrett Freightlines v. Bannock Paving Co., 112 Idaho 722, 731, 735 P.2d 1033, 1042 (1987).

For example, the Iowa State Tort Claims Act also excludes independent contractors from the term “state agency.” I.C.A § 669.2(5). But the Iowa Supreme Court nevertheless adopted the acquired immunity doctrine to protect its independent contractors from liability. Specifically, in McLain v. State, supra, the plaintiffs sued the State of Iowa, its general contractors, and a subcontractor working in an interstate construction zone. The plaintiffs claimed that the construction zone was unreasonably dangerous because the traffic warning signs failed to warn motorists of traffic congestion. McLain, 563 N.W.2d at 601. The district court granted the general contractor and subcontractor summary judgment under the acquired immunity doctrine and in affirming summary judgment, the Iowa Supreme Court held:

The rule is well established that a contractor for the State is not liable to a third party for damages if the contractor complies with the State’s plans and specifications and is not negligent in performing its work . . . . In other words, in those situations the contractor shares the same immunity as the State.

* * *

Here, the evidence in the record reflects that [the general contractors and subcontractor] complied with all State plans and specifications and did not perform their work in a negligent manner. Throughout the project, the State controlled all decisions regarding the placement and installation of the traffic control devices. [The subcontractor] installed the warning signs as it contracted to, and on the day of the accident, the signs were in their proper locations and in complete working order.

Id. at 605 (citations omitted).

The Iowa court also noted that monitoring the effectiveness of the signs was “part of the decision-making process of whether to install additional signs,” which was a decision retained by the State and immunized by statute. Id. The Iowa Supreme Court then held that “[b]ecause [the general contractors and the subcontractor] complied with the State’s contract specifications, we conclude as a matter of law that they may share immunity with the State . . . .” Id.

            Here, like McLain, the subcontractor in our scenario followed the traffic control plan and the traffic plan complied with the MUTCD.  Also, the third-party’s claim that the traffic control plan should have included different or additional traffic devices is a claim against the Department because the Department designed the Traffic Plan —not the subcontractor. The Department, however, is immune from liability because: 1) the traffic plan’s design was a matter of engineering judgment; and, 2) the traffic plan was part of the Project’s “Plans for Construction” for a highway improvement. Neb. Rev. Stat. §§ 81-8,219 (9) & (11). Thus, the subcontractor is cloaked in the Department’s sovereign immunity because it “complied with all State plans and specifications and did not perform their work in a negligent manner. [And] [t]hroughout the project, the Department controlled all decisions regarding the placement and installation of the traffic control devices.” McLain, 563 N.W.2d at 605.

            Now, we need the right case to be taken to the Nebraska Supreme Court.  And remember, in Nebraska you can now file an interlocutory appeal on an order denying summary judgment based on the assertion of sovereign immunity.  Neb. Rev. Stat. § 25-1902.  

Post-Loss Assignments of Benefits: An Easier Way for Contractors to Get Paid

Contractors face an endless stretch of legal and business hurdles on a daily basis. They have to deal with weather, safety, personnel, material acquisition, permits, and needy homeowners. But, getting paid on residential construction work covered by a homeowner’s insurance policy should not be one of those hurdles because there is an easier way for contractors to get paid.

When a homeowner suffers a loss covered by their insurance policy, they have the right to assign their insurance benefits to the contractor making the repairs to their home. By doing this, the homeowner authorizes the insurance company to make the contractor a co-payee for that loss.

In most states, the law permits contractors to ask homeowners to assign their post-loss benefits to the contractor for the work they bid. This allows the contractor to receive payment directly from the homeowner’s insurance company. And, most importantly, helps the contractor avoid those dreaded situations where a homeowner receives their insurance payout but refuses to pay their contractor for its work.

Contractors, however, must beware of the many pitfalls that they can fall into with these post-loss assignments of benefit agreements. Failure to follow laws designed to protect insured homeowners can lead to a contractor’s entire contract becoming voided.

For example, a post-loss assignment of benefits has to be a written agreement. That agreement must contain certain language as set forth by statute, and the contractor has to place the homeowner’s insurance on notice of the assignment within a certain number of days depending on the jurisdiction.

Contractors also have to be careful not take certain forbidden actions on behalf of the homeowner. Some states like Iowa forbid a contractor from negotiating with a homeowner’s insurance company on the homeowner’s behalf. Other states strictly forbid a residential contractor from offering rebates on their deductible as an incentive for choosing their construction company for their job. Mistakes like these can cause a court to find the residential contractor’s entire agreement is void and unenforceable.

Finally, post-loss assignment of benefits under an insurance policy must include specific language depending on the jurisdiction that the contract is contemplated. For example, in Nebraska, a contractor must include the following language in all caps and in 14 pt. font for its assignment to be proper:

YOU ARE AGREEING TO ASSIGN CERTAIN RIGHTS YOU HAVE UNDER YOUR INSURANCE POLICY. WITH AN ASSIGNMENT, THE RESIDENTIAL CONTRACTOR SHALL BE ENTITLED TO PURSUE ANY RIGHTS OR REMEDIES THAT YOU, THE INSURED HOMEOWNER, HAVE UNDER YOUR INSURANCE POLICY. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING.

THE INSURER MAY ONLY PAY FOR THE COST TO REPAIR OR REPLACE DAMAGED PROPERTY CAUSED BY A COVERED PERIL, SUBJECT TO THE TERMS OF THE POLICY.

IT IS A VIOLATION OF THE INSURANCE LAWS OF NEBRASKA TO REBATE ANY PORTION OF AN INSURANCE DEDUCTIBLE AS AN INDUCEMENT TO THE INSURED TO ACCEPT A RESIDENTIAL CONTRACTOR'S PROPOSAL TO REPAIR DAMAGED PROPERTY. REBATE OF A DEDUCTIBLE INCLUDES GRANTING ANY ALLOWANCE OR OFFERING ANY DISCOUNT AGAINST THE FEES TO BE CHARGED FOR WORK TO BE PERFORMED OR PAYING THE INSURED HOMEOWNER THE DEDUCTIBLE AMOUNT SET FORTH IN THE INSURANCE POLICY.

