At this point, after nearly three months of practicing law virtually from home, I think it’s fair to say that what was once novel and experimental has become a kind of new norm for the future.

Sure, state courts in New York, including the Commercial Division, have been returning slowly-but-surely to in-person operations over the last couple weeks, particularly upstate where Syracuse, Binghamton, Rochester, Buffalo, and the surrounding counties officially have entered Phase II of Governor Cuomo’s reopening protocols.

But make no mistake, as long as heath and safety remain the priorities — and as well they should — physical interaction in the courthouse will continue to be minimized while virtual interaction is maximized.  As Chief Judge Janet DiFiore remarked earlier this week:

As we progress toward fuller in-person court operations across the State, our foremost priority remains protecting the health and safety of all those who work in and visit our court facilities.

As it stands, only essential family matters will be conducted in-person.  Criminal, juvenile-delinquency, and mental-hygiene proceedings, as well as all other “non-essential” matters, will continue to be held virtually.  Mediation and all other ADR proceedings also will continue to be conducted virtually.

No strangers to technological innovation, Commercial Division judges around the state have been embracing the new virtual norm with optimism, if not enthusiasm.  A few weeks ago, on May 11, NYSBA’s Commercial and Federal Litigation Section sponsored a “Virtual Town Hall” discussion via Zoom during which Commercial Division Justices Saliann Scarpulla (NY County), Timothy Driscoll (Nassau County), and Deborah Karalunas (Onondaga County) reported on the status of litigating in the Commercial Division during COVID-19 and the methods being employed to move their cases forward.  Here are some highlights on a just a few topics from the program:

  • The Transition to Virtual Proceedings Generally.  The move to virtual courtroom practice, along with all the associated technology (primarily Skype for Business), will require much patience on the part of the bench and bar alike.  Expect some bumps in the road and be prepared to deal with them cooperatively.  Judges are welcoming and even encouraging lawyer input.  Everyone needs to be sensitive to the reality of a general unwillingness to get back to the courthouse on the part of judges and other court staff.
  • Virtual Evidentiary Hearings.  Judges for the most part are encouraging virtual evidentiary hearings and, for those that have conducted them, are finding that they proceed fairly seamlessly.  Managing exhibits remains a challenge, however, especially for document-intensive cases involving lengthy contracts, etc.  Again, patience and cooperation is required.
  • Settlement and ADR.  Judges across the board actively (and successfully) are encouraging parties to settle their cases through court settlement conferences and/or the court’s mediation/ADR programs.  Specifically, Justice Scarpulla has been encouraging settlement by reminding lawyers that their clients should not expect to receive a trial date any time soon.  Justice Driscoll personally has been conducting three-room Skype settlement conferences.  And Justice Karalunas has been emailing lawyers directly, encouraging them to resolve their cases by settlement conference or mediation.

Next week, on June 8, the Business & Commercial Law Committee of the Westchester County Bar Association will be presenting a similar program entitled “Litigating in the Westchester Commercial Division During COVID-19:  A Virtual Town Hall Discussion.”  Westchester Commercial Division Justices Linda Jamieson and Gretchen Walsh will be on hand to address questions concerning, among other topics, the virtual practices and procedures being implemented in their courtrooms, upticks in ADR and settlement, and the recently-instituted gradual reopening of the courthouse on Martin Luther King Boulevard in White Plains.  Register for the program here and join us for the discussion!

Disputes over the scope of insurance coverage are common fixtures in the Commercial Division Courts.  Earlier this month, the First Department partially affirmed Justice Sherwood’s decision in Westchester Fire Ins. Co. v. Schorsch et al.  Considering a matter of first impression in the New York Commercial Division Courts, the decision holds that a D&O policy’s “insured versus insured” exclusion does not preclude coverage for claims against corporate officers by a creditor trust.

The affirmance ensures that Westchester Fire will remain among Justice Sherwood’s extensive list of widely-cited insurance coverage decisions (See, e.g., Freedom Specialty Ins. Co. v. Platinum Mgt. (NY), LLC, 2018 NY Slip Op 32233 [denying a D&O insurers’ motion for summary judgment based on a prior and pending litigation exclusion]; Zurich Am. Ins. Co. v Don Buchwald & Assoc., Inc., 2018 NY Slip Op 33325(U) [holding that an intentional tort could be a covered occurrence, triggering a CGL insurer’s duty to defend]; Alexander v. Starr Surplus Lines Ins. Co., 2020 NY Slip Op 30297(U) [granting a preliminary injunction directing a D&O insurer to advance defense costs to a former corporate officer for an investor lawsuit alleging fraudulent inducement]).

RCAP, Bankruptcy and the Creditor Trust

RCS Capital Corp. (“RCAP”) is a wholesale broker-dealer and investment banking advisor.  Backed by billionaire entrepreneur and investor Nick Schorsch, RCAP’s initial success took a major turn in October 2014, when a related company, American Realty Capital Properties, Inc. announced that a $23 million accounting error over the first half of 2014 was left intentionally uncorrected.  The fallout from that accounting scandal included the resignation of executives, investigations into the misconduct, and a plummeting share price of RCAP.

In March 2016, RCAP announced its intention to file for bankruptcy.  With bankruptcy in its near-future, RCAP’s management made a pitch to creditors in order to maintain control over the company: in exchange for the creditors’ supporting RCAP’s proposed plan of reorganization, RCAP would create, upon its emergence from bankruptcy, a trust for the benefit of RCAP’s creditors (the “Creditor Trust”), and it would assign to the Creditor Trust certain causes of action RCAP had against certain of its former directors and officers, including Schorsch and those allegedly responsible for the accounting scandal.

On May 19, 2016, the bankruptcy court confirmed the bankruptcy plan, which included the provisions creating the Creditor Trust.  Under the plan, the Creditor Trust was assigned all of RCAP’s claims against its former directors and officers and was empowered to “enforce, sue on, settle, or compromise . . . all Claims, rights, Causes of Action, suits, and proceedings . . . against any Person without the approval of the Bankruptcy Court [and] the Reorganized Debtors[].”

The Creditor Trust Sues RCAP’s Directors and Officers, Westchester Fire Denies Coverage under the Policy’s “Insured vs. Insured” Provision

After assignment of RCAP’s claims, the Creditor Trust brought suit in the Delaware Chancery Court against certain former directors and officers for, inter alia, their breach of fiduciary duty to RCAP.  The Complaint ties many of its allegations of “disloyal self-dealing” to Schorsch: “In 30 months nearly $1 billion in public stakeholder investments [in RCAP] was destroyed.  Every penny of loss was the result of wrongdoing by Schorsch and his colleagues.”

Schorsch and the additional individual defendants (the “Individual Insureds”) in the Delaware action sought coverage and indemnification under RCAP’s D&O liability insurance policy.  The policy consisted of a primary policy and several layers of excess; Westchester Fire had the seventh layer of excess coverage.  Westchester Fire’s excess policy followed the form of the primary policy, but unlike the primary and the first through sixth excess layers, Westchester Fire denied coverage and refused to advance defense costs.

Westchester Fire based its denial on various grounds, including that D&O coverage of the Individual Insureds in the action by the Creditor Trust as assignee of claims held by RCAP was barred under the policy’s insured vs. insured exclusion.  Specifically, the policy’s insured vs. insured provision excluded coverage for “any Claim made against an Insured Person . . . : by, on behalf of, or at the direction of the Company or Insured Person.”

