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 Joanna Seybert held that, where both parties failed to perform under a confidentiality agreement, neither could prevail in claiming a breach by the other. Judge Roslynn R. Mauskopf found that plaintiff had not properly served defendant under the Foreign Sovereign Immunities Act. Judge Arthur D. Spatt denied a mother's §1983 claims relating to a search of her son by a school security guard. Judge Spatt also ruled that a contractor forfeited its right to insurance coverage by undue delay in notifying its insurer of an occurrence.

Confidentiality Provision

In Mathis v. Liberty Moving Co., 08 CV 1163 (EDNY, Oct. 26, 2011), Judge Seybert found, after an evidentiary hearing, that neither party could prevail on its claims that the other had breached the terms of a confidentiality agreement, where both sides failed to prove their own compliance with the confidentiality provision.

Plaintiff Lee Mathis, a 72-year-old black male, worked at defendant Liberty Moving for five years. After Liberty allegedly assigned plaintiff fewer work shifts, plaintiff sued for race and age discrimination. The parties settled the case with an agreement that Liberty would pay $68,646 to plaintiff in installments. Under the agreement, certain named persons at Liberty (and another moving company) were to keep the existence and terms of the settlement in "strict confidence" and make no disclosure to anyone else, except "to the extent necessary to enforce or comply with the terms of this Agreement, but only after seven (7) days prior written notice given by the disclosing Party to the other Party." (Emphasis added.) The parties agreed that any confidentiality breach would result in liquidated damages of $10,000.

A co-owner at Liberty testified that, from Liberty's standpoint, the confidentiality clause was critical given the company's concern about copycat lawsuits.

When Liberty was about to make its final payment pursuant to the settlement, one of its dispatchers, Robert Franklin, received a voicemail saying that "Big Lee"—a nickname for plaintiff—was "getting his money this week," and that it was "somebody else's turn to get rich." Mr. Franklin recognized the caller as one Desmond Estrick, a former Liberty employee and plaintiff's friend.

When informed of the voicemail, Liberty withheld the final settlement check and had Franklin call Estrick twice and record the conversation. At first Estrick denied sending the voicemail, but when confronted with the recording, Estrick laughed and remembered leaving the message. Estrick told Franklin that he had heard through the grapevine that "Big Lee" was getting a "package" soon from Liberty. Estrick denied that he got this information from plaintiff. According to plaintiff, though he and Estrick spoke "probably every week," and Estrick would sometimes ask about the case, plaintiff never mentioned the settlement to him.

The fatal flaw in the breach claims here was that neither party could prove its own performance under the confidentiality provision. Liberty revealed the settlement agreement to its comptroller, who was not named in the agreement as a person eligible for disclosure. Liberty justified this disclosure by arguing that the comptroller's knowledge of the agreement was necessary to make payments to plaintiff. This contention, the court noted, was at odds with the plain language of the agreement, which allowed an exception to confidentiality in order to comply with the agreement, "but only after seven (7) days prior written notice." Liberty never gave that notice to plaintiff. Its argument would therefore render the notice provision meaningless.

Similarly, plaintiff himself did not honor the confidentiality clause. Contrary to plaintiff's denials, Judge Seybert found it likely that he had divulged the settlement agreement to Estrick. Liberty, not plaintiff, had a strong incentive to keep quiet about the settlement to prevent lawsuits by other workers. The court also pointed to the friendship between plaintiff and Estrick, Estrick's curiosity about the lawsuit and their frequent conversations about it.

Judge Seybert overruled plaintiff's hearsay objections to admission of Estrick's voicemail message that "Big Lee" was "getting his money this week." Those statements were offered not to prove the truth of their content—i.e., that plaintiff was actually receiving a payment that week—but rather to prove Estrick's knowledge of the settlement. Slip op. 9-10.

