Source: http://nycourts.gov/courts/comdiv/lawreport_Vol10No2.shtml
Timestamp: 2019-04-24 02:52:33+00:00

Document:
The following members of the Section contributed to the preparation of summaries contained in this issue: Mark Berman, David L. Carey, Lisa A. Coppola, Megan P. Davis, Deborah Deitsch-Perez, Ian M. Goldrich, Matthew R. Maron, Paul G. Marquez, Ira B. Matetsky, James E. Pfeffer, John Siegal, Mark I. Silberblatt, Colleen M. Tarpey, and Victoria Zaydman, Esqs.
Gratitude is also extended to the Appellate Practice Committee of the Section and to its Co-Chairs, Preeta D. Bansal and David H. Tennant, Esqs..
Arbitration; employment agreement; FAA; interstate commerce; punitive damages; validity. Procedure; sealing. Motion to compel arbitration of employment dispute.
The court determined that a broad arbitration clause in the employment agreement here was unambiguous and required arbitration. Plaintiff argued that punitive damages were the principal damages being sought. The AAA Commercial Arbitration Rules say nothing about the availability of such damages and New York law does not permit arbitrators to award them. However, the agreement involved commerce since plaintiff’s job concerned commerce and he had been hired away from a job out-of-state. Under the FAA, the court held, punitive damages would be available in arbitration. Plaintiff further contended that the agreement was not valid because of fraud, duress and adhesion, but the court ruled that, rhetoric aside, plaintiff had not alleged specific conduct that supported his assertions and the cases he cited were distinguishable. Finally, a sealing order had properly been entered given the embarrassing allegations in the complaint and the limited public interest therein. Tong v. S.A.C. Capital Management, LLC, Index No. 100509/2007, 5/17/07 (Fried, J.).
Arbitration; expired employment agreement; continuation in practice; renewal; requirement for writing; unsigned shareholders agreement; part performance. Defendants moved to compel arbitration.
Attorney and client; duty to keep confidences (DR 4-101); fiduciary duty; claim for damages by employing law firm. Conversion and replevin; taking of law firm documents; demand for return. Procedure; affidavit by counsel without personal knowledge.
Action by law firm against former associate alleging improper and unethical revelation of client confidences and secrets. Plaintiff moved for a preliminary injunction and defendant cross-moved to dismiss. The former was resolved. As to the latter, the court declined to recognize that an at-will associate could be sued for damages for breach of fiduciary duty based on a violation of DR 4-101, or alleged disclosure of confidential information. A violation of a disciplinary rule, without more, does not give rise to a cause of action for the client, and plaintiff’s posture made his claim even less compelling. Further, no fiduciary duties exist between employer and an at-will employee. Plaintiff urged an exception to this rule, relying on ethical obligations and an employee’s duty of loyalty. The latter, however, the court stated, has been limited to cases of unfair competition. No allegation of disloyalty as supported by the cases had been made against defendant here. Therefore, the fiduciary duty claim failed. The court declined to dismiss conversion and replevin claims as they gave rise to factual questions. The court rejected defendant’s assertion that as an employee of the firm defendant had been entitled to access and remove partnership materials and information. A taking without right constitutes conversion and no demand is required for liability, as defendant suggested. In any case, even if defendant had had a right to possess documents initially, a cause of action for replevin and conversion would arise when the owner demands the return, and a letter by a partner to defendant requesting a meeting to discuss return of firm documents and defendant’s refusal to meet would satisfy this requirement. An affidavit stating that defendant had returned all documents had been made by his attorney without personal knowledge and was thus entitled to no weight. Dismissal in part. Sullivan & Cromwell LLP v. Charney, Index No. 600333/2007, 4/30/07 (Fried, J.). [See summary of related case below].
Attorney and client; attorney client privilege; CPLR §§ 3101(b), (d); 4503(a)(1); disclosure.
