Coyotes' Bankruptcy Judge Gives Parties an Outline of HIs Concerns

i obtained a copy of last week's decision in the Coyotes' bankruptcy case, which has been reported as denying the sale of the franchise so that it can be promptly moved to Hamilton, Ontario.  Here is a quick take:

  • it gives the lawyers a road map of the bankruptcy judge's concerns so they know what to address from now on;
  • the best interests of the creditors -- not the combatants' ego -- are what count in bankruptcy;
  • the NHL better come up with a good reason if it's not going to approve a sale to PSE Sports (Jim Balsillie); and
  • the franchise is bleeding money in Arizona -- and it looks like this has been the case at least since it moved to its new arena.

The league argues that it is concerned that debtor might be using bankruptcy to circumvent its rules -- not a big shock to anyone who ever represented a creditor.

PACER, the federal court system for obtaining documents, is not my favorite service.

Two NY Court of Appeals Cases Illustrate Standard for Pleading Fraud

I don’t post blog entries with great regularity because I try to limit myself to things that in-house counsel or clients might find interesting.  But, I do look every day for things of interest.  Today, I hit gold – three interesting cases from the NY Court of Appeals.  Good thing as I probably won’t be posting anything for at least the next week and a half.  I was tempted to schedule the posts, but, if the law is out there….

Here is the third and final post of the day.

Two of today’s Court of Appeals decisions deal with the pleading requirements for fraud.  They offer a comparison of when the court is prepared to state that fraud has been adequately pled. 

In the first, Eurycleia Partners, LP v. Seward & Kissel, LLP   the court found that plaintiffs failed to plead fraud because the facts did not support an inference that defendant knew of the falsity of statements in an offering memorandum.  The court stated: “the strength of the requisite inference of fraud will vary based upon the and context of each case.”  Given that language, it is will be a rare fraud claim that won’t warrant a motion to dismiss. The court also took particular notice of the fact that the manager of the hedge fund – who had pled guilty to securities fraud – had supplied the plaintiffs with much of the factual basis for the claim. 

In a second case, Sargiss v. Magarelli, the court ruled that an inference of fraud was present in the pleading.  The complaint alleged that, in a 1998 divorce proceeding, the husband misrepresented his financial worth – he claimed that he had transferred a significant interest in a business to his brother.  After the former  husband’s death, his daughter came across documents strongly suggesting that he hadn’t really made the transfer.

The court found – based upon the documents – that  the fraud claim against the decedent’s estate, was stated with adequate particularity.  In addition, there was an adequate inference of fraud against his brother and the company; if the transfer wasn’t, in fact, made, the brother – who controlled the company – necessarily knew about it and was part of the scheme. 



 

NY Court of Appeals -- Outside counsel doesn't owe fiduciary duty to limited partners

A lot of NY lawyers representing limited partnerships will sleep a little bit better tonight.  In Eurycleia Partners, LP v. Seward & Kissel, LLP, the NY Court of Appeals ruled today that they do not owe a fiduciary duty to individual limited partners.  The court analogized the relationship of counsel to limited partners with that of the relationship of corporate ounsel to  shareholders -- and noted that it is well settled that a corporation’s attorneys do not represent shareholders or employees.

The decision also affirmed the dismissal of fraud and aiding and abetting claims against the fund’s lawyers.  More about that in my next post.
 

Out of State Assets of Judgment Debtor May be Garnished if Bank is Subject to NY Jurisdiction

For me, a big part of a discussion regarding whether or not to litigate is figuring out whether there will be anything to collect.  Today, in Koheler v. The Bank of Bermuda, Ltd,  the New York Court of Appeals answered a certified question that might make you lean toward litigation. The decision extends the reach of a judgment creditor.  Provided that a judgment garnishee is subject to New York personal jurisdiction, the garnishee can be ordered to turn over property of a judgment debtor that the garnishee controls even though the property is outside of the state, or the country.  Since New York is a banking center, this could have a long reach.

The case was filed in the Southern District of New York in 1993 by an out of state judgment creditor who sought stock certificates or assets of a judgment debtor.  The certificates were held in Bermuda by the Bank of Bermuda Limited, which was served through the Bank of Bermuda (New York) Ltd., allegedly a subsidiary or agent.

The District Court ordered the Bank to turn the certificates, or money sufficient to pay the judgment, over to the judgment creditor in 1993. Personal jurisdiction was litigated for ten years. Finally, in 2003, Bank of Bermuda, Ltd consented to personal jurisdiction.

This case appears to have a life span reminiscent of Jarndyce v. Jarndyce, and today’s opinion most probably won’t end it -- there is a three judge dissent that asserts that the majority holding may be unconstitutional.  Meanwhile, if a judgment debtor or even a potential defendant has assets in a bank that is related to a bank located in New York, it bears consideration.



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Is a Lawyer A Fiduciary or a Vendor?

