Recent Second Circuit Guidance on Whether Prejudice Must Be Alleged to State a Procedural Due Process Claim

One seemingly insoluble debate in constitutional law concerns whether “prejudice” – essentially synonymous with damages – has to be shown to state a procedural due process claim. Of course, “seemingly” is meant to portend an actual solution (or resolution), at least within the Second Circuit.

The problem can be illustrated by any number of scenarios.

Say a defendant is convicted after woefully inadequate assistance of counsel – no objection to hearsay or propensity evidence, failure to cross-examine an alleged eyewitness, etc. The procedural due process violation is clear, but likely there is no prejudice if, following trial, new evidence sufficient to convict (such a taped voluntary confession) emerges.

Or, say that you, as the fiduciary for your parent who is suffering from Alzheimer’s, submit a insurance claim to have the cost of your parent’s specialized assisted “memory unit” facility covered under a long term care policy that was issued before such facilities came into existence. The carrier sues for a declaratory judgment that coverage is limited to traditional nursing homes (those without specialized services, and thus inexpensive), but engages in sewer service, and you lose the declaratory judgment action by default, since you didn’t know about the case and failed to appear. Again, the procedural due process violation is clear, but perhaps there was no prejudice if, shortly after the default judgment is entered, the relevant appellate court interprets identical policy language as excluding specialized long term care facilities.

Two predominate approaches – the so-called “dignity” and “utility” theories – inform the debate over prejudice as an element of a procedural due process claim. See Robert M. Lawless, “Realigning the Theory and Practice of Notice in Bankruptcy Cases,” 29 Wake Forest Law Rev. 1215, 1221-1224 (1994); Jane Rutherford, “The Myth of Due Process,” 72 Boston U. L. Rev. 1, 47 (1992). The dignity theory holds alleging prejudice is not required to state a procedural due process claim. The utility theory imposes a prejudice requirement. The logic behind the dignity theory is “If there has been no fair day in court, the reliability of the result is irrelevant, because a fair day in court is how we assure the reliability of results.” Lane Hollow Coal Co. v. Dir., Office of Workers’ Compensation, 137 F.3d 799, 808 (4th Cir. 1998). That behind the utility theory reduces to the adage “no harm, no foul.” (The adage was apparently first used in the Hartford Courant in 1956 to describe the art of referring basketball. Fans may remember that referee Tim Donaghy was charged with fixing professional games by calling fouls that did not disrupt the flow of the game, applying a dignity theory, as it were.)

In 2016, the Second Circuit, in In re Motors Liquidation Co., 829 F.3d 135, 162 (2d Cir. 2016). cert den. sub nom. General Motors LLC v. Elliott, 137 S.Ct. 1813 (2017) contrasted the two approaches, and declined to choose between them. Then, it found that, if a prejudice requirement did exist, it had been adequately alleged in the case before it. Specifically, Motors Liquidation ruled that a class of creditors, whose claims were extinguished by a bankruptcy court order approving she sale of “Old GM” assets to “New GM” in connection with the 2009 auto industry bailout, were prejudiced by the lack of actual notice of the sale. It reached this result even though the Court simultaneously rejected the very same legal argument these claimants would have made had they had an opportunity to object to the sale (i.e., that successor liability claims survive a §363 sale). Motors Liquidation held that: “[T]he entire record must be considered and the probable effect of the error determined in light of all the evidence. [I]f [the court] cannot say, with fair assurance, after pondering all that happened . . . that the judgment was not substantially swayed by the error,” then it must find a procedural due process violation. 829 F.2d at 162-163. Motors Liquidation then held that because adequate notice would have given the absent creditors an opportunity to negotiate compensation for their claims, they had been prejudice by the deprivation of that opportunity, notwithstanding that the legal argument that they would have advanced turned out to be wrong.

A remarkably clear-eyed take on Motors Liquidation and where it falls between the dignity and utility theories was written by Daniel Halperin, then a law student, in “Pride and Prejudice: In re Motors Liquidation,” 36 American Bankruptcy Institute J. 52 (2017). Mr. Halperin’s article is absolute must-reading for anyone who wants to understand this issue or grasp the impact of the Motors Liquidation decision. Mr. Halperin concludes Motors Liquidation “blended” the dignity and utility theories; that, that at its core, Motors Liquidation protects the right to negotiate; and that Motors Liquidation is closer to the dignity theory than the utility theory. (Mr. Halperin also notes that personally he is more persuaded by the utility theory.)

Next, in Francis v. Fiacco, 2019 WL 5876504 (2d Cir., Nov.12, 2019), the Second Circuit seemed to adopt without qualification a pure dignity approach, i.e., that it didn’t matter whether the absent parties’ legal argument might have been wrong. Francis held that state corrections officials violated a criminal defendant’s procedural due process rights when, without adequate notice to the defendant or the sentencing court, they failed to implement an order that the state sentence run concurrently with an anticipated federal sentence. Francis expressly recognized that the corrections officials’ view that concurrent sentencing was not allowed in those circumstances was possibly correct. In fact, Francis found a due process violation: “[r]egardless of whether the State Defendants’ course of conduct was legally justified (or perhaps even legally required). . . [.]”

