November 13, 2014

New York Law Journal / Written by: Harvey M. Stone, Richard H. Dolan

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 Jack B. Weinstein, constrained to sentence defendant to a mandatory five-year minimum imprisonment, granted a continuation of bail pending the scheduled date of defendant's selfsurrender to the designated place of incarceration. Magistrate Judge James Orenstein denied a government application for information kept by cell phone providers. Judge Joanna Seybert imposed sanctions for bad-faith litigation. And Judge Arthur D. Spatt denied a motion for leave to file an interlocutory appeal from a bankruptcy court decision.

Bail Pending Self-Surrender

In United States v. Polouizzi, 06 CR 22 (EDNY, Jan. 13, 2011), Judge Weinstein, over the government's objection, continued bail pending a sentenced defendant's self-surrender to the institution to be assigned by the Bureau of Prisons.

Following defendant's conviction for receipt and possession of child pornography, Judge Weinstein was required by statute to sentence him, at the very least, to a mandatory five-year minimum term of incarceration on the receipt counts. Twice previously, Judge Weinstein had set aside the conviction-first, as to the receipt counts, because the failure to inform the jury of the mandatory five-year minimum sentence violated defendant's Sixth Amendment rights; and later, after the Second Circuit's reversal of that ruling, because the appellate court's reduction of the indictment from 23 counts to five showed a prejudicial 'overindictment' the first time around.

The Second Circuit reversed that ruling as well, leaving Judge Weinstein with no remaining latitude here to protect defendant from the harsh mandatory minimum sentence and the government's vigorous embrace, at every turn, of such a sentencing regime even in this case, where mitigating factors called for a modicum of leniency.

Having sentenced defendant to (among other things) five years' incarceration, Judge Weinstein turned to defendant's request to remain on bail until his scheduled self-surrender on March 14, 2011, by which time the Bureau of Prisons will have designated his place of incarceration.

Defendant, the court noted, was repeatedly raped as a child in Sicily. Despite that trauma, he has worked hard and successfully in America, has a devoted wife and five supportive sons, and enjoys a fine reputation in his community.

His offense was this:

He viewed child pornography in a locked room. He has never acted out against a child or anyone else. Convincing evidence demonstrates that he presents no appreciable risk to any child or adult, but that he needs treatment for childhood based psychiatric problems. (Slip op. 1-2)

As the court also observed, 'The direct damage this sentence of incarceration will cause to the defendant and to his family is far greater than any indirect damage he may have inadvertently created in harming those shown on the pictures or videos he viewed.' Slip op. 2

Judge Weinstein was not persuaded by the government's insistence on immediate detention:

The court finds that defendant poses no danger of criminal conduct or a failure to appear as ordered. Self-surrender under such circumstances is the normal practice in federal courts. It saves the government the expense of transportation and avoids the harshness involved in requiring a long and difficult journey from court to prison while shackled, handcuffed and chained. (Slip op. 6)

Indeed, if there is no reason 'except unnecessary infliction of pain' to incarcerate defendant before his self-surrender to the designated institution, 'it would be cruel, unusual and unnecessary' to do so. Slip op. 6-8.

Tracking Information

In In the Matter of an Application of the United States of America for an Order Authorizing the Release of Historical Cell-Site Information, 10-MC-0897 (EDNY, Dec. 23, 2010), Magistrate Judge Orenstein considered a government application, under the Stored Communications Act (SCA), 18 U.S.C. §2701, et seq., for an order compelling the production of 'all 'recorded information identifying the base station towers and sectors that received transmissions from' a specified mobile phone.' The application was denied 'without prejudice to the government's right to seek similar relief by means of an application for search warrant. . . upon a showing of probable cause.'

While the government had made a sufficient showing under the SCA 'that the information is relevant and material to an ongoing investigation,' the court found that granting the government's application would violate the Fourth Amendment.

Magistrate Judge Orenstein acknowledged that his earlier ruling, to the same effect and on essentially indistinguishable facts, had been overturned by Judge Roslynn R. Mauskopf. However, as Judge Mauskopf had not yet issued an opinion explaining the reversal, and was 'not the district judge currently on miscellaneous duty, to whom any review of this order will be assigned,' Slip op. at 2, Magistrate Judge Orenstein considered other authorities. These included out-of-circuit cases recognizing the Fourth Amendment as protecting such cell phone records, as protecting against the installation of a global positioning system on a car, and as protecting e-mail communications. Slip op. 4-6


Noting that he was 'not in a position to assess' the reason for Judge Mauskopf's reversal of his prior opinion, or whether Judge Mauskopf had the opportunity to consider these precedents, Magistrate Judge Orenstein adhered to his prior conclusion that such cell phone records were protected: 'the Fourth Amendment must keep pace with the inexorable march of technological progress, or its guarantees will wither and perish.' Slip op. 7 (citations omitted.)

Rule 11 Sanctions

In Cameron International Trading Co. Inc. v. Hawk Importers Inc., 03 CV 2496 (EDNY, Jan. 18, 2011), Judge Seybert sanctioned defendants' counsel under Rule 11 for bad-faith litigation.

