The Appellate Division Adopts New Uniform Rules of Practice Effective September 17, 2018

Under New York’s unique court structure, the Appellate Division is supposed to be a single statewide intermediate appellate court, broken into four different departments, where most appeals from the decisions of the trial court are finally resolved. But up until now, the four departments have functioned largely independently with rules of practice and customs unique to each.

Come September 17, 2018, however, all of the Departments of the Appellate Division will adopt a new set of uniform rules that will govern appellate practice in New York’s intermediate appellate courts throughout the State. Whether you’re before the First Department in Manhattan, the Second Department in Brooklyn, the Third Department in Albany, or the Fourth Department in Rochester, the rules will finally all be the same (for the most part).  That uniformity will make appellate practice so much better.

Here’s a quick look at some of the rules that are changing.

Perfecting Appeals

Before the new uniform rules were adopted, the Appellate Division departments had different time limits before an appeal would be dismissed as abandoned. In the First, Third, and Fourth Departments, the rule was if you don’t perfect your appeal within 9 months after serving the notice of appeal, the appeal would be dismissed as abandoned. In the Second Department, however, it was only 6 months.  The new uniform rules now provide that 6 months is the general rule.  The parties can, however, stipulate to extend the perfection date up to 60 days, and the appellant can thereafter apply by letter to extend the date another 30 days.  So, if the courts grant the extension requests, the date to perfect an appeal would be back to 9 months.

Briefs

Under the new uniform rules, all of the Appellate Division departments have adopted maximum word counts for briefs (14,000 for appellant’s and respondent’s briefs, and 7,000 for reply briefs). Before, the Third and Fourth Departments had maintained page limits, while the First and Second Department had moved to word counts. The uniform rules also now require briefs to be set in 14-point font (12-point for footnotes), which is new for many of the Departments.  And with the new word limits and font requirements, the last page of each brief must contain a certification telling the Court the name of the typeface, point size, line spacing, and word count to ensure compliance with the new rules.

Best of all, by adopting the uniform rules, the Fourth Department has done away with its (annoying) “no footnotes of any kind in briefs” rule! It was about time.

Challenging Constitutionality of State Statute

A new provision in the uniform rules gives the Attorney General the right to intervene in any case challenging the constitutionality of a state statute to which the State is not already a party. To allow the Attorney General the opportunity to make the decision whether to intervene, the party raising the constitutionality issue in such a case will be required to serve its brief on the Attorney General. That’s a logical extension of CPLR 1012, which gives the Attorney General the same right in proceedings before the trial courts.

Oral Argument

If your brief doesn’t specifically state that you are requesting oral argument of the appeal, and request a specific time allotment, you will be deemed to have waived oral argument and to have submitted the appeal on the briefs. This isn’t really a new requirement, it’s just more clearly stated in the new uniform rules.  The uniform rules also preserve the rules in the First and Third Departments that rebuttal time will be permitted if requested by the appellant’s counsel at the beginning of argument.  No such luck in the Second and Fourth Departments. Both have kept their previous rules prohibiting rebuttal time. Too bad.

Local Rules Preserved

Ok, ok. So, some of the unique local practices of the Appellate Division departments have been preserved in the local rules of each department.  Like the First Department’s rule that an appeal has to be placed on the calendar by the appellate at least 57 days before the first day of the term for which the appeal has been set.  And the Second Department’s rule that rebuttal isn’t available during oral argument, as I mentioned. The Third Department’s local rules deal mostly with the unemployment insurance, workers’ compensation, and Sex Offender Registration Act appeals that are a unique part of the Court’s docket. The Fourth Department did its best to keep its brief cover color requirements (blue for the appellant, red for the respondent, and gray for the reply brief) through the change to e-filing.

All in all, adoption of a new set of uniform rules for the Appellate Division is yet another step in the right direction, after the courts earlier this year adopted mandatory e-filing for many appeals and then recently expanded the e-filing program.  The new uniform rules will make it easier to practice in New York’s appellate courts for attorneys and clients alike.  Anything that makes practice better is a good thing in my book.

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New York Daily Fantasy Sports Suit: What Happens When an Amicus Isn’t Actually a Friend of the Court

It isn’t often that New York appellate courts deny someone the right to submit an amicus brief in a pending appeal. It happens, but it’s rare. In fact, the only time that I remember seeing a New York appellate court turn away a proposed amicus brief was when the proposed amicus had a direct financial interest in the outcome of the appeal. The party, thus, wasn’t a true friend of the Court.

Time to add one more to my list.  In White v Cuomo, the case about whether daily fantasy sports are prohibited gambling under Article I, § 9 of the New York Constitution, the Appellate Division, Third Department, on Thursday, denied Rivers Casino’s motion to file an amicus brief in the case. Rivers’ brief had sought to provide the Court with an alternate definition of prohibited gambling, arguing that the term in the Constitution can’t be understood by the definition the Legislature later put in the Penal Law. Instead, it argued, the constitutional term can only be defined by its original meaning at the time the constitutional amendment was adopted in 1894, and at that time all forms of gambling were prohibited regardless of whether skill or luck dominated. Thus, DFS is prohibited gambling, Rivers sought to argue.

But now having denied Rivers’ amicus motion, the Court won’t consider those arguments. Why would the Court have denied Rivers’ motion when these kinds of motions are routinely granted, and none of the parties opposed Rivers’ motion? Let’s see if we can figure it out.

The Rules for Amicus Curiae Briefs

The rules for amicus submissions in pending appeals are fairly straightforward. Under Rule 500.23 of the Court of Appeals’ Rules of Practice, the Court looks at these criteria for determining whether to grant amicus relief:

Court of Appeals Amicus Rules

The Joint Appellate Division Rules are similar:

Appellate Division Amicus Rules

So, under the rules, New York’s appellate courts want to know:

  • who is the proposed amicus party;
  • what their interest in the case is;
  • what issues they want to brief for the court to consider;
  • that the issues are not mere duplications of the parties’ arguments, and bring something different for the court to consider, but do not raise new issues not raised or addressed by the parties or the court from which the appeal was taken; and
  • the proposed amicus party is a true friend of the court, and not someone who has a direct financial interest in the outcome of the litigation.

Although the Appellate Division’s Rules don’t have a formal timeliness component, the Court of Appeals has made clear that for an amicus motion to be considered, it must be made returnable at least one month before the appeal is scheduled for oral argument. Failure to comply will likely lead the Court to deny the motion, because the Judges wouldn’t have enough time to consider it before hearing the appeal. I’d venture to say that the Appellate Division likely applies a similar, albeit unexpressed, rule.

The Denial of Rivers’ Amicus Motion

The courts have a great deal of discretion in deciding whether to accept a proposed amicus brief, and unfortunately don’t have to give any reason for their decisions. So, we’re left to guess why the Third Department denied Rivers’ motion. In Rivers’ motion, it explained its interest in the case:

This appeal has important implications for Rivers’ business and for the regulated gambling industry more broadly. The industry has relied upon the settled understanding that the Constitution’s prohibition on gambling bound the Legislature, such that the only way to authorize a form of gambling was through constitutional amendment. To say the least, Chapter 237 fundamentally upsets the legal framework upon which this industry has justifiably relied (Rivers’ Proposed Amicus Brf, at 1).

