New York Court of Appeals Holds that the Destruction of Timber to Create Snowmobile Trails in the Adirondacks Violates the Forever Wild Clause of the New York Constitution

In a huge win for the New York State Forest Preserve, and those like me who love it, the Court of Appeals this morning held that the State’s destruction of thousands of trees to build 12-foot wide community connector snowmobile trails throughout the Adirondack Park violates the Forever Wild clause of the New York Constitution. The Court made clear that the Constitution forbids the State from unilaterally permitting projects like this one to be built in the Forest Preserve, without first giving the People of this State an opportunity to decide by voting on a constitutional amendment.

Starting with the legislative background that led up to the adoption the the Forever Wild clause of the Constitution, the majority noted that legislative attempts to protect the wild forests in the Adirondacks had proven ineffective. With that understanding, the majority noted, the delegates to the 1894 constitutional convention “were determined to maintain the wild forest nature of the Preserve—’these wide-spread evergreen woods’—both because of their value as a ‘great resort for the people of this State’ and as a singular ‘capacious cistern, extending over this region’” (Opn, at 6-7). The intent of the Forever Wild clause drafters was clear:

The proposal was revised to ban the leasing of the land and the removal or destruction of timber. As revised, the amendment garnered unanimous support from the 1894 Constitutional Convention delegates and was submitted to a vote of the electorate and approved by the people of the State of New York. The drafters conceived that any use of the Forest Preserve contrary to the constitutional mandate may only be accomplished by an amendment approved by the electorate. The legislature, by more than a century of popular referenda proposing constitutional amendments for projects large and small within the Forest Preserve, confirmed and honored the Convention’s solution. Thus, since becoming law in 1895, the people of New York have voted to amend article XIV, § 1, a total of 19 times to permit specific encroachments on the Forest Preserve.

This intent is seen in the Forever Wild clause’s plain language: “The lands of the state, now owned or hereafter acquired, constituting the forest preserve as now fixed by law, shall be forever kept as wild forest lands. They shall not be leased, sold or exchanged, or be taken by any corporation, public or private, nor shall the timber thereon be sold, removed or destroyed.” That is a strict prohibition.

And although the Court had recognized nearly 100 years ago that the Forever Wild clause’s commands must be interpreted reasonably to permit nonsubstantial and nonmaterial removal of trees, the intent that a constitutional amendment is required every time a substantial project is proposed in the Adirondacks and Catskills has remained unchanged. Indeed, the majority reasoned,

Notably, the majority rejected the State’s attempt to introduce a balancing test that would have allowed the DEC to balance policy interests against environmental preservation in determining whether a proposed development project in the Forest Preserve is permitted under the Forever Wild clause. The interest in providing more access to the Adirondacks is laudable, the majority noted, but the Forever Wild clause protects the forest in its most primitive state. That is precisely why the 1894 constitutional convention delegates took that decision out of the hands of bureaucrats in the first place. It is for the People to decide when a proposal is so worthwhile that the Constitution should be amended to permit it.

This is a strong decision that will go a long way to ensure that New York’s wild forests in the Adirondack and Catskill Preserves are protected by the will of the People for centuries to come. And that is exactly how it should be.

**Disclaimer: My firm and I were proud to represent the Adirondack Council and Adirondack Wild: Friend of the Forest Preserve in filing an amicus brief in this case. A copy of our amicus brief is here:

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.


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.

Court of Appeals Holds Hearsay Statements from Sexual Assault Victim May be Considered to Support College Disciplinary Decision

When a sexual assault occurs on a SUNY campus, the victim shouldn’t have to suffer through the assault twice. The victim has the right to decide not to participate in any disciplinary hearings held by the SUNY disciplinary board, and to instead submit a written or other hearsay statement telling his or her side of the story. And that’s exactly what happened in Matter of Haug v State Univ. of N.Y. at Potsdam (No. 102). The sexual assault victim didn’t want to participate in the SUNY disciplinary hearing against the offender, but instead submitted a written statement.  The victim’s statement was consistent with what she had told the SUNY investigator and a SUNY administrator, and following the hearing, SUNY expelled the offender.

In a surprising reversal, however , the Third Department annulled SUNY’s expulsion determination as unsupported by substantial evidence in the record.  The SUNY Student Code required affirmative consent to sex, which it was undisputed that the student never received, but the Third Department majority nevertheless said that the victim’s hearsay account of the incident was insufficient to meet the substantial evidence standard. Hearsay evidence couldn’t be considered in the substantial evidence determination, the Court held. Instead, the Court held, the complainant’s act of removing her shirt when the student offered sex was enough to show consent in this situation. The Court, therefore, vacated the student’s expulsion.

