In Knox v. Countrywide Bank, 13 CV 3789 (JFB)(WDW) (E.D.N.Y. March 12, 2014), homeowners who took out first and second home mortgage loans from Countrywide sued the bank and others on two fraud theories. The first theory alleged that Countrywide had concealed that the note underlying the mortgage was invalid because the mortgage was held in the name of defendant Mortgage Electronic Registration Systems (“MERS”), an agent of the mortgagee, and was therefore “split” from the underlying note signed by defendant Countrywide. Plaintiffs’ second theory was that Countrywide caused the homeowners to inflate their income on a loan application in order to obtain the loan. Judge Joseph F. Bianco dismissed the fraud claims. With respect to the “splitting” of the mortgage from the underlying note, the Court, citing a New York Appellate Division, Second Department decision , held that plaintiffs had it backwards: the mortgage is unenforceable apart from its underlying note, but the note remains enforceable apart from its mortgage. This dashed plaintiffs’ hopes of using the controversial MERS system (of registering mortgages in the name of an agent so that they could be more easily assigned among lenders) as a basis to get out from under their debt. Since Countrywide held the underlying note, the note was enforceable and there could be no fraud claim. With respect to the inflated income on the loan application, plaintiffs claimed that even though they informed Countrywide that their income was lower than that stated on the form, Countrywide took advantage of plaintiffs’ “severe financial stress” and caused them to submit it anyway. Id. at 7. The Court rejected that theory as well, holding “Plaintiffs’ financial situation does not convert their knowing submission of false information into a cause of action for fraud against Countrywide.” Id. The second fraud theory was dismissed because plaintiffs could not have reasonably relied “on a lender’s misstatement of one’s own income, which one knows to be false.” Id. The Court went on to uphold plaintiffs’ statutory claim for quiet title under Article 15 of the New York Real Property Actions and Proceedings Law, the only claim to survive the dismissal motion.
On March 27, 2014, the Second Circuit issued a decision in DPWN Holdings (USA), Inc. v. United Airlines, Inc., No. 12-4867-cv, discussing the standard for determining whether a post-bankruptcy-discharge lawsuit can be brought based on pre-discharge claims.
In DPWN Holdings, the EDNY denied the defendants’ motion to “dismiss an antitrust price-fixing claim,” rejecting the defendants’ argument that “the plaintiff had sufficient notice of the availability of the claim against a Chapter 11 debtor to satisfy due process requirements and render the claim discharged.” The Second Circuit reversed, explaining that: (more…)
On March 11, 2014, the Second Circuit issued a decision in Donachie v. Liberty Mutual Ins. Co. et al., Nos. 12-2996-CV (Lead), 12-3031 (XAP), clarifying “the scope of a district court’s discretion in deciding whether to award attorneys’ fees to a prevailing” ERISA plaintiff.
In Donachie, the EDNY granted the plaintiff summary judgment “on his claim for long-term disability benefits pursuant to ERISA,” but denied the “plaintiff’s request for attorneys’ fees, based on the conclusion that defendant did not act in bad faith.” The Second Circuit reversed the denial of an award of attorneys’ fees, explaining:
[A] district court’s discretion to award attorneys’ fees under ERISA is not unlimited, inasmuch as it may only award attorneys’ fees to a beneficiary who has obtained some degree of success on the merits. . . . [W]hether a plaintiff has obtained some degree of success on the merits is the sole factor that a court must consider in exercising its discretion. Although a court may, without further inquiry, award attorneys’ fees to a plaintiff who has had some degree of success on the merits, . . . courts retain discretion to consider five additional factors in deciding whether to award attorney’s fees. Those five factors, known in this Circuit as the Chambless factors are:
(1) the degree of opposing parties’ culpability or bad faith; (2) ability of opposing parties to satisfy an award of attorneys’ fees; (3) whether an award of attorneys’ fees against the opposing parties would deter other persons acting under similar circumstances; (4) whether the parties requesting attorneys’ fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA itself; and (5) the relative merits of the parties’ positions.
. . .
[However,] if a court chooses to consider factors other than a plaintiff’s success on the merits in assessing a request for attorneys’ fees, Chambless still provides the relevant framework in this Circuit, and courts must deploy that useful framework in a manner consistent with our case law. A court cannot selectively consider some factors while ignoring others.
(Internal quotations and citations omitted) (bold emphasis added).