It identified the issues it wanted the Third Department to consider—whether the constitutional ban on gambling must be interpreted according to its own terms based upon their original meaning—and Rivers’ arguments certainly differ from the parties’ focus on the statutory test for what is prohibited gambling. And the motion was submitted well before the case is scheduled for argument during the November term. Rivers’ motion seems to satisfy most of the Rules’ requirements for amicus submissions.

Here are the two potential issues that could have led to the Court deciding to deny Rivers the right to participate in the case. First, the issue that Rivers sought to raise is a new one to the case, and wasn’t raised by the parties or addressed by Judge Connolly at Supreme Court. That presents a problem under New York precedent. The Appellate Division has previously held that a proposed amicus party can’t raise new issues different from those argued by the parties (see e.g. Colgate-Palmolive Co. v Erie County, 39 AD2d 641 [4th Dept 1972] [“an Amicus curiae is not a party, and cannot assume the functions of one; he must accept the case before the court with issues made by the parties, and may not control the litigation. Nor may he introduce any issues; only the issues raised by the parties may be considered” (quotation marks and alterations omitted)]). And the Court of Appeals’ rules provide that expressly.

That may not be a fatal flaw, however. There’s certainly an argument that the scope of the constitutional definition of gambling has always been in the case, and Rivers’ argument for an originalist interpretation is merely an extension of the parties’ arguments, a new and different way of looking at the issue. But, the Court certainly was within its discretion to have concluded that Rivers’ proposed amicus brief sought to improperly raise a new constitutional issue that no one had addressed before and to have denied Rivers’ motion on that basis.

Second, although the Appellate Division’s rules don’t contain an express requirement for a proposed amicus party to disclose their financial stake in the case or whether a party is backing or funding the amicus submission, whether an amicus party is a true friend of the court, rather than a party with a direct financial interest in the outcome of the case, is certainly something that the Court can, and often does, consider. Indeed, the Court of Appeals’ rules expressly require those disclosures in an amicus motion.

Here, Rivers’ motion does not disclose who contributed to or was financially backing the amicus submission. Rivers states that it has paid a bunch of money for a casino license in reliance on its understanding that the only forms of gambling that will be allowed in New York are those that have secured a constitutional amendment to be excepted from the constitutional ban, like horse racing and casino gambling. Could the Court have been concerned that Rivers’ interest was a purely economic concern about competition to its brick and mortar casino, and wasn’t a true friend of the court seeking to assist the Court with its decision? That’s what some have guessed, including former Court of Appeals Judge Robert Smith:

We’ll never know exactly why the Third Department decided against considering Rivers’ amicus brief in support of the plaintiffs’ position that DFS is unconstitutional gambling, but it certainly seems the Court had justifiable grounds for deciding as it did.

 

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New York Daily Fantasy Sports Suit: The Amici Bring an Interesting Twist to Whether DFS Violates the NY Constitution’s Ban on Gambling

The State and the Plaintiffs aren’t the only ones who want to be heard on whether the New York Interactive Fantasy Sports Law violates New York’s constitutional ban on gambling. And New York courts are happy to hear their opinions. In White v Cuomo, three parties have sought and been granted leave to file amici briefs—FanDuel and DraftKings in support of the State, and Rivers Casino, one of New York’s four licensed brick and mortar casinos, in support of the Plaintiffs.

Let’s take a quick run through the amici briefs to see what new arguments they bring to the table.

FanDuel and DraftKings

FanDuel’s and DraftKings’ arguments are remarkable similar to the State’s arguments in its opening brief. They both argue that DFS is not gambling prohibited by the New Yor Constitution because the skill required dominates chance-based elements. Thus, it is a bona fide contest for a prize, they argue.

What distinguishes FanDuel’s and DraftKings’ arguments from the State’s is the legal test that they each apply. While the State seeks to have the Appellate Division apply the “dominating element” test that holds that a game constitutes prohibited gambling when chance dominates any skill involved instead of the “material degree” test that holds a game is gambling when chance is involved in a material respect, which Supreme Court applied to hold the IFS Law unconstitutional, FanDuel and DraftKings argue that the tests are substantively identical. It’s just that Supreme Court got it wrong under both.

Particularly, FanDuel and DraftKings trace the “dominating element” test back to a 1904 Court of Appeals’ decision in People ex rel. Ellison v Lavin (179 NY 164, 170-171 [1904]), where the Court held:

Throwing dice is purely a game of chance, and chess is purely a game of skill. But games of cards do not cease to be games of chance because they call for the exercise of skill by the players, nor do games of billiards cease to be games of skill because at times, especially in the case of tyros, their result is determined by some unforeseen accident, usually called luck. The test of the character of the game is not whether it contains an element of chance or an element of skill, but which is the dominating element that determines the result of the game.

The dominating element test was long applied in New York, until at least the 1965 Penal Law amendments that defined gambling to include any contest the outcome of which “depends in a material degree upon an element of chance, notwithstanding that skill of the contestants may also be a factor therein.” Penal Law § 225.00 (1) (emphasis added). The State argues that these amendments changed the test for gambling to the stricter “material degree” test. FanDuel and DraftKings, on the other hand, argue for two reasons that the amendment changed nothing at all.

First, after the 1965 Penal Law amendments, New York courts continued to apply Lavin’s dominating element test to determine when a game depended on chance to a material degree. If skill dominated, the courts held, the game didn’t depend in a material degree on an element of chance, and it wasn’t prohibited gambling.  And vice versa.

Second, FanDuel and DraftKings argue, the legislative history underlying the 1965 Penal Law amendments do not identify any explicit desire to overrule the Court of Appeals’ common law “dominating element” test. The Court, in other contexts, has been very reluctant to find a wholesale abrogation of the common law absent the Legislature’s expressed intention to do so. That simply isn’t present here, they argue.  Instead, the Bartlett Commission that proposed these revisions actually said they weren’t intending to make many changes of substance at all, and the “dominating element” vs. “material degree” test conflict does not appear anywhere in the Commission’s report. Thus, FanDuel and DraftKings argue, the Legislature can’t have intended to replace more than 60 years of precedent applying the “dominating element” test to determine whether a game is prohibited gambling without so much as a word on the subject.

This interpretation is in line with numerous holdings across the country, they argue, including many holding that fantasy sports and daily fantasy sports, in particular, are not gambling because they are contests for which the players pay set entry fees, compete against others in picking the best roster, and play for a set prize pool. One such holding was from New Jersey, and was eventually endorsed by the Third Circuit and Congress. Where DFS games involve “(1) prizes [that] are established and announced in advance; (2) outcomes [that] reflect the ‘relative knowledge and skill of the participants’; and (3) the result is not determined by the outcome for a real-world team or teams or an athlete’s performance in a single real-world sporting event (FanDuel and DraftKings Amici Brf, at 14, quoting Unlawful Internet Gambling Enforcement Act, 31 U.S.C. § 5362(1) (E) (ix) (2006)), they are not gambling.