Insured vs. Insured or “IvI” exclusions are common in D&O policies.  Generally, they prevent a company from expanding its D&O policy into general business insurance by invoking its D&O insurance policy in all cases where the company now disagrees with the actions of certain directors or officers.  In other words, they prevent the company from “push[ing] the costs of mismanagement onto an insurance company just by suing (and perhaps collusively settling with) past officers who made bad business decisions,” Indian Harbor Ins. Co. v. Zucker (6th Cir. 2017).  Like most D&O policies, the IvI exclusion here contained an exception restoring coverage for claims asserted by specified persons who have replaced RCAP’s management and assumed control over RCAP during the pendency of a bankruptcy proceeding.  This “Bankruptcy Trustee Exception” to the IvI exclusion applies to claims “brought by the Bankruptcy Trustee or Examiner of the Company, or any assignee of such Trustee or Examiner, any Receiver, Conservator, Rehabilitator, or Liquidator or comparable authority of the Company.” (emphasis added).

Westchester Fire reasoned that because the IvI exclusion applies to claims asserted by RCAP, and because the Creditor Trust, as assignee of RCAP’s claims, stands in RCAP’s shoes, the IvI exclusion likewise bars coverage in suits brought by the Creditor Trust.  The Bankruptcy Trustee Exception to the IvI exclusion did not apply, Westchester Fire argued, because the limited carve out did not specifically include a voluntary assignee of RCAP’s claims and the Creditor Trust was not a “comparable authority of the Company,” as that phrase is used in the carve out.

Justice Sherwood’s Decision and Partial Affirmance

Justice Sherwood’s April 2019 decision assumed that the Delaware action by the Creditor Trust  triggered the IvI exclusion, but held that the Bankruptcy Trustee Exception restored coverage.  Although the Creditor Trust is not among the specific persons listed in the Bankruptcy Trustee Exception, the trial court held that the catchall phrase in the Bankruptcy Trustee Exception for claims brought by a “comparable authority” of the Company was ambiguous, and that ambiguity must be construed in favor of coverage.  The court accordingly held that the Creditor Trust Action fell within the Bankruptcy Trustee Exception, rendering the IvI Exclusion inapplicable to claims brought by the Creditor Trust.

On appeal, Westchester Fire argued that the Bankruptcy Trustee Exception’s use of the phrase “comparable authority,” was not ambiguous; it referred to authority comparable to a receiver, conservator, or liquidator, and the Creditor Trust was “in no way ‘comparable’” to any of those persons.  Receivers, conservators, and liquidators have control over a company; the Creditor Trust did not have control over RCAP.  Receivers, conservators, and liquidators have fiduciary duties to a company; the Creditor Trust did not have fiduciary duties to RCAP.  And most importantly, receivers, conservators, and liquidators are disinterested—such that they can fulfill simultaneous duties to the debtor and its creditors; the Creditor Trust is not disinterested and works solely for the creditors.  Because the Creditor Trust was more like RCAP itself than a receiver, conservator, or liquidator, Westchester Fire argued, the IvI exclusion applied.

The Individual Insureds argued the contrary: the Creditor Trust was an authority comparable to a receiver, conservator, or liquidator, and accordingly, its claims were subject to the Bankruptcy Trustee Exception to the IvI exclusion.  In fact, the Individual Insureds argued, the Creditor Trust expressly had all the “rights and powers provided in the Bankruptcy Code in addition to any rights and powers granted in the Plan Documents[.]”  So the Creditor Trust’s authority was co-extensive with the powers of any of the other entities listed in the Bankruptcy Trustee Exception.

The First Department, noting that this case raised a matter of first impression, held that the phrase “comparable authority” as used in the Bankruptcy Trustee Exception to the IvI exclusion included the Creditor Trust, and accordingly, the IvI exclusion did not apply to claims brought by the Creditor Trust.  The Court reasoned that because the bankruptcy court approved the reorganization plan, the Creditor Trust was, contrary to Westchester Fire’s argument, more than a naked asignee of the Company’s claims:

Turning to the question of whether the exception for bankruptcy trustees and comparable authorities applies here to restore coverage removed by the insured vs. insured exclusion, we find that the pertinent clauses of the insured vs. insured exclusion and the bankruptcy exception, when read together, are unambiguous.  Their plain language indicates no intent to bar coverage for D & O claims brought by the Creditor Trust, as a post-confirmation litigation trust. . . . [W]hat makes a Creditor Trust “comparable” to a bankruptcy-related entity, seeking to recover funds for the creditors, is that the Trust is not merely a creditor.  Rather, it is an entity and authority created as part and parcel of the bankruptcy reorganization proceeding, empowered by the bankruptcy court’s order of confirmation to file D&O claims.

Ultimately, although the First Department affirmed Justice Sherwood’s conclusion with respect to the applicability of the IvI exclusion, it held that summary judgment on the coverage obligations was inappropriate in light of material factual disputes regarding whether the insureds engaged in wrongdoing to benefit a separate entity.

Practical Considerations

Going forward, the applicability of an IvI exclusion in a D&O insurance policy will still depend on the language of the exclusion and any bankruptcy trustee exception.  That said, companies headed toward bankruptcy reorganization and their creditors would be wise to give strong consideration to Westchester Fire and the potential bargaining chip it provides.  If  creditors can form a trust and pursue a valuable D&O policy by suing former directors and officers for mismanagement, those creditors might be more willing to support a reorganization plan that includes the assignment of such claims to a Creditor Trust.

Many of us have previously heard the expression that there is a fine line between fact and fiction.  In securities law that holds especially true where companies that risk walking the “fine line” in their registration statements and prospectuses could find themselves liable to their stockholders.

In a recent decision, Justice Barry R. Ostrager granted defendants’ motion to dismiss a class action complaint in the Matter of Sundial Growers Inc. Securities Litigation, which was brought by stockholders against Sundial Growers Inc. (“Sundial”), a Canada-based producer of cannabis products, its individual officers and directors, and underwriters.

The class action complaint alleged violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 (“Securities Act”), among other violations, related to misrepresentations made in Sundial’s Prospectus and Registration Statement regarding the “high-quality” of its cannabis in light of the fact that Sundial had previously experienced quality problems which resulted in production of contaminated cannabis that had been rejected by one of its major customers due to its materially deficient quality.

Under Section 11 of the Securities Act, a plaintiff who acquires security may bring suit to hold insurers, directors, or underwriters liable based on allegations that a registration statement “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading…” (15 U.S. Code § 77k).  Similarly, under Section 12(a)(2) of the Securities Act, a plaintiff may also bring suit against “a person who offers or sells a security…by means of a prospectus or oral communications” under similar conditions (15 U.S. Code § 771[a][2]).

However, as the Court explained, not all statements are actionable. Both the First Department and Second Circuit have previously held that expressions of mere puffery or corporate optimism are not actionable under the securities laws (see Northern Group Inc. v Merrill Lynch, Pierce, Fenner & Smith Inc., 135 AD3d 414 [1st Dept 2016]; see Nadoff v Duane Reade, Inc., 107 Fed Appx 250, 252 [2d Cir 2004]).

“Puffery” includes statements that are “too general to cause a reasonable investor to rely upon them, and thus cannot have misled a reasonable investor” or “lack the sort of definite positive projections that might require later correction” (In re Vivendi, S.A. Sec. Litig., 838 F3d 223 [2d Cir 2016]).

