Imagine you hurt your shoulder and it’s just not getting better. You go to the doctor after trying rehab and he says it’s time for surgery. You schedule the date, head in to the hospital, and the doctor fixes your shoulder, or at least he says he did. He tells you to follow up with him over the next year to watch how you recover from the surgery, and you do. He continues to treat you and then, at the end of the year, he says to follow up “as needed.” After 19 months go by, your shoulder starts to hurt again. You go back to the doctor, and he does a second surgery. You see him twice more over the next 20 months when your shoulder hurts.

More than 2 1/2 years pass, and your shoulder still hasn’t gotten better. Although you’re not very happy with the doctor, you don’t have much choice but to go back to him again. But he isn’t doing shoulder surgeries anymore, so he refers you to his partner. Another surgery is needed.

You’ve had it with these guys. It’s been seven years with chronic shoulder pain. Nothing that the doctor has recommended has helped. Not the rehab, the surgeries, or post-op exercises. Fed up, you leave the doctor’s practice and find a new doctor. And a few years later you sue the doctor for malpractice.

That’s what happened to the plaintiff in Lohnas v Luzi (No. 7). It was a bad situation, and brought to the Court of Appeals the issue whether the doctor continuously treated the plaintiff when there was a break in the visits for a longer time than the 2 1/2-year statute of limitations. If it was continuous treatment, Lohnas’ suit could proceed. If not, she sued too late and the case would have to be dismissed.

In a sharply divided 4-3 decision, the Court of Appeals held that questions of fact exist precluding summary judgment on whether the continuous treatment doctrine tolled the statute of limitations for Lohnas’ claim for medical malpractice against Dr. Luzi. The continuous treatment doctrine, the Court noted, ensures that a patient need not break off a relationship with a doctor and sue for malpractice immediately, but can continue to receive treatment for the original condition and then sue up to 2 1/2 years after the doctor’s care has finished. The treatment must indeed be continuous, however, and must be related to the same condition for which the doctor committed the malpractice.

The majority rejected a per se rule that would have held the continuous treatment doctrine inapplicable as a matter of law where there is a gap in treatment for more than the 2 1/2-year statute of limitations. All doctor-patient relationships are not created equal, the Court reasoned, and whether the continuous treatment toll applies depends on the unique facts of each case. Here, there was enough evidence that Lohnas and Dr. Luzi intended a continuous course of treatment for Lohnas’ shoulder injury to send the case to trial. Dr. Luzi was the only doctor she saw for the injury, and she went back to him repeatedly because she still felt pain. The 30-month gap in visits and direction to return on an as-needed basis didn’t make out a defense as a matter of law, the majority held, so the jury should be allowed to decide.

Judge Wilson, writing for the dissent, took the majority to task for confusing a chronic condition with continuous treatment. Comparing this case to the Court’s decision in Massie v Crawford (78 NY2d 516 [1991]), where the Court held that the continuous treatment doctrine couldn’t be invoked for routine regular doctor appointments, Judge Wilson explained that Lohnas’ routine follow ups for the chronic shoulder condition and the gap in treatment of more than 2 1/2 years meant the continuous treatment doctrine couldn’t apply. Indeed, he noted, Dr. Luzi tried different treatments. The alleged malpractice was improperly installing the humeral head in her shoulder during the first surgery that then wore down her rotator cuff. The second surgery was to fix the rotator cuff issue. And then Lohnas only came back after she was pushed into a wall and hurt her shoulder again.

None of these facts, Judge Wilson explained, implicated the policy concerns underlying the continuous treatment doctrine. Lohnas could have easily left the practice, as she later did, and filed suit. She wasn’t getting any treatment at all between the second surgery and the consult for the third, a period of more than 2 1/2 years.

Public policy animated our creation of the continuous treatment doctrine: a doctor engaged in continuous treatment of a patient should not have her efforts chilled by the filing of a lawsuit, nor should the patient undergoing such treatment be required to suffer the burden of suing the physician while still in her care. Where, as here, the treatment is not continuous, no such policy concerns warrant an exception to the limitations period. Indeed, when continuous treatment is absent, public policy, as embodied in the legislature’s selection of a limitations period, cuts the other way: a plaintiff whose surgery and follow- up appointments have been completed, who has been discharged from the hospital, returns to normal life activities, and still suffers “terrible” pain, is on notice that something may be wrong, and is required to take steps to determine whether she has a claim – including by consulting a different doctor if necessary – and file it within the prescribed period (Dissenting Opn, at 5-6).

