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Current Developments in the US District Court for the
Eastern District of New York
Posted: March 8, 2016

Apple Not Required To Assist U.S. Search Of Drug Dealer’s Phone Under All Writs Act

A lot of media attention is being devoted to Apple’s fight with the U.S. Government over a California Magistrate Judge’s February 16, 2016, ex parte order requiring Apple to assist in the Government’s investigation of the San Bernardino mass shooting by disabling the password security features on the iPhone of one of shooters. But as EDNY Magistrate Judge James Orenstein notes in In re Order Requiring Apple, Inc. to Assist in the Execution of a Search Warrant Issued by This Court, 15-MC-1902 (EDNY. Feb. 29, 2016), the California case is only one of several—including the one before him—around the country that presents similar issues under the All Writs Act (the “AWA”). In a thorough, 50-page Memorandum and Order, Magistrate Judge Orenstein denied the Government’s motion to compel assistance from Apple, thereby providing one of the first reasoned legal decisions in an important privacy vs. security societal debate.

The facts in the case before Magistrate Judge Orenstein are much more routine than those arising from the San Bernardino attack. It is precisely because of the adage that ‘hard cases”—like ones involving terrorism and national security—can make “bad law,” that Apple has pushed for consideration of the reach of the AWA in everyday criminal cases like this one. Here, the Government had obtained warrants in 2014 to arrest and search the residence of Jun Feng, a Queens resident, suspected of conspiracy to traffic in methamphetamine. Feng was arrested, indicted and one year later pled guilty. In executing the original search warrant, the DEA had seized (among other things) Feng’s iPhone 5s. Shortly before Feng’s guilty plea, the Government obtained another search warrant—this time to search Feng’s devices, including his iPhone—as part of its continuing investigation into Feng and his co-conspirators. The DEA and FBI were stymied, however, by the iPhone’s password security features which, the Government alleged, threatened to damage the data on the device if the federal agents were to query it without Apple’s technical assistance. Apple refused to assist without a “lawful order” of a court requiring it to do so. The Government applied to the EDNY for such an order under the AWA. At first, Apple provided minimal opposition and the matter languished for several months; however, after its loss in the California case on February 16, 2016, Apple pushed for a reasoned decision on the AWA in New York and it got one.

The AWA, only modestly rephrased since enacted by the first Congress as part of the Judiciary Act of 1789, today states that Article III courts ‘may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” 28 U.S.C. §1651. Magistrate Judge Orenstein denied the Government’s application first, for failing to meet the statutory requirement of being “agreeable to the usages and principles of law” and, second, as a matter of judicial discretion based on the statute’s permissive “may” language.

On the “usages and principles of law” issue, the Magistrate noted that in 1994 Congress had passed the Communications Assistance for Law Enforcement Act (“CALEA”), which provides a fairly “comprehensive legislative scheme” on the extent to which private telecommunications carriers and information service providers are required to assist government agents in law enforcement matters. The Court found that the absence “from that scheme of any requirement that Apple provide the assistance sought here implies a legislative decision to prohibit the imposition of such a duty.” Slip op. 16-20. It further held that the Government had failed in its affirmative obligation to cite other “usages and principles of law” where Congress had empowered the federal courts to compel private entities (as opposed to regulated utilities such as phone companies) to assist in law enforcement. The Magistrate declined to read the AWA as a broad legislative grant to allow any and all orders necessary or appropriate in aid of a court’s jurisdiction because such a reading “raises serious doubts about how such a statute could withstand constitutional scrutiny under the separation-of-powers doctrine.” Slip. op. 29.

The Court did not consider the constitutionality of the application of the AWA to the liberty or due process interests of citizens, such as Apple, that might be compelled against their will to assist in government investigations. However, Magistrate Judge Orenstein held that the Government’s application directed to Apple also failed under the three “discretionary factors’ used in AWA cases: (1) the “closeness” of the party being compelled to the criminal activity at issue; (2) the “burdensomeness” of the Government’s demands on compelled party and (3) the “necessity” of the Government’s obtaining the party’s assistance. Slip. op. 31-48. In brief, the Court reasoned that Apple bore no relationship to or responsibility for Feng’s criminal activity, that being required to disable security features of its products would adversely affect Apple’s business in the eyes of consumers, and that there was “conflicting evidence in the record about the availability, from private sources other than Apple, of technology that would allow the government to bypass the security on Feng’s device.” Slip op. 46.