Defendants moved for an order compelling production of certain documents withheld by plaintiff on the grounds of privilege. Plaintiff claimed that the documents, notes taken during business meetings, had been prepared in anticipation of litigation with defendants and thus were protected under CPLR § 3101(d)(2) and attorney-client privilege. Plaintiff stated that at the time in question it had been represented by counsel who had provided advice as to the merits of a possible lawsuit based on the same underlying facts and circumstances involved in the case here. Plaintiff asserted that all notes had been prepared on the advice of counsel for purposes of communicating with counsel in order to obtain legal advice with regard to the anticipated litigation against defendants. Plaintiff claimed that it had preserved the confidentiality of the notes. Defendants maintained that the documents had been prepared in the course of non-privileged meetings during the ordinary course of business and emphasized that the notes had never been given to an attorney. Defendants cited Town of Babylon in support of their position that the significant lapse of time between the preparation of the notes and the filing of the complaint in this case created a presumption that the materials had not been prepared in anticipation of litigation. The court disagreed with defendant’s reading of Town of Babylon and stated that both the content and the purpose of the notes were relevant, not simply the lapse of time, although the time lapse could be considered by the court as evidence that the documents had not been prepared in anticipation of litigation. After in camera inspection, the court determined that the notes appeared merely to be minutes of discussions at meetings conducted in the ordinary course of business five or six years prior and did not appear to have been prepared in anticipation of this litigation. The court found that the notes were relevant to issues in the instant litigation and were thus discoverable. The court next ruled that plaintiff had failed to meet its burden of establishing that the notes had been prepared for the purpose of obtaining legal advice. The court found significant the fact that the notes had never been turned over to an attorney. Plaintiff’s use of the notes to communicate the facts of the present case could not convert them into privileged documents. Further, the notes did not constitute confidential communications between an attorney and client for the purpose of obtaining legal advice. Bischoff v. Boar’s Head Provisions Co., Index No. 604265/2005, 5/8/07 (Lowe, J.).
Attorney and client; duty to keep confidences (DR 4-101). Procedure; pleading irrelevant matter and in non-succinct manner.
Motion by defendant firm to dismiss on the ground that the complaint improperly disclosed confidences of the firm and its clients in violation of plaintiff’s duties as an attorney (DR 4-101) and his contractual obligations to defendant. The complaint identified a number of the firm’s clients, some deals involving them, and some of the firm’s attorneys who had worked thereon, and also disclosed information about firm dealings. The court stated that privileged matters are those where a confidential communication was made to the attorney by the client for the purpose of obtaining legal advice or services. Fee arrangements, for instance, are not so protected. The court held that the information in the complaint here was not privileged. DR 4-101 forbids more than just disclosure of privileged matters, the court said; it covers anything the client has requested be kept inviolate or disclosure of which would be embarrassing or detrimental. But defendant had cited no authority to support the assertion that, absent a specific client request, “client secrets” would embrace the names of clients, the names of attorneys who handled particular matters, attorney reviews, etc. Some of the information in question, the court noted, was to be found on defendant’s website or in the press. However, the court found that some allegations in the complaint were irrelevant, were not stated concisely (CPLR 3014), or could potentially implicate DR 4-101. Complaint stricken. Plaintiff given leave to replead deleting material in accordance with the decision. Charney v. Sullivan & Cromwell LLP, Index No. 100625/2007, 4/30/07 (Fried, J.).
BCL §§ 1104 (a), 1113, 1117; dissolution; transfer of assets; contracts; receivership.
Commercial real property; lease; purchase option; right of first refusal; late rental payments; non-waiver clause; specific performance; equitable relief. Yellowstone injunction.
Contracts; condition to performance; implied covenant of good faith. Misrepresentation; relation to contract. Mechanic’s liens; foreclosure; burden on lienor.
Contracts; construction; Lien Law § 37; pre-judgment interest; undertaking; res judicata.
Contracts; employment; restrictive covenants; confidential business information; fiduciary duties of independent contractors; unfair competition. Procedure; preliminary injunction; likelihood of success; irreparability of harm despite two months’ delay; balance of equities.
