R.J. Reynolds, Bank of America, CSX, GM in Court News

A Florida jury ruled that R.J. Reynolds Tobacco Co., the second-biggest U.S. cigarette maker, should pay $30 million to a woman whose husband died of lung cancer after years of smoking, according to a lawyer.

A six-person jury yesterday in state court in Pensacola, Florida, ordered R.J. Reynolds to pay Hilda Martin $25 million in punitive damages to punish the cigarette maker for the death of her husband, Benny Martin, according to the company’s lawyer, Mark Belasic. The jury last week awarded Martin $5 million in compensation. Belasic said he would appeal.

The case is at least the seventh of its kind to be tried since the Florida Supreme Court in 2006 ruled that smokers couldn’t sue as a class, or group, on behalf of smokers statewide. The court, in the so-called Engle case, said smokers could sue individually and extended the time for them to do so. Thousands of such cases are pending across Florida.

“We think the jury verdict is an outlier,” Belasic, of Jones Day in Cleveland, said yesterday in a phone interview. “There have been six of these individual Engle lawsuits and no one has been anywhere near this type of verdict.”

The Florida Supreme Court ruling, in a class-action lawsuit headed by a Florida smoker named Howard Engle, upheld a series of factual findings in the case, and said those determinations would apply in all of the individual suits filed by smokers who were part of the Engle class.

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Bank of America Wins Ruling on $1.6 Billion Verdict

Bank of America Corp. doesn’t have to pay a verdict worth as much as $1.6 billion in a customer suit claiming the bank illegally took overdraft fees out of Social Security direct deposits, the California Supreme Court ruled.

The state high court upheld a 2006 appeals court ruling that reversed a 2004 verdict against Bank of America.

The lawsuit claimed California law prohibits banks from taking exempt funds, such as Social Security benefits, from customers’ accounts. The bank continued the practice anyway, lawyers for the customers argued, deducting as much as $160 a day out of one customer’s account.

A San Francisco trial judge in December 2004 ordered the bank to pay customers $296.6 million in compensatory damages and said as many as 1.3 million customers should receive $1,000 each for emotional and economic harm. In 2006, an appeals court reversed the verdict against Bank of America, saying the rule didn’t apply because deductions were being made to customer accounts to cover fees owed on that same account.

The California Supreme Court has previously ruled that banks can’t deduct fees from accounts holding government benefits to recover funds owed in a separate credit-card account.

Bank of America, based in Charlotte, North Carolina, argued the practice isn’t debt collection, as the plaintiffs claim, but simply balancing the books. It would be a significant change in the way banks do business if they had to treat accounts differently based on the source of the funds, said the bank, the nation’s largest.

Jim Sturdevant, attorney for the customers, didn’t return a voice-mail message. Shirley Norton, a bank spokeswoman, had no immediate comment.

The case is Miller v. Bank of America, S149178, California Supreme Court (Sacramento).

Expedia Says It Will Appeal $184.5 Million Fee Ruling

Expedia Inc., the online travel agency, said it will appeal a judge’s order to pay $184.5 million in a case in which it was accused of inflating tax charges on hotel bookings and adding extra service fees.

Expedia received the order from Washington state court in Seattle on May 29, the company said yesterday in a regulatory filing.

“Because we believe that the court’s decision is inconsistent with both the facts and the law, we will vigorously pursue our rights on appeal,” Bellevue, Washington-based Expedia said in the filing.

Expedia was accused in the 2005 lawsuit filed on behalf of customers of paying taxes based on wholesale prices while calculating fees using higher retail prices, pocketing the difference, according to a statement from Hagens Berman Sobol Shapiro LLP, the Seattle-based law firm that represented the consumers.

The travel service also added extra service fees that were pure profit and weren’t used to cover costs, which went against the terms of service, according to the statement.

The case is In re Expedia Hotel Taxes and Fees Litigation, 05-2-02060, King County Superior Court (Seattle).