Because the district court “misapplied” the Chambless “framework,” the Second Circuit found that it had abused its discretion and, on performing the analysis itself, found no reason to deny an award and remanded the case to the district court for an award of reasonable fees.
In a March 11, 2014, summary order, the Second Circuit (Katzmann, C.C.J., Sack, C.J., and Rakoff, D.J.) vacated an order denying the plaintiff’s motion for attorneys’ fees under the Americans With Disabilities Act (the “ADA”). The court also remanded and reassigned the case because Eastern District Judge Sterling Johnson, Jr. had conducted his own investigation of the premises at issue and determined that plaintiff’s counsel had not succeeded in remedying the ADA violations—and therefore was not deserving of attorneys’ fees.
The seemingly sui generis case is Costello v. Flatman LLC, No. 13-1446 (Mar. 11, 2014). The plaintiff obtained a default judgment against the defendant for violations of the ADA and moved for attorneys’ fees as provided in the statute. The district judge visited each of the businesses identified in the plaintiff’s eight lawsuits, and took judicial notice that the “‘alleged structural deficiencies preventing access to persons with disabilities still exist.'” Slip Op. at 3 (quoting district court). Based on those observations, the district court concluded that plaintiff’s counsel “never sought to remedy these failings” and consequently that he should receive no attorneys’ fees. Id. In vacating and remanding, the Circuit explained that structural defects in the buildings that prevented access to the disabled did not represent the kind of fact appropriate for judicial notice because “it is not clear” that such defects are “not subject to reasonable dispute” or that the district court’s conclusions could be “readily determined from sources whose accuracy cannot reasonably be questioned.” Id. The Panel also granted the plaintiff’s request that on remand the case be assigned to another judge, given “the district court’s error in conducting its own investigation of the restaurants and taking judicial notice of its findings.” Id. at 4. The Court did not question the district judge’s impartiality, but said he would likely have difficulty on remand putting his own findings out of his mind.
The domestic relations exception to diversity jurisdiction, which divests federal courts of power to issue divorce, alimony, and child custody decrees, is generally well-known. But the Witness Security Reform Act of 1984 (the “Program Statute”), which deals with the federal witness protection program, creates a rare exception to the exception by expressly creating a right of action for domestic relations matters in federal courts where the Program Statute applies.
In Garmhausen v. Corridan, 07-CV-2565 (ARR)(LB) (E.D.N.Y. Feb. 25, 2014), Judge Allyne R. Ross had to decide whether a child custody dispute involving a parent who had left protective custody would nevertheless benefit from the Program Statute’s federal right of action. Plaintiff, the father of the child at issue, argued that the Program Statute no longer applied once the mother left protective custody, and therefore the court did not have subject matter jurisdiction over the dispute. The government, appearing on behalf of the mother, argued that the court had jurisdiction–even though the mother had been removed from the witness protection program—because the terms of the Program Statute continued to apply. According to Judge Ross, this was a matter of first impression.
The statute makes itself applicable “to any person provided protection” under the program. The government argued that “once someone is ‘provided’ protection, their lives change in immeasurable ways—e.g., new identities, cessation of communication with loved ones, removal to a new state—and they do not typically revert to their former identities or lives when any physical protection ends.” Id. at 5. In essence, the government’s position was that the court retained jurisdiction because once a witness is in the program, he or she never leaves. Judge Ross agreed, finding as a policy matter that it was important to extend the Program Statute’s protections “because of the ongoing relationship that continues in place between Corridan and the Program.”
In U.S. v. Finazzo, 10-CR-457 (RRM)(RML) (E.D.N.Y. Jan. 14, 2014), Judge Roslynn Mauskopf denied three post-trial motions by Defendant Christopher Finazzo: (1) for judgment of acquittal (under Fed. R. Crim. P. 29); (2) to vacate the judgment (under Fed. R. Crim. P. 33); and (3) to arrest the judgment (under Fed. R. Crim. P. 34).
Finazzo was an executive at the clothing retailer Aeropostale who was accused of funneling some of Aeropostale’s graphic t-shirt business to a vendor (“South Bay”) that gave him kickbacks by sharing its profits from the referred business. According to the government, Aeropostale lost profits because it could have paid less to other suppliers if Finazzo had not improperly diverted the accounts to South Bay, in which he owned an undisclosed interest. Interestingly, Aeropostale discovered the fraud during a separate investigation into Finazzo’s conduct, when it uncovered an email from Finazzo’s personal attorney that referred to a list of assets in his “revised wills” that included his interest in South Bay.