In Francis, there was no discussion of lost practical opportunities, such as the lost opportunity to negotiate that was the decisive factor in Motors Liquidation, 2019 WL 5876504, *10, and the decision does not discuss Motors Liquidation. Instead, the decision relied on Mathews v. Eldridge, 96 S.Ct. 893 (1976). Mathews assesses prejudice under a three-part balancing test:

First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government’s interest, including the function involved and t he fiscal and administrative burdens that the additional or substitute procedural requirement would entail. 96 S.Ct. at 902-903 (emphasis added).

Francis found a “high risk of error” because “[t]he procedures . . . involved a coterie of non-lawyers . . . privileging their understanding of the law above the sentence pronounced by the sentencing court.” Id., *11. Note, however, that the underlying legal issue that the correction officials interpreted was an undoubtedly difficult one, with persuasive arguments on both sides and no on-point guidance from the Court.

The next pertinent Second Circuit decision, Knopf v. Esposito, 2020 WL 898081 (2d Cir.) was in 2020, and a case in which I was one of the attorneys for the plaintiffs-appellants. Knopf v. Esposito concerned a conspiracy to violate 42 U.S.C. §1983. Sanford, one of the defendants in the §1983 case was the seller under a real estate contract that hadn’t closed at the time the procedural defect occurred. The procedural defect occurred in Knopf v. Sanford, in which Michael and Norma Knopf were suing Sanford for breach of contract, and in which a trial on the Knopfs’ damages was about to begin. Sanford and his attorneys obtained a private, ex parte opinion from an attorney employed in the New York state intermediate appellate court to the effect that an escrow requirement imposed by that appellate court (to protect the Knopfs’ right to enforce their eventual damages award against the sale proceeds, in which they had an equitable interest) was no longer in force. The Court Attorney rendered that ex parte advisory opinion, despite appellate court having itself denied Sanford’s motion to vacate the escrow requirement just days earlier. The parties to the sale then relied on the Court attorney’s ex parte advisory opinion to close and distribute – rather than escrow – the proceeds.

In Knopf v. Esposito, the Second Circuit held that the procedural defect – the ex parte call from Sanford’s lawyers to the Court attorney to obtain the advisory opinion (from which the Knopfs’ lawyers were excluded) – prejudiced the Knopfs. In particular, it recognized that, had the Knopfs’ lawyers been on the call, they could have obtained a new escrow order to clear up the confusion before the proceeds were distributed. The decision essentially held that it was irrelevant whether the Court Attorney’s opinion were correct or incorrect, since had the Knopfs attorneys been on the call, they could have protected their clients. Knopf v. Esposito is similar to Motors Liquidation since the lost opportunity to obtain a new escrow order is analogous to the lost opportunity to negotiate in Motors Liquidation.

Knopf v. Esposito and Motors Liquidation both locate prejudice in the lost practical opportunity to protect the due process claimant’s interest (by negotiating in Motors Liquidation, by obtaining a new escrow order in Knopf v. Esposito). In other words these decisions do not eliminate the prejudice requirement; instead, they adopt a definition of prejudice that is more expansive than solely a loss traceable solely to a substantive legal error resulting from the lack of notice.

Interestingly, though Knopf v. Esposito is similar to Motors Liquidation, it does not cite that decision. Instead, its cites Fuentes v. Shevin, 92 S.Ct. 1983, 1997 (1972), a polestar for courts inclined toward the dignity approach, which holds “The right to be heard does not depend upon an advance showing that one will surely prevail at the hearing.”

Synthesizing Motors Liquidation, Francis and Knopf v. Esposito, here’s where I see the law as it exists in the Second Circuit.

As noted, Motors Liquidation expressly and Knopf v. Esposito impliedly do sustain the allegation of prejudice. Therefore, they can’t be said to reflect a pure dignity approach. However, both decisions indicate that prejudice is not limited to a lost opportunity to make a correct legal argument, it also includes deprivation of a chance to avoid or mitigate damages by practical means, such as negotiations (in Motors Liquidation) or seeking a provisional remedy (in Knopf v. Esposito).

Where, as in Francis v. Fiacco, the due process claimant is, in fact, relying on a lost opportunity to make a correct legal argument, I think that that the theory he or she would have advanced probably has to pass some level of colorability, determined at the time of the procedural defect, rather than from the hindsight provided by subsequent decisions. This was the holding of ruling of Judge Rakoff in Bogdan ex rel. Parra v. Marsh USA, Inc., 319 F.Supp.3d 633 (S.D.N.Y 2018), rev’d on other grounds, 2020 WL 815776 (Feb. 19, 2020), where he upheld a procedural due process claim based on uncertainty at the time of the procedural defect as to whether the legal argument the plaintiff would have made (had he received notice) was correct, notwithstanding an intervening Supreme Court decision rejecting that argument. Bogdan, supra, 319 F.Supp.3d at 643. Mathews v. Eldridge, of course, focuses on “the risk” of error, not the sort of “certainty of legal error” that subsequent rulings might provide.

In terms of how colorable the possibility of a legal error should be, certainly conflicting case law, or a dissenting Circuit would be enough, and I would place the bar lower, like a reasonable policy-based argument that the prevailing precedents should be overturned. Connecticut v. Doehr, 501 U.S. 1, 14 (1991) is the only decision that I am aware that approaches the issue of “how colorable” the legal position of the absent party must be, and it holds that a “substantial” risk of error (under Mathews) exists if it concerns a “not uncomplicated issue.”

E.W.B.