The Court further noted that opinions are not actionable.  For a statement of opinion to be actionable under securities law it must be false and not honestly believed when made (Waterford Township Police & Fire Retirement Sys. v Regional Mgt. Corp., 2016 WL 1261135 [S.D.NY 2016]).  As Justice Ostrager explained in one of his earlier decisions (Hoffman v AT & T Inc.), when analyzing the truthfulness of a statement made in a registration statement under Section 11, courts look at the facts represented as they existed when the registration statement became effective (In re Initial Pub. Offering Sec. Litig., 358 F Supp 2d 189 [S.D.NY 2004]).  Section 12(a)(2), however, does not specify a time to which materiality is related, thus, courts have held that time of purchase of the securities is the crucial moment for determining materiality of misrepresentations or omissions in a prospectus (In re Alliance Pharm. Corp. Sec. Litig., 279 F Supp 2d 171 [S.D.NY 2003])

In this case, the Court did not engage in the analysis of relating the alleged misrepresentations and omissions in the Registration Statement and Prospectus to the operative time frames.  Rather, the Court found that the alleged misrepresentations were not actionable.  Many of the statements, which began with opinion-based language such as “we believe” and “we intend,” were either “(1) corporate puffery, too vague to be actionable, (2) sincere statements of corporate optimism, or (3) sufficiently offset by robust risk disclosures.”  Thus, the Court held that Sundial made no guarantees regarding the quality of its cannabis.

The Court further explained that Sundial provided sufficient risk warnings in the disclosure section of their Prospectus, in which they outlined the inherent risks of the agricultural business, which could adversely impact their cannabis production, including manufacturers’ return of their products.

Takeaway: Courts view and analyze registration statements and prospectuses with a critical eye.  Thus, companies should take heed to disclose facts accurately and with sufficient detail.  Additionally, using proper diction and syntax in registration statements and prospectuses could differentiate a statement from being viewed by courts as actionable versus non-actionable under the Securities Act.

 

It’s back to business as usual for Commercial Division Justice Andrew Borrok, who recently issued a slew of decisions contributing to New York’s robust Commercial Division jurisprudence.   In one decision, Allergan Fin., LLC v Pfizer Inc. (2020 NY Slip Op 50422 [U] [Sup Ct, NY County Apr. 13, 2020]), Justice Borrok denied a motion to dismiss brought by Pfizer, Inc. (“Pfizer”), finding that the plaintiff’s claims are ripe for adjudication and Pfizer is contractually obligated to reimburse plaintiff for its defense costs in connection with the multi-district federal opioid litigation.

Allergan involved a claim for, among other things, contractual indemnification arising out of an Asset Purchase Agreement (the “APA”), dated December 17, 2008, between Actavis Elizabeth, LLC (“Actavis”) and King Pharmaceuticals LLC (“King”), pursuant to which Actavis acquired from King the prescription opioid Kadian®.

Under the APA, King agreed to indemnify Actavis and its successors for, among other things, third party claims based on the pre-2009 (i.e., pre-closing) marketing and sale of Kadian®.  King also agreed to reimburse Actavis, on a quarterly basis, for “the reasonable and verifiable” costs and expenses, including attorneys’ fees, incurred in connection with any such claim.

Plaintiff Allergan Finance, LLC (“Allergan”), the successor to Actavis’ rights and obligations under the APA, was later sued in a multi-district litigation in connection with its marketing of Kadian® (see In re: Natl. Prescription Opiate Litig., No. 1:17-MD-2804, ECF No. 1201, at *1 [ND OH Dec. 17, 2018]) (the “Opioid Actions”).  The primary basis for the allegations against Allergan was the allegedly improper marketing and sale of Kadian® in the months and years before Actavis acquired the prescription painkiller in December 2008 (i.e., pre-closing conduct for which Allergan claimed Pfizer, as successor to King, should be liable).

Allergan timely notified King/Pfizer (“Defendants”) of the claims in the Opioid Actions, and sought indemnification and reimbursement of its defense costs pursuant to the APA.  Defendants, however, disclaimed coverage and refused to reimburse Allergan for the defense costs.

Allergan ultimately filed an action against Defendants seeking reimbursement for its defense costs, contractual and equitable indemnification, and a declaratory judgment.  Defendants moved to dismiss the complaint, arguing each of Allergan’s claims were “unripe” and “premature,” since Allergan had not yet been found liable in the Opioid Actions, and therefore could not be considered an “Indemnified Party” entitled to reimbursement of its defense costs.

The Court’s Analysis

Justice Borrok rejected Defendants’ arguments and denied the motion, concluding Allergan’s claims were ripe, and that the APA expressly required Defendants to reimburse Allergan for its defense costs.

The Court carefully analyzed the relevant provisions in the APA, concluding that Defendants’ “limited reading of the APA” was “plainly at odds with [its] other provisions,” which expressly provide for both defense and indemnification in connection with any third party claims related to pre-closing conduct, and obligate Defendants to reimburse Allergan on a quarterly basis (i.e., “now”) for costs and expenses incurred in defending the Opioid Actions.

Significantly, the Court noted that the APA does not require an adverse determination as a precondition to the right to receive indemnification or defense costs, and explicitly provides Defendants the right to a refund “in the event” they are ultimately held to not be obligated to indemnify Allergan – a provision which “simply makes no sense if the Defendants are not obligated to provide defense costs until liability is adjudicated.”

The Court also rejected Defendants’ reliance on Dresser-Rand Co. v Ingersoll Rand Co. (2015 WL 4254033 [SD NY Jul. 14, 2015]) for the argument that Allergan’s declaratory judgment claim was premature.  The Court noted that Dresser-Rand, Southern District case, was decided in the context of the federal Declaratory Judgment Act, and had no applicability here.

As the Court explained, New York state courts do not follow the Second Circuit’s approach to ripeness for declaratory judgment claims, which requires careful analysis of several different factors, including (i) whether the judgment will serve a useful purpose in clarifying or settling the legal issues involved, (ii) whether it would resolve or finalize the controversy involved, and “(iii) whether the proposed remedy is being used merely for procedural fencing or a race to res judicata, (iv) whether the use of a declaratory judgment would increase friction between sovereign legal systems or improperly encroach on the domain of a state or foreign court, and (v) whether there is a better or more effective remedy” (Dresser-Rand, 2015 WL 4254033 at *6, citing Dow Jones & Co. v Harrods, Ltd., 346 F3d 359 [2d Cir 2003]).  Those concerns, which were present in Dresser-Rand, were simply not present in Allergan.

As explained by Justice Borrok, the rule in New York state is “that on a motion to dismiss the complaint for failure to state a cause of action, the only question is whether a proper case is presented for invoking the jurisdiction of the court to make a declaratory judgment, and not whether the plaintiff is entitled to a declaration favorable to him” (quoting Law Research Serv., Inc. v Honeywell, Inc., 31 AD2d 900 [1st Dept 1969]).  And so, “where a proper case for a declaration is set out, the merit of the claim is not a relevant factor and New York courts must permit the action to proceed to discovery, trial and judgment” (id.).

In upholding Allergan’s declaratory judgment claim, the Court concluded that Allergan

[I]s not required to wait until its liability is established in an underlying action before it can bring a declaratory action under New York law (see Hudson Ins. Co. v AK Const., LLC, 92 AD3d 521 [1st Dept 2012]). And, here a live and justiciable controversy exists as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.

Three main points may be taken from the Allergan decision:

First, where the right to indemnification or defense costs is based upon a written agreement, the specific language of the contract is paramount to the court’s decision.  New York courts will strictly construe an indemnification agreement as a whole and, whenever possible, interpret the agreement to give effect to its intended purpose.  Courts cannot, and will not, narrowly interpret an agreement so as to render any portion of it meaningless.

