Beyond Being Mortal: Safeguarding the Rights of People with Developmental Disabilities to Efficacious Treatment and Dignity at the End of Life

OCTOBER 2016 VOL. 88 | NO. 8 JournalNEW YORK STATE BAR ASSOCIATION

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Expand your professional knowledge 1.800.582.2452 www.nysba.org/pubs Mention Code: PUB8398 NEW YORK STATE BAR ASSOCIATION JournalNEW YORK STATE BAR ASSOCIATION BOARD OF EDITORS EDITOR-IN-CHIEF ANNUAL MEETING David C. Wilkes Tarrytown e-mail: [email protected] JANUARY 23 – 28, 2017 Hannah R. Arterian Syracuse Marvin N. Bagwell NEW YORK CITY Westbury New York Hilton Midtown Brian J. Barney Rochester 2017 Mark A. Berman New York City Katherine W. Dandy White Plains Janet M. DiFiore Albany Elissa D. Hecker Irvington Michael J. Hutter Albany Barry Kamins Brooklyn Paul R. Kietzman Latham Daniel J. Kornstein New York City Ronald J. Levine New York City Julia J. Martin Syracuse Marian C. Rice Garden City MANAGING EDITOR Daniel J. McMahon Albany e-mail: [email protected] ASSOCIATE EDITOR Nicholas J. Connolly Tarrytown

PUBLISHER David R. Watson Executive Director

REGISTRATION OPENS SOON. NYSBA PRODUCTION STAFF EDITOR BOOK YOUR HOTEL TODAY! Kate Mostaccio DESIGN Lori Herzing Erin Corcoran www.nysba.org/am2017 COPY EDITORS Alex Dickson Reyna Eisenstark Howard Healy EDITORIAL OFFICES One Elk Street, Albany, NY 12207 (518) 463-3200 • FAX (518) 463-8844 www.nysba.org ADVERTISING REPRESENTATIVE Fox Associates Inc. 116 West Kinzie St., Chicago, IL 60654 312-644-3888 FAX: 312-644-8718 New York: 212-725-2106 Los Angeles: 805-522-0501 Detroit: 248-626-0511 Phoenix: 480-538-5021 Atlanta: 800-440-0231 Email: [email protected] EUGENE C. GERHART (1912 – 2007) Editor-in-Chief, 1961 – 1998 CONTENTS OCTOBER 2016

BEYOND BEING MORTAL: SAFEGUARDING THE RIGHTS OF PEOPLE WITH DEVELOPMENTAL DISABILITIES TO EFFICACIOUS TREATMENT AND DIGNITY AT THE END OF LIFE by Christy A. Coe 8

DEPARTMENTS 21 Marketability Discounts in New York Statutory Fair Value Determinations 5 President’s Message by Gregory A. Barber, CFA 6 CLE Seminar Schedule The Treatment and Marshaling of Joint 16 Burden of Proof 31 by David Paul Horowitz Accounts in an Article 81 Guardianship 20 Becoming a Lawyer Proceeding by Lukas M. Horowitz by Anthony J. Enea 46 Contracts by Peter Siviglia 36 Earlier Registered Domain Names, 49 Point of View Later Acquired Trademarks by Robert Kantowitz by Gerald M. Levine 57 Attorney Professionalism Forum 60 Index to Advertisers 40 Spies, Lies and a Hollow Nickel A former prosecutor recalls his role in 61 Classified Notices convicting Soviet spy Rudolf Abel 63 2016–2017 Officers 64 The Legal Writer by Gerald Lebovits

The Journal welcomes articles from members of the legal profession on subjects of interest to New York State lawyers. Views expressed in articles or letters published are the authors’ only and are not to be attributed to the Journal, its editors or the Association unless expressly so stated. Authors are responsible for the correctness of all citations and quotations. Contact the editor-in-chief or managing editor for submission guidelines. Material accepted by the Association may be published or made available through print, film, electronically and/or other media. Copyright © 2016 by the New York State Bar Association. The Journal ((ISSN 1529-3769 (print), ISSN 1934-2020 (online)), official publication of the New York State Bar Association, One Elk Street, Albany, NY 12207, is issued nine times each year, as follows: January, February, March/April, May, June, July/August, September, October, November/December. Single copies $30. Library subscription rate is $210 annually. Periodical postage paid at Albany, NY and additional mailing offices. POSTMASTER: Send address changes per USPS edict to: One Elk Street, Albany, NY 12207.

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Do the Public Good

“Service to others is the rent you pay for your room here on earth.” – Muhammad Ali

t NYSBA, equal access to jus- Professional Conduct encourages New tice is one of our core values. York attorneys to “aspire to provide AOur motto is “Do the public at least 50 hours of pro bono legal ser- good.” I’m excited to update you on vices each year to poor persons.” We our recent activities and plans for this want to make it easier for members to year. volunteer to do pro bono. Supporting Legal Services Provid- Our President’s Committee on ers – As I write, our biannual Partner- Access to Justice (PCAJ) recognized for free civil legal services or cannot ship Conference, hosted by NYSBA’s that attorneys working in government get help from overtaxed civil legal Pro Bono Services Department and agencies often feel restricted in per- services providers. This spring, the Committee on Legal Aid, has just fin- forming pro bono work because of PCAJ produced a report recommend- ished. The Conference brought togeth- unclear rules and the absence of a ing that NYSBA endorse limited scope er more than 500 legal services provid- policy concerning outside work. To representation for low- and moderate- ers and pro bono coordinators from help break down these barriers, in income people. The House will consid- across the state to share ideas and June the PCAJ brought to our House of er the report at its November meeting. develop lasting connections. We pre- Delegates, and the House approved, a The Domestic Violence Initiative I sented dozens of programs on subjects Model Pro Bono Policy and Procedures discussed in last month’s President’s ranging from immigration, foreclosure, for Attorneys in State and Federal Gov- Message, in partnership with the domestic violence, government ben- ernment Agencies. Now each agency Women’s Bar Association of the State efits and housing, to program innova- can tailor this model policy to its own of New York, has a large pro bono tion, technology and management. needs, create an agency policy with component. The Initiative will edu- NYSBA lobbies tirelessly for clear rules and a referral process and cate attorneys about what domestic increased government funding for increase pro bono opportunities for its violence is and how they can help. civil legal services at the state level attorneys. It will encourage them to volunteer and through the Legal Services Cor- To further expand pro bono oppor- to represent domestic violence survi- poration at the federal level. We have tunities for attorneys and increase ac- vors through existing legal services argued strongly for adoption of civil cess to legal assistance for low-income pro bono programs or through new Gideon to provide all New Yorkers the New Yorkers, we have launched a pro bono programs the Initiative hopes right to counsel to protect their basic new online program sponsored by the to help develop in underserved com- human needs, regardless of ability to ABA. At NY.FreeLegalAnswers.org, munities. pay. We also help fund access to justice. low-income New Yorkers can ask sim- Since 2006, NYSBA’s Empire State In 2015, The New York Bar Founda- ple legal questions and volunteer at- Counsel program has honored mem- tion, NYSBA’s charitable arm, distrib- torneys can log on and answer them. bers who perform 50 or more hours of uted $580,000 in grants to 98 civil We call it “pro bono in your PJs,” be- pro bono service in a calendar year. I legal service programs and nonprofits cause attorneys can provide pro bono urge you to celebrate Pro Bono Week, throughout the state. You can help assistance whenever and wherever it October 23–29, by adding your name increase access to justice, by donating is convenient for them. to the roster of Empire State Counsel at www.tnybf.org/donation/ or con- We are exploring other ways for honorees. n tributing to the Foundation when you attorneys to provide limited scope renew your NYSBA membership. representation to low- and moderate- Facilitating Pro Bono Service – income New Yorkers who cannot Claire P. Gutekunst can be reached Rule 6.1 of the New York Rules of afford a lawyer but do not qualify at [email protected].

NYSBA Journal | October 2016 | 5 NYSBACLE Tentative Schedule of Fall Programs (Subject to Change)

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Beyond Being Mortal: Safeguarding the Rights of People with Developmental Disabilities to Efficacious Treatment and Dignity at the End of Life

By Christy A. Coe

Introduction Mortal demonstrates the harm we do as a society by turn- n his New York Times bestselling book Being Mortal: ing aging and death into a medical problem rather than Medicine and What Matters in the End,1 Atul Gawande, a human one.3 The author himself states that his book is IM.D., explains that at the end of life, medicine often “[a]bout the struggle to cope with the constraints of our fails the people it is supposed to help. He laments that the biology, with the limits set by genes and cells and flesh “waning days of our lives are given over to treatments and bones.”4 that addle our brains and sap our bodies for a sliver’s The complexity of the issues surrounding death and chance of benefit.”2 Commentators observed that Being dying as artfully captured by Dr. Gawande in his book

Christy A. Coe, M.S., J.D., is a Principal Attorney on the staff of the Mental Hygiene Legal Service for the Third Judicial Department. Many of the ideas expressed in this article are amplified in the author’s Union College/Mount Sinai School of Medicine Masters in Bioethics project entitled: Legal and Ethical Standards Available to Surrogates When Implementing a Plan of Hospice Care for People with Developmental Disabilities in New York State. The project is available online at www.courts.state.ny.us/ad3/MHLS/Index.html. Special thanks is given to Sheila E. Shea, Esq., Director of the Mental Hygiene Legal Service, Third Judicial Department, for her support and participation in the preparation and editing of this article. were presaged in New York State by the case of Sheila closes with a discussion of legal and ethical principles Pouliot, a person with a profound intellectual disability demonstrating that HCDA has promoted fairness, justice who never had the ability to make her own health care and dignity for people with developmental disabilities. decisions. She could never consider the questions Dr. Gawande suggests are essential when a person is con- Thoughtful Vision and Revision11 fronted with a life-threatening illness or terminal process: Upon the HCDA’s March 13, 2003 effective date, and for “What is your understanding of the situation and its the first time in New York, a court-appointed guardian potential outcomes? What are your fears and what are for a person with mental retardation12 was expressly your hopes? What are the tradeoffs you are willing to authorized to make all health care decisions for her make and not willing to make? And what is the course ward even absent a prior competent choice, including of action that best serves this understanding?”5 In Sheila decisions to withhold and withdraw life-sustaining treat- Pouliot’s case, substituted decisions by involved fam- ment. Subsequent chapter amendments broadened the ily members who recognized the limits of medicine to meaning of the term “guardian” to permit surrogates reverse the course of an incurable disease process could to make end-of-life elections on behalf of people with not be implemented because of the constraints of the New developmental disabilities. Legally authorized surrogates

Quite significantly, the HCDA places an affirmative obligation on the part of the guardian “to advocate for the full and efficacious provision of health care, including life-sustaining treatment.”

York common law. At that time, the law did not permit a now include actively involved family members, such third party to decide that a patient’s quality of life had as a spouse, parent, adult child or adult sibling.13 The declined to a point where treatment could be withheld Consumer Advisory Board (CAB) is a legally authorized absent a prior competent choice.6 surrogate for developmentally disabled people who are Seemingly little known among the legal and medical members of the Willowbrook Class.14 In addition, SPCA professions, and largely as a result of the courageous 1750-b protects an especially vulnerable class of people legacy of Sheila Pouliot, is that since 2003, there has been with developmental disabilities, those without guardians a law in place to address decisions regarding end-of-life or interested family members, by recognizing Surrogate care for people with developmental disabilities who Decision-Making Committees which operate pursuant never had the capacity to make known their wishes and to Article 80 of the Mental Hygiene Law as “guardians” preferences. The Health Care Decisions Act for Persons within the meaning of the act.15 Thus, any narrative about with Mental Retardation (HCDA)7 is codified at Surro- § 1750-b assumes that a “guardian” is a person or entity gate’s Court Procedure Act (SCPA) 1750-b and applies with standing to consent or refuse life-sustaining treat- to the approximately 180,000 people in New York State ment on behalf of a developmentally disabled person, with developmental disabilities. The statute protects the with or without a court appointment. right of people with developmental disabilities to receive The HCDA may seem imposing at first, particularly to efficacious treatment when medically indicated while health care professionals who must navigate its essential promoting dignity at the end of life by permitting exces- provisions. Over time, however, the statute has demon- sively burdensome treatments to be withheld or with- strated fulfilment of its thoughtful vision to end dispari- drawn upon the consent of legally authorized surrogates ties in the law that permitted individuals who possessed and pursuant to statutory standards. decision-making capacity to confront the inescapable Codified seven years before the 2010 Family Health realities of aging and death by forgoing treatments that Care Decisions Act (FHCDA),8 SCPA 1750-b remains a only prolonged suffering while denying such compas- discrete health care decision-making statute for people sionate choices to individuals with lifelong intellectual with developmental disabilities.9 By design, the FHCDA disabilities.16 As stated by the Court of Appeals in In re yields to preexisting surrogate decision-making statutes M.B,17 in the wake of its prior precedent in In re Storar:18 and regulations that apply to people with developmental [A] distinction arose between the common-law rights 10 disabilities and mental illness. Thus, an understand- of competent adults, who could make their wishes ing of SCPA 1750-b by lawyers and clinicians remains a concerning end-of-life care known to family and timely and compelling exercise in New York State. This friends, and mentally retarded persons who had never article provides historical context for the enactment of been competent to make their own health care deci- the HCDA and explains its essential provisions using two sions and for whom life-sustaining treatment could case studies to illustrate application of the law. The article not be refused. When these mentally retarded indi-

