January 15, 2016

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 Raymond J. Dearie was constrained by precedent to deny petitioner's motion to expunge her old criminal conviction, but explained why it is "now time" to change the law in this area. Judge Frederic Block, with only one exception, rejected numerous copyright claims regarding after-the-fact transcriptions of certain unrecorded talks by Rabbi Menachem Mendel Schneerson.

Judge Joseph F. Bianco held that defendant Federal Emergency Management Agency (FEMA) had not waived sovereign immunity as to insurance claims where the policies were sold by a private company and only guaranteed by FEMA. And Judge Brian M. Cogan held defendants, both Chinese companies, in civil contempt for their post-judgment discovery tactics, but denied the particular sanctions proposed by plaintiff.

Expungement of Conviction

In Stephenson v. United States, 10 MC 712 (Oct. 7, 2015), Judge Dearie reluctantly denied petitioner's application to expunge the record of her 1993 criminal conviction, where—even though her record would likely prevent her from receiving a license in her chosen field of nursing—under the current case law she could not show "exceptional circumstances" warranting expungement.

In 1993, at the age of 25, petitioner pleaded guilty to bank fraud. Dearie sentenced her to a day in custody, six months' home confinement and four years' supervised release. During the past 25 years, she "has turned her life around," eventually getting an associate's degree in human services/mental health from LaGuardia Community College and then, for the past four years, working as a trauma-team coordinator at North Shore-LIJ. Petitioner is married and has three daughters. Since her conviction, her record has been exemplary.

In 2010 she filed a pro se petition to expunge the record of her conviction, out of a well-placed concern that her criminal record would be an obstacle to obtaining employment in human services or nursing. The government opposed the motion as not presenting the necessary "extreme circumstances." Because it was not clear whether she could find employment after her course work, the court reserved decision pending developments. In 2015, in response to the court's request for an update, petitioner said she is still interested in a nursing career, and cited her conviction as a likely bar to getting a license.

At a hearing petitioner said she had called the New York State Division of Licensing Services and spoken to a woman who told her that, while a conviction is not an absolute licensing bar, "generally, if you have a record, you can't be licensed." This conversation caused petitioner to discontinue her education in nursing.

As Dearie noted, district courts have discretion to order expungement of criminal records, but only in "extraordinary circumstances"—and many courts have held that adverse employment consequences do not justify such relief. Some courts have required petitioners to show repeated job rejections. In the rare case where expungement has been granted, the record showed not only a history of rejections, but also dire financial circumstances. Slip op. 3-4.

"Much has changed, however, in the four decades since the Second Circuit first wrote that 'extreme circumstances' must be present to warrant expungement." Slip op. 4. See United States v. Schnitzer, 567 F.2d 536 (2d Cir. 1977).

There is now "solid evidence" that a conviction, even an old conviction, is often a significant obstacle to employment, sometimes creating dire financial conditions linked with recidivism. Slip op. 4-6. Given these realities, Dearie observed: "If an ex-offender's inability to find employment puts in jeopardy his or her reentry into society, I am hard pressed to imagine a circumstance more 'extreme.'" Slip op. 6.

Petitioner is "not in such dire straits. She is employed and earns a fair salary above the minimum wage." Her reason for seeking expungement is to obtain a nursing license.

"The State of New York…has taken steps to reduce unjust discrimination against felons in licensing decisions." Slip op. 8. Listing factors in petitioner's favor, the court stated: "I am hopeful that a licensing board will take seriously my conclusion that [petitioner] is of sound moral character and well-suited for the nursing profession."

Judge Dearie also pointed to the "irony" in this case: "precisely because she has been so successful in turning her life around, she has not demonstrated 'exceptional circumstances' warranting expungement." Slip op. 9.

In fact, "[t]here are 65 million Americans living with criminal convictions and suffering adverse consequences." "Criminal records," moreover, "are remarkably public and permanent, and their effects are pernicious….It is time for a change." Slip op. 10.

"That change could come from Congress"—where failure to act has put the federal system "woefully behind" state systems. "As a judiciary," Dearie observed, "it may be time to revisit the standard for granting expungement…" Slip op. 11. In the meantime, the court felt "constrained by controlling precedent" to deny the application.

Copyright-Related Claims

In Vaad L'Hafotzas Sichos v. Krinsky, 11 CV 5658 (EDNY, Sept. 30, 2015), Judge Block dismissed all but one of various copyright, unfair competition, and related claims, as well as a counterclaim, concerning the publication of various works by the late Lubavitcher Rebbe, Menachem Mendel Schneerson.

