Judge Refuses To Reopen Discovery

In Lufthansa Cargo AG v. Total Airport Services, 12 CV 4869 (E.D.N.Y. Oct. 24, 2014), Magistrate Judge Roanne L. Mann granted defendant’s motion for reconsideration to the extent of deferring decision on the admissibility of evidence and denied reconsideration of the motion to reopen discovery. Magistrate Judge Mann had denied defendant’s motion to reopen fact discovery after defendant had fortuitously discovered new evidence during a court-ordered inspection of an aircraft outside the bounds of the authorized inspection and five months after the close of discovery.

Defendant argued that it should be allowed to reopen discovery because plaintiffs’ Rule 30(b)(6) witness, Dieter Hammer, had testified that Lufthansa did not fly with repaired aircraft, but admitted that he was not knowledgeable about structural damage or related repairs. A subsequent 30(b)(6) witness, Andreas Grubert, gave testimony that appeared to contradict Hammer. The newly discovered evidence indicated that Lufthansa may indeed have flown aircraft following structural repairs.

Magistrate Judge Mann refused to reopen discovery because defendant had not been diligent in pursuing additional information from plaintiffs following the contradictory testimony given by Hammer and Grubert. A court-ordered scheduling order may be modified under Federal Rule of Civil Procedure 16(b)(4) only for “good cause,” and “good cause depends on the diligence of the moving party.” Slip op. 6. Here, defendant did not seek documents and answers to interrogatories concerning other repairs for structural damage to plaintiffs’ fleet of aircraft before discovery closed, thus a fortuitous finding during a post-discovery inspection did not demonstrate adequate diligence to convince the court to reopen discovery long after it ended.

Concerning the admissibility of the fortuitous evidence gathered during the inspection of the aircraft, the court concluded:

that the balancing of the probative value of such evidence as against any prejudice resulting from its admission is more appropriately deferred until the time of trial; the presiding judge will then be in a position to consider the testimony already adduced at trial in assessing the admissibility of the proof in question.

Slip op. 10.

Court Declines To Exercise Supplemental Jurisdiction Over Article 78 Claim In Hamptons Eruv Litigation Raising Multiple Federal Claims

Magistrate Judge Kathleen Tomlinson again addressed the ongoing effort to create a Hamptons eruv, in a September 24, 2014 order in East End Eruv Association v. Town of Southampton, et al., 13 CV-4810 (AKT) (EDNY Sept. 24, 2014). An eruv is “an unbroken delineation of an area” that allows Jews “with certain religious beliefs to carry or push objects from place to place within the area during the Sabbath and Yom Kippur.” Slip op. 1. The demarcation of the eruv would be established by attaching “wooden or plastic strips known as ‘lechis’” to the sides of telephone and utility poles. Id. Plaintiffs’ proposed eruv would eventually encompass parts of Southampton, Westhampton Beach, and Quogue. See id. at 1-2.
We last blogged about the ongoing Hamptons eruv dispute here, in discussing Judge Tomlinson’s June 16, 2014 order in the related case Verizon v. The Village of Westhampton Beach, et al., 11 Civ. 252 (AKT) (EDNY June 16, 2014). Magistrate Judge Tomlinson there ruled that Verizon and the Long Island Power Authority could enter into agreements with the East End Eruv Association (“EEEA”) allowing the attachment of lechis to the utilities’ poles. In addition to the Verizon and Southampton cases, there is a third case brought by EEEA against Westhampton Beach, East End Eruv, et al. v. Village of Westhampton Beach, 11 CV 213. See Slip op. 1 n.1.
In her September 24 order, Magistrate Judge Tomlinson granted Southampton’s motion to dismiss to the extent of dismissing without prejudice plaintiffs’ sixth cause of action, which the Judge found was in substance a state-law Article 78 claim, and staying plaintiffs’ remaining claims pending resolution of the Article 78 claim in New York State court. Slip op. 27, 38. Although the sixth cause of action did not mention Article 78 expressly, it incorporated the Article 78 legal standard, seeking a declaratory judgment that the Town’s denial of plaintiffs’ application to allow attachment of 28 lechis to 15 utility poles was arbitrary and capricious, and an injunction directing the Southampton Zoning Board to issue any permits necessary for plaintiffs to construct the eruv. See id. at 26-27. Subject matter jurisdiction was premised on supplemental jurisdiction under 28 U.S.C. § 1367, based on plaintiffs’ assertion of claims under the First and Fourteenth Amendments, 42 U.S.C. § 1983, and the federal Religious Land Use and Institutionalized Persons Act.
Judge Tomlinson declined to exercise supplemental jurisdiction over the Article 78 claim, consistent with the rulings of the “overwhelming majority of district courts.” Slip op. 29. The court relied on Carver v. Nassau County Interim Fin. Auth., 730 F.3d 150 (2d Cir. 2013), in which the Second Circuit declined to decide whether Article 78 itself deprives the federal courts of subject matter jurisdiction, but “recognized the State preference to handle these claims on its own.” Slip op. 31-32. Judge Tomlinson noted that when the Article 78 claim dismissed in that case was later adjudicated in state court, the state court “reached a decision directly contrary to that of the federal district court.” Id. at 32. While the exercise of supplemental jurisdiction might be warranted in “unusual circumstances,” id. at 35, Article 78 is a “’novel and special creation of state law,’” and a “’purely state procedural remedy.’” Id. at 33 (quoting Birmingham v. Ogden, 70 F. Supp. 2d 353 (S.D.N.Y. 1999). Apart from the exceptional case, therefore, supplemental jurisdiction under 28 U.S.C. § 1367 will not lie over an Article 78 claim, even if most or all of the accompanying causes of action are federal.

