MEDIA

March 14, 2003

On Bail Forfeiture, Insurance Firm as Proceeds Stakeholder

Published in: New York Law Journal | volume 229
Written by: Peter R. Schlam and Harvey M. Stone

In the U.S. District Court for the Eastern District of New York, Judge I. Leo Glasser discussed the factors that might cause the court to reconsider a forfeiture of bail. In another case, Judge Glasser awarded attorney’s fees to an insurance company as stakeholder of life insurance proceeds. And Judge Raymond J. Dearie remanded a case involving Supplemental Security Income benefits for reconsideration under recently effective Final Rules applicable to disabled children.

Bail Forfeiture

In United States v. Gallego, 02 CV 5987 (Jan. 29, 2003), Judge Glasser declared a forfeiture of bail and ordered entry of a default judgment for $150,000 against an 18-year-old defendant, who had absconded to Colombia, and the two sureties–his mother and adoptive father. In an unusual gesture, the court intimated that it might grant remission if defendant returns or is apprehended within 60 days.

Defendant was arrested as he tried to enter the country with 4220.9 grams of heroin. Two days later his parents, whose combined annual income is about $50,000, posted bail for him. They paid $10,000 into the court, and signed a bond for $140,000. Six weeks later defendant absconded. Upon discovering that he had gone to Colombia, his mother went there to try to persuade him to return to court. He promised he would return, but remains at large.

Granting the government’s motion for forfeiture and a default judgment under Rule 46, the court found no basis at this stage to exercise its discretion in favor of remitting any money to the sureties. As Judge Glasser noted, defendant’s breach was willful and unexplained, and his failure to return to court overrode certain factors pointing to possible lenience–such as the government’s relatively limited cost and effort to date in the arrest and prosecution; the sureties’ assistance in trying to bring defendant back, locating him and revealing his address in Colombia; the sureties’ status as concerned family members who, unlike professionals, stood to make nothing and lose much in posting security; their compromise request to forego return of the $10,000 deposit but avoid financial ruin threatened by the remaining $140,000 obligation; and the diminished importance of the deterrence factor in such a low profile case.

Attorney’s Fees to Stakeholder

In Travelers Insurance Company v. Estate of Zenifer Garcia, 00 CV 2130 (Feb. 4, 2003), Judge Glasser, adopting the recommendation of Magistrate Judge Robert M. Levy, awarded $25,000 in attorney’s fees to the plaintiff insurer as stakeholder where competing claimants sought the proceeds of a life insurance policy. The court held that precipitous litigation by one of the claimants, even though he ultimately proved to be the sole beneficiary of the policy, forced the stakeholder’s attorneys to expend considerable time in the case that could have been avoided. This justified an award of fees from the policy proceeds.

At the time of decedent’s death, a policy with Travelers Insurance Co. insured her life for $78,771. The designated beneficiary was one George Europe. Shortly after decedent’s death, an attorney wrote to Travelers stating that he represented her five daughters and the estate and that they would be asserting claims under the policy. He also stated that at least two other cases pending in state court bore on the issue of how to distribute the proceeds.

Two months later, Travelers filed this interpleader action to determine the proper beneficiaries. Mr. Europe answered the complaint and, counterclaiming against Travelers, alleged bad faith in filing the interpleader and refusing to disburse the proceeds. Travelers sought court intervention to require Mr. Europe to provide information regarding the other potential claimants. It then deposited $78,771 with the court in an interest-bearing escrow account.

Judge Glasser denied Mr. Europe’s motion for summary judgment against Travelers and granted Travelers’ motion to dismiss the counterclaim. In so ruling, the court reminded Mr. Europe that if he turned out to be the sole beneficiary, he would not be prejudiced by the delay in receiving his money.

Thereafter a court-appointed guardian ad litem for decedent’s minor children reported to the court that they had no cognizable claim under the policy. The parties then stipulated to pay the proceeds to Mr. Europe, except for $25,000 set aside for possible attorney’s fees and costs.

Mr. Europe argued here that Magistrate Judge Levy should not have recommended an award of attorney’s fees to Travelers because a good-faith stakeholder would have "gotten out of the case at the outset, leaving the interested parties with standing in the case." This objection, Judge Glasser observed,

overlooks the extensive effort that was necessary for Travelers to effect service on the possible claimants. Rather than submit its claim and permit Travelers to withdraw once service was effected on the other potential claimants, Europe chose to file counterclaims against Travelers and sought to force dispositive motions while the other potential claimants were still being joined in the action. Indeed, when the summary judgment motion was argued the minor children were still unrepresented.

