This week we present for your consideration two cases: (a) an Alabama Supreme Court opinion concerning the determination of a defendant’s assets for purposes of reducing a jury award of punitive damages; and (b) an Eleventh Circuit decision seeking clarification regarding abuse by the IRS, which will be an important case to continue to monitor.

Gillis v. Frazier, No. 1120292 & No. 1121205 (Ala. 2014)(affirming denial of Rule 60(b) motion but reversing and remanding trial court’s judgment concerning the determination of assets for reducing an award of punitive damages).

The Alabama Supreme Court reversed the decision of the Colbert County Circuit Court and overruledBoudreaux v. Pettaway, 108 So. 3d 486 (Ala. 2012) in a medical malpractice and wrongful death case against Frank Gillis, M.D. in which the jury awarded $5,000,000 to the decedent’s estate. Dr. Gillis treated the decedent prior to her death for atrial fibrillation and prescribed Coumadin, a blood thinner. Patients that receive Coumadin must have their blood monitored frequently to measure the international normalized ratio (“INR”) to ensure that the blood does not become too thin. After discovering that the decedent’s INR had not been measured in three months, Dr. Gillis’ nurse practitioner discontinued the Coumadin. The decedent suffered a massive brain hemorrhage and passed away two days after discontinuing the Coumadin.

Following the jury award, the trial court considered Dr. Gillis’ motion for reducing the damages based on his inability to pay $3,000,000 of the $5,000,000. In denying Dr. Gillis’ motion, the trial court considered a potential bad-faith claim by Dr. Gillis’ against his insurance company as an asset. Thus, the trial court concluded that there should be no reduction in the jury award based insufficient assets.

On appeal to the Alabama Supreme Court, Dr. Gillis asked the court to overrule Boudreaux so that any potential bad-faith claim will not be considered as an available asset in determining the defendant’s ability to satisfy the judgment. Additionally, Dr. Gillis asked the Alabama Supreme Court to overrule Smith v. Schulte, 671 So. 2d 1334 (Ala. 1995), which held that an Alabama statute capping damages for medical malpractice at $1,000,000 was unconstitutional.

The Alabama Supreme Court first considered Dr. Gillis’ argument asking the Court to overrule its prior decision allowing a potential bad-faith claim to be considered an asset for purposes of deciding whether an award of punitive damages should be reduced. The Alabama Supreme Court agreed with Dr. Gillis and determined that a potential bad-faith claim is too speculative to be considered an asset and such a claim may not be considered by a trial court when ruling on a defendant’s motion to reduce a punitive damage award. However, the Court rejected Dr. Gillis request to overrule Smith and refused to reinstate a cap on punitive damages.

United States v. Clarke, No. 12-13190 (11th Cir. 2014)(remanding to district court for determination of specific acts of improper actions by the IRS)

In United States v. Clarke,No. 12-13190 (11th Cir. 2014), the United States Court of Appeals for the Eleventh Circuit declined to determine whether the taxpayers satisfied the standard articulated by the United States Supreme Court for determining if the IRS issued administrative summonses in bad faith.

The IRS may issue a summons to a taxpayer to produce documents to verify the accuracy of the taxpayer’s tax liability. If the taxpayer refuses to comply with the summons, then the IRS may ask a federal district court to enforce the summons. The court will enforce the summons unless the taxpayer demonstrates the summons was issued in bad faith. If the summonses are issued in bad faith, then the taxpayer may examine the IRS agent concerning the motive for issuing the summonses.

In Clarke, the taxpayer had previously agreed to extend the statute of limitations to assess tax liability. With the extended period of limitations set to expire, the taxpayer refused to agree to a second extension. The IRS subsequently issued a summons and sought to enforce it in the district court. The taxpayer alleged that the summons was issued in retaliation for not agreeing to extend the statute of limitations and requested to examine the agent about the motive for issuing the summons. The Eleventh Circuit originally held that an allegation of retaliation is sufficient to allow the taxpayer to examine the agent.

The Supreme Court reversed the Eleventh Circuit Court of Appeals and held that a mere allegation of issuing a summons for an improper purpose is insufficient for a taxpayer to examine an agent concerning the agent’s motives. The Supreme Court stated that a taxpayer must “point to specific facts” or plausible circumstantial evidence that a summons was issued for an improper purpose to examine an IRS agent’s motives. The Supreme Court then remanded the case to the Court of Appeals to determine if the taxpayer satisfied the standard.

On remand, the Court of Appeals discussed the new standard recently articulated by the Supreme Court but declined to determine if the taxpayer satisfied the standard. Rather, the Court of Appeals remanded the case back to the district court. Specifically, the Court of Appeals asked the district court to consider whether the IRS issuing a summons immediately after the taxpayer declined to agree to extend the statute of limitations for a third time constitutes specific facts or plausible circumstantial evidence.