Ex-Kmart Chief Conaway Found Liable for Misleading Investors

Charles Conaway, Kmart Corp.’s former chief executive officer, is liable for misleading investors about the company’s cash crisis in the months before its 2002 bankruptcy, a federal jury determined.

The jury of five men and five women delivered the verdict yesterday near the end of the first full day of deliberations in the trial in federal court in Ann Arbor, Michigan. U.S. Magistrate Judge Steven Pepe will determine what penalty to impose.

The U.S. Securities and Exchange Commission, which seeks to bar Conaway from ever serving as an officer of a publicly traded company, sued him in 2005, alleging he duped investors in a third-quarter 2001 securities filing and during a Nov. 27, 2001, conference call.

The case was “a matter of credibility and accountability,” Alan Lieberman, an SEC lawyer, said after the verdict. “This jury held Mr. Conaway accountable for his own conduct.”

Conaway’s attorney, Scott Lassar, said he was “very disappointed in the verdict.” Conaway plans to appeal, said Lassar.

The SEC alleged that Conaway hid the fact the company was short of cash and had a program to delay payments to vendors. Lassar said in his closing argument that the regulator’s case against his client was “ridiculous.”

The case is Securities and Exchange Commission v. Conaway, 05-cv-40263, U.S. District Court, Eastern District of Michigan (Ann Arbor).

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CSX Unit Wins Reversal of $5 Million Worker Award

The U.S. Supreme Court, siding with a CSX Corp. unit and the railroad industry, set aside a $5 million award to a man who said his 33-year career as a company electrician was to blame for his brain damage and asbestosis.

The 7-2 ruling is a victory for the Louisville & Nashville Railroad, now part of CSX, in its legal fight with Thurston Hensley, who said in his Tennessee suit that he was exposed to toxic solvents and asbestos-laden brake grids while on the job.

The majority faulted the trial judge for not telling the jury how to assess Hensley’s claim that he was afraid of contracting mesothelioma, a type of lung cancer. The Supreme Court in 2003 said that so-called fear-of-cancer damages are permissible only if a railroad worker’s concerns are “genuine and serious.”

That ruling “struck a delicate balance between plaintiffs and defendants -- and it did so against the backdrop of systematic difficulties posed by the elephantine mass of asbestos cases,” the court said in yesterday’s decision. “Jury instructions stating the proper standard for fear-of-cancer damages were part of that balance.”

The court chose not to hear arguments in the case, instead summarily overturning a Tennessee state court decision that upheld the award. Justices John Paul Stevens and Ruth Bader Ginsburg dissented.

“As a practical matter, it is hard to believe the jury would have awarded any damages for Hensley’s fear of cancer if it did not believe that fear to be genuine and serious,” Stevens wrote.

The case is CSX Transportation v. Hensley, 08-1034, U.S. Supreme Court (Washington).

Chrysler Wins Assent to Sell Assets to Fiat-Led Group

Chrysler LLC won court approval to sell most of its business to a group led by Italy’s Fiat SpA, a deal intended to fire up its idled manufacturing plants and resume an 84-year history of selling American cars.

U.S. Bankruptcy Judge Arthur Gonzalez approved Chrysler’s sale in a ruling filed at May 31 in Manhattan. The sale faced more than 300 objections. Gonzalez overruled those that weren’t withdrawn or resolved. The approval came hours before General Motors Corp. filed for bankruptcy.

The carmaker is selling itself to an entity owned by Fiat, a union benefit trust, the U.S. Treasury and the Canadian government. The Auburn Hills, Michigan-based company will get $2 billion in cash to distribute to secured lenders holding $6.9 billion in loans. Turin-based Fiat can walk away from the sale if it isn’t completed by June 15, with a one-month extension for antitrust approvals. The company didn’t receive any other bids for its assets, attorneys said.

The case is In Re Chrysler LLC, 09-50002, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).

