Leon A. Brown v. City of South Burlington, Vermont, Charles Hafter, Individually and as City Manager, City of South Burlington, and Michael O'neil, Individually and as Chief Engineer, City of South Burlington

Citations: 393 F.3d 337; 22 I.E.R. Cas. (BNA) 371; 2004 U.S. App. LEXIS 27060Docket: 03-9060

Court: Court of Appeals for the Second Circuit; December 28, 2004; Federal Appellate Court

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Leon A. Brown, the plaintiff-appellant, appeals a summary judgment from the United States District Court for the District of Vermont, which favored the defendants-appellees: the City of South Burlington, City Manager Charles Hafter, and Fire Chief Michael O'Neil. Brown's lawsuit sought damages for wrongful termination, citing violations of the First Amendment, retaliation under the False Claims Act (FCA), and Vermont state law. The District Court ruled that Brown had ratified a release of claims he signed before initiating the lawsuit and was barred from contesting it due to his failure to timely return the consideration received for that release.

The basis for Brown's termination stemmed from an anonymous letter sent in January 1999, which alleged misconduct by Fire Chief O'Neil regarding the misuse of funds from FEMA following the 1998 Ice Storm. The letter claimed that O'Neil submitted false invoices for meals purportedly provided to firefighters during the disaster response, asserting that no meals were actually served. It also indicated a decline in volunteer firefighters’ morale, attributing their departure to dissatisfaction with O'Neil's leadership. The letter was addressed to various officials and media outlets, suggesting a whistleblower context for Brown's claims.

The Letter prompted multiple inquiries and reports regarding meal reimbursement claims made by the South Burlington Firefighter's Association (S.B.F.F.A.). On January 26, 1999, Scott A. Merchant informed Chief O'Neil that actual receipts for meal expenses were lost amid confusion, leading to the submission of estimated invoices to FEMA as receipts. Merchant expressed disappointment over attacks on the credibility of the S.B.F.F.A. On January 29, 1999, Chief O'Neil updated City Manager Hafter, confirming he reviewed the reimbursement documentation and communicated with FEMA, providing them with copies of the receipts from Merchant. On February 2, 1999, FEMA Inspector Frederick J. Costello reported that he found the meal reimbursement records compliant with FEMA guidelines but noted that the anonymous Letter was under investigation.

The City Police Department initiated an investigation, reportedly at the behest of City Manager Hafter, assigning Detective Gary Small to the case. Chief O'Neil suspected firefighter Leon Brown as the author of the Letter, citing Brown's personal issues, including a low promotion exam score, injuries from a car accident, extended sick leave, and significant home damage from a nearby fire. Captain Ken Dattilio, Brown's supervisor, corroborated this suspicion, noting Brown's recent depression and feelings of animosity toward O'Neil, as well as Brown's medication for health issues. Detective Small compared the Letter's envelope with those from Brown's residence. 

On February 9, 1999, both Detective Small and Captain Dattilio interviewed Leon Brown, who confessed to typing the Letter and expressed regret about his actions. He detailed his grievances with Chief O'Neil and mentioned financial difficulties, the car accident, and poor performance on his promotion exam. When asked about any illegal actions by Chief O'Neil regarding FEMA funds, Brown stated he was unsure but claimed that no meals had been provided and that the Emergency Management Coordinator, Sonny Audette, had hesitated to sign the reimbursement slips.

Chief O'Neil submitted a confidential memorandum to City Manager Hafter on February 16, 1999, detailing the investigation into a Letter that falsely accused him of misconduct. O'Neil reported that firefighter Brown, who admitted to writing the Letter, was considered untrustworthy by department members, damaging morale. O'Neil recommended Brown's termination due to these factors. Later that day, Hafter informed Brown of the recommendation and began his inquiries, ultimately offering Brown the choice between resignation and termination. Brown chose to resign on March 12, 1999, receiving $7,964.70 in a settlement that included standard termination payments.

After resigning, Brown pursued a fraudulent meal reimbursement claim with FEMA, which confirmed the claim was indeed fraudulent and implicated O'Neil and Hafter in the scheme. Hafter had authorized a false claim for 299 non-provided meals, leading the U.S. Attorney's Office to file a complaint against the City under the False Claims Act, resulting in a stipulated judgment of $2,500 on October 27, 2000.

