November 12, 2014
This column reports on several significant, representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Raymond J. Dearie found that plaintiffs' state law claims against an air carrier were not preempted by the Montreal Convention. Judge Nicholas G. Garaufis found the fugitive disentitlement doctrine to apply in a forfeiture case. And Judge Frederic Block reversed a decision by a company's plan administrator to deny a claim for disability benefits.
In a class action alleging violations of the Montreal Convention as well as breach of contract, fraud and negligence, all arising from the failure of World Airways to run flights for which plaintiffs had purchased tickets, Judge Dearie held that the Montreal Convention does not preempt plaintiffs' state law claims. In re Nigeria Charter Flights Contract Litigation, 04 MD 1613/ In re World Airways Litigation, 04 CV 0304 (EDNY, Oct. 25, 2007). The court also granted in part World's motion for summary judgment and denied other motions for summary judgment by both sides.
The certified class consisted of plaintiffs who purchased tickets before Jan. 31, 2004, for travel between Nigeria and the United States and whom World failed to transport after it had discontinued scheduled flights. In December 2002, World entered into an agreement with Ritetime Aviation and Travel Services Inc. to supply Ritetime with charter flights between New York, Atlanta and Lagos for sale to the public. The charter agreement required World to provide aircraft and flight support for 83 round-trip flights between the United States and Nigeria from Feb. 28 to Dec. 30, 2003.
World and Ritetime both contemplated that the flights would continue beyond 2003. Ritetime sold tickets for travel in 2004 to plaintiffs and others. Ritetime fell behind in its payments to World and, by Dec. 31, 2003, owed World over $2 million.
In late 2003, World warned Ritetime that it would stop participating in the program unless Ritetime paid its debt. On Dec. 28, 2003, World cancelled a round-trip flight between New York and Lagos. After operating a final round-trip flight on Dec. 30-31, 2003, World ended the program. Hundreds of people who had purchased tickets for flights in 2004 were therefore unable to travel. Passengers who had already flown the outbound legs of their round trips were stranded in foreign airports.
On Jan. 19, 2004, after 'discussions' with the Department of Transportation, World flew 318 stranded passengers from Lagos to New York, and allegedly paid for 20 passengers stranded in the United States to return to Lagos. Named class representatives, after being stranded, had to arrange their own transportation. Other plaintiffs never flew on the first legs of their scheduled trips.
Passengers sued World, Ritetime and Ritetime's CEO in various state and federal courts. The panel on Multidistrict Litigation transferred the cases to the Eastern District, where they were consolidated.
The Montreal Convention entered into force in 2003, replacing the Warsaw Convention as the system of liability for international air carriers. Article 19 of the Montreal Convention governs claims arising from delay. World asserted that plaintiffs' state law claims sound in delay, fall within the scope of Article 19, and thus are preempted under the general preemption language in Article 29.
In Judge Dearie's view, World's failure to transport plaintiffs constitutes not delay, but nonperformance of a contract. '[P]laintiffs,' the court noted, 'have shown that World simply refused to fly them, without offering alternate transportation.' In addition, 'the drafting history of the Warsaw Convention's Article 19, whose pertinent language is identical to its Montreal Convention counterpart, indicates that it was not intended to cover claims for nonperformance.' Slip op. 11-12. Because the preemptive effect of those conventions extends no further than their substantive scope, Article 19 does not preempt plaintiffs' state law claims, including breach of contract, fraud and negligence.
'By the same logic,' Judge Dearie granted World's motion for summary judgment as to plaintiffs' Montreal Convention claims, in light of plaintiffs' failure to allege delay under Article 19.
Regarding the contract claims, the court denied summary judgment motions by both World and plaintiffs. Slip op. 13-36.
Judge Dearie then rejected World's argument that plaintiffs' fraud and negligence claims are preempted by the Airline Deregulation Act of 1978, which provides that no state shall 'enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route or service of an air carrier that may provide service under this subpart.' 49 U.S.C. §41713(b)(1). Under a test developed in this circuit, that act preempts tort claims only if three conditions are present, one of which is that 'the underlying tortious conduct was reasonably necessary to the provision of the [airline] service' at issue in the claim. Rombom v. United Air Lines, Inc., 867 F.Supp. 214, 221-22 (SDNY, 1994).
Here, the fraud claims are rooted in the refusal to fly ticketed passengers, and the negligence claims in the allegedly inadequate supervision of Ritetime; the carriage of ticketed passengers and contracting with another carrier are 'airline services.' As Judge Dearie concluded, however, neither an airline's refusal to transport ticketed passengers, nor its selection of a contracting carrier that engages in the same conduct, is 'reasonably related to the provision' of such services. The conduct of which defendants are accused is, rather, 'outrageous.' Slip op. 39.
Though dismissing the federal claims, the court in its discretion chose to exercise supplemental jurisdiction over the state law claims, where dismissal 'at this juncture would frustrate the goals of judicial economy, convenience and fairness.' Slip op. 40.
Forfeiture: Fugitive Disentitlement
In United States v. All Funds on Deposit at: Citigroup Smith Barney Account No. 600-00338 Held in the Name of Kobi Alexander, 06 CV 3730 (EDNY, Sept. 10, 2007), Judge Garaufis, deciding a variety of motions in a forfeiture case, granted the government's motion for summary judgment with respect to its fugitive disentitlement claim, but stayed that decision pending further developments.