10 | October 2016 | NYSBA Journal viduals became irreversibly, terminally ill they were, hold or withdraw life-sustaining medical treatment for a in effect, ineligible for hospice or other palliative care person who never had capacity to make such a decision.28 because their guardians were unable to refuse more intrusive, acute medical treatments aimed at extending A substantive health care decision-making stan- life for as long as possible. dard also emerged with the 2003 chapter amendments. Guardians must base all health care decisions “solely As a consequence of this disparity, family mem- and exclusively on the best interests of the mentally bers, caregivers and advocacy groups for the mentally retarded sought relief from the Legislature. They retarded person and, when reasonably known or ascer- shared the stories of mentally retarded patients forced tainable with reasonable diligence, on the mentally to suffer painful, intrusive life-sustaining medical retarded person’s wishes, including moral and religious treatments after it was clear that they would never beliefs.”29 The statutory factors that must be considered regain any quality of life because the requests of their in determining the person’s best interests include the guardians (usually parents or siblings) to end life- dignity and uniqueness of the individual; the preserva- sustaining measures could not be honored. This was tion, improvement or restoration of the person’s health; the situation the Legislature sought to remedy when the relief of the person’s suffering by means of pallia- it enacted the Health Care Decisions Act for Persons tive care and pain management; the effect of treatment, 19 with Mental Retardation. including artificial nutrition and hydration, on the In perspective, the act was intended to prevent care person; and the patient’s overall medical condition.30 from being forced upon a person, causing suffering. A medical decision cannot be based on financial con- However, there was also a countervailing consideration siderations or a failure to afford the mentally retarded that treatment might be arbitrarily withheld from a individual the respect that would be afforded any other person with developmental disabilities due to their per- person in the same circumstances.31 ceived diminished quality of life.20 The HCDA attempts Quite significantly, the HCDA places an affirmative to balance these competing interests and is a reflection of obligation on the part of the guardian “to advocate for legislative intent that life should be maintained in all but the full and efficacious provision of health care, including those situations where treatment would be an extraordi- life-sustaining treatment.”32 Life-sustaining treatment is nary burden on the person, in the life that they have, and defined as “medical treatment, including cardiopulmo- in the case of artificial nutrition and hydration, that there nary resuscitation and nutrition and hydration provided is no reasonable hope of maintaining life. by means of medical treatment, which is sustaining life functions and without which, according to reasonable The HCDA medical judgment, the patient will die within a relatively Prior to the enactment of the HCDA, an SCPA article short time period.”33 In the event a guardian contem- 17-A guardian was understood to exercise some degree of plates the withdrawal or withholding of life-sustaining medical decision-making authority.21 However, the scope treatment, SCPA 1750-b imposes a decision-making proof this power was unclear, particularly in the aftermath of cedure that must be followed before the decision can be Storar. Because article 17-A is a diagnosis-driven statute, implemented. a jurisdictional prerequisite exists requiring petitioners to The threshold requirement of the process is that the file certificates from two physicians or a physician and a attending physician confirm to a reasonable degree of psychologist22 that the subject of the proceeding is “inca- medical certainty, after consultation with another physi- pable to manage him or herself and/or his or her affairs cian or a licensed psychologist, that the person currently by reason of mental retardation and that such condition is lacks the capacity to make health care decisions.34 Addi- permanent in nature or likely to continue indefinitely.”23 tionally, the attending physician and a concurring physi- The 2003 chapter amendments to the SCPA imposed cian must attest that the person has a terminal condition, an additional certification requirement applicable to all or is permanently unconsciousness or has “a medical con- future guardianship proceedings requiring the support- dition other than such person’s mental retardation which ing certificates obtained from physicians or psychologists requires life-sustaining treatment, is irreversible and to address whether the subject possesses the capacity to which will continue indefinitely,” and must further cer- make health care decisions.24 tify that the life-sustaining treatment imposes or would In the event the individual has the ability to make impose an extraordinary burden on the person in light health care decisions, a guardian can still be appointed of the person’s medical condition and the expected out- to make other types of decisions.25 If the subject of the come of the life-sustaining treatment.35 Before artificially proceeding is found to lack capacity, the guardian is provided nutrition or hydration may be withheld or granted full medical decision-making authority.26 In the withdrawn, two physicians must also confirm that “there latter event, the HCDA removed any uncertainty con- is no reasonable hope of maintaining life” or that the arti- cerning the scope of that authority, clarifying that health ficial nutrition or hydration itself “poses an extraordinary care decisions include “any decision to consent or refuse burden” on the patient.36 These conclusions by medical to consent to health care,”27 including decisions to with- professionals are a condition precedent to any decision to

NYSBA Journal | October 2016 | 11 end life-sustaining treatment – without them, life-sustain- the patient’s goals for care, reviews possible treatment ing treatment must be afforded to the person.37 options, and ensures shared, informed medical decision- If the requisite medical determinations are made, making.47 The MOLST is an optional form, and only one the next step is for the guardian to express a decision to of many to document a patient’s treatment preferences end life-sustaining treatment either in writing, signed concerning end-of-life care. However, the MOLST is the by a witness, or orally in the presence of the attending only authorized form in New York State for document- physician and another witness, and the decision must be ing both non-hospital DNR and DNI48 orders. Addition- included in the person’s medical record. The physician ally, the MOLST has proven beneficial to patients and can then issue the appropriate medical orders or object providers as it provides specific medical orders and is to the guardian’s decision but, in either case, the decision recognized and used in a variety of health care settings, to end life-sustaining treatment cannot be implemented not just hospitals.49 immediately.38 The act grants a number of persons and Effective January 21, 2011, OPWDD approved the use organizations automatic standing to lodge an objection of the MOLST for individuals with developmental dis- to a guardian’s decision upon receiving notice from the abilities. For people with developmental disabilities who attending physician – the mentally retarded person;39 a never had capacity to make a decisions, the MOLST must parent or adult sibling; the attending physician; any other be accompanied by the Legal Requirements Checklist health care practitioner providing services to the patient; for Individuals with Developmental Disabilities.50 The the director of a mental hygiene facility and the Mental required checklist mirrors the requirements of the HCDA, Hygiene Legal Service, where the patient resides or resid- ensuring that SCPA 1750-b standards have been met prior ed in a mental hygiene facility;40 and the commissioner to implementation of a decision to withhold or withdraw of the Office of People with Developmental Disabilities life-sustaining treatment for an individual with develop- (OPWDD), where the developmentally disabled person mental disabilities.51 does not reside in a facility.41 The statute provides that notice be provided to parties with standing by the attend- SCPA 1750-b as Applied ing physician at least 48 hours prior to the implementa- Decisions regarding end-of-life care for another are tion of a decision to withdraw life-sustaining treatment, fraught with emotion and uncertainty for guardians, or at the earliest possible time prior to the implementa- families, providers and advocates. Increased moral tion of a decision to withhold life-sustaining treatment.42 distress occurs when providers and medical systems If there is no objection, the guardian’s decision to are unfamiliar with the legal processes and are unable withdraw or withhold life-sustaining treatment is put to effectively guide guardians. In addition, the proce- into effect, without judicial involvement. An objection, dural protections imposed by the law are seen by some however, will suspend implementation of the guard- as obstructions to providing quality care. There is no ian’s decision (unless the suspension would itself result simple resolution to factual disputes, but experience in the death of the patient) until the dispute is resolved tells us that familiarity with the mandated processes can through a dispute mediation where available, such as ease this distress and ensure that appropriate treatment through a hospital ethics committee,43 or by a court of is rendered. While each case will turn on the person and competent jurisdiction.44 Thus, the HCDA clarifies that his or her medical condition, the following examples guardians can make health care decisions for people with demonstrate how the standards codified at SCPA 1750-b developmental disabilities who themselves were never have been applied. competent to make those decisions, including elections to forgo life-sustaining treatment. But it imposes a series Loretta’s Story of procedural requirements – intended to safeguard the Loretta was 65 years old when this author met her. She interests of the patient and prevent an improvident deci- had been born with Down syndrome and lived most sion by the guardian – that must be satisfied prior to the of her life in facilities licensed or operated by OPWDD. implementation of such a decision.45 While she lacked the capacity to make her own health care decisions, she was fortunate to have her sister as her Medical Orders for Life Sustaining Treatment advocate. By the time Loretta was 65 years old, she was New York State is one of the many states that subscribes burdened with many of the age-related health problems to the use of Medical Orders for Life-Sustaining Treat- most of us will experience. She was also having seizure ment (MOLST). The MOLST is intended for patients activity of unknown etiology and had been diagnosed who want to make end-of-life treatment decisions, who with dementia. Loretta had become increasingly with- reside in long-term care facilities or require long-term drawn from her usual activities and she found any devia- care services and/or may die within a year.46 Completion tion from her routine disruptive. She was physically frail, of the MOLST begins with a conversation between the no longer ambulated, and spent her days dozing while in patient, the patient’s health care agent or surrogate, and bed or a Geri-Chair. Devoted staff in her residential set- a qualified, trained health care professional that defines ting were sensitive to her needs.

12 | October 2016 | NYSBA Journal Loretta was closely followed by her primary care Joseph’s parents were his legally authorized surro- physician and a neurologist. She continued to decline gates and refused to consent to the insertion of a feeding and was diagnosed with end-stage Alzheimer’s dis- tube. The attending physician and the chief medical offi- ease, hypertensive heart disease, congestive heart failure, cer of the hospital supported the parents’ decision based osteoporosis, recurrent pneumonia, seizure disorder, and upon their determination that providing such treatment aspiration. Her sister, confronted with Loretta’s deterio- would impose an extraordinary burden on Joseph. Upon rating condition, contacted the primary care physician, receiving notice of the decision to withhold life sustain- who agreed it was appropriate to limit aggressive treating treatment from Joseph, OPWDD objected. A proceed- ment. The physician determined Loretta lacked capacity ing was commenced pursuant to SCPA 1750-b seeking, to make health care decisions and obtained a concurring among other things, an order authorizing surgical inser- opinion as to her capacity. The attending physician and tion of a feeding tube to deliver nutrition and hydration a concurring doctor determined that Loretta had several to Joseph. irreversible medical conditions meeting the standards set Following a hearing, the Supreme Court denied forth in SCPA 1750-b. OPWDD’s petition, concluding that the guardians,

Decisions regarding end-of-life care for another are fraught with emotion and uncertainty for guardians, families, providers and advocates.

Among the elections made for Loretta, her sister con- through the respondent hospital, met their burden of sented to a do-not-resuscitate order, a do-not-intubate establishing that insertion of a feeding tube would order, no artificial nutrition or hydration and limited impose an extraordinary burden on Joseph in light of his medical interventions. A MOLST form, with completed medical condition other than mental retardation and the checklist, implementing the treatment elections was com- expected outcome of the life-sustaining treatment. Pursu- pleted. The physician provided notice of the elections to ant to SCPA 1750-b(5)(a), the decision to withhold artifi- the facility director and to my office, the Mental Hygiene cially provided nutrition and hydration was suspended Legal Service (MHLS). The medical literature, the opin- pending the completion of judicial review, including the ions of the attending physicians and familiarity with the determination of an appeal. progression of end-stage Alzheimer’s disease, in particu- On appeal, the Appellate Division, Fourth Depart- lar, led the MHLS and the facility to agree that the plan ment reversed the decision of the trial court.53 In the of care developed for Loretta would provide her with court’s view, the factors advanced by respondent, i.e., the comfort and support at the end of her life, while spar- difficulty Joseph would encounter when he was moved ing her the bodily insults that can come with intrusive to a new facility; the need for restraints to prevent him interventions that are not curative and prolong suffering. from removing the feeding tube; the continuing risks of In Loretta’s case, the SCPA 1750-b standards were met aspiration; and the potential complications arising from and no objection was lodged to her surrogate’s end-of- the feeding tube did not support finding that the treat- life decisions by either the facility director or MHLS. The ment would impose an extraordinary burden on Joseph. doctor’s orders were implemented and thus began a plan The court relied on the testimony of the witnesses from of compassionate care for Loretta. the agency, the nurse and physician who cared for Joseph at his residential placement, and found that Joseph was Joseph’s Story “alert, responsive, seemingly pain free and the burdens The case of In re Joseph P. is not personal to this author, of prolonged life are not so great as to outweigh any plea- but is one of the few reported decisions applying the sure, emotional enjoyment or other satisfaction that [he] HCDA.52 Joseph was a 55-year-old man who had pro- may yet be able to derive from life.”54 found intellectual disabilities, cerebral palsy with spastic quadriplegia, and curvature of the spine. He resided in an Legal/Ethical Considerations OPWDD group home when he became ill and was admit- As the cases of Loretta and Joseph illustrate, when mak- ted to a hospital where he was diagnosed with aspiration ing a best interest determination for a person with devel- pneumonia. An evaluation revealed that he suffered opmental disabilities, there are many objective factors a from dysphagia. It was determined that Joseph could no surrogate must consider, such as the patient’s ability to longer tolerate food or liquid orally and that, unless he function, the degree of pain the person may be experienc- received nutrition and hydration through a feeding tube, ing either with or without treatment, the person’s overall he would die within a short period of time. condition and chance for recovery, as well as the risks,

NYSBA Journal | October 2016 | 13 side effects and benefits of proposed treatment. Even The HCDA is crafted to mitigate the potential that where objective criteria may be identified and applied, negative perceptions about the quality of life led by ambiguities inevitably consume surrogates, physicians people with developmental disabilities will intrude into and advocates when considering whether life-sustaining surrogate decision-making. Primarily, surrogates must treatment would impose an “extraordinary burden” on advocate for the full and efficacious provision of health another person. care, including life-sustaining treatment.59 Nonetheless, The concept of “extraordinary burden” is not explic- people with developmental disabilities are increasingly itly defined in the law or medicine. One court com- vulnerable and confront many health care inequalities.60 mented that extraordinary burden on the patient “could, Many depend upon governmental assistance which lim- in terms of the nature of the burden, reasonably mean an its their access to medical providers and choice of care.

The law requires the physician to opine if the provision of a medical treatment would pose an extraordinary burden on the patient. extraordinary physical, psychological, emotional or even Issues relating to health care access, coupled with com- economic burden.”55 While the HCDA defined param- peting legal precepts, compound the difficulty in evenly eters for when a treatment burden should be deemed applying a uniform system of end-of-life care for people “extraordinary” – consideration of the patient’s medical with developmental disabilities. condition and the expected outcome of the treatment – other factors no doubt weigh on physicians and surro- Conclusion gates. For instance, rendition of life-sustaining treatment Pursuant to the FHCDA, the Task Force on Life and might cause a person to be tethered to a respirator for the the Law61 is studying whether the FHCDA should be balance of her life in a skilled nursing home far from the amended to incorporate procedures, standards and prac- people who supported her throughout her life. Such an tices for decisions about the withdrawal or withholding outcome might be intolerable to some, but may not be of life-sustaining treatment from patients with mental intolerable to someone who has lived her life in residen- disabilities, including those with developmental disabili- tial settings.56 ties.62 The outcome of the study and potential legislative Additionally, the law requires the physician to opine action are unknown, but experience demonstrates that if the provision of a medical treatment would pose an SCPA 1750-b continues to fulfill its laudable goals. extraordinary burden on the patient. Some physicians A simple yet enduring observation was made by Dr. complain that this is a judgment for surrogates, not phy- Gawande in Being Mortal, when he said “as a person’s sicians, to render. The doctor often has to assess the bur- end draws near, there comes a moment when responsibil- dens on her patient at the bedside with little knowledge ity shifts to someone else to decide what to do.”63 When of the quality of life her patient enjoys. Medical records others must choose, SCPA 1750-b has promoted fairness, for people with developmental disabilities often describe justice and dignity during life and as it comes to an the patient as “unfortunate” before all else, revealing a end.64 n negative impression or bias toward the patient’s circumstances that may intrude into the assessment of treatment 1. Atul Gawande, Being Mortal: Medicine and What Matters In the End (2014) (Being Mortal). benefit and burdens. Thus, conceivably, individuals who 2. Id. at 9. are not dying become the subject of DNR orders precisely 3. Marcia Angell, A Better Way Out, Being Mortal: Medicine and What Matters because they are disabled. in the End, N.Y. Rev. of Books (Jan. 2015). Placing reliance on actively involved family surro- 4. Being Mortal at 259. gates to make elections for people with developmental 5. Id. disabilities who lack capacity is a thoughtful revision of 6. See Blouin v. Spitzer, 213 F. Supp. 2d 184 (N.D.N.Y. 2002). Under the com- the statutory framework. No doubt, however, the bond mon law at that time, the refusal or termination of life-sustaining treatment to an ever present caretaker can be stronger than attach- was only permitted where there was “clear and convincing” evidence of the ments to family members in certain cases. Regrettably, patient’s intentions (see In re Storar, 52 N.Y.2d 363 (1981)). still near are the days when doctors told parents of a child 7. 2002 N.Y. Laws ch. 500. born with developmental disabilities to “send him away 8. 2010 N.Y. Laws ch. 8, § 1. The legislature amended the Public Health Law (PHL) to “establish a decision-making process . . . whereby a surrogate 57 and put him out of your mind.” Those who care for is selected and empowered to make health care decisions for patients who people with developmental disabilities may have quite lack capacity to make their own health care decisions and otherwise have not appointed a [health care] agent.” See Robert Swidler, New York’s Family a different perspective on whether certain treatments Health Care Decisions Act: The Legal and Political Backgrounds, Key Provisions and would pose an extraordinary burden.58 Emerging Issues, N.Y. St. B.J., June 2010, p. 18.

