Posted in Derivative Claims Pleading

Judge Engelmayer Shoots Down a Starr

Starr International, a shareholder of AIG, is run by AIG’s former leader, Hank Greenberg. In Starr Intern’l v. Federal Reserve Bank of New York, Judge Engelmayer takes on Starr’s charge that the FRBNY ran roughshod over AIG’s shareholders when it bailed out AIG during the 2008 financial crisis. Judge Engelmayer describes Starr’s complaint as painting “a portrait of government treachery worthy of an Oliver Stone movie.” But like much of Oliver Stone’s work, the Judge found the complaint contains more imagination than fact.

According to Starr, the FRBNY exploited its financial rescue of AIG to create “a backdoor bailout” of other banks. In particular, the FRBNY required AIG to satisfy its outstanding credit default swap contracts (insurance that AIG provided to banks for the banks’ disastrous subprime mortgage loans) on “terms needlessly detrimental to AIG.” The complaint also alleges that the FRBNY circumvented Delaware law anti-dilution provisions by grabbing 80 per cent of AIG’s common stock. Because the FRBNY was alleged to have “de facto” control of AIG by reason of its rescue package, Starr alleged it “stood in a fiduciary relationship to AIG’s other shareholders…,” and had to act in the shareholders’ interests.  Continue Reading

Posted in Pleading Securities

Judge Netburn on PLSRA and Prejudice

The Private Litigation Securities Reform Act of 1995 was passed (over Bill Clinton’s veto) in order to limit frivolous federal securities fraud lawsuits. The Act established strict pleading requirements, and, in order to reduce the costs of litigation, barred discovery during the pendency of a motion to dismiss, which is the routine first line of defense to securities lawsuits. A plaintiff can obtain discovery if a motion to dismiss is pending only if the discovery is necessary to preserve evidence or prevent “undue prejudice.”

 In In Re GMR Securities Litigation, Magistrate-Judge Netburn was faced with plaintiff’s claim that he was the only “stakeholder” in the litigation without access to documents, and therefore was suffering undue prejudice. Judge Netburn noted that the Second Circuit has not yet addressed the meaning of “undue prejudice” under the PLSRA, but found that the fact that other individuals have access to the documents plaintiff wants is not “controlling.”  Rather, plaintiff would have to show that those other “stakeholders” were bringing ongoing litigation that competed with plaintiff’s own PLSRA claims, thereby putting plaintiff at a disadvantage. Absent that specific showing, the Judge found no undue prejudice to plaintiff arising from the automatic stay, and denied discovery pending a decision on defendants’ previously filed motion to dismiss. 

Posted in Pleading Securities

Judge Forrest on “Fabulous Fab” and Securities Fraud

In SEC v. Tourre, Judge Forrest rejected the SEC’s motion to reconsider part of its complaint against Fabrice Tourre, the thirty-something Goldman executive involved in selling subprime mortgage securities to Goldman clients. In an e-mail, Tourre unfortunately referred to himself as ‘Fabulous Fab’ for standing tall while the subprime mortgage market collapsed – a moniker that stuck. 

The question before Judge Forrest was whether the Supreme Court’s decision in Morrison v. Nat’l Australia Bank barred securities fraud claims against Tourre for the sale of subprime securities made by Goldman to a customer in Germany, even if Goldman obtained title to the securities in New York. Under Morrison, the Supreme Court made clear that section 10(b) and Rule 10b–5 apply only to “transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities.” 

The SEC argued that Goldman’s taking title in New York was in connection with its fraudulent sale to its customer in Europe, and therefore fell within Morrison’s ambit. The SEC relied on a recent Second Circuit decision, holding that for purposes of section 10(b), “a sale of securities can be understood to take place at the location in which title is transferred.” Absolute Activist, 677 F.3d at 68.

