Your client who was just subpoenaed to provide documents in an arbitration, advises you, but with confidence says “But we did not agree to arbitrate, so I can ignore this, right?” After some discussion, your client agrees it’s in her best interest to comply with the subpoena, but only after you promise she will not be forced to arbitrate. How can you be sure your client will not be brought into the arbitration?  A recent decision by the Honorable Barry Ostrager highlights some ways in which a non-signatory can be dragged into an arbitration they never even envisioned

In IQVIA RDS Inc. v. Eisai Co. Ltd, IQVIA, a subcontractor, was forced to seek a stay of arbitration after Eisai, the client, sought to join IQVIA as a party to its ongoing arbitration against PharmaBio, the contractor.  The only problem was that the subcontractor never agreed to an arbitration provision.

If the subcontractor did not agree to arbitrate this dispute, how could it be forced into an ongoing arbitration?

The Direct Benefits Theory

The client argued that the subcontractor was prohibited from avoiding arbitration under a theory known as direct benefits estoppel.  This is an exception to the general rule against binding non-signatories to arbitration.  Under this theory, a non-signatory may be compelled to arbitrate where it “knowingly exploits the benefits of an agreement containing an arbitration clause and receives benefits flowing directly from the agreement” (Notably Federal Courts have applied a similar theory, see Ouadani v. TF Final Mile LLC, 876 F.3d 31, 33 (1st Cir. 2017).  The court found that the subcontractor did not receive direct benefits from agreement between the contractor and the client because their agreement conferred no direct benefits on the subcontractor.  Rather, the agreement allowed the contractor the option to select a subcontractor of its choosing.  Simply because the contractor hired and paid the subcontractor did not make the subcontractor a direct beneficiary of the contract compelling it to arbitrate. Thus, the court allowed the subcontractor to seek a stay of arbitration.

Prior participation in the Arbitration

Another way a non-signatory could be forced to arbitrate its dispute is if it already “participated” in the ongoing arbitration.  Section 7503 (b) of the CPLR states that a party may not seek a stay if it already participated in the arbitration.   A party participates in arbitration by, among other things, appearing in the dispute, selecting the arbitrators, or scheduling the hearing.  The subcontractor’s participation in the ongoing arbitration was limited to complying with subpoena demands.  This, as the court found, is not participating in the arbitration for purposes of Section 7503 (b).  Thus, subcontractor was permitted to seek, and was granted, a stay of arbitration.

The lesson here is that even if your client did not agree to an arbitration provision, it still could be forced into arbitration.  You and your client should be wary of these pitfalls, and seek to avoid these mistakes, if you do not wish to arbitrate your disputes.

 

Hogan

To welcome the New Year, we venture outside this blog’s traditional realm of commercial division practice and procedure to reflect on the nature of “intent” at the intersection of professional wrestling and insurer coverage liability. No, this is not a surrealist poem, but a recent decision by Justice Peter Sherwood of the Commercial Division for New York County arising from the 2015 publication of scandalous material featuring professional wrestler Terry Bollea (aka Hulk Hogan).

In May of 2016, Bollea filed an action in Pinellas County, Florida (Case No. 16-002861-CI), against Don Buchwald & Assocs. (DBA), Bollea’s former talent agency, and Tony Burton, Bollea’s agent at DBA, among others. In that action, Bollea asserted claims for, among other things, invasion of privacy and intentional infliction of emotional distress, arising from Burton’s alleged role in delivering scandalous footage to the now-defunct website Gawker. A year later, in May of 2017, Bollea filed an amended complaint against DBA for “negligent retention,” alleging that DBA acted negligently by employing Burton when DBA “knew or should have known” that Burton was “predisposed to committing wrongs.”

DBA subsequently sought to have its commercial liability insurer, American Zurich Insurance Company (AZIC), and umbrella liability insurer, Zurich American Insurance Company (ZAIC), provide a defense to DBA and Burton in the Florida action pursuant to certain Primary Policies and Umbrella Policies. These policies provide coverage for “bodily injury” caused by an “occurrence” that takes place during the policy period.

AZIC and ZAIC disclaimed coverage, arguing, among other things, that certain of the claims were ineligible for coverage, and that all of DBA’s and Burton’s actions were allegedly intentional and therefore not caused by an “occurrence,” as defined in the policies. The insurers subsequently filed an action in New York Supreme Court, New York County, Commercial Division, seeking a declaration that, among other things, they have no duty to defend DBA and Burton.

