In re: Trustees of Conneaut Lake Park — civil — reversal — Hardiman

Pennsylvania law bars insurance companies from paying out fire insurance to a “named insured” if the owner of the property owes back taxes on it. The main purpose of this law, the Third Circuit noted today, is to keep property owners from profiting from arson.

This appeal arose from a fire at a beach club owned by one corporation and operated by another. The operator insured the club against fire damage, there was a fire, and the operator submitted a claim. It emerged that the owner owed taxes on the property; the non-payment happened long before the operator ever entered the picture. But the upshot was that the vast majority of the operator’s insurance payout — hundreds of thousands of dollars — went to various government bodies to pay off the owner’s back taxes, not to cover the fire losses of the operator who paid the policy. Not surprisingly, the operator sued. (The suit was transferred to bankruptcy court when the owner filed for bankruptcy.)

The district court ruled that the operator was entitled to the insurance payout because the PA statute was ambiguous and the legislative intent was to apply it only to insureds who were themselves the tax-delinquent property owners. Today, the Third Circuit reversed, holding that the plain language of the statute required it to be applied to any named insured and rejecting the operator’s argument that the outcome violated the takings clause. The court left the door open for the operator to try to recover money from the owner in the bankruptcy proceedings.

Now, I’m no insurance expert, but I suspect this holding could create a giant mess for Pennsylvania. Does the Third Circuit’s reading of PA law mean that now every would-be tenant in the state needs to research and then monitor their property owner’s property tax payments or face catastrophic loss from denial of fire-insurance proceeds they bought and paid for in perfect good faith? Is that realistic? How many PA tenants don’t even know the identity of their property owner? Do PA tenants need to insist that future property leases require the owners to be and stay current on property taxes as a lease condition? What about current leases? Unless I’m mistaken, the consequences of today’s paean to plain meaning could be broad and profoundly disruptive.

The opinion does not address these concerns, but it defends its holding with a policy argument of its own, warning that the insurer’s “interpretation could incentivize an end run around Section 638 by permitting unscrupulous owners to use the corporate form to collect insurance proceeds without satisfying their delinquent taxes.” Fair point. But, in my view, the problem the court avoids is nothing compared to the problems it creates. If the operator seeks en banc rehearing, I think it deserves a serious look.

Joining Hardiman were Fisher and Greenaway. Arguing counsel were John Mizner for the operator-insured and Arthur Martinucci of Quinn Buseck for the appellants.

Cazun v. AG — immigration — affirmance — Rendell

The Third Circuit today affirmed the denial of an asylum applicant’s appeal, upholding the government’s rule that aliens subject to reinstated removal orders are ineligible to apply for asylum. Although the panel was unanimous on the outcome, it divided along ideological lines on the rationale. The majority found the statute ambiguous and applied Chevron deference to the agency’s interpretation, but the concurrence in the judgment found the statute unambiguous and thus that Chevron was inapplicable.

Joining Rendell was McKee; Hardiman concurred in the judgment. Arguing counsel were Keren Zwick of the National Immigrant Justice Center for the asylum applicant and Carmel Morgan for the government.

US ex rel. Gerasimos Petratos v. Genentech — civil / qui tam — affirmance — Hardiman

The Third Circuit issued a significant False Claims Act ruling yesterday, affirming on alternative grounds the district court’s dismissal of a pharmaceutical qui tam action.

The appeal arose from a drug company’s marketing of its “multi-billion dollar cancer drug” Avastin; the company’s head healthcare data analyst alleged that the company concealed key information about the drug’s side effects, which resulted in doctors prescribing the drug more often and the government paying out more Medicare claims. The analyst then sued under the False Claims Act.

The district court dismissed the suit on falsity grounds based on its view that the analyst had to prove that how the drug was used had been rejected by the FDA, not by individual doctors. The Third Circuit disagreed, holding that the district court had conflated two different statutory standards. But the Third Circuit affirmed on alternative grounds, holding that the suit failed on materiality grounds under the recent USSC Escobar decision, essentially because the government continued paying out Medicare claims even after the analyst revealed his information. The court concluded, “Petratos’s allegations may be true and his concerns may be well founded—but a False Claims Act suit is not the appropriate way to address them.”

Joining Hardiman were Scirica and Rosenthal SDTX by designation. Arguing counsel were Matthew McCrary of San Francisco for the appellants, Mark Mosier of Covington & Burling for the company, and Weili Shaw for the government.

UPDATE: this post on JDSupra calls Genentech a “gift to qui tam defendants” because it relied on the government’s non-intervention as evidence that the alleged wrong was immaterial. The post asserts that the government chooses to intervene in less than 25 percent of cases, and “No authority has ever suggested … before” that non-intervention suggests immateriality.