Service Under the FSIA

In Avelar v. J. Cotoia Construction Inc., 11 CV 2172 (EDNY, Nov. 2, 2011), Judge Mauskopf vacated a default judgment issued by the Supreme Court, County of Queens, against the Permanent Mission to the United Nations of the People's Republic of the Congo f/k/a Gouvernement de la Republique du Congo Brazzaville ("Congo Mission"), where service violated the Foreign Sovereign Immunities Act (FSIA). The court also vacated the levies against Congo Mission's real property and bank accounts in execution of the judgment.

Plaintiff commenced the Queens County action to recover for damages sustained while working at a site owned by Congo Mission in Bronxville. Plaintiff named the contractor as defendant and later added Congo Mission. Plaintiff was employed by a subcontractor. In July 2009, plaintiff delivered English language versions of the state court summons and complaint to a receptionist at Congo Mission, located at 14 E. 65th St. in Manhattan. Congo Mission never answered. Its only communication to plaintiff was a written reply to plaintiff's letter notifying Congo Mission that it would seek a default judgment if Congo Mission did not answer. The Head of Mission, Ambassador Raymond Serge Balé, explained that he did not believe Congo Mission to be liable. Plaintiff mailed additional documents to Congo Mission, but it took no action. In November 2010 the state court awarded a default judgment against Congo Mission in the amount of $475,000. Between February 2010 and May 2010 plaintiff filed judgment liens against Congo Mission property and attached its bank accounts.

In May 2010 Congo Mission removed the state court action to the Eastern District, and moved to dismiss for lack of personal jurisdiction and to vacate the state court judgment and all liens and attachments because service of process on Congo Mission violated the FSIA. The United States filed a statement of interest in support of Congo Mission's position. Plaintiff moved for remand, which was denied.

Judge Mauskopf concluded that plaintiff "failed properly to serve Congo Mission, thereby rendering void the state court default judgment." Under section 1608(a) of the FSIA, there are four exclusive methods of effecting service on a "foreign state": "(1) service by prior agreement between the parties; (2) service in compliance with a convention to which the foreign state is a party; (3) failing both (1) and (2), service by the Clerk of Court; (4) failing (3) service by the State Department through 'diplomatic channels.'" Slip op. 6.

Plaintiff had not served Congo Mission in compliance with any FSIA method. Instead, plaintiff delivered a copy of the summons and complaint to Congo Mission and mailed various other documents including the order granting the default judgment. Plaintiff did not contend that he had any private agreement with Congo Mission. Additionally, the People's Republic of the Congo is not a party to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, which in any event applies only to international service. Nor did plaintiff effect service through any Clerk of Court or the State Department. Service was thus improper, and the state court default judgment and subsequent liens and attachments were a nullity.

Apart from defective service, Congo Mission's property and bank accounts were immune from execution and levy under the Vienna Convention on Diplomatic Relations. Sworn statements by Ambassador Balé that those assets were used for diplomatic purposes and necessary for Congo Mission to function, required the court to vacate the levies and attachments.

Judge Mauskopf granted Congo Mission's motion to dismiss the complaint.

Search of Minor Student

In Love v. Riverhead Central School District Board of Educ., 09 CV 5680 (EDNY, Nov. 9, 2011), Judge Spatt granted partial summary judgment to a school district and officials, dismissing constitutional tort claims asserted by the mother of the minor plaintiff, while denying certain defendants' motions alleging defective service of the minor's claims.

Plaintiff Marilyn Love sued the Board of Education in Riverhead Central School District and numerous of its employees under 42 U.S.C. §1983, based on a warrantless search of her eighth-grade son, co-plaintiff T.L. T.L. had been summoned to the defendant principal's office where he was subjected to a pat-down search by a security guard, at the principal's direction, after the guard stated that T.L. had been observed giving money to two students. The search yielded nothing. The complaint asserted, and defendants did not presently dispute, that Love was not timely notified of the search as required by the district's Student Handbook.

The complaint claimed that the search violated T.L's rights to due process and equal protection, as well as his Fourth Amendment right to be free from unreasonable search and seizure. As elaborated by plaintiffs' opposition papers, Love claimed that she had a separate due process right to be advised of the search in accordance with the Student Handbook.

