Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

At one time or another, almost every lawyer presented with a claim says: “I think that might be champerty!” Then, research shows, it isn’t. Champerty is elusive, to say the least.

Last week, the NY Court of Appeals affirmed the narrow definition of champerty. In answering certified questions from the Second Circuit, the court ruled that indemnity claims – obtained in a settlement where there was a pre-existing interest -- were not barred by champerty. Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix Capital Markets, LLC as Master Servicer and Special Servicer v. Love Funding Corporation.

The facts – which involve the sale, transfer and litigation related to mortgages – cover several years and parties. However, the holding is clear.

• First, the court defined champerty very narrowly as: the purchase of claims for the purpose of bringing an action in order to involve parties in costs and annoyance, where such claims would not be prosecuted absent that purpose.

• Second, it is not champerty to acquire the right to bring a claim as part of a settlement. The court was not aware of any New York case holding that it is champerty to acquire -- as part of a settlement -- indemnification rights for reasonable costs and fees incurred in past legal actions.

• Third, the rights transferred may be for an amount greater than the amount demanded in the underlying action. The court noted that it was not aware of any New York case standing for the proposition that it is champerty to settle a dispute by accepting a transfer of rights having the potential for a recovery that is larger than one demanded as a cash settlement.

This should reassure anyone who has ever taken a claim as part of a settlement.

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Many corporations have accident reporting policies which require their employees to draw conclusions about the cause of an accident or whether it could have been avoided. The goal is improved safety, but the result is often heartburn for in-house counsel because documents prepared in the ordinary course of business generally must be produced in litigation. With the goal of improved safety, reports are often -- rightly or wrongly -- very self-critical.

Corporate counsel who hope to keep conclusions in confidence will often promptly hire outside counsel to assist in an accident investigation when litigation is anticipated.  They should be encouraged by last week’s decision of Magistrate Smith in Byrd v Wal-Mart Transportation, LLC, in the US District Court, Southern District of Georgia, which found the conclusions in a report were privileged even if the report was prepared pursuant to a corporate policy.

 Following a fatal truck accident, Wal-Mart’s in-house lawyers immediately hired outside local counsel because litigation was anticipated. Counsel was involved in the investigation of the accident. In the ordinary course of business, Wal-Mart has its safety personnel perform an investigation, which is then reviewed by a “Serious Accident Committee.” The committee issues an opinion as to whether the accident was “preventable” or “non-preventable.”

 During Wal-Mart’s corporate deposition plaintiff inquired about the conclusions of the Serious Accident Committee. Wal-Mart claimed privilege; plaintiff argued that the conclusions were reached in the ordinary course of business, rather than in anticipation of litigation, and had to be disclosed. The court granted Wal-Mart a protective order noting that this line of inquiry involved mental impressions that are privileged. Plaintiffs’ lawyers might take heart from a foot note that suggests that the deponent would have had to have been privy to counsel’s deliberations in order for the privilege to apply.

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In-house lawyers only tell clients if they “can” do something, but not if they “should.” Compliance departments take care of advising about the “should.” I came across that distinction today in an article on Law.com about Pfizer. I have no personal knowledge about the Pfizer situation, but, generally speaking, this distinction simply amazed (infuriated) me. How can: whether or not something may violate a regulation, put your client at risk of litigation or a claim, or in any way violate a legal standard not be part of a law department’s analysis for its in-house clients?  

Last I heard, staying out of trouble with corporate constituents (including regulators) was good long term business strategy. If management needs a compliance nanny to tell it the right thing to do the problem isn’t with the law department. If management doesn’t trust  -- or believe -- its lawyers’ counsel, maybe it has the wrong lawyers.  I still think that lawyers are supposed to be "trusted advisers" but not deciders of business strategy. 

The can/should distinction reflects the opinion held by some lawyers who have never been in-house that somehow in-house lawyers don’t really functioning as counsel to their in-house clients, or are ethically deficient.

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I am not a big fan of joint representation of employers and employees in civil matters no matter how clear the signed waiver or how sophisticated the client.  A number of years ago, I was involved in the defense of a breach of restrictive covenant/trade secret matter and represented both the current employer and new employee.  When the employer learned that the employee was, um, less than straightforward about what he had taken from his former employer, the new employer called me and told me to tell the new employee he was “fired”.  I declined and, fortunately, was able to point to the waiver letter and discussions that clearly explained my refusal. No matter, it took some effort to get the bill paid.

I know joint representation can save a client fees, or avoid having another lawyer at the table debating strategy or asking questions at a hearing that completely undercut a defense.  But, as a recent case, Trautenberg v. Paul Weiss, et al., shows, joint defense can spawn malpractice litigation and bad publicity (assuming you agree that exists).