On summary judgment, Justice Sherwood offered a thorough and expansive discussion of the insurers’ obligation to defend the claims against DBA and Burton. First, the “duty to defend” is broader than the “duty to indemnify,” and arises where there is a “reasonable possibility of coverage” (Rhodes v Liberty Mut. Ins. Co., 67 AD3d 881, 882 [2d Dept 2009]). Moreover, “[i]f any of the claims against an insured arguably arise from covered events, the insurer is required to defend the entire action” (Town of Massena v Healthcare Underwriters Mut. Ins. Co., 98 NY2d 435, 443-444 [2002]).

The insurers’ argument that the policies did not cover claims for intentional torts was also rejected, because from the perspective of an insured employer, its employees’ intentional torts would be “unexpected, unusual and unforeseen.” “In that context, New York courts assess whether the insured intended to cause harmful consequences, not whether the insured, as a general matter, intended to act.” Furthermore, even intentional torts might give rise to coverage for “accidental” conduct, “where the plaintiff in the underlying action can succeed on his or her intentional tort claim without actually proving intentional or knowing conduct – i.e., where something less than actual intent suffices to establish liability.”

Applying this principals, the court held that the Florida action gave rise to a duty to defend because, from DBA’s standpoint, Burton’s acts in allegedly aiding and abetting the publication of scandalous footage were unexpected. Moreover, under Florida law, a claim for intentional infliction of emotional distress can be sustained by showing “reckless disregard,” without proving deliberate or intentional harm.

Defendants facing liability for intentional conduct should thus bear in mind that an “intentional” tort can still be “accidental” within the meaning of commercial liability policies, so long as the actor did not intend to achieve the specific harmful results (see Messersmith v American Fid. Co., 232 NY 161, 165-166 [1921]).

A preliminary injunction is one of the available provisional remedies, namely, equitable relief entered by a court prior to a final determination of the merits. The relief usually orders a party to restrain from a course of conduct or compels a party to continue with a course of conduct until the action has been decided. Preliminary injunctions differ from temporary restraining orders in that TROs are usually granted pending a hearing for a preliminary injunction where a court determines that “immediate and irreparable injury, loss or damage will result unless the defendant is restrained before the hearing can be held.” See CPLR § 6301.

The standard that a party seeking a preliminary injunction must satisfy to obtain such “extraordinary” relief is the well-settled three-prong test: (1) a probability of success on the merits, (2) danger of irreparable injury in the absence of an injunction and (3) a balance of equities in its favor. See Nobu Next Door, LLC v. Fine Arts Hous., Inc., 4 N.Y.3d 839, 840 (2005).

Injunctive relief is not designed to determine the merits of the action, rather its function is to preserve the status quo pending the outcome of an action. For this reason, preliminary injunctions can be used as a significant weapon in commercial and business litigation. Nevertheless, it is important to understand when this remedy is available and when it is not.

Establishing the second prong of the test often proves to be the most difficult since the vast majority of commercial and business litigation cases seek monetary damages—something that can be remedied at the disposition of a litigation and therefore not worthy of the extraordinary remedy of injunctive relief. By definition, the concept of irreparable injury seeks relief for a type of harm for which there is no adequate remedy at law (e.g., no monetary damages).

New York County Commercial Division Judge Sherwood recently denied an application for a preliminary injunction for two reasons: the plaintiff sought a remedy which would alter, not maintain, the status quo and because plaintiff could not show irreparable harm.

In that case, the plaintiff sought to have the Court compel the defendant to deliver shares in defendant’s company to plaintiff based on the terms of a purchase and sale agreement between the parties. However, defendant argued that the transfer of shares would be in violation of various SEC rules preventing the plaintiff from acquiring further shares of defendant’s common stocks. Ultimately, Sherwood decided that compelling the defendant to transfer the shares would alter the status quo because it would be giving plaintiff its ultimate relief it sought by allowing it to bypass a potentially illegal transfer of shares. See Crede CG III, Ltd. v. Tanzanian Royalty Exploration Corp., 2018 NY Slip Op 32918 (New York County, 2018).  This type of relief, also known as a “mandatory” injunction, is granted only upon a much higher burden. See Lehey v. Goldburt, 90 A.D.3d 410, 411 (1st Dep’t 2011).