THE INSURED HOMEOWNER IS PERSONALLY RESPONSIBLE FOR PAYMENT OF THE DEDUCTIBLE. THE INSURANCE FRAUD ACT AND NEBRASKA CRIMINAL STATUTES PROHIBIT THE INSURED HOMEOWNER FROM ACCEPTING FROM A RESIDENTIAL CONTRACTOR A REBATE OF THE DEDUCTIBLE OR OTHERWISE ACCEPTING ANY ALLOWANCE OR DISCOUNT FROM THE RESIDENTIAL CONTRACTOR TO COVER THE COST OF THE DEDUCTIBLE. VIOLATIONS MAY BE PUNISHABLE BY CIVIL OR CRIMINAL PENALTIES.

The contractor must have the homeowner sign and date below this language as well. Then, after the  post-loss assignment of benefits is executed, a residential contractor in Nebraska must provide a copy of the assignment to the homeowner’s insurance company within five business days.

By taking advantage of post-loss assignments of rights under an insurance policy, contractors can keep revenue streams open cand collections moving. And often times, these simple assignments can help a contractor avoid the headache of executing liens as well. Residential contractors, however, should remember that contracts can be tricky. Assignments like the one described above need to be properly incorporated into the contractor’s underlying contract and those contracts need to meet all necessary formalities under the law to be binding. Therefore, contractors should never hesitate to reach out to a construction lawyer who is familiar with construction contracts and litigation when they have questions about their contracts.

Nebraska Supreme Court Clarifies Enforcement of Covenants Regarding Homeowners’ Associations

Erickson | Sederstrom's attorneys’ have extensive background in real estate disputes.  If faced with a difficult issue involving real estate – including conveyances, development, zoning, construction, property tax, or other issues – we recommend you contact our office and speak with one of our attorneys. 

 Real estate developments typically are governed by covenants that require or prohibit certain actions by property owners.  To be enforceable, covenants must involve issues that “touch and concern” the land.  The “touch and concern” element of real property covenants has been convoluted in its development.  The Nebraska Supreme Court recently narrowed the interpretation of this element as applied to communities governed by a homeowners’ association (“HOA”).  See Equestrian Ridge Homeowners Ass'n v. Equestrian Ridge Estates II Homeowners Ass'n, 308 Neb. 128, 146 (2021).  Specifically, the court determined that the “touch and concern” element may be satisfied as applied to communities governed by an HOA when the “burden” of HOA payments is afforded to a “benefit” that is: (1) considered a necessity to the community; and (2) increases the value of the community’s lots.

 Facts

 In Equestrian Ridge Homeowners Ass'n v. Equestrian Ridge Estates II Homeowners Ass'n, the Nebraska Supreme Court decided a dispute between two neighboring HOAs involving real covenants running at law in a neighborhood near Gretna, Nebraska.  The covenants addressed requirements to maintain a street.

 In 2004, Ted Grace (“Grace”) and Duane Dowd (“Dowd”) owned contiguous tracks of land near Gretna.  Together, Grace and Dowd agreed to grant their respective tracts of land to Equestrian Ridge, an L.L.C. established by Grace and Dowd, and develop the tracts into residential subdivisions.  Subsequently, Grace and Dowd executed an additional agreement to develop Grace’s tract (“Equestrian Ridge Estates”) first, then Dowd’s tract (“Dowd Grain Subdivision”) thereafter.  All fifteen lots in Equestrian Ridge Estates were sold and were subject to the authority of its HOA through a series of covenants, conditions, and restrictions (“CC&R’s”).  During the development of Dowd Grain Subdivision, the parties determined that Shiloh Road, the only accessible pathway to the Subdivision, terminated at a dead end; therefore, the parties decided to improve accessibility to the Subdivision by “extending Shiloh Road past its dead end to the west, across the border with” Equestrian Ridge Estates.  This agreement was evidenced by Dowd’s promise to subject Dowd Grain Subdivision and its forthcoming HOA, through a series of CC&R’s, “to a sharing of one third of the costs and expenses for the repair and maintenance of 232d Street within Equestrian Ridge Estates.”

 After developing several lots within Dowd Grain Subdivision and renaming the subdivision Equestrian Ridge Estates II, Dowd resigned from the HOA.  Thereafter, “[t]he board members of Equestrian Ridge Estates II HOA formally accepted Dowd's relinquishment of all his interests and agreed to manage the subdivision, and contributed its share of maintenance costs to improve 232d Street.

 In early 2015, Equestrian Ridge Estates II HOA “met to discuss major roadwork that was expected along 232d Street” and made several complaints, including “that when Equestrian Ridge Estates HOA made repairs to 232d Street, it did so without the input of Equestrian Ridge Estates II HOA.”  Equestrian Ridge Estates II HOA further complained “that they only ever learned about 232d Street maintenance projects upon receiving invoices from Equestrian Ridge Estates HOA, typically without any explanation about the maintenance for which they were being asked to contribute.”  Afterwards, Equestrian Ridge Estates II HOA amended its CC&R’s “to remove any requirement of [their] lot owners to contribute to maintenance costs of 232d Street” and refused to contribute to road maintenance costs, while Equestrian Ridge Estates HOA paid the entire amount.  As a result, Equestrian Ridge Estates HOA filed suit against Equestrian Ridge Estates II HOA to seek payment for the road maintenance costs pursuant to the covenants.

 Legal Conclusions

 The Nebraska Supreme Court held that Equestrian Ridge Estates II HOA “was bound to contribute to 232d Street maintenance costs under the 2004 Agreement” because Equestrian Ridge Estates II HOA “was a successor in interest of Dowd Grain Subdivision and, as such, was bound by the covenant at issue in the 2004 Agreement, which runs with the land in perpetuity.”  In support of its holding, the Nebraska Supreme Court set forth and applied the three requirements for a covenant to run with the land:

(1) The grantor and the grantee must have intended that the covenant run with the land, as determined from the instruments of record; (2) the covenant must touch and concern the land with which it runs; and (3) the party claiming the benefit of the covenant and the party who bears the burden of the covenant must be in privity of estate. 