Application by real estate services company for a preliminary injunction against former employees and their business. Hearing held. One defendant had worked as sales agent for plaintiff. Plaintiff had maintained an office at a large condo building, had had management contracts with many units there, and had executed many leases there. At issue was whether defendant had to divest himself of contact information relating to clients with whom he had worked while at plaintiff and whether he should be forbidden to solicit these clients or do any work on behalf of them. Defendant had taken department customer lists, financial information, availability lists and other information when he left plaintiff, although a covenant in his employment agreement with plaintiff required him to return same and not disclose it for two years after his employment ended. The court held that plaintiff had shown a likelihood of success that this defendant had violated the agreement. Plaintiff contended that the information it had compiled in its availability list and contact list was a trade secret misappropriated by defendants. The court found that contact information, availability information, and financial data were not publicly available. The names of unit owners were available, but much time and effort would have been required to recreate the other information. Thus, plaintiff was likely to prevail on its contention that the information taken was not readily ascertainable, as well as that defendants had not developed the contact list themselves. Leo Silfen was distinguishable because defendant here had not obtained customer names from casual memory or available lists, information here was not well-known to competitors, and defendant had copied confidential information. The court further determined that it was likely that plaintiff would succeed in its contention that the two individual defendants owed fiduciary duties to plaintiff that they had violated even though they were independent contractors. Plaintiff had also shown a likelihood of success as to its unfair competition claim. Injunctive relief could be awarded against the individual co-defendant even though he had left plaintiff and joined a business other than the corporate defendant for some months. Irreparable harm had been shown, though plaintiff had not acted for two months. The equities favored plaintiff. Injunction to be granted against solicitation or serving of plaintiff’s clients, except those with whom defendants had already entered into contracts (to avoid harming the clients), but defendants would be barred from doing any additional work for these persons. Information to be returned and deleted from computers. D.S.M. Realty Corp. v. Goloso, Index No. 604407/2006, 4/16/07 (Fried, J.).
Contracts; employment; restrictive covenants; preliminary injunction; irreparable harm.
Contracts; employment; restrictive covenants; unfair competition.
Contracts; express warranties; advertisement; implied warranties; UCC 2-315. Fraud; relation to contract.
Contracts; interpretation; ambiguity; merger clause; order of precedence clause.
Contracts; interpretation; breach; design; assignment; liability; statute of limitations. Damages; consequential; incidental; limited remedy (UCC 2-719 (1) (a)); failure of remedy (UCC 2-719 (2)).
Contracts; interpretation; license agreement, exclusivity; ambiguity.
Contracts; stock purchase agreements; damages; unclean hands; interpretation; ambiguity; extrinsic evidence. Procedure; pleading; tortious interference; scienter; reliance; fraudulent inducement. Due diligence. Merger clause.
Corporation; ownership. Preliminary injunction; shareholder’s meeting. Judicial estoppel. Equitable relief; clean hands.
Fraudulent misrepresentation; class of persons defrauded; falsity. Negligent misrepresentation; special relationship. Fiduciary duty. Defenses; in pari delicto and unclean hands. Damages. Motions for summary judgment and other relief by defendants.
Plaintiff had sold her seat on the New York Stock Exchange. A month later the Exchange had announced that it would merge with Archipelago Holdings LLC to create a for-profit, publicly traded entity. Plaintiff alleged that the NYSE CEO had held a meeting with working members and stated that the NYSE would not be going public. Plaintiff asserted claims for fraudulent and negligent misrepresentation and breach of fiduciary duty. Plaintiff had not attended this meeting, but her husband had. The court rejected plaintiff’s argument that the fraudulent misrepresentation claim should survive on the authority of Restatement (2d) of Torts § 533, but did uphold it under Section 531 regarding liability to a class of persons and Ultramares. Plaintiff had been a seatholder at the time of the meeting and a reasonable jury could conclude that defendant had intended that seatholders would reasonably rely. The facts regarding falsity were in dispute and the court rejected defendants’ contention that no reasonable jury could conclude that the NYSE had had plans to go public as of the date of the meeting. On negligent misrepresentation, there had been no privity here and defendant had not known that the husband was acting on plaintiff’s behalf. Therefore, plaintiff could not show a special relationship and the claim had to be dismissed. Defendants argued that the fiduciary duty claim must fail because the purpose of the meeting had not been action by the CEO in the scope of his relationship with seatholders. On this there were questions of fact, the court concluded. Defendant’s acts were arguably in violation of a confidentiality agreement and Lindner and so not shielded; this presented a jury question. Defendants relied upon in pari delicto and unclean hands. As an equitable defense, the latter was unavailable in this action for damages. As to the former, defendants argued that plaintiff had attempted to trade using insider information. The court postponed a ruling on this until further briefing. The fiduciary duty claim against the NYSE was dismissed since it had had no such duty to the seatholders. On damages, the court found Lama applicable and ruled that plaintiff’s proposed measure of damages was too speculative. Plaintiff’s projection of a reasonable time after notice of the fraud was too long. Plaintiff challenged the market price as an accurate reflection of value because the market was small and insufficient. The court ruled that the jury would decide this, as well as what was a reasonable period, although it would not exceed 60 days after the announcement. Prior to the trial date, plaintiff’s counsel had made a statement to the press and showed a confidential document to the press. The court adjourned the trial for nine months to avoid any prejudicial impact. The court concluded that no further action was required. Motion granted in part. Wey v. New York Stock Exchange, Inc., Index No. 602510/2005, 4/10/07 (Ramos, J.).