Next the plaintiff argued that it would be irreparably harmed if its application for a preliminary injunction was not granted because the defendant was “on the verge of insolvency” threatening plaintiff’s ability to collect on a potential judgment issued at the conclusion of the case. Here, defendant was a publicly traded company created to help fund some of its gold and precious metal mining projects in Tanzania. At the time of the application it had current assets of $1.3 million and debts of over $10 million along with $50 million in assets located in Tanzania where the law of that country does not currently recognize United States judgments.

Judge Sherwood reaffirmed the principle that the relief of a preliminary injunction is not available in an action seeking solely money damages. He reasoned that plaintiff’s damages consisted of the value of publicly traded stock of defendant’s company which could easily and readily be calculated. Sherwood reasoned that the fact that defendant might not have any assets left by the end of the litigation was not enough to award a preliminary injunction because an “unsecured creditor has no cognizable interest in a debtor’s property until the creditor obtained a judgement.” He went on to say that a creditor therefore “has no equitable prejudgment remedy that will interfere with the debtor’s use of its property—even if the defendant threatens to strip itself of assets.”

In conclusion, commercial litigators must remember that the extraordinary remedy of a preliminary injunction, can be used as a weapon, but such relief is only available to maintain the status quo and where irreparable harm exists.

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Forum-selection clauses were once widely disfavored by many courts on the theory that such provisions operated to improperly divest the court of jurisdiction.  But now, it is well-recognized that parties to a contract may freely select a forum of their choosing to resolve a dispute arising from that contract.  In fact, forum-selection clauses are now prima facie valid unless the party seeking to avoid the enforcement of a forum-selection clause makes a “strong showing” that it should be set aside. But what does that mean?

A party challenging a forum-selection clause must show:

  • Enforcement of the clause would be unreasonable and unjust, or in contravention of public policy;
  • The clause is invalid because of fraud or overreaching; or
  • A trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of its day in court.

This is a significantly high burden to meet.  Indeed, a recent decision by Justice Emerson in Somerset Fine Home Bldg., Inc. v Simplex Indus., Inc., 2018 NY Slip Op 51845 (U) (Sup Ct, Suffolk County Dec. 14, 2018) serves as a reminder that simply claiming “unequal bargaining power” in drafting the contract, or the “financial distress” of traveling to another state may be insufficient to set aside a valid forum-selection clause.

The plaintiff in Somerset was a home builder located in Suffolk County, New York, and the defendant was a manufacturer of modular homes located in Scranton, Pennsylvania.  In May 2017, the parties entered into a sales agreement (the “Agreement”) whereby the plaintiff agreed to purchase a modular home from the defendant. The Agreement contained a forum-selection clause providing that any dispute related to the Agreement would be determined by the laws of the Commonwealth of Pennsylvania and that the exclusive forum would be the Court of Common Pleas of Lackawanna County, Pennsylvania.  Ultimately, the plaintiff sued the defendant in Suffolk County, New York for, among other things, breach of the Agreement.  The defendant moved to dismiss arguing that the parties expressly agreed to litigate their dispute in Pennsylvania.

Justice Emerson rejected plaintiff’s argument that the Agreement and forum-selection clause were “unconscionable,” noting that, as an initial matter, the forum-selection clause was “not hidden or tucked away within a complex document of inordinate length.”  Rather, the clause appeared in the same size and print as the rest of the agreement, each page of which was initialed by plaintiff’s principal.

The Court also rejected plaintiff’s argument that “it was in a weaker bargaining position than defendant” and that it “had no choice” but to enter into the Agreement, explaining that a forum-selection clause will not be invalidated merely because the parties do not possess equal bargaining power.  Importantly, the Agreement at issue in Somerset, like many agreements, clearly stated that each party had “the opportunity to obtain the assistance of counsel in the negotiation, drafting and execution of the agreement.”

Finally, plaintiff’s argument that it was a “small company” that could not travel to Pennsylvania was equally unavailing, as Justice Emerson explained that “simply claiming financial distress does not warrant setting aside a valid forum-selection clause.”  The plaintiff in Somerset did not demonstrate that commencing an action in Pennsylvania would be so financially prohibitive that it would be deprived of its day in court, or that the Pennsylvania court would treat it unfairly.