Italian Forum Selection Clause Contained In Order Confirmation Form Upheld

In Allied Dynamics Corp. v. Kennametal, Inc., 12-CV-5904 (JFB)(AKT) (E.D.N.Y. Aug. 5, 2014), Judge Joseph F. Bianco granted defendants’ motion to dismiss plaintiff’s claims for breach of contract and tort based on improper venue. Plaintiff, a New York manufacturer of turbine parts, had ordered blade parts from defendant, an Italian company, for gas turbine assembly. Plaintiff alleged that defendant had failed to provide goods of the quality and quantity promised.
When plaintiff filed suit in New York, defendants asserted that the parties had chosen Milan, Italy, as the exclusive forum for disputes. This forced the court to determine, first, which documents constituted the parties’ agreement, and, second, whether that agreement included the forum selection clause. The court resolved these questions by applying the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). After an evidentiary hearing, the court held that plaintiff’s initial purchase orders constituted offers but defendants’ order confirmations—which included the forum selection clause in dispute, among other general terms and conditions—constituted rejections and counteroffers that plaintiff was deemed to have accepted under the CISG when it failed to object within fifteen days of receipt of each confirmation.
But that did not end the inquiry. Even valid forum selection clauses can be overcome if the partyresisting enforcement can show that enforcement would be “unreasonable or unjust, or that the clause is invalid for reasons such as fraud or overreaching.” Slip op. 15 (internal quotation and citation omitted). The court found no evidence of fraud or overreaching and concluded that the Italian forum would not deprive plaintiff of a remedy. As a result, Judge Bianco dismissed the case in favor of the Italian courts.

No Prohibition On Utilities Permitting Use Of Their Poles To Mount Strips Demarcating Eruv In Westhampton Beach

