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July 2010 Archives

July 31, 2010

Law School for Insurance Professionals Buffalo Date Announced

The Torts, Insurance, and Compensation Law Section of the New York State Bar Association will present:

Law School for Insurance Professionals
Friday, October 1, 2010
Holiday Inn Amherst
1881 Niagara Falls Blvd.
Amherst, NY 14228



*The last day to pre-register online is September 30, 2010.



New York City - 9-28-10

Syracuse - 9-28-10

Albany - 9-29-10

Long Island - 10-1-10

Westchester - 10-1-10

July 7, 2010

Court of Appeals Resurrects Lenders' Fraud Claim as "Reasonableness" Could Not be Determined as a Matter of Law, Despite Apparent Lack of Due Diligence, Where Lender Required Representations and Warranties as to Accuracy of Financial Statements

DDJ Mgt., LLC v. Rhone Group LLC, ___ N.E.2d ___, 2010 WL 2516811 (N.Y.), 2010 N.Y. Slip Op. 05603 (June 24, 2010), involved four companies ("plaintiffs") that loaned a total of $40 million in March of 2005 to the now defunct American Remanufacturers Holdings, Inc. and affiliated companies ("ARI"). Plaintiffs brought suit against ARI's shareholders and others ("defendants"), alleging, among other things, that defendants defrauded plaintiffs into making the loans through the use of material misrepresentations in financial statements provided to plaintiffs. Although the financial statements on which the plaintiffs relied "contained some features that might have aroused concern in a skeptical reader who examined them carefully," plaintiffs had also insisted that ARI represent and warrant that the financial statements were "accurate." Plaintiffs claim that all of these representations and warranties later proved to be false.

Defendants moved for dismissal of all plaintiffs' causes of action under CPLR § 3211. The Supreme Court (New York County) dismissed all of the claims except the claim of fraud. The Appellate Division (First Department) modified the Supreme Court decision and dismissed that claim as well, emphasizing that "plaintiffs never looked at ARI's books and records" and concluded that, having failed to do so, they could not then "properly allege reasonable reliance on the purported misrepresentations." The Court of Appeals granted leave to appeal and reversed.

Defendants claimed that, under the rule stated in Schumaker v. Mather, 133 NY 590, 596 (1892), plaintiffs had the means of knowing, "by the exercise of ordinary intelligence, the truth or the real quality of the subject of the [statements]," and, as such, were required to "make use of those means [in order to conserve a] complain[t] that [plaintiffs were] induced to enter into the transaction by misrepresentations."

The Court distinguished cases in which that rule had been applied against sophisticated business persons or entities claiming to have been defrauded, stating that "where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry."

The Court cited JP Morgan Chase Bank v. Winnick, 350 F.Supp.2d 393 (S.D.N.Y. 2004), in holding that the facts of several state and federal cases applying New York law did "not support the interpretation that a duty to inquire is necessarily triggered as soon as a plaintiff has the slightest 'hints' of any 'possibility' of falsehood." The Court also agreed with the JP Morgan Court that it was unable to say as a matter of law that "a reasonable lender of equivalent experience should have inquired further" into defendants' financial statements after having obtained representations and warranties to the effect that nothing in the financial statements was materially misleading. As such, the Court held that whether the plaintiffs were justified in relying on the warranties they received is a question better resolved by a trier of fact.

The Court stated that in order to sustain its claim, plaintiffs must prove that the representations and warranties were false and that the shareholder defendants knew the financial statements gave an untrue picture of ARI's financial condition. This claim, however, would survive the pleading stage because a plaintiff alleging that it has been a victim of fraud should not be "denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred."


Daniel J. Gocek, Law Student at University of Virginia School of Law

July 2, 2010

Social Networking in the Workplace is Both a Blessing and a Curse: Business Tort and Employment Law Concerns

While online social networking websites may have initially targeted high school and college students, they have rapidly expanded to all demographics. More importantly, they've reached even the largest corporations and a whole host of smaller companies and not-for-profit organizations of all shapes and sizes. Even law firms (from Wall Street to Main Street) have established presences in social media.