14 | October 2016 | NYSBA Journal 9. PHL § 2994(b)(3)(c). 40. A mental hygiene facility is a residential facility licensed or operated 10. FHCDA also only applies in general hospitals, nursing homes and hos- by the Office for People with Developmental Disabilities (OPWDD) and pice programs. See PHL § 2994-b(1). includes, a developmental center or school, a community residence and a family care home (MHL § 1.03(6); In re Alexis H, 174 A.D.2d 1030 (4th Dep’t 11. Turano, Practice Commentaries (McKinney’s Cons Laws of NY, Book 1991)). 59-A, SCPA 1750-b, p. 451). 41. SCPA 1750-b(5); Presumably notice to the OPWDD Commissioner is 12. Article 17-A of the SCPA is titled “Guardians of Mentally Retarded and designed to ensure oversight of the surrogate’s decision in the absence of Developmentally Disabled Persons.” The term “mental retardation” has been review by the Mental Hygiene Legal Service where the developmentally dis- largely repealed and removed from New York State statutes in favor of the abled person does not reside in a setting where the Service has jurisdiction. term “developmental disability” (see 2010 N.Y. Laws ch. 168; 2011 N.Y. Laws ch. 37). A bill is pending in the New York State Senate to substantially reform 42. SCPA 1750-b(4)(e). Article 17-A of the SCPA and will, if enacted, repeal the term “mental retarda- 43. SCPA 1750-b(5)(d). The statute provides that an objection shall be referred tion” while otherwise substantially modernizing the statute S. 04983. to a dispute mediation system, or similar entity for mediating disputes in a 13. The legislature delegated to the commissioner of the then Office of hospice. In the event that such dispute cannot be resolved within seventy-two Mental Retardation and Developmental Disabilities the responsibility to pro- hours or no such mediation entity exists or is reasonably available for media- mulgate a surrogate list (2007 N.Y. Laws ch. 105). The surrogate list is found tion of a dispute, the objection shall proceed to judicial review pursuant to at 14 N.Y.C.R.R. § 633.10. this subdivision. 14. The Willowbrook litigation was a civil rights action concerning the care 44. SCPA 1750-b(6). Special proceeding authorized. The guardian, the and treatment of children and adults with developmental disabilities resid- attending physician, the chief executive officer, the MHLS (if the person is in ing at the former Willowbrook State Developmental Center on Staten Island or was transferred from residential facility or program operated, approved (see generally N.Y. State Ass’n for Retarded Children v. Carey, 393 F. Supp. 715 or licensed by the OPWDD) or the commissioner of OPWDD or his or her (E.D.N.Y.1975)). Pursuant to the Willowbrook consent decree, the Consumer designee (if the person is not in and was not transferred from such a facility Advisory Board (CAB) was created to oversee the care and treatment of class or program) may commence a special proceeding in a court of competent members and advocate for their due process rights. jurisdiction with respect to any dispute arising under this section. 15. MHL §§ 80.01 et seq. 45. In re MB, supra note 17 at 443–44. 16. Turano, supra note 11, at p. 451. 46. Patricia Bomba, Landmark Legislation in New York Affirms Benefits of a Two- Step Approach to Advance Care Planning Including MOLST: A Model of Shared 17. 6 N.Y.3d 437 (2006). Informed Medical Decision Making and Honoring Patient Preferences for Care at the 18. 52 N.Y.2d 363 (1981). End of Life, 17 Widener Law Review 475 (2011). 19. 6 N.Y.3d at 440. 47. See New York State Department of Health website, www.health.ny.gov/ professionals/patients/patient_rights/molst. 20. Leslie P. Francis, Discrimination in Medical Practice: Justice and the Obliga- tions of Health Care Providers to Disadvantaged Patients, The Blackwell Guide 48. “DNI” means do-not-intubate. A DNR order is distinct from a DNI order. to Medical Ethics, Eds. Rosamond Rhodes, Leslie Francis and Anita Silvers, A person whose respiratory status is failing may experience cardiac arrest, Blackwell Publishing Ltd. 2007, 162–79. but not all patients do. It is important legally to separate “do-not-intubate” from “do-not-resuscitate” discussions. Katz, Paula. “Separating DNI from 21. See Rose Mary Bailly & Charis Nick-Torok, Should We Be Talking? Begin- DNR Discussion,” Today’s Hospitalist, October 2014. ning a Dialogue On Guardianship for the Developmentally Disabled in New York, 75 Alb. L. Rev 807 (2012). 49. See New York State Department of Health Website, supra note 47. 22. SCPA 1750(1). 50. Id. 23. Id. 51. See New York State Office for People with Developmental Disabilities website, www.opwdd.ny.gov/opwdd_resources/information_for_clinicians/ 24. SCPA 1750(2). Capacity to make health care decisions is defined at PHL MOLST. § 2980(3) and means the ability to understand and appreciate the nature and consequences of health care decisions, including the benefits and alternatives 52. In re Joseph P, 106 A.D.3d 1548 (4th Dep’t 2013). to any proposed health care and to reach and informed decision. 53. Id. 25. SCPA 1750(2). 54. Id. at 1551, citing In re DH, 15 Misc. 3d 565 (Sup. Ct., Nassau Co. 2007). 26. Id. 55. In re Leonard B., 164 Misc. 2d 518, 525 (Sup. Ct., Albany Co. 1995), modified 27. See SCPA 1750-b(1), cross-referencing PHL § 2980(6). on other grounds, Finn v. Leonard C., 221 A.D.2d 896 (3d Dep’t 1995). 28. In In re MB, supra, the Court of Appeals determined that guardians 56. Felicia Nimue Ackerman, Patient and Family Decisions About Life-Extension appointed before the effective date of the HCDA were empowered to make and Death, The Blackwell Guide to Medical Ethics, Eds. Rosamond Rhodes, end-of-life treatment elections without the necessity of a judicial proceeding Leslie P. Francis and Anita Silvers, Blackwell Publishing 2007, 52–68. for an amended guardianship order that specifically authorized the guardian 57. Lisa Reswick, My Banished Brother, New York Times, http://well.blogs. to makes these elections. nytimes.com/2016/04/01. 29. SCPA 1750-b(2)(a). 58. Kathleen M. Fisher, Michael J. Green, Frederick K. Orkin & Vernon M. 30. SCPA 1750-b(2)(b)(i–v). Chinchilli, A Content Analysis from a US Statewide Survey of Memorable Health- care Decisions for Individuals with Intellectual Disability, Journal of Intellectual 31. SCPA 1750-b(2)(c). and Developmental Disability 34(3), 258–65 (2009). 32. SCPA 1750-b(4). 59. SCPA 1750-b(4). 33. SCPA 1750-b(1). Under the statute, cardiopulmonary resuscitation is 60. Roland L. Ward, Amanda Nichols, Ruth Freedman, Uncovering Health presumed to be life-sustaining treatment without the necessity of a medical Care Inequalities Among Adults with Intellectual and Developmental Disabilities, judgment by an attending physician (id.) Health and Social Work 35:4, November 2010. 34. SCPA 1750-b(4)(a). 61. The Task Force on Life and the Law, established in 1985, consists of 35. SCPA 1750-b(4)(b)(i)(ii). experts who advise on public policy and issues arising at the interface of 36. SCPA 1750-b(4)(b)(iii). medicine, law and ethics (www.health.ny.gov/regulations/task_force. 37. In re MB, 6 N.Y.3d at 443. 62. 2010 N.Y. Laws ch. 8, § 28. 38. SCPA 1750-b(4)(e). 63. Being Mortal at 252. 39. SCPA 1750-b(4)(e)(i). Notice to the patient can be dispensed with where it 64. Health Care Choices: Who Can Decide?, OPWDD (February 2012) (April 5, is determined within a reasonable degree of medical certainty that the person 2015), www.opwdd.ny.gov/health-care-choices-brochure. with would suffer immediate and severe harm from receiving notice.

NYSBA Journal | October 2016 | 15 BURDEN OF PROOF BY DAVID PAUL HOROWITZ David Paul Horowitz ([email protected]) is a member of Geringer, McNamara & Horowitz in New York City. He has represented parties in personal injury, professional negligence, and commercial cases for over 26 years. In addition to his litigation practice, he acts as a private arbitrator, mediator and discovery referee, and is now affiliated with JAMS. He is the author of Bender’s New York Evidence and New York Civil Disclosure (LexisNexis), as well as the most recent supplement to Fisch on New York Evidence (Lond Publications). Mr. Horowitz teaches New York Practice at Columbia Law School and lectured on that topic, on behalf of the New York State Board of Bar Examiners, to candidates for the July 2016 bar exam. He serves as an expert witness and is a frequent lecturer and writer on civil practice, evidence, ethics, and alternative dispute resolution issues. He serves on the Office of Court Administration’s Civil Practice Advisory Committee, is active in a number of bar associations, and served as Reporter to the New York Pattern Jury Instruction (P.J.I.) Committee.

“New York Is the Louisiana of Civil Practice”

Introduction (I mean, it’s New Orleans!), and now In 1958, the sesquicentennial of the I have taught New York Practice since feel I need to make amends. enactment of the 1808 Civil Code of 2000, and have tried to convey to stu- So, let me extend a sincere apology Louisiana, Judge John T. Hood, Jr., dents just how different, how much to the honorable State of Louisiana, described it in glowing terms: of an outlier, New York’s CPLR is and my esteemed colleagues there at The Louisiana Civil Code has been from the codes of civil procedure in the bar, for using their fine state as the called the most perfect child of the most other states,1 as well as the Fed- butt of my little joke. civil law. It has been praised as eral Rules of Civil Procedure on which “the clearest, fullest, the most phil- most of those codes are based (and The Louisiana Civil Code osophical, and the best adapted to which all law students have studied in As penance, as well as to prepare to dis- the exigencies of modern society.” the first year of law school). cuss the CPLR with an alien audience, I It has been characterized as “per- To each class I have offered the fol- read up on the Louisiana Civil Code. haps the best of all modern codes lowing analogy: I learned that misconceptions abound throughout the world.” Based on Roman law, modeled after the about its origin: Do you remember how, in the great Code Napoleon, enriched first year of law school, professors The Louisiana Civil Code was with the experiences of at least would often state that there was greatly influenced by, and was twenty-seven centuries, and mel- the majority rule, the minority rule, modeled after, the Code Napoleon. lowed by American principles and and the law in Louisiana? Well, However, lay beliefs and expres- traditions, it is a living and durable New York is the Louisiana of civil sions that the Napoleonic Code monument to those who created it. practice. has been in force in Louisiana are After 150 years of trial, the Civil I gave this illustration, year after totally unfounded . . . the Louisi- Code of Louisiana remains vener- year, thinking myself rather clever, ana Civil Code differed from the able, a body of substantive law secure in the knowledge that I would Napoleonic Code in its approach to adequate for the present and capa- the fundamental matter of sources never need to explain this slight to an ble of expanding to meet future of law. The extreme legal positiv- needs. At this Sesquicentennial it audience in Louisiana. Until this year, ism of the Code Napoleon that has is appropriate for us to review the when I was invited to present at this elevated legislation to the status history and development of the year’s annual joint TICL/Trial Law- of the single source of law may Louisiana Civil Code. yers fall program in New Orleans. On be contrasted with the genius of The event which we celebrate is top of that, in addition to participating the Louisiana Civil Code that has in a panel discussion on the use of always recognized custom as an the passage of an act by the Legis- social media in litigation, I was invited authoritative source of law and lature of the Territory of Orleans, to participate in a second panel discus- equity as a source for the resolu- approved on March 31, 1808, pro- sion titled, “Louisiana v. New York: The tion of disputes in the absence of a mulgating a compilation of laws, 2 Napoleonic Code and English Com- positive law or custom. now commonly referred to as the 3 mon Law.” I accepted the invitation Civil Code of 1808.

16 | October 2016 | NYSBA Journal (b) Errors Which Might Be Obvi- Also in 1958, an article by then- Louisiana v. New York ated if Made Known Prompt- Columbia Law School Professor, now Continuing my course of self-study, I ly. Errors and irregularities occur- U. S. District Court Judge for the East- compared three sections of the CPLR ring at the oral examination in the ern District of New York, the Hon. near and dear to my heart with their manner of taking the deposition, Jack B. Weinstein, appeared in this counterparts in the Louisiana Code. in the form of the questions or very publication.4 Titled, Revision of The first, setting forth the scope of dis- answers, in the oath or affirmation, New York Civil Practice, it examined the closure, are very similar. or in the conduct of persons, and efforts then under way to craft what New York’s CPLR 3101(a) provides: errors of any kind which might would become, five years later, the be obviated or removed if objec- (a) Generally. There shall be full tion were promptly presented, are CPLR. disclosure of all matter material Echoing complaints today by those waived unless reasonable objection and necessary in the prosecution thereto is made at the taking of the who believe that the CPLR is in need or defense of an action, regardless deposition. of a major overhaul, Judge Weinstein of the burden of proof . . .11 * * * reflected on the then-current state of (d) Competency of Witnesses or the Civil Practice Act (CPA), the civil In turn, Louisiana’s Civil Code Art. Admissibility of Testimony. Objec- procedure code that immediately pre- 1422 provides: tions to the competency of a wit- ceded the CPLR: Parties may obtain discovery ness or to the admissibility of tes- We have been too long cowed by regarding any matter, not privi- timony are not waived by failure the Civil Practice Act, by a monster leged, which is relevant to the sub- to make them before or during the ject matter involved in the pend- of complexity created by us and for taking of the deposition, unless ing action, whether it relates to us, so that no one dares – except on the ground of the objection is one the claim or defense of the party an ad hoc basis – reexamine this seeking discovery or to the claim which might have been obviated creature that controls so much of or defense of any other party, or removed if objection had been 5 what we do. including the existence, descrip- made at that time . . . tion, nature, custody, condition, When Judge Weinstein wrote those Louisiana’s Art. 1443 similarly pro- and location of any books, docu- 6 words, the CPA was 27 years old. Our ments, or other tangible things and vides: 7 CPLR is now 53 years old. the identity and location of per- A. Examination and cross-exami- The 1808 Louisiana Civil Code was sons having knowledge of any dis- nation of witnesses may proceed first amended in 1825, then again in coverable matter. It is not ground as permitted at the trial under the 1870,8 and then left untouched until for objection that the information provisions of the Louisiana Code 1987, when a series of revisions began.9 sought will be inadmissible at of Evidence . . . the trial if the information sought In contrast to our constant com- B. All objections made at the time appears reasonably calculated to plaints about the CPLR, Louisianans of the examination to the qualifica- lead to the discovery of admissible are very proud of their civil code. In tions of the officer taking the depo- evidence.12 1933, one writer described its impact sition, or to the manner of taking this way: Not much sunlight between the it, or to the evidence presented, or to the conduct of any party, and The Civil Code of Louisiana is two. The next sections I compared any other objection to the pro- the most important contribution of ceedings, shall be noted by the Louisiana to an American culture. govern deposition practice and are, once again, very similar (although, officer upon the deposition . . . Any It possibly is the most important objection during a deposition shall of course, CPLR 3115 must be read in accomplishment in the history of be stated concisely and in a non- American law in the sense of the conjunction with the Uniform Deposi- argumentative and non-suggestive 13 relation it bears to the future direction Rules). The essential provisions manner. Evidence objected to shall 14 tion of American law . . . It is a of CPLR 3115 are: be taken subject to the objections. rather grim commentary on our (a) Objection when Deposition Counsel shall cooperate with and be courteous to each other and to historians that the significance of Offered in Evidence. Subject to the the witness and otherwise conduct the Louisiana Civil Code has been other provisions of this rule, objec- themselves as required in open completely overlooked . . . As a tion may be made at the trial or hearing to receiving in evidence court and shall be subject to the cultural document, the Civil Code any deposition or part thereof for power of the court to punish for has its own merit. It is beautifully any reason which would require contempt . . . written, so carries the best tradition the exclusion of the evidence if * * * 10 of civilian aesthetics. the witness were then present and D. Unless otherwise stipulated, or testifying. as provided in Article 1455, objec- Would that the CPLR had such loyal tions are considered reserved until fans.