At the time of this writing, the case is on appeal to District Judge Margo Brodie.

Posted: January 29, 2016

Second Circuit Examines Appealability of Non-Final Orders

On December 9, 2015, the Second Circuit issued a decision in Rodriguez v. Anderson, 14-3828(L), dismissing an appeal because it was from a non-final order.

In Rodriguez, both the plaintiff and certain defendants appealed the denial of their motions for summary judgment. The Second Circuit dismissed their appeals, explaining, with respect to the plaintiff’s appeal:

The historic rule in the federal courts has always prohibited piecemeal disposal of litigation and permitted appeals only from final judgments. Nonetheless, under Rule 54(b), a district court can determine, in its discretion, if an immediate appeal is warranted in the interests of justice by issuing a certification along with an explanation for its determination. But the exercise of this discretion must follow the procedures set out by the Rule, and the requirement of an express determination that there is no just reason for delay has not been taken lightly by this Circuit.

This Court has held that it is possible to have jurisdiction over a non-final order even when the district court did not formally enter a Rule 54(b) certification:

When there is a judgment in a consolidated case that does not dispose of all claims which have been consolidated, there is a strong presumption that the judgment is not appealable absent Rule 54(b) certification. In highly unusual circumstances, a litigant may be able to overcome this presumption and convince us that we should consider the merits of the appeal immediately, rather than waiting for a final judgment.

But the exception identified in Hageman has been restricted to highly unusual circumstances, for example, where the district court clearly intended to enter a final judgment but inadvertently failed to do so.

The parties do not point to any such highly unusual circumstances in this case. . . . [The plaintiff] never sought Rule 54(b) certification, and she does not identify any evidence that the district court intended to but inadvertently failed to certify its order for immediate review. Indeed, it is clear from that order that the district court anticipated that trial would go forward on [the plaintiff’s] claims, and the court scheduled a trial date during the follow-up status conference. . . . We have repeatedly noted that the district court generally should not grant a Rule 54(b) certification if the same or closely related issues remain to be litigated.

Accordingly, [the plaintiff’s] appeal is dismissed. [The plaintiff] may file a motion in the district court requesting Rule 54(b) certification in order to reinstate her appeal, but we note that the district court is under no obligation to grant her request. Respect for the historic federal policy against piecemeal appeals requires that a Rule 54(b) certification not be granted routinely.

(Internal quotations and citations omitted).

Posted: January 12, 2016

Court-Appointed Guardian Ad Litem Not a State Actor

On December 22, 2015, the Second Circuit issued a decision in Milan v. Wertheimer, 14‐3527‐CV, holding that court-appointed law guardians are not state actors for the purposes of Section 1983.

In Milan v. Wertheimer, the plaintiff brought Section 1983 claims against several defendants, including two lawyers (Fred Wertheimer and Denise Costanza) who were “law guardians, also known as ‘attorney[s] for the child,’ appointed by New York’s family court to represent the interests of [the plaintiff’s] children in . . . custody proceedings.” The EDNY dismissed the claims against the law guardians. The Second Circuit affirmed, explaining:

The question of whether law guardians so appointed are state actors has not previously been addressed by this Court.

Other circuits, in determining that law guardians are not state actors for the purpose of § 1983, have relied largely on Polk County v. Dodson, 454 U.S. 312 (1981).    In Polk County, the Supreme Court held that public defenders do not act under color of state law when performing a lawyer’s traditional functions as counsel to a defendant in a criminal proceeding, notwithstanding the fact that the state pays for the services they provide. We believe that the analogy of a law guardian to a public defender is apt.  Although both are supplied and funded by the state, each acts according to the best interests of the client with no obligation to the mission of the state. Accordingly, we hold that law guardians who act as attorneys for the child are not state actors for the purposes of suits filed pursuant to § 1983.

(Internal quotations and citations omitted).

Posted: December 14, 2015

Court Awards $5 Million In Attorneys’ Fees And Costs In Civil Rights Saga

“The Court assumes familiarity with the facts and procedural history of the case” Judge Joanna Seybert writes in the opening sentence of Restivo v. Nassau County, 06-CV-6720 (E.D.N.Y. Nov. 30, 2015), but it is difficult to appreciate fully the outcome – the award of $5 million in attorneys’ fees and costs to the well-known plaintiffs’ civil rights firm, Neufeld Scheck & Brustin LLP (“NSB”) – on the basis of the short summary that the Court provides to resolve the fee motion. This much shorter blog entry will necessarily do the matter even less justice, but here goes: plaintiffs John Restivo and Dennis Halsted were wrongly convicted in 1985 for the rape and murder of a Long Island teenager named Theresa Fusco. They spent 18 years in prison, until 2003, when they were finally released based on exculpatory DNA evidence and the help of attorneys from the “Innocence Project” (which was founded by named NSB partners, Barry Scheck and Peter Neufeld).