Magistrate Judge Kathleen Tomlinson’s June 16, 2014 decision in Verizon v. The Village of Westhampton Beach, et al., No. 11 Civ. 252 (AKT), allows the establishment of an eruv to proceed in Westhampton Beach. An eruv is an “unbroken delineation of an area” that allows Jews “with certain religious beliefs to carry or push objects from place to place within the area during the Sabbath and Yom Kippur.” Slip op. 1. The court ruled that there is no bar to Verizon and the Long Island Lighting Company (“LIPA”) allowing the placement of wooden or plastic strips, known as “lechis,” on their telephone and utility poles for the purpose of demarcating the eruv. In the action, Verizon and LIPA sought a declaratory judgment that they would not incur any liability to the towns of Westhampton Beach, Quogue, and Southampton by entering into agreements with the East End Eruv Association (“EEEA”) permitting the Association to install the lechis. In a related case, the EEEA asserted that its members’ constitutional rights were violated by the towns when they allegedly prevented establishment of an eruv. The utilities’ declaratory judgment action is less glamorous, turning on the construction of the utilities’ franchise agreements, the state Transportation Corporations and LIPA statutes, and the scope of the towns’ police powers. (The action was stayed as to Southampton so the June 16 ruling pertains only to Westhampton Beach and Quogue.)
Although it was undisputed that the utilities own the poles on which the lechis were sought to be placed, the towns argued that the utilities lacked authority to license use of their poles for other than utility purposes. However, this argument fell flat given that the utilities had previously allowed the temporary mounting of posters and banners announcing local events, such as the Westhampton Beach St. Patrick’s Day Parade. The court construed the utilities’ franchise agreements with the towns and found they contained no prohibition on the utilities licensing use of their poles for non-utility purposes. See Slip op. 24. The court also found that the Transportation Corporations Act, which the court determined was applicable to Verizon, but not LIPA (which was created by statute as a “subdivision of the state,” and was therefore not a corporation subject to the Transportation statute, Slip op. 28), did not bar Verizon from entering into such license agreements. See Slip op. 31-32. As to LIPA, the court determined that Section 1020-g(c) of the LIPA Act gives LIPA “the discretion to lease or use its poles as it sees fit.” Slip op. 39.
That left the question whether the towns’ police powers permit them to prevent the utilities from licensing the use of their poles for placement of lechis. The court held that although the municipalities could regulate the mounting of lechis under their police powers, Westhampton Beach had no ordinance doing so, and as a result there was no municipal regulatory bar to the utilities permitting placement of lechis on their poles. As to Quogue, the town had denied EEEA’s application to place lechis on certain utility poles under an ordinance allowing Quogue to regulate encroachments onto public roads, but the utilities disputed the applicability of that regulation to lechis. See Slip op. 57. The court allowed further briefing on the issue of whether it could interpret the ordinance in light of Quogue’s denial of the application.

“Payday” Loan Recipients Compelled To Arbitrate RICO Claims

The strong federal presumption in favor of enforcing arbitration clauses is well known. In Moss v. BMO Harris Bank, N.A., 13 CV 5438 (JFB)(GRB), Judge Bianco reaffirmed just how strong it is. The case is a putative class action asserting civil RICO claims based on defendants’ alleged role in facilitating “payday” loans, which are short-term, high fee, closed-end loans made to consumers to provide funds in anticipation of an upcoming paycheck.

Plaintiffs signed loan agreements with various online lenders that contained arbitration clauses. The defendants were neither parties to the loan agreements nor mentioned by name in the agreements. But the defendants, who facilitated the funds transfers connected with the loans, nevertheless moved to compel arbitration on the theory that the plaintiffs had agreed to arbitrate disputes against the lenders’ “agents” and “servicers.” Plaintiffs argued that the arbitration provisions did not place them on notice that they were consenting to arbitrate with defendants.

The court disagreed with plaintiffs. Judge Bianco applied a “two-part intertwined-ness test” to determine whether plaintiffs were sufficiently put on notice of their agreement to arbitrate. First, the court had to determine whether plaintiffs’ claims arose under the subject matter of the underlying agreements. It had little trouble concluding that they did. Second, the court had to determine whether there was a “close relationship” between the plaintiffs and non-signatory defendants. While this was a closer question, the court held that the loan agreements’ references to “agents” and “servicers” implicitly described the services provided by defendants. Therefore, it was foreseeable to plaintiffs that they had agreed to arbitrate claims against the defendants, especially because the agreements explicitly referred to the electronic funds transfer process. Thus, the court compelled arbitration and stayed the federal court case.