 Applied here, the “intent to bind” element was met because it was contemplated in the 2004 agreement that the covenants at issue “would bind lot owners in the future.”  When considering the “touch and concern” element, the court noted that “it has been found impossible to state any absolute tests to determine what covenants touch and concern land and what do not.”  Therefore, this issue was “one for the court to determine in the exercise of its best judgment upon the facts of [the] case.”

 The Nebraska Supreme Court has adopted a clearer explanation of “what it means for a covenant to touch and concern the land.”  The “covenant must impose, on the one hand, a burden upon an interest in land, which on the other hand increases the value of a different interest in the same or related land.”  The “touch and concern” element is met in this instance because “[i]n exchange for the burden of being required to contribute to 232d Street maintenance costs, Dowd afforded Equestrian Ridge Estates II and its future lot owners the benefit of paved access across 232d Street to public roads.”

 Finally, the Nebraska Supreme Court distinguished and applied various definitions of “privity” when analyzing the third element of “privity of estate.”  See id. at 146-47.  In essence, “privity” can be “defined as mutual or successive relationships to the same right of property, or such an identification of interest of one person with another as to represent the same legal right or derivative interest . . . between parties.”  Id. at 147.  The “privity of estate” element is satisfied in this case because Equestrian Ridge Estates II, the same property that Dowd once owned, is now controlled by Equestrian Ridge Estates II HOA and owned by Equestrian Ridge Estates II HOA and Equestrian Ridge Estates II's lot owners.  Id.  Accordingly, “Dowd and these lot owners are successive owners of the same land pursuant to their deeds of purchase for the lots.”  Id. 

 Therefore, Dowd’s promise to subject his subdivision to a requirement to contribute to 232d Street maintenance costs at the time of the 2004 agreement “was a covenant that ran with the land.”  As a result, Equestrian Ridge Estates II HOA, as the successor in interest to Dowd, was bound to contribute to 232d Street maintenance costs.

 Future Developments for Covenants Running at Law as Applied to Communities Governed by an HOA

 Although the “touch and concern” element has been convoluted throughout its development, the Nebraska Supreme Court has now narrowed its interpretation of this element as applied to communities governed by an HOA.  Specifically, the court determined that the “touch and concern” element may be satisfied as applied to communities governed by an HOA when the “burden” of HOA payments is afforded to a “benefit” that is: (1) considered a necessity to the community; and (2) increases the value of the community’s lots, such as the street maintenance costs involved here. 

Nebraska Supreme Court Upholds Premises Liability Standard, Rejecting Foreseeability as a Conclusory Factor

In Sundermann v. Hy-Vee, the Nebraska Supreme Court found that Hy-Vee was not liable to the plaintiff, Sundermann, who sustained serious injuries when she was struck by a pickup truck while using an air compressor to fill her tires in a Hy-Vee parking lot.  Sundermann v. Hy-Vee, Inc., 306 Neb. 749 (2020).  In support of its holding, the Nebraska Supreme Court applied the framework for premises liability and rejected the trial court’s finding that Hy-Vee was liable based upon a more general foreseeability analysis.  Id at 764.  The premises liability test holds that a possessor of land is subject to liability for an injury caused to its lawful visitor by a condition on the land if

(1) the possessor either created the condition, knew of the condition, or by the existence of reasonable care would have discovered the condition; (2) the possessor should have realized the condition involved an unreasonable risk of harm to the lawful visitor; (3) the possessor should have expected that a lawful visitor such as the plaintiff either (a) would not discover or realize the danger or (b) would fail to protect himself or herself against the danger; (4) the possessor failed to use reasonable care to protect the lawful visitor against the danger; and (5) the condition was a proximate cause of damage to the plaintiff. 

Id.  Applying these elements to the facts, the first element was satisfied because Hy-Vee designed the parking lot area and chose where to place the air compressor.  Id at 767.  In considering the second element, the court viewed the evidence in the light most favorable to the plaintiff and assumed that there was a genuine issue of material fact regarding whether the location of the air compressor created an unreasonable risk of harm.  Id at 771.  When considering the third element, the law holds that “a land possessor is not liable to a lawful entrant on the land unless the possessor has or should have had superior knowledge of the dangerous condition.”  Id at 770.  Further, a landowner will not be liable for a dangerous condition unless the landowner “should have expected” that the plaintiff “either would not discover or realize the danger or would fail to protect himself or herself against the danger.”  Id. 

The open and obvious doctrine states that a possessor of land is not liable to an invitee for harm caused by any activity or condition on the land when the danger is known or obvious to the invitee.  Id.  The court found that the dangers of parking in the drive aisle to use the air compressor were obvious and the plaintiff would have appreciated the risks associated with parking where she did and crouching down to fill her tires.  Id.  Further, there was no evidence that Hy-Vee had any reason to believe that Sundermann would become distracted and unable to recognize the obvious risk, but rather Sundermann testified that she was aware of the danger and was watching for traffic.  Id.  Because the open and obvious doctrine clearly applies, Hy-Vee is not liable under the doctrine.

The court therefore found that the third element could not be satisfied, stating “even when a land possessor is aware lawful visitors are choosing to encounter an obvious risk, it does not necessarily follow that the land possessor has reason to expect the lawful visitors will fail, or be unable, to protect themselves from that risk.  Id.  Hy-Vee had not received any safety complaints before about that location, and there had not been any prior accidents that would lead Hy-Vee to believe lawful visitors would fail to protect themselves from the obvious risk associated with choosing to park in the drive aisle.  Id.  Further, Hy-Vee had no reason to expect that the plaintiff would not appreciate the danger posed by her activities.  Id.

            Because the third element could not be satisfied, Hy-Vee could not be held liable for Sundermann’s injuries.  This case was significant in rejecting the analysis used in the trial court, which focused on whether it was reasonably foreseeable that a lawful visitor would be injured in such a way.  This court instead focused on the premises liability standard, in which foreseeability is a consideration, but not a conclusory factor.