In 2006, NSB filed a § 1983 civil rights action on behalf of Restivo, Halsted and a third-man, John Kogut, who had initially confessed to the crime but was acquitted in a 2005 re-trial based on evidence that the lead Nassau County detective on the case, Joseph Volpe, had manufactured evidence and had obtained the confession improperly. The issue in § 1983 action was whether Volpe and Nassau County had unconstitutionally deprived the plaintiffs of their right to a fair trial. The plaintiffs also sued for malicious prosecution. A first trial ended in 2012 in a verdict for defendants. NSB moved for a new trial for Restivo and Halsted on the ground that they were prejudiced by the jury’s receipt of evidence of Kogut’s confession, which tainted its consideration of the degree to which the defendants had probable cause to suspect Restivo and Halsted. Judge Seybert granted a new trial in her joint decision in Kogut v. County of Nassau, 06 CV 6695, and Restivo v. Nassau County, 06-CV-6720 (EDNY, July 22, 2013). In the second trial, which ended in 2014, the jury awarded Restivo and Halsted $18 million each — $1 million for each year of their wrongful incarceration.

Judge Seybert’s fee decision recites impressive numbers of deposition and trial days, expert reports and Daubert challenges over the course of eight years of civil litigation, including two trials. It is clear that the facts and the results, not nuance in the law on attorneys’ fees, drives the award. Nevertheless, there are a few legal tidbits for practitioners who are fond of the law of lawyering. First, the Court found that counsel could overcome the presumption in favor of “in-district” hourly fee rates and granted the application for higher SDNY partner rates of $700/hour on the ground that “no lawyers with primary offices in the [EDNY] have obtained a successful jury verdict in a § 1983 wrongful conviction suit, as NSB did here” Slip Op. 7. Second, the Court refused to dock the application for time spent on “dismissed, withdrawn and abandoned claims” quoting the Second Circuit for the proposition that “[e]specially in a complex case, competent counsel is entitled to raise ‘alternative legal grounds for a desired outcome, and the court’s rejection of or failure to reach certain grounds is not a sufficient reason for reducing a fee.'” Slip Op. 11 (quoting Green v. Torres, 361 F.3d 96, 100 (2d Cir. 2004)). Third, the Court declined to fault NSB for “block billing” entries on their time sheets (i.e., failure to itemize how much time was spent on each task covered in a multi-task description), noting that the practice “is pervasive in the legal industry” and was not prohibited in this Circuit. Slip Op. 13. Indeed, the only “haircut” to the application was the “legitimate concern” raised by Defendants to “instances in which NSB lawyers billed travel time as attorney time.” Slip Op. 13. NSB wisely took that issue off-the-table by agreeing to omit those entries. Id. In the end, the Court awarded $4.58 million in attorneys’ fees for the 1983 actions, $320,000 in costs and $97,132.50 for the time and costs of preparing the fee application itself. The total is $4,997,914.55.

    Editors’ Note: For more casual, but detailed reading about the underlying criminal case against Restivo, Halstead and Kogut, their acquittals, the subsequent civil rights trials and the jury’s $18 million award to each of Restivo and Halstead, see “The Price of a Life” in the April 13, 2015 issue of The New Yorker.

Posted: December 10, 2015

Lender Has Standing to Foreclose When it Possesses Note

On November 24, 2015, the Second Circuit issued a decision in Eastern Savings Bank, FSB v. Thompson, 14-4520-CV, reversing the EDNY’s grant of summary judgment to a defendant in a foreclosure action on the ground that the plaintiff lacked standing to bring a foreclosure action because of defects in the chain of assignments of title.

In Eastern Savings Bank, the plaintiff brought a foreclosure action against the defendant. The EDNY granted summary judgment to the defendant on the ground that the plaintiff lacked standing to bring the action because of a defect (cured after the lawsuit was initiated) in the chain of assignment of the note. The Second Circuit reversed, explaining:

Under New York law, a plaintiff establishes its standing in a mortgage foreclosure action by demonstrating that, when the action was commenced, it was either the holder or assignee of the underlying note. Notably, either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident. Thus, although assignment of a mortgage without the accompanying note does not provide the assignee with a right to the debt, the delivery or assignment of a note without the accompanying mortgage transfers the debt and can confer standing on the recipient.