Second, although in some cases it may be premature to assert indemnification or declaratory judgment claims until there is a finding of liability,  certain indemnification-based claims may be ripe where the issue of indemnification is not contingent upon a finding of liability, and the parties’ respective obligation are clearly spelled out in the agreement.  In Allergan, the Defendants had a present obligation to reimburse and indemnify Allergan for defense costs incurred in the Opioid Actions (subject to a right of refund), which was not contingent upon a finding of liability.

Third, on a motion to dismiss a declaratory judgment claim on ripeness grounds, New York state courts will not analyze the multiple factors set forth by the Second Circuit in Dow Jones.  Rather, New York state courts will look to see whether “a proper case is presented for invoking the jurisdiction of the court to make a declaratory judgment” – that is, whether a live and justiciable controversy exists – not whether the plaintiff will ultimately be successful on such claim.

When filing a shareholder derivative suit, it‘s important to get the job done right the first time, as other shareholders may not get a second bite of the proverbial apple.

In Noor v. Mahmood, the Second Department upheld Justice Lawrence Knipel’s Order which granted defendants’ motion for summary judgment, dismissing a shareholder derivative action pursuant to the doctrine of res judicata where a previous derivative action commenced by a different shareholder against the same defendants and based on the same alleged wrongdoings had already been dismissed.

In the earlier action, commenced in 2015, a shareholder brought a derivative suit on behalf of the corporation based on defendants’ alleged breaches of fiduciary duty and diversion of corporate assets.  That action was dismissed pursuant to CPLR 3211 as a result of the shareholder’s failure to adequately allege demand futility.  There, the majority of the board consisting of disinterested directors had exercised their business judgment and refused to authorize the derivative suit (click here to read my blog on avoiding dismissal based on demand futility).

In 2017, plaintiff, a different shareholder, brought a separate derivative suit against the same defendants with identical allegations as those raised in the 2015 suit.  Interestingly, plaintiff in this action was one of the disinterested directors who had refused to authorize the derivative suit in the earlier action.

In an effort to save the second derivative suit from the same fate of the earlier action, plaintiff argued that because he had changed his mind and decided to file suit, there was no longer a disinterested majority that considered the action meritless.  Furthermore, plaintiff argued that the prior dismissal was not on the merits and cannot be the basis for res judicata.

The Second Department, however, reasoned that claims asserted in a shareholder’s derivative action belong to and are brought on behalf of the corporation, not the shareholders themselves.  Thus, a judgment in an action brought on behalf of the corporation by one shareholder precludes other actions brought by other shareholders where they are predicated on the same wrongdoing (Grika v. McGraw, 161 A.D.3d 450 [1st Dept. 2018]).

This case is in line with the public policy behind the doctrine of res judicata: to ensure finality, prevent vexatious litigation, and promote judicial economy (Xiao Yang Chen v. Fischer, 6 N.Y.3d 94, 100 [2005]).

The holding in Noor is also consistent with the precedent established in New York federal courts: that a determination on the merits in a shareholders’ derivative action is res judicata in subsequent actions as to the corporation and all of its shareholders, including those who were not parties to the prior derivative action, as long as the parties’ interest were adequately represented in the original action (Lee v. Marvel Enterprises, Inc., 765 F.Supp.2d 440 [S.D.N.Y. 2011]; see, e.g., Henrik v. LaBranche, 433 F.Supp.2d 372 [S.D.N.Y. 2006]).

The court in Henrik v. LaBranche noted that the general rule precluding other actions brought by subsequent shareholders where they are predicated on the same wrongdoing is not without exception.  There, the U.S. District Court for the Southern District of New York discussed the possibility for a different result where the plaintiff shareholder in the first action is alleged to have inadequately represented the interests of all of the shareholders and there is a showing that the “representative failed to prosecute or defend the action with due diligence and reasonable prudence, and the opposing party was on notice of facts making that failure apparent” (Henrik, citing Restatement (Second) of Judgments,§ 42).

Takeaway: Recognizing that shareholders may not get a second bite of the apple when filing a shareholder derivative action, it is important to analyze the merits of a derivative suit and determine if any claims may be brought by the shareholder individually.  Additionally, shareholders contemplating a subsequent derivative action should also consider whether their interests were adequately represented in the earlier action.

If supermodel Tyra Banks has taught us anything about the modeling industry, it’s that the competition is fierce. Unfortunately, one Manhattan-based modeling agency and former agent aren’t learning this lesson on the runway—they’re learning it in a courtroom.

In a recent decision, the First Department upheld a portion of Justice Andrea Masley’s Order which enjoined a defendant modeling agent and modeling agency from unfairly competing, disclosing or misappropriating plaintiff’s confidential information, and interfering with plaintiff’s contractual relationship with its models, but refused to extend the terms of the employment agreement which prohibited the agent from contacting and soliciting models throughout the pendency of the litigation.

In Marilyn Model Management, Inc. v Derek Saathoff, 1 Model Management, LLC d/b/a One Management, a modeling agency brought an action seeking injunctive relief and damages for “flagrant and repeated breaches” of the non-solicitation and confidentiality obligations of its former agent, Derek Saathoff.  Plaintiff’s complaint alleged that Saathoff unlawfully solicited at least six of the plaintiff’s models, two of which abandoned the plaintiff agency for Saathoff’s new agency, 1 Model Management LLC, also a named defendant in the action. Saathoff resigned from the plaintiff modeling agency to begin representing models with 1 Model, a direct competitor of the plaintiff. Despite his contractual obligations, one could assume Saathoff was not too concerned with keeping his actions a secret when he posted an image of a model, still under contract with the plaintiff, to his Instagram page, publicly welcoming her to his new agency.

Unfortunately for Saathoff, his employment agreement with the plaintiff included a series of non-solicitation obligations restricting Saathoff’s ability to solicit for the duration of his employment and for six months thereafter. Saathoff also agreed to keep plaintiff’s non-public information confidential during his employment and at all times thereafter.

The trial court underscored that pursuant to CPLR 6301, a party seeking injunctive relief must establish (1) the likelihood of success on the merits of the action; (2) the danger of irreparable harm in the absence of a preliminary injunction; and (3) a balance of equities in favor of the moving party (Gliklad v Cherney, 97 AD3d 401, 402 [1st Dept 2012] [citations omitted]).

As to the non-solicitation provision of the employment agreement, the lower court found a likelihood of success on the merits because plaintiff established the non-solicitation provision was reasonable: the restrictive covenant lasted only 6 months after termination, was restricted to the geographical limits of the tri-state area, and was based on an employer’s legitimate interest in “protection against misappropriation of [its] trade secrets or of confidential customer lists, or protection from competition by a former employee whose services are unique or extraordinary (BDO Seidman v Hirshberg, 93 NY2d 382, 388-389 [1999]). The lower court was satisfied that the plaintiff would suffer actual and imminent injury if Saathoff was not enjoined from soliciting plaintiff’s models and that money damages would unlikely make plaintiff whole if Saathoff continued to hire away plaintiff’s models. Lastly, the lower court found the balance of equities to tip in plaintiff’s favor, stating that prohibiting Saathoff from soliciting plaintiff’s models would not deprive him of his livelihood nor prevent him from being successful at 1 Model.

As to the confidentiality provision, the lower court found the provision to be reasonable, “especially in this field,” and thus enjoined both Saathoff and 1 Model from (1) using, disclosing and/or misappropriating any of plaintiff’s confidential information; (2) unfairly competing with plaintiff through confidential information; and (3) interfering with the contracts between plaintiff and its models.