In a cogent dissent at the Appellate Division, two Justices took the majority to task for, among other things, substituting the Court’s own judgment of the facts for the SUNY disciplinary board that heard the testimony at the disciplinary proceeding.  The dissent emphasizes that the complainant’s story that she “froze” upon the student’s advances was consistent when she told it both to the SUNY investigator and to an administrator.  It did not have any of the hallmarks of unreliability that have lead to the general rule that hearsay evidence, on its own, isn’t enough to constitute substantial evidence.  Moreover, the only reason why the complainant’s account was technically hearsay, the dissent pointed out, was because she didn’t want to participate in disciplinary proceedings.  Her decision to invoke that right doesn’t undermine the credibility of her account of the assault.

SUNY appealed, and the Court of Appeals understandably reversed. In a short memorandum opinion, joined by 6 of the 7 Judges, the Court held that the victim’s hearsay statement could be considered when deciding whether substantial evidence, a very low standard, existed in the administrative record to support SUNY’s expulsion decision.

The Court, adopting the Appellate Division dissent’s view, also took the Appellate Division majority to task for substituting its view of the facts for the SUNY disciplinary board’s findings. “[I]t was the province of the hearing board to resolve any conflicts in the evidence and make credibility determinations,” the Court held. And thus, it was not for the Appellate Division to reweigh that evidence on appeal.

By holding that a sexual assault victim’s hearsay statements may be considered both at the administrative level and in a subsequent challenge to a disciplinary decision, the Court of Appeals has preserved the victim’s right to choose whether or not to participate in the disciplinary proceedings. That’s undoubtedly, to me at least, the right result. If the victim is unwilling or unable to relive the assault in the context of a subsequent disciplinary proceeding, he or she shouldn’t have to.  Holding otherwise would have forced the victim into a sort of Hobson’s choice: relive the sexual assault in live testimony at the hearing and be cross-examined, or don’t participate at all. The Court of Appeals’ holding in Haug, therefore, will continue to allow victims of sexual assault to decide whether or not to participate in a disciplinary hearing, free from considerations of how that decision will impact the disciplinary process.

The Court of Appeals’ opinion is here.

For the First Time, Court of Appeals Issues a Separate Opinion While Denying Leave to Appeal

When the Court of Appeals grants or denies a motion for leave to appeal, it generally does so in a one sentence order that says “motion for leave to appeal denied” or “motion for leave to appeal granted.”

At most, the Court will issue paragraph explanations sometimes when it has to dismiss a motion for leave to appeal on a complex jurisdictional ground. And it does that only so the parties understand what is preventing the Court from deciding the motion for leave on the merits.

Yesterday, however, for what I believe to be the first time, the Court of Appeals published a separate opinion in denying a motion for leave to appeal (at least that’s what my brief Westlaw research seems to suggest). You’ll see that at the United States Supreme Court sometimes when a Justice disagrees with the denial of certiorari and writes separately to explain why. But I’ve never seen it at the Court of Appeals.

In this case, Judge Eugene Fahey wrote separately to concur in the denial of leave to appeal in the so-called chimpanzee habeas corpus case. In that case, an animal rights group sought a writ of habeas corpus to free two captive chimps, Tommy and Kiko, from private owners who are keeping them in small cages within the State. Judge Fahey explains that if the Court were to grant leave, he would vote to affirm because the habeas had already been sought and denied on the chimps behalf, and two successive writs can’t be sought under the CPLR. So, he concurs in the denial of leave to appeal.

But, that’s not the end of his thoughts. Instead, Judge Fahey explains, the question of whether habeas corpus can be available for the release of a non-human animal will have to be addressed at some point.  And he offers an approach for how that question should be answered:

The Appellate Division’s conclusion that a chimpanzee cannot be considered a “person” and is not entitled to habeas relief is in fact based on nothing more than the premise that a chimpanzee is not a member of the human species. I agree with the principle that all human beings possess intrinsic dignity and value, and have, in the United States (and territory completely controlled thereby), the constitutional privilege of habeas corpus, regardless of whether they are United States citizens, but, in elevating our species, we should not lower the status of other highly intelligent species.

The better approach in my view is to ask not whether a chimpanzee fits the definition of a person or whether a chimpanzee has the same rights and duties as a human being, but instead whether he or she has the right to liberty protected by habeas corpus. That question, one of precise moral and legal status, is the one that matters here. Moreover, the answer to that question will depend on our assessment of the intrinsic nature of chimpanzees as a species. The record before us in the motion for leave to appeal contains unrebutted evidence, in the form of affidavits from eminent primatologists, that chimpanzees have advanced cognitive abilities, including being able to remember the past and plan for the future, the capacities of self-awareness and self-control, and the ability to communicate through sign language. Chimpanzees make tools to catch insects; they recognize themselves in mirrors, photographs, and television images; they imitate others; they exhibit compassion and depression when a community member dies; they even display a sense of humor. Moreover, the amici philosophers with expertise in animal ethics and related areas draw our attention to recent evidence that chimpanzees demonstrate autonomy by self-initiating intentional, adequately informed actions, free of controlling influences.