And so, because the forum-selection clause in Somerset was the product of an arm’s-length business agreement between sophisticated commercial entities, and was neither outrageous nor oppressive so as to warrant a finding of unconscionability, the court dismissed the case.

Somerset reaffirms the principle that a forum-selection clause is prima facie valid and will not be set aside unless the challenging party makes a “strong showing” that the clause is unreasonable, unjust or invalid because of fraud.  An example of a forum-selection clause set aside on the grounds of fraud is found in People v Northern Leasing Sys., Inc., 60 Misc 3d 867 [Sup Ct, NY County Nov. 17, 2017].  There, the forum-selection clause was held to be invalid where the various lease agreements at issue, among other things, were materially and fraudulently altered after execution, contained forged signatures, and were otherwise “permeated with fraud”.

And, when would trial in another forum be “so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court”?  Well, some courts have vitiated forum-selection clauses when enforcement would essentially extinguish an otherwise reasonable claim, such as where the costs and inconvenience of forcing a party to litigate a case in a foreign state would effectively end the case before it began (seeYoshida v PC Tech USA, 22 AD3d 373 [1st Dept 2005] [forum-selection clause invalid where forum selected was Tokyo, Japan, with a totally foreign language and vastly different laws, so as to effectively “deprive plaintiff of his day in court”]; Northern Leasing Systems, Inc. v French, 48 Misc 3d 43 [1st Dept 2015] [forum in New York gravely inconvenient where parties’ agreement, businesses, and equipment were all located in California, and where defendant, an 86-year-old man, was a resident of California]).

One Final Note: Contracting parties may also expressly consent to the specific designation of the Commercial Division as the exclusive forum in New York states.  This may be beneficial for more sophisticated contracting parties who wish to streamline the process of having their contractual dispute heard in the Commercial Division rather than in New York state courts generally, as the Commercial Division judges are generally well-versed in commercial law.   In fact, the Commercial Division Rules even supply a “sample choice of forum clause” at Appendix C for practitioners to borrow.

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As readers of this blog have come to appreciate, we here at New York Commercial DCheck the Rulesivision Practice tend to report on — among other things Commercial Division — the procedural particularities of litigating commercial matters before the various judges that have been assigned to the Commercial Division over the years.  Such particularities may arise from, say, a new or amended Commercial Division Rule, or from a new or amended Individual Practice or Part Rule.

For example, we repeatedly have reported on the particularities of the individual-practice rules of Manhattan Commercial Division Justice Eileen Bransten, who, along with her colleague Justice Charles E. Ramos (also no stranger to this blog), will be retiring this month and will be succeeded next year by incoming Justices Joel M. Cohen and Andrew S. Borrok.  In case you missed it, the New York Law Journal announced the appointments of Justices Cohen and Borrok to the Commercial Division just before Thanksgiving.

Speaking of procedural particularities and new Commercial Division judges, perhaps most particular of all are the Practices for Part 54 overseen by New York County’s most recent addition to the Commercial Division, Justice Jennifer G. Schecter, who was appointed in April 2018 and took over the docket of recently-retired Manhattan Commercial Division Justice Shirley Werner Kornreich.

Justice Schecter’s Part Rules are numerous and specific — 58 if you’re counting (not including subparts) — and cover everything from file to trial.  Her rules seemingly anticipate anything that can arise during the course of a complex commercial litigation in a way that only someone who spent more than a decade as Principal Law Secretary to former Chief Judge Judith Kaye of the New York Court of Appeals and the aforementioned Justice Bransten can appreciate.

To be sure, there is much to consider in Justice Schecter’s rules, but here are 10 or so important reminders for practitioners litigating in her Part:

Rule 21 — Don’t ask your assistant or paralegal to call the court to confirm scheduling, etc.  “The court will only take calls from the parties’ attorneys of record.”

Rule 27 — Don’t dump documents on your adversary after hours.  “[W]hen a discovery deadline is set forth in a court order, that deadline is 5:00 pm, New York time.”

Rule 31 — Don’t withhold documents on the basis of privilege without serving a privilege log along with your production.  “Failure to serve a privilege log with the party’s production will, absent good cause, be deemed a waiver of the party’s objection on the ground of privilege.”