This week, in a decision reviewing sanctions imposed by the Bankruptcy Court, Judge Young of the USDC in Massachusetts quoted at length from an essay critical of the current state of law practice.  It provides an interesting counterpoint to much of what is written about law firm practice and marketing.  Here is a -- sorry, pretty long, but thought provoking  -- portion of the decision:

"How is it that our profession, the legal profession-which could have and should have strongly counseled against the self interested excesses that set up the collapse-instead has eagerly aided and abetted those very excesses? How could we (all of us who profess to be lawyers) have fallen so low?

Perhaps the answer lies in a poignant and little known essay by the distinguished attorney Carl M. Sapers.

By the 1980's, the generalist lawyer had been succeeded by specialized lawyers, each of whom, like the hedgehog, knew only one thing but knew it very well.

By the mid-1980's, we had all become “transactional” lawyers engaged to handle a particular problem. We no longer were engaged to know about all of our client's legal problems. The in-house counsel had that plenary knowledge. We were no longer engaged to furnish wise judgment, but rather to solve a specific legal problem.

This development created in its train two significant changes: the wise counselor became a skilled technocrat; the traditional fiduciary became a vendor. The narrow focus of legal assignments meant that lawyers no longer comprehended the quotidian concerns of the client, nor did they see the client whole. Because the client chose its legal services on the basis of price, speed, and experience and cherry-picked what it thought the most appealing from several firms, the firms themselves had a diminished sense of loyalty to any client.

Perhaps, even more significantly, we as lawyers had lost that moral clarity that had characterized ... practice....

In February 1994, the Council of the Boston Bar rejected ... proposed guidelines [concerning lawyer political contributions], but proponents of the idea appealed to the Large Law Firm Group, which met monthly in Boston to discuss matters of mutual concern (while carefully avoiding the exchange of information that might implicate the Sherman Act).
The response from that mighty body, composed of the managing partners of our largest firms, was: “If it is not illegal, why should we curtail what we are doing?” This constituted a new definition of legal ethics. We only stop at the water's edge of criminality.
....

The working day was extended; the expectation of billable hours grew by leaps among partners and by leaps and bounds among associates. With more time directed at specialized work, there was less time to be involved in community life and recreational or cultural pursuits. Dean Kronman of the Yale Law School, in his provocative study, The Lost Lawyer: Failing Ideals of the Legal ProfessionFN4 describes law practice at its best as “the lawyer-statesman ideal,” when clients sought lawyers for their wisdom and experience, not just their technical agility within a narrow area of law. Dean Kronman observes that “the increasing narrowness of large-firm practice must itself be viewed as a threat to the lawyer-statesman ideal.” FN5 He writes that lawyers' “imaginative powers shrink as the boundaries of their experience do .” FN6 The new devotion to billable hours had narrowed the breadth and scope of most lawyers' lives.
FN4. Harvard University Press, 1993.
FN5. Id. at 304.
FN6. Id. at 307.

In the 1990s, the trajectory of practice was constant. More specialization, greater emphasis on billable hours, and more leveraging of increasing numbers of associates. Improving the bottom line was a guiding light in the management of large firms. Lawyers were sensitive to where their earnings ranked in the city, and for the first time partners jumped from firm to firm to improve their compensation. But then a sea change occurred: we who had habitually compared ourselves to our peers now began to compare ourselves to our clients.
Suddenly, Warren Buffet, Bill Gates, and Goldman Sachs became the standards against which we measured our compensation. With that comparison, another self-imposed barrier in our practice crumbled. Lawyers had kept a disinterested distance in order to claim a healthy objectivity in dealing with client problems; they were now prepared to take an equity stake in their clients.
....
[Today] diversity is remarkable. The partners come from a multitude of law schools; Harvard no longer dominates. Women are manifestly in positions of leadership; there were no women partners in the twelve largest firms in 1950. The members of the fourteen largest firms in 1999 come from all over the globe.
But something has been lost as well. Where are the seasoned lawyers with the moral clarity ....? Where are the lawyer-statesmen of an earlier generation who exalted our profession?

Carl M Sapers, Fifty Years of Large-Firm Practice in Boston: From moral clarity to the water's edge of criminality? Legal Chowder R. Kass. Ed.) at 73 (MCLE 2002)"



 

WA Supreme Court Holds WA is Demand Futility State and Follows Delaware Law

The Washington Supreme Court ruled today that Washington follows the Delaware “demand futility” rule for shareholder derivative claims.  The court was answering a certified question in a case filed in the US District Court for the Western District of Washington involving option backdating at  a Washington corporation, In re F5 Networks, Inc.,

Shareholders may bring a derivative suit without making a demand on the board of directors if there is a reasonable doubt that the board could exercise “its independent and disinterested business judgment in responding to demand.”  Reasonable doubt will be present and demand excused if under particularized facts it is doubtful that 1)  the directors are disinterested and independent, and 2) the challenged transaction was the product of a valid exercise of business judgment.

