November 12, 2014

New York Law Journal / Written by: Harvey M. Stone, Peter R. Schlam

In the U.S. District Court for the Eastern District of New York, in a decision relating to the $1.25 billion settlement between the Swiss banks and Holocaust victims, Chief Judge Edward R. Korman excoriated the banks for persistently denying the extent of their misconduct during and after the war, and resisting the effort to open up all relevant records. Judge Arthur D. Spatt dismissed a Bivens suit alleging inadequate medical care in prison. Judge Raymond J. Dearie applied the "discretionary function exception" defense to liability under the Federal Tort Claims Act. Judge David G. Trager remanded a collection action involving consideration of HUD regulations. And Judge John Gleeson awarded attorneys' fees exceeding $220 million in a class action.

Holocaust Victim Assets

In In re Holocaust Victim Assets Litigation, 97 CV 461 (EDNY, Feb. 19, 2004), Chief Judge Korman took the Swiss bank defendants on a historical reality tour of their widespread forced transfers of customer assets to the Nazis, their systematic destruction of Nazi-era records in post-war decades, and their other routine practices to deceive victims of Nazi persecution. The court's extensive commentary was triggered by the banks' "frivolous and offensive" objections to Special Master Judah Gribetz's Interim Report on Distribution of funds. Central to the banks' objections was a continuing denial of their own profit-driven misconduct. This, the court stated, "bring[s] to mind the theory that, 'if you tell a lie big enough and keep repeating it, people will eventually come to believe it.' '" The "Big Lie" here: "during the Nazi era and in its wake, the banks never engaged in substantial wrongdoing.'

In July 2001 the Second Circuit affirmed Judge Korman's historic settlement in this case. Since then, parts of the settlement funds have been distributed.

In the mid-1990's, the Swiss Parliament and the Federal Council established the Bergier Commission to report on Swiss conduct, particularly that of its financial center, during and after World War II. The Swiss Bankers' Association, the World Jewish Restitution Organization and the World Jewish Congress established the Volcker Committee to conduct a vast audit focused on (1) assessing the Swiss banks' treatment of accounts belonging to victims of Nazi persecution, and (2) identifying those accounts that have lain dormant or have been unavailable to the victims or their heirs. In its point-by-point rebuttal of the banks' objections to the interim report, the court analyzed the findings of the Bergier Commission and the Volcker Committee, showing where defendants were distorting the historical record or taking language from the relevant reports out of context.

Judge Korman rejected the banks' objections to (1) presumptions applied by the Claims Resolution Tribunal in the absence of contrary evidence; (2) the publication of 15,000 dormant accounts "possibly" related to the Holocaust (and not previously designated as "probably" related); and (3) providing the tribunal, through a consolidated Total Accounts Database, with unfettered access to the complete records of all 4.1 million dormant accounts as to which some record exists.

These objections were based on the banks' persistent mischaracterizations of their conduct. As the court noted: "Perceived economic self-interest not only dominated the banks' actions during the war; it drove the banks to act against their clients' interests for decades thereafter, leading to the dormancy and elimination of an unknowable number of accounts once held by victims of Nazi persecution.'

Given that the amount of the banks' liability was fixed and the distribution is being administered by the court, the "only purpose" to their objections has been "to burden the record with spin and distortion.'

As to the objections regarding access to the Total Accounts Database, Chief Judge Korman added:

The truth appears to be that the banks fear the embarrassment that will come from further successful claims by Nazi victims and their heirs. This embarrassment cannot outweigh the good that could come from more open cooperation.

Medical Care in Prison

In Perez v. Hawk, 02 CV 5063 (EDNY, Feb. 10, 2004), Judge Spatt dismissed Bivens claims by a federally incarcerated plaintiff seeking monetary, declaratory and injunctive relief for alleged violations of his Fifth and Eighth Amendment rights in connection with his medical treatment at Allenwood (a "low security" correctional facility) and the Metropolitan Detention Center in Brooklyn. Plaintiff brought his suit against the director of the Federal Bureau of Prisons, numerous officials at Allenwood and the MDC, and a company that distributes chemicals for prison water supplies.

The complaint detailed plaintiff's suffering from alleged painful and alarming medical problems from September 2000 through March 2002. He initially complained to an Allenwood doctor of itching, swelling and rashes. The doctor prescribed an antihistamine. As plaintiff's symptoms persisted and worsened, he complained that the antihistamines were not working. He asserted that Allenwood's water supply was the cause of his condition. The doctor prescribed a different antihistamine.

No allergist or dermatologist was provided to examine him.

