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.

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.

Court’s Misreading Of Data Leads To Successful Motion For Reconsideration

In In re Gentiva Securities Litigation, 10 CV 5064 (E.D.N.Y. Dec. 10, 2013), two individual defendants and the defendant corporation moved for reconsideration of Judge Arthur D. Spatt’s order denying their motion to dismiss federal securities claims.  The case is a class action alleging that Gentiva, a health care provider, artificially inflated its stock price through a scheme that involved ordering unnecessary medical care for clients, and then billing the federal government for these illegitimate expenses.  At issue was whether the plaintiff class had properly pleaded scienter.

One of the individuals, Potapchuck, asserted that the claims against him did not meet Section 10(b)’s scienter requirement because he sold his shares pursuant to a “10b5-1 plan,” under which shares are divested at predetermined times.  Potapchuck pointed out that he sold only 12% of his shares, if the 10b5-1 trades were disregarded.  That fact made the difference on reconsideration.  After commenting that “Defendants should have specifically quantified the number of 10b5-1 [trades] in their prior motions to dismiss, rather than relying on the Court to comb through the Defendants’ financial records,” the Court found that the relatively small amounts at issue—just 12% of Potapchuck’s shares, resulting in $300,000 in net profits—did not support an inference of scienter.  The Court reached a different result regarding the other individual defendant, Malone, who sold 99% of his shares during the class period for approximately $2.14 million (and none pursuant to 10b5-1 plans).  Those trades were sufficient to plead scienter against Malone.

The fact that only one corporate insider engaged in allegedly suspicious sales caused the Court to change its mind about the Section 10(b) claim against Gentiva as well, which was dismissed on the ground that an inference of its fraudulent intent could not be shown.  Thus, the Court reversed course on reconsideration and dismissed two of the three defendants, while upholding claims against the third.

Attempt To Lift Officer–Director Bar Fails

In SEC v. Alexander, No. 06 CV 3844 (E.D.N.Y. Oct. 24, 2013), Judge Nicholas Garaufis denied a motion by the former CFO of Comverse to modify a consent judgment.  Facing charges that he participated in a scheme to backdate stock option grants in Comverse stock, David Kreinberg had pleaded guilty in 2006 and entered into a consent order with the SEC in which he agreed never again to be an officer or director of a public company.  Kreinberg sought to remove the officer and director bar, claiming that it caused him to forego numerous employment opportunities.

The Court first noted that motions for reconsideration of a final judgment are generally disfavored and require a showing of exceptional circumstances.  That showing needed to be even stronger here where the judgment at issue was on consent, described by the court as “basically [] a contract.”  The Court rejected Kreinberg’s arguments that his seven years of good behavior and extensive cooperation warranted lifting the bar.  Instead, Kreinberg was held to his bargain:

Defendant’s underlying conviction has not been overturned.  Defendant knew, when he agreed to the bar, that he was forfeiting future potential earnings.  As a financial professional, he would be aware of the ramifications of such as choice.  Having weighed the costs and benefits, he chose the bar over further negotiations or litigation of the issue.  And he received not only the benefits of quick settlement of his civil case, but extreme leniency in criminal sentencing as a direct result of his civil settlement.  To put the SEC to its proof on the issue of the bar, he might have had to risk greater sanctions.  That he miscalculated, if indeed he did, is not a reason to revise his bargain absent the showing of any extraordinary hardship.

Slip. op. at 8 (citation omitted).