Matthew D. Quandt accepted into TIDA (the Trucking Industry Defense Association), one of only six attorney members in Nebraska/Iowa.

The Trucking Industry Defense Association (TIDA) is a nonprofit association with members devoted to sharing knowledge and resources for defense of the trucking industry. Founded in 1993, TIDA has become the organization of choice for over 1,600 motor carriers, trucking insurers, defense attorneys and claims servicing companies. The organization is committed to reducing the cost of claims and lawsuits against the trucking industry. Members work to develop strategies and share knowledge to defend the trucking industry in personal injury, property damage, workers' compensation and cargo claims. TIDA members advocate on behalf of the industry’s interests.

As part of his trucking defense practice, Mr. Quandt offers 24-hour rapid response: facilitate on-scene investigation, organize applicable post-crash testing, collect driver and company documents, take steps to maintain confidentiality and expert work product, ensure FMCSR compliance, etc.

Nebraska Supreme Court Upholds PSC Approval of Keystone XL Route

On August 23, the Nebraska Supreme Court issued its long-awaited opinion in the Keystone XL pipeline route approval case that was argued before the court in fall, 2018. Issued as In Re Application No. OP-0003 and cited as 303 Neb. 872, the opinion stems from a suit brought by landowners and advocacy organizations in opposition to the Nebraska Public Service Commission's decision in November of 2017 to approve the Mainline Alternative Route (MAR) for the Keystone XL Pipeline.

In a 59-page, unanimous decision, authored by Justice Funke, the Court stated:

"In summary, the PSC is an elected body created by the Nebraska Constitution to serve the public interest... the legislature determined that '[t]he construction of major oil pipelines in Nebraska is in the public interest...' The Legislature designated the PSC as the agency responsible for determining which pipeline route is in the public interest. After months of careful consideration, the PSC determined that the evidence showed that the MAR (Mainline Alternative Route) is in the public interest. Upon de novo review, we find there is sufficient evidence to support the PSC's determination that the MAR is in the public interest. The assignments of error are without merit."

While those who argued in favor of the project welcomed the news, those who have long opposed the project, like Bold Nebraska founder and current Chair of of the Nebraska Democratic Party, Jane Kleeb, issued comments stating the Legislature, or a new President in 2020 could seek to undo the opinion issued by the Supreme Court.

U.S. Supreme Court Takes Broad View of Qualified Immunity for Police Officers

       The United States Supreme Court recently held that a police officer who shot a woman holding a knife outside her home was entitled to qualified immunity because his actions did not violate clearly established statutory or constitutional rights that a reasonable person would have known. Kisela v. Hughes, 584 U.S. ___, 138 S. Ct. 1148 (2018).

       In May 2010, Andrew Kisela and other officers responded to a 911 call that a woman carrying a knife was acting erratically. Officers spotted Sharon Chadwick in the driveway of a nearby house. Then, Amy Hughes, matching the 911 description of the woman acting erratically, emerged from the house carrying a large knife. Hughes stopped near Chadwick, at which time the officers drew their guns. After officers told Hughes to drop the knife twice, Kisela shot Hughes four times. Less than one minute passed from the time the officers first saw Chadwick to when Kisela shot Hughes.

       Hughes sued Kisela under 42 U.S.C. § 1983, alleging Kisela used excessive force in violation of the Fourth Amendment, which the Court did not decide. Instead, it held Kisela was entitled to qualified immunity, even if a Fourth Amendment violation did occur.

       The Court explained that, “although existing case law does not have to be directly on point…existing precedent must have placed the statutory or constitutional question at issue beyond debate” to deny a police officer qualified immunity. Excessive force, particularly, “is an area of the law in which the result depends very much on the facts of each case, and thus police officers are entitled to qualified immunity unless existing precedent squarely governs the specific facts at issue.” Thus, an officer does not violate a clearly established right unless “the right’s contours were sufficiently definite that any reasonable official in the defendant’s shoes would have understood that he was violating it.”  The Court held the facts in Kisela were “far from an obvious case in which any competent officer would have known that shooting Hughes to protect Chadwick would violate the Fourth Amendment.”

       This decision is in line with other recent Supreme Court decision on excessive use of force by police officers.  Claimants asserting excessive use of force claims against police officers must overcome strong deference in favor of the police officers in order to prevail on their claims.

Interaction Between Nebraska Statutes Defining When a Judgment is Entered and Bankruptcy Law

Under federal law, filing a petition in bankruptcy implements an automatic stay regarding judicial actions against the debtor. The Nebraska Supreme Court has clarified whether a judgment violates the automatic stay when the judgment is announced verbally prior to a bankruptcy filing, but signed and file stamped after the filing.

In Doe v. Fireman’s Fund Insurance Co., Jane Doe filed suit in Lancaster County District Court against Red Willow Dairy, Jim Huffman and Ann Huffman. 287 Neb. 486 (2014). Jim and Ann Huffman owned Red Willow Dairy, and Doe alleged the company failed to investigate and supervise an employee that assaulted Doe. Doe filed a motion for default judgment on December 14, 2009, after all defendants failed to answer her complaint. On December 18, 2009, the court sustained the motion for default judgment and directed Doe’s attorney to submit a proposed order within seven days. On December 21, 2009, Red Willow Dairy and the Huffmans filed for bankruptcy.  On December 22, 2009, the judge signed an order for the default judgment, and the Lancaster County District Court Clerk file stamped the order.

As part of a bankruptcy settlement, Doe received rights the Huffmans and Red Willow Dairy might have against Fireman’s Fund Insurance Company for its actions relating to the original lawsuit. Doe filed a complaint against the company, alleging it breached its duty to defend Red Willow Dairy and the Huffmans. In return, Fireman’s filed a motion for partial summary judgment, arguing that the entry of the default judgment violated the automatic stay even though the court announced the judgment three days prior. The district court agreed and granted the motion for partial summary judgment.

