January 9, 2019

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

In their Eastern District Roundup, Richard H. Dolan discuss three recent decisions, one which declined to realign a corporate defendant as a plaintiff in a diversity action; another which dealt with various issues in connection with a motion to suppress evidence in a criminal case; and the last which dismissed an action brought under the Federal Tort Claims Act relating to a murder in Panama.

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 declined to realign a corporate defendant as a plaintiff in a diversity action. Judge Arthur D. Spatt dealt with various issues in connection with a motion to  suppress evidence in a criminal case. And Judge Edward R. Korman dismissed an action brought under the Federal Tort Claims Act relating to a murder in Panama.

Motion to Realign Corporation in Derivative Action and Dismiss for Want of Diversity Jurisdiction

In Hebei Tiankai Wood & Land Construction Co., Ltd. v. Frank Chen & Kirin Construction, Inc., 18 CV 2795 (EDNY, Dec. 21, 2018), Judge Weinstein applied the “doctrine of antagonism” to deny realignment, in a derivative action, of a party named as a nominal defendant, where realignment as a plaintiff would have defeated diversity jurisdiction.

Plaintiff Hebei Tiankai Wood & Land Construction Co., Ltd. is a Chinese corporation. It brought suit against Kirin Construction, Inc. and Frank Chen, who was running Kirin.

Both Kirin and Chen are citizens of New York.

The complaint alleged that Chen induced Hebei Tiankai to invest $300,000 in Kirin in exchange for 51 percent of the Kirin stock, plus assistance in obtaining an L-1 visa for one of Hebei Tiankai’s representatives. While certificates evidencing Hebei Tiankai’s interest in Kirin issued, Chen refused to allow Hebei Tiankai to exercise any control over Kirin. Invoking the court’s diversity jurisdiction, Hebei Tiankai asserted claims against Chen for fraudulent inducement, breach of contract, and breach of fiduciary duty, and named Kirin as a nominal defendant.

Chen argued that Kirin should be realigned as a plaintiff and the matter dismissed for lack of diversity jurisdiction. Weinstein converted the motion to one for summary judgment, and the parties agreed that it could be decided without an evidentiary hearing.

Weinstein “assumed for purposes of this opinion that Plaintiff’s claims are derivative and intended to remedy wrongs to.” Kirin, Slip op. 8. Chen’s motion was nonetheless denied under the doctrine of antagonism, which allows a court to decline to realign the corporation in a derivative action as plaintiff where it is, in fact, hostile to the interests  of the plaintiff.

Kirin was properly aligned as a defendant under this doctrine, for two reasons. First, Chen retained de facto control of Kirin. Second, Hebei Tiankai alleged “that Chen has engaged in fraud by wasting the investment in Kirin by Plaintiff and by engaging in other acts of malfeasance … . When the dominant official of a corporation is accused of fraud, the corporation is appropriately aligned as a defendant.” Slip op. 9, citing ZB Holdings v. White, 144 F.R.D. 42, 46 (S.D.N.Y. 1992).

While Hebei Tiankai’s majority ownership of Kirin was a factor cutting against antagonism, it was only one factor. “The court’s role is to determine where the real collision of interests lies. The pleadings show that collision between Plaintiff on one side and Chen and Kirin on the other.” Slip op. 9.

Weinstein reviewed the importance of alienage jurisdiction—the right of foreign nationals to sue U.S. citizens in federal court—which was established in response to difficulties British creditors encountered, prior to the Constitutional Convention, in collecting from American debtors in state courts. Even today, “[l]itigating in state court could be burdensome, since foreign parties might be subject to the civil procedures of more than one jurisdiction.” Hebei Tiankai’s right to a federal forum therefore ought not be disturbed by realignment where Kirin was, in fact, hostile to its claims. Slip op. 9- 12.

Motion to Suppress/‘Franks’ Hearing

In United States v. Robinson, 16 CR 545 (EDNY, Nov. 13, 2018), Judge Spatt denied certain aspects of defendant’s motion to suppress, granted others, and deferred still others pending a hearing.

Defendant argued that evidence seized during a warrantless search of a rental van should be suppressed because he had not abandoned his reasonable expectation of privacy. Spatt ordered a suppression hearing to clarify details of the search, including whether the officers first learned that defendant was not an authorized user of the rental van before or after they conducted the search. Slip op. 7-11.