Plaintiff began to experience rapid heartbeats, a swollen tongue, night shocks, swelling in the joints, numbness, and mucus-like bowel secretions. Though he continued to receive antihistamines, calamine lotion and the like, his condition became more severe. In December 2000 he was transferred to MDC, Brooklyn, where his symptoms did not abate. At one point he was given antibiotics for blood in his stool and excruciating stomach pain. Later he told a doctor at the MDC that his continuing symptoms were caused by chemicals in the water supply.

Judge Spatt dismissed a number of claims against the individual defendants for various deficiencies. The court then turned to the core issue, whether prison officials were "deliberately indifferent" to plaintiff's "serious" medical needs, so that their conduct amounted to the "unnecessary and wanton infliction of pain" proscribed by the Eighth Amendment.

The court assumed, for purposes of the motion to dismiss, that plaintiff had a "serious" medical condition. But the allegations of misdiagnosis and mistreatment still did not make out a constitutional violation. Plaintiff alleged no "deliberate" misconduct by any of the defendants. In fact, the complaint and attached records show that plaintiff received frequent treatment and testing. "At most," Judge Spatt stated, the alleged mistreatment "states a cause of action for medical malpractice." The court therefore dismissed the constitutional claim for inadequate medical care.

Judge Spatt also dismissed the Eighth Amendment claim based on the alleged danger from the prison water supply. Giving plaintiff leave to amend, the court directed him to set forth facts showing (1) "deliberate indifference" to his medical needs, and (2) treatment of the water supply that was harmful to plaintiff and the overall inmate population.

Tort Claims Act

In Cohen v. United States, 98 CV 2604 (EDNY, Jan. 29, 2004), Judge Dearie, following a bench trial, granted judgment to defendant based, in part, on the discretionary function exception defense to liability under the Federal Tort Claims Act (FTCA).

Isabel and Murray Cohen were visiting the Gila Cliff Dwellings National Monument in New Mexico, when Isabel slipped and fell on a steep descending trail, breaking her ankle. The trail, composed of native material and log retainer bars, was a one mile loop which climbed to the cliff dwellings, crossed a cliff face and then descended by a switch back. A sign at the head of the trial warned visitors of the "strenuous, unpaved, rough nature of the trail" and advised visitors to use proper footwear. Visitors could purchase a trail guide booklet for 50 cents, which described the terrain and provided safety information, but plaintiff did not purchase a guide.

Following the accident, National Park Service employees investigated the area of the accident and concluded that the trail surface looked normal and all the retainer logs were in good condition. An expert in trail design testified that he had assessed the trail a year before the accident. Upon examining a picture taken of the area where plaintiff fell, the expert concluded that the log retainer bars were partially exposed, and not in a state of disrepair. The condition of the retainer bars was in keeping with his 1994 plan for the renovated trail. He also testified that the gravel at the site was not a hazardous condition.

The discretionary function exception limits the FTCA's waiver of sovereign immunity. The exception exempts any claim based on a discretionary function or duty on the part of a federal agency or an employee of the government, whether or not the discretion was abused. When the exception applies, the United States has not waived its immunity and the courts do not have jurisdiction. In order for the exception to apply, first, the acts alleged to be negligent must involve an element of choice and not be compelled by statute or regulation. Second, the government's judgment must be based in public policy or susceptible to policy analysis.

Concerning the decision to include the log retainer bars on the trail, Judge Dearie found no mandatory statute, regulation or policy governing the design and construction of the nature trails. Thus, the Park Service exercised discretion in deciding to place log retainers in the trail. The efforts of the Park Service to maintain the trail in as natural a setting as possible was also a public policy decision.

Concerning the maintenance of the log retainer bars, the first prong of the discretionary function exception was met because there was no explicit policy mandating the maintenance of the bars, but the second prong was not met because there was no public policy rationale for a failure to repair. Having found that the court had jurisdiction to address this aspect of plaintiff's negligence claim, Judge Dearie turned to applicable New Mexico law. Under New Mexico's Recreational Use Statute, because there was no admission fee, visitors to the Gila Cliff Dwellings are considered trespassers. Thus, the government as landowner would be liable only if "the trespasser's injury resulted from an unreasonably dangerous artificial condition." Slip op. 18. As Judge Dearie concluded, defendant had no duty to plaintiffs under New Mexico law for several reasons: (1) the bars were not inherently dangerous or flawed; (2) the existence of some degree of erosion was expected and did not constitute a hazardous condition; and (3) prior to plaintiff's fall there had been no similar accidents, so defendant had no actual or constructive knowledge of any dangerous condition posed by the log retainer bars. Judge Dearie also found no liability under an ordinary negligence standard.


In JK&E Partnership v. Chase Manhattan Bank, 03 CV 2543 (Jan. 16, 2004), Judge Trager remanded a collection action back to state court. Two respondents had removed the action on the grounds that petitioner's claims required consideration of HUD regulations.

