Posted in Arbitration Class Actions Contract

Judge Netburn Shrinks an Arbitration Clause

Here’s a pop a quiz, drawn from Judge Netburn’s Report and Recommendation in Borecki v. Raymours Furniture Co., Inc. Is the following arbitration provision in a contract between a store and its customer a broad or narrow arbitration requirement: “[A]ny claim, dispute, or controversy between you and us that in any way arises from or relates to the goods and/or services you have purchased or are purchasing from us (the “Purchases”), now or in the past, including . . . any information we seek from you . . . .”?

Many lawyers, accustomed to courts’ deference to arbitration provisions, would answer “broad, arbitration will apply to any dispute.” But they’d fail the test.

Scott Borecki purchased a bedroom set from Raymours, and left his cell-phone number for the furniture company to contact him when the set was ready for pick up. The sale and pick up went smoothly. But three years later, Raymours texted Borecki four times promoting its local Raymour and Flanigan store. Borecki was not interested in the local promotion; instead, he brought a putative class action asserting that Raymours violated the Telephone Consumer Protection Act, a federal law which restricts unauthorized telemarketing.

Raymours moved to compel arbitration, arguing that Borecki’s claim “arises from or relates to” the purchase of his bedroom set. After all, but for Borecki’s purchase Raymours wouldn’t have his cell number. Therefore, Raymours assumed, the claim “relates to” the purchase.

But Judge Netburn drew a finer line. The question she posed was whether Raymour’s text messages were related to Borecki’s purchase of the bedroom set—not whether the means by which Raymours obtained Borecki’s contact information related to the purchase. Even though the arbitration agreement defined “claim” to require the “broadest reasonable meaning,” Judge Netburn concluded that the text messages were sale promotions unrelated to the purchase of the bedroom set, and that Borecki’s claim was not subject to arbitration. Judge Netburn distinguished Borecki’s claim from claims that she said would be arbitrable, such as false advertising, a product defect, or even text messages asking Borecki to rate its furniture favorably.

Rubbing salt in to Raymours’ wound, Judge Netburn also found that a class action waiver included as part of the arbitration provision could not be enforced: “Because the Agreement’s class action waiver is applicable only to arbitrable claims, and because I recommend finding that the Arbitration Agreement does not require Borecki to arbitrate his TCPA claim, Borecki’s TCPA claim may be asserted as a class action.”

Under court rules, Judge Netburn’s Report and Recommendation now goes to Judge Kaplan for his review (since she sits as a Magistrate-Judge). Regardless of the case’s ultimate outcome, Borecki is a cautionary tale for companies that expect that customer-related litigation will take place in the privacy of an arbitration forum, not in the glare of a class action courtroom.

Hat tip again to Christine Choi for helping with this post.

Posted in Injunctions Trials

Judge Forrest Helps UPS Quit Cigarettes

In The State of New York v. United Parcel Service, Inc., the State claimed that UPS illegally transported untaxed cigarettes from Native American reservations to New Yorkers. In ruling for the State, Judge Forrest walked a fine line in sanctioning UPS; she awarded damages, but denied the State’s request for injunctive relief, and a court monitor.

Judge Forrest awarded $166 million to New York State and $81 million to New York City. Given UPS’s “high level of culpability” and the public health issues related to cigarettes, Judge Forrest found that the financial penalties imposed were not unfair. “[O]nly a hefty fine will impact such a large entity sufficiently to capture the attention of the highest executives in the company.”

However, Judge Forrest also found that UPS “dramatically improve[d] its compliance efforts” in response to the lawsuit. Steps taken after the case started included  screening against non-compliant shipper lists, adding personnel to the compliance team, hiring an outside counsel to investigate active shippers, and boosting its audit procedures. As the Judge  put it, UPS “transformed itself from a willfully blind actor to one actively doing far more.” Of note, Judge Forrest recognized that “this lawsuit, including the resulting reputational and financial costs, provides standalone economic motivation for UPS to proceed more carefully in the future.”

The claims against UPS asserted that the company had violated the terms of an Assurance of Discontinuance (AOD) it negotiated with New York in 2005 as a resolution to a state investigation into whether the company was in compliance with the applicable laws on cigarette shipments. Plaintiffs argued, and Judge Forrest ruled, that UPS had violated the 2005 agreement by continuing to ship millions of dollars’ worth of untaxed cigarettes between Native American reservations and other locations throughout New York state. But despite violating the AOD, in the end UPS − at some financial cost − maintained control over its own business operations and avoided a third-party monitor.

Bottom line: UPS dodged a bullet, but did not escape uninjured.

Hat tip to Bethany Clarke for assisting with this post.