Doe appealed the district court’s decision, arguing that signing the order previously announced and file stamping were only clerical in nature and Nebraska should adopt the ministerial exception referred to by United State Court of Appeals for the First Circuit. The “ministerial exception” reasons that when a judicial decree is so clear and unambiguous, the judicial action is complete. Any subsequent announcements that provide a court with no discretion do not violate the automatic stay rule.

The Nebraska Supreme Court declined to adopt this exception, noting that the exception contradicts Nebraska Statute §25-1301. The Nebraska law resolves any uncertainty regarding the commencement of the time to appeal a judgment by defining “judgment” as a decision that is rendered and entered. The court reasoned that the rendition in this case occurred when the default judgment was announced on December 18, 2009. The entry of the default judgment did not occur until December 22, one day after the Huffmans and Red Willow Dairy filed for bankruptcy. Because the district court did not sign and file stamp the judgment until December 22, it did not become a “judgment” until that day. The court reasoned that because the judgment was not finalized until December 22, it violated the automatic stay rule regarding the bankruptcy petition filed on December 21, 2009.

The Nebraska Supreme Court’s decision ensured that the definition of “judgment” stays clear and consistent in Nebraska. Although creditors in other jurisdictions do not violate the automatic stay rule when future proceedings involve only clerical matters, Nebraska creditors must be cautious when it comes to such proceedings.  If you have questions regarding application of the automatic stay rule with regard to collection actions, please contact one of the Erickson|Sederstrom attorneys working in the creditors rights area.

Tortious interference among set of valuable tools for employers to protect their information from misuse by former employees

Recently, the Eighth Circuit Court of Appeals reviewed an appeal out of the District of Nebraska. The multiple claims against former employees, including a claim for tortious interference with business relationships, a claim not often considered by employees and employers, but which can make a wide array of damages available to a plaintiff. The claim often arises alongside claims that former employees have taken trade secrets or used confidential information to solicit clients or other employees. Read on to learn more!

Factual Background

            Bryce Wells (“Wells”) was the president and shareholder of West Plains Company. Wells sold West Plains Company to West Plains, L.L.C. (West Plains), in February 2012. West Plains operated a freight brokerage operation called CT Freight. When Wells sold West Plains Company, the employee defendants and Jodi May (“May”) all continued to work for West Plains in the same positions they held prior to the sale. The employee defendants signed the West Plains Employee Handbook, “which prohibited employees from engaging in conflicts of interest and disclosing confidential information to a competitor.”

            In October of 2012, Wells began forming Retzlaff Grain Company, a freight brokerage company. Retzlaff Grain Company did business as RFG Logistics. Wells recruited four of the employee defendants who “signed confidentiality and consulting agreements with Wells.” Wells provided them each with $5,000 as a consulting fee.

            These four employee defendants worked with Wells in creating RFG Logistics and recruited the remaining employee defendants to join RFG Logistics by the end of January, 2012. The employee defendants then submitted their resignations from CT Freight.

Procedural History

            In February 2012, West Plains brought suit, alleging “(1) misappropriation of trade secrets against all defendants; (2) tortious interference with business relationships against all defendants; (3) tortious interference with employment relationships against Wells and RFG Logistics; (4) breach of the duty of loyalty against the employee defendants; (5) civil conspiracy against all defendants; and (6) a violation of the Computer Fraud and Abuse Act . . . against [one of the employee defendants].”

            The district court granted a temporary restraining order against the defendants “prohibiting them from contacting and providing freight brokerage services for the customer and carriers of CT Freight” until the court ordered and to return all documents taken from West Plains. The temporary restraining order was extended to April 5, 2013. The district court ruled in favor of the defendants regarding the claims for tortious interference with employment relationships and the claim under the Computer Fraud and Abuse Act.

            At trial, the jury found in favor of West Plains on the tortious interference with business relationships claim as to all defendants except for three. The jury also found a breach of the duty of loyalty by all employee defendants. Finally, the jury found that all defendants, except May, entered into a civil conspiracy. According to these findings, the jury awarded West Plains $1,513,000 in damages and required forfeiture of compensation of all employee defendants. The defendants appealed.

Tortious interference with business relationships

            In order to prove tortious interference with a business relationship in Nebraska, the following must be shown: 1) “the existence of a valid business relationship or expectancy”, 2) that the person interfering had knowledge of the business relationship or expectancy, 3) “an unjustified intentional act” by the interferer, 4) a showing that the interference caused the harm, and 5) damage to the party whose business relationship or expectancy was interfered with. The defendants alleged that that their conduct did not amount to unjustified interference and that West Plains did not prove their conduct caused that damages sustained by West Plains after the temporary injunction expired.

Acts of Unjust Interference

            Often the key question in a tortious interference claim is whether the acts that interfered were justified and proper. In this case, the Eighth Circuit Court of Appeals determined that “a jury could find Wells unjustly interfered with West Plains’ business relationship by knowingly paying, recruiting, and seizing CT Freight’s workforce, infrastructure, and customer relationships.”

            The court reasoned that Wells knew that by recruiting freight brokers away from CT Freight that he could essentially own CT Freight without having to pay for it. Although Wells instructed the employee defendants not to take any customers from CT Freight, he recruited the leaders of CT Freight and began a plan “that effectively would remove CT Freight’s business to RFG Logistics.” The group resignation resulted in an inability by CT Freight to “broker large quantities of freight.”

            The court also found that “the employee defendants took it upon themselves to take CT Freight’s customer lists, documents, and confidential information.” There were messages between some of the employee defendants discussing how to send the customer information to their personal emails. During the process of their departure, the defendants took steps to not “disrupt their business with their existing customers, whom they admittedly planned to bring with them the moment they left CT Freight.” The court held that “[w]hile there was nothing unjust about the employee defendants’ choice to leave at-will employment with West Plains, there was evidence the employee defendants knew and understood their group resignation would decimate CT Freight.”