. . . The record admits no genuine dispute that [the plaintiff] possessed the original note, indorsed in blank, prior to commencing this action in March 2012. . . . Further, defendants failed to raise any question of fact as to whether [the plaintiff] retained possession of the note.

When a plaintiff demonstrates that upon commencement of the action it possessed a note, indorsed in blank, by way of physical delivery, New York has consistently found the plaintiff to have sufficient interest in the enforcement of the debt to support standing in a foreclosure action.

(Internal quotations and citations omitted) (emphasis added).

Posted: December 1, 2015

Suit Against State Court Judges Barred By Younger Abstention Doctrine

On November 12, 2015, the Second Circuit issued a decision in Falco v. Justices of the Matrimonial Parts of the Supreme Court of Suffolk County, 15-863-CV, affirming the dismissal of an action against New York State Supreme Court justices on Younger Abstention Doctrine grounds.

In Falco, the plaintiff was ordered by a Suffolk County matrimonial judge to pay half the cost of court-appointed counsel for his children in a divorce proceeding. The plaintiff refused and brought a Section 1983 action in the EDNY “challenging the constitutionality of the New York laws that authorize State judges to order parents to pay for attorneys appointed for their children.” The defendants moved to dismiss on Younger abstention grounds. The EDNY granted the motion. The Second Circuit affirmed.

The court began by discussing the standard for granting a motion to dismiss on Younger abstention grounds. It explained that the EDNY had erred in deciding the motion under the Second Circuit decision in Spargo v. New York State Commission on Judicial Conduct rather than the standard set forth in Sprint Communications, Inc. v. Jacobs, which the Supreme Court decided after Spargo. In Sprint, the Supreme Court “clarified that district courts should abstain from exercising jurisdiction only in three exceptional circumstances involving (1) ongoing state criminal prosecutions, (2) certain civil enforcement proceedings, and (3) civil proceedings involving certain orders uniquely in furtherance of the state courts’ ability to perform their judicial functions” and that “these three exceptional categories define Younger’s scope.”

The Second Circuit went to hold that:

[o]n de novo review, however, we independently conclude that [the plaintiff’s] case presents circumstances that qualify as “exceptional” under Sprint and that Younger abstention was therefore warranted. [The plaintiff’s] federal lawsuit implicates the way that New York courts manage their own divorce and custody proceedings—a subject in which the states have an especially strong interest. In particular, [the plaintiff] challenges the State court’s order that he pay half the fees of the attorney appointed to represent his children in the divorce proceeding. Although there is some disagreement among New York courts about whether the fees for such court-appointed counsel should be borne by the public or by the parents, . . . there is no discernible disagreement that orders relating to the selection and compensation of court-appointed counsel for children are integral to the State court’s ability to perform its judicial function in divorce and custody proceedings. The circumstances of this case therefore clearly fall within Sprint’s third category: pending State civil proceedings involving orders uniquely in furtherance of the state courts’ ability to perform their judicial functions.

(Internal quotations and citations omitted).

Posted: November 30, 2015

Court Elects Lodestar Over Percentage Method In Awarding Attorneys’ Fees In FLSA Case, While Reducing Lodestar Fee To Account For Overstated Hours And Other Timekeeping Excesses

In Marshall v. Deutsche Post DHL, No. 13-CV-1471 (E.D.N.Y. Sept. 21, 2015), Judge Dearie reduced a claim for $500,000 in attorneys’ fees under the Fair Labor Standards Act, 29 U.S.C. § 216(b), to $370,236.50. The parties settled the case for $1.5 million while plaintiffs’ motion for certification as a collective action was pending. Plaintiffs’ claim for compensatory damages was $1,650,000.