Rivers Casino

On the other side, Rivers Casino appeared in support of the Plaintiffs’ arguments that the IFS Law is unconstitutional, arguing that the law had fundamentally upset the casino gambling industry’s legitimate expectations that gambling can only be authorized in New York by a constitutional amendment. That’s what the casinos had to do, and so too should the fantasy sports industry, it argues.

Beyond the “we had to get a constitutional amendment, and so should you” rhetoric, Rivers Casino’s legal argument is fairly straightforward. It offers a definition of constitutionally prohibited gambling that is far more strict than any party to this case has previously discussed and doesn’t rely at all on the skill vs. chance dichotomy. As Rivers’ puts it,

Before considering the meaning and scope of the Penal Law, this Court first must decide if DFS constitutes gambling as that term is used in the Constitution. For reasons explained below, the term gambling as used in the Constitution means simply: to wager on games of skill or chance. Whether DFS is viewed as a game of skill or chance, or should be subject to criminal penalties in New York, it is still unauthorized “gambling” as that term is used in the Constitution. From there, the Legislature presumably may decide to criminalize DFS, or to prescribe civil penalties, but the Legislature cannot somehow “authorize” DFS. Chapter 237, therefore violates the Constitution’s general prohibition against gambling. (Rivers’ Brf, at 3-4).

To support this argument, Rivers breaks out the early 1900s dictionaries, which appear to define gambling as wagering money on games of either chance or skill, without differentiation. Rivers, thus, argues that selling access to the DFS pool is prohibited gambling under the Constitution, even if it involves a measure of skill. Indeed, at the time the constitutional ban was implemented for the first time, the Legislature also amended the Penal Law to criminalize wagering on “the skill, speed, or power of endurance of man or beast” involving “any unknown or contingent event whatsoever” (Rivers Brf, at 8, quoting L. 1895, ch. 1, § 1, amending § 351 of the Penal Law). That, Rivers argues, is a conclusive construction that even games of skill are subject to the constitutional ban.

Rivers also argues that the constitutional ban itself was intended to prohibit the Legislature from authorizing any form of gambling by merely calling it not gambling. The debates surrounding the constitutional ban show that the intent was to take the decision about what is gambling and what is not out of the Legislature’s purview, because, the convention delegates believed, the temptation to grab the gambling tax revenues and run would always be strong and often too strong to resist. Thus, Rivers argues, while the Legislature can decide how to enforce the constitutional ban on gambling, it can’t redefine it and authorize what the Constitution prohibits.

Oral Argument

In addition to seeking leave to file an amici brief, FanDuel and DraftKings also sought leave to participate in the oral argument of the appeals. The Third Department, however, denied that request. It’s not often in New York appeals that an appellate court will grant oral argument to an amicus party. In fact, the only time I’ve seen it is when it’s the State asking for divided argument. That’s not a hard and fast rule, but it seems to be the way that these high profile cases play out.

With the case now fully briefed, and the amici briefs in, we now have to wait until November for the oral argument, with a decision expected in late December 2019 or January 2020.

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NY Daily Fantasy Sports Suit: Plaintiffs Argue that a Rose is a Rose and DFS is Gambling, Notwithstanding the Legislature’s Attempt to Say Otherwise

What kind of world do we live in, the Plaintiffs in White v Cuomo want to know in their constitutional challenge to New York’s Interactive Fantasy Sports Law that authorized and regulated daily fantasy sports games in New York for the first time. “[A] Shakespearean world inhabited by Romeo and Juliet where substance trumps form, and a rose is, in fact, a rose; or . . . in a parallel universe of alternative facts, like the one inhabited by Humpty Dumpty—and now by the New York State Legislature—where ‘gambling’ is not ‘gambling’ simply because the Legislature has decided to call it something else” (Plaintiffs’ App Div Brf, at 2). To the Plaintiffs, a rose is still a rose, and DFS is wagering money on real life athletes in real life games over which the bettors have no control. That’s gambling, they argue, and barred by Article I, § 9 of the New York Constitution.

In the Plaintiffs’ opening brief to the Appellate Division, Third Department, they make four principal arguments in support of Justice Connolly’s decision declaring the IFS Law unconstitutional: (1) DFS falls within the Penal Law’s definition of prohibited gambling, and the Legislature’s rationale for an opposite finding ignores the realities that DFS is a game involving a material degree of chance and are wagers on future contingent events; (2) the New York Attorney General admitted that DFS is prohibited gambling when it prosecuted DraftKings and FanDuel before the IFS Law was adopted; (3) DFS looks like gambling and is regulated like gambling, so it must be gambling; and (4) the Legislature was not free to define gambling to exclude DFS because it had applied the constitutional gambling ban to all forms of sports wagering over more than 100 years. Let’s take a closer look at each of the arguments.

DFS is Gambling Under the Penal Law Because it Involves a Material Degree of Chance and Wagers on Future Contingent Events

The Plaintiffs start with the Penal Law definition of gambling. Under Penal Law § 225.00(2), “[a] person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.” According to Plaintiffs, that means “[t]he key elements, therefore, of gambling are (1) whether a contestant stakes or risks something of value, (2) upon a contest of chance or a future contingent event not under his control or influence, (3) with the understanding he will receive something of value in the event of a certain outcome” (Plaintiffs’ App Div Brf, at 32).

DFS fits all three, they argue. DFS players pay an entry fee to the companies to participate—that’s something of value. The players have absolutely no control over how the athletes they select for their fantasy teams perform in the real life games—that’s a wager on a future contingent event not under their control. And if their fantasy team outperforms others, they win a prize—that’s receiving something of value in the event of a winning outcome. So, the Plaintiffs contend, DFS is gambling as the Legislature has defined it in the Penal Law.

The Legislature’s opposite conclusion in the IFS Law, they argue, lacks a rational basis and shouldn’t be accorded the presumption of constitutionality on which the State strongly relies. Attacking the Legislature’s rationale, the Plaintiffs first argue that DFS is a game of chance. There is no real distinction between the fantasy DFS game and betting on a real sports contest, the Plaintiffs contend, because the performances on which DFS is based are real life athletes in real games on any given night over whom the DFS players have absolutely no control. An athlete they choose for their DFS team could get hurt in the first inning, or have an off night shooting the ball, or could miraculously score the game winning goal in the Miracle on Ice, but in the end, the DFS player’s performance is all based on things well outside of his or her control.  There’s unquestionably a material degree of chance involved, they contend. And just like poker, the mere fact that the players use their skill to play their hands, or for DFS to assemble their teams, doesn’t eliminate that material degree of chance.