NYSBA Journal | October 2016 | 17 trial or other use of the deposition. other party to identify each person Paragraph, the court shall also A party may instruct a deponent who may be used at trial to pres- require the party seeking discov- not to answer only when necessary ent evidence under Articles 702 ery to pay the other party a fair to preserve a privilege, to enforce a through 705 of the Louisiana Code portion of the fees and expenses limitation on evidence imposed by of Evidence. reasonably incurred by the latter party in obtaining facts and opin- the court, to prevent harassing or B. Upon contradictory motion of ions from the expert . . . repetitious questions, or to prevent any party or on the court’s own questions which seek information motion, an order may be entered Conclusion that is neither admissible at trial requiring that each party that has Having learned that procedurally New retained or specially employed a nor reasonably calculated to lead York and Louisiana are more alike person to provide expert testimony to the discovery of admissible evi- then not, I plan to retire my traditional in the case or whose duties as dence. opening in future New York Practice an employee of the party regu- larly involve giving expert tes- classes. However, when it comes to expert timony provide a written report As for the CPLR, if revising it devel- disclosure, the two states’ procedures prepared and signed by the wit- ops any momentum, Judge Weinstein diverge in significant respects. CPLR ness. The report shall contain a made clear in 1958 who was best suit- 3101(d) provides: complete statement of all opinions ed to undertake that work: to be expressed and the basis and (d) Trial preparation. This is a subject on which only we reasons therefor and the data or lawyers and judges can and should 1. Experts. other information considered by (i) Upon request, each party shall the witness in forming the opin- speak with authority. For, if we identify each person whom the ions. The parties, upon agreement, have any special competence and party expects to call as an expert or if ordered by the court, shall responsibility, surely it is in the witness at trial and shall disclose in include in the report any or all of procedures by which litigation is reasonable detail the subject matter the following: exhibits to be used handled, the practice under which on which each expert is expected as a summary of or support for the our judicial system vindicates the to testify, the substance of the facts opinions; the qualifications of the substantive rights of all the people and opinions on which each expert witness, including a list of all pub- of the state.15 n is expected to testify, the qualifica- lications authored by the witness tions of each expert witness and a within the preceding ten years; the 1. I say “most other states” because I have been summary of the grounds for each compensation to be paid for the too lazy to do a 50-state survey. expert’s opinion . . . study and testimony; a listing of 2. Civil Law Commentaries, Vol. 1, Issue 1, * * * any other cases in which the wit- Winter 2008, The Civil Codes of Louisiana 17. ness has testified as an expert at 3. John T. Hood Jr., The History and Development (iii) Further disclosure concern- trial or by deposition within the of the Louisiana Civil Code, 19 La. L. Rev. (1958), ing the expected testimony of any preceding four years. http://digitalcommons.law.lsu.edu/lalrev/vol19/ expert may be obtained only by iss1/14. court order upon a showing of * * * 4. Though in 1958 it was called the New York special circumstances and sub- D. (1) Except as otherwise provid- State Bar Bulletin. ject to restrictions as to scope and ed in Paragraph E of this Article, 5. Id. at 308. a party may, through interroga- provisions concerning fees and 6. The CPA was enacted in 1921. CPR For The expenses as the court may deem tories, deposition, and a request CPLR, N.Y. St. B.J., January 2010, p. 20. for documents and tangible things, appropriate. However, a party, 7. The CPLR took effect September 1, 1963. Id. discover facts known or opinions without court order, may take the 8. Civil Law Commentaries, Vol. 1, Issue 1, held by any person who has been testimony of a person authorized Winter 2008, The Civil Codes of Louisiana 17. identified as an expert whose opin- to practice medicine, dentistry or 9. Id. podiatry who is the party’s treating ions may be presented at trial. If a report from the expert is required 10. Mitchell Franklin, Book Review, 7 Tul. L. Rev. or retained expert, as described in 632, 633 (1933) (reviewing Benjamin W. Dart, Civil paragraph three of subdivision (a) under Paragraph B, the deposition Code of the State of Louisiana (1932)). shall not be conducted until after of this section, in which event any 11. CPLR 3101(a). other party shall be entitled to the the report is provided. 12. Art. 1422. Scope of discovery; in general. full disclosure authorized by this * * * 13. 22 N.Y.C.R.R. § 202.21. article with respect to that expert (3) Unless manifest injustice would without court order. 14. CPLR 3115. Objections to qualification of per- result, the court shall require that son taking deposition; competency; questions and Louisiana’s rules, found at Art. 1425, the party seeking discovery pay answers. provide for additional disclosure, akin the expert a reasonable fee for 15. Jack B. Weinstein, Revision of New York Civil time spent in responding to dis- to the Federal Rules, upon motion: Practice, 30 N.Y. St. B. Bull. 298, 1958. covery under this Paragraph; and A. A party may through interroga- with respect to discovery obtained tories or by deposition require any under Subparagraph (2) of this

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19904 BLW BLTX NY State Bar Journal Oct PA 8x10.875.indd 1 9/2/16 4:16 PM BECOMING A LAWYER BY LUKAS M. HOROWITZ Lukas M. Horowitz, Albany Law School Class of 2019, graduated from Hobart William Smith in 2014 with a B.A. in history and a minor in political science and Russian area studies. Following graduation, he worked for two years as a legal assistant at Gibson, McAskill & Crosby, LLP, in Buf- falo, New York, and with the New York Academy of Trial Lawyers hosting CLE programs. Lukas can be reached at [email protected].

Law School Lesson #1: You Can’t Wing It ime does funny things when a Law school orientation was nothing the first week. The standout point was momentous event, in my case like undergraduate orientation, which that I was not alone. I found myself con- Tthe start of classes at Albany was primarily social in nature, and stantly thinking, “Am I understanding Law School, looms on the horizon. In by design, serving as an extended ice- this?” and, if not, “Am I the only one the months leading up to the start of breaker between members of the enter- not understanding this?” The “Cheat school, time slowed to a crawl. In the ing class. Law school orientation was Sheet” reminded me that I was not weeks since the start of my three-year something entirely different, focused alone in my confusion and doubts, that journey, time has moved at light speed. on establishing, and explaining, the I was surrounded by students with the To help slow things down a bit, I decid- school’s high expectations for the enter- same angst, and that the best solution ed to write about my journey. ing class. It was also reassuring, and was for us to help each other surmount During my final year of college I I was impressed with the wide rang- the obstacles that lay ahead. was pretty sure I wanted to be a law- ing support network and resources the Having made it through the read- yer. The previous summer I worked Law School provided. It felt very user- ings, I found myself sitting in my very as an intern for Justices Laura Douglas friendly, and that was a relief. Through first class, anticipating a casual, short and Elizabeth Taylor in Supreme Court, faculty presentations and participation introduction to the course, the profes- Bronx County. It was a great experi- in mock classes, my sense that I would sor, and the syllabus. Boy, was I wrong! ence, and I learned a lot, but as I looked be able to succeed in law school was We jumped right into the cases, cover- forward to graduation, the news on the renewed. However, I would be lying if ing topics from intent to negligence law school/legal career front remained I didn’t admit to feeling, at times, both to promissory notes. Fortunately, the dicey. Recognizing that it was unlikely I like a small fish in a big pond, and a fish professors made it clear that it was would be able to become a judge imme- out of water. not a sink or swim kind of day, and diately following graduation from law My first day of classes left my head displayed the same anticipation and school, I decided I needed exposure to spinning. I had spent the two days excitement that we as students were the day-to-day life of a lawyer before prior to that first day of classes going feeling. The discussions were rich with deciding if practicing law was what over, and over, the assigned readings. content, informative, and very confus- I wanted to do for the next 40 or so Never before had I done so much (actu- ing. Reality set in that first day. It was years. I had the good fortune to land ally, any) work before the first class of a finally happening. a position as a legal assistant at an semester, and never before had I been In my first class of the day, the pro- exceptional law firm, Gibson, McAskill so confused. Cases are written in a dif- fessor informed the class that there are, & Crosby, LLP, in Buffalo, N.Y. My two ferent language, and learning Russian in fact, “stupid questions.” In the class years at the firm solidified my desire in college was much easier. One new immediately following, the professor to pursue a legal career, and convinced and very useful tool I came upon prior informed the class that there is “no such me I possessed the necessary tools to to the start of classes was the “First-Year thing as a stupid question.” While I ini- tackle the three-year marathon through Law Student Cheat Sheet” from the tially scratched my head at the contra- law school. State Bar, which contained useful tips to diction, as I thought about it, I realized After a month of classes, I confess I help navigate cases. it was a perfect example of “thinking have some doubts. I have experienced However, what stood out for me like a lawyer,” holding two opposite orientation, case briefs, the Socratic from that packet was the section regard- views, neither one wrong. method, and Blue Book citations, and ing self-care. Essentially, it reminded All in all, my first month of law I have also experienced a level of anxi- readers that in order to graduate from school has been a great experience. I ety I have never felt before. I realize I law school, you had to be alive when the remain optimistic, and hope to main- might need just a few more tools in my time comes to graduate, something that tain that optimism going forward; so toolbox. seemed more and more unlikely during Continued on Page 34

20 | October 2016 | NYSBA Journal Gregory A. Barber, CFA, the managing director at Barber Analytics, LLC, is a corporate valuation expert focused on valuations for statutory and mediated minority shareholder buyouts. Peter A. Mahler, Esq., a partner at Farrell Fritz, P.C., assisted with legal research for this article; however, the opinions expressed are solely the author’s.

Marketability Discounts in New York Statutory Fair Value Determinations By Gregory A. Barber, CFA

s a securities analyst observing the discussion of their decisions on entrepreneurial behavior in general. between appraisers, attorneys, and the courts This factor can tip the balance in favor of not applying Aregarding the applicability of marketability dis- marketability discounts in general, but at the same time, counts in statutory shareholder buyouts, one can’t help introduce uncertainty for appraisers. but feel the discussion has become an increasingly entangled series of misunderstandings, miscommunica- The Statute Language tion, and inconsistencies. Appraisers appear to try ear- New York Business Corporation Law (NYBCL) § 1104-a1 nestly to get the courts and attorneys to understand the allows holders of 20 percent or more of the votes of all valuation concepts, and when and how marketability outstanding shares of a corporation to “present a petition discounts are applied, but it seems the parties are locked of dissolution on one or more” grounds, including (1) in either a state of perpetual disagreement or misun- the “directors or those in control of the corporation have derstanding. Based upon a review of the leading New been guilty of illegal, fraudulent or oppressive actions York cases, though, it seems only some of the courts may toward the complaining shareholders” and (2) the “prop- have misapplied marketability discounts. Some courts erty or assets of the corporation are being looted, wasted, appear to have a clear understanding of when and how or diverted for non-corporate purposes by its directors, to apply marketability discounts, and believe it’s what officers or those in control of the corporation.” The statute the language of the statute requires. And some New York also grants the court wide latitude when deciding whether courts now appear to be considering the broader impact to proceed with the involuntary dissolution to consider

NYSBA Journal | October 2016 | 21 whether “liquidation of the corporation is the only feasible Business Interests5 and Valuing Closely Held Corporations means whereby the petitioners may reasonably expect to and Publicly Traded Securities with Limited Marketability: obtain a fair return on their investment . . . .” Approaches to Allowable Discounts from Gross Values,6 and As an alternative to involuntary dissolution, NYBCL one court case, Ford v. Courier-Journal Job Print. Co. (Ford).7 § 1118 allows “any other shareholder or shareholders or Haynsworth in Valuation of Business Interests does not the corporation” at any time within 90 days after the fil- appear to share the court’s view that discounts should be ing of the petition to “elect to purchase the shares owned applied in squeeze-out valuations, as he also states in his by the petitioners at their fair value . . . .” If the parties article that in are unable to agree to a fair value, the court may stay the some situations, however, no discount is proper. For proceeding to dissolve the company and determine “the example, it would be inappropriate to impose a dis- fair value of the petitioner’s shares as of the day prior to count in a dissenters’ rights case or in a case where a the date on which such petition was filed, exclusive of minority interest has been improperly squeezed out any element of value arising from such filing . . . .” The of the business. Allowing discounts in these situa- NYBCL does not provide a definition of fair value, leav- tions would undercut the purpose of dissenters’ rights ing the determination to the courts. The New York courts statutes to give minority shareholders the fair value of routinely apply marketability discounts to company their shares, and it could also encourage squeeze outs.8 shares in determining fair value, and stand with only a few other jurisdictions in doing so. In addition, Lyons and Whitman in Valuing Closely Held Corporations and Publicly Traded Securities with Limited Leading New York Cases Marketability: Approaches to Allowable Discounts from Gross Blake v. Blake Agency Values say that “when control of a business is for sale . . . One of the most-cited and earliest cases that addresses we believe that as long as businesses are truly solvent . . . the applicability of marketability discounts in § 1118 there are always markets for control blocks of stock. Given proceedings is Blake v. Blake Agency (Blake).2 The case, an several months, or say a year’s time, buyers virtually

