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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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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The NY Court of Appeals – in a four/three decision handed down today -- answered certified questions involving the interpretation of CPLR 214-c, the provision that extends the statute of limitations for persons suffering latent injuries. The court ruled that the statute is limited to latent effects, but that a latent injury can be one that manifests itself several hours after exposure to a substance.

Plaintiff in Giordano v. Market America, Inc., claimed that he suffered a series of strokes as a result of taking pills containing ephedra. The effects of ephedra that allegedly increase the risk of stroke typically occur within hours of ingestion. However, plaintiff only became aware of the alleged relationship between strokes and ephedra about four years after his illness, when the death of a major league pitcher was reported in the news as being related to the drug.  Thus, the suit was commenced outside the standard three year statute of limitation.

Historically, the CPLR 214-c extension has been available to parties who alleged exposure to substances that did not manifest symptoms of injury for several years – such as DES and asbestos. Today’s decision seems to broaden the application of the statute, from injuries allegedly caused by substances that are dormant in the system for years before they manifest their allegedly injurious effects, to -- pretty much -- anything that doesn’t result in an immediate, obvious physical response after exposure.

The court also held that the standard for knowledge of the purported connection between the injury and substance was whether it was sufficiently known in the scientific or expert community, not the general press. Thus, when a latent injury claim is used to extend the three year statute, the parties will have to gear up for a battle of experts.

If there is a problem with the broad definition of “latent”, it is lack of certainty about the statute of limitations. Reading the decision, you can see that a lot of effort and expense have already been incurred by plaintiff and defendant, and the case is now on its way back to federal court, probably for more of the same.

Ironically, this broad definition of latent might create more risk for a plaintiff’s counsel deciding whether to take a case, than for defendants who will be forced to do a really early evaluation of the scientific merit of a claim.  Defendants are probably relieved that the focus remains on the scientific or expert knowledge, rather than the general media -- which seemingly would change the focus to the knowledge of the plaintiff.

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When I first got out of law school, I was a licensed notary public. The partner who I often worked for said: “Are you crazy? If you’re smart you’ll get rid of that as soon as possible.” The idea was that everyone would want me to notarize signatures that weren’t signed in front of me so that clients, spouses, and neighbors wouldn’t be inconvenienced by actually having to see a notary. Obviously, refusing to help is not a great spot for a junior associate.

This is not a theoretical problem for any notary, or for clients who can be made to look, at best, like people who take the easy way-out, or, at worst, like liars. For example, I once had a client who had a document notarized in the State of New York, County of Kings, aka, Brooklyn. At his deposition, he was asked if he had ever been to Brooklyn. Oops, no. Not great for a misrepresentation defendant. (Fortunately, the document was signed long before his defense counsel had anything to do with this.)

A recent Seventh Circuit decision, Ponsetti v. GE Pension Plan, discusses a similar problem, with a more profound result – the notarized document, which purported to consent to a change of beneficiary, was not given effect. In the litigation challenging the plan's refusal to give effect to the change, an affidavit prepared by the notary admitting that she had not actually witnessed the signature was among the evidence showing that the consent could not be valid.  Not a pretty picture for anyone involved. The beneficiary was not changed, and, I suspect, there was a lot of grief for the notary. The case has a good discussion of this area of the law.

My license expired without renewal.

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Last week the New York Law Journal featured two decisions regarding attorney-client and work product disputes in litigation between Gucci America and Guess?.

In the first decision, the protection of the attorney-client privilege was denied because Gucci’s in-house lawyer was not an active member of any bar – he only maintained inactive status in California.

Active bar membership is necessary for the benefit of the attorney client privilege. There is an exception to this rule where: the lawyer fraudulently held himself out to the client as an attorney; the clients genuinely and reasonably believe that the person is an attorney; and if, pursuant to this belief, the client made confidential communications to the person. Here, Gucci’s belief that the in-house counsel was a lawyer was unreasonable – it never tried to confirm the extent of the counsel’s qualifications.

This decision has implications for everyone: clients must take steps to confirm that their lawyers maintain active bar membership; litigators, in disputes where attorney client privilege is asserted, should confirm that the communications involved a licensed attorney as well as substance protected by the privilege. The information regarding bar status is usually available on-line.

The second decision involves work product privilege and choice of law issues between United States and Italian law. Gucci was instructed to revise its privilege log, and to meet and confer with opposing counsel before returning to the court for decision.
 