Insurance; excess liability policies; follow form clause; annualized aggregate limits of liability; interpretation.
Declaratory judgment action regarding excess umbrella liability coverage and whether the aggregate limits of liability applied to the entire three-year policy term or separately on an annualized basis. Some of the policies were subscription form, quota share policies and all were follow form policies. Plaintiff argued in favor of annualized aggregate limits, contending that, though the excess policies did not contain the word “annual,” the language of the underlying policies, to which the excess ones followed form, explicitly annualized aggregate limits. The court noted that the non-contradictory language of the underlying policy would control the excess policy containing a follow form clause. The court pointed out that the underlying policies were incorporated by the follow form clause into the excess policies subject to the declarations in the latter. The declarations pages did not define “in the aggregate,” “limit of liability,” or “occurrence” and “annual” did not appear therein. In contrast with this silence, the underlying policies stated that the aggregate limit of liability would be the insured’s total loss in 12 months of the policy period. This condition of the underlying policies, the court ruled, would be incorporated into the excess policies by the follow form clause. The court declined to consider extrinsic evidence in view of the lack of ambiguity in the excess and underlying policies. Principles of contract interpretation, rather than of reinsurance law, applied here. Defendants argued that if plaintiff’s interpretation were adopted, the amount of their resulting liability would differ from the amount stated in signature pages, thereby creating a contradictory term. The court rejected this argument because the amount on the signature pages did not define how the limits were to be applied. Partial summary judgment for plaintiff. Union Carbide Corp. v. Affiliated FM Ins. Co., Index No. 600804/2004, 4/12/07 (Ramos, J.).
Interpleader action by insurer to resolve competing claims to proceeds of a policy issued on behalf of Tyco Intl., Ltd. and its officers and directors. Plaintiff had paid out some $20 million of the $25 million policy limit for defense costs. Plaintiff wished to pay out the balance or pay it into court and be discharged. A dispute remained as to coverage for one defendant, a former Tyco director, who had pled guilty to a felony in connection with his receipt of a large finder’s fee. Various civil actions were pending brought by or on behalf of Tyco shareholders. Tyco and this defendant disputed right to $3.3 million in remaining proceeds. The defendant argued that he should recover his past defense costs ($1.8 million) and subsequent defense costs before Tyco could be paid. Tyco argued that fraud and personal profit exclusions barred coverage for defendant. However, the court concluded, most of the allegations against defendant were legally and factually distinct from defendant’s receipt of the fee, having to do with misrepresentations regarding Tyco’s finances, improper accounting and bonuses and loans to defendants other than this one. The court exercised its equitable power to apportion proceeds. Payment to the defendant would reflect the intent of the policy that officers and directors would have priority over Tyco, which also could have resort to excess coverage. The general principle of “first in time, first in right” would not prevent this apportionment. Federal Insurance Co. v. Tyco International, Ltd., Index No. 601416/2004, 4/23/07 (Freedman, J.).
Insurance; “insured versus insured” exclusion; apportionment; sublimit for equitable relief. Fiduciary duty; breach; special relationship; insurer and insured. Covenant of good faith and fair dealing; relation to contract. Settlement offer; CPLR 4547.