But even if DFS didn’t involve a material degree of chance, as the Legislature found and the State contends on this appeal, the Plaintiffs argue that DFS is nevertheless a wager on future contingent events over which the DFS players have no control, and so it is prohibited gambling. As the Plaintiffs put it, “it is indisputable that the outcome of any IFS contest must inevitably be based upon a future contingent event—the performance of real-life athletes in real-life games. It is equally indisputable that an IFS contestant has absolutely no control over how those athletes will perform in those games, as the State itself has stipulated” (Plaintiffs’ App Div Brf, at 47). Indeed, the Plaintiffs argue, the mere fact that those real life players are being used in a fantasy game doesn’t magically transform the bets on their performances from gambling to not gambling. Supreme Court, therefore, properly declared the IFS Law unconstitutional, the Plaintiffs assert.

The New York Attorney General’s Prior Admissions

Unsurprisingly, the Plaintiffs support much of their argument with citations to the New York Attorney General’s position and public statements that DFS is gambling prohibited by the New York Constitution in People v DraftKings. Back before the adoption of the IFS Law, the Attorney General commenced criminal proceedings against DraftKings and FanDuel for what the Attorney General claimed was illegally offering DFS games that constituted prohibited sports betting. In particular, the Attorney General told the New York Daily News:

Daily fantasy sports is much closer to online poker than it is to traditional fantasy sports … FanDuel and DraftKings take a bite out of every bet. That is what bookies do, and it is illegal in New York … In fact, as our court papers lay out, these companies are based on business models that are identical to other forms of gambling . . . Consider the final moments of a football game where the outcome has been decided and the winning quarterback takes a knee to run out the clock and assure victory. Let’s say it’s Eli Manning, and the Giants are defeating the Eagles or the Cowboys. Statistically, this play would cost the quarterback one yard – a yard that could make the difference between someone on DraftKings or FanDuel winning or losing tens of thousands of dollars. What did that have to do with the bettor’s skill? It’s the classic risk involved in sports betting. Games of choice involve some amount of skill; this does not make them legal. Good poker players often beat novices. But poker is still gambling, and running a poker room – or online casino – is illegal in New York (Plaintiffs’ App Div Brf, at 50).

Throughout the criminal proceedings, the Attorney General took a strong position that DFS was prohibited gambling, for many of the same reasons that Judge Connolly invalidated the IFS Law. The Plaintiffs now use the Attorney General’s own arguments as evidence that DFS remains the same kind of banned gambling that it was then. Indeed, quoting from a former Attorney General’s opinion, the Plaintiffs attempt to equate DFS to straight sports betting, which the Attorney General has long held needed a constitutional amendment to be authorized.

If DFS Looks Like Gambling and is Regulated Like Gambling, It Must be Gambling

What do they say about ducks? If it looks like a duck, and quacks like a duck, then it’s a duck. Well, that’s how the Plaintiffs frame their third argument for why DFS is gambling banned by the New York Constitution.

Listing off a number of factors that make DFS look like gambling, the Plaintiffs cite to the bets on real life athletes in real life games over whom the DFS players have no control, that the DFS operators rake a piece of the prize pool, that the Legislature put the IFS within the Racing, Pari Mutuel Wagering and Breeding Law where other forms of gambling are regulated, and that the law offers protections for “compulsive” players, aka problem gamblers. Although the Legislature excluded “registered” DFS operators from the criminal prohibition, the mere fact of registration does not change the underlying nature of the DFS game. DFS is still DFS whether or not the operator is register, and it’s still gambling, the Plaintiffs argue.

The Legislature Was Not Free to Exclude DFS From the Definition of Gambling

Even though the term “gambling” is not defined in Article I, § 9 of the New York Constitution, that does not grant the Legislature unlimited license to define the term in any manner it wishes, the Plaintiff argue. Words must be construed to have their ordinary meanings, and thus “the Legislature [could not] ignore certain kinds of gambling, let alone pass laws to enable rather than to prevent it, as it has done here . . . Otherwise, as Supreme Court pointed out in this case, the prohibition against gambling, a protection embodied in the Bill of Rights in Article I of the New York Constitution, would exist only at the sufferance of the Legislature” (Plaintiffs’ App Div Brf, at 61-62).

From the 1894 addition of the constitutional ban on gambling, the Legislature and the Attorney General have always understood that sports betting is illegal gambling. DFS is no different than sport betting, because the bets are still placed on real life performances over which the DFS players have no control. Thus, it too is illegal gambling, and the Legislature wasn’t free to ignore over 100 years of history to find otherwise. Indeed, the Plaintiffs argue,

Courts are not required to stand by helplessly while the Legislature interprets the Constitution any way it wants. The difference between what Plaintiffs and the State cite as precedent turns on the distinction between the “interpretation” versus the “implementation” of a constitutional mandate. It is the Judiciary’s sole prerogative to interpret “gambling”; it falls to the Legislature to implement laws to prevent it. Thus, the determination on whether daily fantasy sports falls within the definition of “gambling” is for the Judiciary, not the Legislature, to decide. Supreme Court properly interpreted the term (Plaintiffs’ App Div Brf, at 68).

Plaintiffs’ Cross Appeal

Finally, Plaintiffs argue on their cross appeal of Judge Connolly’s decision that he also should have declared the Legislature’s attempt to decriminalize DFS without substituting some other penalty unconstitutional. As the Plaintiffs view the constitutional commands, Article I, § 9 requires the State to pass laws to prevent gambling. The removal of the criminal sanction in the IFS Law is permitted, therefore, only if the Legislature substitutes some other penalty in its place.  “It could, for example, have enacted a civil law prohibiting gambling and imposing civil fines to prevent any person or entity from operating IFS. Instead, it left a statutory and regulatory vacuum by decriminalizing gambling while not substituting something else in its place to prevent it” (Plaintiffs’ App Div Brf, at 70).

This legal limbo, where DFS has been decriminalized but still violates the constitutional ban, cannot withstand scrutiny, the Plaintiffs’ argue. Either the IFS law falls in its entirety, or it doesn’t. As an example, the Plaintiffs point out that DraftKings and FanDuel are still operating with impunity, and without any statute or regulation to stop them from continuing to violate the Constitution. “This is precisely why Chapter 237 should be struck down in its entirety, and not just partially, as Supreme Court did. The Legislature did not exclude IFS from the Penal Law definition of ‘gambling’ because it intended to substitute in its place some alternative measure to prevent it. Quite to the contrary, it inserted the exclusion for the obvious and sole purpose of enabling IFS to occur, so that the State could regulate and tax it. This is precisely why the exclusion is unconstitutional because it had the effect—an effect that was the Legislature’s deliberate objective—to enable that which is constitutionally prohibited” (Plaintiffs’ App Div Brf, at 72).

Next up in my run through the Appellate Division briefs, a not so surprising application for two DFS titans to participate in the appeal.