Defendant also moved to suppress evidence seized pursuant to a state warrant. Spatt found that the warrant lacked the required specificity, and that an affidavit supporting it, which provided the missing information, did not cure this because the warrant did not direct the executing officers to refer to the affidavit for guidance. On the other hand, the supporting affidavit sustained the government’s position that the officers executing the warrant had acted in good faith, making suppression uncalled for. Spatt noted “some degree of overlap between the Defendant’s motion regarding the warrantless search of the Rental Van and his motion relating to” the state warrant, and left open the possibility that the motion to suppress the proceeds of the warrant might be reconsidered if additional supporting facts were developed during the suppression hearing regarding the search of the rental van. Slip op. 12-21.

A hearing was required to determine whether records from a cell phone that the government claimed to have recovered without a warrant from a nearby roof should be suppressed, where defendant had made non-conclusory allegations that the phone was, in fact, recovered from the rental van. Slip op. 22-25. Under Delaware v. Franks, 438 U.S. 154 (1978), a suppression hearing on this subject also was necessary to determine whether a federal warrant, obtained in part through the government’s representation that it had found the phone on the roof, had issued upon materially  false statements misleading the Magistrate Judge. Slip op. 23-25.

Spatt rejected defendant’s argument that the federal warrant and a second federal warrant issued the same month were obtained without probable cause. Both warrants were facially sufficient, so suppression was denied, “pending the outcome of the Franks hearing.” Slip op. 26-33.

Defendant’s motion to reopen an earlier hearing to suppress records obtained from his personal cellphone was denied both as untimely, and because the government had established that parole officers properly retained the phone under a safekeeping policy rationally related to their caseworker duties, rather than as part of a criminal investigation. Slip op. 38- 44.

Immunity Under the Federal Tort Claims Act

In Rodriguez v. Velez-Pagan, 17 CV 3911 (EDNY, Oct. 26, 2018), Judge Korman dismissed, for lack of subject matter jurisdiction, claims against the U.S. Army, Department of Defense, Department of State, and the United States, brought under the Federal Tort Claims Act (FTCA), and other statutes. The claims arose from a murder in Panama.

Velez-Pagan was a member of the Administrative and Technical Staff at the U.S. Embassy in Panama. Following an afternoon at the beach, Velez-Pagan beat to death Vanesa Itzel Rodriguez Chavarria (Rodriguez) while driving an Embassy-provided car. Velez-Pagan was returned to the United States, tried by a military court and convicted for unpremeditated murder, aggravated assault and possession of steroids.

Rodriguez’s estate and her parents filed wrongful death administrative claims with the Army and the State Department, which were denied.

The waiver of sovereign immunity by the United States under the FTCA is limited and subject to exceptions which insulate the government from liability. The foreign country exception bars all claims arising from any injury suffered in a foreign country. Because Rodriguez’s murder occurred in Panama, “the foreign country exception bars any claims arising out of Velez-Pagan’s crimes.” Slip op. 4. Korman rejected plaintiffs’ argument that the crime occurred in territory of the United States because the murder took place in an Embassy car.

The FTCA also bars claims arising from intentional torts, including claims based on assault and/or battery, even if the claims otherwise sound in negligence. Plaintiffs argued that hiring and supervision claims were separate claims and thus should not be barred. Here, however, the negligence and wrongful death claims were not independent of the hiring and supervision claims, because “[t]he substance of each claim arises out of an assault or battery claim, and the United States’ alleged negligence is predicated on its employment of Velez-Pagan.” Slip op. 7.

In addition, under the FTCA only the United States and not the agencies—the U.S. Army, the Department of Defense, the Department of State—could be held liable for torts committed by a federal agency. Thus, the claims asserted against the Agency Defendants were dismissed. Immunity is waived, moreover, only when an employee is acting within the scope of his office or employment. “Because Velez-Pagan’s assault and murder of Rodriguez was [not] the kind of work he was hired to perform, … it was outside the scope of his employment.” Slip op. 8.

As Korman also noted:

  • Personnel decisions of the United States fall within the discretionary function exception, which means that claims based on negligent supervision and hiring are barred.
  • Plaintiffs’ claims based on the failure to comply with drug-testing regulations are not cognizable because the FTCA waives immunity only under circumstances that would establish liability “in the same manner and to the same extent as a private individual under like circumstances.” Slip op. 10 (citations omitted).

Having found no basis for original federal jurisdiction against the United States and the federal agencies, the court could not exercise supplemental jurisdiction over the claims against Velez-Pagan in his individual capacity. Slip op. 11-12.

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.