Insurance coverage dispute arising out of a lawsuit commenced against Princeton that alleged misuse of foundation monies. The Robertson Foundation had been established in 1961 to fund and support the graduate program of the Woodrow Wilson School of Public and International Affairs. The Foundation, the endowment of which had increased to $600 million over the years, was governed by trustees, some family-appointed and others university-appointed. The former and some family members commenced an action in 2002 alleging that Princeton and the other trustees had breached fiduciary duties, abused their majority interest, and misappropriated funds by diverting them from the Foundation’s mission to Princeton’s general purposes. Here, defendant National Union had issued a policy protecting Princeton which provided an aggregate limit for coverages of $15 million and included defense costs. Defendants argued that the action was not covered by the policy because of an “insured versus insured” exclusion and that, if some claims were covered, coverage was limited to $5 million based on a sublimit for equitable relief. Defendants contended that the exclusion applied because the action was one brought by the Foundation, a “subsidiary” of the covered organization (the University), against the university-appointed trustees. The court noted that exclusions are strictly construed. The purpose of the exclusion is to prevent collusive lawsuits. Although there was no indication of collusion here, the court found, the exclusion applied because there were claims brought on behalf of the organization, which included subsidiaries such as the Foundation, against individual insureds. A derivative claim exception did not apply because the action was brought with the assistance and active participation of individual insureds, the family-appointed trustees. But, a narrow construction being required, the exclusion, the court held, applied only to the claims explicitly brought on behalf of the Foundation against individual insureds (two of 12 claims). The question then arose whether National was obliged to furnish all defense costs subject to recoupment of the uncovered claims or whether apportionment before resolution of the case was appropriate. The court concluded that the insurer might be able to allocate as the derivative claims against the university-appointed trustees were excluded, although apportionment was unlikely to affect the insurer’s ultimate obligation, Princeton’s costs having far exceeded the limit. The insurer also sought to limit coverage to the sublimit because the underlying claims were equitable, contending that the whole underlying action was equitable, while Princeton urged that the limit applied only to claims seeking equitable relief. The court stated that the distinction in question generally turns on the type of relief sought. The sublimit would not apply to claims seeking monetary damages or the return of funds. The New Jersey Chancery Court hears legal claims ancillary to equitable ones. The endorsement in question contemplated apportionment so, the court ruled, the insurer could allocate if apportionment was feasible. Princeton asserted a claim for breach of fiduciary duty, but the court held that nothing here took the case out of the ordinary relationship between insurer and insured, a non-fiduciary one. Princeton asserted a claim for breach of the implied covenant of good faith and fair dealing, but the essence of the claim was the breach of contract claim. An exhibit reciting a settlement offer by defendants was not relevant and was likely inadmissible (CPLR 4547) and thus was ordered stricken. A claim under the New Jersey Consumer Fraud Act was held deficient. Trustees of Princeton University v. National Union Fire Ins. Co., Index No. 650202/2006, 4/10/07 (Freedman, J.).
Limited liability company; Limited Liability Company Law; Section 610; member’s right to bring derivative action; common law right; evidence of LLC membership; standing; Section 408.
Partnerships; general partners; tax matters partners; fiduciary duty; participation in breach by corporate officer. Contracts; breach; liability of non-signatory officers; bad faith. Alter ego; piercing the corporate veil.
Procedure; comity; CPLR 5304; personal jurisdiction; long arm statue; post-judgment interest.
Plaintiff moved for an order recognizing and enforcing in New York a money judgment which had been entered against defendant in Korea. Plaintiff further requested that the order entering judgment be for the United States dollar equivalent as granted in the Korean judgment. Plaintiff contended that defendant had consistently opposed enforcement of the judgment. Defendant argued that the Korean court that had granted the judgment had had no personal jurisdiction over it. Defendant contended that the judgment should not be enforced in the United States because the bases for personal jurisdiction set forth in CPLR 5304 (a)(2) had not been satisfied. An order granting defendant’s motion to dismiss had been reversed by the Court of Appeals. The Court of Appeals had stated that lower courts might recognize other bases of jurisdiction, typically, the jurisdictional guidelines provided in CPLR 302, to determine whether a foreign court had had proper jurisdiction over a judgment debtor. The court had determined that personal jurisdiction existed even though New York has no tort of negligent performance of contract. Defendant maintained its contention that the Korean court had had no personal jurisdiction over it. The court ruled that it would follow the Court of Appeals’ determination and that defendant’s assertions regarding personal jurisdiction had been made too late and in the wrong court. The court stated that defendant had been properly served in the Korean action, had had the opportunity to contest the jurisdictional issue there, yet had not done so. Further, the court noted, defendant had failed to attempt to vacate the Korean judgment in that forum. Failure to enforce the judgment based on defendant’s belated assertions could encourage U.S. corporate defendants operating in foreign countries to default in those forums and then contest personal jurisdiction in New York. Such actions, the court stated, would undermine the principle of comity, and, by extension, the provisions of CPLR Art. 53, which were intended to streamline enforcement of foreign judgments in New York. The court further observed that such actions could also prejudice foreign plaintiffs, who might be forced to litigate the same action in two separate forums, thus causing delay and additional expense. The court granted plaintiff’s request that the Korean judgment be entered in the same amount in U.S. dollars as set forth in won in the Korean judgment. The court explained that the Korean won must be converted into U.S. dollars at the rate of exchange at the time the New York judgment was entered. Post-judgment interest would be added until the date of entry of judgment. Sung Hwan Co. Ltd. v. Rite Aid Corp., Index No. 112444/2001, 5/01/07 (Lowe, J.).