On appeal, the First Department affirmed that plaintiff successfully demonstrated its entitlement to injunctive relief by clear and convincing evidence. However, as it pertained to the non-solicitation provision, the First Department split from the lower court’s ruling which enjoined Saathoff from contacting or soliciting plaintiff’s employees throughout the duration of the action. The First Department noted that by the terms of the employment agreement, the restrictive covenant only applied to a term of six months following the termination of Saathoff’s employment. Saathoff’s termination became effective on September 25, 2018 and thus, the contractual restrictive covenant, by its terms, expired on March 25, 2019. Accordingly, the First Department found no basis for the injunction to remain in place for the pendency of the action.

Takeaway: Counsel should closely analyze the terms of employment contracts before seeking injunctive relief for violations of restrictive covenants—the Commercial Division will not extend them beyond their contractual limits even while litigation is pending.

Three months ago very few of us regularly communicated by virtual videoconferencing.  Today, it’s fast become a daily routine, and in all likelihood will become a more permanent part of our practice.  Who would have guessed that by May 2020, we would be comfortably conducting mediations, hearings, court conferences and even trials by Skype, Zoom or other videoconferencing platform, from home nonetheless?  The adjustment has not been easy for all involved.  Prior to the pandemic, many justices had not permitted emails.  However, when the cases were limited to those deemed “essential” and attorneys were not able to use New York State Courts Electronic Filing (“NYSCEF”) for filing, there was simply no way to contact many of the judges.  However, as Plato recognized over 2,300 years ago, “necessity is the mother of invention”.  That’s when the courts decided to publish rules and/or set up Part emails.

As we embrace our new world, the Commercial and Federal Litigation Section of the New York State Bar Association has prepared a Virtual Courts Contact List based on preferences expressed by each Commercial Division Justice.  So we’re here to share the list with you (at the bottom of this post) and hope you find it helpful in navigating through the “work at home” routine.  Caution to all however: counsel should, of course, check (a) the temporary part rules, if any, on the website for the assigned Commercial Division Justice (see, e.g., https://www.nycourts.gov/LegacyPDFS/courts/comdiv/NY/PDFs/Part-54-Temporary-Rules.pdf) and (b) the website for the relevant county or judicial district’s Supreme Court to see if there are specific rules, procedures or forms to be used in requesting conferences.  For example, Nassau County Justice is using the attached form:  http://ww2.nycourts.gov/sites/default/files/document/files/2020-04/Email%20Request%20For%20Conference%20Form.pdf

And a Big Thanks  go out to Kathy Kass, Esq., Counsel in the Commercial Division Support Office, for providing us with specific links to the Commercial Division Justices in New York County:

~Justice Borrok –  requests for conferences in Part 53 may be made via email to sfc-part53@nycourts.gov

~Justice Cohen – requests for conferences in Part 3 may be made via email to sfc-part3@nycourts.gov

~Justice Friedman – see https://www.nycourts.gov/LegacyPDFS/courts/comdiv/NY/PDFs/Part-60-Temporary-Rules.pdf

~Justice Masley – see   https://www.nycourts.gov/LegacyPDFS/courts/comdiv/NY/PDFs/Part48-Temporary-Rules.pdf

~Justice Ostrager – requests for conferences in part 61 – sfc-part61@nycourts.gov

~Justice Scarpulla –  requests for conferences in Part 39 may be made via email to part-39@nycourts.gov

~Justice Schecter – https://www.nycourts.gov/LegacyPDFS/courts/comdiv/NY/PDFs/Part-54-Temporary-Rules.pdf

~Justice Sherwood – see https://www.nycourts.gov/LegacyPDFS/courts/comdiv/NY/PDFs/part49-temporary-rules.pdf

In addition, see there is also  a conference request email for all NY Supreme Civil parts, https://www.nycourts.gov/legacypdfs/courts/1jd/supctmanh/PDF/Remote-Conference-Protocol.pdf

 

County/ Judicial District Justice Best Remote Contact as of April 17th 2020
Albany County Hon. Richard Platkin Email: PlatkinChambers@nycourts.gov
Email requests for conference should copy counsel for all parties
Kings County / Brooklyn Hon. Lawrence Knipel

Email: lknipel@nycourts.gov

Law Clerk: Aaron Blinder
ablinder@nycourts.gov
Email requests for conference should copy counsel for all parties

Kings County / Brooklyn Hon. Larry D. Martin

Email: ldmartin@nycourts.gov

Law Clerk: David C. Pepper
dpepper@nycourts.gov

Assistant Law Clerk: Dorichael Rodriguez
drodrig3@nycourts.gov
Email requests for conference should copy counsel for all parties

Kings County / Brooklyn Hon. Leon Ruchelsman

Email: lruchels@nycourts.gov

Law Clerk: Mark Kagan
mkagan@nycourts.gov
Email requests for conference should copy counsel for all parties

Nassau County Hon. Stephen A. Bucaria

Attorneys may request a priority conference with the Court on pending matters by sending a standardized email request form to each Judge’s Chambers.  A group email address for each Judge’s Chambers has been established for this purpose as provided below.  Attorneys and unrepresented parties will indicate the reason for the requested conference.  Chambers shall then determine whether a conference is necessary or appropriate and direct the manner of the conference, i.e., by telephone or video.

judgebucariaremote@nycourts.gov
Email requests for conference should copy counsel for all parties

Nassau County Hon. Vito M. DeStefano

Attorneys may request a priority conference with the Court on pending matters by sending a standardized email request form to each Judge’s Chambers.  A group email address for each Judge’s Chambers has been established for this purpose as provided below.  Attorneys and unrepresented parties will indicate the reason for the requested conference.  Chambers shall then determine whether a conference is necessary or appropriate and direct the manner of the conference, i.e., by telephone or video.

judgedestefanoremote@nycourts.gov
Email requests for conference should copy counsel for all parties

Nassau County Hon. Timothy S. Driscoll

Attorneys may request a priority conference with the Court on pending matters by sending a standardized email request form to each Judge’s Chambers.  A group email address for each Judge’s Chambers has been established for this purpose as provided below.  Attorneys and unrepresented parties will indicate the reason for the requested conference.  Chambers shall then determine whether a conference is necessary or appropriate and direct the manner of the conference, i.e., by telephone or video.

judgedriscollremote@nycourts.gov
Email requests for conference should copy counsel for all parties

Nassau County Hon. Jerome Murphy

Attorneys may request a priority conference with the Court on pending matters by sending a standardized email request form to each Judge’s Chambers.  A group email address for each Judge’s Chambers has been established for this purpose as provided below.  Attorneys and unrepresented parties will indicate the reason for the requested conference.  Chambers shall then determine whether a conference is necessary or appropriate and direct the manner of the conference, i.e., by telephone or video.

judgemurphyremote@nycourts.gov
Email requests for conference should copy counsel for all parties

New York County Hon. Andrew Borrok Email: SFC-Part53@nycourts.gov
Email requests for conference should copy counsel for all parties
New York County Hon. Joel M. Cohen Email: sfc-part3@nycourts.gov
Email requests for conference should copy counsel for all parties
New York County Hon. Marcy Friedman Until further notice, communications with the Court should be directed to the Part 60 email
Eamil: SFC-PART60@nycourts.gov.
Email requests for conference should copy counsel for all parties
New York County Hon. Andrea Masley Email: sfc-part48@nycourts.gov
Email requests for conference should copy counsel for all parties
New York County Hon. Barry Ostrager Email: SFC-PART61@nycourts.gov
Email requests for conference should copy all parties
New York County Hon. Saliann Scarpulla Email: Part-39@nycourts.gov
Email requests for conference should copy counsel for all parties
New York County Hon. Jennifer G. Schecter All requests for conferences should be made by contacting Justice Schecter’s Principal Law Clerk Michael Rand by email at mrand@nycourts.gov, copying all counsel and setting forth the reason for and nature of the conference requested.
New York County Hon. O. Peter Sherwood

To schedule a conference, the attorneys should email the clerk assigned to their case.

