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Ignoring Court Ordered Discovery Leads to Preclusion of Tenant’s Claim, by Arthur Xanthos

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Dentists are fond of saying if you ignore your teeth, your teeth will go away.  The same is true in litigation: ignore your discovery obligations and your claim will go away. This Firm is defending a building owner in a case brought by a tenant (who happens to be a lawyer).  The tenant alleges among other things bodily injury from second-hand smoke in his apartment.  As is customary, we demanded medical authorizations (to secure medical records related to the tenant's treatment) and a bill of particulars compelling the plaintiff to particularize his bodily injuries.  We also made sure the court included those demands in several court orders.

For unknown reasons, the plaintiff-tenant-lawyer refused to hand over medical authorizations and refused to particularize his injuries.  After several attempts at securing the documents failed, this Firm made a motion to compel the tenant to produce the medical authorizations and to serve a meaningful bill of particulars. That motion resulted in an order, with which the plaintiff-tenant-lawyer failed to comply. So another motion was made, and this time an order was sought to preclude/dismiss the tenant's bodily injury claims.  That second motion resulted in a more stringent order setting another deadline for the tenant's compliance, and warning the tenant of penalties for non-compliance.  The tenant again failed to comply. At a subsequent conference and upon being advised of the tenant's non-compliance, the court after oral argument precluded the tenant from any bodily injury claims at trial, and dismissed any negligence claims found in his complaint.  A copy of this decision/order (Johnson v. 78/79 York) can be found at this Firm's website (www.gbglaw.com) under Publications.

Preclusion orders are very rare, especially against pro se plaintiffs.  Counsel should expect to make more than one motion, and should request a progressively stronger sanction with each motion made.  Obtaining such an order is not a quick exercise either, as it took nearly two years to secure the one discussed herein.                                                                  -APX 12/16/14
Arthur Xanthos, bodily injury, discovery, dismissal, Jeffrey Johnson, landlord, lease, litigation, preclusion, sanctions, secondhand smoke, tenant

Shareholder Disputes: How to Obtain Company Documents, by Stuart F. Gartner

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What can you do if you suspect that shareholders in your company are engaging in fraud or mismanaging the company, yet your requests for corporation records go unheeded? In Novikov v. Oceana Holdings Corp., a case handled by this Firm, the Kings County Supreme Court answered that question: so long as you have a legitimate purpose (such as investigating suspected mismanagement), you can force the company to turn over relevant corporation records.

Our client was a minority owner in a closely held corporation (the "Company") that owned a mixed commercial and residential building ("Building") in the Brighton Beach area of Brooklyn.  Our client had been kept out of the decision making loop by the other shareholders, and received virtually no information from them as to the Company.  Over time, he began to suspect that the other shareholders were engaging in self-dealing and mismanaging the Company.  Among other things, our client believed that one  of the shareholders had taken a substantial loan from the Company that had gone unpaid, and that the other shareholders were paying themselves unreasonable salaries, and had rented a commercial unit in the Building at a below market rent to another, separate company owned by them.  To investigate the suspected misconduct, our client demanded to see Company tax returns, financial statements, and property leases.

The Company refused to give over the documents voluntarily, so this Firm brought a Supreme Court petition on our client's behalf to compel the Company to do so.  The Company opposed the petition, saying that it had already given a redacted Company tax return, and that our client had bad motives for seeking the documents.

The Court granted the petition, ordering the Company to give over to our client unredacted State and Federal tax returns, profit and loss statements, leases, employment and commission agreements, shareholder meeting minutes and lists, and mortgage and loan documents.  (A copy of the decision is found at www.gbglaw.com under Decisions.)  The key to the Court's decision is a well-known point of law:  In addition to a statutory right for certain documents, "[a] shareholder has a common law right to inspect corporate books and records when the request is made in good faith and for a proper purpose....Investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are in fact proper purposes ..." 

(Critically, our client with other counsel had tried previously to compel the Company to produce documents, but was turned away by the Court for failing to show a proper purpose for his request.  Our petition on his behalf included documentary evidence supporting his belief of Company mismanagement.)
 