Some professional uses for social networking are obvious: marketing, networking, communication. But virtually every aspect of modern business has felt the impact of the social media revolution, including recruiting, training, and product development. Simply put, very few organizations can afford to ignore this tidal wave of the future present.

Perhaps the most appealing hallmark of social media is the cost, which is generally perceived as nominal for most applications. However, in addition to tangible operating costs and assorted opportunity costs, the proliferation of social media also imposes new or heightened threats to the litigation budget. Like it or not, when it comes to social media, the law still matters.

For better or worse, employees can cause the same type of trouble for themselves or their employers through social media as they can through other channels. In fact, the peculiar aspects of social media may exacerbate the frequency and severity of the problems.

The following are several areas in which social networking poses a host of legal risks:

Harassment: The prevalence of social networking has not (yet) changed the terms of anti-harassment laws. However, it has created new forums in which harassment can occur. Of paramount concern is the informality generally associated with social networking communications. Moreover, comments made on the Internet are usually stored in some form or another for an extended period of time, potentially leaving easily recoverable evidence of wrongdoing.

Defamation: Derogatory comments made through social networking sites can result in litigation, and already have in some cases.

Copyright/Trademark Infringement: Virtually all of the information on the Internet is copyrighted, including social networking posts and messages. However, the very nature of such media provides an environment in which content is frequently copied and reused without permission.

Breach of Confidentiality: Since the age of e-mail it has been possible for large volumes of information to be disseminated to a host of recipients with just few clicks of a mouse. However, social networking activities may increase the risk of disclosure by an employee or discovery by an aggrieved party. Social networking likely also provides more fertile grounds for inadvertent breaches.

Endorsement Advertising Violations: Individuals and companies who promote products online may be subject to FTC regulations, including the recently revised "Guides Concerning the Use of Endorsements and Testimonials in Advertising." 16 C.F.R. Part 255.

In addition to the general concerns described above, the increased role of social media in recruiting and hiring practices also introduces a number of legal concerns, including the following:

Discrimination: Information contained on social networking sites tends to differ markedly from that found on job applications or resumes. Consequently, employers may gain (and potentially rely upon) information regarding protected categories (e.g., religion, sexual orientation) that would not otherwise be obtained through traditional hiring methods.

N.Y. Labor Law § 201-d: Sometimes referred to as the "Smokers' Rights Law," this statute more broadly prohibits employers from taking adverse action against employees and applicants based on the legal use of consumable products (e.g., cigarettes, alcohol) outside of work and their lawful off-duty recreational activities. With some potential exceptions, this law prohibits employers, in most situations, from refusing to hire someone based on the fact that the applicant engages in social networking or, for example, that the applicant has posted multiple pictures involving the use of alcohol at a party and related lawful, but perhaps professionally questionable, activities.

Fair Credit Reporting Act: The Fair Credit Reporting Acts requires that employers obtain informed, written consent of applicants before conducting background checks through third-party consumer reporting agencies. This requirement would likely apply where a third-party recruiter is reporting on information found through social networking sites or other online content.

Recordkeeping: Most employers are required, and all are generally advised, to maintain certain information about job applicants for a period of time. Information obtained about applicants through the Internet may be subject to these requirements or applicable employer practices and procedures.

Finally, perhaps the most uncertain of the issues addressed here is the question of whether employees and job applicants have applicable speech or privacy rights with respect to their social networking activities. Public employees may have constitutional protections in some limited circumstances. Employees may also have certain enforceable rights through various state and federal electronic communications and wiretapping statutes. And in some cases, the terms of use of the various social networking websites might also yield a source of protection for individuals not wanting their profiles viewed by their current or prospective employers.

As with so many aspects of human resources practice, employers' best defense to these legal threats lies in well-designed preventative measures. As a first step, employers should promulgate a social media policy tailored to their particular workplace. Training regarding best practices is also recommended. However, it is critical that this initial focus not be a one-time impetus. Given the nature of social media, policies and practices will need to be routinely monitored and periodically revised. Moreover, multiple business areas (human resources, operations, IT, legal, etc.) must play an ongoing role.

Appropriately utilized, social networking tools can be both exciting and rewarding—especially for those who take the appropriate precautions in their use.

Scott P. Horton, Esq.

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About July 2010

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

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