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I was taught to expressly include costs and attorneys’ fees in any release or settlement agreement because – if I didn’t -- the opposing party would come back and demand that the client pay those claims on top of the settlement amount. I always did it but, frankly, I thought this was an urban legend. I was wrong -- this issue made it all the way to the Washington Supreme Court. The dispute in McGuire v Bates illustrates the wisdom of using belts and suspenders when drafting agreements.

After a settlement of $2,180 plaintiff asserted that the settlement of “all claims” did not include statutory attorneys fees, which are awarded to a prevailing party in Washington in certain situations. An arbitrator denied this claim; the Superior Court decided plaintiff was the prevailing party and awarded attorneys' fees, costs and interest on the settlement amount.  The Court of Appeals affirmed.  The Washington Supreme Court, in a unanimous decision, reversed and ruled that a settlement of “all claims” includes a claim for attorney fees.

Despite this decision, it seems like a good idea to always expressly include costs and attorney fees in any settlement and release, since one superior court judge and an appellate panel saw this the other way. 
 

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In Adams v Genie Industries, Inc., decided today, the Court of Appeals ruled that a manufacturer has a post-sale duty to warn of risks discovered after the sale of a product; the manufacturer does not have a duty to recall or retrofit the product.    The case arose from the tipping over of a personnel lift manufactured by defendant. The accident occurred approximately 11 years after the lift was sold to the plaintiff’s employer.

The case also discusses when a party may appeal after it has stipulated an additur or remittitur. Any information about when an order may be appealed is always welcome.

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Responding to discovery requests is expensive, but – in all likelihood -- will cost less than the $8,000,000 default judgment sanction that the Washington Supreme Court reinstated today in Magana v. Hyundai.

This decision is a must-cite for anyone moving for or opposing discovery sanctions. There is a two-judge dissent.

The case – which the court said involves “unique facts and circumstances” -- was commenced in 2000 and arises from an auto accident that took place in 1998. An  $8,000,000 jury verdict was set aside by the Court of Appeals in 2005. Upon remand, plaintiffs requested that defendant update discovery responses prepared in 2000. A motion to compel was filed about three months before the second trial was scheduled to begin.  Documents involving similar problems came to light.

The  trial court determined that the additional documents should have been produced long before the motion to compel. Defendant, apparently, had only reviewed law department files for complaint documents; there were others in defendant’s consumer affairs department. Plaintiffs argued that they were prejudiced in trial preparation; the court agreed, and the sanction was imposed because of false responses, spoliation and substantial prejudice to plaintiffs.

That is a gross simplification of the facts in the opinion.

The bottom line for businesses is: when responding to discovery requests, you must search outside your legal department for responsive documents. In addition, when you think that discovery requests are over-broad (not really a “unique fact or circumstance” in my experience) consider the pros and cons of moving for a protective order instead of simply objecting in your responses and waiting for a motion to compel.

The irony here is that defendant won the appeal of the $8,000,000 jury verdict but has now been assessed with the same judgment, plus an obligation to pay plaintiffs’ attorneys fees and expenses, and, just a guess, there are going to be some insurance issues. Of course, with the additional disclosures, plaintiffs probably think they could have done much better if they had time to get ready for a second trial. 

Whatever, it is crystal clear that Washington courts will not tolerate incomplete discovery responses.
 

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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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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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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.
 

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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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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)"

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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.

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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.
 

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The New York Court of Appeals issued three interesting decisions this morning. One – a libel case – offers an analysis of “clear and convincing” evidence of actual malice.   Often when asked to explain that standard, the response is: “Well, it has to be clear and convincing.”  Or, "it is somewhere between a preponderance of the evidence and proof beyond a reasonable doubt."  Neither explanation is overly helpful.

Today’s decision in Shulman v. Hunderford   discusses the facts necessary for a finding that actual malice has been proven by clear and convincing evidence. The court, which normally only reviews law, not facts, was able to do so because of the libel standard articulated by the Supreme Court in New York Times v. Sullivan  – the statement must be made with actual malice, and the record must be examined to make certain that there is no constitutional violation.  Thus, this is a rare case in which the NY Court of Appeals could do a factual analysis.  It is interesting for citizens of Washington, as well, because there has been talk of the state legislature prohibiting untrue campaign statements.

Plaintiff brought the action alleging libel after he lost a local election. The basis of his claim was a pamphlet circulated on the eve of the election, which said that plaintiff had flagrantly broken the law.  The case went to a jury and defendant was found liable for $100,000 in punitive damages.  The trial court set aside the verdict, the Appellate Division reinstated it, and the Court of Appeals dismissed the action.

