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

Yesterday, the First Department issued a decision in VOOM HD Holdings v. EchoStar Satellite that is must reading for any potential litigant. The court adopted the federal “Zubulake” standard that “once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold to ensure preservation of relevant documents.” Litigation is reasonably anticipated when an organization is "on notice of a credible probability that will become involved in litigation, seriously contemplates initiating litigation, or when it takes specific actions to commence litigation."

Because of defendant’s purported failure to preserve electronic data when litigation was anticipated, and its failure to halt email purges after litigation was started, and its prior issues with destruction of electronic evidence, the decision also discusses the standards for spoliation of evidence and sanctions.  The court was not impressed with defendant's argument that it was seeking an amicable business solution so there was no reasonable anticipation of litigation.

The bottom line is that defendant will be subject to an adverse inference -- the a jury will be charged to presume the relevance of the evidence that is not available.   In addition, the defendant will return to a judge who has already determined that it is grossly negligent in its management of litigation.
 

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One of the things that I enjoy about being a lawyer is dealing with and learning new things every day. This weekend I learned that using the word “tender” as opposed to “offer” and being very careful in making certain that insurance proceeds were paid to the correct party was expensive for an insurer in Kansas.

Fajardo v. Safeco Insurance Co., from the US District Court for Kansas, was an action to enforce a settlement – not a wrongful death action, although the underlying claim arose following the death of Mr. Fajardo in an auto accident. Plaintiff-heirs claimed they were entitled to interest on the policy limits as they had not been paid within thirty days after they had agreed to a settlement with the other driver’s insurance company. (Payment within thirty days after an insurance settlement is a Kansas statutory requirement.  If payment is not made, interest begins to accrue at 18%.) The insurer countered that it was not required to pay the funds within thirty days because the statute did not apply, and because the payment was not due until the court had apportioned the settlement, which is required for a wrongful death recovery in Kansas.

Decision was in favor of the plaintiffs. The 30-day payment requirement applied and, because a settlement is not a “recovery”, apportionment was not necessary. Therefore, there was a settlement at the time that the plaintiffs accepted the tender:

“The parties have stipulated that the Defendant "tendered" (a stronger term than ‘offered’) policy limits to settle all claims stemming from decedent's death, and that Plaintiffs accepted the tender on the same terms. This was an ‘unconditional and positive acceptance’ which formed a contract.”

This is Kansas law and I’m not a Kansas lawyer, and there are some puzzling facts in the decision, but, the fact that a court would see a difference between being offered policy limits and being tendered policy limits got my attention. Presumably, a claimant might find him/herself irrevocably bound after indicating acceptance of a tender.  In any event, it is something to think about when making an offer, or accepting one.

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I know I didn't do a blog post for more than three months and am now doing my second post in two days.  It isn't a New Year resolution, I simply came across two cases that seem to be of general interest to commercial lawyers.  Today's case shows the importance of the way in which a challenge to an arbitration clause is framed.  Challenge just the arbitration clause, you're in court; the entire agreement, you're in arbitration.

Everyone I know who has purchased a newly constructed home has had some issues.  The plaintiff-purchasers and children in Townsend v. The Quadrant Corporation apparently had more than some.  They sued in Superior Court for outrage, fraud, unfair business practices, negligence, negligent misrepresentation, rescission and breach of warranty.  The seller, and its parent and its parent corporation, moved to compel arbitration, based upon a clause in the purchase/sale agreement.  (The parent corporations’ motion for summary judgment was denied; the decision also discusses when compelling arbitration in waived.)

The Supreme Court ruled – in an opinion signed by four justices – that because plaintiffs challenged the validity of the entire purchase/sale agreement, not just the arbitration provision, the claim would be determined by an arbitrator.  The opinion ruled that the children’s claims, which tracked the parents’ claims would also be arbitrated on the theory of equitable estoppel.  

However, a concurrence/dissent signed by five justices stated that the children’s claims would not be subject to arbitration because they were not signatories to the purchase/sale agreement.

I have no idea or position regarding the merits of these claims, or the facts in this matter, and it is helpful for any business operating in this state to have the court speak on enforceability of arbitration clauses.   But this seems puzzling to me – why isn’t the concurrence/dissent the primary opinion, it is signed by the majority of the justices.  More disturbing is the apparent result that the non-signatory parent corporations are going to arbitration, while the non-signatory children will have a court determine these same claims.  I doubt this made anyone happy.

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An Appellate Division, First Department, decision handed down yesterday, Ostrov v. Rozbruch, should be must reading for any lawyer involved in filing a complaint, supplying a bill of particulars, or filing or responding to a summary judgment motion in New York state court. 

Defendant/doctor appealed the denial of summary judgment in regard to a medical malpractice theory that was more fully developed by the plaintiff in supplemental submissions after the initial oral argument of the defendant's summary judgment motion.  The Appellate Division unanimously ruled that supplemental submissions are only permissible in very rare circumstances that weren’t present in this case. Absent those rare circumstances, the CPLR procedure must be followed.  Summary judgment granted to the defendant.

For me, reading the decision – without the benefit of the entire record – this seemed pretty close as to whether the plaintiff had identified the issue in the complaint or the bill of particulars, and the trial court was trying to be fair to the plaintiff and defendant in allowing more briefing on the point. 