Procedure; injunction against pursuit of pending action abroad; comity; forum selection clause; judgment on the merits; bad faith commencement of foreign action; posting of bond; non-identical parties; irreparable harm.
At issue was plaintiff’s application for an injunction preventing defendants from pursuing an action filed by them in Korea after commencement of this case, in which this court had granted plaintiff’s motion for summary judgment as to liability under loan agreements for some $65 million. The Korean action sought a declaratory judgment of non-liability. The court had previously denied defendant’s request for a stay of this action in favor of the Korean matter because of lack of a good faith and credible explanation for defendant’s delay. Although comity militates against staying foreign proceedings generally, that can be done in some circumstance (Indosuez). Here, the court stated, a stay was appropriate as there was, as held previously, an enforceable forum selection clause and a forum non conveniens argument had been rejected. Forum selection clauses are increasingly important in international business transactions, the court noted, wherein parties are entitled to certainty. Failure to issue an injunction would nullify the clause. An anti-suit injunction would not violate principles of comity since comity is not implicated where a forum selection clause is involved, there being no possibility of treading on the legitimate prerogatives of the foreign jurisdiction. Further, there was a judgment on the merits, which was entitled to protection. Last, there was evidence of bad faith by defendants. The posting of a bond by defendants did not require a different outcome, nor did the presence of another defendant in the Korean case, a seemingly unnecessary party. Defendants argued that a showing of irreparable harm was required, but the court rejected this contention. DWHK Recovery Co. v. Daeha Company Ltd., Index No. 116222/2004, 4/25/07 (Lowe, J.).
Procedure; pleading; declaratory judgment claims; treatment as contract claims; notice of claims. Misrepresentation; pre-contract statements; disclaimers; merger clause; reliance; warranties in agreement; sophistication of investor and due diligence; relation to contract. Fraudulent inducement; CPLR 3016 (b); prediction; opinions. Damages; punitive; general public harm.
Action by private equity firm seeking to recover $4 million investment in mortgage banking concern on basis of alleged misrepresentations. Plaintiff asserted claims for declaratory relief, which the court deemed ordinary contract claims seeking indemnification for losses under an agreement to the extent plaintiff could prove that representations and warranties in the agreement regarding certain financial statements and regulatory compliance were false. The court found that the pleading provided defendants sufficient notice of claims against them. Defendants’ principal challenge was to the complaint’s reliance upon a pre-contractual confidential memo and oral statements regarding the financial condition of defendant company and regulatory compliance. The court agreed with defendants that disclaimers in the memo and a merger clause in the agreement barred reliance on pre-contract representations, though plaintiff could proceed as to warranties in the agreement. Plaintiff’s status as a sophisticated investor and extensive due diligence by it would not automatically bar plaintiff from relief as to misrepresentations in the warranties since the warranties would be rendered meaningless by such an interpretation. Claims for fraud and misrepresentation, the court stated, were superfluous or insufficient since an action should proceed in contract rather than tort where, as here, parties have negotiated an indemnity provision in regard to all losses from defendant’s fraud or misrepresentation. The damages plaintiff could obtain for the alleged fraud appeared to be the same as those obtainable through breach of contract. Fraudulent inducement claims failed (CPLR 3016(b)) since general allegations of lack of intent to perform a contract are insufficient, and statements of prediction or opinion are not actionable. A plea for punitive damages failed since this case did not involve egregious conduct directed at the general public. Inter-Atlantic Fund, LP v. Alvaro, Index No. 601611/2006, 4/13 /07 (Moskowitz, J.).
Procedure; pleading; RICO; common law fraud; GBL 349.