The asserted federal question involved a determination as to which of two judgment creditors had the superior claim to certain assets of Glick Development Affiliates. In March 1992, petitioner JK&E Partnership had obtained a state court judgment against GDA for about $3.8 million. That judgment recognized payment rights against GDA that JK&E had purchased from non-party Marine Midland Bank, along with "a September 1989 Collateral Assignment of Partnership Interest from GDA to Marine Midland Bank relating to Thessalonica." Respondent Thessalonica Court Associates is a New York limited partnership that owns a federally regulated and subsidized housing project in the Bronx.

JK&E thus had the right to receive from GDA certain amounts otherwise due from GDA to Thessalonica. For the years 1992-1997, Thessalonica paid these amounts to JK&E. In 1998, however, it stopped making these payments and began making them, in whole or part, to East Atlantic Realty, Inc. (EAR). EAR had obtained a judgment against GDA and, when the New York City Sheriff conducted a foreclosure sale of GDA's rights to income from Thessalonica in 1999, EAR purchased those rights.

A question thus arose as to who was entitled to the amounts otherwise due from Thessalonica to GDA: JK&E, pursuant to its judgment and the 1989 Collateral Assignment, or EAR, pursuant to its judgment and purchase of rights at the 1999 foreclosure sale. JK&E raised the issue in its continuing enforcement efforts in state court when, in May 2003, it filed a motion in connection with that payment stream, seeking a judgment of over $368,000 for amounts due for the year 1998 forward.

In a supporting affidavit, JK&E stated that "GDA's indebtedness to JK&E is secured by a 1989 duly perfected collateral assignment of certain of GDA's partnership interests in Thessalonica." St. James and Thessalonica removed, arguing that determination of the competing rights of JK&E and EAR to the assets of Thessalonica raised a federal question, in that it required consideration of HUD regulations and regulatory agreements.

Finding no substantial federal questions, Judge Trager granted JK&E's petition to remand. One question offered in favor of removal was whether the 1989 Collateral Assignment was void because it assertedly included rights to participate in the affairs of Thessalonica. Normally, the conveyance of such rights would require HUD approval. But as the court held, "the relevant whether [that conveyance] invalidates the Collateral Assignment in its entirety. The Collateral Assignment clearly specifies that it will be governed, construed and enforced in accordance with the laws of the State of New York..... Thus, JK&E's contention that it has a perfected security interest in GDA's share of Thessalonica's cash surplus hinges on state law considerations.'

The other asserted federal issue was the validity of the 1999 Sheriff's foreclosure sale, which JK&E argued was "a nullity because it was in violation of State Law, the Partnership Agreement, the HUD Regulatory Agreement and HUD Regulations." Judge Trager found this issue to be an insufficient ground for removal, since JK&E raised the invalidity of the foreclosure sale only in anticipation of a defense to its state law claims, not as a federal claim, and, in any case, "federal law plays only a small part in such a determination.'

Attorneys' Fees

In In re Visa Check/Mastermoney Antitrust Litigation, 96 CV 5238 (EDNY, Dec. 19, 2003), Judge Gleeson awarded slightly more than $220 million in attorneys' fees to class counsel from a settlement fund of more than $3 billion.

As Judge Gleeson observed, in the Second Circuit both the "lodestar" method of computation and the "percentage of the fund" method are available for calculating attorneys' fees in class fund cases, but the trend is to use the percentage method and cross-check using documentation of hours. The key consideration is what is reasonable under the circumstances.

Class counsel requested a total fee of $609 million, which Judge Gleeson characterized as excessive since it represented about 10 times lead counsel's hourly rate. Nonetheless, applying the relevant factors, the court concluded that class counsel was entitled to an extraordinary fee, because (1) they had litigated the case for seven years, taken 400 depositions, undertaken four rounds of class certification briefing, and written 16 summary judgment motions, 31 motions in limine and three Daubert motions; (2) the magnitude and complexity of the litigation were enormous, involving almost every U.S. bank and more than five million merchants; (3) the litigation was risky and used a large percentage of lead counsel's resources; (4) the representation was uniformly excellent; (5) the huge fee awarded by the court appeared small in comparison to the settlement; and (6) public policy concerns supported a substantial fee award because the settlement produced "significant and lasting benefits for America's merchants and consumers."

The fee award of $220 million represented 6.5 percent of the settlement fund and a lodestar cross-check multiplier of 3.5. Judge Gleeson also awarded lead counsel reimbursement of $18 million in costs and expenses.

Peter R. Schlam and Harvey M. Stone are partners at Schlam Stone & Dolan.

[This article is reprinted with permission from the March 12, 2004, issue of the New York Law Journal. Copyright © 2007 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]