 

 

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Court of Appeals Holds Commercial Contracts Can Waive Right to Seek Declaratory Judgment to Interpret the Terms of the Agreement and Yellowstone Relief

Contracts are often ambiguous. They are usually long, with many terms, and you never know how they will apply in circumstances that the parties never contemplated. That’s why the power to go to court to ask for an interpretation of the agreement and how it applies to the unique facts that the parties face has been so important in New York, the self-proclaimed commercial center of the world.

Not anymore, says the majority of the Court of Appeals in 159 MP Corp. v Redridge Bedford, LLC (No. 26). The right to freedom of contract trumps all. And sophisticated parties with counsel are allowed to agree to waive the right to seek a declaratory judgment to interpret the terms of a commercial contract if they do so in the agreement. Public policy can’t invalidate the express terms of the waiver, and a suit seeking to interpret the agreement and a stay of the period in which to cure any default while the court decides the issues—better known as a Yellowstone injunction—must be dismissed.

In 159 MP Corp., commercial tenants executed two 20-year commercial leases to occupy a building in Brooklyn and run a grocery store. The leases were typical boilerplate commercial agreements, but had been revised by handwritten additions and deletions, including this paragraph in the lease rider:

159 MP - 1

After the building owner sent notices of default to the tenants, the tenants commenced a declaratory judgment action seeking a declaration that they hadn’t defaulted under the leases and a Yellowstone injunction to prohibit the owner from terminating the leases or bringing removal proceedings while the court decided the issues. The owner, however, moved to enforce the waiver clause, arguing that the action should be dismissed.

Supreme Court, Kings County denied the Yellowstone injunction and dismissed the complaint, holding that the clear terms of the waiver clause prohibited the declaratory judgment action. The Court held that the waiver didn’t prevent an action for damages or prohibit the tenants from raising any interpretation arguments in defense of a removal proceeding, but just precluded this action for declaratory relief.

The Appellate Division, Second Department affirmed, with one Justice dissenting, on this issue of first impression in New York. Like Supreme Court, the Appellate Division agreed that the waiver should be enforced according to its terms, and noted that the tenants were not left without available relief. The lone dissenting Justice, however, argued that the waiver clause is void as against public policy because “the declaratory judgment action, together with the Yellowstone injunction, serve a valuable public policy role in relations between commercial landlords and tenants, providing a mechanism for a commercial tenant to protect its valuable property interest in the lease while challenging the landlord’s assessment of its rights” (159 MP Corp. v Redbridge Bedford, LLC, 160 AD3d 176, 204 [1st Dept 2018] [Connolly, J., dissenting]).

On appeal, the Court of Appeals majority too held that the waiver clause should be enforced according to its plain terms. In doing so, the majority rejected the tenants’ argument that the waiver clause violates New York public policy. The public policy, the majority emphasized, actually cuts the other way in favor of the freedom of contract: “In keeping with New York’s status as the preeminent commercial center in the United States, if not the world, our courts have long deemed the enforcement of commercial contracts according to the terms adopted by the parties to be a pillar of the common law” (Opn, at 6). Thus, the majority held, “because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after ‘balancing’ the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger” (id. at 8). According to the majority, that balancing in most cases, including this one, weighs in favor of the freedom of contract.

159 MP - 2159 MP - 3

The availability of a Yellowstone injunction, the majority noted, is premised on having a valid action. Without one, the request for a stay is academic. But, the majority emphasized, a Yellowstone injunction isn’t necessary because a commercial tenant can’t be evicted from a property without first being able to defend its rights in a removal proceeding, where it will have the chance to argue about how the agreement should be interpreted and that it didn’t breach the lease. Thus, the majority reasoned, “there is no strong societal interest in the ability of commercial entities to seek such a remedy that would justify voiding an unambiguous declaratory judgment waiver negotiated at arm’s length, merely because this incidentally precluded access to Yellowstone relief” (Opn, at 16).

Judge Rowan Wilson, in dissent, would have voided the waiver clause on public policy grounds. As Judge Wilson put it,

159 MP - 4

Judge Wilson forecasts that the majority’s prioritization of the freedom of contract over access to the courts for interpretation of commercial agreements will incentivize building owners to “include a waiver of declaratory and Yellowstone relief in their leases as a matter of course. Those clauses will enable them to terminate the leases based on a tenant’s technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations” (Dissenting Opn, at 2-3). Those dire consequences of the majority’s departure from the longstanding New York rule, he argues, are not worth the cost.

The Court of Appeals’ opinion can be found here.

 

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NY Daily Fantasy Sports Suit: State’s Opening Brief Makes a Strong Pitch that the Legislature Rationally Determined that DFS is Not “Gambling” Under the NY Constitution

The game for the fate of daily fantasy sports in New York is on, and the State has scored first. Ok, ok. In appellate litigation, the losing party below always gets the ball first. And the State certainly lost below in this one. Judge Connolly of Supreme Court, Albany County held that daily fantasy sports were “gambling” prohibited by Article I, § 9 of the New York Constitution. But oftentimes the appellant’s opening brief leaves much to be desired, and much for the Court to decipher.

Not so here. The State has called on its stable of ready appellate lawyers, picked a great one—I know from personal experience because he’s beaten me in a case at the Court of Appeals before (still hurts now three years later)—and articulated a very strong argument for why the New York Legislature has the power to define what is and what is not gambling prohibited by the Constitution, how the Legislature exercised that power rationally here in deciding that the mixed skill and chance DFS games are not gambling, and how the courts should defer to that rationally supported legislative choice.

To recap quickly, back in 2016, there was a huge push to allow daily fantasy sports contests in New York, but the New York Attorney General said that the games violated New York’s constitutional ban on gambling. The DFS industry in response started a full court press to lobby for legislative authorization of the games. The industry didn’t want to wait the two-plus years it would have taken to amend the New York Constitution. The result: Chapter 237 of the Laws of 2016, known as the Interactive Fantasy Sports Law, which attempted to exempt “interactive fantasy sports” from the New York Constitution’s ban on gambling. Specifically, it provides:

img_6573

A number of plaintiffs challenged the law as a violation of the constitutional gambling ban, and they won. At least in part. Judge Connolly held that DFS was gambling and struck down most of the IFS law, but held that the Legislature acted within its power to decriminalize the games. So, as we stand now, DFS is unconstitutional gambling, but if the games are offered in New York nevertheless, the operators can’t be brought up on criminal charges.

In the State’s opening brief challenging Judge Connolly’s holding that the IFS Law is unconstitutional, the State makes the case that because the Constitution leaves the term “gambling” undefined, and specifically authorizes the Legislature to implement the constitutional ban, it has to be up to the Legislature to fill the gap by defining what is and what isn’t prohibited gambling. Specifically, the State builds its case on traditional notions of judicial deference to rational legislative decision making. The State points out that the Court of Appeals has repeatedly held that where the Constitution provides broad and undefined powers to the Legislature to implement a constitutional provision, as here, the courts must defer to the Legislature’s factual findings and rational implementations of that power. The State’s constitutional duty to care for the “needy” and to provide a “sound, basic education” are two such examples. Neither constitutional provision actually spells out what standard the State is required to meet, and so that job is left to the Legislature to undertake.