However, there seem to be policy considerations at work -- the opinion notes that summary judgment is supposed to be expeditious, and, in this case, seventeen (17) months had elapsed between filing of the motion and the trial court’s final order.  Therefore, my interpretation of this decision is: motions are to be decided, not held over; the CPLR is really the rule and second bites of the apple will be permitted only in the rarest of circumstances; and/or do not even think of sandbagging an opposing party with a new theory at the summary judgment stage, whether intentional or not.

In other (nicer) words, the lesson here is that a plaintiff must clearly plead all of his or her theories in the complaints and bill of particulars, and provide evidence to support them in opposition to summary judgment.  Maybe the message to the trial court is to exercise its discretion at risk of reversal.

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I’ve seen a number of recent articles pointing out that law firms seem to be on a merger binge. That, coupled with lawyers moving from firm to firm, as well as bankruptcies, securities cases and mass torts – where the list of counsel often seems almost as long as a decision -- makes last month’s opinion in Roosevelt Irrigation Dist. v Salt River Project, from the Federal District Court in Arizona, a good resource for deciding whether to move to disqualify a firm because of some prior involvement in a matter. Disqualification motions in a CERCLA action were granted in a 127 page decision.

Thanks to Justia.com for posting a copy to download.
 

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I’ve always counseled clients that releases are construed narrowly by New York courts. Maybe they still are for consumers, but if you are a corporation or a “sophisticated” person, be very, very wary of signing any release of all "claims known or unknown" if you think the person you are releasing isn’t as honest as George Washington. That is the message that I get from decisions handed down yesterday by the NY Court of Appeals in Centro Empresarial Cempresa S.A. v. America Movil and Arfa v. Zamir.

In each of these cases plaintiffs allegedly learned that the facts were markedly different from those represented by the defendants at the time the releases were signed.  The court upheld the dismissal of fraud claims. For a claim to survive the release, the court required that plaintiffs allege that the releases were induced by a separate fraud; misrepresentations during negotiation are not the basis of a subsequent fraudulent misrepresentation or fraudulent inducement claim.

A few other points from the decisions:

• The existence of a fiduciary relationship doesn’t change this rule if the “fiduciary relationship is no longer one of unquestioning trust”. My query: Does a breakdown of trust in a relationship destroy the a person's right to rely on a fiduciary, or a fiduciary's  obligations?
• Dismissal of the fraudulent inducement or misrepresentation claim connected to a release can be granted on a motion to dismiss – usually, a high burden for a defendant even where fraud is involved. (The Appellate Division decision in Arfa reveals the decision was on a motion to dismiss.  It has a longer discussion of the facts.)
• Demonstrating justifiable reliance requires that you investigate any alleged misconduct if you determine that the party you are dealing with isn’t trustworthy.

Two (maybe, three) key learnings:

• If you suspect that the person you have a dispute with is not trustworthy, be really careful of signing a release that doesn’t carefully list what you are releasing.
• Choice of law may be important in releases.
• If you sleep with dogs, you get fleas.

I think the goal here is to have finality in resolving disputes, but the result may be prolonged disputes and increased litigation.   After reading these decisions, unless unusual considerations existed,  I would not recommend signing a release of all claims without the sort of discovery that you can get in litigation.
 

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Here’s a topic for a few law review articles (not this blog). What is the effect, if any, of yesterday’s Supreme Court decision in AT&T Mobility v. Concepcion, on the Washington Supreme Court’s decision in McKee v. AT&T, which struck down a contractual prohibition on class actions?  Here is a blog post I did in 2008 regarding McKee.

Yesterday's case reversed the Ninth Circuit, which had applied California law, but the statements regarding the Federal Arbitration Act and its intent, raise questions for anyone dealing with consumer claims.

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This is an update to a post I did last September about solicitation of former customers after the sale of the good will of a business. The Second Circuit requested that the NY Court of Appeals give guidance on whether New York still implied a covenant of non-solicitation of former customers after the sale of the good will of a business, and, if it did, what are its limits.

Today, in Bessemer Trust Co. v. Branin, The court ruled that there is still an implied covenant of non-solicitation of former customers after the sale of the good will of a business. Determining whether there has been improper solicitation is a question of fact.

The court recognized that there is always a risk on the part of the purchaser of a business that customers will decide to go elsewhere as a result of the change in ownership. The decision discusses how a seller of good will – who is no longer working for the purchaser -- may respond to former customers who inquire about the seller’s current employer or business.

Here is the bottom line:

while a seller may not contact his [*9]former clients directly, he may, "in response to inquiries" made on a former client's own initiative, answer factual questions. Furthermore, under the circumstances where a client exercising due diligence requests further information, a seller may assist his new employer in the "active development . . . of a plan" to respond to that client's inquiries. Should that plan result in a meeting with a client, a seller's "largely passive" role at such meeting does not constitute improper solicitation in violation of the "implied covenant." As such, a seller or his new employer may then accept the trade of a former client.

If you plan on doing this, read the entire opinion carefully.

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Effective April 20, 2011, lawyers will be able to act as in-house counsel for New York organizations without satisfying the traditional requirements. The new 22 NYCRR Part 522 sets forth the proof required for the special admission, what is required for compliance, what services may be performed, and how to terminate the admission.

Anyone who is working in-house without being admitted in NY should pay close attention as the rule sets forth time limits for admission, and states that failure to comply with the rule is professional misconduct.
 

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