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Ex-Enron Unit Executive Pleads Guilty Before Retrial

Kevin Howard, former finance chief for Enron Broadband Services, pleaded guilty to one count of falsifying the business’s books and records and avoided a retrial on whether he participated in a conspiracy to mislead investors about the Enron Corp. unit’s performance.

Howard pleaded guilty yesterday in federal court in Houston just before jury selection was to begin in his third trial over charges he improperly recognized revenue from a failed venture to deliver movies via Enron’s Internet services division.

He agreed to serve 4 months to 12 months either on probation or under home confinement, according to Howard’s attorney, Barry Pollack.

“He will not serve even a single day in jail,” Pollack said in a phone interview after the plea hearing. “And the government acknowledges in the statement of facts that there was never any personal benefit to Kevin from that transaction.”

Jurors hung on all counts against Howard in a 2005 trial, in which the jury also failed to convict any of four other former Enron Broadband executives on charges they had conspired to overstate the unit’s performance and capabilities.

Howard was retried in 2006 on narrower charges with Michael Krautz, the division’s senior accountant. Jurors convicted Howard and acquitted Krautz in that trial, and the judge later threw out the verdict against Howard, citing an appellate ruling in a different Enron case that prosecutors had tried some of the Enron defendants under an invalid legal theory.

The U.S. Justice Department said in a statement that Howard admitted to improperly booking $53 million in future revenue from what the company called Project Braveheart, allowing the Broadband unit to falsely meet its loss projections for the fourth quarter of 2000.

The case is U.S. v. Howard, H-03-093, U.S. District Court, Southern District of Texas (Houston).

For more verdict and settlement news from yesterday, click here.

New Suits

Emulex Files Suit Seeking to Block Broadcom Takeover

Emulex Corp. said it asked a California court to block a hostile $764 million takeover bid for the U.S. chipmaker from Broadcom Corp.

Emulex, based in Costa Mesa, California, sued in state court in Orange County to stop Broadcom from proceeding with its tender offer until the bidder discloses and corrects all material related to “criminal and improper activities,” according to the lawsuit, a copy of which was provided by Emulex. None of the claims contained in the lawsuit is relevant to the bid, Broadcom said in an e-mailed statement.

The suit steps up the dispute between the two Southern California-based companies, which compete in the market for chips that help server and storage computers transfer data. Emulex Chief Executive Officer James McCluney said last month that shareholders should reject Broadcom’s bid, saying the offer of $9.25 a share is too low.

Emulex’s shareholders and employees “should be suspicious of Broadcom’s statements,” the lawsuit said. Broadcom “has a history of not telling the truth to the investing public.”

The case is Emulex Corp. v. Broadcom Corp. and Does 1-100 inclusive, 00123829, Superior Court of California (County of Orange).

To read more of this story, click here.

For more new suits news from yesterday, click here. For copies of recent civil complaints, click here.

Lawsuits/Pretrial

Argentina Is Sanctioned by Manhattan Judge in Bondholder Suits

Argentina was sanctioned by a federal judge for failing to comply with a court order to turn over to bondholders documents regarding its pension funds, according to court records.

U.S. District Judge Thomas Griesa in Manhattan ruled in October that Argentine pension funds nationalized by that country’s government and held in the U.S. may be used to satisfy bondholder judgments against the republic. Argentina has appealed. Griesa later ordered the South American nation to turn over documents related to its pension funds to bondholders.

In a court filing yesterday, Griesa formally found the republic in contempt for failing to turn over records. The documents relate to the republic’s effort in April to liquidate almost $206 million of Certificados de Deposito Argentino that were subject to a 2008 freeze order. The judge said he’d presume during the remainder of the case that Argentina tried to move funds out of the U.S. to hide them from creditors.

Argentina defaulted on $95 billion in debt in late 2001, the biggest such default in history. In 2005, then-President Nestor Kirchner, current President Cristina Fernandez de Kirchner’s husband, offered holders of defaulted debt 30 cents on the dollar. Holders of about $20 billion in bonds rejected that deal; some of them sued.