Here, although the securities were transferred to Goldman in the United States, that was not enough to establish a claim against Tourre. The defrauded German customer did not assume irrevocable liability for the purchase until the transfer to it in Europe, and Tourre’s fraud was in connection with that purchase. There was no fraud in connection with Goldman’s assumption of title in New York since no fraud was perpetrated on Goldman. 

“According to the SEC, the broad interpretation of section 10(b)’s “in connection with” language provides the necessary link between the Goldman transfer of title and the [German] note purchase to establish 10(b) liability. The Court finds, however, that the “in connection with” language modifies how close the fraud and the offending domestic transaction must be – not whether the domestic transaction can sit between the fraud and a purely foreign transaction, thereby itself providing the ‘connection.’ “

The SEC motion was brought under Rule 54(b) of the federal rules of civil procedure, which provides that “[A]ny order or other decision … may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.”  The SEC argued that the new Second Circuit decision required revision of an earlier order dismissing the claims against Tourre, but Judge Forrest did not agree: “There is substantial case law supporting that prior “law of the case” should only be revisited in the face of “an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”

On the other hand, the balance of the SEC’s complaint on sales of the same subprime securities to other Goldman customers is set for trial against Tourre next year. 


Posted in Trials

Judge Gorenstein on Bad Drivers and Bad Verdicts

It’s not often a simple fender-bender goes to trial in the S.D.N.Y. But any trial can generate interesting jury law. And taking a few fender-benders to trial can hone the craft. 

In Springer v. Cetro.pdf, Magistrate-Judge Gorenstein found himself presiding over a jury trial arising from plaintiff’s hasty decision to reverse down West 83rd street to double park while her husband priced a nearby garage. Defendant tried to navigate her car around plaintiff’s, but did not make it — a real Manhattan driving story. Plaintiff sued, claiming she was injured.

The jury awarded plaintiff $76,000 for past and future medical expenses, but only $2 dollars for past and future pain and suffering. Plaintiff wanted more and moved to set aside the verdict on the ground that the result was inconsistent — how could the jury not find any pain and suffering damages, yet award medical expenses to treat pain and suffering? In Judge Gorenstein’s words:

 “The verdict is inconsistent on its face in that it finds that plaintiff is entitled to payment in amounts that would cover virtually all past and proposed future medical expenses…while at the same time awarding only nominal damages for pain and suffering. Yet, the uncontroverted testimony was that those medical treatments were designed to relieve plaintiff’s pain and suffering.” 

Judge Gorenstein set out the general rule, which that ‘the district court has a duty to reconcile the jury’s answers … with any reasonable theory consistent with the evidence…,” but he could not do that here. The defendant offered that maybe the jury found the treatments were preventive, or the result of an aggressive treatment regimen provided by plaintiff’s doctors. Yet, the judge found that begged the question of how the allegedly aggressive treatments could have been necessary in the absence of pain and suffering, and there was no evidence in the record that the treatments were necessary regardless of pain. 

The judge ordered a new trial on damages only, giving the attorneys a not very common opportunity to try a fender-bender in federal court, twice.

Posted in Contract

Judge Nathan, the Family Corleone, and Contract Repudiation

Forty-three years after the publication of The Godfather, a prequel to the Corleone story now is the focus of a copyright battle before Judge Nathan in Paramount Pictures v. Puzo.

In 1969, Mario Puzo sold Paramount Pictures certain copyrights to the novel, including “the sole and exclusive right: to make and cause to be made literary and dramatic and other versions and adaptations of every kind . . . .”  When Puzo’s estate recently sought to publish The Family Corleone, Paramount sued for copyright and trademark infringement. The Estate counterclaimed for breach of contract and tortious interference based on Paramount’s refusal to consent to the prequel’s publication, and sought cancellation, rescission, and repudiation of the 1969 contract. The Family Corleone (written by Ed Falco) has since been published pursuant to an interim settlement agreement, under which all funds from the book’s publication were placed in escrow.