The court reached this holding by analyzing RCW 23B.07.400(2),  the shareholder derivative suit demand provision, and the fact that Delaware courts are well versed in this matter -- more than half of publicly traded corporations and sixty (60) percent of Fortune 500 companies are incorporated in Delaware.

The court also held that the reasoning in Ryan v. Gifford, a Delaware case finding demand futile in an option backdating claim based upon circumstantial evidence, applied to the F5 Networks claim.

Although the opinion only follows Delaware law on the demand futility standard, if the Washington statutory scheme is similar to that of Delaware in another  area – given the reasoning that Delaware courts are well versed in corporate law – it seems reasonable to rely on Delaware case law in cases involving Washington corporations.

How An Appellate Court Works

For anyone who has wondered how an appellate court works, there is an amazing article in today's New York Law Journal by Justice Saxe.  I followed a free link in my daily NYLJ e-mail expecting a quick little article -- instead, I found a comprehensive description of the internal procedures of the Appellate Division, First Department.  I'm not sure how, or if, it will have an effect on how lawyers approach appeals -- outside of calling attention to how important reply briefs are -- but it was refreshing to have it explained.

 

 

 

Phoenix Coyote Bankruptcy Presents Many Interesting Issues for Businesses

Leaving aside the fact that I am a hockey fan – one of my lifetime highs was being at Madison Square Garden on June 14, 1994 – what is going on with the Phoenix Coyotes should be of interest to anyone who deals with franchises, bankruptcy, has received taxpayer financing, or has professional sports marketing deals. 

For those who don’t follow hockey, the Coyotes filed for bankruptcy this week and are trying to have the court approve the sale of the club to the founder of Research in Motion, who presumably would move the team from Arizona to southeastern Canada.  The NHL, which for years has seemed to think that playing ice hockey in the sunbelt is better than having it played in Canada, had a different purchaser in mind.  So, it stripped the current owner of his right to run the team, and the Commissioner says that he doesn’t think that the other owners would approve the sale proposed by the Coyotes.

Because the current owner and the NHL appear to have declared war, it seems that the Bankruptcy court will have to deal with some interesting issues.  A few come to mind immediately.  After a bankruptcy, who controls where a franchise goes, who controls who owns it, who operates it – the league, an appointed trustee or the current owner as debtor in possession?  Can a league prevent a member from filing for bankruptcy? What is the effect on a league if a member files for bankruptcy?  What happens to taxpayer financed facilities? I’m sure there are many more issues that will develop as this case works its way through the bankruptcy process.   Will Wayne Gretzky leave the sun to return to coach in Canada. (I guess that isn't a legal issue.)

Here are what the Wall Street Journal, ESPN, the CBC, and the New York Times  have to say about this, so far.
 

Two Interesting Cases re Awards of Attorneys' Fees For In-House Counsel Work

In the last two days, I have seen two interesting decisions regarding attorneys’ fee awards for in-house counsel litigation work. The first, AMX Enterprises, L.L.P. v. Masters Realty Corp.,  decided by the Texas Court of Appeals, has a comprehensive discussion of the appropriate measure of attorneys’ fees – should they be based upon market value or cost-plus value.  After surveying various jurisdictions, the court determined that market value is the appropriate measure.  The opinion also discusses the proof that should be submitted for an award.  Ultimately, the case was sent back for a new trial on the fee issue.

The second case, Wordtech Systems, Inc. v. Integrated Network Solutions, Inc.  decided by Judge England of the USDC for the Eastern District of California, also discusses the proof necessary for an in-house counsel fee award.  Even while noting the “glaring lack of support” the court awarded $67,500 for the in-house services.

 While it is very nice to have your employer compensated for your work – and certainly provides strong evidence of an in-house litigator’s value to his or her employer, as well as, a basis for a nice bonus for a good result – these cases support the wisdom of keeping time records if there is the potential for an attorneys fee award.

Unfortunately, I was only able to find the Westlaw opinion for each of these cases.  If that is a problem, contact me.


 

Equal Pay Act Applies to In-House Attorneys; Reinstatement is Appropriate Remedy

Yesterday, the Wisconsin Court of Appeals yesterday affirmed an order reinstating an in-house attorney who had been terminated.  This case applied federal law, so it should be of interest to all in-house counsel -- both terminators and terminatees. 

Defendant in Sands v. Menard contested the affirmance of an arbitration panel’s order requiring reinstatement of defendant’s former executive general counsel.  The arbitration panel had ruled that defendant violated the Equal Pay Act by paying plaintiff less than a similarly situated male employee and had retaliated against her for asserting her discrimination claims. 

In addition to compensatory and punitive damages, defendant was ordered to reinstate plaintiff. The opinion has a fairly long discussion regarding the standard of review, the application of anti-discrimination laws to in-house counsel and the appropriate remedies for violation of those laws.  The bottom line in the opinion is that the defendant failed: “to explain how Wisconsin law regarding clients’ rights to choose their attorneys, or the rules of professional conduct, could negate the remedies of wrongfully terminated employees under federal law.”  

This will probably give professional responsibility gurus a lot to discuss.