The majority’s rule, Judge Wilson reasoned, allows what should be prohibited: manipulation of the statute of limitations by returning to a doctor regularly for routine check ups on a chronic condition.

With the 4-3 split Court, only one thing is really clear. No one really knows what is continuous treatment and what isn’t.

The Court of Appeals’ opinion can be found here.

Financial fraud is complex. The schemes cooked up by fraudsters are intricate, and the financial maneuvers used are often difficult to follow. The fraud alleged in Cortlandt Street Recovery Corp. v Bonderman (No. 14) is no different.

Breaking it down to the extent I can, a number of private equity investors were interested in acquiring a profitable and debt-free telecom company in Greece, and set up a group of shell companies in Luxembourg to make the buy. The group, called Hellas Group, borrowed heavily (about €1.6 billion) to buy the Greek company, and had very little equity to repay the loans. In another round of borrowing in 2006, Hellas Finance (a subsidiary of Hellas Group) borrowed €200 million in exchange for payment-in-kind notes, which were governed by the indenture that is the focus of this case.

What’s an indenture? An indenture is a legal agreement that vests title of securities, like the payment-in-kind notes here, in a single trustee who is given certain specified powers to act on behalf of all of the noteholders. It’s usually tough to get all noteholders who may have different interests to act collectively, so the appointment of the indenture trustee to act on their collective behalf helps to solve that problem. Generally included in the bundle of rights given to the indenture trustee, which are limited to what’s in the agreement, is the right to bring suit to recover the principal, interest, costs, and fees in the event that the investment tanks and the debtor defaults.

In Cortlandt Street Recovery Corp., at the same time that Hellas Finance issued the payment-in-kind notes, Hellas the parent redeemed €973.7 million in convertible preferred equity certificates, and paid the cash to the private equity investors. For a more in depth look at the Hellas investments, read this Economist piece. When the global financial crisis hit, Hellas Finance defaulted on the payment-in-kind notes, as did another Hellas subsidiary that had guaranteed the notes.

The  indenture trustee, on behalf of all of the noteholders, brought an action to recover the €200 million and interest from Hellas, a number of the Hellas subsidiaries, and the private equity investors, alleging that the convertible preferred equity certificate redemptions were fraudulently intended to render Hellas Finance, the primary debtor, insolvent. Even though the private equity investors weren’t parties to the payment-in-kind notes, the indenture trustee alleged claims against them for breach of contract, fraudulent conveyances, unlawful corporate distribution, and unjust enrichment, and sought to pierce the corporate veil on an alter ego theory.

The private equity investors moved to dismiss, and Supreme Court granted the motion. The Court held that the indenture that specified the indenture trustee’s powers and rights did not allow it to sue for recovery for the alleged fraud. The Court also dismissed the alter ego claims.

The Appellate Division, First Department modified the order on appeal, and reinstated the indenture trustee’s claims against the private equity investors. The Court held, the indenture governing recovery for default under the payment-in-kind notes “confers standing on the trustee to pursue . . . the fraudulent conveyance and other . . . claims, which seek recovery solely of the amounts due under the notes, for the benefit of all noteholders on a pro rata basis, as a remedy for an alleged injury suffered ratably by all noteholders by reason of their status as note holders” (Cortlandt St. Recovery Corp. v Hellas Telecommunications, S.à.r.l., 142 AD3d 833, 833-834 [1st Dept 2016]). The Appellate Division also reinstated the alter ego theory claims, and then granted leave to the Court of Appeals.

Because the right of the indenture trustee to bring suit is defined by the indenture agreement, the Court of Appeals began its analysis with normal principles of contract law. A contract means what its unambiguous words say. The contract’s language has to be read in context of the obligations. And a court can’t read any language of an agreement to be meaningless. In this case, the indenture agreement provided:

If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, and interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture.

That’s pretty clear, the Court held.  “[A]ny available remedy” means any remedy at law or in equity. “The plain meaning of section 6.03, then, is to authorize a trustee to pursue any lawful means of enforcing the noteholders’ rights, against any individual or entity, based on any viable theory of recovery in order to secure repayment upon the event of a default on the debt to noteholders” (Opn, at 10).