At issue in the case is language that was in an early version of the of the 1969 agreement between Puzo and Paramount, which did not make it to the final version. That language would have granted Paramount the right to “publish said work and/or any versions or adaptations thereof, or any part or parts thereof, and to vend copies thereof.”  Paramount contends the stricken language merely reserved Puzo’s right to publish the original Godfather novel, as well as versions or adaptations thereof; the Estate claims it meant Puzo retained all book publication rights, including to any sequels.

Judge Nathan dismissed the Estate’s counterclaims for cancellation and rescission on the grounds that the Estate had not properly alleged a breach significant enough to warrant the “extraordinary remedy” of rescission. The Court also dismissed the Estate’s tortious interference claim based on the failure to show damages, given that The Family Corleone had been published, and the sales proceeds were escrowed. But the Court denied Paramount’s motion to dismiss the Estate’s counterclaim for breach of contract and repudiation. She found that the Estate’s claim was not preempted by federal copyright law. And as a matter of New York contract law, she also found that the mere assertion by a party of an untenable contract position does not amount to a claim that the party repudiated its contract. But a claim for repudiation that can allege more – such as when it is alleged that the untenable contract position is advanced by a party “to avoid its contractual obligations or when it refuses to perform its contractual obligations absent the other party’s satisfaction of extra contractual provisions,” a claim for repudiation is stated.

The Court did not decide the ultimate question of which party actually owns the book publishing rights to Godfather sequels. That will have to wait for another day – unless one party can make a settlement offer the other can’t refuse.

(My colleague Joe Alonzo ably assisted on this entry.)


Posted in Contract

Judge Engelmayer on Getting It Right and Summary Judgment

Once parties decide to litigate, it’s not so easy to extricate – as Judge Engelmayer’s opinion in First American Intern. Bank v. The Community’s Bank amply demonstrates.

Community’s Bank entered into an agreement with FAIB to share any Award of local development funds it received from the federal government. Sure enough, Community’s Bank was awarded a $432,000 grant, but the Award’s terms prohibited Community from transferring the Award except to an affiliate – which did not include FAIB. Community’s Bank claimed that it was barred from transferring any proceeds of the Award to FAIB and therefore entitled to keep the full Award, whereas FAIB claimed that so long as Community’s Bank received the Award proceeds from the government in the first instance, it could thereafter share them.

However, both banks did agree that one of their competing claims had to be right. And they both asked Judge Engelmayer to decide the case on summary judgment – and spare them the cost of more litigation. Judge Engelmayer recognized that “given the [small] stakes at issue, a resolution of the decisive question of contract interpretation at this stage would be far more efficient for the parties than deferring that question for trial.” But he didn’t bite: “although such a ruling would have doubtless been more efficient for the parties,” ‘no reasonable person’ could interpret the ‘not pellucid’ contract language only one way. And off the parties were sent to a jury trial that likely will cost more than the amount at stake. In other words, once you enter the courthouse door it may not be so easy to exit “efficiently.”

The opinion is also useful as it discusses in detail the court’s role in interpreting contract language – in Judge Engelmayer’s view, a court should tread carefully unless the contract’s language is “wholly unambiguous.”

Posted in Contract

Judge Dolinger on Guarantees, Usury and Sophisticated Parties

Judge Dolinger’s opinion in AXA v. Endeavor makes clear that a guarantor of a corporation’s debt will remain liable on his guarantee, even if the guarantor does not receive consideration in addition to that which the company received. And in more bad news for a corporate guarantor, he can be hit with a very high default interest rate.

Defendant Buffa, a principal of Endeavor, guaranteed payment of a put option that Endeavor wrote in favor of AXA. The agreement provided that Endeavor had to repurchase shares it sold to AXA if AXA “put” the shares to Endeavor. AXA notified Endeavor that it was exercising its right to put the shares to Endeavor, but Endeavor “was unable to satisfy its obligations.” When AXA turned to Buffa, they were met with two defenses – that Buffa’s guarantee was void for lack of consideration, and that a twenty-five per cent default interest rate was an unenforceable penalty.