CLE Program: Commercial Litigation Academy 2014

On June 5, 2014, Schlam Stone & Dolan partner Jeffrey Eilender will co-chair a CLE program about discovery in the Commercial Division. Among the panelists will be Commercial Division Justice Jeffrey Oing. This event is part of a two-day program hosted by the New York State Bar Association to focus on federal and state-court commercial litigation.

Sentencing Issues

In Halloway v. United States, No. 01-CV-1017 (E.D.N.Y. May 14, 2014), Judge John Gleeson pressured the government to agree to reopen the sentencing of a defendant who had rejected a plea bargain of 130-147 months for stealing three cars at gunpoint and after losing at trial was sentenced to 57 years in prison. The disparity in the terms offered by the plea bargain and the post-conviction sentencing resulted from a practice known as “stacking,” whereby the defendant received the consecutive mandatory minimum penalties for all three violations of 18 U.S.C. § 924(c) for gun possession. As noted in the opinion, the Sentencing Commission has asked Congress to amend Section 924(c) to eliminate the practice of stacking, so that increased mandatory minimums apply only to prior convictions as opposed to multiple violations of the same statute in the same indictment.

Judge Gleeson noted that this almost 20-year-old case illustrates some of the problems that have “plagued” the federal criminal justice system: “(1) the excessive severity of sentences, (2) racial disparity in sentencing, and (3) prosecutors’ use of ultraharsh mandatory minimum provisions to annihilate a defendant who dare to go to trial.” Slip op. 1. Judge Gleeson cited statistical studies finding that black men like defendant have long been disproportionately subjected to stacking of Section 924(c) counts. Turning to the defendant in this case, Judge Gleeson noted that during his 19-year imprisonment in Florida (which has kept him from seeing his five children and eight grandchildren whom he’s never seen), defendant has tried to better himself by completing numerous wellness and educational programs.

A year earlier, Judge Gleeson had requested the United States Attorney to consider exercising discretion and agree to an order vacating two or more of defendant’s Section 924(c) convictions so that he could be resentenced. The government declined, but suggested that defendant might be eligible for a presidential pardon. In response, Judge Gleeson noted that DOJ policy regarding clemency applications disqualifies inmates who have committed crimes of violence, which made it unlikely that defendant could receive executive clemency.

In conclusion, Judge Gleeson renewed his request to the United States Attorney to reconsider its decision not to agree to vacate two or more of defendant’s convictions. Should the government again refuse to agree to reopen the sentencing, Judge Gleeson indicated that he may take matters into his own hands by addressing defendant’s pending application to reopen his collateral challenge to his conviction as the “extraordinary” penalty in this case “may warrant further briefing on the constitutional issues raised by such a use of prosecutorial power.” Slip op. 5. Judge Gleeson also noted that although he had earlier rejected a claim of ineffective assistance of counsel, he “may direct a closer inspection of that issue as well” should the government not reconsider its decision not to reopen defendant’s sentencing. Id.

Judge Garaufis Denies Defendants’ Summary Judgment Motion In Government’s Antitrust Case Against American Express Based On Government’s Theories Concerning The Significance Of Undisputed Facts

In a May 7, 2014 order in United States v. American Express Co, No. 10-CV-4496 (NGG) (RER), Judge Nicholas G. Garaufis denied summary judgment to defendant American Express in the government’s antitrust action against Amex arising out of the company’s “anti-steering” rules. These rules impose certain restrictions on merchants that accept American Express cards, which, generally speaking, prohibit merchants from expressing to customers a preference for other cards or imposing conditions on use of the Amex card that are not also imposed on users of other cards.

The United States and the attorneys general of 17 states allege that the anti-steering rules are anti-competitive in violation of Section 1 of the Sherman Act. Under Second Circuit precedents, to prove anti-competitive effect plaintiffs had to establish either an actual adverse effect on competition or market power in the relevant market. See Slip Op. 9, 12. The government’s theory of “actual adverse effect” on competition rested largely on the higher fees Amex charged merchants compared to Visa and Mastercard. Id. at 13. The government contended that absent the anti-steering rules, Visa and Mastercard could have competed with Amex to urge merchants to convey to customers a preference among cards, as was done in the 1990s with merchants’ displays of signs such as “We Prefer Visa,” and that this would have driven down prices across the industry.