Damages after April 5, 2013

            The defendants argued that there was not enough evidence to prove that the defendants’ resignations caused the losses suffered by CT Freight. The Eight Circuit determined that “[the defendant’s] concerted action . . . resulted in tortious interference that caused damage to West Plains.”

            West Plains went from a profit of over $800,000 in 2012 to a net loss of $150,000. West Plains tried to preserve the business by recruiting employees but could not find employees for the business. The court reasoned that even though West Plains did hire new employees, these employees did not have sufficient experience or a customer base in the industry. The Eighth Circuit concluded that “the evidence was sufficient to show the defendants’ actions caused a loss of profits to West Plains, and that loss continued after the expiration of the temporary injunction.”

Breach of Duty of Loyalty

            The Eight Circuit determined that the employee defendants breached their duty of loyalty, as well. The employee defendants, while employed by West Plains, “intended to hinder CT Freight’s business” by giving CT Freight information to Wells and resigning together in order to make sure customers followed. The employee defendants signed an agreement prohibiting them from partaking in conflicts of interests and distributing company information. Seven of the employee defendants signed the confidentiality and consulting agreements with Wells, violating their employment agreement with West Plains. Also, four of the employee defendants received the compensation from the consultation with Wells.

            The employee defendants also argued that the forfeiture of their pay was excessive. The Eighth Circuit determined that there was “adequate support for each award” based on the extent of involvement with RFG Logistics.

Civil Conspiracy

            A civil conspiracy can arise when two or more people accomplish, by concerted action, an unlawful object. A finding that the defendants committed unjustified interference with West Plains’ business or breached their duty of loyalty “would support the conspiracy claim.” The Eighth Circuit determined that “[t]here was abundant evidence showing the defendants entered into an agreement tortuously to interfere with West Plains’ business or to breach their duty of loyalty.”

Mitigation

            The defendants argued that West Plains did not show that it mitigated its damages upon the resignation of the employee defendants. The Eighth Circuit determined that West Plains immediately transferred employees from another division to CT Freight and contacted its customers that left with the employee defendants in an attempt to retain their business. CT Freight even expanded its business into other sectors of the industry. This all satisfied its duty to mitigate damages.

West Plains, L.L.C. v. Retzlaff Grain Co., 870 F.2d 774 (8th Cir. Aug. 30, 2017).

Takeaway for employers

            If you suspect former employees are appropriating your confidential information to consult with your clients or employees or may be planning to appropriate your information to form a competing venture, it is best to get your attorney involved right away. You may have rights to assert through a cease and desist letter, and could ultimately be vindicated in a court of law.

Department of Labor Clarifies Test for Determining Whether an Intern is an Employee under the FLSA

On January 5, the United States Department of Labor clarified that, going forward, it will use the “primary beneficiary” test a number of federal appellate courts use to determine whether interns are considered employees under the Fair Labor Standards Act. This decision was announced after the United States Court of Appeals for the Ninth Circuit, in December, became the fourth appellate court to reject the Department of Labor’s prior six-part test for the same topic.

Under the Department of Labor’s prior six-part test, an intern was considered an employee unless all the following factors were met:

1.       The internship is similar to training which would be given in an educational environment;

2.       The internship experience is for the benefit of the intern;

3.       The intern does not displace regular employees;

4.       The employer provides that the training derives of no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded;

5.       The intern is not necessarily entitled to a job at the end of the internship;

6.       The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

However, the Ninth Circuit, along with the Second, Sixth, and Eleventh Circuits, expressly rejected this test.  Instead, the courts preferred the “primary beneficiary test”. Under this more flexible test, discussed by the Second Circuit in Glatt v. Fox Searchlight Pictures Inc., courts and employers would weigh and balance seven non-exhaustive factors. These factors are:

1.       The extent to which the intern and the employer clearly comprehend that there is no anticipation of compensation.

2.       The extent to which the internship provides training similar that would be given in an educational environment.

3.       The extent to which the internship is linked to the intern’s formal educational program by coursework of academic credit.

4.       The extent to which the internship accommodates the intern’s academic schedule.

5.       The extent to which the internship’s duration is limited to the time period when the intern is provided beneficial learning by the internship.

6.       The extent to which the intern’s work supplements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

7.       The extent to which the intern and the employer understand that the internship is directed without entitlement to a paid job at the end of the internship.

Employers should take time to examine any internship positions to determine if an intern could possibly be considered an employee under the Fair Labor Standards Act.

EEOC Sues Employer for Gender Discrimination Related to Parental Leave Policy

Recently, the Equal Employment Opportunity Commission (“EEOC”) filed suit against cosmetic company Estee Lauder Companies, Inc. alleging the company discriminated against men by providing less parental leave benefits than women. Under federal law, men and women are allowed equal pay for equal work.

The EEOC alleges that the company’s leave policy allows for six weeks of leave for new mothers and “primary caregivers” and two weeks for “secondary caregivers”.  According to the suit, a male employee applied for primary caregiver status, but was denied. The employee was allegedly told that the “primary caregiver” designation only applied to surrogacy situations and would not apply to men avowing they would be the primary caregiver to their child. The EEOC argued that such a policy violates Title VII of the Civil Rights Act of 1964, which prohibits discrimination based on gender, and the Equal Pay Act of 1963, which prohibits discrimination based on gender when men and women work at the same company under comparable circumstances.

At this time, there does not appear to be an issue with the “primary caregiver” and “secondary caregiver” designation that many employers use when the policy is gender neutral. However, critics state that defining “primary caregiver” and “secondary caregiver” without utilizing gender stereotypes is easier said than done and could lead to gender discrimination when applied incorrectly.

With more companies allowing parental leave for both mothers and fathers, employers should review their policies to ensure that parental leave policies are not discriminatory. For example, an employer could provide the same benefits to mothers and fathers for the birth or adoption of a child, while allowing additional benefits tied directly to medical disability for pregnancy, childbirth, or similar circumstances. Such a policy may help avoid the issue of defining who is considered the “primary caregiver”, and it be more straight-forward for employees to apply in the workplace.

ERISA: A Plan Sponsor’s liability for an underfunded plan.