Judge Dolinger quickly disposed of the argument that Buffa’s guarantee was void for lack of consideration: “New York law has explicitly and consistently upheld personal guaranties, particularly absolute and unconditional guaranties of payment that help to persuade a party to enter into a contract with a company for which the guarantor works, the required consideration being implicitly the same consideration as underlies the contract as a whole.”

And for those who think that a twenty-five per cent interest rate is usurious? It’s not. The usury law doesn’t apply to default interest. Nor was the twenty-five per cent an unenforceable penalty. Buffa argued that the rate was akin to illegal liquidated damages because it was disproportionate to any foreseeable loss to AXA — calculated as the difference between the price at which AXA bought and sold the stock. AXA countered that the twenty-five per cent rate protected it if it extended Buffa’s time to perform (which it did), and for lost opportunity costs, such as being deprived of prompt payment. Judge Dolinger viewed this as a contract between “sophisticated parties,” and gave the guarantor no slack:

“In sum, we find that the unambiguous provision setting forth the default interest rate of twenty-five percent reflects the manifest intent to shield plaintiff from risk in partial consideration for the extension of the option period, which allowed defendants to temporarily forestall litigation of their default under the original contract. Such a rate is not independently unconscionable or void as against public policy, and it was agreed upon by two sophisticated parties…”

In other words, when it comes to business litigation before Judge Dolinger, you are what you write.


Posted in Intellectual Property Procedure

Judge Nathan on The Velvet Underground and Declaratory Judgments

Lawyers of a certain age may remember Lou Reed and the Velvet Underground, one of the seminal counterculture rock bands of the 1960s. Their first album, The Velvet Underground and Nico, was sponsored by Andy Warhol, who also designed the album’s now iconic artwork in 1967: a banana image. Today, forty-five years later, Judge Nathan (born 1972) addressed the Underground’s declaratory judgment action that they, not the Warhol Foundation, are the owner of Warhol’s banana design. In The Velvet Underground v. The Warhol Foundation, Judge Nathan found that the Underground could not show the existence of an “actual controversy” within the meaning of the federal declaratory judgment act.

The Underground claims that over the years it has developed a trademark right in the banana design, while Warhol claims that it has a competing copyright interest in the same design. The Underground sued to invalidate Warhol’s copyright claim under the declaratory judgment act. Warhol moved to dismiss on the ground that it executed a covenant not to sue the Underground for any copyright infringement claim, and that the existence of the covenant eliminated any actual controversy between the parties, divesting the court of jurisdiction. The Underground claimed that there remained a live controversy because the covenant did not resolve which party actually owned the copyright, and that Warhol’s potential copyright claim affected its capacity to commercially exploit the banana design.

In an opinion that strictly enforces the limits of declaratory judgment jurisdiction, Judge Nathan found that the “mere existence” of a competing copyright claim was insufficient to create a “specific and immediate” dispute because the Underground remained “legally free” to market its product “even in the face of an adversely-held copyright.” Judge Nathan concluded that the possibility that Warhol’s copyright claim will cause commercial injury does not, “without more establish an actual legal controversy,” and that the “Constitution gives this Court no power” to resolve the dispute at this time. She dismissed the complaint, albeit without prejudice.

Judge Nathan’s opinion is worth reading on several fronts. Not only does it inform about the strict limits federal courts impose on their declaratory judgment jurisdiction, but it’s interesting to see that Warhol and the Underground are still at it today. Indeed, the lawsuit continues on various other claims and counterclaims concerning ownership of the banana design.


Posted in Contract

Judge Stein on Buyers in the Ordinary Course and Shady Art Dealers

The art world has its share of litigation and shady dealers, so buyers beware. In Carroll v. Baker, Judge Stein found that the owner of a valuable painting entrusted to a corrupt dealer for sale could not get it back from the person who purchased it from the dealer – even though the dealer pocketed the entire purchase price and shortly thereafter filed for bankruptcy. Under the doctrine of “buyer in the ordinary course of business” the purchaser was entitled to keep the painting, and the original owner was left holding the bag.