Rule 33 — Don’t send a colleague to a status conference without full knowledge of the case.  “Attorneys appearing for conferences must be fully familiar with the case [and] should be prepared to discuss the merits of their case at all conferences.”

Rule 34 — Bring everything with you to compliance conferences if you want the court to rule on a discovery dispute.  “Any party that wants to resolve a dispute about the sufficiency of a discovery response during a conference shall bring whatever will be needed to obtain a ruling, including copies of the disputed demands and responses.”

Rule 39 — Adhere to new Commercial Division Rule 17 concerning word limits and swear to it.  “Every brief, memorandum, affirmation, and affidavit shall include . . . a certification by the counsel who has filed the document describing the number of words in the document.”

Rules 40-41 — Don’t file an attorney “brief-irmation” or a party “brief-adavit” in support of a motion.  “Argument must be confined to the brief,” which “must accompany every motion.”

Rules 45 and 52 — Include complete copies of all contracts filed as exhibits to your motion papers.  “Excerpts of contracts may not be filed.”

Rule 54 — Agree with your adversary on a joint Rule 19-a statement of material facts or don’t bother.  “If the parties cannot agree on a joint statement, a Rule 19-a statement of facts is not permitted.”

Rule 55 — Obtain and file your oral-argument transcripts if you want a decision on your motion.  “Motions will not be marked fully submitted and the court will not issue a decision until the transcript is e-filed and the Part Clerk receives a hard copy of the transcript with the e-filing confirmation receipt.”

Be sure to check in early next year for future posts on the individual practices of incoming Manhattan Commercial Division Justices Cohen and Borrok.  In the meantime, a happy holiday season to all our readers!

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The Donald J. Trump Foundation, a private foundation incorporated in 1987, was formed “exclusively for charitable, religious, scientific, literary or educational purposes”,  and as stated in the Certificate of Incorporation, shall not be for propaganda or participating or intervening in “any political campaign.”  The Foundation’s president and founder, is Donald J. Trump.

Donald J. Trump Foundation logo.pngThe Attorney General of the State of New York filed suit against the Foundation, Mr. Trump and the Board members, alleging breaches of fiduciary duty, waste, wrongful party transactions and dissolution of the Foundation.  The basis?  The petition claims that the Foundation and Board members engaged in illegal and abusive transactions over the years, violated corporate and statutory rules for fiduciaries, and misuse of charitable assets including self-dealing.  Significantly, the petition alleges that Mr. Trump used donated money to purchase personal items, advance his presidential election campaign and settle certain legal obligations.  The petition attaches many emails, photos, contribution lists and other supporting documentation.

Respondents moved to dismiss the petition in its entirety, alleging a variety of defenses, ranging from lack of jurisdiction under the Supremacy Clause of the U.S. Constitution, statute of limitations,  and failure to state a claim.  Justice Saliann Scarpulla, in a well-reasoned decision, denied the motion to dismiss all of the claims, except for the sixth cause of action seeking injunctive relief.  As to that claim, the court held that the injunctive relief sought was moot in light of the Respondent’s attempt to voluntarily dissolve the Foundation.

A key ruling was on statute of limitations, specifically, Respondents argued that the transactions at issue occurred more than six years ago.  They also argued that inquiry into any of the transactions occurring more than three years before the petition was filed is barred since the relief sought for those was primarily monetary.  Noting that movant on a motion to dismiss bears the initial burden of establishing untimeliness,  that burden then shifts to plaintiff to establish timeliness or an applicable tolling.  Here, Justice Scarpulla found that since the claims arose out of a fiduciary relationship, the limitations period is tolled until the fiduciary “opening repudiated his or her obligation or the relationship has been otherwise terminated.”   The court also applied the “continuing wrong doctrine“, noting that it applies in many types of cases, namely, breach of contract, breach of fiduciary duty and statutory violations.  The petition itself alleges continuing, pervasive failure to manage and operate in accordance with applicable rules and law.  That, coupled with the mixed relief sought — injunctive and monetary — led the court to apply the six-year statute of limitations, finding that the conduct at issue was not barred “as a matter of law” at this threshold stage of the case.