So too here, the State argues. Article I, § 9 of the Constitution bans “gambling” but expressly delegates to the Legislature to pass laws that carry out that command. Because the Legislature has outlined what prohibited “gambling” looks like in the criminal statutes, and undertook an extensive fact finding process in enacting the IFS Law, the State argues that it’s not for the courts to undermine the Legislature’s rational conclusion that DFS games are not prohibited gambling. As the IFS Law specifically found, they are not games of pure chance, but are instead based on a player’s skill in assembling a roster of real life athletes to compete against everyone else’s chosen rosters. DFS games, therefore, are not predominately contingent upon games outside of the player’s control, but on his or her player selection and roster management abilities.

Notably, the State points out a number of examples of times when the Legislature has in the past declared that a certain activity is not prohibited gambling, including the selling of insurance and commodities trading. The strongest example, however, is that in 1995, the Legislature specifically exempted horse race handicapping tournaments from the constitutional ban: 

As the State sees it, therefore, the IFS Law is just the Legislature’s latest exercise of its constitutional power to implement Article I, § 9 by defining what is and what is not prohibited gambling. That finding and policy judgment, which is based on extensive record evidence from the pre-enactment legislative hearings, is entitled to deference from the courts, the State argues.

The State also contends that Judge Connolly confused which constitutional standard should apply to evaluate whether DFS is a prohibited “game of chance.” From the adoption of the constitutional gambling ban, the State argues, the standard for deciding whether a game is prohibited has been whether skill or chance predominates while playing. Judge Connolly, however, used the “material degree” test that is derived from the statutory definitions of gambling under the Penal Law, not the dominating element standard required by the Constitution. Judge Connolly held that DFS was prohibited gambling because a material degree of chance was involved, notwithstanding that the players’ skill predominates. This was reversible error, the State contends. Because Judge Connolly accepted the Legislature’s factual finding that skill predominates over chance in DFS, that should have been the end of the Court’s inquiry and the IFS law should have been upheld.

For good measure, the State even argues that the law satisfies the statutory material degree standard, because the “Legislature heard a wealth of expert opinion, witness testimony, and statistical studies supporting the view that skill was such a dominant element in success at interactive fantasy sports contests that the role of chance was ‘overwhelmingly immaterial'” (State’s App Div Brf, at 34). The Legislature was entitled to credit that evidence, and the Court should defer to it as well, the State contends.

Next, the State argues that Judge Connolly’s conclusion that the DFS players exercise no control over the sporting events on which DFS is scored focuses on the wrong contest. It’s not the real world games that DFS players are playing in. They’re playing in separate contests over which they exercise substantial control. They choose which undervalued players to roster, which stacks to try to take advantage of, and which potential overvalued busts to avoid. In doing so, they meaningfully influence the outcome of the DFS games in which they play. Thus, the State argues, the Legislature rationally decided that DFS games “are not wagers on future contingent events not under the contestants’ control or influence,” which would be prohibited (State’s App Div Brf, at 35, quoting Racing Law § 1400 [l] [b]).

Finally, the State asserts that the Legislature rationally found that DFS is a bona fide contest for prizes where the players are required to pay an entrance fee to play and use their skill to influence the outcome. This, the State contends, is not gambling, and is just like when the owner of a horse pays an entrance fee to race the horse for the chance to win the purse. The Court of Appeals has held that that isn’t unconstitutional gambling, and thus neither is DFS, the State argues.

Coming into this appeal, I wasn’t very confident about the State’s chances to have Judge Connolly’s decision reversed. But the State’s reframing of the issues to ones focused on legislative policy making and the deference owed to those decisions by the court, so long as they are rational, has considerably strengthened their case. If the State succeeds in convincing the Appellate Division that this case is all about a legislative policy choice to allow DFS in New York, a decision with which the judiciary shouldn’t interfere, the State has a strong case to defend the IFS law and have Judge Connolly’s decision overturned. Indeed, given the very heavy burden that the plaintiffs face to show that the law is unconstitutional beyond a reasonable doubt, and the strong case for judicial deference that the State has made, this is turning out to be a much closer case than I had originally thought.  I’ll be watching closely to see how the Plaintiffs now respond.

 

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No Office, No Problem: Court of Appeals Holds that Violation of Judiciary Law § 470’s “Physical Office” Requirement Does Not Render Action a Nullity, But Could Subject Attorney to Discipline

In a unanimous decision authored by Judge Michael Garcia, the Court of Appeals today resolved an important issue of first impression implicating multi-state practice in New York—“whether an action, such as filing a complaint, taken by a lawyer duly admitted to the bar of this State but without the required New York office is a nullity.”

In Arrowhead Capital Finance, Ltd. v Cheyne Specialty Finance Fund L.P., the Court held that the failure of a nonresident attorney to comply with the physical office requirement in Judiciary Law § 470 at the time an action is commenced does not render the action a nullity. The opinion resolved a split between the First Department, which has held that any action taken by a nonresident attorney who fails to maintain a physical office in New York as required under Judiciary Law § 470 is a nullity, and the Second and Third Departments, which have permitted nonresident attorneys to cure a Judiciary Law § 470 violation by obtaining an attorney with a New York office or by application for admission pro hac vice by appropriate counsel.

The Court noted that the rule adopted by the Second and Third Departments stems from its prior decision in Dunn v Eickhoff (35 NY2d 698, 699 [1974]) where it held that “[t]he disbarment of a lawyer creates no ‘nullities,’ the person involved simply loses all license to practice law.” The Court held that “given [its] holding in Dunn, it would be incongruous to conclude that, unlike the acts of a disbarred attorney, actions taken by an attorney admitted to the New York bar who has not satisfied Judiciary Law § 470’s office requirement are a nullity.” Thus, the Court adopted the Second and Third Department rule and concluded that “the party can cure the section 470 violation with the appearance of compliant counsel or an application for admission pro hac vice by appropriate counsel.”

The Court, however, clarified that a Judiciary Law § 470 violation is not without consequences. The attorney who violates section 470 by practicing in the State without a physical office could face discipline. The court held that “[w]here further relief is warranted, the trial court has discretion to consider any resulting prejudice and fashion an appropriate remedy and the individual attorney may face disciplinary action for failure to comply with the statute.” “This approach,” the court concluded, “ensures that violations are appropriately addressed without disproportionately punishing an unwitting client for an attorney’s failure to comply with section 470.”

Important Practice Tip

Beyond clarifying the effect of a nonresident attorney’s violation of the physical office requirement in Judiciary Law § 470, the Court’s decision in Arrowhead includes a notable practice point that should not be overlooked.