The lesson offered by the Novikov decision is clear: the Business Corporations Law provides protections for minority shareholders; but whether you succeed in your request to obtain company documents depends on how well you can, prior to commencing a lawsuit, garner relevant facts and articulate a strong basis for your belief that the company is being mismanaged.   -SFG 11/3/2014

    




BCL 624, board of directors, business law, closely held corporation, corporate mismanagement, corporate records, corporations, inspection, limited liability companies, shareholders

Gartner + Bloom Lawyers Awarded SuperLawyer Distinction for 2014

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The Firm is pleased to announce that Ken Bloom and Arthur Xanthos have received the New York Metro Area SuperLawyers distinction for 2014. Ken received the SuperLawyer award in the area of construction litigation (http://digital.superlawyers.com/superlawyers/nyslrs13?pg=81&search_term=bloom&doc_id=-1&search_term=bloom#pg81) while Arthur received his in the area of business litigation (http://digital.superlawyers.com/superlawyers/nyslrs14#pg77).
Arthur Xanthos, attorneys, business litigation, construction law, Gartner + Bloom, Ken Bloom, SuperLawyers

Arbitrating Indemnity Issues During the Pendency of a Supreme Court Action, by Arthur Xanthos

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Our last article warned of a pitfall with the traditional arbitration clause - ‎an arbitrator may end up with a power (e.g., the power to award punitive damages) that was never intended by the parties. Here we highlight another arbitration issue that has arisen several times in our practice.

Assume an Owner (O) hires a General Contractor (GC) to do work on a construction site, and the standard AIA form contract is executed containing a mandatory arbitration clause providing that "all disputes between the parties arising out of this agreement shall be resolved by binding arbitration under then applicable commercial arbitration rules". Plaintiff-worker (P) trips and falls while working on the site and sues both O and GC, alleging ‎negligence, as well as violations of the New York State Labor Law (the "Lawsuit"). O and GC each answer the Lawsuit and assert cross-claims against each other for contribution, defense, and indemnification.

All of the above is standard fare and occurs almost reflexively. But then something unusual happens: O's counsel files an arbitration demand, demanding that ‎GC arbitrate the issue of whether GC owes O defense and indemnification in the Lawsuit (the "Arbitration"). Inter-defendant arbitration of an indemnity obligation in the context of a pending personal injury lawsuit is an unusual tactic, and raises a host of procedural problems. For example, what happens to the rest of the case as the arbitration proceeds? What if the arbitration requires the resolution of other issues that have not yet been decided by the court? What if the arbitration takes the case beyond “standards and goals”? New York courts have come up with methods of dealing with the procedural problems. See, e.g., Weiss v Nath, 97 A.D.3d 661, 664 (2d Dep't 2012); County Glass & Metal Installers, Inc. v. Pavarini McGovern, LLC, 65 A.D.3d 940, 940-941 (1st Dep't 2009); and 624 Art Holdings, LLC v. Berry-Hill Galleries, Inc., 2012 N.Y. Misc. LEXIS 6440, 26-27 (N.Y. Sup. Ct. June 7, 2012). But even assuming counsel is willing to navigate the attendant procedural problems, in our opinion inter-defendant Arbitration of part of a Supreme Court action can only be justified in one of two circumstances:

1. Where a quicker resolution of the indemnity issue would occur in the Arbitration as opposed to the Lawsuit, and that speed is worth the arbitration fees; and/or
2. Where a more favorable resolution of the indemnity issue would occur in the Arbitration as opposed to the Lawsuit.

It is likely that New York counsel always will conclude that a quicker resolution would occur in the Arbitration. Counsel could also conclude that a more favorable resolution would occur in the Arbitration under the following scenarios:

1. If the rules applicable to the Arbitration (but not applicable to the Lawsuit) generate a better result -- of course then Arbitration would be advisable. But to make this decision counsel must retrieve the applicable Arbitration rules, review them for application to the indemnity issue, and compare the result with that obtained via the Lawsuit.
2. If the particular arbitrator used comes from a construction background and therefore knows or “feels” that such indemnity obligations should regularly be enforced -- here too Arbitration would be advisable.

So the conclusions are these: If the Arbitration would yield a more favorable result, choose inter-defendant arbitration regardless of the fees for arbitration. If the arbitration would yield a quicker result, and a result no worse than that yielded in Supreme Court, choose to arbitrate if you are willing to pay the cost to arbitrate in exchange for a speedier decision. In all other cases, bide your time and wait for the assigned Justice to make the decision on summary judgment.