Action by automobile insurance carriers against certain companies, their principals, and their attorneys alleging involvement in a scheme of no-fault insurance fraud. Attorneys moved to dismiss RICO claims and claims of common law fraud, violation of GBL 349, etc. Plaintiffs alleged that the attorneys had furthered the scheme. The court stated that a RICO claim requires proof of participation in an enterprise and that participation must be in the operation or management of the enterprise, not just in its activities or affairs. Various cases have held that claims against attorneys fell short in this regard. The court ruled that the allegations here failed to plead with the required specificity connection between the defendants and the violations or any pattern and failed to allege facts showing participation as required. A conspiracy claim similarly failed. The court found that the common law fraud claim was deficient, lacking adequate particularity (CPLR 3016 (b)). The alleged misconduct, having been directed at insurance companies rather than consumers, did not state a claim under GBL 349. Motion to dismiss granted. Allstate Insurance Co. v. Buziashvili, Index No. 603776/2003, 5/4/07 (Freedman, J.).
Shareholder derivative actions; demand on board (BCL 626 (c); futility; particularity.
Shareholders derivative action against officers and the board of Bed, Bath & Beyond alleging violations of fiduciary duty, waste, etc. in connection with a stock option backdating scheme. The court granted a motion to dismiss because plaintiff had failed to make a demand or plead board futility with particularity (BCL 626 (c). Three directors were interested, but plaintiff failed to allege why the other seven were interested. Conclusory allegations are insufficient, and the mere presence of directors on committees does not provide particularization as to individual participation or alleged collusion with interested directors. Further, the complaint was silent on the directors’ alleged failure to keep informed, and the assertion of failure to exercise business judgment was conclusory, failing to allege with particularity that the transaction was so egregious on its face that it could not have been the product of sound business judgment. Wandel v. Eisenberg, Index No. 603665/2006, 5/3/07 (Ramos, J.).
Shareholder derivative actions; settlement; approval (BCL 626); factors; substantial benefit to corporation and shareholders.
Joint motion of the parties for court approval of a settlement of a derivative action against Citigroup’s Board of Directors. Twenty-nine shareholders had filed objections and a hearing was held. Plaintiff here asserted that the Board had breached its fiduciary duties, mismanaged the company and wasted assets by failing to implement adequate internal controls, which led to improper arrangements with Enron and other companies, among other things. The complaint alleged claims that had been made in a prior action by plaintiff and various other actions, all of which had been dismissed. The court noted that plaintiff, as she admitted, faced great difficulty in proving liability. Counsel had found no evidence of misconduct by the Board and the defendants had defenses that could have been raised. The legal standard for proof of breach of fiduciary duty is very high, especially if the standard for Caremark claims were applied. The earlier cases had failed. The defendant argued for approval in what the court found to be conclusory fashion. The only benefits to Citigroup and its shareholders, the court found, would be elimination of the disruptive and distracting litigation and non-monetary benefits brought about by corporate governance reforms. The problem was that the plaintiff’s efforts in favor of the latter had merely duplicated the corporation’s own prior and independent efforts. Although arms-length negotiation and engagement in discovery are factors to consider, that they had occurred did not immunize the parties from judicial scrutiny of the terms of the settlement. Although plaintiff would have had a difficult time proving her case, defendants had not moved to dismiss, but instead had negotiated a settlement containing a broad release of the defendants and a $3.3 million fee for plaintiff’s counsel. A court should not substitute its business judgment for that of the parties, the court said, but that does not mean the court should rubber stamp what the parties agree upon. That there were only a small number of objectants was not determinative. The court refused to approve the settlement because of the disparity between the reforms, which had already been introduced, and the broad general release, as well as the absence of consideration from the individual defendants. The release and payment of plaintiff’s attorney’s fees were prejudicial to Citigroup and its shareholders, and approval would set a dangerous precedent. The relevant standard is one of substantial benefit to the corporation, not any benefit. It was a red herring for defendants to say that they were trying to save Citigroup from future litigation costs since the same could be said whenever any derivative action settles. There would be no substantial benefit to Citigroup, the court ruled. The court further pointed out that there was no assurance in the settlement that the reforms would be implemented for a set period of time. Approval denied. Carroll v. Weill, Index No. 600645/2006, 5/14/07 (Ramos, J.).
Trade secrets; misuse; secrecy; novelty. Procedure; summary judgment; feigned issue of fact; contradiction of deposition. Prima facie tort; motive.
The editors are aware of the following appellate action with regard to cases summarized in this issue of the Law Report.
This information is provided for general information and the editors do not warrant the completeness or accuracy of this information. Counsel are advised to conduct their own cite checking of cases that are of interest to them.
** The decisions discussed have been posted in PDF format, but the reader should be aware that these PDF copies may not be exact images of the original signed text as filed in the County Clerk’s Office.

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