In June 2006, claimant Kobi Alexander flew from the United States to Israel while the government was investigating whether Converse Technologies had backdated stock options and whether Kobi was involved. Kobi's counsel represented that Kobi would return to the United States on July 28. Meanwhile, Kobi wired nearly $57 million to accounts in Israel from one of the accounts that the government seeks to forfeit. On July 31, a warrant was issued for Kobi's arrest on backdating charges; in August the FBI declared Kobi a fugitive; and on Sept. 20, 2006, a grand jury indicted him. A few days later he was arrested in Windhoek, Namibia, and an extradition request is currently pending.
The government filed the forfeiture action in July 2006, alleging that funds in the captioned Smith Barney accounts, totaling $49.4 million, were involved in money laundering and were proceeds of mail, wire and securities fraud. The government alleged that the backdating scheme generated $138 million in gross proceeds.
Even though claimants' counsel had verified the initial statements of interest filed on behalf of claimants Kobi and Hana Alexander, the court permitted claimants to file Amended Verified Statements of Interest. The government argued that claimants showed bad faith by failing to verify the original claims because to do so would have disclosed their whereabouts. Although the court found claimants' conduct to be suspicious and evidence of malicious intent, the absence of prejudicial delay warranted the permission to amend.
Next, the court held in abeyance the decision on whether Hana had standing to assert an interest in the funds pending discovery on the nature of her interest. Hana admitted that she had no ownership interest in the accounts which were in Kobi's name. She argued, however, that she 'had involvement with and directed activity in one of the accounts' and had used funds from that account. The court ordered immediate discovery on Hana's possessory interest, if any, in the accounts at issue.
Finally, the court granted summary judgment to the government under the fugitive disentitlement doctrine embodied in the Civil Asset Forfeiture Reform Act of 2000 (CAFRA). Application of the doctrine is discretionary, and Judge Garaufis found that all five elements of the doctrine had been satisfied. First, four warrants had been issued for Kobi's arrest. Second, there was sufficient circumstantial evidence to infer Kobi's knowledge of the warrants ordering his arrest, including the warrant leading to his arrest in Namibia. Third, the forfeiture action related directly to the criminal case because both arose from the same backdating scheme. Fourth, Kobi was not in custody in another jurisdiction and nothing prevented him from returning to the United States to face the criminal charges against him. Fifth, Kobi has declined to re-enter the United States.
Declining claimants' request to assess the merits of the forfeiture case, the court stated:
[E]ven if I found it appropriate to consider the merits of the Government's case in determining whether to apply the fugitive disentitlement doctrine, this factor does not weigh in favor of permitting Kobi to pursue his claim.Slip op. 35.
In deciding to apply the doctrine, Judge Garaufis also noted that Kobi was a sophisticated businessman represented by competent counsel, charged with 35 counts of serious criminal conduct; that he had suddenly relocated his family to Namibia to avoid the court's jurisdiction, after wiring $57 million to accounts in Israel; and that, after telling the government he would return to the United States in July, he is now fighting extradition.
As to Kobi's argument that applying the fugitive disentitlement doctrine would deprive him of property without due process, Judge Garaufis pointed to the U.S. Court of Appeals for the Second Circuit's holding that 'a person who refuses to appear in the United States for arraignment on criminal charges of which he has notice thereby waives his due process rights in related civil forfeiture proceedings.' United States v. Collazo, 368 F.3d 190, 202 (2d Cir. 2004). Slip op. 37. In response to Kobi's allegation that forfeiture would constitute an excessive fine, Judge Garaufis agreed to hold an evidentiary hearing, if necessary, on the issue of excessiveness under CAFRA and the Eighth Amendment.
ERISA: Denial of Disability Benefits
In DiMeglio v. Bridgestone/Firestone Americas Holdings Inc., 05 CV 4538 (EDNY, Sept. 26, 2007), Judge Block granted summary judgment for plaintiff, reversing defendant's decision to deny disability benefits to plaintiff under its Long Term Disability Benefits Plan (plan) and remanding the matter to the plan administrator.
Plaintiff sought benefits under the plan in 1997 as a late enrollee, which required that he provide evidence of good health. On the questionnaire, plaintiff marked 'no' to the question whether he had 'been diagnosed or received treatment by/from a member of the medical profession' for '[g]out, arthritis, rheumatism, neck or back strain/sprain/injury, any deformity or loss of limb, or other disease or disorder of the back, spine, muscles, bones or joints.' In July 2001, plaintiff submitted a claim for long-term disability benefits under the plan following a 2001 diagnosis of herniated disc and osteoarthritis in his right hip. The disability committee rejected his claim for benefits, based on 2001 medical reports that his condition was caused by an accident twelve years earlier. The disability committee concluded that plaintiff's answer on the questionnaire was a false statement justifying the denial of benefits.
None of his pre-1997 medical reports indicated that he had either been diagnosed or received treatment for arthritis or a back injury.
Judge Block found the decision of the disability committee as affirmed by the pension board to be 'arbitrary and capricious.' According to Judge Block, the terms 'diagnosis' and 'treatment' require some act by a medical professional, not merely a complaint by a patient. Firestone conceded that there was no evidence of a pre-1997 diagnosis and pointed only to records created in 2001, reports of hip and back pain in 1997 and treatment for back problems in 1992. None of these documents provided substantial evidence of pre-1997 arthritis or back injury, and Judge Block concluded that the disability committee had based its decision on 'mere speculation.' Slip op. 10. The court also found no evidence of a knowing misrepresentation by plaintiff, which was required for a denial of benefits.
Judge Block remanded the claim to the plan administrator to consider the merits of plaintiff's claim that he was 'totally disabled' under the plan.
Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.
[This article is reprinted with permission from the November 9, 2007, issue of the New York Law Journal. Copyright © 2007 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]