Based on these conceptual arguments, the Court concluded that material issues of fact existed as to whether the anti-steering rules had an actual adverse effect on competition. The Court’s ruling that material issues of fact existed as to whether Amex had market power was also based arguments that were conceptual rather than evidence-based. The Court found that “the basic facts relating to Amex’s market share are not in dispute.” Id. at 18. But the government had a “customer insistence theory,” under which cardmember brand loyalty allegedly gave Amex control over how much merchants would use the Amex card, which allegedly enhanced Amex’s market power. Id. at 18. The Court’s approach, in short, was closer to a motion to dismiss than to a summary judgment analysis, with the court assessing the plausibility of the government’s theories of anti-competitive effect and market power, rather than whether it had presented sufficient evidence to suggest that Amex’s anti-steering rules have an actual anti-competitive effect or that Amex has market power.

Two Claims Revived Upon Reconsideration In HSBC Bank Overdraft Fee Litigation

In In re: HSBC Bank, USA, N.A. Debit Card Overdraft Fee Litigation, 13 MD 2451 (E.D.N.Y. April 21, 2014), Judge Arthur D. Spatt took the rare step of granting a motion for reconsideration in a class action involving allegations that HSBC customers were improperly charged “overdraft fees” on debit card transactions. Plaintiffs claimed that the bank posted debits in a “largest to smallest” order instead of chronologically in order to maximize overdraft fees for itself, allegedly in violation of the bank’s agreements with customers.

The Court had originally dismissed plaintiffs’ claims for violation of New York General Business Law (“GBL”) § 349 and breach of contract. The GBL claim was dismissed as untimely because the federal class action was filed more than three years after the conduct at issue. Upon reconsideration, the Court held that because the plaintiffs had originally filed their claim in New York state court and received a dismissal without prejudice, they should have been entitled to the benefit of tolling under the U.S. Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). Further, the Court recognized that the state court action provided HSBC with timely notice of the GBL claim, and so “HSBC cannot be heard to complain about lack of notice or prejudice in having to defend against this claim.” Id. at 13.

The breach of contract claim had been dismissed for failure to allege a breach of a specific term of the contracts at issue. Upon reconsideration, the Court acknowledged that it “overlooked” some of the provisions in the debit card agreements, in particular a provision stating that debit card transactions would be treated as a “simultaneous withdrawal” from customers’ checking accounts. Id. at 14.

Judge Weinstein Grants Summary Judgment To Contract Creditor Piercing The Corporate Veil

In an April 4, 2014 judgment and order in Jiaxing Globillion Import and Export Co. v. Argington, Inc., 11 CV 6291 (JBW) (E.D.N.Y. Apr. 4, 2014), Judge Jack B. Weinstein granted summary judgment for plaintiff and pierced the corporate veil to hold one of the corporate defendant’s two shareholders liable for the company’s breach of contract. Plaintiff Jiaxing Globallion Import and Export Co. (“JG”) entered into a contract with Argington, Inc., to supply children’s furniture and furniture parts for a contract price of nearly $900,000, and delivered the goods in 28 shipments between 2009 and 2011. Argington paid only for a portion of the shipments, and earlier in the case a default judgment was entered against it for $672,905. Judge Weinstein had little trouble granting JG’s summary judgment motion on its claim to pierce the corporate veil, which under governing Missouri law had to be pled as a distinct cause of action. The two shareholders were husband and wife and made all decisions for the company. They observed no corporate formalities, comingling funds and using corporate funds for their personal expenses, including purchases at Costco, Crate and Barrel, Home Depot, IKEA, Prospect Park Tennis and elsewhere. They failed to declare as income the personal expenses the corporation paid for them. As a result of the company’s payment of the shareholders’ personal expenses, the company became undercapitalized. Between 2009 and 2012 the company’s debt to vendors went from 0 to $558,000, but instead of paying their vendors the shareholders disbursed $554,000 from the corporation to themselves. They also disbursed to themselves $193,000 in loans. In his decision Judge Weinstein did not report that there was any countervailing evidence.