When conducting a valuation of an interest in a company it is important to differentiate among the characteristics of the company, the interest, and the market into which the interest is sold. appeal from the Supreme Court, concerned the valuation always can be found for such control positions.”9 Lyons of a 25 percent interest in a small insurance brokerage and Whitman go on to state the generally held belief for company, Blake Agency, Inc., located in Queens County. minority positions in closely held companies that “there The holder of the interest sought dissolution under § may be no market existing or creatable for such minority 1104-a and the corporation elected to purchase the inter- interests.”10 The authors also say that “as a general rule, est in a timely manner under § 1118. Justice Thompson’s and in the absence of compelling evidence to the contrary, opinion for the appellate panel disallowed a minority where control shares exist, no discounts from gross value discount on the shares because “§ 1104-a was enacted for should be logically taken to account for a lack of market- the protection of minority shareholders, and the corpora- ability . . . .”11 tion should therefore not receive a windfall in the form The Ford case cited in Blake was a dissenting stockhold- of a discount because it elected to purchase the minority ers action decided by the Kentucky Court of Appeals. In interest . . . .”3 However, a discount for lack of market- the case, common shareholders holding 12.8 percent of ability of 25 percent was allowed “because the shares of a the shares voted against a sale transaction and demanded closely held corporation cannot be readily sold on a pub- payment of the fair value of their shares. Although the lic market. Such a discount bears no relation to the fact Ford court ultimately agreed to a 25 percent marketability that the petitioner’s shares in the corporation represent a discount in the valuation of Courier-Journal Job Printing minority interest.”4 Company, a close reading of the opinion suggests the From an appraiser’s perspective, these statements court was using the marketability discount as a method raise a number of questions, an exploration of which of applying different weights to the valuation methods may resolve some of the apparent misunderstandings of considered. The court states that the marketability dis- when marketability discounts are applied and how they count used by the appraisers “merely indicates that the are measured. But before that, let’s examine the support appraisers gave some weight to the market value of the for this position referenced in the case. In support of this stock in computing the fair value thereof, which they are position, the Blake court cited two articles, Valuation of free to do.”12 The market value approach used by the

22 | October 2016 | NYSBA Journal appraisers examined sales of minority shares between than the minority interest in an identical publicly traded officers of the company, which, with informed buyers and company.18 sellers, would have considered both the minority position Having an organized market for minority shares, such the shares represented as well as the illiquid nature of the as the New York Stock Exchange or the NASDAQ, pro- investment. But seeing no contradiction, the Ford court vides liquidity for investors and allows them to exit their goes on to state that “[n]or do we feel that the [market- investments, reducing the investor’s risk. Without such a ability] discount herein was applied merely because of market minority shareholders in private companies suffer the minority position of the appellants.”13 In support of from increased risk and logically pay a lower price for the size of the marketability discount the appraisers cited their shares. Restricted stock studies compare the prices studies conducted on minority interests in what appears paid for minority interest – shares unable to be sold on to be restricted stock common shares, again seeing no the public stock exchange with the price of the freely contradiction in applying marketability studies of minor- traded minority shares of the same company to develop a ity interests with an interest that is not discounted for its measure of the discount for a lack of marketability for minority position, which can only be a majority or con- minority interests. Pre-IPO studies attempt to determine trolling position.14 the appropriate marketability discount for closely held Before returning to the Blake court’s key statements minority shares by examining the difference between a and getting too nuanced in our critique of the support company’s pre-IPO price and its IPO price. cited, let’s shed more light on an appraiser’s perspective. Controlling interests of both closely held and publicly To begin simply, when conducting a valuation of an inter- traded companies are usually sold in an informal market est in a company it is important to differentiate among created by intermediaries.19 Depending on the size of the characteristics of the company, the interest, and the the company, the intermediary is either an investment market into which the interest is sold. All three of these banker (larger transactions) or a business broker (smaller features can have a material impact on the value of an transactions). In either case, the sale process usually takes interest. But to reach a fair value conclusion that is sup- a few to several months. To a buyer of 100 percent of a ported, defendable and explainable it is helpful, as much publicly traded company, there is no ongoing liquidity as possible, to keep these features separate. in the form of a publicly traded security. Since all the Companies, of course, come in all shapes and sizes. shares have been purchased by one buyer, there are no Investors generally pay higher prices for businesses that shares to trade and the company is delisted from the are characterized by low risk and are expected to grow annual cash flow quickly. There are dozens of characteristics any investor (minority or majority) will consider in assessing these two basic features, such as the experience and record of company management and the historical growth in cash flow, but the important distinction to remember is these are all characteristics of the company. Interests in companies are generally divided between controlling or majority interests (over 50 percent of the voting power) and minority interests (under 50 percent of the voting power).15 If an investor controls the company he or she can select the board, choose the company’s stra-  tegic direction, pay oneself a reasonable, but generous, COURT & LITIGATION 370 Lexington Ave. salary, among other benefits. But most important for our Suite 1101  BANKRUPTCY & DEPOSITORY discussion, the controlling shareholder can elect to sell New York, NY 10017 the company or its underlying assets. Controlling inter-  TRUSTS & ESTATES 212-986-7470 ests in publicly traded companies usually sell for more on a 212-697-6091 Fax per-share basis than the minority interests traded on stock  INDEMNITY & MISCELLANEOUS exchanges.16 The additional share price paid for control  LICENSE & PERMITS is called a control premium. The mirror image of the [email protected] control premium is called the discount for lack of control and unfortunately, ambiguously, also called a minority discount. Controlling interests in closely held companies sell for more than their minority interests on a per-share basis also because those minority shares would have SURETY BOND SPECIALISTS even less value than the marketable, exchange-traded www.LevineCompany.com minority shares.17 Finally, a controlling interest in a private company also would sell for more on a per-share basis

NYSBA Journal | October 2016 | 23 stock exchange. Buyers of controlling interests of publicly marketability discount for a controlling interest, it is best traded companies enjoy no benefit of liquidity relative to to examine studies of liquidity discounts for controlling control purchasers of private companies with respect to interests. Again, similar company characteristics make the market on which the interest could eventually be sold. the analysis better. In addition, the length of the period of With this perspective in mind, let’s return to the Blake illiquidity is very important to consider for both minority court’s statements. The first statement that “§ 1104-a was and majority interests. To look at marketability discount enacted for the protection of minority shareholders, and studies for shares that will be illiquid for two years and the corporation should therefore not receive a windfall apply them to shares that have a six-month expected in the form of a discount because it elected to purchase holding period would materially overstate the market- the minority interest . . .” leads appraisers to conclude ability discount. the interest is not going to be discounted for its minority Examining marketability discounts of minority inter- status, so the 25 percent interest being appraised in Blake ests that have a few months until they are freely tradable to a Agency must be the pro-rata share of the value of a 100 controlling interest that also has a few months until liquid- percent controlling interest. ity certainly would provide a better indicated market- The second statement that a discount for lack of mar- ability discount than the one selected by the Blake court, ketability of 25 percent was allowed “because the shares which didn’t seem to apply much analysis in the selection of a closely held corporation cannot readily be sold on a of the discount.20 But using minority interest marketabil- public market” is confusing because, if the Blake court is ity studies for controlling interests is a poor substitute valuing the company on a controlling basis and control- for an analysis of marketability discounts in controlling ling or 100 percent interests are not sold on the public interests in companies with similar characteristics and markets, why is the comparison to the public stock mar- similar expected holding periods. Controlling interests, ket being made? The speed with which minority shares for the reasons discussed above, are generally more sell on the stock exchange seems irrelevant to the sale of attractive than minority interests, and logically would not a controlling interest in Blake Agency. suffer from marketability discounts as high as those seen The final statement that “[s]uch a discount bears no for minority interests. The appropriate analysis would relation to the fact that the petitioner’s shares in the examine the sales of controlling interests that could be corporation represent a minority interest” seems to be sold immediately with sales of controlling interests that made to distinguish the marketability discount applied are sold in the normal time period of a few to several to be one appropriate for a controlling interest, versus a months. The problem is that no studies or analysis is pos- minority interest, presumably because the company will sible because there are no controlling interests that sell take several months to sell. Taken together, the Blake court within a few days because even if a buyer stands ready statements seem to say a marketability discount should to buy the target company, the due diligence and negotia- be applied to a controlling interest in Blake Agency tion of the merger or sale agreement takes time.21 because it will take longer to sell the entire company than Most appraisers however, in my experience do not a minority interest in Blake Agency, if the company were apply marketability discounts to controlling interests out- publicly traded. side of a statutory fair value proceeding as the Blake court It is true that the sale of the entire company will take proposes. This is for several reasons. First, the marketing longer than a sale of minority shares, if the minority shares or holding period is relatively short, just a few months, were traded on a national stock exchange. As stated so the adjustment for marketability is viewed to be quite above, it will take about five to seven months to sell the small and immaterial relative to the value conclusion. whole company, but only a few days to sell a very small Second, and perhaps of more consequence, the holder of interest, if it were traded on a stock exchange. So the key the controlling interest enjoys the earnings of the com- question, if we accept the Blake court’s view that a mar- pany and other benefits of control over the marketing ketability discount is correctly applied, is what discount period, offsetting the lack of dividends that a minority from the value of the entire company, if any, is appropriate shareholder usually experiences. Most of the companies because the controlling interest will take several months in the minority-interest restricted stock and pre-IPO to realize liquidity? studies referenced to develop marketability discounts When determining marketability discounts it’s very (including those in the case cited by Blake, i.e., Ford) are important to examine the sales of interests with similar in companies that are not paying dividends. characteristics, i.e., if you are applying a marketability Finally, also consider that any holder of illiquid stock, discount to a privately held minority interest, you should whether holding a minority restricted stock interest that look at liquidity discount studies for minority interests. It can only be sold in one year or a majority interest which also helps to examine the discounts in companies with could be sold in six months, is exposing his or her capital similar company characteristics (size, industry, level of to negative company events that could occur over the profitability, and importantly, the level of dividends or holding period. This creates uncertainty around what the distributions). And likewise, if you are determining a stock price will be when liquidity is available or when the

24 | October 2016 | NYSBA Journal company is ultimately sold. In the same way, the minority and Blake.28 However, the language in Pace and Blake dif- shareholder that has elected to dissolve a company under fers and says value “should be determined on the basis § 1104-a and is being bought out under § 1118 is exposed of what a willing purchaser, in an arm’s length transac- to, as part of an unpredictable appraisal process, the risk tion, would offer for the corporation [emphasis added] as that the value of his or her interest is unknowable and an operating business, rather than as a business in the may not be realized for many months, and sometimes for process of liquidation.” As stated above, the entire corpo- years. Viewing the entire statutory buyout process as a ration could be sold in a few months through the reten- whole, it seems to be applying a double burden to assess tion of an intermediary, such as an investment banker, the petitioner’s shares a marketability discount as well as and would transfer with it all the benefits of control. The subject them to an unpredictable statutory buyout pro- petitioner’s minority interest would likely not be sale- cess lasting much more than a few months.22 able at all. Conspicuously absent in the Seagroatt opinion

When determining marketability discounts it’s very important to examine the sales of interests with similar characteristics, i.e., if you are applying a marketability discount to a privately held minority interest, you should look at liquidity discount studies for minority interests.

In re Seagroatt Floral Co, Inc. was any discussion of the inapplicability of a minority The next leading case chronologically is In re Seagroatt discount, as there was in Blake. The Seagroatt court seems Floral Co., Inc. (Seagroatt).23 The facts in Seagroatt followed to be taking the position that fair value should take into a pattern typical of dissolution cases. Two corporations consideration the minority nature of the interest and its involved in growing and distributing cut flowers were lack of marketability. held by the seven grandchildren of the founder. Dissen- Consistent with the first statement, the Seagroatt court tion arose among the owners and two of the shareholders, goes on to say minority shareholders in close corpora- each owning approximately 17 percent of the common tions are unlikely to find prospective buyers for their shares of both companies, petitioned the court seeking a shares and it “follows that, whatever method of valu- dissolution under § 1104-a, alleging oppressive behavior ing an interest in such an enterprise, it should include against the directors. Each corporation timely elected to consideration of any risk associated with illiquidity of purchase the shares under § 1118 and the Supreme Court the shares.”29 Again Haynsworth’s Valuation of Business stayed the dissolution proceedings and referred the mat- Interests is cited generally and O’Neal’s Close Corporations ter to a referee to ascertain the fair value of the stock. The specifically.30 As discussed above, Haynsworth does not referee, in turn, valued the two companies together and seem to share the court’s view that discounts should be applied a 25 percent discount for lack of marketability. applied in squeeze-out valuations. In addition, although The decision was appealed and the Appellate Division set a copy of the third edition of O’Neal’s Close Corporations, aside the 25 percent marketability discount because the which was cited, is no longer available, the 2004 edition appraiser stated the “fact that it’s a closely held compa- provides a balanced review of the relevant dissolution ny” had been considered in his selection of the company’s cases across the country addressing the illiquidity dis- capitalization rate.24 The Court of Appeals agreed and count and doesn’t appear to be an endorsement of the refused to overturn the decision with respect to the mar- application of a marketability discount in the context of ketability discount. In the opinion the Court of Appeals a statutory dissolution. O’Neal and Thompson state that made a number of comments that provided a great deal “in a majority of states with decisions on this point the of insight into its view of marketability discounts, as well appreciation of such a discount is rejected.”31 They go on as other associated valuation issues.25 to state that it “seems particularly inappropriate to apply The Seagroatt court’s view of fair value was different, such a discount when a shareholder is selling to a person and arguably would result in a lower value, than the Blake or family that owns all or must [sic] of the other shares court’s perspective. The Seagroatt court said the “objec- of the corporation.”32 In support of the discussion above tive of a proceeding under Business Corporation Law regarding Blake, they also state that while “the lack of a § 1118 including the one now before us is to determine market affects the ability to sell minority shares in a com- what a willing purchaser in an arm’s length transaction pany, the market for all of a company’s assets or shares or would offer for petitioners’ interest in the company [empha- for a controlling interest operates differently and may not sis added] as an operating business.”26 In support of this be adversely influenced by the fact that the company’s statement the court cited In re Pace Photographers (Pace)27 shares are not traded.”33

NYSBA Journal | October 2016 | 25 The Seagroatt court clearly views fair value as the The Beway court expressed a strong opposition to value of the petitioner’s interest in an arm’s-length sale minority discounts, saying they were “inconsistent with taking into account the lack of marketability of the inter- the equitable principles developed in New York deci- est. After reviewing the court’s language closely, many sional law”37 and that “imposing a minority discount . appraisers might think they should apply a minority . . would result in minority shares being valued below discount as well. That the Court of Appeals in Seagroatt that of majority shares, thus violating our mandate of is attracted by the notion that the discounted value is equal treatment of all shares of the same class.”38 The the correct measure is not really surprising. Ignoring Court of Appeals for the first time extends its language shareholder statutory rights for a moment, outside of an to include consideration of the impact of its decision actual control transaction, minority interests in private on corporate activities in general, saying “a mandatory companies usually have little value to third parties even reduction in the fair value of minority shares to reflect when operated by honest, capable, fair-minded majority their owners’ lack of power in the administration of the owners.34 It could be argued that the value received by corporation will inevitably encourage oppressive major- the petitioner in Seagroatt was above what could have ity conduct.”39 The Beway court also returns to the defini- been realized in a sale of the interest to an unrelated third tion of fair value detailed in Blake, saying courts should party, especially if the grounds for the § 1104-a petition “determine the minority shareholder’s proportionate

The Seagroatt court clearly views fair value as the value of the petitioner’s interest in an arm’s-length sale taking into account the lack of marketability of the interest.