The purchaser, Carroll, sought a declaration that he owned a painting purchased from the once prominent, now defunct, Salander Gallery. The painting was consigned to Salander for sale by Baker, who did not otherwise register or denominate his ownership. Carroll, also a dealer, claimed that Salander never told him that it did not own the painting. Judge Stein found that Carroll “would have had no reason to doubt [Salander’s] ownership of the painting on the basis of its investigation into the painting’s provenance,” and thus qualified as a buyer in the ordinary course under the Uniform Commercial Code. As such, Carroll was entitled to keep the painting. “The Court is not unsympathetic to the plight of Mr. Baker, an innocent person who now bears the burden of Salander’s fraudulent conduct and whose recourse may be limited to attempting to recover from a bankrupt felon. Nonetheless, the Court concludes that Carroll observed “reasonable commercial standards of fair dealing in the art trade….”

For those who follow these matters for reasons of art, the painting at issue was Untitled by John D. Graham, “a twentieth century American modernist painter.” For those who follow for reasons of law, it’s interesting to note that Judge Stein found Carroll credible even though in an unrelated state court lawsuit Justice Gammerman wrote a searing opinion concluding that in that case Carroll had “attempted to perpetrate a fraud on both the plaintiff and the court.” But Judge Stein decided that “what is of importance is whether Carroll has testified truthfully in this action.”

Posted in Class Actions Procedure

Judge Koeltl on Madoff, Picower and the Automatic Stay

Jeffrey Picower, who profited from his investments with Bernard Madoff to the tune of $7 billion, was found dead in his bathing suit at the bottom of his private Florida swimming pool in October 2006. His family agreed to return the $7 billion after his death as part of a settlement of a fraudulent transfer of assets lawsuit brought by the Madoff trustee for the benefit of Madoff’s victims. The $7 billion, which includes a payment to the government, is a significant portion of the funds available for distribution to the victims of Madoff’s Ponzi scheme.

The Picower’s settlement with the trustee included an injunction protecting the Picower family from any direct claims by individual Madoff creditors once its settlement with the trustee was finalized. The Madoff bankruptcy court approved the settlement, and, consistent with the terms of the settlement, also ruled that two class actions brought by Florida residents in Florida against the Picowers to recover for Madoff losses were barred by the terms of the settlement, as well as by the automatic stay provision of the Bankruptcy Code.

The Florida plaintiffs appealed to Judge Koeltl in In re Madoff. They argued that they should be able to sue the Picowers directly because their claims against the Picowers were “independent” of the trustee’s, and were not the “property of the estate” subject to the trustee’s exclusive rights. Judge Koeltl upheld the bar of the Florida actions. He held that the Florida actions were substantively identical to the claims initially brought by the trustee (even though they were denominated as tort claims instead of fraudulent transfer claims), and that the Florida plaintiffs did not allege the violation of any duty to them by Picower that was not shared by the other creditors of the Madoff estate. Accordingly, the claims properly belonged to the Madoff estate and the trustee, and the Florida actions were barred. In any event “[a]llowing the Florida Actions to go forward would carry real risks to the estate, implicating the viability of the current settlement and the possibility of future settlements . . . .”

Judge Koeltl’s opinion also contains a very informative discussion of the applicability of the doctrine of in pari delicto to claims brought by a bankruptcy trustee. In cases where the bankrupt company engaged in misconduct, that defense operates under principles of agency to make a trustee subject to the same defenses as could be asserted against the company — even where the trustee is seeking to maximize the estate for creditors. The plaintiffs argued that their claims were distinguishable from the trustee’s because they were not subject to an in pari delicto defense. But Judge Koeltl found that the defense did not apply to claims that the trustee had a statutory right to bring, like fraudulent transfer claims against Mr. Picower. Otherwise, creditor-plaintiffs could obtain “judgments without the bankruptcy system, based on claims that are derivative or duplicative of claims that are property of the estate.”