When wrongs occur over a substantial period of time — like those alleged here — a detailed pleading, demonstrating the continuity, relatedness and pervasiveness is essential to survive dismissal.  The petition here lays out in detailed fashion a continuous timeline.  Such careful pleading makes it very difficult for a defendant to overcome the “continuing wrong” doctrine.  It remains to be seen, however, after discovery and a likely motion for summary judgment, whether the alleged acts of misconduct are indeed “continuous”  and sufficient to overcome the statute of limitations defense.  The court here made it clear in denying the dismissal motion based on statute of limitations that the Respondents could not demonstrate untimeliness “at this pre-answer stage of the proceedings.”  Stay tuned for future developments!

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Tired of printing hundreds of thousands of documents and carrying numerous boxes of documents to court? The New York Commercial Division has heard your cry.  The New York Law Journal  reported that the Commercial Division courts are committed to utilizing technology to help make litigation efficient and more user friendly. The Commercial Division hopes to utilize innovative and advanced technology to efficiently adjudicate, among others, complex commercial matters. The benefits are bountiful as they will be valuable to lawyers, judges, and jurors.

In October, innovative technology made its debut in Justice Saliann Scarpulla’s courtroom in the New York County Commercial Division. In addition to Justice Scarpulla’s Part Rules, which require all cases be electronically filed and all documents text-searchable, Justice Scarpulla’s courtroom now contains an “86-inch screen to display documents, a podium with a document viewer and a USB port and small screens for attorneys and the judge.”   The new 86-inch screen permits attorneys to highlight and mark up documents. It also allows attorneys to scan documents while at the podium during trial, which helps to avoid unnecessary emergencies and courtroom delays.  Additionally, in an effort to protect client confidentiality, the courtroom contains a separate USB port for attorneys to use if their documents are highly sensitive so that they cannot be accessed through the court’s Wi-Fi. This new technology also permits attorneys to attend conferences via Skype, thus conserving time and expense.

In addition to the 86-inch display screen, the jury box in the courtroom was expanded and is now wheelchair accessible and offers technological assistance to jurors who are hearing or vision impaired. Similarly, jurors will no longer be inundated with reams of documents, as this new technology permits attorneys to provide jurors with a flash drive to access and review the documents in a more efficient matter.  In that regard, Justice Scarpulla stated that “we can promise a juror that they’re not going to be here for six months looking through documents.”  All of these technological improvements will undoubtedly have a positive effect on the willingness of people to serve as jurors and significantly impact efficiency in the courtroom.

“We think it’s important to have the right technology to give the business community in New York the sense that we could compete with the best courts in the world,” Justice Scarpulla opined.  Justice Scarpulla’s courtroom is the first, of what will hopefully be many New York courtrooms, to utilize this innovative technology that will make New York courts a much more desirable venue to handle complex commercial disputes.

The Commercial Division has initiated other changes that reflect its efforts to increase efficiency through technology.  For example, the Commercial Division promulgated Rule 11-e(f), which went into effect on October 1, 2018, encouraging parties to “use the most efficient means to review documents, including electronically stored information.” This new Rule, which addresses the use of technology-assisted review in the discovery process was discussed at length in Kathryn Cole’s blog, titled Important Update for Those Who Practice in the Commercial Division of the NYS Supreme Courts.

As technology pervades the legal profession, it is crucial that practitioners stay current with the changing technological landscape moving forward. Make sure you stay up-to-date with judge’s part rules and changes in the Commercial Division that we are certain to see in the future.

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What consequences might an attorney face if she allows her client to deliberately disregard a court order? A recent decision by Justice Sherwood held that civil contempt is not an appropriate sanction for such complicity so long as the attorney herself did not engage in conduct that violated a court order.

In A&F Hamilton Heights Cluster, Inc. v Urban Green Mgt., Inc. (653038/2014), an action seeking damages for alleged mismanagement and to determine ownership and control of a partnership, Justice Kornreich, prior to her retirement, appointed a receiver and managing agent for the partnership’s five rental properties in West Harlem. Justice Kornreich ordered that the partners and their agents cease collection of partnership receivables and turn over all partnership money to the receiver. Justice Sherwood took over the case in July 2017.