In its motion for leave to appeal, Arrowhead limited its appeal “to the extent that the Appellate Division failed to reverse and remand the Order and Judgment of Supreme Court dismissing [its] Complaint as a ‘nullity’” for the Judiciary Law § 470 violation. The Judiciary Law § 470 dismissal, however, only related to the breach of contract and fiduciary duty claims that survived Defendant’s first motion to dismiss. By limiting its appeal to the distinct Judiciary Law § 470 issue, and not appealing the dismissal of its other claims, Arrowhead precluded the Court from reviewing the propriety of Defendant’s first motion to dismiss (see Quain v Buzzetta Constr. Corp, 69 NY2d 376, 380 [1987]). Thus, the Court granted defendant’s motion to strike the portion of Arrowhead’s brief addressed to defendant’s first motion to dismiss.

It is unclear whether Arrowhead’s decision to limit the appeal was strategic. Certainly, crystalizing an issue of first impression doesn’t hurt a party’s chances of having its motion for leave to appeal granted. But, by limiting the appeal, you give up other issues that could have otherwise been raised. Attorneys should be wary of the Court’s rule in Quain and only limit their appeals if they are willing to relinquish their rights to challenge other issues in the case.

And one more thing. The Court would do well to explain the practical impacts of its decisions to the parties and the bar in general in as plain of terms as possible. Here, the Court’s decretal paragraph reads:

To aid the parties and trial court, adding a clarifying clause to the decretal saying expressly that only the claims dismissed for the Judiciary Law § 470 violation remain to be litigated on remand would go a long way. Although this may appear straightforward in this case, many times the Court’s decisions on jurisdiction and reviewability leave parties scratching their heads about what to do next to fix the issues. The Court should try to help address those issues in its decisions to the best it can.

The Court of Appeals’ opinion can be found here.

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The New York Constitution Can Help Fix the Backlog of Appeals in the Appellate Division, Second Department

Everyone admits that the backlog of pending appeals in the Appellate Division, Second Department is a problem. As Presiding Justice Alan Scheinkman acknowledged in an op-ed in the NY Law Journal last fall, “it can take as long as 18 months for a civil appeal to obtain a place on the court’s day calendar and then more time for a decision to be rendered.” That’s 18 months after an appeal is fully briefed. And to get that far in the first place it could take up to a year from when the notice of appeal is served. So, in reality, the Second Department is often looking at appeals that are pending for almost three years before they are decided.

Recognizing this huge issue, Presiding Justice Alan Scheinkman of the Second Department announced a number of procedural reforms in September 2018 that were designed to decrease the Court’s backlog of appeals. First, the Court increased its oral argument calendars from 20 to 24 cases per day. That’s a good first start. Judge Scheinkman also noted that the Court would use specialized benches for an additional sitting in some long delayed matrimonial, Commercial Division, and land use and zoning appeals.

Third, Judge Scheinkman announced that he was reemphasizing the Court’s requirement of mandatory mediation for pre-perfected appeals through the Court’s Civil Appeals Management (CAMP) program. Judge Scheinkman’s hope is that early mediation will help new appeals, and long delayed ones, settle, which would help reduce the Court’s backlog. Finally, Judge Scheinkman also forecasted that the Second Department would be much less receptive to extensions than it had been in the past. Under the new Appellate Division Uniform Rules, parties can obtain two 30-day extension for their principal briefs by stipulation or letter agreement, but any further extension requires a formal motion “upon a showing of good cause.” The Court will not show much empathy for claims of a heavy workload or a pending reargument motion in the trial court. As Judge Scheinkman put it,

Extension motions should be confined, as the rule says, to limited circumstances where good cause exists, such as where an unexpected health issue or other unforeseeable event has occurred.

In addition to Presiding Justice Scheinkman’s reforms, a proposal was introduced in the Legislature last year to split the Second Department into two separate courts—a North division covering appeals from Dutchess, Orange, Putnam, Rockland, and Westchester counties and a South division covering appeals from Brooklyn, Queens, Nassau, and Suffolk counties.

That’s an interesting proposal, but there are two catches. First, the bill received little support last year and died in the Judiciary Committee of the NY Assembly, the only house in which the bill was introduced. Second, splitting the Second Department requires a constitutional amendment. The NY Constitution expressly provides that there shall be 4 departments of the Appellate Division, and specifies their boundaries.

And the constitutional amendment process is a long and troublesome one. The proposed amendment first has to pass in two successive legislatures, and then be approved by the people of this State at a general election. Normal people, however, aren’t generally thinking about how to fix the backlog of appeals in the Second Department and whether splitting it in two makes sense for the judiciary. So, finding the necessary support for a constitutional amendment may prove difficult.

But the Second Department doesn’t need the rigmarole of a constitutional amendment to fix its backlog of appeals. The New York Constitution already provides two solutions that I noticed. First, section 4(a) of the Judiciary article of the NY Constitution grants the Legislature the right to change the boundaries of the Appellate Division departments every ten years as long as it doesn’t change the total number of departments. Here’s how they’re currently divided:

The Second Department covers the 2nd, 9th, 10th, 11th, and 13th Judicial Districts, while the First Department covers the 1st and 12th, the Third Department covers the 3rd, 4th, and 6th, and the Fourth Department covers the rest.

So, how can the Legislature change the boundaries of the Second Department to reduce its backlog of appeals? Well, it’s all just moving pieces to a puzzle. The 9th Judicial District could become part of the Third Department. Or maybe just move Putnam, Dutchess, and Orange counties into the 3rd Judicial District, which would take them from the Second Department into the Third. Or to get all crazy with it, move Onondaga County into the 6th Judicial District, trade the 5th Judicial District from the Third Department to the Fourth in exchange for the 6th Judicial District, make the 9th Judicial District part of the Third Department, and send the 2nd Judicial District to the First Department. Oh, plus a player to be named later and cash considerations. The possibilities are endless. I’m fairly certain that it’s been more than ten years since the Legislature changed the boundaries of the Appellate Division, so this option is on the table.

If that’s too confusing for you, there’s a second way. Tucked away in the judiciary article is a never-mentioned provision giving the four Appellate Division Presiding Justices the right to call a meeting when one of the Departments is unable to complete its work within a reasonable time and transfer appeals to the other Departments. Who knew? Particularly, Article VI, section 4(g) of the Constitution provides:

So here, because the Second Department has been unable to decide all of its appeals within any reasonable period of time, it could be time for the four Appellate Division Presiding Justices to call a meeting of the families and transfer a bunch of Second Department appeals upstate. The Third and Fourth Departments decide fewer appeals after oral argument each year than the Second (1,579 in the Third Department and 1,444 in the Fourth Department compared to 3,815 in the Second Department in 2017).

Sure, this option would tax the Third and Fourth Department Justices with more work, but overall it should reduce the time that it takes to have appeals decided throughout the State. A little increase in the times from notice of appeal to decision in the Third and Fourth Departments should be more than offset by the significant reduction in the Second Department. And the caseload would be spread out across the four Appellate Division departments more equitably.