The Court of Appeals determined that, to prove libel, the evidence had to show actual malice with convincing clarity.  Because the record failed to show that defendant knew that his statement was untrue, or that defendant had no basis for thinking plaintiff guilty of any legal transgression, the evidence of actual malice was not clear and convincing – even though defendant “could not have believed every word in the statement”.  (That seems to relate to defendant's use of the word "flagrantly.")  Therefore, clear and convincing evidence of actual malice requires a showing that the defendant knew his statement was not true and had no basis for thinking it was true.

Given this ruling, clear and convincing evidence is a pretty stringent standard. 
Granted this is an analysis of whether actual malice is proven in the context of Constitutional free speech, but the clearly convincing standard applies in other civil contexts – such as fraud, which is a pretty common cause of action in commercial litigation.

I’m working on posts about the other two decisions. 

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Two big lessons can be learned from an interesting decision by Magistrate Payson in Tailored Lighting, Inc. v. Osram Sylvania Products, Inc., decided last week in the US District Court for the Northern District Court of New York.  First, an in-house lawyer can anticipate a deposition notice if he or she verifies interrogatories, and second, make sure that the witnesses produced in response to a Rule 30(b)(6) notice of deposition can answer all questions asked.

As for the in-house counsel's deposition, the opinion discusses the factors that should be present before a lawyer will be deposed, and, after deciding that the deposition should go forward, states that the questions are to be limited to:

(1) identifying the information provided to and relied upon by [the in-house lawyer], whether through communications with individuals or review of documents, in answering the interrogatories; (2) identifying the particular source (person or record) of that information; (3) non-privileged communications between [the in-house counsel] and his human sources about that information that occurred in the course of investigating and answering the interrogatories.

In other words, there is a good chance – as anyone who has ever attended a deposition knows – that there will be a lot of going back and forth about privilege with threats to call the judge the day that the deposition takes place. It seems easier to have someone outside of the legal department sign the verification.

Second, the decision addresses the scope of Rule 30(b)(6) witnesses – and orders that two of the identified witnesses to be re-deposed to answer certain questions that they could not answer in their initial testimony. 

In no way am I critical of the parties in this case because I know from experience that you pretty much have to be in a case to understand the how and why that litigation unfolds, and when I unsuccessfully looked for a free copy of this opinion on-line, I could see that this case has been a siege for the parties. 

But, I see literally dozens of articles each week about concern regarding outside counsel fees in these days of financial sturm und drang.  Avoiding motions to compel by anticipating arguments like those made on this motion seems like a good way to go.




 

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When I was in law school I clerked for a managing attorney who made his clerks – to our occasional frustration -- obey every procedural rule to the letter.  A case, Cornhusker Casualty Ins. v. Kachman,
handed down by the Washington Supreme Court last month shows that there is merit to strict compliance, even if you think that taking the rule one step further seems more effective.

The question presented by the case was whether a commercial auto insurance policy was effectively cancelled.  The Washington statute required actual delivery or mailing to the insured at its last known address.  Here, the insurer sent the notice of cancellation by certified mail. The letter was not received.  The cancellation was not effective – because the statute uses the term “mailed” not “certified mail”. 

One might argue that certified mail has a better chance of being received than first class mail.  (And, give the sender the comfort of a signed receipt in the file.) But, the court finds that certified mail places a duty on the recipient to either be at home or go to the post office, and is more relevant to the actual delivery option that was set forth in the statute. The bottom line is that the statute required mailing or receipt, neither one was present, and the policy was not effectively cancelled.

Since 2006 the statute has required the insurer to “deliver or mail,” and the court does not state if the change would affect its reasoning.  However, the case illustrates the fact that statutory procedures are to be followed; substituting your idea of an improvement is not a great idea.  


 

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A recent opinion of Judge Pechman of the Western District of Washington in Aecon Buildings, Inc. v. Zurich North America, illustrates the importance of good in-house litigation management, complying with discovery, and supplying a detailed privilege log on time.  Defendant appears to have failed on all counts and the result is that defendant must pay into the court the amount that it was billed by its attorneys from the time its initial disclosures were filed through the date that defendant produced a relevant file – a period of more than eight months – as a discovery sanction.