Argentina’s lawyer, Carmine Boccuzzi, didn’t return a call.

The case is Aurelius Capital Partners v. Argentina, 07-cv- 02715, U.S. District Court for the Southern District of New York (Manhattan).

Wells Fargo’s Wachovia Unit Objects to Hartmarx Sale

Wells Fargo & Co. filed an objection to the proposed sale of bankrupt suitmaker Hartmarx Corp. to a U.K. private-equity firm, arguing the $86.5 million offer won’t generate enough cash to pay secured debt.

The cash portion of the bid by Emerisque Brands U.K. Ltd. will probably end up being “significantly less” than the $70.5 million stated in the sale agreement, Wells Fargo’s Wachovia unit said May 29 in U.S. Bankruptcy Court in Chicago, where Hartmarx is based.

“There is no limit as to how low the cash portion of the purchase price may be adjusted,” San Francisco-based Wells Fargo, the agent for itself and other lenders, said in the objection. The “lenders do not accept and will not consent to the terms” of the offer, it said.

Hartmarx asked a judge May 21 to name London-based Emerisque and SKNL North America BV the so-called stalking-horse bidder at a June 30 auction. Illinois Governor Patrick Quinn and lawmakers in Washington urged the bank to support the deal and avoid liquidating the clothier, citing Wells Fargo’s receipt of $25 billion in federal aid.

The case is In Re Hartmarx Corp., 09-02046, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

For more lawsuits news from yesterday, click here.

Trials/Appeals

Business-Method Patents Will Get U.S. Supreme Court Scrutiny

The U.S. Supreme Court agreed to consider what types of business methods qualify for patent protection in a case with ramifications for the software, biotechnology and financial services industries.

The justices yesterday said they will review a lower court decision that narrowed the class of patentable inventions, excluding some innovations that don’t have a physical component. Because it came from the federal appeals court that handles all patent appeals, the ruling had marked a watershed in U.S. intellectual property law.

The issue is dividing companies. Microsoft Corp., International Business Machines Corp. and a financial-services industry trade group supported limits on business method patents at the appeals court, while others, including consulting company Accenture Ltd. and appliance maker Royal Philips Electronics NV, say the court’s requirements on inventors are too strict.

“The decision is overreaching, works an unnecessary sea change in deep-rooted principles of patent law and will necessitate a massive revaluation of America’s intangible technology assets,” Amsterdam-based Philips argued in papers urging the Supreme Court to step in.

The case will mark the first time since 1981 the Supreme Court has ruled on the types of innovations covered by the U.S. Patent Act. The justices will hear arguments and rule during the nine-month term that starts in October.

In the dispute before the court, inventors Bernard L. Bilski and Rand A. Warsaw are seeking a patent on a way to buy or sell energy at a fixed price based on the expected weather for a season.

The case is Bilski v. Warsaw, 08-964, U.S. Supreme Court (Washington).

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Exelon Bid for NRG Energy Goes to Trial in New York

A trial started over a challenge to Exelon Corp.’s $6.2 billion hostile-takeover bid for NRG Energy Inc., owner of power plants in Texas, California and the U.S. Northeast.

NRG sued Exelon, the largest U.S. operator of nuclear power plants, to thwart the bid, which NRG rejected as too low. Exelon is offering 0.485 share for each share of NRG to create the largest U.S. power producer. U.S. District Judge John Koeltl began hearing evidence yesterday in New York.

Lawyers for NRG argue Exelon can’t afford to close on the hostile offer because that would significantly increase the company’s debt. The offer is designed to pressure the smaller company into cooperating in a transaction requiring Exelon to take on less debt, the attorneys said.

“Exelon would put its business and business model at risk by closing the exchange offer,” NRG’s lawyer Yosef Riemer said in his opening statement.

Exelon wouldn’t risk buying NRG without doing in-depth due diligence, which it would be denied through a hostile offer, Riemer told the judge.