There are solutions to fix the huge backlog of undecided appeals in the Second Department. The courts just need to know where to look. Although Presiding Justice Scheinkman’s efforts are certainly laudable, and may well help reduce the problem to an extent, I think the time has come for more drastic action than adding 4 more cases to the daily argument calendar can provide. The time is here to look to our Constitution and use the powers that the Legislature and Judiciary have been granted to change the boundaries of the Appellate Division departments or transfer Second Department appeals to other departments. Indeed, three years for an appeal is just too long for any party to have to wait.

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Court of Appeals January Session Arguments of Interest: U.S. Bank National Association v DLJ Mortgage Capital, Inc.

If you thought the fallout from the residential mortgage foreclosure had run its course by now, you’d be wrong. For in the New York courts (and many others, I’m sure), litigation over bad mortgages lives on, and once again finds its way to the New York Court of Appeals. This time, the Court is asked to decide a number of procedural issues in lawsuits over breaches of the representations and warranties about the quality of the mortgages placed in a number of RMBS trusts, and will hear oral arguments tomorrow, January 9, 2019.

Nos. 6 & 7    U.S. Bank National Association v DLJ Mortgage Capital, Inc. (and other actions)

In these breach of contract actions, DLJ placed thousands of mortgages worth nearly $4 billion into residential mortgage backed securities trusts for which U.S. Bank was the trustee. In No. 6, an investor in the trusts, the Federal Housing Finance Agency, sued DLJ for breach of its representations and warranties about the mortgages, but was forced to substitute U.S. Bank because the trust agreement strictly limited suits by investors. Only the trustee could bring suit on behalf of the investors, the agreement said, so FHFA lacked standing. After U.S. Bank was substituted, Supreme Court dismissed the action with prejudice anyway, which barred U.S. Bank from refiling it under CPLR 205(a).

The Appellate Division, First Department affirmed the dismissal with prejudice, reasoning that U.S. Bank was not a “plaintiff” to which the 6-month CPLR 205(a) extension to refile could apply. Nor could U.S. Bank’s claims relate back to the prior action because, the Court held, there was no “valid preexisting action” to which the newly filed action could relate back to.

In No. 7, the issue is slightly different. U.S Bank actually filed this action directly, but failed to comply with a condition precedent to suit, namely, serving notice on both DLJ and Ameriquest as the originator of the loans that it was invoking the trust agreement’s repurchase obligations. Because U.S. Bank failed to comply with the condition precedent before commencing the action, Supreme Court dismissed the action, without prejudice to refiling. The Appellate Division, First Department again affirmed, this time reasoning that U.S. Bank could refile within 6 months under CPLR 205(a) after complying with the stated condition precedent to suit.

I’ve always wanted to know who qualifies as a “plaintiff” under CPLR 205(a), and now we’ll all get to find out! Also notably, one of these cases is being argued by #AppellateTwitter luminary Bob Loeb (@BobLoeb on Twitter). I’ll be heading down to the Court to watch the arguments in person tomorrow, but if you aren’t in Albany, then I strongly recommend watching the Court of Appeals’ livestream of arguments, which can be found here.

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Court of Appeals January Session Arguments of Interest: Arrowhead Capital Finance, Ltd. v Cheyne Specialty Finance Fund L.P.

The Court of Appeals begins the new year with one week of oral arguments that features a critical issue effecting multi-state practice of law in New York. On January 9, 2019, the second day of oral arguments, the Court will determine whether the failure of a plaintiff’s nonresident attorney to maintain an in-state office at the time the action was commenced, in violation of Judiciary Law § 470, renders the action a nullity and requires dismissal of the action (the Court’s case summary can be found here).

No. 4  Arrowhead Capital Finance, Ltd. v Cheyne Specialty Finance Fund L.P.

Judiciary Law § 470 provides that “[a] person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state.” Upon the certified question from the Second Circuit as to “the minimum requirements necessary to satisfy the statutory directive that nonresident attorneys maintain an office within the State ‘for the transaction of law business under Judiciary Law § 470,” the Court of Appeals held “the statute requires nonresident attorneys to maintain a physical office in New York” (Schoenefeld v State, 25 NY3d 22, 25 [2015]).

Arrowhead Capital Finance, Ltd. v Cheyne Specialty Finance Fund L.P. seeks to answer a question left unanswered by the Court of Appeals in Schoenefeld—what is the effect of a nonresident attorney’s failure to comply with the minimum requirements of Judiciary Law § 470.

Barry Goldin is an attorney licensed to practice law in the State of New York who maintains an office in Allentown, Pennsylvania. In June 2014, Goldin, commenced this action on Arrowhead’s behalf against Cheyne, Arrowhead’s general partner, for breach of two trust agreements. The complaint that Goldin filed listed his Allentown office address with its telephone and fax numbers as well as an address at 240 Madison Avenue in Manhattan.

After Cheyne successfully moved to dismiss all of Arrowhead’s claims except for breach of fiduciary duty and breach of contract, Cheyne sought permission to file a second motion to dismiss the action on the ground that Goldin violated Judiciary Law § 470. Specifically, Cheyne argued that the Madison Avenue address listed on the complaint “is not an actual law office occupied by [Goldin], or, for that matter, anyone else.” In response to the motion, the New York law firm of Wollmuth Maher & Deutsche filed a notice of appearance as co-counsel for Arrowhead in the action. Goldin posited that the second motion to dismiss should be denied because any violation of Judiciary Law § 470 was cured by Wollmuth’s appearance as co-counsel.

The Appellate Division, First Department disagreed, holding that “[p]laintiff’s subsequent retention of cocounsel with an in-state office did not cure the violation, since the commencement of the action in violation of Judiciary Law § 470 was a nullity.” The First Department’s “nullity” rule directly conflicts with precedent from the Second and Third Department which permit a nonresident attorney to cure a Judiciary Law § 470 violation by obtaining a new counsel with a New York office or by filing a pro hac vice application (see, e.g., Elm Mgt. Corp. v Sprung, 33 AD3d 753 [2d Dept 2006]; Stegemann v Rensselaer County Sheriff’s Off., 153 AD3d 1053 [3d Dept 2017]).

The Court of Appeals resolution of this issue with have a great impact on the future of multi-state practice in New York. Certainly, unwitting plaintiffs should not be punished for their attorneys’ violation of Judiciary Law § 470. Conversely, clients should not be able to refute actions taken by their nonresident attorneys on their clients’ behalf merely because the attorney has violated Judiciary Law § 470. However, is judicial economy served by dismissing actions without prejudice for an attorney’s failure to maintain bricks and mortar in New York? After all, the nonresident attorney Goldin in Arrowhead is licensed to practice law in the New York. And isn’t that why New York adopted the Uniform Bar Exam, to make it easier to maintain a multi-state practice?

Interestingly, Goldin is scheduled to present Arrowhead’s oral argument of the appeal before the Court of Appeals, even though doing so is technically a violation of section 470. By allowing that to occur, could the Court be signaling that Goldin’s affiliation with Wollmuth, a New York City firm, was sufficient to cure his violation? We shall see.

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