Judge Spatt dismissed the mother's claims as failing to allege sufficient interference with the family relationship: "The cases which have held that there is a Section 1983 cause of action pertaining to the parent-child relationship typically take place in the context of physical removal. . . . Whether or not school officials notified Marilyn Love [of the search], the action cannot be said to have been directed specifically toward disruption of the family relationship." Slip Op. 13, 15.

As to T.L.'s claims, the court denied a motion for summary judgment brought on service grounds by the defendant principal and a co-defendant. Judge Spatt rejected the argument that these defendants had preserved their service defenses by pleading a lack of personal jurisdiction in their answers. Insufficient service of process is a distinct defense under Fed. R. Civ. P. 12(b), which they failed to plead and therefore waived. Slip Op. 5-10.

Insurance Policy Notice

In Mt. Hawley Insurance Company v. Abraham Little Neck Development Group Inc., 09 CV 3463 (EDNY, Nov. 21, 2011), Judge Spatt, granting summary judgment to plaintiff insurer, issued a declaration that it had no obligation to cover, defend or indemnify the insured, while denying summary judgment to the insurer as to the injured party.

In September 2008, Gilberto Diaz was injured while working as an employee of subcontractor E. Anderson Enterprises on a construction project in Oyster Bay. Defendant Abraham Little Neck Development Group, insured by Mt. Hawley Insurance Company under a liability policy, was the general contractor. The policy required Abraham Little Neck to provide plaintiff with notice of an occurrence or offense as soon as possible. The policy also required Abraham Little Neck to obtain hold-harmless agreements from subcontractors indemnifying it against losses from work performed by them. Abraham Little Neck complied with the subcontractor insurance provision by entering into a hold-harmless provision with Anderson, which required Anderson to provide a current certificate of liability insurance and a Workers' Compensation certificate.

In November 2008, Diaz's attorney sent Abraham Little Neck a letter notifying it that Diaz had been injured in an accident on the Oyster Bay construction site. The attorney asked Abraham Little Neck to forward the letter to its insurance carrier and threatened to sue if he did not receive a response. Abraham Little Neck responded that Diaz was an employee of subcontractor Anderson, which had provided certificates of liability and Workers' Compensation. Abraham Little Neck did not notify Mt. Hawley.

In January 2009, Diaz commenced an action against Abraham Little Neck in Supreme Court, Suffolk County, seeking damages for his injuries, although Abraham Little Neck claims it did not receive notice of the action until June 2009. Abraham Little Neck notified its insurance broker the same day it received notice of the Diaz action. The broker investigated and notified Mt. Hawley. Plaintiff denied coverage based on the breach of the policy's notice provision due to the delay between Abraham Little Neck's awareness of Diaz's accident (November 2008) and notification to plaintiff (June 2009). Mt. Hawley commenced this action against Abraham Little Neck and Diaz seeking a declaration that it had no obligation under the policy to cover, defend or indemnify Abraham Little Neck or any other person.

As Judge Spatt found, Abraham Little Neck failed to give timely notice of the Diaz accident to Mt. Hawley. Abraham Little Neck's belief that the subcontractor had superseding liability was unreasonable as a matter of law and did not excuse failure to provide timely notice. Slip op. 10. The threat of suit in the November 2008 letter triggered the notice provision, requiring notification as to any occurrence that "may" lead to a claim.

The court rejected retroactive application of Insurance Law §3420(a)(5), which prohibits insurers from denying claims as untimely unless the delay prejudiced the insurer. Section 3420(a)(5) applies only to policies "issued or delivered" on or after Jan. 17, 2009, whereas the policy at issue was issued in June 2008.

Judge Spatt denied summary judgment as to Diaz, because there was nothing in the record indicating whether or not Diaz had notified the insurer about the accident.

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 December 9, 2011, issue of the New York Law Journal. Copyright © 2011 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.]