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April 2010 Archives

April 12, 2010

Mandatory E-Filing for "Certain Commercial Cases" Takes Effect in New York County

NOTICE TO THE BAR - April 1, 2010

New York County

Mandatory Electronic Filing in New York County commences May 24, 2010.

District Courts With Diversity Jurisdiction To Use Federal Rules For Class Actions Even When Underlying Lawsuit is Based On State Law

On March 31, 2010, the Supreme Court ruled that a Federal Court hearing a case based on diversity jurisdiction may certify a class action under the Federal Rules of Civil Procedure, even though the underlying lawsuit is based upon a state law claim. Shady Grove Orthopedic v. Allstate Insurance (No. 08-1008), 2010 WL 1222272, ____ U.S. ____ (2010).

Shady Grove Orthopedic Associates provided medical care to a patient who was injured in an automobile accident. As part of her payment, the patient assigned her rights to insurance benefits under an Allstate Insurance Co. policy to Shady Grove. The policy was governed by New York law. As such, Allstate had 30 days to pay Shady Grove’s claim. Allstate paid, but not within the 30 days. Allstate then refused to pay the required statutory interest.

Shady Grove sued in the Eastern District of New York. The District Court had jurisdiction based on diversity of citizenship. Shady Grove’s claim was for about $500. Shady Grove, however, brought its claim as a class action seeking to recover on behalf of itself and a class of others to whom Allstate owes interest.

New York prohibits class action suits seeking penalties or statutory minimum damages. N.Y. Civ. Prac. Law Ann. § 901. The District Court, sitting in diversity, found that the statutory interest was a penalty and dismissed the case. The Second Circuit affirmed finding that Federal Rule of Civil Procedure 23 did not conflict with §901(b) and that §901(b) was substantive with in the meaning of Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). Specifically, the Second Circuit found that the rules do not conflict because §901 dealt with the particular type of claim that is eligible for class treatment where Rule 23 dealt with the criteria for determining whether a class can and should be certified. Therefore, the Second Circuit decided §901 must be applied by a Federal Court sitting in New York with diversity jurisdiction despite the existence of Federal Rule of Civil Procedure 23.

The Supreme Court found that Fed. Rule Civ. Proc. 23(b) “creates a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action.” As such “Rule 23 provides a one-size-fits-all formula for deciding the class-action question.” The Court also found that New York’s §901(b) addresses the same question, but “it states that Shady Grove’s suit ‘may not be maintained as a class action’ because of the relief it seeks.” (Emphasis added by the Court.) Since Rule 23 would permit the class and §901(b) prohibits the class, the Court found that the two rules conflict. Therefore, §901(b) “cannot apply in diversity suits unless Rule 23 is ultra vires.” Since it is well with in Congress’s power to determine what cases the Federal Courts hear, Rule 23 is not ultra vires.

The Court reinforced its decision with the text of the rules and called the Second Circuit’s line between eligibility and certifiability “entirely artificial”. Importantly, the Court found that Rule 23 explicitly authorizes a federal court to certify a class by stating “if the prescribed preconditions are satisfied ‘[a] class action may be maintained.’” (Emphasis added by the Court.) The term “may”, as used in Rule 23, gives discretion to the plaintiff, not a court, as it is the litigants who maintain actions. Since Rule 23 and §901 both addressed under what circumstances a class action could be maintained, the rules conflicted. Thus, when a plaintiff brings a class action, even if his claim is based on diversity jurisdiction, “like the rest of the Federal Rules of Civil Procedure, Rule 23 automatically applies ‘in all civil actions and proceedings in the United States district courts.”

Jason B. Desiderio, Esq.


The Torts, Insurance and Compensation Law Section (3rd and 4th Judicial Districts)
The Trial Lawyers Section (3rd and 4th Judicial Districts) of the New York State Bar Association

Will hold a reception in honor of:

The Hon. Thomas Mercure
On the occasion of his reelection to Supreme Court
Reappointment to the Appellate Division, Third Department


The Hon. John C. Egan, Jr.
On the occasion of his appointment to the
Appellate Division, Third Department

April 29, 2010 | 6:00 p.m. to 8:00 p.m.
Refreshments and Hors d’oeuvres
Saratoga National Golf Club | Saratoga Springs, New York