Posted in Contract

Judge Pauley Pierces the Veil

Judge Pauley’s opinion in LiquidX v. Brooklawn Capital, LLC is a good example of a company paying a steep price for trying to outwit its creditors.

The Receivables Exchange (TRE), a financial startup that created an exchange for the purchase and sale of accounts receivable, was on the verge of a desperately needed round of financing. But on the eve of closing, TRE lost an important arbitration to a creditor, opening the door to similar creditor claims. The new money evaporated.

Undeterred, one of the potential new financiers and two TRE board members hatched a plan to salvage TRE’s business by acquiring its assets and transferring them to a new corporation, LiquidX—and leaving TRE’s creditors holding the bag while continuing TRE’s business, albeit under a new name. The linchpin of the plan, named after Caerus, the Greek God of opportunity, involved LiquidX buying TRE’s bank loan, and then privately foreclosing on TRE’s assets.

Critically, TRE had to independently appraise its assets at less than its bank loan to cut-off other creditor claims.

Sure enough, with the chief operations officer telling the appraiser that TRE was in the dumps, the appraisal came in low. The private foreclosure went ahead, and TRE’s business immediately re-emerged intact under the name LiquidX, providing a “seamless” transition to its customers. When TRE’s creditors complained, LiquidX (over) confidently sought a court ruling that it was not TRE’s alter-ego, and therefore was free and clear of TRE’s creditors.

That’s when Judge Pauley stepped in. He rejected the argument that the plan was a good-faith effort to save TRE and its employees jobs. He noted that its masterminds, including the two members of the TRE board, hid their interest in LiquidX from the entire TRE board when negotiating the loan purchase. As such, the transaction between the two companies was tainted. “The most significant factor in this case, however, is that the corporations did not deal with one another at arm’s length.” Indeed, the low appraisal of TRE’s assets flew in the face of LiquidX’s own optimism about its future.

Judge Pauley also rejected LiquidX’s argument that it had no alter-ego relationship with TRE because the ownership of the two companies did not overlap. “Ownership…is a proxy for control. It is certainly possible to exercise control over corporate functions without owning the corporation itself….” After finding that LiquidX controlled TRE’s decision making even in the absence of ownership, Judge Pauley had little trouble finding that LiquidX used its control to perpetrate a wrong—leaving TRE’s creditors in the lurch. Therefore, TRE’s creditors could pursue LiquidX as TRE’s alter-ego.

Project Caerus may have seemed quite creative when it was hatched, but Judge Pauley was not impressed. The Greek Gods can be tricky.

Hat tip to Christine Choi for assisting on this post.


Posted in Contract ERISA Preemption Promissory Estoppel

Judge Oetken Teaches Doctors a Hard Lesson about Promissory Estoppel

A promise made is a promise kept—unless it is made over the phone under an ERISA plan.  So ruled Judge Oetken last week, in a dismissal of a doctor’s lawsuit to collect payment allegedly promised by a healthcare benefit plan administrator.  McCulloch Orthopedic Surgical Servs., PLLC, a/k/a Dr. Kenneth E. McCulloch v. United Healthcare Ins. Co. of New York, a/k/a Oxford, No. 14–CV–6989 (JPO) (S.D.N.Y. June 8, 2015).

Dr. McCulloch, an orthopedic surgeon, performed arthroscopic knee surgery on a patient.  Prior to performing the surgery, his staff contacted United Healthcare Insurance Company of New York (aka “Oxford”), and allegedly was assured that the patient was covered by Oxford’s plan, that the plan provided for payment to out-of-network physicians such as Dr. McCulloch, that the plan covered the surgical procedures that Dr. McCulloch would provide for the patient, and that Oxford would reimburse Dr. McCulloch at 70% of UCR (the usual, customary, and reasonable rates for such procedures).

The doctor proceeded with the surgery on the basis of his understanding.  Afterwards, he billed Oxford $15,479.80 for the surgery (i.e., the alleged UCR of $34,024, minus certain deductions and offsets).  Oxford paid $641.66, and also apparently sent McCulloch a reply letter denying coverage.  Continue Reading

Posted in Privilege Issues

Judge Kaplan Finds Claim of Fraud Trumps Attorney-Client Privilege

Without waiver, discovery of bona fide privileged documents is usually a dead end. That principle would seem to be especially rock-solid when those documents are the subject of a subpoena addressed to adversary counsel in related litigation (in this case, to enforce a foreign judgment). But in Chevron v. Donziger, et al., a judgment enforcement action that has been anything but ordinary (here and here), Judge Kaplan ruled that where there is probable cause that the foreign judgment was procured by fraud, and the documents sought relate to that fraud, neither work product protection nor attorney-client privilege applies.   Continue Reading