were accurate. It is only with the presence of fraudulent interest”40 in the corporation, that is, “what a willing or oppressive behavior, or the looting or wasting of cor- purchaser, in an arm’s length transaction, would offer for porate assets by the majority, together with consideration the corporation as an operating business.”41 Contrary to of what is equitable to the parties as individuals and good the extensive support cited for the Beway court’s position public policy, that an observer begins to understand why on minority discounts, there is no support cited for the other undiscounted values might, on balance, be the bet- application of the marketability discount. However, the ter remedy. Beway court clearly thought one was appropriate since it sent the marketability discount back for reconsideration, Friedman v. Beway Realty Corp. saying the Supreme Court erred in reducing the market- The Beway35 decision is not a § 1118 case, but since the ability discount to 21 percent. Court of Appeals expressed in the opinion that “there is As was the case with Blake, it’s hard to know if the no difference in analysis between stock fair value deter- court believed: (1) because the sale of the entire company minations under Business Corporation Law § 623, and would take several months a discount for lack of market- fair value determinations under Business Corporation ability was appropriate; or, (2) it should treat the interest Law § 1118”36 the case is relevant to our discussion. The as controlling for purposes of considering the minority case involved petitioners who voted their shares against discount, but as a minority interest for application of the consolidation of nine corporations invested in real the marketability discount. If the latter is true, the court estate into a single partnership. The petitioners timely has created a value that doesn’t exist in the real world, elected their appraisal rights under § 623 and asked the one that takes part of its characteristics from controlling Supreme Court to determine the fair value of their shares. interests, and part from minority interests in private The Supreme Court and the Appellate Division both companies. And this “split personality” of the New York refused to apply a minority discount, but did apply a 21 court approach is what appraisers find so confusing. percent marketability discount. The respondent’s expert In valuing a particular interest, appraisers are trying to had recommended a 45 percent marketability discount simulate how a market would react to an interest offered based upon restricted stock studies of minority common for sale. That interest can be either a controlling interest, shares, which the Supreme Court had adjusted down. a minority as-if-publicly-traded interest, or a minority, The Court of Appeals accepted the lower courts’ deter- private interest. It can’t be two different types of interests mination on the minority discount, but sent the discount at the same time. Appraisers use discounts and premiums for lack of marketability back for a new and likely higher to move the values indicated by the valuation methods determination. applied to reach the desired end point or “level of value.”

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® The Better Solution 122 East 42nd Street, Suite 803, New York, NY 10168 Additional Locations: Garden City, Brooklyn, Staten Island, Westchester and Buffalo (800) 358-2550 | www.namadr.com But the foundation upon which all the analysis is con- fers48 or that discounts encourage corporate squeeze-outs structed is the nature of the interest itself, or the qualities and shouldn’t be encouraged with a financial incentive.49 of the interest that have been defined (i.e., value a minor- The Rhode Island Supreme Court in Charland v. Country ity interest in a private company as its pro-rata share View Golf Club took the practical view that if the dissolu- of the value of the entire company). But the New York tion had been allowed to proceed, all the shareholders courts in refusing to apply a minority discount, but then would have received the same amount, so no discount applying a marketability discount suitable for a minority should apply.50 Finally, the Indiana Court of Appeals in interest, effectively are claiming the interest has attributes Wenzel v. Hopper believed that the dissolution proceeding of two different types of interests – it is both a controlling and buyout created liquidity for the minority sharehold- and a minority interest at the same time. Although you er, so no liquidity discount was appropriate.51 could define such a value, such interests don’t exist in The courts that applied marketability discounts were actual markets between unrelated, informed parties. both unusual cases. In Munshower v. Kolbenheyer, the It is also interesting to note that the Beway court saw Florida District Court of Appeal applied a marketability no inconsistency in refusing to apply a minority discount discount relying “on New York case law as persuasive because it “would result in minority shares being valued in this matter”52 without any further discussion or com- below that of majority shares”42 but allowed a significant ment. In Balsamides v. Protameen Chemicals,53 the Supreme marketability discount which would yield a lower value Court of New Jersey found itself in the unique position for the minority shares, exactly what it had just refused of deciding what fair value meant when the oppressed to allow on principle. Allowing the majority to purchase shareholder was buying out the oppressing shareholder. the minority shares at a 21 percent or 30.4 percent dis- The Balsamides court was convinced by the expert that count from the value of the whole company would allow a marketability discount of 35 percent was appropriate the majority to elect to sell the whole company within a because the entire company could only be sold for the dis- few months with a significant profit on the discounted counted amount. The testimony of the expert that seemed minority shares they just purchased. From a broader per- to convince the court was, from an appraiser’s perspec- spective, it doesn’t matter what the discount is called; as tive, doubtful. The expert stated that “whether you long as the majority can sell the company for more it is a apply a marketability discount to one hundred percent discount that violates the “mandate of equal treatment of of the shares of stock, fifty percent of the shares of stock, all shares of the same class.”43 or twenty percent of shares of stock, the marketability Also of note is that almost all of the cases cited by discount would be the same.”54 As discussed above, this the Beway court in support of its decision not to apply statement appears to contradict the fact that controlling a minority discount also chose not to apply a market- interests are much more attractive and marketable than ability discount. Of the seven cases cited, five explicitly minority interests in private companies. Important in the addressed the marketability discount and declined to Balsamides court’s reasoning seemed to be that it didn’t apply it for the same reasons the minority discount was “want to afford a shareholder any incentive to oppress refused.44 Of the two other cases, one could be interpret- other shareholders.”55 And it is this consideration – the ed as declining to apply a marketability discount as well, incentives and penalties that the law provides for busi- but the language isn’t explicit.45 The other case involved ness owners, investors and entrepreneurs – that brings a the valuation of a 90.2 percent interest in a business in much broader and, for some, a helpful perspective to the a divorce and no marketability discount was applied.46 marketability discount discussion. These five decisions, which include four state Supreme There is an area of study in economics that seeks to Court decisions and one appellate court decision, saw understand the role of entrepreneurs in the economy. no reason to differentiate between a marketability and The most recent major contribution to this area of study minority discount as they both produce the same unequi- was by William J. Baumol in 1990. He theorized that table result, i.e., minority shares being valued below that entrepreneurial individuals (i.e., business owners) have of majority shares. a choice to devote their labor toward private-sector wealth creation (e.g., product innovation, moving pro- A Broader Perspective duction to more profitable products), or toward secur- To be candid, valuing an asset whose value changes ing wealth redistribution through political and legal depending on who holds it presents a thorny problem for processes (e.g., lobbying government to protect their the courts. A review of dissolution cases from the highest industry, lawsuits).56 The former activities are viewed as courts across the nation revealed a number of reasons productive (creating new wealth) and the later as unpro- they were opposed to applying a marketability discount. ductive (redistributing existing wealth, and in some cases An often repeated reason was that applying the discount destroying existing wealth). Oppressive behavior on the would be contrary to the purpose of the statute, i.e., to part of majority shareholders seeking to squeeze out the protect minority shareholders.47 Other reasons cited were minority at a discounted price would fall into the unpro- that discounts were not appropriate in inter-family trans- ductive category. Baumol hypothesized that how “the

28 | October 2016 | NYSBA Journal entrepreneur acts at a given time and place [in history] combined with New York’s rather consistent applica- depends heavily on the rules of the game – the reward tion of a significant marketability discount, allows for structure in the economy – that happens to prevail.”57 oppressive behavior on the part of the majority to be The “rules of the game” from an entrepreneur’s perspec- rewarded. From an incentives perspective, the New York tive include the legal and judicial system. Baumol went statutory scheme and the courts are encouraging unpro- on to propose that entrepreneurs are always present in ductive behavior on the part of entrepreneurs. Although societies, but societies that don’t provide a “constructive one could imagine a discounted value for an oppressed and innovative script” for them are likely to find their minority shareholder is a remedy relative to receiving growth atrophied.58 Although Baumol’s work is difficult virtually nothing on the open market for his or her shares, to prove conclusively, other authors have conducted eco- from a broader perspective, it’s hard to imagine the New nomic research that supports his theory.59 York legislature intended to reward oppressive majority Seen from the entrepreneurial economist’s perspective, behavior when it enacted § 1104-a and § 1118. oppressive behavior of majority shareholders should, at a From an appraiser’s perspective, a flexible role for minimum, not be rewarded with the opportunity to pur- discounts in fair value determinations in general cre- chase minority shares at a discount. This would qualify as ates uncertainty as each case has its own facts. Whether behavior that does not create wealth or contribute to the discounts apply to the valuation may not be known until growth of the economy as a whole. Further, some oppres- after the appraiser has done his or her work. But this sive behavior by majority shareholders does not appear uncertainty can be addressed by providing the court much different from theft (e.g., grossly excessive salaries, values with and without discounts. As the application the individual purchase of company assets well below of discounts is primarily a matter of law in any event, it value) and should be discouraged. seems better to leave the discount decision to the court. If Alternatively, there are unusual instances where the the role of the courts is viewed as simply to contribute to oppressing shareholder is the minority. Imagine a sce- the “rules of the game” for entrepreneurs and investors nario where an unrelated investor buys the shares of a and to maximize wealth-creation behavior, the debate family business from a minority shareholder at a price of whether to apply discounts in shareholder buyouts that reflects both discounts for lack of control and market- becomes a little less difficult. n ability. The investor then engages in a campaign to pres- sure the majority shareholders to purchase his shares by 1. Although some New York courts have stated that they consider the definition of fair value under NYBCL § 623 (appraisal or dissenter’s rights alleging the majority takes excessive salaries and threat- actions) to be the same as fair value under § 1118, when making very nuanced ening to disqualify the company for S-Corporation status distinctions between what is equitable and good public policy, it is better by transferring the shares to an ineligible shareholder. to confine the discussion to a single, similar action. So I will confine my discussion to § 1118 dissolution actions. Admittedly, however, in the case of If the majority is simply trying to operate and grow the minority shareholder oppression or “squeeze-outs,” the distinction between business in a fair manner, respectful of the duties to, and methods used by the majority which trigger appraisal rights versus dissolu- rights of, all the shareholders, the behavior of the minor- tion rights is sometimes a matter of form, and the underlying public policy and equity issues are very similar. ity would be viewed as unproductive by entrepreneurial 2. Blake v. Blake Agency, 107 A.D.2d 139 (App. Div. 1985). economists. Again, considering the incentives structure 3. Id. at 149. of the economy and society as a whole, it doesn’t seem 4. Id. the oppressing minority should be rewarded for his 5. Harry J. Haynsworth IV, Valuation of Business Interests, 33 Mercer L. Rev. behavior through the purchase of his interest at an undis- 457 (1981–1982). counted price, as it represents simply a redistribution 6. William P. Lyons and Martin J. Whitman, Valuing Closely Held Corporations of wealth and no new wealth creation. In fact, from the and Publicly Traded Securities with Limited Marketability: Approaches to Allowable incentives perspective, one could argue the buyout price Discounts from Gross Values, 33 Bus. Law. 2213 (July 1978). for this investor should reflect both minority and market- 7. Ford v. Courier-Journal Job Print. Co., 639 S.W.2d 553 (Ky. Ct. App. 1982). ability discounts, a similar value as it was purchased for. 8. Haynsworth, supra note 5, at 489. Again, the instances where the minority shareholder is 9. Lyons and Whitman, supra note 6, at 2226. the oppressor seem to be the exception. 10. Id. at 2227. The current New York statutory scheme is ill-suited to 11. Id. allow for the consideration of shareholder behavior when 12. Ford, 639 S.W.2d at 556. determining a remedy. Under NYBCL § 1118, the election 13. Id. to purchase the petitioning shareholder’s shares is almost 14. Id. always made before there can be any finding by the court 15. In practice, the level of control of an interest is viewed on a continuum. A that there are grounds for dissolution under § 1104-a. 100 percent interest, for example, is more attractive than an 80 percent interest Once the election to purchase the shares is made, New as the 80 percent interest must always be concerned with meeting its fidu- York courts have viewed their role as simply determin- ciary duties to the minority shareholders. ing the fair value of the minority shares without regard 16. Buyers of controlling interests are normally divided between financial and synergistic. Financial buyers are those that do not have existing opera- 60 to shareholder behavior. Such a statutory scheme, when tions and include private equity and hedge funds. Synergistic buyers are