“Exelon harbors a secret intent not to close its exchange offer,” NRG said May 29 in a legal brief, parts of which are blacked out. Also, “the evidence will show that the exchange offer fails to disclose a number of material facts and conditions,” NRG said.

Exelon’s attorney Walter Carlson told Koeltl yesterday his side will present seven witnesses, including Chief Executive Officer John Rowe and President Christopher Crane, to show it’s serious.

The case is NRG v. Exelon, 09-2448, U.S. District Court, Southern District of New York (Manhattan).

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Microsoft Uses Appeal of Patent Loss to Seek Jury Changes

To Microsoft Corp., a $368 million jury loss in California over its Outlook software provided an opportunity to argue in a federal appeals court that there should be greater limits on patent trial damage awards, Bloomberg News’ Susan Decker and William McQuillen report.

The world’s largest software maker says last year’s loss to Alcatel-Lucent SA over a feature of its Outlook application is the perfect example of a system that can give inventors of small technologies big windfalls before juries. Microsoft supporters are asking the court to clarify what jurors can see and hear before awarding money damages in patent-infringement cases.

Judges should be “vigorous gatekeepers when it comes to the introduction of damages evidence and instruction of juries,” a dozen companies including Intel Corp. and Bank of America Corp. said in a court filing supporting Microsoft in the appeal of the San Diego verdict, which will be argued June 2 in Washington.

Microsoft, backed by Apple Inc. and Oracle Corp., said requests for cash must show a link between the patented feature and demand for the product. The Intel group goes further, saying judges shouldn’t let jurors hear about the size of a product’s market unless the patent owner is seeking compensation for lost profit.

Some companies, including Johnson & Johnson, 3M Co. and General Electric Co., say Microsoft is trying to solve a problem that doesn’t exist.

The case is Lucent Technologies Inc. v. Gateway Inc., 08- 01485, U.S. Court of Appeals for the Federal Circuit. The lower court case is Lucent Technologies Inc. v. Gateway Inc., 07-cv- 2000, U.S. District Court, Southern District of California (San Diego).

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National Australia Bank Fraud Case Gets U.S. High Court Query

The U.S. Supreme Court signaled it may consider how far the country’s securities-fraud laws extend overseas, asking the Obama administration for advice on a shareholder lawsuit against National Australia Bank Ltd.

Australian shareholders of Melbourne-based NAB want the justices to review a federal appeals court’s decision that the suit was beyond the jurisdiction of U.S. courts. The investors’ appeal says HomeSide Lending Inc., formerly a Florida-based mortgage-service subsidiary of NAB, fraudulently overvalued its assets, eventually forcing $2.2 billion in writedowns.

Should the high court take up the case, it would become one of the top business disputes of the nine-month term that starts in October. The U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Securities and Exchange Commission all filed briefs when the dispute was before the U.S. Court of Appeals in New York.

The justices directed their request yesterday to U.S. Solicitor General Elena Kagan, the administration’s top courtroom lawyer. She will receive input from the SEC, which supported the investors at the appeals court.

The case stems from NAB’s disclosure in 2001 that interest- rate assumptions used by HomeSide in a valuation model were incorrect and caused inflated estimates of mortgage-servicing fees. Writedowns in 2001 caused the bank’s American depositary receipts to fall more than 11 percent.

The case is Morrison v. National Australia Bank, 08-1191, U.S. Supreme Court (Washington).

To read more of this story, click here.

For more trial and appeals news from yesterday, click here.

Litigation Departments

Stanford Lawyer Quits SEC Case, Says He Was Replaced

R. Allen Stanford, the Texas financier accused by U.S. regulators of running an $8 billion fraud scheme, replaced the lawyers who have been leading his defense since April, according to a court filing.

Lead counsel Jacks C. Nickens, and his Houston law firm, Nickens, Keeton, Lawless, Farrell & Flack LLP, yesterday filed papers with U.S. District Judge David Godbey stating Stanford had replaced them with another Houston lawyer, Michael Sydow.