***************Reception open to district members only***************

For more information, contact: bmahan@nysba.org


RSVP by April 26th to:
Jim Kelly Elizabeth Dumas
(518) 464-1300 Ext. 312 (518) 464-0600 Ext. 221
jkelly@rwgmlaw.com emdumas@ainsworthsullivan.com

Corporation Held Subject to Successor Liability in Title VII Suit

In EEOC v. Nichols Gas & Oil, Inc., __ F.Supp. __, 2010 WL 175158 (W.D.N.Y.), the District Court for the Western District of New York examined whether a successor corporation is liable for a Title VII suit filed against the previous corporation. The court determined that under the substantial continuity test, a successor corporation can be liable for the torts of a predecessor, especially when the purchasing entity had notice of the claim, the new company conducted the same business, and the previous company was unable to pay when the action was commenced.

The EEOC brought a Title VII action against Nichols Gas & Oil (“Nichols”). While the action was ongoing, Nichols entered into an agreement with Townsend Oil Corp. (“Townsend”) to sell the company. After Townsend found out about the EEOC claim, it required Nichols to indemnify it from any claims arising from the EEOC complaint. Fearing any negative impacts related to the Title VII action, Townsend changed the name of the company to Townsend Oil Corp. Townsend then sent a letter to Nichols’ customers indicating that the two companies had merged and service would not change.

Defendant Townsend then filed a motion for summary judgment seeking a determination that it has no successor liability for Nichols’ alleged discrimination. Townsend contended the general common law test in Graham v. James, 144 F.3d 229,240 (2d Cir. 1998) should be utilized. The common law states generally a corporation that acquires the assets of another corporation is not liable for the torts of its predecessor. However, the court rejected this argument and stated that the substantial continuity test, not the general common law, is expressly applied to Title VII cases under the Code of Federal Regulations. See 29 C.F.R. § 825.107 (2009).

The substantial continuity test required a court to determine whether the imposition of liability is equitable. The court examined three critical factors in this case, but different factors may be utilized in other situations. Notice was first examined by the court. Townsend had clear notice of the EEOC complaint, and because of this notice, the purchase agreement included an indemnity clause. Therefore, this clear notice weighs in favor of successor liability in under this prong of the test as explained in Golden State Bottling Co., Inc. v. National Labor Relations Bd., 414 U.S. 168, 185, 94 S.Ct. 414, 425, 38 L.Ed.2d 388 (1973). The second factor the court considered was continuing the same business. Here, it was clear that Townsend maintained the same business. The letter to customers provided an assurance that Townsend was engaged in exactly the same conduct Nichols had done in the past. The third and final factor the court considered in the substantial compliance test was the ability to pay. The court determined that Nichols was unable to pay when the action was commenced so Townsend should be liable. To hold otherwise would defeat the purpose of a monetary remedy under Title VII.

Additionally, the court considered whether Townsend is liable for compensatory and punitive damages. Under Musikiwamba v. ESSI, Inc., 760 F.2d 740, 749 (7th Cir.1985), all damages are available under the substantial continuity test. Thus, even though this is an equitable doctrine, it is not limited to equitable relief. Specifically in this case, the court reasoned that compensatory damages are appropriate against Townsend because these damages in a Title VII case are designed to make the employee whole. Accordingly, the court determined that compensatory damages may be appropriate here after a jury determines liability. However, the same cannot be said for punitive damages in this instance. Because punitive damages are designed to punish the wrongdoer, they are not appropriate against Townsend, who is not the wrongdoer in this action. However, it should be noted that the court did not state that punitive damages are never available against a successor corporation.

This case demonstrates the intricacies of successor liability. The substantial continuity test, applied in Title VII cases, is based in equity and requires the court to balance the interests at stake. Thus, results may vary on a case by case basis. However, it seems clear that a successor corporation is liable for the actions of a predecessor when it is aware of these actions and proceeds with the purchase anyway, carries on the same business, and it can pay damages when the predecessor cannot. Finally, it should be noted that both punitive and compensatory damages may apply to a successor.

Matthew J. Kibler, Esq.