NYSBA Journal | October 2016 | 29 operating companies that may be able to realize operating synergies with the 44. Cavalier Oil Corp. v Harnett, 564 A.2d 1137, 1145 (Del. 1989) (“Discounting target company. Although it’s generally true that controlling interests sell at a individual share holdings injects into the appraisal process speculation on premium to the exchange-traded stock price, there are times when the public the various factors which may dictate the marketability of minority share- market prices shares above the price control buyers are willing to pay. holdings. More important, to fail to accord to a minority shareholder the full proportionate value of his shares imposes a penalty for lack of control, and 17. However, because arm’s-length, minority-interest sales of privately unfairly enriches the majority shareholders who may reap a windfall from the owned companies are extremely unusual, and if they do occur, are rarely appraisal process by cashing out a dissenting shareholder, a clearly undesir- reported, there are no studies to support this assertion. able result.”); Hickory Cr. Nursery v. Johnston, 167 Ill. App. 3d 449, 455 (1988) 18. Appraiser’s often note that in control transactions private companies sell (“Lastly, though Johnston’s expert stated that a discounting of Johnston’s for lower multiples of earnings (a cheaper price) than their publicly traded interest would be in the range of 10% to 35% if it were marketed to an out- counterparts. Although the research is not definitive, this is likely caused by sider as a minority interest and Hickory Creek’s expert applied a minority the private companies having less attractive company characteristics (i.e., a discount of 25% in his unadjusted formula analysis, we find such discounting lack of audited financial statements, less experienced management, slower does not apply in the instant case when a minority interest is being assumed earnings growth, less product and geographic diversification). In addition, by the remaining shareholders resulting in a substantial pro rata increase in buyers of publicly traded companies can often reduce or eliminate the target’s their share and control of the corporation.”); Woodward v. Quigley, 133 N.W.2d standalone public company costs (such as executive and board member com- 38, 44 (Iowa 1965) (“Plaintiffs cited Felder v. Anderson, Clayton & Co., Del. pensation, audit fees, and costs associated with internal controls), giving the Ch., 159 A.2d 278, 285, in which the court apparently approved a 10 percent impression they are paying more (i.e., a higher multiple) on a current earn- discount from the average multiplier “for certain reasons, such as the lack of ings basis. marketability of the stock, etc.” In view of our interpretation of the purpose 19. Controlling interests in private companies are sometimes sold on an of the statute, we decline to follow the Delaware court in this position, if it, exchange through a public offering, but this is a small number of transactions by this statement, approved such a discount.”); In re McLoon Oil Co., 565 A.2d compared to the investment bank/business broker market. 997, 1003 (Me. 1989) (“The referee expressly rejected Lido’s contention that he should discount the full value of each company because of the minority status 20. The Blake court seems to have relied on the discount used in Ford. The and lack of marketability of the Dissenters’ stock. On appeal Lido’s only seri- Ford court relied upon the expert that appears to have cited restricted stock ous challenge to the referee’s finding of fair value is directed at the referee’s discount studies of minority shares where the restricted shares could not be recognition of the Dissenters’ full proportionate interest in the whole value sold for a period of two years (Ford, 639 S.W.2d at 556). of each company, free of any minority or nonmarketability discount. We find 21. Ideally, the study would include 100-percent-interest sales of the same Lido’s arguments for such discounts unpersuasive. In our view application of company in a process that took a few days and also several months, but this those discounts would run directly counter to our appraisal statute’s purpose “dual reality” does not exist in the real world. of protecting dissenting shareholders.”); Rigel Corp. v. Cutchall, 511 N.W.2d 519, 526 (Neb. 1984) (“We are persuaded, however, that in the event of a 22. The petitioner also usually receives interest from the valuation date merger, neither a minority discount nor a deduction for lack of marketability during the § 1118 process, similar to a controlling shareholder receiving is to be given in determining the fair value of a dissenter’s shares under the dividends and other benefits during the sale of a controlling interest into the provisions of § 21-2080. Only by not doing so can the statutory policy of fully market by an intermediary, making the two positions reasonably analogous. compensating a dissenting minority shareholder be achieved.”). 23. In re Seagroatt Floral Co. Inc., 78 N.Y.2d 439 (1991). 45. Brown v. Allied Corrugated Box Co., 91 Cal. App. 3d 477, 487 (1979) 24. Id. at 447. (“According to that approach, the minority shares would then have to be val- 25. Perhaps more significant as the Seagroatt court’s direct comment on the ued in relation to what they would bring in the open market, with an appro- applicability of marketability discounts is the court’s interpretation of the priate reduction for the fact that they do not give their purchaser control of statutory language with regard to the going-concern versus liquidation issue the corporation. Further, if, as was apparently the case here, the controlling and whether shareholder misconduct is a consideration under § 1118. Howev- shareholder has been using his position to insure that no benefits, such as er, in the interest of brevity and focus, these topics will need to be addressed dividends or employment, ever accrue to the owners of the minority shares, at another time. then an argument could be made that the value of the minority shares should be reduced even further, perhaps to zero. Thus, the very misconduct and 26. Seagroatt, 78 N.Y.2d at 445. unfairness which provoked the minority shareholders to seek involuntary 27. In re Pace Photographers, Ltd., 71 N.Y.2d 737, 748 (1988). dissolution could, in this manner, be used to further oppress them. This, the statutory scheme before us cannot be read as condoning.”). 28. Blake, 107 A.D.2d 139, 146. 46. Eyler v. Eyler, 492 N.E.2d 1071, 1074 (Ind. 1986) (“Regardless whether 29. Seagroatt, 78 N.Y.2d at 445. using the date of separation, or using any other date through the completion 30. F. Hodge O’Neal and Robert B. Thompson, O’Neal’s Close Corporations § of the final hearing, the shares constituting the 90.2% share of the business 9.34, at 162–63 (3d ed. 1993). were at all said times held in joint ownership and not burdened by the factors 31. F. Hodge O’Neal and Robert B. Thompson, O’Neal and Thompson’s Close which may warrant consideration of the “minority interest” discount.”). Corporations § 9.32, at 231 (Rev. 3d ed. 2004). 47. Advanced Commc’n Design v. Follett, 615 N.W.2d 285, 292 (Minn. 2000); 32. Id. Morrow v. Martschink, 922 F. Supp. 1093, 1105 (D.S.C. 1995). 33. Id. at 232. 48. Morrow, 922 F. Supp. at 1104; Wenzel v. Hopper, 779 N.E.2d 30, 39 (2002). 34. There are exceptions to this general rule. Some private technology/ 49. Advanced Commc’n Design, 615 N.W.2d at 292; Wenzel, 779 N.E.2d at 39. Internet companies have broad public awareness and a large shareholder base 50. Charland v. Country View Golf Club, Inc., 588 A.2d 609, 613 (R.I. 1991). created by the exercise of options by their employees. Shares of these compa- 51. Wenzel, 779 N.E.2d at 39. nies are exchanged by accredited investors by companies such as SharePost, Inc. and SecondMarket Solutions Inc. (purchased by NASDAQ). 52. Munshower v. Kolbenheyer, 732 So. 2d 385, 386 (Fla. Dist. Ct. App. 1999). 35. Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995). 53. Balsamides v. Protameen Chem., 734 A.2d 721 (N.J. 1999). 36. Id. at 168. 54. Id. at 737. 37. Id. at 167. 55. Id. at 738. 38. Id. at 169. 56. William J. Baumol, Entrepreneurship: Productive, Unproductive and Destruc- tive, 98 J. Polit. Econ. 893 (1990). 39. Id. 57. Id. at 894. 40. Id. at 168. 58. Id. 41. Id. (quoting In re Pace Photographers, Ltd., 71 N.Y.2d 737, 748 (1988)). 59. Russell S. Sobel, Testing Baumol: Institutional quality and the productivity of 42. Id. at 169. entrepreneurship, 23 J. Bus. Venturing 641 (2008). 43. Id. 60. Pace, 71 N.Y.2d at 746.

30 | October 2016 | NYSBA Journal The Treatment and Marshaling of Joint Accounts in an Article 81 Guardianship Proceeding By Anthony J. Enea

he existence of joint bank or brokerage accounts spouse, children, sibling(s) or other third parties. For has become ubiquitous in 21st century America. example, the joint account may have been created because TThere are numerous legitimate and logical rea- the parties to the joint account contributed the funds or sons for the creation of a joint account. However, when assets comprising the account, or acquired said funds an Article 81 guardianship proceeding is commenced during their marriage. An owner may also decide he or and the alleged incapacitated person (AIP) has accounts she wants a joint owner to have full and unfettered access jointly owned with another person, it is imperative for to the account during their lifetimes (especially helpful the petitioner to determine the reason the joint account(s) if there is a subsequent disability) or upon the death of was created, the benefits conferred to each joint owner, the owner, irrespective of whether the joint owner made if any, and the impact the guardianship proceeding may equal contributions to the account. have on the funds. This article will explore the different Joint accounts are also commonly utilized and rec- ways of holding joint assets and explain how to treat and ognized as an effective wealth transfer vehicle, which marshal said joint assets for the purposes of a guardian- permits the transfer of assets from one party to another ship proceeding. upon death without necessitating the probate of a Last Will & Testament or the creation of a trust. Joint accounts Joint Accounts as well as what are known as “Totten Trusts,” or “Transfer It is particularly common for married couples and seniors on Death Accounts” for brokerage and security accounts, to have joint bank or brokerage accounts with their pass by operation of law to the surviving joint tenant(s) or the designated person. For a Totten Trust or Transfer on

Anthony Enea is a member of Enea, Scanlan & Sirignano, LLP with offic- Death Account, usually only an original death certificate es in White Plains and Somers, New York. He is a past chair of the Elder is required by the bank or financial institution as proof Law Section of NYSBA and Past President and Founding Member of the that the surviving joint tenant(s) is authorized to access New York Chapter of the National Academy of Elder Law Attorneys. He the funds. practices exclusively in Elder Law, Wills, Trusts & Estates and Guardianship proceedings. He wishes to acknowledge the significant assistance and For Convenience Accounts research of Lauren C. Enea, J.D. with the preparation of this article. The right to receive by operation of law the joint account upon the death of a joint tenant does not apply to a joint

NYSBA Journal | October 2016 | 31 account that is created and held “for the convenience” 675 may only be refuted by “direct proof or substantial of the depositor. Accounts “for the convenience” are circumstantial proof, clear and convincing and sufficient regulated by § 678 of the N.Y. Banking Law. Section 678 to support an inference that the joint account had been provides that opened as a matter of convenience or by proving undue 4 when a deposit of cash, securities or other property influence, fraud or lack of capacity.” has been made, or shares shall be issued in or with With respect to securities accounts or brokerage any banking organization or foreign banking corpora- accounts in joint names, the Transfer on Death Security tion transacting business in this state, in an account in Registration Act (TOD) and Estates, Powers and Trusts the name of the depositor and another person, and in Law 13-4.1 through 13-4.12 (EPTL) permits joint securi- the form to be paid or delivered to either ‘for the con- ties and brokerage account holders to have the same venience’ of the depositor, the making of such deposit rights and choices that joint bank account holders have. or issuance of shares shall not affect the title to such The TOD was enacted on July 26, 2005 and it amended deposit or shares and the depositor is not considered the EPTL by enacting a new part four to Article 13. It to have made a gift of one-half the deposit or of any is essentially codified in EPTL 13-4.1 through 13-4.12. additions or accruals thereon to the other person, and, on the death of the depositor, the other person shall Under EPTL 13-4.2, a “transfer on death” or “payable on have no right of survivorship in the account.1 death” securities or brokerage account can only be established by sole owners or multiple owners having a right

Section 675(b) provides that the burden of proof is upon the one challenging the presumption of joint tenancy.

Section 678 of the Banking Law specifically gives of survivorship in the account. The owners of a securi- the depositor the ability to have two signatories on an ties or brokerage account held as tenants-in-common are account who can withdraw funds from the account, but expressly prohibited from creating a “transfer on death” the “convenience” signatory is not permitted to make a account. Although the creation of a “transfer on death” or gift of more than half of the funds in the account, and his “payable on death” securities or brokerage account does or her access does not bestow any survivorship benefits not require that any specific language be utilized to create upon the joint account title holder. In order for the provi- the account, the usage of the phrases “transfer on death” sions of § 678 to apply, the words “for the convenience” and “payable on death” or their abbreviations “TOD” or or similarly “for convenience only” must appear on the “POD” should be used to evidence the creation of the title of the account. If the aforesaid words do not appear, future interest.5 However, under EPTL 13-4.4 evidence of the presumptions created by § 675 of the Banking Law the establishment of the account is the opening documen- will be applied. tation that indicates that the beneficiary is to take owner- Section 675 provides that the making of a deposit ship upon the death of the other owner(s). in the name of the depositor and another to be paid to either the depositor or to the survivor is prima facie The Potential Problems Caused by Joint Accounts in evidence that the depositor intended to create a joint a Guardianship tenancy, and that where such a deposit is made, the bur- In the past, some courts in New York, when dealing with den of proof is on the one challenging the presumption the existence of joint accounts in a guardianship proceed- of joint tenancy. Under § 675, three rebuttable presump- ing under Article 81 of the Mental Hygiene Law (MHL), tions are created: (1) as long as both joint tenants are liv- did not fully analyze the ramifications of the use of a joint ing, each has a present unconditional property interest account(s) by the incapacitated person. For example, in in an undivided one-half of the money deposited; (2) the past, some courts have in their proposed form for that there has been an irrevocable gift of one-half of the the findings of fact, conclusions of law and judgment funds in the account by the depositor to the other joint included an outright prohibition against the guardian tenant; and (3) that the joint tenant has a right of survi- maintaining any joint accounts as part of the guardian- vorship in said entire joint account upon the death of the ship estate. The taking of such a position by the court other joint tenant. requires the attorney for the petitioner to be cognizant Section 675(b) provides that the burden of proof is of such a position, so that he or she may be able to take upon the one challenging the presumption of joint ten- the appropriate measures, and seek the appropriate and ancy. In In re Camarda2 and In re Coddington,3 the court necessary relief as to the joint account(s) in the petition. held that the presumption of joint tenancy created by § If the court maintains a policy that joint accounts cannot

32 | October 2016 | NYSBA Journal be maintained by the guardian, it will be necessary for rights of survivorship that is entitled to the presumptions the petitioner to assess how the joint tenant(s)’ one-half of Banking Law § 675; is a “transfer on death” account interest and rights of survivorship in said joint account(s) under EPTL 13-4.1 through 13-4.12; or is merely a “for the will be impacted by the appointment of a guardian of convenience” account under Banking Law § 678. the property, and whether the joint tenant will lose his or her rights to access the funds in the joint account, as Specifically Delineate Your Proposal as to Any Joint well as his or her survivorship interest. In many instances Account(s) in the Guardianship Petition where the guardianship proceeding is being initiated by The guardianship petition should contain a clear and the spouse of the alleged incapacitated person and the concise description of the relief sought by the petitioner spouse is requesting a transfer of all joint accounts and with respect to any joint bank or brokerage account(s). assets to himself or herself (Medicaid planning/estate If a transfer of the title of the joint account from the AIP planning purposes) then the issue of how to title the to the other named joint account holder is being sought, account in the guardianship is often moot. it is necessary that same be specifically delineated in the Additionally, it requires an assessment and review of petition. The petition should also specifically identify the how and why the joint account(s) was created, who is account by its account number, name of bank or broker- entitled to notice of the relief being sought and what is his age firm, as well as the existing title on the account. It or her right to be heard. Irrespective of what the court’s should also specify the title of the account to be created proposed form judgment states, the survivorship rights once the account or any part thereof has been marshaled of a joint tenant(s) cannot and should not be terminated by the guardian, or whether an apportionment of the or modified without the joint tenant being given notice account or outright transfer to the other named account of the proposed change and an opportunity to be heard. holder is being sought. Additionally, it is critical to To accomplish this, it is necessary that the petitioner address the survivorship interest of each joint tenant in undertake a thorough investigation of the account(s) the petition. in issue and specifically delineate in the guardianship As briefly stated above, if the potential exists that the petition what is being proposed with respect to the joint AIP may need Medicaid (either nursing home or home account(s). care and/or has estate tax issues) and a transfer of the assets in a joint bank or brokerage account is being sought Identifying the Joint Accounts in the Petition for the spouse, blind or disabled child (exempt transfer(s) Section 81.08 of the MHL specifically provides for the dis- for Medicaid eligibility) it is more likely that the Guard- closure of the approximate value of any property or assets ianship Court will approve a transfer of the AIP’s interest held by the alleged incapacitated person in the petition in the account(s) to the other named title holder, without for the appointment of a guardian. It is incumbent upon any apportionment to the AIP. This is also true if no objec- the petitioner to undertake the necessary investigation to tion to the proposed transfer is made by any other inter- determine which bank or brokerage accounts the AIP has ested party to the proceeding and the AIP’s testamentary in his or her name alone or holds jointly with others or is scheme as reflected in any Last Will & Testament or trust the beneficiary of, and to disclose that information in the is consistent with the proposed transfer. guardianship petition. Obviously, complications could arise when the pro- In doing so, with respect to any bank or brokerage posed transfer is to a joint account holder who is not accounts, the petitioner should specifically identify any the spouse of the AIP. If, for example, the joint account jointly held bank or brokerage account(s), and whether holder is a child, family member or friend, there will be said joint account(s) are joint accounts entitled to the issues as to whether the child, family member or friend presumptions of § 675 of the Banking Law, or are “for the contributed any of the funds in the joint account(s), and convenience” accounts under § 678 or “transfer on death” whether the proposed transfer will create the five-year accounts with respect to any brokerage account pursuant look-back period and a period of ineligibility for nursing to the TOD and EPTL 13-4.1 through 13-4.12. The peti- home Medicaid purposes (unless it qualifies as an exempt tion should specifically identify any person who has an transfer to a spouse, blind or disabled child). There will interest in the account, the extent of his or her interest also be the issue of whether the other interested parties and whether he or she has a right of survivorship in the to the guardianship will consent to the transfer, and if account. the proceeds of the account are to be apportioned by In most cases this should not be problematic if the joint and between the account holders, how will title to each account holder is the spouse of the AIP and he or she has apportioned account be held, and what impact will the a joint account with the AIP. However, if the joint account apportionment have on the survivorship interest of holder is a child of the AIP or a third party, the petitioner each joint tenant. Whether it is in the new guardianship should obtain copies of the account signature cards and account created or the other account, the protection of the any other bank or financial institution record which may survivorship interest of each joint account holder must be describe whether the account is a joint account with addressed.