As Judge Glasser recognized, courts normally do not award fees in interpleader actions, especially to insurance companies whose fees are generated in the ordinary course of business. But this case "clearly involved unique problems for a disinterested stakeholder, threatened with claims from one attorney that the proceeds were the subject of ongoing state court actions, claims from identified beneficiaries of the policy, and claims from an estate for which no administrator had yet been appointed." Slip op. 8-9.

SSI Standard: Disabled Kids

In Kittles v. Barnhardt, 01 CV 5547 (EDNY, Feb. 19, 2003), Judge Raymond J. Dearie, remanding a case concerning Supplemental Security Income benefits for a child, directed that the application be reconsidered under Final Rules, which came into effect after the Administrative Law Judge denied benefits and before the Social Security Administration’s Appeals Council affirmed that denial. Judge Dearie remanded the case to the ALJ after determining that the change in the rules precluded any meaningful review by the court.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 created a new set of standards for assessing childhood disability, particularly for determining whether a child’s impairment was "functionally equivalent" to a disability listed in the regulatory "Listing of Impairments." The Final Rules, effective Jan. 2, 2001, differ materially from the Interim Rules applied by the ALJ in this case. Under the Final Rules, the ALJ must

evaluate the effects of the child’s impairments in five broad areas of development or functioning: (1) cognitive/communicative development, (2) motor development, (3) social development, (4) personal development, and (5) concentration, persistence, or pace.

Like the Interim Rules, the Final Rules require a finding of one severe limitation or two marked limitations to establish functional equivalence. But the SSA expanded the number of domains for this evaluation from five to six, including "(1) the child’s ability to acquire and use information, (2) to attend and complete tasks, (3) to interact and relate with others, (4) to move about and manipulate objects, (5) to care for oneself, and (6) health and physical well-being." By this expansion, the Final Rules split the former "cognition/communication" category into two domains: "acquiring and using information" and "interacting and relating." The Final Rules, which also clarified and detailed the criteria for disability, were to be applied in all pending cases no matter what the stage of administrative review. Thus, although the ALJ applied the Interim Rules, the Appeals Council was obligated to apply the Final Rules. The Appeals Council, however, did not indicate whether it reviewed the ALJ’s decision under the Final Rules.

In Judge Dearie’s view, the commissioner had not applied the correct legal standard. The bulk of the child’s impairments here involved her communicative function–the area split by the Final Rules into two domains: "acquiring and using information" and "interacting and relating with others." By applying the Final Rules, the court noted, the Appeals Council might have found a marked limitation in two domains. Judge Dearie offered other examples of how the Final Rules could have affected the outcome here. For example: (1) The new instructions, providing guidance in resolving inconsistencies between a child’s test scores and other information in the record, might have required the ALJ to contact the tester for clarification. (2) The Final Rules "provide that a child should be evaluated not only in what she ‘cannot do,’ but also in what she has ‘difficulty doing, needs help doing, or is restricted from doing’ because of her impairments." Slip op. 25. (3) The Final Rules give detailed guidance concerning the six domains, particularly for "acquiring and using information, interacting and relating with others, and attending to and completing tasks."

‘Substantial Evidence’

Having concluded that the commissioner did not apply the appropriate law, the court examined whether the ALJ’s decision was supported by "substantial evidence." Judge Dearie noted the confusion arising from the difference in the law in place when the ALJ made his decision and when the Appeals Council denied relief. In remanding the case, Judge Dearie observed:

to attempt to review the Commissioner’s decision for substantial evidence utilizing the Final Rules is a bit like comparing apples and oranges, since the ALJ’s decision was made under a completely different rule regime–namely, the Interim Rules. It is not clear how exactly this Court should engage in this inquiry–should it assess whether the ALJ had substantial evidence to support his decision had it been made under the Final Rules, even though he made it under the Interim Rules? Should it assess the sufficiency of the evidence utilizing the five broad areas of the six domains?

Slip op. 27.

Peter R. Schlam and Harvey M. Stone are partners at Schlam Stone & Dolan.

[This article is reprinted with permission from the March 14, 2003, issue of the New York Law Journal. Copyright © 2007 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]