Moving to dismiss an action to enforce a settlement agreement, defendants' counsel argued that the court lacked continuing jurisdiction to enforce the Stipulation of Settlement. They made this argument even though the settlement agreement specifically provided that (1) the court would have 'exclusive jurisdiction' to enforce the agreement, and (2) in the event of breach the parties alleging default 'may apply to the United States District Court for the Eastern District of New York to enforce' the agreement. Defendants contended that the Stipulation of Dismissal failed to specifically incorporate the Settlement Agreement, even though the Stipulation of Dismissal referred to the 'so ordered' Settlement Agreement twice.

As Judge Seybert concluded, sanctions under 28 U.S.C. §127 were not adequate because the remedy would be to award costs to plaintiffs, who were already entitled to and had been awarded all costs and attorney's fees by the court. Similarly, there was no point to compensation through civil contempt because plaintiffs were already entitled to receive all possible compensation under the Settlement Agreement. Moreover, defendants and their counsel had no warning from the court of activities that could warrant criminal contempt


Judge Seybert thus turned to Rule 11 to impose sanctions. The court found defendants' argument that the court had no jurisdiction to enforce the settlement to be frivolous and illogical. Their interpretation would have rendered meaningless the references to the settlement agreement in the Stipulation of Dismissal. Defendants' argument that the court had jurisdiction to enforce the settlement agreement only until the case was dismissed with prejudice showed bad faith. This argument, combined with defendants' general course of conduct, merited sanctions.

Defendants had ignored plaintiffs' initial notice of breach, argued that their 'cure' foreclosed any enforcement action, disregarded plaintiffs' request to reopen the case and failed to appear at the first conference. Defendants sought adjournments leading to delays lasting several months and then appeared unprepared for the hearing on the first order to show cause, claiming surprise that they were supposed to present witnesses or other evidence. Judge Seybert found that these actions were geared only to delay and showed a 'manifest and calculated disrespect for the court and its authority.' Slip op. 13.

The court imposed sanctions equal to the time Judge Seybert and Magistrate Judge William D. Wall and their law clerks spent dealing with defendants' motion to dismiss. The total sanctions amounted to $4,900, calculated by multiplying the billing rate for first year associates-$ 175 per hour-by the number of hours spent: 28.


ankruptcy Court Decision

In Thaler v. Estate of Vincent J. Arbore (In re Poseidon Pool & Spa Recreational Inc.), 10 MC 753 (EDNY, Dec. 8, 2010), Judge Spatt denied appellants' motion for leave to file an interlocutory appeal from a decision of the bankruptcy court holding that Poseidon Pool & Spa Recreational Inc., the debtor, was insolvent as of July 1, 2003.

In May 2002, Victor J. Arbore, a former officer, director and shareholder of the debtor, entered into a redemption agreement providing that the debtor would redeem his 10 shares of stock for $450,000. The debtor paid $50,000 and signed a promissory note promising to pay $6,500 a month. Mr. Arbore died in September 2002, but the debtor continued to make payments to his estate until September 2005.

The debtor filed a voluntary petition under Chapter 11 on Oct. 7, 2005, which was converted to Chapter 7 on Sept. 7, 2006. The Chapter 7 trustee filed an adversary proceeding against the estate seeking return of payments made under the Redemption Agreement, contending that any payments not made out of surplus or when the debtor was insolvent violated New York Business Corporation Law §513. Bankruptcy Judge Dorothy T. Eisenberg held a hearing and determined that the trustee had established the debtor's insolvency as of July 1, 2003.

The estate sought leave to appeal Judge Eisenberg's decision. Judge Spatt applied the standard set forth in 28 U.S.C. §1292(b) governing interlocutory appeals to the court of appeals. The first issue—whether the trustee proved that the debtor was insolvent from July 1, 2003, until the petition date by a preponderance of the evidence—presented a question of fact, rather than a pure question of law. Thus, that issue was not proper for review on interlocutory appeal, which allowed review only of decisions on controlling questions of law that would terminate the action or materially affect the outcome of the litigation. To determine whether the trustee established insolvency by a preponderance of the evidence, the court would have to perform an in-depth evidentiary analysis.

The second issue-whether the bankruptcy court applied the incorrect burden of proof-was an issue of law. Judge Spatt concluded, however, that Judge Eisenberg had applied the correct burden of proof, so this issue could not serve as the basis for an interlocutory appeal. It was also clear that Judge Eisenberg had correctly weighed all the estate's objections in reaching the decision that the trustee had made a prima facie case of insolvency.

The final issue the estate sought to appeal was whether Judge Eisenberg properly applied the standard for insolvency in BCL §513. The estate contended that Judge Eisenberg incorrectly applied the balance-sheet insolvency definition found in the Bankruptcy Code rather than the equitable insolvency definition in section 513. Section 513 defines insolvency as an inability to pay debts as they become due in the usual course of business. Balance-sheet insolvency occurs when the company's liabilities exceed its assets.

Questions of insolvency are questions of law and whether the Bankruptcy Court correctly interpreted the statute could be considered a controlling issue of law. But here the court decided that the real issue concerned 'the application of the equitable insolvency standard.' Because this was at bottom a factual inquiry, it was not properly the subject of an interlocutory appeal. Slip op. 17.

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 February 10, 2011, issue of the New York Law Journal. Copyright © 2011 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]