The underlying case set forth a claim of bad faith refusal to defend and indemnify by a plaintiff who had been named as an additional insured on a policy.  At the time the insurance claim initially was tendered, it was rejected by an adjuster and the file was closed.  About one year later, and one month after the suit was started, a second adjuster reviewed the claim and noted that coverage had been triggered.  That adjuster was instructed not to continue work on the claim, and was not named in defendant’s initial disclosures as an individual who might have discoverable information. The second adjuster’s work came to light when her deposition was noted – she had signed declarations authenticating documents.  It seems that no one could state with certainty who ordered the second review, or why it was performed.

The court stated that defendant’s “failure to include in its responses to requests for production any documentation of [the second adjuster’s] work on the claim file, and its failure to produce, until the eleventh hour, a privilege log documenting those portions of the claim file attributable to her that it withheld on the basis of privilege, are clear violations of the discovery rules.”  That is a summary – the details run to almost eight pages.

This decision is must reading for anyone who believes that work done on a matter after a lawsuit has been started is privileged. 

 

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Historically, and I stress “historically,” New York State Court orders compelling discovery were not received with great concern.  In fact, it usually took three of them before there were serious consequences.  Things have been changing, and, if you doubt it, read Wilson v. Galicia Construction & Restoration Corp.,  which was decided by the Court of Appeals in April.   The court has spoken: discovery orders must be obeyed. The decision upholds a judgment of $700,000 against a defendant whose answer was stricken as a sanction for resisting discovery, even though the defendant had what appeared to be a strong fraud defense against the claim.  

Wilson was a personal injury claim.  Plaintiff alleged that he was injured by an object that fell from a scaffold into his eye.  The company that erected the scaffold and multiple others were named as defendants.  The scaffold company resisted discovery, and the trial court issued an order directing that discovery requests were due by a date certain or the scaffold company’s answer would be automatically stricken.  The answer was stricken.  

One month later, in response to a discovery request from another party, plaintiff produced the object that injured his eye.  It was an air-gun pellet that, apparently, had been fired into plaintiff's eye, rather than falling from the scaffold.  In other words, the facts supporting liability in the complaint were incorrect.  All of the defendants, except for the scaffold company, were dismissed. 

Over the next few years, the scaffold company tried to vacate the order striking its answer for several reasons.  It argued “justifiable excuse” without success.  It argued that the underlying claim should be dismissed because it was fraudulent.  This failed on the grounds that the sanction was a result of the scaffold company’s own behavior, not the plaintiff’s.

In the Court of Appeals, the scaffold company also argued that plaintiff had not satisfied the statutory requirements for proof after a default.  The court ruled that the argument was not preserved and did not reach it – and noted the unfairness to plaintiff if the court did rule in the scaffold company's favor. Two judges dissented on the grounds that evidence of fraud by plaintiff was compelling and it was an abuse of discretion for the trial court not to address it in order to preserve the integrity of the judicial system.

Seven hundred thousand dollars is a huge sanction. One might be tempted to argue that the court of appeals thought that resisting discovery was a strategic decision that should be punished.  Or, that the court might have ruled otherwise if the argument was preserved.  Or, that the dissent is correct.  No matter.  Powerful message delivered by the court.  The days of delay are over, and ignoring the message can be very expensive.  The $700,000 judgment represents a reduction of the trial court's award of  more than $1,000,000.

 

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For the past few months I have subscribed to a Westlaw service that sends a daily email with links to cases in which the words ‘in-house,” and “lawyer” or “counsel” appear.  Most of the cases aren’t very illuminating about how courts view in house lawyers.  However, I have found two trends of interest.  First, there are a lot of discovery disputes about production of in-house lawyers’ notes.  And, second, when attorney fees are awarded, courts require opposing parties to pay attorney fees for time spent by in-house lawyers on litigation matters much more often than I expected.  When I come across a case that seems to lay down some law instead of simply ruling on these points, I’ll do a post.

Meanwhile, I did come across an auto accident case, Stallings v. Werner Enterprises, Inc., 2008 WL 4078783, pending in the federal district court for Kansas, which illustrates one downside to identifying a worker as an independent contractor – it can refute a claim of attorney client privilege. Defendant Werner Enterprises’ in-house counsel interviewed an independent contractor driver as part of an accident investigation shortly after a truck/car accident.  Plaintiff sought the notes of the meeting.  The court ruled that the attorney-client privilege did not cover the interview – the driver wasn’t seeking legal advice from the lawyer and there was no confidential relationship.  Because plaintiff demonstrated a need for the statements made shortly after the accident, the attorney’s notes were to be examined in camera to see if the statements could be separated from the attorney’s impressions. After the court’s review, only two paragraphs were redacted.

The case applies Kansas law, but might be thought of during accident or any other internal investigations.

 

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