Paul Weiss had represented Citibank and Trautenberg in connection with the defense of some claims arising out of the WorldCom debacle.   Paul Weiss also advised Citibank regarding Trautenberg’s severance agreement.  Two years after a severance agreement was negotiated and signed, Trautenberg sued Paul Weiss alleging breach of fiduciary duty and attorney misconduct relating to the firm's role in the severance discussions.

The case was dismissed for failure to state a claim on the pleadings, which generally is a pretty difficult motion to win.  The decision carefully analyzes the complaint and law, but, let's face it, in August 2009, a plaintiff who already received a five million dollar severance hardly tugs at the heartstrings.

Whatever, this is grief that both lawyers and clients can do without.

 

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Limited liability companies have only been authorized in Washington since 1994 and there isn’t much case law discussing them or the statutory scheme which authorizes them.  So, any decision discussing LLC law is big news.

Knowing this -- and doing business as a PLLC -- last May, I promptly downloaded a Washington State Supreme Court  decision that discusses whether an LLC may sue and/or be sued after its certificate has been canceled or it has been dissolved.   Chadwick Farms Owners Association v. FHC LLC,  The decision, which involves two distinct fact patterns, is a bonanza for anyone interested in LLC law or who advises clients about it.  The opinion also reviews when the members of an LLC may be personally liable.

However, although the decision is must reading for anyone looking to sue a dissolved LLC, or for the former members of an LLC who want to bring an action (or are concerned about being sued), the discussion and the rulings that the court makes are fairly technical.  Anyone else might find it, well, dry reading, which is why I looked at it on my desktop for almost 90 days before getting past page 2. 

There is a vigorous dissent (it is a 5-4 decision), so it is probably prudent for someone reading the decision to check if the legislature has addressed the concerns in the dissent.

 
 

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Going through the pile of decisions that I meant to write about, but didn’t, I came across a New York Court of Appeals decision from earlier this year that should be of interest to anyone advising about used equipment sales.  In Jaramillo v. Weyerhaeuser,  the court reaffirmed its prior rulings that a business selling its used equipment is not strictly liable for a workplace accident where the equipment was not sold in the ordinary course of business and was sold “as is, where is.” 

The machine in issue was sold as part of the defendant’s Investment Recovery Business, a division that distributes quarterly catalogs of sale items, advertises in trade journals and does market research.  The year the machine was sold (1986) the division grossed between 7.5 million and 8.5 million dollars.  The sale was not deemed in the ordinary course of business and defendant was not strictly liable for plaintiff’s injuries.

Although the opinion left the door open for “some imaginable case” where a seller of used goods could be held strictly liable, this decision reads as if the court is trying to drive a stake through the heart of these claims.  In any event, a seller of surplus equipment is provided with a useful road map of the relevant factual considerations.  For an injured plaintiff, it should do the same, but is pretty discouraging as to the likelihood of success.

 

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Failure to fully respond to a non-party subpoena may now create a risk greater than sanctions in New York -- it might create tort liability.  In IDT Corporation v. Morgan Stanley Dean Witter & Co., the First Department has ruled that claims for fraudulent misrepresentation and fraudulent concealment may be based upon intentional spoliation of evidence.

The spoliation claim arises from defendant, Morgan Stanley’s purported failure to fully respond to a subpoena in an arbitration between two of its clients (Morgan Stanley was not a party to the arbitration).  Morgan Stanley had represented in writing that its production of approximately 2,000 pages of documents fully complied with the subpoena.

In this action, the remainder of which was dismissed by the Court of Appeals in March,  plaintiff asserts that it learned that only a small number of responsive documents had been produced by Morgan Stanley in response to the subpoena.  Allegedly, 500,000 pages were not produced, and the omitted documents included some “smoking guns” -- which would have resulted in an increased arbitration award if plaintiff had known of them at the time.

The trial court had dismissed the claims for fraud and fraudulent concealment because of an earlier Court of Appeals case, Ortega v. City of New York, which did not allow a claim of negligent spoliation against a third party.

The Appellate Division distinguished Ortega and ruled that claims for fraud and fraudulent concealment had been sufficiently alleged – a material misrepresentation of fact was made when Morgan Stanley represented that it had fully complied with the subpoena; the misrepresentation had been intentionally made to mislead plaintiff; that plaintiff had reasonably relied on the misrepresentation, and had suffered damages as a result (more would have been awarded in the arbitration).  Because plaintiff stated a claim under existing tort principles, there was no reason to dismiss it because it involved spoliation of evidence in an action in which the defendant was a non-party.   

There are a number of facts in this case that arguably present unusual (or, distinguishable) circumstances, including whether this is limited to third-parties who have fiduciary relationships with the other parties.   But, the fact is that this is one more reason to pay close attention to those non-party subpoenas.
 

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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.

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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. 

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