The 8th Circuit recently held that a defined benefit pension plan participant’s claim against a Plan Sponsor cannot move forward if an underfunded plan becomes overfunded during the course of litigation.  In Thole v. US Bank, National Association, et el, No. 16-1928 (October 12, 2017),  the 8th Circuit held that a defined benefit pension plan participant who alleges a breach of fiduciary duty and prohibited transaction claims under ERISA is unable to assert their claims if the plan subsequently becomes overfunded, even if the overfunding occurs after litigation has been filed.  

In Thole, the Plaintiffs were retirees of U.S. Bank and participants in the U.S. Bank Pension Plan (“the Plan”).  U.S. Bancorp was the Plan’s sponsor, while U.S. Bank was the Plan’s trustee.  Pursuant to the Plan document, the Compensation Committee and Investment Committee had authority to manage the Plan’s assets. The Compensation Committee was composed of U.S. Bancorp directors and officers.  The Compensation Committee designated a subsidiary of U.S. Bank as the Investment Manager with full discretionary investment authority over the Plan’s assets.

Plaintiffs brought an action against U.S. Bank, N.A., U.S. Bancorp, and multiple U.S. Bancorp directors challenging the defendants’ management of the Plan.  The Plaintiffs alleged that the defendants violated the Employee Retirement Income Security Act of 1974 (ERISA) by breaching their fiduciary obligations and causing the Plan to engage in prohibited transactions.  The Plaintiffs asserted that the ERISA violations caused significant losses to the Plan’s assets in 2008 and resulted in the Plan being underfunded.  Plaintiffs challenged the management of the Plan from September 30, 2007 to December 31, 2010. 

Plaintiffs alleged that the Investment Manager had invested the entire portfolio in equities managed by the Investment Manager.   Plaintiffs further alleged that because defendants put all the Plan’s assets in a single higher-risk asset class, the Plan suffered a loss of $1.1 billion.  The status of the Plan as underfunded at the commencement of litigation was not in dispute.  

Following the commencement of litigation U.S. Bank made voluntary contributions to the Plan in the amount of $311 million dollars.  These additional voluntary contributions resulted in the Plan becoming overfunded, with more money in the plan than was needed to meet its obligations. Defendants moved to dismiss the case asserting that Plaintiffs could no longer prove they had suffered any financial loss. The District Court dismissed the action, concluding that because the Plan was now overfunded, the Plaintiffs lacked a concrete interest in any monetary relief that the court might award to the Plan if the plaintiffs prevailed on the merits. On Appeal the 8th Circuit Court of Appeals affirmed the District Court’s decision.

In addition to the monetary relief sought by Plaintiffs, the Court also determined that the Plaintiffs’ injunctive relief claim against the Investment Manager could not move forward.  While ERISA provides that a plan participant or beneficiary may bring a civil action to enjoin any act that violates any provision of the Act or terms of the plan the Court held that plaintiffs must make a showing of actual or imminent injury to the Plan itself, and because the Plaintiffs could not show injury as the plan was overfunded injunctive relief was not appropriate. 

The Court’s holding allows a Plan sponsor to make additional contributions to a Plan even after litigation has commenced, increasing the burden on a Plaintiff to prove injury in such an action. 

Can Data Breach Victims Sue in Federal Court Without Actually Suffering Identity Theft?

Recently, health insurer CareFirst Inc. filed a petition with the Supreme Court of the United States to resolve a disagreement among federal appellate courts on the issue of whether victims of data breaches may sue in federal court when they do not allege a present injury. This suit, on appeal from the United States Court of Appeals for the District of Columbia Circuit, will largely center on the idea of standing, a threshold requirement for any plaintiff hoping to sue in federal court. More specifically, CareFirst Inc. alleges the D.C. Circuit erred in reasoning that a plaintiff has standing to sue in federal court simply by virtue of the fact and nature of the data that was accessed by hackers. The data included names, birth dates, email addresses, and subscriber identification numbers.

Pursuant to the federal law, standing requires that a plaintiff suffer some sort of injury to sue. Future injuries may be actionable. However, courts will require that there be a substantial risk of injury. For data breach victims that have not seen evidence of identity theft or fraud, the main question is whether theft of private information as a result of a data breach creates a substantial risk of an identity theft to be actionable.

This August, the United States Court of Appeals for the Eighth Circuit, which hears cases from federal courts in Iowa and Nebraska, ruled in Alleruzzo v. SuperValu, Inc. that a district court properly dismissed many plaintiffs from a data breach action. In that case, hackers gained access to customers’ card information from a grocery store network. This included names, card numbers, expiration dates, card verification values codes, and personal identification numbers. Several customers filed suit under a variety of theories, but only alleged that one customer suffered a single fraudulent charge. Due to lack of injury, the case was dismissed by the district court.

On appeal, the plaintiffs argued that theft of their card information created a substantial risk that they will suffer identity theft in the future. The court initially noted that because card information does not contain social security numbers and birth dates, the information cannot plausibly be used to open new accounts, a form of identity theft most harmful to consumers. It also analyzed a 2007 Government Accountability Office report, which concluded that based on available information, most breaches have not resulted in detected incidents of identity theft. Since the plaintiffs presented no facts from which the court could conclude that plaintiffs suffered a substantial risk of future identity theft, they had no standing to sue in federal court.

The Eighth Circuit and the D.C. Circuit are not the only courts to consider the issue. Like the Eighth Circuit, the United States Court of Appeals for the Fourth Circuit, in Beck v. McDonald, concluded that the risk of identity theft was too hypothetical to allow plaintiffs to sue. Meanwhile, the United States Courts of Appeals for the Sixth and Seventh Circuit have stated, in Reijas v. Neiman Marcus and Galaria v. Nationwide Mutual, that data breach victims suffered an imminent risk of identity theft when the breach occurred.

While the Supreme Court has not yet agreed to hear CareFirst’s arguments, this is certainly an issue to keep watching. Should courts continue to state that data breach victims have standing to sue businesses by virtue of the fact that hackers gained access to the data, such litigation can be expected to rise as data breaches continue. 