Does an intelligent nonhuman animal who thinks and plans and appreciates life as human beings do have the right to the protection of the law against arbitrary cruelties and enforced detentions visited on him or her? This is not merely a definitional question, but a deep dilemma of ethics and policy that demands our attention. To treat a chimpanzee as if he or she had no right to liberty protected by habeas corpus is to regard the chimpanzee as entirely lacking independent worth, as a mere resource for human use, a thing the value of which consists exclusively in its usefulness to others. Instead, we should consider whether a chimpanzee is an individual with inherent value who has the right to be treated with respect (Fahey, J., concurring, at 4-5).

Whatever Judge Fahey’s thoughts are on the availability of habeas corpus for chimps and other animals, it is significant that the Court of Appeals seems to moving in the direction of explaining its work. A separate opinion on a motion for leave to appeal can signal to the bench and bar that a case may present important issues, but that it’s not the right vehicle for deciding those issues. It’s a welcome addition to the work of the Court.

The Court of Appeals’ motion decision can be found here.

Court of Appeals Gets “Cleaned Up,” and Also Decides an Identity Theft Case

When a thief, or these days a hacker, steals your credit card and uses it, most people call that identity theft.  The New York criminal statutes, however, haven’t been so clear about whether the use another’s personal identifying information, such as their name, bank account, or credit card number, is enough to show that the criminal has assumed the person’s identity. The Appellate Division, First Department has said that merely using another’s personal information, without more conduct actually assuming the person’s identity, isn’t enough for an identity theft conviction. The Fourth Department, on the other hand, disagreed and said that it was.

The Court of Appeals, resolving this conflict, held in People v Roberts (No. 42) and People v Rush (No. 43) that the statutory language of the identity theft statute is clear: use of another’s personal identifying information alone is sufficient for a conviction.  The statute, Penal Law §§ 190.79 and 190.80, is pretty clear. It provides that a person is guilty of identity theft:

“when [such person] knowingly and with intent to defraud assumes the identity of another person by presenting [themselves] as that other person, or by acting as that other person or by using personal identifying information of that other person, and thereby . . . commits or attempts to commit [a felony]” (Penal Law §§ 190.79 [3]; 190.80 [3]).

Using the personal identifying information of another person is enough for a conviction. As Judge Rivera writing for the majority put it:

To establish identity theft in the first or second degree, the People must establish as the mens reathat the defendant knowingly and actually intended to defraud by the actus reusof assuming the identity of another. The statute expressly limits the manner by which a defendant assumes the identity of another to three types of conduct: by presenting oneself as that other person, acting as that other person, or using that other person’s personal identifying information.3Contrary to defendants’ argument, the requirement that a defendant assumes the identity of another is not a separate element of the crime. Rather, it simply summarizes and introduces the three categories of conduct through which an identity may be assumed. In other words, the “assumes the identity of another” language is the operational text that sets forth the actus reusof identity theft, while the three types of acts listed are the legislatively-recognized methods by which a defendant satisfies that element (Opn, at 12).

But what’s really the most important part of this opinion is not what’s in the majority, but what’s in Judge Wilson’s separate opinion concurring in part and dissenting in part. On page 6 of Judge Wilson’s writing, he does something that has never before been seen in a Court of Appeals opinion. He uses the citation signal “cleaned up”:

What’s (cleaned up), you ask? Created by Jack Metzler (@SCOTUSPlaces on Twitter), it’s a now relatively established way for attorneys to indicate in their writing that they’ve altered the form of a quote without changing its substance, and without the overly cumbersome parenthetical that you used to have to include, like (citations, quotations marks, and alteration omitted). It can also be used to eliminate unnecessary string cites to citing or quoting authority in the case you’re citing or quoting. Jack’s piece explaining the need for and use of (cleaned up) can be found here.

With Judge Wilson’s use of “cleaned up,” the Court of Appeals joins a long list of other Courts across the country, including the Fifth Circuit and others, adopting this new approach to clarifying legal writing. Now, it’s time for New York to formally adopt it in the Tan Book to make this exciting event a staple in appellate work and opinions across the entire state.

The Court of Appeals’ opinion can be found here.

Sharply Divided Court of Appeals Rejects Per Se Rule that a Gap in Treatment Longer than 2 1/2-Year Statute of Limitations Should Bar Application of Continuous Treatment Doctrine

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.

Court of Appeals: Indenture Trustee Can Bring Third Party Actions to Recover for Fraudulent Redemption of Assets Rendering Debtor Insolvent

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.


Plurality of Court of Appeals Holds Party Barred from Asserting a Federal Compulsory Counterclaim in a Subsequent State Court Suit

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.

Court of Appeals: Private Facebook Posts are Discoverable Under Normal Discovery Rules

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.

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