Cases with even index numbers (excluding the year) are generally assigned to Ms. Crasson [scrasson@nycourts.gov].
Cases with odd index numbers are generally assigned to Mr. Rivera [mrivera@nycourts.gov].
Email requests for conference should copy counsel for all parties

Onondaga County Hon. Deborah H. Karalunas Email: Judge-Karalunas-Chambers@nycourts.gov
Email requests for conference should copy counsel for all parties
Onondaga County Hon. Anthony J. Paris Email: Judge-Paris-Chambers@nycourts.gov
Email requests for conference should copy counsel for all parties
Onondaga County Hon. Donald A. Greenwood Email: Judge-Greenwood-Chambers@nycourts.gov
Email requests for conference should copy counsel for all parties
Queens County Hon. Marguerite A. Grays Email:   QNSCDPTB@nycourts.gov
Email requests for conference should copy counsel for all parties
Queens County Hon. Leonard Livote Email: QNSCDPTA@nycourts.gov
Email requests for conference should copy counsel for all parties
Queens County Hon. Joseph Risi Email; QNSCDPTC@nycourts.gov
Email requests for conference should copy counsel for all parties
Suffolk County Hon. Elizabeth Hazlitt Emerson Emails have been created for each Judicial Part. These Part emails may be utilized by the bar to request a conference with the Court.
Contact via email @ Sufemerson@nycourts.gov
Email requests for conference should copy counsel for all parties
Suffolk County Hon. Jerry Garguilo Emails have been created for each Judicial Part. These Part emails may be utilized by the bar to request a conference with the Court.
Contact via email @ Sufgarguilo@nycourts.gov
Email requests for conference should copy counsel for all parties
Suffolk County Hon. James Hudson Emails have been created for each Judicial Part. These Part emails may be utilized by the bar to request a conference with the Court.
Contact via email @ Sufhudson@nycourts.gov
Email requests for conference should copy counsel for all parties
Westchester County Hon. Gretchen Walsh The best means to request a conference call is through assistant court attorney Ryan Wintermute rjwinter@nycourts.gov.
Email requests for conference should copy counsel for all parties
Westchester County Hon. Linda S. Jamieson Communication via email by contacting assistant court attorney, Joseph Hadala: jhadala@nycourts.gov
Email requests for conference should copy counsel for all parties
7th Judicial District Hon. J. Scott Odorisi The Court is available to conduct conferences – via either Skype for Business or the
telephone. If you would like to schedule a conference, e-mail Maureen Ware at
mware@nycourts.gov on notice to all parties.
8th Judicial District Hon. Emilio Colaiacovo Emaill: ecolaiac@nycourts.gov
Email requests for conference should copy counsel for all parties
8th Judicial District Hon. Timothy J. Walker Email: tjwalker@nycourts.gov
Law Clerk: Darryl J. Colosi, Esq.   Email: dcolosi@nycourts.gov
Email requests for conference should copy counsel for all parties

 

With global commerce massively affected by the COVID-19 pandemic, post-pandemic litigation will undoubtedly result in a rise of interstate depositions and discovery. In turn, litigants engaged in actions pending outside of New York State will seek depositions and discovery from individuals and businesses residing in New York. As a result, New York attorneys will likely be asked to provide guidance or even be retained to assist litigants in these endeavors. This blog post provides readers with a primer on the procedures for obtaining depositions and discovery in New York pursuant to the Uniform Interstate Deposition and Discovery Act found in New York Civil Practice Law and Rules (“CPLR”) § 3119 (the “Act”).

The following scenario illustrates the utility of the Act: AB, a plaintiff engaged in an action against CD pending in California, realizes during the course of discovery in the California action that CD’s accountant, EF, is in possession of CD’s records relevant to AB’s prosecution of the California action. The problem is EF is a resident of New York and AB does not have jurisdiction over EF in California. How can AB obtain CD’s records from EF and EF’s deposition in New York?

The Act allows AB or AB’s attorneys to obtain an “out-of-state” subpoena—California subpoena—“issued under authority of a court of record of a state other than this state” (CPLR 3119 [a] [1]; Patrick M. Connors, Practice Commentaries, McKinney’s Cons Laws of NY, C3119:2 [2018]). Thereafter, AB must then submit the California subpoena to the county clerk in the county in which discovery is sought, typically, the county in New York where EF resides or has its principal office (CPLR 3119 [b] [3]; CPLR 503). The county clerk will then issue a New York subpoena (hereinafter, the “subpoena”) to be served on EF in New York (CPLR 3119 [b] [2]). Alternatively, AB can retain a New York licensed attorney to issue the subpoena without the need to involve the county clerk or courts (CPLR 3119 [b] [4]). AB must provide the New York attorney with either an original or a true copy of the out-of-state subpoena (CPLR 3119 [b] [4]).

Under CPLR 3119, the subpoena requires a person (defined in the statute as “an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government, or governmental subdivision, agency or instrumentality, or any other legal or commercial entity”) to “attend and give testimony at a deposition;” “produce and permit inspection and copying of designated books, documents, records, electronically stored information, or tangible things in the possession, custody or control of the person;” or “permit inspection of premises under the control of the person” (CPLR 3119 [a] [2] and [a] [4] [i]-[3]; see also CPLR 3119 [d] [noting that CPLR 2303, 2305, 2306, 2307, and 2308 apply to subpoenas issued under CPLR 3119 [b]).

The New York subpoena must: “(i) incorporate the [same] terms used in the out-of-state subpoena” and “(ii) contain or be accompanied by the names, addresses and telephone numbers of all counsel of record in the proceeding to which the subpoena relates and of any party not represented by counsel” (CPLR 3119 [b] [3]).

Once issued, AB or AB’s New York attorney must serve the subpoena in accordance with CPLR 2302 (i.e., cause the subpoena to be issued with or without a court order) and CPLR 2303 (i.e., serve the subpoena in the same manner as a summons and pay in advance a witness fee for travel and attendance) (CPLR 3119 [c]).

Since there is no action or proceeding pending before any court in New York, a proceeding related to the subpoena (e.g., for protective orders or to enforce, quash or modify the subpoena) must be brought as special proceedings in the supreme court in the county where the subpoena is returnable (CPLR 3119 [e]).

In this regard, if EF fails to comply with the subpoena issued by the county clerk or a New York attorney (a non-judicial subpoena), AB can commence a special proceeding to enforce the subpoena and compel EF’s compliance pursuant to Art. 4 of the CPLR (CPLR 3119 [e]; CPLR 2308 [b] [disobedience of non-judicial subpoena]; Margulis v Zlochiver, No. 155201/2019 [Sup Ct, New York County Nov. 20, 2019] [ordering the appearance of a witness for an examination before trial “previously duly noticed . . . pursuant to the Uniform Interstate Deposition and Discovery Act and CPLR § 3119, and [to] have copies of records material to his testimony”). Likewise, if EF believes that it has grounds to seek a protective order, EF can commence a proceeding to quash or modify the subpoena (CPLR 3119 [e]; CPLR 2304). A special proceeding is commenced by filing a petition either on Notice of Petition or by Order to Show Cause (CPLR 402 and 403).