After trial, Finazzo challenged his convictions on over a dozen counts of mail and wire fraud. He essentially claimed that the government had failed to offer “solid proof of the actual, identifiable, monetarily better deal” Aeropostale could have gotten elsewhere. Op. at 27. Judge Mauskopf rejected that argument. She held that the applicable mail and wire fraud statutes did not impose such a requirement, and even if they did, there was evidence introduced at trial sufficient to show that the company would have paid lower prices for t-shirts from other vendors.
In The Gowanus Dredgers v. Baard, 11 CV 5985 (PKC) (E.D.N.Y. Dec. 17, 2013), the Gowanus Dredgers (the “Dredgers”), a charitable organization established “to raise awareness of environmental issues affecting the Gowanus waterfront in Brooklyn and the broader New York/New Jersey harbor area,” sued Erik Baard, the founder of a group called the Long Island City Community Boathouse (“Boathouse”) that later became affiliated with the Dredgers. After Baard resigned from the leadership of both the Dredgers and the Boathouse, he allegedly continued to use the logo and name of the Boathouse on his Facebook page. As a result, the Dredgers sued Baard for trademark infringement under the Lanham Act, common law unfair competition, and New York’s unfair competition laws.
In deciding the Dredgers’ motion for summary judgment, Judge Pamela Chen addressed whether they had standing to assert infringement claims owned by the Boathouse, which used (and therefore owned) the trademark at issue. The Dredgers argued that they owned the Boathouse’s trademark because: (1) the Boathouse was “essentially a subsidiary” of the Dredgers; (2) the Boathouse was an “activity committee” of the Dredgers governed by the Dredgers’ by-laws; (3) the Dredgers provided insurance to the Boathouse; and (4) the Boathouse operated as a “fiscal conduit” for fundraising for the Dredgers. Baard countered by arguing that the Boathouse was a separate entity from the Dredgers, therefore they did not have standing to assert the infringement claims at issue.
Judge Chen found that issues of fact concerning the Dredgers’ ownership of the Boathouse precluded summary judgment. She was not persuaded that the purchase of insurance coverage or the alleged “fiscal conduit” relationship constituted evidence of ownership. What she found “most telling” was the absence of a contract, board minutes, correspondence, or an authorization evidencing the Dredgers’ ownership of the Boathouse. After oral argument she gave the Dredgers the opportunity to submit an affidavit supplementing their claim of ownership, and the Dredgers did so. However, the affidavit did not definitively resolve the ownership question and left issues of fact.
In Animal Science Products, Inc. v. Hebei Welcome Pharmaceutical Co. Ltd., 05 CV 0453 (E.D.N.Y. Dec. 30, 2013), Judge Brian Cogan granted in part plaintiffs’ request for attorneys’ fees under the Clayton Act, to the extent of awarding $4,093,163.35 in fees, and no costs, out of the $13,724,641.75 in fees and $1,363,307.68 in costs requested. The case was a seven-year, multi-district anti-trust class action against Chinese vitamin C manufacturers, in which a group of direct purchasers alleged that the defendants participated in a cartel to fix prices and limit the output of vitamin C exported to the United States. Plaintiffs settled with two of the four main defendants and ultimately recovered a judgment, after a jury trial and trebling of the damages, of $153,300,000 against defendants Hebei Welcome Pharmaceutical Co. and North China Pharmaceutical Group Corp. Plaintiffs were represented by Boies, Schiller & Flexner LLP and Susman Godfrey LLP.
Judge Cogan accepted plaintiffs’ counsel’s hourly rates of $375-$980, even though they were higher than the rates customarily charged by lawyers with offices in the District, due to the complex and demanding nature of the case. The Court said the case involved factual and legal issues that “have never been considered in this district and very possibly would be unique anywhere,” and required that “extraordinary” resources “be brought to bear to prosecute the case.” Slip op., 3. In the Court’s view there was “no plaintiffs’ class action firm with the capacity to deal with a case of this magnitude resident within this district.” Slip op., 4. The Court said that because it was not a “close question” whether to apply the forum rate or counsel’s national rates, there was no need for plaintiffs to offer independent evidence that their counsel’s national rates were reasonable. Rather, the Court relied on its own knowledge of market rates in the relevant community, which includes the Southern District, and said that plaintiffs had bolstered their reasonableness showing by demonstrating that counsel’s proposed rates were the same as the rates charged to clients paying on an hourly basis, and that similar or higher rates had been approved by courts in other complex class action litigation.