On January 10, 2001, Brown requested reimbursement for additional sick leave accrued until March 1999, reiterating his earlier claims of fraudulent meal claims. After receiving no response, he filed a complaint in the U.S. Court for the District of Vermont on October 15, 2001. The defendants moved for summary judgment, which was referred to Magistrate Judge Jerome J. Niedermeier, who subsequently filed a detailed report and recommendation on April 7, 2003.

Defendants argued that Brown was barred from asserting claims due to a Release he signed. The Magistrate Judge identified a triable issue regarding Brown's claim that he was induced to sign the Release through Defendants' fraudulent misrepresentations related to meal reimbursements, recommending denial of summary judgment on the Release's validity. Regarding other claims, the Magistrate Judge recommended granting summary judgment to individual Defendants Hafter and O'Neil on the False Claims Act, Vermont wrongful termination, and First Amendment claims. Specifically, the Magistrate Judge noted:

1. The retaliatory discharge claim under the False Claims Act was dismissed against individual defendants because they are not considered employers under the Act.
2. The Vermont wrongful termination claim should have been filed against the municipality instead of the individuals, as required by state law.
3. The individual defendants were entitled to qualified immunity on the First Amendment claim, having acted in good faith based on a reasonable fear of disruption from Brown's termination linked to an anonymous letter.

On the First Amendment claim's merits, the Magistrate Judge again recommended summary judgment for Defendants, stating that discharging an employee for internal grievances expressed in an anonymous letter would be justified if it could potentially disrupt the workplace. However, the Magistrate Judge recommended denying summary judgment for the False Claims Act retaliation claim and the Vermont state law claim, indicating that there was a triable issue regarding whether Brown's discharge was retaliatory for his whistleblowing activities. The report suggested that Vermont law would support a whistleblower exception to at-will employment.

On May 8, 2003, the District Court, in a brief opinion addressing the parties' objections, concurred that genuine factual issues existed regarding the Release's procurement by fraud but noted a new argument from Defendants concerning Brown's failure to tender consideration for the Release. Since this argument had not been previously presented to the Magistrate Judge, the District Court recommitted the matter for further determination on this point and its implications for Brown's remaining claims.

On August 27, 2003, a Magistrate Judge issued a fifteen-page report recommending summary judgment in favor of Defendants based on the defense of ratification related to a Release. The Judge found the defense of ratification was properly established and could be included under the broader defense of release. If ratification could not be inferred, the Judge recommended allowing Defendants to amend their answer to explicitly include it. The report highlighted that consideration for the Release was adequate, noting payments made to terminated employees that they typically wouldn't receive, including two weeks of severance pay and unused sick leave. The Judge concluded that any economic duress that may have rendered the Release ineffective had been eliminated by October 16, 2000, when the plaintiff, Brown, regained employment and received a substantial settlement from a separate personal injury claim. It was noted that Brown was aware of alleged misrepresentations by January 1, 2001, as indicated by his demand for additional money. Brown's later attempt to tender back consideration was deemed untimely, occurring on May 8, 2003, long after he was aware of the misrepresentations and after any economic duress had ceased.

On September 25, 2003, the District Court addressed Brown's objections to the Second Report in a seven-page unpublished opinion, upholding the timeliness, validity, and consideration of the Release, and affirming that the ratification defense was applicable to claims under the False Claims Act. The court found no undue delay in allowing Defendants to amend their answer and rejected the notion that the Release was void against public policy. Consequently, the District Court directed the entry of summary judgment for Defendants. The case was subsequently appealed with a focus solely on the ratification determination, rendering other issues moot for review.