Prior to appointment of the receiver, an interrelated group of entities and their affiliates had managed the properties—referred to here as “Partner A” and “Partner B.” Partner A brought a motion seeking imposition of fines and imprisonment for civil and criminal contempt arising from Partner B’s, Partner B’s attorneys’ (Tendy Law, “Tendy”), and the property management agent retained by Partner B (“Managing Agent”)’s, failure to comply with the court’s orders concerning cessation of partnership receivables and turnover of money to the receiver. The court stated the relevant standard for civil contempt as follows:

To establish civil contempt based on an alleged violation of a court order, the movant must establish, by clear and convincing evidence, that a lawful order of the court expressing an unequivocal mandate was in effect, and that the order was disobeyed to a reasonable certainty (see In re Department of Envt’l. Protection of City of N. Y. v Dep’t of Envt’l. Conservation of State of NY, 70 NY2d 233 [1987]; In re McCormick v. Axelrod, 59 NY2d 574, amended 60 N.Y.2d 652 [1983]; Vujovic v Vujovic, 16 AD3d 490 [2d Dep’t 2005]). The party to be held in contempt must be shown to have had knowledge of the order, and the disobedience must have prejudiced the rights of another party (see McCain v Dinkins, 84 NY2d 216 [1994]; In re McCor11ack, 59 NY2d 574; Garcia v Great Atl. & Pac. Tea Co., 231 A.D.2d 401 [1st Dep’t 1996]).

In a decision dated November 2, 2018, the court granted the motion. The court found that Partner B and the Managing Agent had “engaged in a pattern of conduct contrary to the direction of the court,” including continuing to collect rents, withholding funds in the partnership account, paying itself fees using partnership funds, and eventually transferring the partnership account’s balance to Partner B. Because these actions comprised a longstanding, repeated pattern of conduct, the court rejected Partner B’s and the Managing Agent’s defense that the transactions were “complex” and that payments had been made “in error.”

As for Tendy, the court found it “complicit” in Partner B and Managing Agent’s disregard of the court’s orders concerning cessation of partnership receivables and turnover of money. In particular, Tendy had “feigned a need for guidance” from the court and sought permission from the court to allow Managing Agent to return funds to Partner B. Tendy also misrepresented to the court the amount remaining in the partnership’s account. In light of the receiver’s multiple complaints concerning Partner B’s and Managing Agent’s disregard of the court’s orders, the court found that Tendy had, at best, “engaged in studied indifference to the contempts of their client and its agent.” However, notwithstanding such complicity, the court declined to hold Tendy in contempt, because Tendy had not violated any court order.

The court’s order raises questions concerning an attorney’s obligations when its client refuses to comply with a court order. Though Tendy avoided liability by failing to take an active role in withholding funds from the receiver, its indifference to its client’s misconduct did not escape the court’s approbation. Counsel finding themselves in such circumstances would thus be wise to tread carefully.

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As litigators in the Commercial Division, everyone knows that discovery can be particularly burdensome and time consuming.  This is especially true when you have clients that are very protective of their information.  The Commercial Division already has anticipated this by offering attorneys a model confidentiality agreement, which in some cases can be further negotiated by the parties for their additional protection.

In Callsome Solutions Inc. v. Google Inc., the parties, as Google would come to regret, included an Attorneys’ Eyes Only (“AEO”) provision in their confidentiality agreement.  Manhattan Commercial Division Justice Andrea Masley scolded and sanctioned Google for its AEO designation of hundreds of documents and thousands of lines of deposition testimony.  The Court stated that the “AEO designation was reserved for truly secret documents” and that it should be used “as sparingly as possible.”  This is because “improper designations, not only delay, but also impact. . . the communications between [client] and its attorney.”   Therefore, in designating documents AEO, litigators must take careful consideration to limit the documents with that designation and make sure those documents are only designated in good faith.

In Callsome, the parties entered into stipulated confidentiality agreement that called for two tiers of confidentiality: (1) confidential; and (2) highly confidential – attorneys’ eyes only.   The latter designation was designed to protect confidential information that is “extremely sensitive.”  After Google designated hundreds of documents and thousands of lines of deposition testimony, the plaintiff requested that Google de-designate groups of documents and testimony, Google then engaged in a “slow trickle” of de-designation.

In issuing sanctions against Google, it was not just Google’s over-designations that irritated the court, it was also the “slow trickle” of corrections.  Specifically, the Court found that this “trickle” did not “rectify the initial improper designations.”  Further, Google even attempted to use the corrections as a negotiation tactic within the litigation, attempting to extract concessions from the plaintiff.  The Court found that “[n]o public policy is served by crediting Google’s purported offer to compromise. . .” because “AEO designations are not negotiable.”