Judge Dearie applied the lodestar method, under which a presumptively reasonable fee is determined by multiplying “a reasonable hourly rate by the reasonable number of hours required by the case.” Slip op. 10. He criticized the percentage-of-settlement method for determining fees sought by plaintiffs’ counsel as dependent on one of the prevailing “amorphous multi-factor tests” that “are often outcome driven”—”‘a list of factors without a rule of decision [that] is just a chopped salad.'” Slip op. 12 (quoting In re Synthroid Mktg. Litig., 264 F.3d 712, 719 (7th Cir. 2001)). The judge explained that “[i]t is almost impossible to know what amount of time, litigation magnitude, complexity, and risk justifies a 20 percent versus 30 percent fee award,” and noted that most of the cases awarding a 33 percent fee in employment class actions are “without persuasive force” because they “cite to ‘proposed orders drafted by the class action plaintiffs’ bar'” that reflect minimal, if any, review by judges. Slip op. 12 (quoting Fujiwara v. Sushi Yasuda Ltd., 58 F. Supp. 3d 424, 436 (S.D.N.Y. 2014)).

In applying the “modified” lodestar method, in which the court considers case-specific factors at the outset to determine the reasonable hourly rate (rather than once the lodestar fee is calculated), see Slip op. 14, the Court rejected plaintiffs’ counsel’s requested hourly rates of $400 to $750 for senior partners, $350 and $400, respectively, for a junior partner and senior associate, $190 and $375 for associates, and $85-$150 for paralegals. Judge Dearie observed that prevailing rates in FLSA cases in the Eastern District are “now well established” at $300 to $400 for partners, $200 to $300 for senior associates, and $100 to $150 for junior associates, though he questioned the wisdom of “treating Brooklyn and Manhattan as separate legal markets,” as the Second Circuit does. Slip op. 15 & n.3.

Regarding the number of hours spent, the Court concluded they were “overstated,” finding that many time entries were “vague and evidence redundant work.” Slip op. 20. The Court criticized the “top heavy” approach reflected in the senior partners having spent most of their time reviewing others’ work and “conferring with each other.” Id. Judge Dearie also criticized the firm’s block billing; billing in quarter hour increments, which “tends substantially to overstate” the time spent since “many tasks require only a short time span to complete,” slip op. 21 (internal quotation marks omitted); and billing travel time at full hourly rates, even though the general rule in the District “is that travel time is compensated at one-half the amount of time billed.” Slip op. 22. To “trim the excess” from the billing entries, Judge Dearie imposed an across the board percentage cut of 10%. Slip op. 22. The resulting fee award was $370,236.50. The Court also awarded the total amount of costs requested, some $33,300. See slip op. 23.

Posted: November 25, 2015

Appeal Dismissed As Untimely Based on Unsuccessful Attempt to E-File

On October 30, 2015, the Second Circuit issued a decision in Franklin v. McHugh, No. 14‐4096‐CV, dismissing an appeal as untimely because the electronic filing of the notice of appeal, although timely attempted (and believed by counsel to have been timely made) was not successfully processed by the court’s electronic filing system.

In Franklin, the appellant’s counsel “attempted to file” a notice of appeal from an adverse decision of the EDNY “electronically through the Case Management/Electronic Case Files (“CM/ECF”) system . . . .” He “uploaded the notice of appeal and other requisite documents to the CM/ECF system on that day and paid the required $505 filing fee by accessing www.pay.gov, the federal government website for making payments to government agencies” and “received an email from www.pay.gov transmitting a receipt for his payment.” However, the CM/ECF system did not register the notice of appeal on the court docket on October 23 or, indeed, on any day from then through October 27.  Rather, on October 28, after” appellant’s counsel “learned that the District Court docket sheet (operated through CM/ECF) did not reflect the notice of appeal, his office contacted the Eastern District’s Clerk’s Office,” which told him to refile the documents, and pay the fee again,” which he did. Appellant’s counsel “was assured that the initial receipt of October 23, 2014 would stand as proof that” he “did timely file, but due to issues with the ECF system the notice of appeal did not get properly docketed.”

The respondent moved to dismiss the appeal as untimely. The Second Circuit granted the motion. It began by reciting the established rule that “[t]he timely filing of a notice of appeal in a civil case is a prerequisite to the appellate court’s jurisdiction” and “is not subject to judicially created equitable exceptions.” It went on to address whether appellant had timely filed the notice of appeal.

The court examined the local rules relating to electronic filing, explaining:

[T]the Joint Local Civil Rules of the United States District Courts for the Southern and Eastern Districts of New York direct parties serving and filing papers to follow the instructions regarding Electronic Case Filing (ECF) published on the website of each respective Court. They confirm that a document filed by electronic means in accordance with such instructions will be deemed properly filed. The Eastern District publishes its instructions for electronic filing in that court’s CM/ECF User’s Guide, available on its website.  As relevant here, it instructs:

Upon completion of an electronic filing the last screen you see is a Notice [o]f Electronic Filing screen. This screen will tell you, among other things, the document number assigned to your document; will contain your electronic file stamp; and, at the bottom of the page, will notify you that a notice will be, or will not be, electronically mailed to counsel.

