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Current Developments in the Commercial Divisions of the
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Posted: July 11, 2018

Tortious Interference Claim Upheld; Defendant Did Not Establish Economic Interest Defense as a Matter of Law

On July 5, 2018, the First Department issued a decision in Normandy Real Estate Partners LLC v. 24 E. 12th St. Associates LLC, 2018 NY Slip Op. 04969, refusing to dismiss a tortious interference claim because the defendant could not defeat the economic interest defense as a matter of law, explaining:

The complaint states a cause of action for tortious interference with contract by alleging that plaintiff entered into a valid contract (the letter agreement) with Associates, that Tahari had knowledge of the letter agreement, that Tahari intentionally and improperly induced Associates to breach the enforceable provisions of the letter agreement by entering into an agreement with it to purchase the lease and purchase option during the exclusivity period, and that as a result plaintiff suffered damages. The allegations show that Tahari’s inducement of Associates to breach the enforceable provisions of the letter agreement exceeded a minimum level of ethical behavior in the marketplace.

Tahari failed to establish the economic interest defense to tortious interference with contract as a matter of law. The complaint’s allegations show that Tahari was effectively plaintiff’s competitor, that it did not appear to have a prior contractual or economic relationship with Associates, and that it had merely a generalized economic interest in soliciting Associates to sell the lease and the purchase option for profit.

(Internal quotations and citations omitted).

In New York, there are circumstances where a someone can be held liable for causing someone else to break their contract with you (tortious interference with contract), and they can even be held liable for causing someone not to enter into a contract with you in the first place (tortious interference with prospective economic advantage). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think someone has interfered with your rights relating to a contract.

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Posted: July 10, 2018

Employees Who did not Sign Agreement in Their Individual Capacities Nevertheless Entitled to Enforce Arbitration Provision

On July 3, 2018, the First Department issued a decision in Huntsman International LLC v. Albemarle Corp., 2018 NY Slip Op. 04962, holding that employees who did not sign an agreement containing an arbitration provision nevertheless were entitled to enforce the provision, explaining:

The individual defendants, who were officers or employees of Rockwood and did not sign the SPA in their individual capacities, are nevertheless entitled to enforce the arbitration provision, because any breach of the SPA would have to be the result of an action or inaction attributable to them. A rule allowing corporate officers and employees to enforce arbitration agreements entered into by the corporate principal is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement. Further, even a nonsignatory may be estopped from avoiding arbitration where he knowingly accepted the benefits of an agreement with an arbitration clause.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are–by agreement–decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.

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Posted: July 9, 2018

State Qui Tam Action Dismissed Because Allegations Were Based on Public Information

On June 28, 2018, the First Department issued a decision in State of New York ex rel. Rasmusen v. Citigroup, Inc., 2018 NY Slip Op. 04845, affirming the dismissal of a state qui tam action because “[t]he court lacked subject matter jurisdiction over this action because plaintiff’s allegations that defendant wrongfully underpaid its New York State taxes are derived from and are substantially similar to allegations that were already in the public domain.”

The New York False Claims Act (as well as the federal False Claims Act on which it is modeled) provides a way for private citizens to bring claims against those who defraud the government by making false claims to the government. This decision illustrates one of the many restrictions on false claims act cases. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have non-public information about someone who has been cheating the government.

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Posted: July 8, 2018

Fraud Claim Does Not Invalidate Arbitration Provision Unless Fraud Relates to That Provision

On June 27, 2018, the Second Department issued a decision in Zafar v. Fast Track Leasing, LLC, 2018 NY Slip Op. 04774, holding that a fraud claim does not invalidate an arbitration provision unless the fraud relates to that provision, explaining:

A party may not be compelled to arbitrate a dispute unless there is evidence which affirmatively establishes that the parties clearly, explicitly, and unequivocally agreed to arbitrate the dispute. Under both federal and New York law, unless it can be established that there was a grand scheme to defraud which permeated the entire agreement, including the arbitration provision, a broadly worded arbitration provision will be deemed separate from the substantive contractual provisions, and the agreement to arbitrate may be valid despite the underlying allegation of fraud.