In the context of this case, that means that the indenture trustee isn’t just limited to asserting claims against Hellas Finance, as the debtor, or the Hellas subsidiary, as the guarantor. It can go after the private equity investors too, as long as the recovery it is seeking is for the principal, interest, and related costs of the payment-in-kind notes on behalf of all of the noteholders.

The Court, in dicta, also noted that its plain meaning interpretation of the indenture was consistent with the interpretation of the virtually identical language of the Revised Model Simplified Indenture, and the related commentary by the American Bar Association. The model indenture, the Court noted, appears to have been the form for the indenture in this case, and so the parties surely would have expected the two to have been given the same construction.

The Court was careful to caution, however, that this interpretation of the indenture only holds for post-agreement fraud, like the one alleged here. For fraudulent inducement claims based on pre-indenture misrepresentations, the interpretation is different. In that kind of case, the “any available remedy” language does not give the indenture trustee any right to bring claims for violations of the federal or state securities laws, primarily because the individual noteholders likely will be in different positions, which could create conflicts for the trustee, and can bring their own claims.

Like the Appellate Division, the Court of Appeals too agreed that the indenture trustee had validly stated alter ego theories against the private equity investors. Whether the trustee can make out that case, however, is a different question for a different day.

The case will now proceed back in the trial court, with the indenture trustee trying to show that this all was just a massive fraud to line the private equity investors’ pockets, and the investors arguing that these were legitimate recapitalization efforts that just didn’t end up working out. I’ll leave it to the financial investment experts to guess how that’s going to come out.

The Court of Appeals’ opinion can be found here.

A case about movie investments is the latest that has closely divided the Court of Appeals. Actually, the issue before the Court had absolutely nothing to do with the movie or the lost investment. Instead, it’s the kind of issue that sparks interest in the community of appellate lawyers who look at how the courts work—whether res judicata principles bar assertion of a federal compulsory counterclaim in a later state court action when it wasn’t brought in an earlier federal suit on similar facts. Fascinating, I know.

In Paramount Pictures Corporation v Allianz Risk Transfer AG (No. 16), Allianz invested in a Paramount film, but agreed to waive any claims against Paramount and not to sue if the investment went south. The investment tanked, and Allianz sued Paramount in federal court anyway, notwithstanding the waiver of claims and bar to lawsuits. Paramount defended the litigation based on the waiver provision, but never raised the covenant not to sue as an affirmative defense or pleaded Allianz’s breach of it as a counterclaim in the federal suit.

After the federal court predictably dismissed the case because of the waiver provision, Paramount brought this breach of contract suit in state court based Allianz’s breach of the covenant not to sue. Allianz moved to dismiss, arguing that res judicata barred Paramount’s breach of contract claim because it was a mandatory counterclaim that was never asserted in the federal suit and was barred by Rule 13(a) of the Federal Rules of Civil Procedure.

Rule 13(a) requires any party to a suit to assert any mandatory counterclaims that it has in that litigation or else they will later be barred from doing so. That rule has never before applied to New York litigation. Instead, New York is a permissive counterclaim jurisdiction, where a defendant to a New York litigation has no obligation to assert any counterclaims, but can wait to assert its own claims in a separate later action.

Recognizing that New York hasn’t subscribed to Rule 13(a)’s mandatory counterclaim rule, Supreme Court denied the motion to dismiss, citing New York’s permissive counterclaims rule under CPLR 3011. To adopt the federal rule, the Court held, would conflict with New York’s rule.

The Appellate Division, First Department, however, reversed and dismissed the suit. The Court held that Rule 13(a) should be applied in state court litigation, and Paramount’s breach of contract claim was thus barred by res judicata for failure to assert it as a mandatory counterclaim in the federal suit.

A plurality of the Court of Appeals affirmed, in a closely split decision. Three judges joined the plurality opinion (Judges Garcia, Stein, and Fahey), two concurred in the judgment only but for different reasons (Judge Rivera and Chief Judge DiFiore), and one dissented (Judge Wilson). What really split the Court was whether it should even be deciding whether to apply federal res judicata precedent to decide whether Paramount’s breach of contract claim should be barred in state litigation.

Judge Garcia, writing for the plurality, began with the principle that the US Supreme Court has the last word on the preclusive effect of federal judgments. And because federal judgments flow from federal courts exercising different types of jurisdiction—generally either federal question or diversity—the federal rules of preclusion are different for each. For a federal judgment based on federal question jurisdiction alone, the Supreme Court has held, federal res judicata principles apply. For diversity jurisdiction cases, state preclusion rules apply.