Be aware that failing to strictly comply with CPLR 3119 and the laws of New York can result in the court denying an application to compel compliance with the subpoena or for a protective order (Matter of Boyarsky, No. 53667/2014 [Sup Ct, Westchester County May 9, 2014] [denying an application for order compelling production of documents where no evidence exists that the subpoena was “issued under authority of the court of record in Massachusetts”]; Hyatt v State Franchise Tax Bd., 105 AD3d 186, 194 [2d Dept 2013] [New York law on attorney-client privilege applies on a motion for a protective order]).

Moreover, an out-of-state party cannot use a subpoena to go on a fishing expedition but only to “compel the production of specific documents that are relevant and material to the factual issues in a pending proceeding” (Matter of Home Box Office Inc. v Laster, No. 153946/2019 [Sup Ct, New York County Jun. 5, 2019] [granting motion to quash out-of-state Florida subpoena in its entirety] citing Mestel & Co., Inc. v Smythe Masterson & Judd, Inc., 215 AD2d 329 [1st Dept 1995]; Hyatt v State Franchise Tax Bd., 105 AD3d at 200-201 [citing the Recommendations of the Advisory Committee on Civil Practice: “The Act recognizes that the discovery state has a significant interest in protecting its residents who become non-party witnesses in an action pending in another jurisdiction from unreasonable or burdensome discovery requests.”] [citation omitted]).

Lastly, remember that CPLR 3119 only “provides a mechanism for disclosure in New York for use in an action that is pending in another state . . . , not the other way around” (see, e.g., Lerner v Newmark & Co. Real Estate, Inc., 178 AD3d 418 [1st Dept Dec. 5, 2019] citing Matter of 91 St. Crane Collapse Litig., 159 AD3d 511, 512 [1st Dept 2018]). In the latter case, CPLR 3108 controls in instances when the other state does not have a similar Uniform Depositions and Discovery Act (see Genesis Merchant Partners, LP v Gilbride, Tusa, Last & Spellane LLC, No. 653145/2014 [Sup Ct, New York County Feb. 23, 2020] [issuing a commission pursuant to CPLR 3108 for information via deposition in Connecticut] citing Wiseman v American Motors Sales Corp., 103 AD2d 230, 235 [1st Dept 1984]).

The COVID-19 pandemic has had widespread impact on litigation, with some courts and most cases coming to a screeching halt.  Some courts have responded with Orders or rules (Massachusetts Sup. Jud. Ct. Order OE-144 [March 20, 2020]; Wisconsin S. Ct. Order [March 25, 2020]; Florida S. Ct., No. AOSC20-16 [March 18, 2020]), while others have not, leaving the practitioner to determine the logistics under existing procedural rules and whatever Executive or Administrative Orders are in place.

As of this writing, we thought it might be helpful to provide the landscape in the state and federal courts in New York, and the impact, if any, Governor Cuomo’s Executive Order 202.7 may have.  We also provide links to helpful resources as you near your first virtual deposition.  We intend to update this as the landscape changes.

New York Law on Remote Depositions

New York Civil Practice Law and Rules (“CPLR”) 3113(b) mandates that an “officer” put the deponent under oath. The officer, or someone acting under the direction of the officer, must record the testimony.  Typically, a notary public or a stenographer serves the function of an officer who then records the testimony.

Pursuant to CPLR 3113(d), the officer administering the oath and transcribing the testimony must be physically present at the location where the deponent is testifying. Put simply, the statute does not permit the officer to be at a remote location and accessible by telephone. The rationale makes sense:  the officer who swears in the witness must have proof that the person before them is the actual witness.  SIgnifciantly, however, the statute allows the parties to stipulate otherwise (CPLR 3113[d]; In re Estate of Smith, 29 Misc 3d 832, 834 [Sur Ct 2010] [The court notes that “unless otherwise stipulated to by parties, the officer administering the oath shall be physically present at the place of the deposition”]). CPLR 3113(d), in part, states that “[u]nless otherwise stipulated to by the parties, the officer administering the oath shall be physically present at the place of the deposition and the additional costs of conducting the deposition by telephonic or other remote electronic means, such as telephone charges, shall be borne by the party requesting that the deposition be conducted by such means.”  In Washington v Montefiore Hospital et al., the Third Department held that because the court reporter who administered the oath was not present in the deponent’s office during his testimony, and rather, was present by telephone, the deposition was not conducted in accordance with CPLR 3113. However, there, the Court held that because there was no objection to the manner in which the oath was administered, thus preventing any correction of defect, the objection was waived (see Matter of Washington v Montefiore Hosp., 7 AD3d 945, 948 [3d Dept 2004]).

The rule further provides,that the testimony can be recorded by “stenographic or other means.” Indeed, CPLR 3113(d) permits the parties to “stipulate that a deposition be taken by telephone or other remote electronic means and that a party may participate electronically.” The stipulation must be agreed to by all the parties to a litigation and must detail 1) the method of recording; 2) the use of exhibits; and 3) who must and may be physically present.

Federal Law on Remote Depositions

Pursuant to Federal Rule of Civil Procedure (“FRCP”) 30(b)(4), “the parties may stipulate – or the court may on motion order – that a deposition be taken by telephone or other remote means.” In other words, under federal law, the court can order that a deposition be taken by telephone or other remote electronic means even in the absence of an agreement between the parties (Fed R Civ P 30[b][4]). Rule 30(b)(3) further states that testimony may be recorded by “audio, audiovisual, or stenographic means” and that the party who notices the deposition bears the recording costs.  In addition, any party can arrange to have the deposition testimony transcribed.

The COVID-19 pandemic has even caused certain federal judges to temporarily supplement their individual rules to permit all depositions to be taken by remote means, including telephone and videoconference (see Judge Lewis J. Liman’s COVID-19 Emergency Individual Practices in Civil and Criminal Cases).  The rule also provides that “[f]or avoidance of doubt, a deposition will be deemed to have been conducted “before” an officer so long as that officer attends the deposition via the same remote means (e.g., telephone conference call or video conference) used to connect all other remote participants, and so long as all participants (including the officer) can clearly hear and be heard by all other participants” (see id.).

Rule 30(b)(5) states that, unless the parties stipulate otherwise, the “deposition must be conducted before an officer appointed or designated under FRCP 28 (Nowlin v Lusk, 2014 WL 298155, at *5 [WD NY Jan. 28, 2014]).  Under FRCP 28, the deposition must be taken before either: 1) an officer authorized by federal law or by the law in the place of examination to administer oaths; or 2) a person appointed by the court where the action is pending. Rule 28 defines “officer” as a “person appointed by the court under this rule or designated by the parties under Rule 29(a).”  Notably, under FRCP 29(a), the parties can stipulate that “a deposition may be taken before any person, at any time or place, on any notice, and in the manner specified – in which event it may be used in the same way as any other deposition.” Put simply, the parties can stipulate that remote video depositions will be conducted by a person who is not a notary. The stipulation can also address the remote participation of the officer. The Rule does not require the parties to obtain the court’s approval of these stipulations. However, it is important to note that local rules can require approval for these stipulations.  Therefore, it is critical to consult both the Local Rules of the operative District Court, and the Individual Rules of the assigned Magistrate and Article III Judge.

Although the parties can stipulate otherwise, federal courts have held that a deposition is deemed to have been conducted before an officer if that officer “attends the deposition via the same remote means (e.g., telephone conference call or video conference) used to connect all other remote parties, and so long as all participants (including the officer) can clearly hear and be heard by all other participants)” (see Sinceno v Riverside Church in City of New York, 2020 WL 1302053, at *1 [SD NY Mar. 18, 2020] [permitting all depositions to be taken by telephone, video conference, or other remote means in light of the COVID-19 pandemic]).