The broad arbitration clause in the 2014 agreement, together with the other provisions of the 2014 agreement, demonstrate that the plaintiffs explicitly and unequivocally agreed to arbitrate the matters that are the subject of this action. In addition, the plaintiffs’ bare conclusory assertions of fraud failed to establish that any alleged fraud was part of a grand scheme that permeated the entire agreement, including the arbitration clause.

(Internal citations omitted).

This decision illustrates the general rule that dispute resolution provisions in a contract, such as a waiver of a right to a jury trial or a requirement that a dispute be arbitrated, will be enforced even when there is a claim for breach of the contract or that the plaintiff was induced to enter into the contract (but not the dispute resolution provision itself) by fraud. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of a contractual dispute resolution provision.

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Posted: July 7, 2018

Crime-Fraud Exception Does Not Apply to Challenged Privilege Claims

On June 21, 2018, Justice Masley of the New York County Commercial Division issued a decision in Kenyon & Kenyon LLP v. Sightsound Technologies, LLC, 2018 NY Slip Op. 31282(U), holding that the crime-fraud exception did not apply to challenged privilege claims, explaining:

According to the Firm, during a SightSound board meeting to ratify the Napster settlement agreement, defendants discussed, among other related items, the Firm’s security interest in the patents. The Firm alleges that a GE employee, claiming to be a DMT representative, attended the meeting and successfully directed the board to transfer the proceeds to GE. The Firm also alleges that Kenneth Glick’ — GE and DMT’s “designee” on the SightSound board of directors — voted that the Napster payment be transferred to GE instead of the Firm. In so doing, the Firm argues, Glick was “patently self interested” and effectively defrauded the Firm, as a known creditor, including breaching his fiduciary duty to SightSound’s shareholders.

The Firm’s principal allegation of fraud is that Glick was a self-interested board member and directed the transfer of the Napster Settlement Proceeds to his employer, GE, knowing that SightSound was insolvent. On this basis, the Firm contends that the record is replete with “badges of fraud.” In response, GE contends that the challenged documents bear no connection to the Napster Settlement Proceeds. GE also rejects the Firm’s theory of a supposed fraudulent scheme to keep the money away from Kenyon.

The crime-fraud exception to the attorney-client privilege lifts the veil of protection for communications made in furtherance of contemplated fraud or other wrongful conduct. Preserving the sanctity of privileged communications, advice in furtherance of a fraudulent or unlawful goal cannot be considered sound. Thus, the crime-fraud exception forces disclosure of communications involving fraudulent schemes, alleged breaches of fiduciary duty, or accusations of other wrongful conduct. A party seeking to compel disclosure based on the crime-fraud exception must establish a factual basis for a showing of probable cause to believe that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud or crime. The Firm has established neither.

The facts alleged fail to establish probable cause that GE engaged in conversations to either commit or further a fraud on the Firm. The facts indicate that GE received the funds for distribution to DMT under the Asset Purchase Agreement (APA), which this court held gives DMT the sole discretion to decide whether the Firm’s lien would be a certain category of reimbursable expense under the APA. GE merely exercised its contractual discretion, as approved by the court. Even if, as the Firm argues, another agreement, the Novation Agreement, released DMT from certain obligations under the APA, that is hardly probable cause to believe fraud was committed or contemplated. The same is true as to Glick. The Firm alleges that Glick had a fiduciary duty to SightSound’s creditors given the company’s insolvency. The Firm argues that directors of an insolvent corporation are empowered, as fiduciaries, to protect the interests of the corporations’ creditors. On the premise that the corporation is insolvent, the Firm argues that Glick owes a fiduciary duty to the creditors of SightSound and that a breach of Glick’s fiduciary duty is an adequate basis for application of the crime-fraud exception. Contrary to the Firm’s insistence, however, SightSound’s solvency remains disputed, thus precluding application of the exception.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. This decision relates to a narrow exception to the attorney-client privilege rules: the crime/fraud exception. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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Posted: July 6, 2018

Mandatory Injunction Properly Denied Because There Were No Extraordinary Circumstances

On June 28, 2018, the First Department issued a decision in Spectrum Stamford, LLC v. 400 Atlantic Title, LLC, 2018 NY Slip Op. 04853, holding that a mandatory injunction had been properly denied because there were no extraordinary circumstances, explaining:

Here, Supreme Court properly exercised its discretion in denying plaintiff’s motion for an injunction. Defendant should be permitted an opportunity to defend itself. There is no imperative, urgent, or grave necessity that the current property manager be replaced with CBRE at this time. While plaintiff argues that it sustained irreparable harm because the property continues to be managed by an agent that it does not desire, citing Rakosi v Sidney Rubell Co., LLC (155 AD3d 564, 565 [1st Dept 2017]) and Fieldstone Capital, Inc. v Loeb Partners Realty (105 AD3d 559, 560 [1st Dept 2013]), plaintiff’s interests are different from the plaintiffs in those cases. Plaintiff is merely an assignee of the lender and has solely an economic interest, whereas the plaintiffs in Rakosi and Fieldstone were owners of the properties with concerns about title and entered directly into property management agreements with the defendants.

Finally, plaintiff’s request for relief is primarily mandatory in nature as it requires defendant and the current property manager to assist with the transition to CBRE (whether explicitly to benefit CBRE or implicitly to protect its own proprietary information). A mandatory preliminary injunction by which the movant would receive some form of the ultimate relief sought as a final judgment is granted only in unusual situations, where the granting of the relief is essential to maintain the status quo pending trial of the action. A mandatory injunction should not be granted, absent extraordinary circumstances, where the status quo would be disturbed and the plaintiff would receive the ultimate relief sought, pendente lite. Here, while plaintiff may have a contractual right to choose the property manager, there has been no showing of extraordinary circumstances requiring CBRE immediately assume management of the property.

(Internal quotations and citations omitted).

It is common in commercial litigation that parties seek equitable relief such as injunctions, attachments or the appointment of a temporary receiver in order to preserve assets or maintain the status quo when money damages will not make them whole at the end of a litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding seeking–or opposing–such relief.

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Posted: July 5, 2018

Court Examines Rules Relating to Impleader in Complex Cases

On May 14, 2018, Justice Marcy Friedman of the New York County Commercial Division issued a Decision & Order in Nomura Asset Acceptance Corp. v. Nomura Credit & Capital, Inc., 2018 NY Slip Op. 30928(U), which addressed a number of issues relating to impleader in complex commercial cases.

The underlying action was brought by HSBC Bank as Trustee of an RMBS (residential mortgage-backed securities) trust against Nomura Credit & Capital, which had sold the securitized loans to the trust, alleging that Nomura had made false representations concerning the quality of the loans and had failed to comply with its contractual obligation to repurchase defective loans. Nomura then impleaded Wells Fargo and Ocwen Loan Servicing LLC (“the Servicers”) alleging that they had breached their contractual obligations to review the loan files and identify deficient loans, thereby depriving Nomura of the opportunity to replace or repurchase them.

The Servicers moved to dismiss the third-party complaint on a variety of grounds, several of which are discussed here.

First, Ocwen moved to dismiss under CPLR § 1007, arguing that Nomura’s claims against it did not arise from Nomura’s potential liability to the plaintiff trustee, and more specifically that the trustee’s claims against Nomura concerned false representations made at the time the trust was created, whereas Nomura’s claims against it involved breaches that took place after the trust had been created, and after Nomura’s own false statements had been made.

The court rejected Ocwen’s argument, first noting as a general matter that “[a]s is common in the RMBS litigation, this case [ ] requires application to the complex financial instruments and contracts at issue of general legal precepts that were developed in materially different contexts,” and then analyzing the facts as follows:

This case involves a hybrid in which the theories of liability in the main and third-party actions differ, but the damages sought by defendant/third-party plaintiff in the third-party action relate directly to the damages sought against defendant in the main action. More particularly, the alleged breaches of contract by Ocwen and Nomura in the third-party and main actions, respectively, are not causally connected. It is not claimed, for example, that Ocwen’s alleged breaches of its servicing and/or notification obligations caused Nomura’ s alleged breaches of representations and warranties or prevented Nomura from notifying the Trustee upon its own separate discovery of breaches. However, Ocwen was a party to the PSA, under which the Trustee’s sole remedy for breaches of representations and warranties is the repurchase protocol. As pleaded by Nomura, each of the parties, including Ocwen, had the ability to either facilitate or frustrate that remedy. For its part, Nomura was required to cure, substitute, or repurchase defective loans at the Purchase Price, which is calculated pursuant to a contractual formula. Nomura claims that this contractual formula has been or will be affected by Ocwen’s separate breaches of contract, resulting in an increase in the amounts for which Nomura may be liable to the Trustee for breaches of representations and warranties. There is thus a claimed causal relationship between Ocwen’s alleged breaches of contract and the specific damages for which Nomura may be liable to the Trustee.