A release is recognized as a contract, and ratification refers to a party's binding adoption of an act that was not initially legally obligatory. Brown contends that his execution of the Release was not legally binding due to alleged misrepresentations by the Defendants and claims he did not intend to adopt the invalid Release. Generally, a voidable contract can be ratified through express or implied conduct, but the ratifying party must act voluntarily and with full knowledge of the relevant facts. The intent to ratify is crucial and must be demonstrated by conduct that implies approval. In cases involving a release, the releasor must show unequivocal conduct indicating an intention to ratify, even when the release was obtained through fraud. Retaining consideration after discovering fraud may indicate ratification. To avoid being found to have ratified a release where consideration has been paid, the releasor must tender back the amount received, a principle upheld in common law. In the case of Fleming, the court ruled that the plaintiff's failure to return the $75,000 consideration she received rendered her attempt to rescind the release ineffective. Vermont law similarly mandates that a party wishing to rescind a settlement must return any received consideration; failure to do so bars recovery. A Vermont Supreme Court case highlighted that a plaintiff's attempt to disavow a release was unsuccessful because they had not returned the consideration and the request was made outside the statutory limitations period.

In a 1905 ruling by the Vermont Supreme Court in Ward v. Marvin, the court established that a party's right to rescind a contract due to fraud is contingent upon acting within a reasonable time after discovering the fraud. The court emphasized that while the timing is generally a legal question, disputes involving facts such as excuse and discovery of fraud present a mixed question of law and fact appropriate for jury determination. 

The Restatement of Contracts further refines this principle, stating that a party loses the right to avoid a contract for misrepresentation if they do not express their intention to do so within a reasonable time upon learning of the fraud or misrepresentation. Factors influencing what constitutes a reasonable time include the potential for prejudice to the other party, justifiable reliance by others, fault by either party, and the contributing conduct of the other party.

Moreover, to successfully avoid a contract based on fraudulent misrepresentation, the party must not only notify the other party of their intent to rescind within a reasonable time but also return any consideration received in that same timeframe. Timeliness of this return is typically a factual question, and courts have permitted tendering of consideration even during trial proceedings.

Factors influencing the determination of ratification extend beyond merely the time elapsed between discovering that a release was fraudulently induced and the subsequent disaffirmance of that release. While a period of two years and five months was deemed sufficient by the District Court for establishing ratification, a more thorough analysis is necessary. In this case, the action was initiated within nine months after Brown became aware of the alleged fraudulent misrepresentations. Although the Release's validity was challenged in the pleadings, the specific ratification issue arose only after the Defendants filed a motion for reconsideration, approximately one and a half years after the action commenced. Brown attempted to return the consideration paid for the Release three times, contrasting with other cases where no effort to tender back was made.

Additionally, the Defendants were aware of Brown's intention to disaffirm the Release upon his receipt of the Complaint, which contested its validity shortly after he became aware of the alleged fraud. The context underscores the role of the False Claims Act, designed to protect whistleblowers and the public interest. Notably, in similar federal statutes, the Supreme Court has eliminated the tender-back requirement, as seen in cases under the Older Workers Benefit Protection Act and the Federal Employers' Liability Act. However, Congress did not exempt retaliation claims under the False Claims Act from the common law rules regarding tender and ratification.

Brown's delay in returning the consideration for the Release is assessed in light of his entitlement to the majority of the $7,964.70 received, with only the severance pay portion being non-entitled to all terminated employees. The legal precedent from Chaput v. Unisys Corp. establishes that a release requires valid consideration not otherwise owed to the releasor. Brown acknowledged that part of the payment he received was indeed consideration for the Release. To avoid ratification, it was necessary for him to tender back that portion, though he offered to return the entire amount, with interest, on three occasions after the ratification issue was raised.

The assessment of whether Brown disaffirmed the Release in a reasonable timeframe must consider the potential prejudice to the Defendants due to any delay. Vermont law mandates notice of disavowal and repayment for personal injury claim releases but does not negate the general principle regarding the releasor's timely notice of rescission. Courts tend to be lenient regarding the timing of notice and tenders, with the key consideration being whether the releasee suffered prejudice from the delay.

Factors influencing the prejudice determination include whether the Defendants relied on the Release, the nature of that reliance, Defendants' awareness of Brown's potential grounds for disaffirmance, and any fault on either party's part regarding the execution and subsequent disaffirmance of the Release. The case is remanded for the District Court to further analyze the issue of ratification and decide if it can be resolved through summary judgment or if a trial is necessary, while also allowing for the examination of other summary judgment issues.