The Torts, Insurance and Compensation Law Section Announcement

The Torts, Insurance and Compensation Law Section will hold a reception in honor of

The Honorable Paula L. Feroleto

April 15, 2010
5:30 p.m. to 7:00 p.m.
Open Bar and Hors d'oeuvres

Pearl Street Grill & Brewery
Buffalo Lighthouse Room, 3rd Floor
76 Pearl Street
Buffalo, NY

RSVP to:
Jennifer Greene
(716) 847-5493


Supreme Court Finds That Under §36(B), Fees For Mutual Fund Investment Advisor Must Be Similar To What The Fees Would Be If Negotiated At Arm’s Length.

On March 30, The Supreme Court of The United States handed down its decision in Jones v. Harris Associates (No. 08-586), 2010 WL 1189560, ___ US ___ (2010), which focuses on “what a mutual fund shareholder must prove in order to show that a mutual fund investment adviser breached the ‘fiduciary duty with respect to the receipt of compensation for services’ that is imposed by §36(b) of the Investment Company Act of 1940, 15 U.S.C. §80a-35(b) (hereinafter §36(b)).”

Because of the nature of an investment fund, the relationship between a fund and its investment advisor is “fraught with potential conflicts of interest.” To limit the effect of these conflicts, the Investment Company Act of 1940, as amended, contains protections for mutual fund shareholders. One of these protections includes a fiduciary duty, imposed upon investment advisers, to ensure that their compensation is proper and granting individual investors a private right of action for a breach of that duty. 15 U.S.C. §80a-35(b).

In this case, shareholders of three different mutual funds filed an action claiming that the fees charged by their mutual funds manager, Harris Associates, L.P., were “disproportionate to the services rendered” and “not within the range of what would have been negotiated at arm’s length in light of all the surrounding circumstances.”

The District Court granted summary judgment based on Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (CA2 1982). There, the Second Circuit had stated that the proper standard for determining if a fee violates §36(b) was “whether the fees charged . . . were so disproportionately large that they could not have been the result of arm’s-length bargaining.” In applying that standard, the District Court examined Harris Associates’s fees for its other clients and the fees charged by other investment advisors. It then compared those fees with the fees charged to the shareholders in this case and found that the fees were not outside the appropriate range for such fees.

On appeal, the US Court of Appeals for the Seventh Circuit affirmed, but explicitly disapproved of the Gartenberg test. The Seventh Circuit relied on trust law relating to the creation of a trust and found that the fiduciary (in this case the fund manager) must “make full disclosure and play no tricks but is not subject to a cap on compensation.” Therefore, to prove a violation of §36(b), a plaintiff would have to show the compensation was “so unusual” that it gave rise to an inference “that deceit must have occurred, or that the persons responsible for the decision have abdicated.”

In overturning the Seventh Circuit’s decision and affirming most parts of the standard laid out in Gartenberg, the Court pointed out that prior to the Seventh Circuit’s decision, “something of a consensus had developed regarding the standard set forth over 25 years ago in Gartenberg.” Not only had a similar test been adopted by at least three other Circuit Courts, but the SEC has formalized similar factors in its regulations. In fact, in this case petitioners, respondents, and the Federal Government as Amicus Curiae all argued in favor of the Gartenberg approach, although they differed on its application.

The Court also agreed with the Gartenberg approach because it encompassed the proper meaning of the phrase “fiduciary duty” for that term’s use in §36(b). Finding that the Seventh Circuit’s trust based definition was too narrow, the Court relied on its own decision in Pepper v. Litton, 308 U.S. 295 (1939) for the proper test when evaluating these kinds of contracts. Quoting Litton, the Court said, “The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm’s length bargain.”

Finally, the Court also preferred the Gartenberg standard because it recognized the important function played by the “disinterested directors” of the fund, which are mandated by the Investment Company Act. These disinterested directors must approve adviser fees. As such, Courts should be able to consider the approval of the fee by these disinterested directors when determining if the fee violates §36(b).

Given the consensus that had developed around Gartenberg-type decisions, the Court’s own history in defining “fiduciary duty” in similar contexts, and the deference a Gartenberg-like test would give to the disinterested directors of a fund, the Court found that a test based in the theory of the Gartenberg decision is proper when reviewing fees under §36(b).

Jason B. Desiderio, Esq.

About April 2010

This page contains all entries posted to Business Torts and Employment Litigation Blog in April 2010. They are listed from oldest to newest.

March 2010 is the previous archive.

May 2010 is the next archive.

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