APX 10/8/14
ADR, alternative dispute resolution, arbitration, Arthur Xanthos, construction law, general contractors, indemnification, indemnity, insurance, labor law, lawsuit, personal injury, premises liability, real estate

Camelot Returns to Manhattan!

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Gartner + Bloom is pleased to support the Washington Heights and Inwood Development Corp (WHIDC.org), which holds the annual Medieval Festival at Fort Tryon Park on Sunday, September 28, 2014 from 11:30 am to 6pm.


The festival is a unique chance to experience the Medieval period in the most authentic setting this side of the Atlantic.  The area around the Cloisters Museum in Fort Tryon Park is transformed into a medieval market village where knights in armor, jugglers, jesters, magicians, musicians, storytellers, and puppeteers will perform.  A blacksmith, manuscript illuminator, pottery decorator, wood carver and other artisans will demonstrate their crafts.  Performers and fairgoers dress in historical costumes.  Medieval food is available and craft items will be sold. 

The afternoon culminates with a jousting event between knights on horseback! Yes, they do knock each other off their horses!

Admission is free. This annual event is sponsored by the City of New York Parks and Recreation and the WHIDC. 

We hope to see everyone there!


Medieval Festival, real estate, WHIDC

Binding Arbitration: A New Timebomb for Lawyer and Client, by Arthur Xanthos

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It is customary to recommend to a range of clients that they agree to binding arbitration as a mechanism to resolve future disputes under an agreement. Arbitration is often regarded as a cheaper, quicker alternative to litigation.  The typical arbitration clause reads as follows: "Any dispute arising under this agreement shall be resolved by arbitration before the American Arbitration Association in New York City under the commercial arbitration rules then in effect." It is just as customary in the same agreement to choose a particular State law, e.g., New York law, to govern the resolution of future disputes.  A simple version of this choice of law clause reads as follows: "This agreement shall be governed by the laws of the State of New York."

Yesterday, the New York State Appellate Division, First Department, had the opportunity to consider a case involving an agreement containing both clauses.  A limited liability company's operating agreement contained both an arbitration clause and a choice of law (New York) clause. But the commercial arbitration rules (mandated by the arbitration clause) conflicted with New York State law (mandated by the choice of law clause) in one important respect: commercial arbitration rules permit an arbitrator under some circumstances to assess punitive damages against a party to the arbitration.  New York State law, on the other hand, does not permit an arbitrator to assess punitive damages.  So when an agreement contains both clauses (commercial arbitration rules, and New York State choice of law), may an arbitrator award punitive damages?

Yes, said the Appellate Division in a sharply divided 3-2 decision. Matter of Flintlock Constr. Servs. LLC v. Weiss, 2014 NY Slip Op 05818 (8/14/2014).  The majority held that the operating agreement's choice of law provision, in the absence of additional limiting language, "is insufficient to remove the issue of punitive damages from the arbitrator".

The Flintlock decision is problematic for two reasons: First, what do contracting parties do about their already executed agreements that now have conflicting clauses? It is barely overstatement to say that the overwhelming majority of shareholder agreements, operating agreements, asset sale agreements, and even employment agreements contain both of these clauses.  Second, how should such agreements be drafted going forward?  Pending an appeal of the Flintlock decision, attorneys should follow the First Department's direction and place limits on the arbitrator's power to impose punitive damages.  The new clauses might read as follows:

              "ARBITRATION. Any dispute arising under this agreement shall be resolved by arbitration before the [NAME OF ARBITRATION TRIBUNAL] in [LOCATION].  The arbitration shall be conducted under commercial arbitration rules then in effect, but the arbitrator(s) shall resolve the dispute in accordance with the laws of the State of New York without giving effect to principles of conflict of laws. The arbitrator(s) shall have the limitations on his, her and their power and authority as are found in New York State law, including without limitation no power or authority to award or assess punitive damages."

                "CHOICE OF LAW. This agreement, its validity, construction, and enforcement, shall be governed by the laws of the State of New York, without giving effect to principles of conflict of laws."

                                                                                            APX 8/15/14 



     

  
ADR, alternative dispute resolution, arbitration, Arthur Xanthos, choice of law, contracts, Flintlock, Gartner + Bloom, limited liability company, operating agreement, punitive damages