“Mr. Stanford’s stated desire to have other counsel serve as lead counsel in all pending and prospective litigation and his refusal to have any direct communications with Nickens Keeton provides more than adequate grounds for Nickens Keeton’s withdrawal,” Nickens said in the filing. He also said Stanford hasn’t consented to his firm’s withdrawal from the case.

The U.S. Securities and Exchange Commission sued Stanford, two associates and three companies he controls in February, accusing them of misleading investors about the nature and oversight of self-styled certificates of deposit he sold through Antigua-based Stanford International Bank Ltd.

Stanford has denied any civil or criminal wrongdoing.

The case is SEC v. Stanford International Bank, 3:09-cv- 00298-N, U.S. District Court, Northern District of Texas (Dallas).

Lawyer Cauley Pleads Guilty to Stealing $9.3 Million

Arkansas class-action attorney Steven Eugene Cauley pleaded guilty to federal charges that he stole more than $9 million from client escrow accounts he controlled.

Cauley, 41, pleaded guilty yesterday to fraud and criminal contempt before U.S. District Judge Paul Crotty in New York.

Cauley, formerly of Little Rock’s Cauley Bowman Carney & Williams PLLC, pleaded guilty to wire fraud and criminal contempt and was released on $5 million bond. Sentencing is scheduled for Sept. 10. Under federal guidelines, Cauley faces 78 to 97 months in prison.

In a May 14 petition to surrender his law license, Cauley told the Arkansas Supreme Court that he held in escrow the $66.5 million in proceeds of class-action lawsuit against The BYSIS Group Inc., a Roseland, New Jersey-based firm that services insurance companies. Cauley’s firm was among the lead attorneys in the 2004 class-action, or group, lawsuit.

“I failed to safely hold the last approximately $9.3 million of those funds and pay over when required to do so,” Cauley said in his petition. “I made false statements to others to explain my failure to pay over these funds, which I had used for other and unauthorized purposes.”

The BYSIS case is In re Bisys Securities Litigation, 04-cv- 3840, U.S. District Court, Southern District of New York (Manhattan).

For more litigation department news from yesterday, click here.

Court News

GM Bankruptcy Judge Gerber Is ‘Sharp,’ Seasoned in Big Cases

Robert Gerber, the bankruptcy judge who oversaw the biggest asset sale and the largest financing loan in bankruptcy court history, will show an exacting style of inquiry at General Motors Corp.’s reorganization, lawyers said.

A U.S. judge in New York’s Southern District since 2000, Gerber’s experience in handling Chapter 11 cases such as Adelphia Communications Corp. and Lyondell Chemical Co. may come in handy when trying to split up GM, the biggest U.S. manufacturer ever to file for protection from creditors.

“He is easily one of the best judges in the Southern District, extremely smart, considerate of counsel and careful,” said Mark R. Jacobs, a lawyer at Pryor Cashman in New York who dealt with Gerber in the Adelphia case. “He has a terrific judicial demeanor, and will give the GM case the attention it needs and deserves.”

Gerber, 62, will preside as creditors challenge the government’s allocation of $82.3 billion of GM assets and $172.8 billion of debt, owed to more than 100,000 creditors. At stake are the jobs, health and retirement benefits of about 90,000 U.S. workers and their families, the economic viability of their communities and about $50 billion in loans from U.S. taxpayers.

The carmaker plans to launch a new company, 60 percent- owned by taxpayers, in 60 to 90 days to sell Cadillacs, Chevrolets, Buicks and GMC trucks in the U.S. Gerber will supervise the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and at least 11 unwanted factories. He will likely use the example of Chrysler LLC, which won court approval last weekend to sell most of its assets to a group led by Italy’s Fiat SpA, as a model during deliberations.

GM’s bankruptcy case is In re General Motors Corp., 09- 50026, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To read more of this story, click here.

To contact the reporter on this story: Elizabeth Amon in Brooklyn, New York at eamon2@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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