Although the Eastern District’s instruction could have been more explicit, it plainly implies that an electronic filing is not complete until the last screen, called “Notice of Electronic Filing,” appears on the user’s computer.   

(Internal quotations and citations omitted). The court went on to find that:

although [the appellant’s] counsel undoubtedly intended to file a notice of appeal electronically on October 23, 2014, his efforts fell short of the mark.  His account of his attempt to file electronically a notice of appeal on October 23 suggests strongly that counsel simply overlooked the last step of the process: he appears to have followed the electronic filing process through the fee‐paying stage only, stopping upon receiving the receipt for payment.  He does not represent that he proceeded past that point or that he received the critical Notice of Electronic Filing screen; and he appears to have failed at the time to notice the shortcoming.
  
As described in the User’s Guide, only the appearance of the Notice of Electronic Filing screen would have confirmed that the notice of appeal was actually filed and docketed.  The notice of appeal therefore was not “filed” with the Eastern District’s Clerk’s Office on October 23, and our Court is not at liberty to treat it as having been filed then.  Rather, the record is plain that the notice was filed—untimely—on October 28, 2014.

(Internal quotations and citations omitted). The court suggested that the error might have been curable, but that appellant’s counsel failed to do so, explaining:

This is not to say that there might not be occasions in which a true malfunction in the CM/ECF system or in Internet operation prevents or somehow distorts a timely electronic filing.  In such an instance, the federal rules provide for the vigilant counsel a path to relief in the district courts from the otherwise unforgiving deadline that we apply here: Federal Rule of Appellate Procedure 4(a)(5)(A) empowers a district court to extend the time to file a notice of appeal if a party so moves no later than 30 days after the time prescribed by this Rule 4(a) expires and shows excusable neglect or good cause.  Thus, after [the appellant’s] counsel learned on October 28 that his October 23 notice of appeal was not in fact filed, he might have moved the District Court, within 30 days after the appeal deadline to extend the time for filing his notice of appeal.  Absent an extension, however, . . . our Court cannot accept [the appellant’s] notice of appeal as timely.  And the District Court no longer has authority to alter [the appellant’s] time to appeal.

(Internal quotations and citations omitted).

Posted: November 10, 2015

No Forfeiture of Substitute Property Without Showing That Offense Property Unrecoverable

In United States v. Espada, 10 CR 00985-1 (EDNY, Sept. 2, 2015), Judge Frederic Block explored competing claims to the pension benefits of convicted former state senator Pedro Espada, in the context of the Government’s effort to forfeit the pension. The Government sought forfeiture of the pension as “substitute assets,” that is, assets not connected to the offense for which Espada was convicted. In order to forfeit substitute assets the Government must show that, in essence, offense assets are not available for forfeiture, and once that showing is made, the court “is required to enter a preliminary order forfeiting the substitute property without regard to any third-party interests in the property.” Slip op. 7, 9. Following Judge Block’s entry of a preliminary order of forfeiture, Espada’s wife filed a petition claiming an interest in the pension as his beneficiary. Under the forfeiture statutes, title to offense assets vests in the United States upon commission of the crime, a principle known as the “relation back” provision. Slip op. 8. The relation back provision, however, “does not specify when the government acquires an interest in substitute property.” Id. (emphasis in original). Thus, the Court had to decide whose interest in the pension vested first, the Government’s or Mrs. Espada’s.

The Court concluded that under state law, Mrs. Espada’s interest vested when her beneficiary’s interest became irrevocable in January 2011. Slip op. 11. Determining when the Government’s interest vested, however, was “a question of some complexity,” since the relation back provision does not say “when the government’s interest in substitute property vests and the Second Circuit has yet to address this precise question.” Slip op. 13. The Court drew on case law surrounding pre-trial restraints of substitute assets under the forfeiture statutes, the majority of which holds that the pre-trial restraints available for use against offense property cannot be applied to substitute assets. Slip op. 14-18. The Second Circuit so held in construing the forfeiture provisions of the RICO statute—which “are identical in all material respects to those of the criminal forfeiture statute,” Slip op. 16—in United States v. Gotti, 155 F.3d 144 (2d Cir. 1998). Slip op. 17.