But what about so-called mixed jurisdiction cases, where both federal question claims and diversity claims are determined in a case? As Judge Garcia pointed out, “[t]he Supreme Court has not squarely addressed the applicable federally prescribed rule of decision – the uniform federal rules or state preclusion law – in a case where, as here, the judgment in the parties’ federal action encompassed both federal- and state-law claims” (Plurality Opn, at 6). Whether the Court of Appeals should answer that open question of federal law on its own split the Court.

Judge Garcia and the plurality decided it should, and held that federal law applied because applying state law to a mixed jurisdiction case would be contrary to “federal interests” (Plurality Opn, at 7). Judge Garcia explained,

That made a state law res judicata analysis unnecessary to decide whether Paramount’s claim should be barred in the state litigation, the plurality held.

Under federal claim preclusion principles, which look at whether the two claims arise from the same transaction or series of transactions, whether the same evidence is needed for both, whether the facts needed for the second claim were also presented in the first, the plurality held that Paramount’s claim was barred. The investors’ claims in the federal suit and Paramount’s counterclaim were too related not the be tried together. Paramount’s failure to assert the counterclaim in that prior action, thus, barred it from bringing a later state court action to enforce the covenant not to sue.

Judge Rivera and the Chief Judge disagreed with the plurality’s decision to reach the unsettled question of the preclusive effect of the federal judgment in a mixed jurisdiction case. In fact, they argued, the question need not have been answered at all because Paramount’s claims were barred regardless of which res judicata principles applied. As the plurality agreed, Paramount’s claim for breach of the covenant not to sue arose out of the same series of transactions as Allianz’s claims in the federal action, and thus were barred because Paramount did not assert its claim when it had the chance to do so. Judge Rivera criticized the plurality for going too far in what essentially amounted to a mistaken advisory opinion.

Judge Wilson, dissenting, disagreed with both and argued that the Supreme Court, had it addressed the issue of the preclusive effect of a federal judgment in a mixed jurisdiction case, would have parsed the claims based on their jurisdictional predicate. Paramount’s breach of contract counterclaim is a state law claim over which the federal district court had diversity jurisdiction, he argued. So the Supreme Court’s precedent would require application of state res judicata principles, and state law would not bar Paramount’s claim here.

Judge Wilson also argued that the plurality had fundamentally confused FRCP Rule 13(a) with federal res judicata principles as if the two were synonymous. They are not, Judge Wilson noted.

Further, Judge Wilson contended, Rule 13(a)’s compulsory counterclaim rule is a policy choice to protect the federal courts from repeated litigations over the same subject. But that policy doesn’t come into play when the counterclaim is later asserted in state court. It is the state courts, not the federal ones, that would be burdened. And New York’s permissive counterclaim rule is a different policy choice. Indeed, as a Judge Wilson put it, “[i]t would be quite strange, though, for the federal court to ‘extend’ the preclusive effect of its judgment to a subsequent claim, arising from the same transaction or occurrence, brought by a defendant seeking to litigate a state law claim and have his or her own day in state court, where the state has made the choice to allow a defendant that option. Unless a judgment on the separately-filed claim would nullify or undermine the federal judgment, federal courts have neither a res judicata interest nor an efficiency interest in that outcome” (Dissenting Opn, at 14).

I tend to agree with Judge Wilson that the plurality’s approach, effectively applying Rule 13(a) in New York based on federal res judicata principles, ignores the unique jurisdictional based on which state law claims can be heard in federal courts, and then what procedural rules apply to those claims. Although I won’t go so far as to guess how the Supreme Court would answer this unsettled question, I think Judge Wilson’s detailed approach makes sense. State law claims litigated in federal court don’t become any less state law claims merely because they are pleaded together with federal question claims. So, state law procedural rules and res judicata principles should apply when a later state court suit is brought to prosecute a cause of action that could have been asserted in the prior federal action. In that case, New York’s policy choice to allow counterclaims to be litigated separately should rule the day, not federal procedural policies. Nevertheless, the plurality’s approach is now the law of New York. Parties beware.

The Court of Appeals’ opinion can be found here.

Like privacy wonks have always said, everything you do online will live on forever. In metadata, back up tapes, and the cloud. The same is true for what you say on Facebook, Twitter, or any other social media platform. And although privacy settings can protect your content from the general public, limiting it to sharing with specifically designated family and friends, those same protections don’t hold in litigation.