Rabbi Schneerson was for many years leader of the worldwide Lubavitcher Orthodox Jewish community. Frequently, he spoke on occasions when, under the community's religious practices, it was impermissible to record or transcribe him. Some members of the community would memorize such speeches and transcribe them later, to be reviewed and revised by the Rebbe. These writings, referred to as the "Likkuttei Sichos," were published in book form beginning in the early 1960s.

Starting in the late 1960s, plaintiff Salman Chanin worked with others in the community to "restructure the editing and publishing operation." In 1976, the group he had joined for this purpose, plaintiff Vaad L'Hafotzas Sichos, was formally incorporated. Chanin became, and remains, a director of the organization.

Following Rabbi Schneerson's death in 1994, different members of the Lubavitcher community involved in the publications, including Vaad and defendant Merkos L'Inyonei Chinuch, Inc., had a falling out, evidently related at least in part to the question of what Hebrew honorific phrase should follow the late Rebbe's name. In 1998, Vaad registered the Likkutei Sichos with the U.S. Copyright Office. Merkos subsequently published its own version, "virtually identical" to the previously published version but using a different honorific.

In November 2011, plaintiffs brought suit alleging copyright infringement (as well as other claims). At the same time Vaad, claiming to be the "work-for-hire author," applied to register copyrights in six other works of the Rebbe. After registrations issued, plaintiffs amended their complaint to include these other works. Defendants, including Merkos, counterclaimed for a declaratory judgment invalidating Vaad's copyright as having been procured by fraud.

On cross-motions for summary judgment, Judge Block dismissed all of the parties' claims but one, and dismissed the counterclaim. Whether Likkutei Sichos is considered as a "compilation" or a "derivative work," Vaad failed to show its original input—"the very foundation of copyright protection"—to these works. The Rebbe had retained final authority over content, and he alone was listed as author upon publication. Slip op. 14-18. Claims on five of the six additional works, which involved at least "some modification" of the Likkutei Sichos, were dismissed as well: either the individuals who modified them were not affiliated with Vaad, or they were paid by Vaad without the signed writing required to establish copyright protection on a "work for hire" theory. Slip op. 18-19.

As to one work, Hagada Shel Pesach—a selection of previously published materials relating to the Passover seder—there was "some evidence" that a member of Vaad's editorial staff had sufficient creative input to support a copyright claim. The claim on that matter was therefore put down for trial. Slip op. 21.

Defendants' counterclaim was dismissed because fraud on the Copyright Office is not the basis for an independent claim, but rather a defense to an infringement claim. As to all but Hagada Shel Pesach, plaintiffs' claims had been dismissed, so no such defense was needed. As to Hagada Shel Pesach, Vaad's claim of work-for-hire authorship would be tried but, even if that claim failed, "an intent to deceive the Copyright Office cannot be inferred merely from the fact that Vaad claims authorship." Slip op. 21-23.

Sovereign Immunity

In Foster v. Federal Emergency Management Agency, 15 CV 1760 (EDNY, Sept. 15, 2015), Judge Bianco granted defendant FEMA's motion to dismiss for lack of subject matter jurisdiction based on FEMA's sovereign immunity as a government agency.

The National Flood Insurance Act (NFIA), passed in 1969, provides a "Direct Program" under which FEMA insures policyholders directly and a "Write-Your-Own Program" (WYO Program) under which National Flood Insurance Program (NFIP) policyholders are insured by WYO companies. More than 90 percent of the Standard Floor Insurance Policies written under the NFIP are written by private WYO companies authorized to sell policies that FEMA guarantees. The WYO companies make the policy decisions relating to claims, proof of loss and loss estimates, but a policyholder may appeal the decision to FEMA.

Plaintiffs' residence was flooded when Hurricane Sandy hit Long Island on Oct. 29, 2012. Plaintiffs' flood insurance policy had ended on Sept. 11, 2012, but remained in effect for an additional 30 days. Plaintiffs negotiated a renewal policy with an Allstate agent, and Allstate, a WYO Program company, issued a renewal policy effective Oct. 23, 2012. The agent did not inform plaintiffs that because the policy was not renewed within 30 days, the new policy would not be effective until 30 days from Oct. 23. As a result, Allstate denied plaintiffs' claim in the amount of $222,000 and sought back the substantial amounts it had already paid to plaintiffs. Plaintiffs appealed Allstate's decision to FEMA, which affirmed it.