Based on the text of the forfeiture statute and the case law, Judge Block concluded that the Government cannot acquire an interest in substitute property until it has demonstrated that it cannot obtain offense property for forfeiture. Accordingly, the Government’s interest in Espada’s pension vested only on January 23, 2014, “when the Court entered a preliminary order forfeiting his pension as substitute property.” Slip op. 22. Since Mrs. Espada’s interest vested first, the Court granted summary judgment in Mrs. Espada’s favor, stating that it would issue an amended forfeiture order reflecting her interest in the pension. Slip op. 23.

Posted: October 27, 2015

Judge Cogan Strips Belarus Entities Of Sovereign Immunity Defense As Sanction For Discovery Abuse

In a civil case of international intrigue, Funk v. Belneftekhim a/k/a Concern Belneftekhim, 14 CV 0376 (E.D.N.Y. Oct. 20, 2015), the facts alone make for a worthy read. Plaintiffs, a New York attorney and his legal assistant, represented investors in defendants, a Belarusian oil company and its U.S. subsidiary that were connected with Belarussian government officials and several “John Does.” U.S. governmental sanctions in 2006 and 2007 against Belarus gave rise to a “commercial dispute” between plaintiffs’ clients and defendants over the status of the investments. Slip op. at 3. According to the complaint, instead of negotiating in good faith, after several meetings in New York, the defendants in 2008 “lured” plaintiffs to travel to London whereupon they drugged plaintiffs, flew them against their will to Belarus and imprisoned and tortured them for over a year. District Judge Brian M. Cogan’s opinion recounts diplomatic efforts at high levels of the U.S. government and human rights organizations to obtain plaintiffs’ release. Slip op. at 5.

In 2012, plaintiffs commenced suit in New York Supreme Court against defendants for assault and battery, false imprisonment, infliction of emotional distress and other intentional torts. Defendants did not answer and took no action with respect to the case until 2014, when they removed it to federal court on the twin bases of diversity jurisdiction and original jurisdiction for actions involving foreign states. Defendants then moved to dismiss based upon sovereign immunity defense and lack of personal jurisdiction. The Court determined that the parties would have to engage in discovery for it to resolve the issues, but defendants would not cooperate. The Court at first issued monetary sanctions against defendants and, when they failed to pay, plaintiffs moved for default judgment as a discovery sanction.

The legal issues resolved might at first blush appear to be of interest only to the litigants, but Judge Cogan grappled with several jurisdictional, pleading and discovery issues that should attract wider attention. First, Judge Cogan resolved that “a discovery sanction other than monetary fines, which defendants continue to refuse to pay, is appropriate.” Slip op. at 10. He added that “although it may eventually come that point,” id., default was too much of a sanction too soon and that, first, the Court should impose a lesser but still severe sanction of striking the sovereign immunity defense. In that way, the sanction fit the offending conduct of failure to engage in discovery on the defense. The Court vacated “per diem” monetary sanctions previously imposed on defendants on a going forward basis, but kept those in place that had already accumulated.

The striking of the sovereign immunity defense gave rise to another issue: whether the removal was untimely. 28 U.S.C. 1441(d) allows for enlargement of the usual 30-day period for removal (see section 1446) in cases of sovereign immunity “at any time for cause shown.” Plaintiff argued for remand based on the dismissal of the defense. The Court rejected remand on the grounds that, at the time of the removal, “it [was] not the case that the defense was so frivolous that [defendant] could not invoke [Section 1441(d)] and trigger the Court’s discretion to enlarge the removal period.” Slip op. at 11. The Court further noted that it continued to have diversity subject matter jurisdiction. Id.

Finally, the Court required plaintiffs to re-plead with more particularity under Fed. R. Civ. P. 9(b) their fraud claim that defendants had “lured” them from New York to London with the intent to imprison them in Belarus. It noted that “defendants’ personal jurisdiction arguments may well be dependent on the survivability of the plaintiffs’ fraud claims.” Slip op. at 13. The Court noted that “[m]erely attributing statements to [corporate] ‘defendants’ is not enough as it neither alleges the names of the speakers nor the specific positions they held for defendants.” Slip op. 15. Sympathizing that the plaintiffs could not without discovery identify several of the John Doe defendants, the Court added “if any of the John Doe defendants are responsible for the fraudulent statements, plaintiffs must at least identify what the Doe defendant said, when it was said and where it was said.” Id.