Posted in Procedure Securities

Judge Sullivan Teaches Apple a Lesson

Activist investor David Einhorn’s hedge fund, Greenlight Capital, withdrew the highly publicized case it brought against Apple alleging that the tech giant tried to ram through a proposal in its annual proxy by “bundling” it with other less controversial proposals. But not before Judge Sullivan gave Greenlight a nice win, and left some important precedents on proxy voting for the rest of us. Continue Reading

Posted in Pleading Procedure Securities

Judge Rakoff on the Edge Act and “Local Prejudices of State Courts”

Investors who lost money in the housing crisis may prefer to have their case heard by a hometown jury in state court, instead of as a federal securities fraud claim. But if their investment included properties outside of the United States, the Edge Act – created after WWI “in order to protect federally chartered banks engaged in international banking from variations in state law and the local prejudices of state and insular courts” – will force their claims into federal court. Continue Reading

Posted in Contract Trials

Judge Rakoff Issues First Verdict Ever For Insurer and Against Bank for Bad Mortgages

Judge Rakoff issued an opinion with significant implications for parties litigating cases involving mortgage backed securities. In Assured Guaranty v. Flagstar Bank, Assured sought to recover some $89 million in insurance claims it paid to bondholders who invested in Flagstar bonds secured by what turned out to be lousy mortgages. When the mortgage market collapsed, the bonds secured by the mortgages also failed, leaving Assured on the hook. Assured claimed that Flagstar breached its contract with Assured by overstating the quality of the mortgages when it asked Assurance to insure the bonds — about 15,000 separate mortgage loans. After a bench trial, Judge Rakoff agreed with Assured and found that Flagstar was liable for the $89 million in insurance claims paid by Assured to bondholders. Judge Rakoff’s opinion is the first ever after trial holding a bank liable for breach of its representations and warranties to its monoline insurer about the quality of the morgages it originated. Continue Reading

Posted in Foreign Awards Pleading

Judge Stein on Saddam, Oil for Food and RICO

In Republic of Iraq v ABB AG, Judge Stein dismisses claims by the current Iraqi government, the Republic of Iraq, against BNP Paribas under RICO for facilitating the corruption of the United Nation’s Oil for Food Program by the Saddam Hussein Regime. The Oil for Food Program was intended to allay the suffering of the Iraqi people caused by worldwide trade sanctions against Iraq after its 1990 invasion of Kuwait. The Program allowed Iraq to sell oil to third parties so long as the proceeds were used to purchase food and medical supplies for the Iraqi population. Under the Program, the proceeds of approved sales were deposited in a UN escrow account at the New York Branch of BNP Paribas. According to the complaint, the Hussein Regime, with the active assistance of the Bank and other defendants, exploited the Program to siphon off millions of dollars in kickbacks for itself and its political allies.

In a fascinating decision, Judge Stein finds the Republic has standing to sue for wrongful depletion of the UN escrow account because the account was held for Iraq’s “proprietary benefit,” and further finds that the Republic’s claims are not barred by either the act of state or political question doctrines. But, after dangling those hopeful signs before the Republic, he then dismisses its case against BNP with prejudice. Continue Reading

Posted in Class Actions Pleading Securities

Judge Scheindlin Keeps Rating Agencies on the Hot Seat (Update on DOJ Filing)

Judge Scheindlin continues to define the law for rating agencies, finding that they don’t have immunity from fraud claims on the ground that their ratings are merely their own opinions, not statements of fact. That’s pretty significant for lawsuits arising out of the subprime mortgage meltdown. Here’s how she nicely sums up the essence of a viable fraud claim against a rating agency in King’s County v. IKB Deutsche Industriebank, which involved a rating for a structured investment vehicle made up of bad mortgages: “To sustain a fraud claim against each rating agency, then, plaintiffs must provide evidence that the rating agency issued a rating that it knew was unsupported by facts or analysis – that the rating agency did the equivalent of issuing a restaurant review despite never having dined at the restaurant.”

In denying motions by the rating agencies for summary judgment, Judge Scheindlin addresses each of the elements of a fraud claim against a rating agency. First, she finds that when “a rating agency issues a rating, it is not merely a statement of that agency’s unsupported belief, but rather a statement that the rating agency has … reached a fact based conclusion as to creditworthiness.” Next she finds that a jury can infer scienter, or intent to defraud investors, based on evidence that an agency issued a rating it knew was inaccurate, and that a plaintiff’s testimony is enough on its own to establish “reliance” on the rating. She also finds that reliance on the rating agencies can be reasonable where the agencies had access to information not available to investors, and the investments rated were “the most opaque structured credit vehicles and transactions on the market.” Continue Reading