A party cannot over designate documents then hold the improperly designated documents hostage until the adversary surrenders.  Such conduct will not be countenanced by this court.

The Court held that “Google’s conduct flouts widely accepted rules of civility embedded in New York litigation and in particular the Commercial Division,” and that it “effectively prevented the expeditious resolution of this litigation.”  The Court further held that Google engaged in frivolous conduct warranting sanctions under 22 NYCRR Section 130-1.1.

The first takeaway here is that confidential designations of any kind, particularly AEO designations should be made in good faith.  Second is that after designating documents AEO, when faced with a request to de-designate, you should ensure that you do not delay the litigation by refusing to do so or attempt to use your designations as a negotiating tactic.  Make sure you have a good faith basis for your designation, and stick to your guns.

 

However, if you believe that a document does not warrant such designation, but your client is still skittish, you can, as the Court suggested, amend (or draft) the confidentiality agreement to guarantee your client further protections such as providing for financial penalties in the event of a breach.  Over designation only delays litigation and shifts the burden to your opponent, which is never appropriate.

You’ve just represented a client in an arbitration proceeding…and lost. The client wants to “appeal” the decision. Now what? The only remedy your client has is to request that the court vacate or modify the arbitration award. However, this is no small task.

A recent decision by New York County Commercial Division Justice Charles E. Ramos (NSB Advisors, LLC v C.L. King & Assoc., Inc., 2018 NY Slip Op 32533 [Sup. Ct., NY County 2018]) serves as a reminder that a party seeking to vacate an arbitration award faces a heavy burden. Arbitration awards are almost always upheld by New York State courts because the standard of review is so high. An arbitration award must be upheld when the arbitrator offers “even a barely colorable justification for the outcome reached.”

The burden of proof lies with the party that is challenging the arbitration award to show the court why the award should be vacated. Pursuant to CPLR §7511, an application to vacate or modify an arbitration award may be made by a party within 90 days after the decision is rendered.

The only two instances when an arbitration award may be vacated include (1) instances involving fraud, corruption or misconduct of the arbitrators or (2) where an arbitration award exhibits “manifest disregard of the law”. To vacate an arbitration award on the latter ground, a court must find that the arbitration panel knew of a governing law yet refused to apply it or ignored it, and that the governing law was well defined, explicit and clearly applicable.

Examples of what could constitute a “manifest disregard of the law” include “an explicit rejection of controlling precedent” and “a decision that is logically impossible”. However, it is important to remember that the arbitration panel is entitled to make its own factual and legal findings, just like a judge or a jury. Alleging mere factual error by the arbitrator or misapplication of complex legal principals will not suffice.

A party seeking to vacate an arbitration award is best served by making every effort to obtain the reasoning behind the arbitration award. However, this must be requested prior the rendering of the award by the arbitrator. Moreover, arbitrators are not automatically required to explain their decision and Article 75 of the CPLR does not impose this requirement. Unfortunately, a failure to provide an explanation for the award is not grounds for vacating it.

However, in some instances, the parties can request that the arbitration panel issue an “explained decision.” Pursuant to FINRA Rule 13904(f), an arbitration panel may contain a rationale for the underlying award if the parties jointly request what is known as “an explained decision”. However, if only one party seeks this relief, the arbitrator is not required to honor the request. In this case, the arbitration was governed by FINRA, but the parties failed to request an explained decision. Justice Ramos reasoned that without an explanation behind the award, it would be next to impossible to determine whether the award was, in fact, a “manifest disregard of the law”.

Finally, a party seeking to vacate an arbitration award must provide the entire arbitration record to the court. Justice Ramos criticized Respondent in this case for not providing the court with a complete record of the arbitration materials despite acknowledging that the complete record included over 16,000 pages of transcripts and 800 exhibits. He reasoned that the court could not possibly have the opportunity to conclude that the arbitration panel “manifestly disregarded the law” with just “a mere snapshot of what occurred.”

Takeaway: Vacating an arbitration award is an uphill battle and attorneys seeking this relief from the court should avail their client to every procedural advantage, including seeking an explained decision from the arbitration panel and submitting the entire record for the court’s review.

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