In sum, federal law, unlike New York State law, does not require the physical presence of the officer in the same location as the deponent.

Executive Order 202.7 and Depositions

In light of the COVID-19 pandemic, on March 19, 2020, Governor Cuomo issued Executive Order 202.7 (“EO”), which suspended until April 18, 2020 the rule requiring the physical appearance of a notary public for the signing of documents.  To date, it is unclear whether the suspension will be extended. It is also not clear what impact, if any, the EO has on CPLR 3113’s physical presence requirement.  The EO addresses the witnessing of document signings, not the administration of oaths at depositions. Specifically, Executive Order 202.7 permits notary services to be performed by video provided the following conditions are met:

  • The person seeking the Notary’s services, if not personally known to the Notary, must present valid photo ID to the Notary during the video conference, not merely transmit it prior to or after;
  • The video conference must allow for direct interaction between the person seeking the Notary’s services and the Notary (g., no pre-recorded videos of the person signing);
  • The person seeking the Notary’s services must affirmatively represent that he or she is physically situated in the State of New York;
  • The person seeking the Notary’s services must transmit by fax or electronic means a legible copy of the signed document directly to the Notary on the same date it was signed;
  • The Notary may notarize the transmitted copy of the document and transmit the same back to the person seeking the Notary’s services; and
  • The Notary may repeat the notarization of the original signed document as of the date of execution provided the Notary receives such original signed document together with the electronically notarized copy within thirty days after the date of execution.

The New York Department of State has issued guidance to notaries regarding Executive Order 202.7.  Below are the additional considerations for notaries:

  • Notaries public using audio-video technology must continue to follow existing requirements for notarizations that were unaltered by the Executive Order. This includes, but is not limited to, placing the notary’s expiration date and county where the notary is commissioned upon the document.
  • If the notary and signatory are in different counties, the notary should indicate on the document the county where each person is located.
  • An electronically transmitted document sent to the notary can be sent in any electronic format (e.g., PDF, JPEG, TIFF), provided it is a legible copy.
  • The notary must print and sign the document, in ink, and may not use an electronic signature to officiate the document.
  • The signatory may use an electronic signature, provided the document can be signed electronically under the Electronic Signatures and Records Act (Article 3 of the State Technology Law). If the signer uses an electronic signature, the notary must witness the electronic signature being applied to the document, as required under Executive Order 202.7.
  • The Executive Order does not authorize other officials to administer oaths or to take acknowledgments, and only applies to notary publics commissioned by the Secretary of State’s office.
  • Following remote notarization, if the notary receives the original document within 30 days, the notary may notarize the document again (i.e., physically affixing a notary stamp and hand signing the document) using the original remote notary date.
  • Additionally, when performing remote notarization pursuant to this Executive Order, the Department recommends the following best practices. (However, not following these two recommendations will not invalidate the act or be cause for discipline):
    • Keep a notary log of each remote notarization;
    • Indicate on the document that the notarization was made pursuant to Executive Order 202.7.

Some Helpful Links and Advice From Court Reporters

So what are court reporters doing in light of the pandemic?  Adapting of course!  Many are offering free virtual or on-line demonstrations of how to conduct a remote deposition, or helpful  information on how the depositions would proceed.  Some examples can be found at Enright, Veritext or Bee Reporting, to name a few.  You might want to share these “tutorials” with your witness or clients so they understand the process before “taking the stand”.

 

 

A few weeks back, my colleague Chris Clarke reported on the response of the New York court system to the commercial chaos arising out of the COVID-19 pandemic, including in the court system generally, the Appellate Division, and of course, the Commercial Division.

Among other developments, Chris’s post highlighted Chief Administrative Judge Lawrence K. Marks’s March 15 statewide Memorandum — which postponed until further notice all “non-essential” court functions as part of a “continuing and evolving effort to assure the operation of the courts in the safest possible manner for the public and our employees in this time of medical emergency” — as well as his March 19 Administrative Order — which “strongly discouraged” in-person litigation or other actions “inconsistent with prevailing health and safety directives relating to the coronavirus health emergency.”

Recent decisions throughout the state, including in New York County, suggest that courts are adhering to these directives, particularly as it relates to discovery.

For example, the day after Judge Marks’s Administrative Order, the Supreme Court in Brielmeier v Legacy Yards Tenany, LLC granted a motion to compel a post-Note of Issue IME and allowed the parties to further adjourn the IME — already more than two years delinquent due to “law office failure” — by an additional 60 days “if the IME cannot be conducted due to the COVID-19 pandemic.”

A week later, in Galas v. Thor 1231 Third Ave. LLC, New York County Supreme denied a pre-mature motion for summary judgment and directed the parties to proceed with depositions — with the caveat that “to the extent that the parties are unable to conduct their depositions as scheduled in their last conference order due to the current COVID-19 (coronavirus) crisis, they may reschedule them at the next conference.”

Elsewhere around Foley Square, certain SDNY judges have developed standing orders dealing with the crisis that are being adopted and issued in dozens of cases across the board.

For example, District Judge Lewis J. Liman , as well as Magistrate Judges Katherine H. Parker and Barbara Moses — in light of the federal government’s ongoing efforts “to minimize person-to-person contact” — have been issuing the following standing order concerning depositions:

ORDERED, … that all depositions in this action may be taken via telephone, videoconference, or other remote means, and may be recorded by any reliable audio or audiovisual means…. For avoidance of doubt, a deposition will be deemed to have been conducted “before” an officer so long as that officer attends the deposition via the same remote means (e.g., telephone conference call or video conference) used to connect all other remote participants, and so long as all participants (including the officer) can clearly hear and be heard by all other participants.

District Judge P. Kevin Castel, for his part, has been issuing a standing order directing that all upcoming court conferences “will be held by teleconferencing” and requiring all plaintiffs’ counsel to “contact all defendants’ counsel to provide defense counsel with call-in information; [and] email the call-in information to [Judge Castel].”

Taking the award for the “Most Humane Standing Order,” however, is Magistrate Judge Ona T. Wang, whose order not only insists on the now all-too-familiar “shelter-in-place” protocol…

ORDERED, that counsel shall conduct work remotely. This includes, but is not limited to, client meetings, work meetings, and hand deliveries of courtesy copies to the Court (courtesy copies can be sent via email or mail)

… but also expresses a certain sensitivity to what may be going on in the personal lives of litigants during this crisis…

ORDERED that if any party or counsel has any private, personal, familial or medical concerns that they need to share with the Court that would necessitate further orders, counsel may email [Judge Wang] ex parte provided that they advise the other parties that they will be contacting the Court ex parte.

A final note of caution with regard to this recent trend of coronavirus compassion from the courts:

Lest any litigant be tempted to take advantage of the slack cut by these decisions and orders, one would be well-advised to heed the recent admonishment from District Judge Kenneth M. Karas in Koch v Preuss following an appeal from the dismissal of a bankruptcy proceeding for lack of prosecution:

Appellant’s attempt to invoke the recent coronavirus pandemic to excuse his failures over the past eleven months is, frankly, appalling. Over the past few days, this Court has granted every request for an extension or telephone conference with which it has been presented based on the coronavirus. The Court is acutely aware of the hardships and dislocations associated with the current pandemic, and the Court has assumed good faith by those making related requests. Appellant’s request, however, is different. While the coronavirus outbreak is recent, appearing in the United States and coming to public attention within the last month, Appellant’s failures have been lengthy, repeated and ongoing for nearly a year…. In sum, Appellant cannot excuse his longstanding failure to prosecute his appeal by retroactively capitalizing on a recent crisis.