. . .

The court rejects Ocwen’s contention that allowing impleader in this case would create a standard under which any party whose conduct indirectly increases a plaintiff’s damages may be impleaded. Although the alleged breaches of contract by Ocwen and Nomura are separate, this is not a case in which the acts of the third-party defendant are related only in an attenuated fashion to the plaintiff’s damages and the conduct alleged in the main action. Ocwen had a prescribed role in the repurchase protocol, which constitutes the Trustee’s sole remedy for breaches of representations and warranties and which it allegedly breached: Jt purportedly failed to notify the other parties upon its discovery of breaches of representations and warranties, assertedly depriving Nomura and the Trustee of the options of substitution, cure, or repurchase early in the life of the loans. Affording Nomura the benefit of all favorable inferences, as the court must do on a motion to dismiss it was also reasonably foreseeable that breaches by Ocwen of its servicing and/or notification obligations would “exacerbate” the damages for which Nomura may be held liable.

(Emphases added.)

Second, the court rejected the Servicers’ argument that Nomura’s claims are premised upon its own breaches of the PSA, and that as a breaching party Nomura is barred from bringing actions against others for breach of the PSA, on the grounds that a prior material breach only bars a claim if the promises in question were dependent rather than independent. And in this case:

Nomura’ s breach of contract claim in the third-party action is based, in part, on the Servicers’ alleged failure to notify Nomura of breaches of representations and warranties. The PSA unambiguously required each Servicer to provide prompt notice to Nomura upon that Servicer’s discovery of a qualifying breach of representation or warranty. In arguing that Nomura’s own alleged breaches of representations and warranties deprive Nomura of the right to enforce the Servicers’ notification obligations, the Servicers fail to recognize that the parties’ covenants are independent Indeed, a breach of a representation or warranty was a condition that, once discovered by the Servicers, triggered their duty to notify Nomura (among others) of the defect The Servicers’ position in effect would preclude Nomura from ever enforcing the Servicers’ notification obligation. There is no support in the language of the PSA for such a result. The Servicers’ notification obligation was plainly integral to Nomura’s own obligation, under the repurchase protocol, to cure, substitute, or repurchase defective loans. . . . .

The court reaches the same conclusion with respect to the Servicers’ argument that Nomura’s breaches of representations and warranties bar Nomura from suing to enforce the servicing obligations. These obligations exist independently of and must be performed regardless of, the truth or falsity of Nomura’s representations and warranties. If the parties had intended to bar Nomura from suing to enforce the servicing obligations, they could have expressly so provided.

(Emphases by the court.)

Third, the court rejected Ocwen’s argument that Nomura’s measure of damages—the increase in the purchase price of the defective loans between the time Ocwen discovered the defects and the time Nomura’s liability to the trustee is calculated—was an impermissibly speculative claim for consequential damages:

As this court has previously held, it is apparent from the plain terms of the PSA that the notification obligations serve primarily to facilitate the repurchase remedy for breaches of representations and warranties. Ocwen does not dispute that the Purchase Price of defective loans may increase as a result of delays in repurchase. At this preliminary stage, and on this cursorily briefed record, the court is not persuaded that the damages sought by Nomura are not general damages, which flow directly from the breach, as opposed to consequential damages, to which a heightened pleading standard would apply.

Moreover, assuming arguendo that the damages sought by Nomura are consequential in nature, the record does not support a finding, as a matter of law, that they are speculative or incapable of proof with reasonable certainty. Ocwen contends that Nomura’s damages theory depends on speculation that the Purchase Price at the time of Ocwen’s discovery was lower than the Purchase Price Nomura may ultimately pay the Trustee, and that Nomura would have acted swiftly to remedy defective loans had it received prompt notice of breaches from Ocwen. Ocwen merely identifies potential factual issues, which cannot be decided at the pleading stage.