In its motion to dismiss, FEMA argued that it had not waived sovereign immunity under the NFIA for breach-of-contract actions and non-tort claims such as plaintiffs'. NFIA includes a partial waiver of sovereign immunity for suits against FEMA in connection with the "Direct Program," where FEMA directly insures policyholders. But the courts have held that WYO Program policyholders may not sue FEMA after a WYO company denies their claims.

In Judge Bianco's view this position is supported by NFIA's statutory and regulatory framework. Section 4072 provides that a claimant has the right to sue FEMA upon disallowance by "the Administrator," which courts have interpreted to mean only when the policy is issued by FEMA itself, but not under the WYO Program. Moreover, FEMA's disposition of an appeal does not trigger the limited waiver of sovereign immunity, because FEMA is not thereby acting as an insurer denying a claim. Plaintiffs purchased their flood insurance policy directly from Allstate, filed their claim with Allstate, and Allstate agents adjusted and denied their claim.

Bianco also dismissed plaintiffs' tort claims against FEMA under the Federal Tort Claims Act (FTCA) for failure to exhaust administrative remedies. The FTCA requires a claimant to present the claim to the appropriate federal agency within two years after the claim accrues and then sue in federal court within six months after the federal agency acts on the claim. Plaintiffs acknowledged that they had not filed an administrative claim with FEMA, claiming that it would be futile. But plaintiffs' claim of futility did not excuse their failure to comply with the exhaustion requirement. Slip op. 12.

Civil Contempt Remedies

In Animal Science Products v. Hebei Welcome Pharmaceutical Co. (In re Vitamin C Antitrust Litigation), 05 CV 453 (Master File 06 MD 1738) (EDNY, Oct. 9, 2015), Judge Cogan granted plaintiff's motion for civil contempt but rejected the requested remedies without prejudice.

Plaintiff obtained a jury verdict and judgment in the amount of $148 million against defendants Hebei Welcome Pharmaceutical Co., Ltd. and North China Pharmaceutical Group Corporation. Defendants resisted plaintiff's efforts to enforce the judgment and never produced any post-judgment discovery in response to plaintiff's requests. In October 2014 the court issued an order granting plaintiff's turnover motion against Hebei as to its bank accounts and plaintiff's motion to compel discovery in aid of execution against both defendants.

Finding that North China's assets were protected by sovereign immunity under the Foreign Sovereign Immunities Act, the court denied plaintiff's requests for orders in aid of execution against that defendant. The court also denied Hebei's motion to stay execution and plaintiff's request that the court order defendants to make installment payments. Thereafter, defendants' counsel stated that neither defendant would comply with the order because they risked criminal prosecution in China under the State-Owned Assets Supervision and Administration Commission of the Hebei Province of the People's Republic of China (SASAC).

Judge Cogan determined that an order of civil contempt was appropriate:

First, the October order was clear and unambiguous as to defendants' obligation to produce post-judgment discovery, including documents relating to defendants' cash and equivalent assets, investment assets available for sale, real estate, durable assets and secured debts relating to their assets.

Second, defendants' non-compliance was clear and convincing.

Third, defendants had not been reasonably diligent in attempting to comply. Although defendants claimed that they feared criminal prosecution if they complied with the order, that fear was not supported by the history of the case: As the court had already found, their claimed risk of criminal prosecution was pretextual. Tellingly, defendants had participated in merits discovery without being prosecuted or expressing fear of prosecution. In addition, the Chinese Government through its Ministry of Commerce participated in the case as amicus without objecting to merits discovery or stating that discovery would contravene Chinese law. Defendants' "new evidence," moreover, actually reinforced the fact that (a) they could seek authorization from the SASAC to produce the documents, and (b) it was not impossible for them to comply with the court's order. Slip op. 7.

Cogan rejected the remedies proposed by plaintiff. A coercive per diem sanction would not work because defendants continued to refuse to pay the $148 million judgment. Plaintiff's request to be appointed receiver was facially defective. Under New York law a receivership order must specify the property to be received, and plaintiff failed on that count and never explained how plaintiff would manage the assets. Slip op. 9-10.

The court suggested, without so stating directly, that plaintiff's best course would be to move to compel the banks with relevant information to comply with subpoenas. Although the banks have invoked the "separate entity rule" regarding levying and seizure of assets located in a foreign branch's accounts, that rule does not bar an order compelling a New York branch of a foreign bank to comply with an information subpoena. As Judge Cogan recognized, the banks would most likely disclose customer information only in response to a court order.

Though denying plaintiff's motion as to the remedies sought, the court did so "without prejudice to seeking such other enforcement mechanisms as may be available to satisfy the judgment." Slip op. 12.

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.