That’s what the Court of Appeals held recently in Forman v Henkin (No. 1), which I previewed here. In Forman, Kelly Forman sued Mark Henkin for injuries she suffered when she fell off one of his horses while riding in a state park on Long Island. Forman alleged that the leather strap attaching a stirrup to the saddle broke and caused her to fall. She claims that she suffered a traumatic brain injury that caused “cognitive deficits, memory loss, inability to concentrate, difficulty in communicating, and social isolation.” Although she was an active Facebook user at the time, about a year after her fall, she deactivated her account. Nonetheless, in discovery, Henkin sought an order compelling her to give him unrestricted access to her Facebook account, including posts from the non-public portion of her account.

Supreme Court granted the motion, in part, and ordered that Forman produce some private posts from her Facebook account, “including all photographs of herself that she privately posted after the accident, except those involving nudity or romantic encounters, and also the timing and length, but not the content, of her private Facebook messages.”

The Appellate Division, First Department, modified the order, however, on a 3-2 vote. The majority vacated the portion of the order requiring production of the private Facebook posts, except for any photos that she intended to use at trial. The majority cautioned that mere speculation that some of the private posts might be relevant is an insufficient basis to require production. The dissenters, however, argued that the majority put too high a burden on discovery of private social media documents. Case law over the last few years has tended toward allowing discovery, they said, and Supreme Court’s order was a proper balance under CPLR 3101(a).

The unanimous Court of Appeals agreed with the Appellate Division dissenters. After spending a bit of time explaining Facebook’s privacy settings, and acknowledging that sharing things on Facebook is still fairly new (in the grand scheme of history), the Court held that “there is nothing so novel about Facebook materials that precludes application of New York’s long-standing disclosure rules to resolve this dispute” (Opn, at 7). New York’s normally broad discovery rules apply. No new or heightened standards for discovery are required, the Court held.

The Court rejected a former First Department rule for private social media discovery, which required the party seeking the information to establish a factual basis for delving into the private posts by showing that information on the public portion of a social media account tended to contradict or conflict with the plaintiff’s alleged injuries or claims. That rule, the Court held, “effectively permits disclosure only in limited circumstances, allowing the account holder to unilaterally obstruct disclosure merely by manipulating ‘privacy’ settings or curating the materials on the public portion of the account” (Opn, at 8). That would be contrary to New York’s policy for allowing broad disclosure in litigation.

Discovery of private social media information isn’t unlimited, however, the Court held. Requests still have to be narrowly tailored and reasonably calculated to reveal relevant information. Fishing expeditions still aren’t allowed.

we agree with other courts that have rejected the notion that commencement of a personal injury action renders a party’s entire Facebook account automatically discoverable. Directing disclosure of a party’s entire Facebook account is comparable to ordering discovery of every photograph or communication that party shared with any person on any topic prior to or since the incident giving rise to litigation – such an order would be likely to yield far more nonrelevant than relevant information. Even under our broad disclosure paradigm, litigants are protected from unnecessarily onerous application of the discovery statutes (Opn, at 9-10 [cleaned up]).

Providing useful guidance to the trial courts supervising discovery, the Court took the opportunity to explain what the inquiry should be when discovery disputes arise.

In the event that judicial intervention becomes necessary, courts should first consider the nature of the event giving rise to the litigation and the injuries claimed, as well as any other information specific to the case, to assess whether relevant material is likely to be found on the Facebook account. Second, balancing the potential utility of the information sought against any specific “privacy” or other concerns raised by the account holder, the court should issue an order tailored to the particular controversy that identifies the types of materials that must be disclosed while avoiding disclosure of nonrelevant materials. In a personal injury case such as this it is appropriate to consider the nature of the underlying incident and the injuries claimed and to craft a rule for discovering information specific to each. Temporal limitations may also be appropriate – for example, the court should consider whether photographs or messages posted years before an accident are likely to be germane to the litigation. Moreover, to the extent the account may contain sensitive or embarrassing materials of marginal relevance, the account holder can seek protection from the court (see CPLR 3103[a]) (Opn, at 10).

Litigants and the courts now have a defined rule to apply—and to me what seems to be a sensible approach—when disputes come up about whether private social media posts should be discoverable. I’m sure further litigation will clarify how the rule applies in different and unique circumstances, but a little bit of predictability here should go a long way.

The Court of Appeals’ opinion can be found here.