This decision illustrates the complex and unusual nature of the issues presented in RMBS litigation, and also provides good analyses of impleader, prior material breach, and damages law.
Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com or Schlam Stone & Dolan of counsel Niall Ó Murchadha at nomurchadha@schlamstone.com if you or a client have questions regarding RMBS litigation.

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Posted: July 4, 2018

Insurance Law 3105 Does Not Relieve RMBS Insurer of Obligation to Plead All Elements of Common Law Fraud Claim

On June 27, 2018, the Court of Appeals issued a decision in Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 2018 NY Slip Op. 04686, holding that Insurance Law 3105 does not relieve an RMBS insurer of the requirement to plead all the elements of common law fraud against its insured, explaining:

The required elements of a common law fraud claim are a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury. Justifiable reliance is a fundamental precept of a fraud cause of action, as is resulting injury. This Court has previously held, in the context of a monoline insurer suing for fraudulent inducement of a financial guaranty on a transaction involving asset-backed securities, that to plead a claim for fraud in the inducement or fraudulent concealment, plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations. In apparent recognition of the fact that justifiable reliance and loss causation are required elements of its fraudulent inducement claim, Ambac’s operative complaint pled these well-established elements, alleging that Ambac reasonably relied on Countrywide’s statements and omissions when it entered into the Agreements and issued its Policies, and that as a result of Countrywide’s false and misleading statements and omissions, Ambac suffered, and will continue to suffer, damages including claims payments under the Policies. Nevertheless, Ambac argues it need not make the showing required to substantiate these allegations.

Supreme Court relied on Insurance Law § 3105 in addressing Ambac’s claim that it need not show justifiable reliance or loss causation. Distinguishing this Court’s holding in ACA Financial because the parties in that case did not raise the issue of New York Insurance Law § 3105, under which Ambac seeks recovery here, Supreme Court held that the only pertinent question under Section 3105 is whether the information allegedly misrepresented by Countrywide induced Ambac to take action that it might otherwise not have taken, or, in other words, whether the misrepresentation was material. This was error.

Insurance Law § 3105 plays no role here. Ambac did not, and could not, seek recovery under this section, nor does section 3105 function to relieve Ambac of the burden of showing justifiable reliance. Section 3105 (b) (1) provides that no misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material, and no misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract. Section 3105 does not provide an affirmative, freestanding, fraud-based cause of action through which an insurer may seek to recover money damages. Nor does it inform a court’s assessment of the longstanding common law elements of fraudulent inducement. By its terms, section 3105 is only relevant when an insurer seeks rescission of an insurance contract or is defending against claims for payment under an insurance contract, relief that Ambac cannot, and does not, seek.

Moreover, section 3105 was intended to overrule prior case law which did not require a showing of materiality for an insurer to avoid its obligations under a policy based on the insured’s misrepresentations. Section 3105, intended to benefit the insured party, does not remove required elements for a showing of common law fraudulent inducement under any insurer-only exception.

Public policy reasons support the justifiable reliance requirement. Where a sophisticated business person or entity claims to have been taken in, the justifiable reliance rule serves to rid the court of cases in which the claim of reliance is likely to be hypocritical. Excusing a sophisticated party such as a monoline financial guaranty insurer from demonstrating justifiable reliance would not further the policy underlying this venerable rule.

Likewise, there is no merit to Ambac’s argument that it need not show loss causation. Loss causation is a well-established requirement of a common law fraudulent inducement claim for damages. This Court long ago noted that to give rise, under any circumstances, to a cause of action, either in law or in equity, reliance on the false representation must result in injury. This Court recently affirmed this requirement, as well as the principle that, if the fraud causes no loss, then the plaintiff has suffered no damages. It applies with equal force to Ambac’s claim.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophsticated businessperson’s reliance on a false statement must be reasonable and that reliance must have caused the damages claimed. This decision makes clear that those rules apply even to insurers. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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Posted: July 3, 2018

Receiver May Be Liable For Distributing Funds In Violation Of Order; Lack Of Knowledge Immaterial Because Order Was E-Filed

On May 24, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in Kadosh v. Kadosh, 2018 NY Slip Op. 31005(U), describing the standard under which a court-appointed receiver could be held liable for actions taken in the course of their duties.