Virtually the entire reduction in the fees and the complete denial of the costs was in order to avoid what Judge Cogan viewed as double counting, in light of plaintiffs’ prior receipt of a substantial amount in fees and costs from the settling defendants. Plaintiffs sought the “full amount of their fees in this case even though a substantial portion of those fees have been paid” as a result of the settlements, on the theory that “they are entitled to an enhancement of their lodestar calculation and that in lieu of that, I should not apply a credit in favor of defendants to their fee recovery.” Slip op., 11. Judge Cogan rejected plaintiffs’ argument that relied on a “linkage between an enhancement and an offset” for fees already recovered, because plaintiffs’ proposal would result in an enhancement of “over 100%.” He concluded that not offsetting the fees plaintiffs had already received would result in a windfall to them at odds with the Clayton Act’s allowance of a “reasonable” fee award.
In In re Symbol Techs., Inc. Securities Litigation, 05 CV 3923 (E.D.N.Y. Dec. 5, 2013), Judge Denis Hurley denied defendants’ motion to dismiss the consolidated amended class action complaint. The case involves Symbol Technologies, a manufacturer of inventory management products that was the subject of a government investigation into “systematic accounting fraud, including the manipulation of inventory levels to artificially inflate reported revenues” prior to the class period. That government investigation led several former executives to plead guilty to criminal charges and the company to agree to consent decrees enjoining future violations of the antifraud provisions of federal securities laws.
At issue in the case were statements by the company and its senior executives to the effect that the company had put its financial improprieties behind it. According to the complaint, those statements misrepresented Symbol’s financial results, the efficiency of its internal controls, and improvements in its corporate governance, which led to an inflation of Symbol’s stock price that damaged plaintiffs when the truth emerged. Judge Hurley had little trouble concluding that the consolidated amended complaint sufficiently alleged the necessary elements of a securities fraud claim: misrepresentations by defendants, materiality, falsity, scienter, and loss causation.
Of interest to us was his analysis of defendants’ claim that the Private Securities Litigation Reform Act’s “safe harbor” provision applied to defendants’ revenue projections. The lead plaintiff argued that the safe harbor provision did not apply because of an exclusion for issuers who had “been the subject of a judicial or administrative decree or order.” In short, plaintiff asserted that Symbol’s consent decrees deprived the company of safe harbor protection while defendants asserted that the consent decrees did not constitute a “judicial or administrative decree or order.” In a case of first impression—neither the parties nor the Court found direct support for either side’s position—Judge Hurley found defendants’ argument to be a “distinction without a difference” and held the exclusion to apply.
In In re Gentiva Securities Litigation, 10 CV 5064 (E.D.N.Y. Dec. 10, 2013), two individual defendants and the defendant corporation moved for reconsideration of Judge Arthur D. Spatt’s order denying their motion to dismiss federal securities claims. The case is a class action alleging that Gentiva, a health care provider, artificially inflated its stock price through a scheme that involved ordering unnecessary medical care for clients, and then billing the federal government for these illegitimate expenses. At issue was whether the plaintiff class had properly pleaded scienter.
One of the individuals, Potapchuck, asserted that the claims against him did not meet Section 10(b)’s scienter requirement because he sold his shares pursuant to a “10b5-1 plan,” under which shares are divested at predetermined times. Potapchuck pointed out that he sold only 12% of his shares, if the 10b5-1 trades were disregarded. That fact made the difference on reconsideration. After commenting that “Defendants should have specifically quantified the number of 10b5-1 [trades] in their prior motions to dismiss, rather than relying on the Court to comb through the Defendants’ financial records,” the Court found that the relatively small amounts at issue—just 12% of Potapchuck’s shares, resulting in $300,000 in net profits—did not support an inference of scienter. The Court reached a different result regarding the other individual defendant, Malone, who sold 99% of his shares during the class period for approximately $2.14 million (and none pursuant to 10b5-1 plans). Those trades were sufficient to plead scienter against Malone.
The fact that only one corporate insider engaged in allegedly suspicious sales caused the Court to change its mind about the Section 10(b) claim against Gentiva as well, which was dismissed on the ground that an inference of its fraudulent intent could not be shown. Thus, the Court reversed course on reconsideration and dismissed two of the three defendants, while upholding claims against the third.