Justice O. Peter Sherwood

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]).

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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Over the past year or so, we have made a point of highlighting in the “Check the Rules” series on this blog periodic updates to the individual practice rules of certain Commercial Division Justices, including Justice Eileen Bransten in New York County (twice, in fact), Justices Marguerite A. Grays and Leonard Livote in Queens County, and Justice Sylvia G. Ash in Kings County.

Continuing with this theme of local-rule vigilance, Commercial Division practitioners should take note some recent changes to the individual practice rules of Manhattan Commercial Division Justice O. Peter Sherwood.

Justice Sherwood’s Practices for Part 49, which were revised as of this month, provide some notable additions (and omissions) from his prior rules, which dated back to May 2014 before most of the Commercial Division Advisory Council’s new-rule proposals and amendments were adopted and implemented.

Be Prepared, Be Authorized. Justice Sherwood opens his practice rules with an express and emphatic reminder to attorneys practicing in his Part of the requirements under Rule 1 of the Commercial Division Rules that “counsel . . . must be fully familiar with the case . . . and fully authorized to enter into agreements, both substantive and procedural, on behalf of their clients.” In other words, appearing in Part 49 is no “cattle-call.” Attorneys should have factual command of their cases, as well as the requisite authority to bind their clients.

Separate and Describe Your Exhibits. Justice Sherwood now requires attorneys practicing in his Part who wish to annex exhibits to their correspondence or motion papers to separately e-file their exhibits and designate them with a “descriptive title.” In other words, a simple designation of “Exhibit A” won’t cut it. Attorneys must provide a description (e.g. “Operating Agreement, dated as of September 20, 2018”) so that adversaries and court personnel viewing the docket or other notice of filing can immediately understand what has been filed.

Get Advance Permission to Adjourn Appearances. Justice Sherwood now requires that requests for adjournment be submitted a full two business days in advance of the scheduled appearance. Justice Sherwood conferences his cases on Tuesdays, so that means attorneys must get their requests for adjournment in by no later than Thursday of the prior week.

Check Your E-Mail. Justice Sherwood’s new rules provide that the court may choose to communicate with counsel via e-mail “regarding scheduling matters or to make certain inquiries.” Note, however, that this line of communication only goes one way. It does not mean that attorneys practicing in Part 49 may “initiate communication with the court via email” or “use e-mail to make arguments.”

Complete Party Discovery Before Bothering Non-Parties. Justice Sherwood “strongly encourages” attorneys practicing in his Part to “attempt to confine their requests to parties to the action and resort to third-party disclosure only when it reasonably appears that the information being sought is otherwise unavailable.” Justice Sherwood also requires that all non-party subpoenas be “simultaneously served” on all parties, and that all documents and information produced in response be exchanged among all parties within five days of receipt.

Follow Instructions When Seeking to File Under Seal. Justice Sherwood’s updated practice rules provide specific instructions concerning the filing of documents under seal:

  • Applications to file under seal must be made by Order to Show Cause, which must be preceded by a meet-and-confer regarding the documents proposed for seal.
  • Motions will be considered in light of the limitations imposed under applicable case law, and the movant must propose redactions “as opposed to wholesale sealing.”
  • Any document proposed for seal must be filed in its original, un-redacted form as an exhibit, with the proposed redacted version filed “as a subset of that exhibit.”
  • All motions must be accompanied by a joint index of the documents proposed for seal, including the basis for sealing and any objection thereto.

Finally, as for notable omissions, Justice Sherwood appears to have dispensed with his former requirement – which, as far as I’m aware, was entirely unique to his Part – that  motion submissions also be provided to the court “in .rtf format on a computer disk.”

**Nota Bene** – Attention Kings County Commercial Division practitioners: How much is your case worth? The general practice rules for the Kings County Commercial Division also were updated this month to double the monetary threshold from $75,000 to $150,000.

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I made two observations coming out of Grand Central Station during my morning commute last week. First, the city really stinks after a string of oppressively hot and humid summer days. Second, there appears to be a temporary taxi stand, perhaps occasioned by the ongoing construction of the new One Vanderbilt building, just outside the south entrance of Grand Central Terminal on 42nd Street under the Park Avenue Viaduct.

This latter observation was rather rudely forced upon me when the precarious position of one such cab nearly caused me to traverse its front-end Bo and Luke Duke style. The site of the mangled NYC taxi medallion fastened to the cab’s dented hood was a striking metaphor for the current state of the taxi industry given the increasing popularity of ride-sharing services like Uber and Lyft.

The plight of the cabbie was on display in a recent decision from the Honorable O. Peter Sherwood of the Manhattan Commercial Division in a case called Capital One Equip. v Deus, in which the cabbie-defendants, after defaulting on a promissory note representing more than $400,000 borrowed to purchase a taxi medallion, attempted to rest on the traditional contractual defense of impracticability or impossibility of performance in a summary proceeding under CPLR 3213.

The essence of Defendants’ claim was that “due to the economic change in the medallion and taxi industry of New York by ride sharing applications like Uber and Lyft, there is an impossible hurdle for the defendants to overcome, making the repayment of the loan impossible.”

Readers may recall from their law-school hornbook days that the impossibility defense contemplates truly unexpected circumstances. As the plaintiff-lender in the Deus case put it, “the impossibility defense . . . only excuses a party’s contractual performance where there has been destruction or obstruction by God, a superior force, or by law.”

The cabbies, however, likened their situation to the kind of critical condition contemplated by the traditional defense, describing the industry as being “on life support with little to no chance for a reversal of its current dire situation.”

“At the heart of the problems facing the NYC Taxi industry,” cried the cabbies, “is the emergence of companies such as Uber and Lyft which are exempt from the regulatory framework burdening the medallion owners.” As a result, “ridership in New York City yellow taxi cabs has dropped almost 30%” and “NYC taxi medallions, which were selling for in excess of $1,000,000 as recently as 2013, have plummeted in market value” – all of which has led to a “collapse of unprecedented proportions.”

A creative argument to be sure, but the court wasn’t buying it. Citing New York case law going back to the late 1960’s, the court ultimately held for the plaintiff-lender, finding that “performance of a contract is not excused where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship. Economic hardship alone cannot excuse performance; the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”

Coming on the heels of several driver suicides in recent months, the Deus decision is just more bad news for the NYC taxi industry. While market forces created by the advent of ride-sharing services may not be “superior” enough to satisfy the impossibility defense, one thing’s for sure: it’s a difficult time to be a taxi driver in New York City.

**UPDATE**  Perhaps the cabbies are seeing a little light after all. Around the time this post was published last week, news broke that the New York City Council had tugged the reigns of the Uber/Lyft ride-sharing industry by passing minimum-wage requirements for drivers, as well as a one-year freeze on the licensing of participating vehicles in the city. The first-of-their-kind bills, particularly the cap on e-hail cars, was driven in large part by increased problems related to city-street congestion. Today, Mayor de Blasio signed the bills into law.