In the underlying action, two brothers were disputing the proper division of funds in an escrow account, which was under the control of a receiver. Because one of the brothers was in a fee dispute with his counsel (“DHC”), and had agreed that attorney fees would be paid out of his share of the escrow, the court issued an order (“August 2016 Order”) specifically directing that any release of funds could only be made upon receipt of a letter signed by both the party and DHC. But once the court decided how the funds were to be distributed, the receiver, relying solely upon an oral representation by the party, distributed his entire share of the funds to him without notice to or consent by DHC. When the receiver moved to settle his accounts and for discharge, DHC opposed.

The court first rejected the receiver’s argument that DHC lacked standing, and could recover in a lawsuit it had filed directly against its client:

The preconditions in the August 2016 Order were specifically for the benefit of DHC, as DHC was the only party that stood to lose if David got paid from the escrow without first paying his legal bills. And while the amount of DHC’s damages might be mitigated based on the outcome of its litigation with David, such litigation is only necessary due to the Receiver’s violation. Ergo, the time and money DHC now must spend seeking to recover from David is the direct consequence of the Receiver’s violation.

The court also rejected the receiver’s defense of immunity, noting that “immunity only extends to a receiver who acts in good faith and with appropriate care and prudence” (emphasis by the court), and going on to state that:

The Receiver contends that he may not be held liable for what he characterizes as mere “errors in judgment.” But that is not the accusation. Though the Receiver is not alleged to have acted in bad faith, he is alleged to have acted “with a lack of due care.” He is guilty of that offense. The only basis for the Receiver to have disbursed the $2.7 million to David is the August 2016 Order. 14 The Receiver, however, claims to have never seen that order. He apparently relied on David’s oral representation to justify the disbursement, even though David was represented by counsel at the time.

That was not a de minimis violation for which a receiver is ordinary exculpated. Leaving aside whether it was negligent for the Receiver to have failed to look up the August 2016 Order on NYSCEF (it was), it is inexcusable for him to have disbursed $2.7 million to David without first independently confirming that the court had permitted him to do so. A reasonable attorney could not (and should not) assume the existence or parameters of a court order merely by the say so of one of the litigants (especially in such a hotly contested case) without first reviewing a copy of the order or at least conferring with that litigant’s counsel (who, as noted earlier, told the Receiver not to disburse the funds due to its fee dispute with David). According to the Receiver, he never saw a copy of the August 2016 Order prior to writing David a check for $2. 7 million.

The Receiver’s conduct amounts to gross negligence because his actions evinced a reckless indifference to the rights of the other parties in this action. The Receiver, a licensed New York attorney, cannot claim that an attorney acts reasonably by taking actions pursuant to a court order which he has never seen. The Receiver was specifically informed by DHC of a fee dispute with David, but sent David the money without first inquiring (e.g., with a quick email) of DHC the status of such dispute. While the Receiver may not have had reason to know that DHC had a lien on the funds in escrow, Zapson’s August 7, 2016 email proves that the Receiver was aware of a fee dispute. More importantly, without actually reviewing the August 2016 Order, which could have contained any number of preconditions, the Receiver was in no position to ascertain who might be adversely affected by his actions. The court is unaware of any authority immunizing a receiver for this sort of reckless behavior. Immunity is supposed to protect fiduciaries from good faith exercises of judgment, but not the reckless release of millions of dollars to a dishonest litigant merely on his say so.

(Internal citations and quotations omitted, emphases added.)

This decision is of interest not only as it concerns the scope of a receiver’s immunity from suit, but also as it relates to the importance of the NYSCEF system; the receiver’s explanation for his failure to comply with the August 2016 Order was that he had never seen it, which the court rejected out of hand:

He takes this position despite executing an e-filing authorization in conjunction with his appointment as Receiver, in which he, like all counsel of record in this part, agreed to accept service of orders filed on NYSCEF. See Dkt. 83. As reflected on NYSCEF, it was the Receiver himself who e-filed this authorization. In fact, the docket in this action indicates that the Receiver personally e-filed nearly 40 documents. Apparently, at some point, the Receiver stopped following the docket despite not yet having been relieved.

If a document has been e-filed, all parties are presumed to have seen it.

Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com or Schlam Stone & Dolan of counsel Niall Ó Murchadha at nomurchadha@schlamstone.com if you or a client have questions regarding an attorney’s failure to perform his or her duties.

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