Davis v. State: State is not required to plead and prove an exception to the State Tort Claims Act, and an exception to the State’s immunity may be raised for the first time on appeal or sua sponte.

On October 6, 2017, in the case of Davis v. State, the Nebraska Supreme Court concluded that its prior cases holding that the State of Nebraska (the “State”) must plead and prove an exception to the State’s immunity from suit under the State Tort Claims Act (the “STCA”) were clearly erroneous. Davis v. State, 297 Neb. 955, 979 (2017).  As a result, the Court overruled its prior cases “to the extent they can be read to hold that a state attorney waives an immunity defense under [the Act] by failing to raise it in a pleading or to a trial court.”  Davis, 297 Neb. at 979.1

Instead, the Court held “that an exception to the State’s waiver of immunity under the STCA is an issue that the State may raise for the first time on appeal and that a court may consider sua sponte [(i.e., on its own motion)]”.  Id.  The Court’s rationale for its holding was that “when a plaintiff’s complaint shows on its face that a claim is barred by one of the exceptions [to the STCA], the State’s inherent immunity from suit is a jurisdictional issue that an appellate court cannot ignore.”  Id.  While not specifically stated, the Court’s holding in Davis will also apply to claims under Nebraska’s Political Subdivisions Tort Claims Act (the “PSTCA”).  See id.

The effect of the Court’s holding in Davis is that a plaintiff bringing a tort claim against the State or against a political subdivision will have to meet somewhat of a heightened pleading standard.  In addition to having to comply with the procedural requirements of the STCA or the PSTCA, plaintiff’s will also have to ensure that their complaint does not show, on its face, that the claim is barred by one of the exceptions to the State’s or political subdivision’s waiver of immunity.  If it is, the trial court, or even an appellate court, has the inherent power to determine whether the plaintiff’s allegations show that the tort claim is facially barred by an exception to the STCA or the PSTCA.  See id. at 980.

The Davis holding also relaxes the pleading standard for the State and political subdivisions.  As indicated above, because the Court considers the exceptions to the State’s and political subdivision’s waiver of immunity under the STCA and PSTCA as jurisdictional issues (i.e., whether the court has the power to hear the case), the failure to raise an exception in a responsive pleading or at trial does not operate as a waiver of the defense, and may be raised by either the State, political subdivision, or the court for the first time on appeal.

1 The cases that were overruled were Maresh v. State, 241 Neb. 496, 489 N.W.2d 298 (1992); Hall v. County of Lancaster, 287 Neb. 969, 846 N.W.2d 107 (2014); Doe v. Board of Regents, 280 Neb. 492, 788 N.W.2d 264 (2010); Reimers-Hild v. State, 274 Neb. 438, 741 N.W.2d 155 (2007); Lawry v. County of Sarpy, 254 Neb. 193, 575 N.W.2d 605 (1998); Sherrod v. State, 251 Neb. 355, 557 N.W.2d 634 (1997); and D.M. v. State, 23 Neb. App. 17, 867 N.W.2d 622 (2015).

Bankruptcy Creditors Given Leeway to File Proofs of Claim Based Upon Stale Debts

In Midland Funding, LLC v. Johnson, 581 U.S. ___, 137 S.Ct. 1407, 197 L.Ed.2d 790 (2017), the United States Supreme Court held that creditors in Chapter 13 bankruptcy cases do not violate the Fair Debt Collection Practices Act if the creditor files a proof of claim based upon a stale debt in the bankruptcy case.  In other words, even if the statute of limitations set forth by state law has expired as to the creditor’s claim against the debtor, it is not a violation of federal law for the creditor to file a proof of claim in the bankruptcy case.  Once the proof of claim has been filed, the burden is on the debtor, through counsel, to identify the stale nature of the claim and object to the claim.  The Chapter 13 bankruptcy trustee may also object.  If no objection is made, the claim is likely to be allowed in the bankruptcy case.

Midland Funding has led to additional questions, including whether the same rule applies in Chapter 7 bankruptcy cases as well or is limited to Chapter 13.  Although Midland Funding was focused on Chapter 13, we believe the holding regarding stale debts would apply to Chapter 7 consumer bankruptcy cases.  Based on Midland Funding, creditors will in some cases be able to recover at least part of a debt that could not be pursued outside the bankruptcy court forum.  Creditors are now significantly more likely to file such claims in bankruptcy cases. 

Erickson | Sederstrom recommends that creditors planning to file a proof of claim that would be time-barred under state law first consult with counsel to ensure they do not violate the Fair Debt Collection Practices Act.

May an Insurer Depreciate the Cost of Labor in Determining the Actual Cash Value of a Covered Loss?

Recently, the United States District Court for the District of Nebraska certified this question to the Nebraska Supreme Court: “May an insurer, in determining the ‘actual cash value’ of a covered loss, depreciate the cost of labor when the terms ‘actual cash value’ and ‘depreciation’ are not defined in the policy and the policy does not explicitly state that labor costs will be depreciated?”. Today, the Nebraska Supreme Court found in the affirmative. 

Henn v. American Family Mut. Ins. Co. involves a current dispute over the interpretation of a homeowners’ insurance policy. At the crux of the dispute was whether labor costs can be depreciated in determining the actual cash value (replacement cost minus depreciation) of a covered damage under the policy. In its analysis, the Nebraska Supreme Court noted that Nebraska law has always generally allowed for depreciation in defining “actual cash value”. Despite the plaintiff’s argument that depreciating labor is illogical because labor does not depreciate, the court noted that such an argument is in contravention of the court’s prior reasoning that actual cash value must not equal the amount required to complete the repairs. Actual cash value is meant only to start repairs. 

The court also stated that Nebraska courts may still consider material and labor when determining actual cash value. This approach ensures that the insured does “not pay for a hybrid policy of actual cash value for roofing materials and replacement costs for labor” as the property is comprised of both materials and labor. Therefore, an insurer may depreciate labor in determining the actual cash value of a covered loss when not stated otherwise in the policy.