NYSBA Journal | October 2016 | 33 For example, if apportionment is not sought and 1. N.Y. Banking Law § 678. a complete transfer is made to the non-incapacitated 2. 63 A.D.2d 837. account holder, will it be necessary that the account be 3. 56 A.D.2d 697. titled “in trust for” the incapacitated person? This could 4. Kleinberg v. Heller, 38 N.Y.2d 836, 841. be problematic if the incapacitated person is a potential 5. EPTL 13-4.5. candidate for Medicaid, and the prior death of the non- incapacitated person would result in the passage of the funds by operation of law in the account to the incapacitated person. This problem may be obviated if the incapacitated party can be the beneficiary of a Supplemental or Special Needs Trust (SNT). In that event it would be CONNECT appropriate to title the account of the non-incapacitated party “in trust for” the SNT of the incapacitated party. WITH NYSBA Additionally, in order to protect the non-incapacitated account holder, it may be necessary to see that the account marshaled by the guardianship be titled “X, as Visit us on the Web: Guardian of his or her property of Y, in trust for Z” so as to protect his or her survivorship interest. www.nysba.org

Conclusion There are a multitude of differing and complex scenarios Follow us on Twitter: that could arise then dealing with joint accounts within the context of a guardianship proceeding. However, www.twitter.com/nysba irrespective of the scenario it is necessary that the petition address the issue of the joint account(s) head-on and Like us on Facebook: clearly articulate the relief sought and the basis for the position being taken. www.facebook.com/nysba Additionally, in an age where the cost of long-term care is a significant issue for most seniors, it is imperative that all Medicaid eligibility issues also be properly Join the NYSBA addressed within the context of the guardianship proceeding. n LinkedIn group: www.nysba.org/LinkedIn

Becoming a Lawyer Continued from Page 20 far so good. Next month, I begin work on my first memorandum of law, and I have chosen to represent the defendant. The most unnerving aspects of the assignment are that first, we have only a month to complete the assignment, and second, the memo cannot exceed six pages. In the past, a six-page limitation meant that assignment was getting done the night before it was due, and with ease. Given the topic, and the amount of material to cram into the memo, I am quite sure I will come to dread the six-page limitation. As I struggle with my memorandum of law, I will also be volunteering for moot court and trying to figure out how the sound waves from a speaker can cause a battery to an individual. Wish me luck. n

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34 | October 2016 | NYSBA Journal DQ-0001_NYBA_journal_SeptOct-2016.indd 1 8/31/16 10:57 AM Earlier Registered Domain Names, Later Acquired Trademarks By Gerald M. Levine

This article is reprinted with permission from the Spring/ domain names coexist with trademark domain names Summer 2016 issue of Bright Ideas, a publication of the with this difference: while domain names are limited to Intellectual Property Law Section. For information on joining the Internet, trademarks have a double identity in being the Section, visit www.nysba.org/ips. present in both actual and virtual marketplaces, a factor that enhances their value to doppelgängers unlawfully I. The Rise of Cyber-Entrepreneurs taking advantage of the good will and reputations of Trademarks have a long history; domain names are of trademarks established in actual marketplaces. recent origin. Trademarks were “invented” to “iden- While alphanumeric designations and trademarks tify and distinguish [one person’s] goods . . . from those have distinct personalities, they come into conflict and manufactured or sold by others and to indicate the source are potentially injurious to trademark owners and decep- of the goods.”1 Domain names are merely functional ele- tive to consumers when the strings are identical or con- ments “invented” to identify and link locations on the fusingly similar. Unlike identical trademarks in the actual Internet. The Lanham Act defines domain names as “any marketplace, which can coexist in different classes of alphanumeric designation which is registered with or goods and services, no two identical strings can coexist assigned by any domain name registrar . . . as part of an on the Internet. Strings that are similar can coexist, but electronic address on the Internet.”2 as their similarities morph to the confusing end of the It took only a short time after the introduction of the spectrum, they too may encroach on statutorily reserved Internet for entrepreneurs to figure out how to profit by rights. buying domain names unassociated with trademarks and Occupying locations on the Internet that arguably using them to generate income either through pay-per- infringe third-party rights represent a potential threat click search sites or holding them in inventory for future to the integrity of existing trademarks. This threat sale. With one caveat – that registrations not purposefully Gerald M. Levine is a partner in Levine Samuel, LLP in New York City, infringe third-party rights – there was not then and there and the author of a treatise on trademarks, domain names, and cybers- is not now anything unlawful in registering strings of quatting, Domain Name Arbitration, A Practical Guide to Asserting and characters that happen to correspond to existing trade- Defending Claims of Cybersquatting (Legal Corner Press 2015). marks. Absent a legal basis for forfeiture, non-trademark

36 | October 2016 | NYSBA Journal was met in 1999 by the introduction of two remedial the complainant had some rights in the SUCCESS BANK regimes designed specifically to protect trademark own- mark, they were “junior to the rights of Respondent due ers: the Uniform Domain Name Dispute Resolution to registration of the domain.” The Panel criticized the Policy (UDRP),3 an alternative, online dispute resolu- complainant for “stretch[ing] [their] argument to the tion process implemented by the Internet Corporation extreme.” If the law were as the complainant wanted it for Assigned Names and Numbers (ICANN), and the to be, the Panel wrote, then any owner of later acquired Anticybersquatting Consumer Protection Act (ACPA), a trademarks “could peruse the lightly used or parked statutory scheme that is incorporated into the Lanham domains, initiate a trademark registration application Act.4 years after the . . . disputed domain name was registered and then claim UDRP rights in the domain under the first II. Priority element of the UDRP.” As the Policy has been construed, bad-faith use alone is The Panel’s reasoning in Success Bank represents the not a predicate for forfeiture.5 Unless complainant proves consensus view of the parties’ respective rights in these that respondent both registered the domain name in bad circumstances, but it does not address the problem posed faith and is using it in bad faith – a conjunctive or binary by domain names registered prior to trademark acquisi- requirement as opposed to the disjunctive requirement of tion that subsequently resolve to infringing websites. the ACPA – it cannot prevail on its complaint. Generally speaking, domain names that predate the existence of III. Departing from the Consensus trademarks, even if their holders commence using them I have pointed out previously that the development of the in bad faith, cannot by definition have been registered in UDRP is in the common-law tradition.9 In deciding cases bad faith. The consensus view is set forth in paragraph Panels are not limited to “statements and documents sub- 3.1 of the WIPO Overview of WIPO Panel Views on mitted” by the parties but may apply “any rules and prin- Selected UDRP Questions: ciples of law that [they] deem applicable.”10 The consen- [W]hen a domain name is registered by the respondent sus that bad-faith use following good-faith registration before the complainant’s relied-upon trademark right is not actionable even though registrants are obviously is shown to have been first established (whether on engaged in cyberpiracy is the product of construction, a registered or unregistered basis), the registration of not statute, and it has been challenged by a new construc- the domain name would not have been in bad faith tion – first by the panelist who established it in the first because the registrant could not have contemplated decided case under the UDRP, World Wrestling Federation the complainant’s then non-existent right.6 Entertainment, Inc. v. Michael Bosman,11 before recanting In other words, the owners of later-acquired trade- it nine years later in City Views Limited v. Moniker Privacy marks complaining that earlier registered corresponding Service / Xander, Jeduyu, Algebralive, D2009-0643 and domain names are infringing have no basis for cybers- Octogen Pharmacal Company, Inc. v. Domains By Proxy, Inc./ quatting claims. The ACPA is more explicit in requiring Rich Sanders and Octogen e-Solutions12 (the Mummygold that the plaintiff’s marks must have been “distinctive at line of cases), and then by others applying this new con- the time of the registration of the domain name.”7 This struction in sometimes inappropriate circumstances. means that the owners of later-acquired trademarks lack The new construction rests on two principal proposi- standing for a cybersquatting claim, although they still tions: first, that registrants are bound contractually by may have a viable claim under the Lanham Act. This limi- their representations in the registration agreements, and tation of the UDRP has resulted in complaints by trade- second, that the Policy should be read as requiring in mark owners that they are left with no remedy against appropriate fact situations a retroactive finding of bad- bad-faith use by domain name holders taking advantage faith registration based on subsequent bad-faith use for of the rising reputations of later-acquired trademarks. breach of warranty. This is known as the unitary view This objection presupposes bad-faith use after trademark of the Policy, as opposed to the consensus view that the owners have established a reputation in the marketplace Policy requires a binary finding, i.e., that bad faith use even though the domain name preceded the establish- alone is insufficient to prove cybersquatting ment of rights in the trademark. While the Mummygold view has not dislodged the This situation is distinguishable from the common consensus that bad-faith use but good-faith registration is situation illustrated in Success Bank v. ZootGraphics c/o beyond the scope of the Policy – embodied most notably Ira Zoot,8 in which the complainant had no commercial in Guru Denim Inc. v. Ibrahim Ali Ibrahim abu-Harb,13 in presence as “Success Bank” when the domain name was which the dissenting panelist was the Mummygold Panel registered but later rebranded itself before obtaining a – it nevertheless has opened up a vigorous conversa- federal registration for the term. It nevertheless argued tion on the issue of bad-faith use following renewal as that having a registered trademark made its right to evidence of bad-faith registration. In particular, against superior to the respondent’s right to the backdrop of Mummygold, the Panel in Eastman Sporto the domain name. The Panel pointed out that although Group LLC v. Jim and Kenny14 introduced a new reading of

NYSBA Journal | October 2016 | 37 the Policy by focusing on pre- and post-renewal conduct. WIPO Overview: “While the transfer of a domain name Before discussing Eastman Sporto, I summarize the legal to a third party does amount to a new registration, reasoning underlying both the Mummygold and Eastman a mere renewal of a domain name has not generally been Sporto views. treated as a new registration for the purpose of assessing bad First, trademark owners are either third-party ben- faith” (emphasis added). Generally, renewal is regarded eficiaries of registration agreements, in which case they as a continuation of registration. However, the WIPO have derivative claims for registrants’ breaches of their Overview does recognize that Panels are beginning to representations and warranties in their registration agree- “consider the renewal of a domain name as equivalent ments, or they have direct claims for registrants’ viola- to a new registration in certain circumstances, includ- tions of paragraph 2 of the Policy. Below is a side-by-side ing where it is found that: the registrant changed its use comparison of the two representations:

Registration Agreement Paragraph 2 of the Policy You agree and warrant that: (i) neither your registration (a) the statements that you made in your Registration nor use of the any of the Network Solutions services nor the Agreement are complete and accurate; (b) to your manner in which you intend to use such Network Solutions knowledge, the registration of the domain name will Services will directly or indirectly infringe the legal rights of not infringe upon or otherwise violate the rights of any a third party . . . and (vi) you agree to comply with all third party; (c) you are not registering the domain name for applicable laws and regulations” (emphasis added). an unlawful purpose; and (d) you will not knowingly use the domain name in violation of any applicable laws or regulations (emphasis added).

Note that while these provisions are similar, they of the domain name prior to renewal [and continued not identical. They both extract promises from regis- the bad faith thereafter].”15 trants about their purposes for registering and using The most recent case applying a version of the domain names, but Paragraph 2 is more severe by Mummygold reasoning without directly citing it is Camilla introducing the concept that a registration could be Australia Pty Ltd v. Domain Name Admin, Mrs. Jello, LLC,16 “unlawful” – particularly Paragraphs 2(c) and (d). It in which a three-member Panel including the recanter in naturally provokes a question about the offending Guru Denim (but now joined with like-minded panelists) use: What if, contrary to their representations, holders held that the representation and warranty applies to “the (having registered their domain names lawfully before registrant’s future conduct made at the time the registrant the existence of a trademark) begin using their domain applies for registration of a domain name.”17 names unlawfully after a later-acquired trademark has While the Mummygold reasoning is essentially at a developed a reputation? dead end notwithstanding Camilla, this is not true of the The new construction has two branches. Panels Eastman Sporto construction. Dissatisfaction with the con- adhering to Branch #1 (the “Mummygold” line of cases) sensus was first voiced in a 2004 case, PAA Laboratories take the position that bad-faith use alone is sufficient GmbH v. Printing Arts America.18 The Panel there held to find abusive registration. They reject the consensus that “[t]he abusive refreshing of the original registration view noted earlier – that complainants must prove that is an act which this Panel considers should be an act of respondents both registered and are using the domain a kind encompassed by paragraph 4(a)(iii) of the Policy.” name in bad faith – and argue that registrants’ rep- It then stated that the “benefit of an original good faith resentations that they will not use domain names for registration should not be perpetual to the point where any unlawful purpose are a continuing obligation, not it can cloak successors in title and successors in ‘pos- simply limited in time to the purchase of the domain session’ long after the original registration would have name. The Panels of this view are reinforced by their expired.” Notwithstanding this view, the Panel “reluc- reading of the preamble to paragraph 4(b) of the Policy tantly” denied the complaint because of “the need for to mean that the Policy requirement is not binary but consistency and comity in domain name dispute ‘juris- unitary. They convert the “and” to an “or.” Such a read- prudence.’” ing brings the UDRP into alignment with the disjunc- The Eastman Sporto Panel stated that he “share[d] tive model of the ACPA (see n.5). [PAA Panel’s] reservations,” but instead of acquiescing, Panels adhering to Branch #2 (the “Eastman Sporto” it rejected the traditional approach.19 The Panel held that line of cases) propose a less dramatic departure from subsequent bad-faith use “should be an act of a kind the consensus. They take the view that the assessment encompassed by paragraph 4(a)(iii)” and concluded that of bad faith restarts upon renewal of registration. While “[b]ased upon the record in this proceeding . . . [the] this construction makes sense, it too is inconsistent Panel deems Respondent’s 2009 renewal of the disputed with consensus as reported in Paragraph 3.7 of the domain name to be the date on which to measure wheth-

38 | October 2016 | NYSBA Journal er the disputed domain name was registered and used in that the domain registrant “register[ed], traffic[ked] in, or bad faith.” used the domain name” in bad faith. n The Eastman Sporto reasoning – that forfeiture is justi- fied when respondents intentionally change their uses 1. 15 U.S.C. § 1127. of domain names to take advantage of complainants’ 2. Id. 3. Implemented by the Internet Corporation for Assigned Names and marks – was applied recently in Adam Milstein v. Benjamin Numbers (ICANN) following a two-year study commencing in 1997 and Doherty.20 The Panel there held that “[w]hat is at issue publication of a Final Report in April 1999 by the World Intellectual Property here is the deliberate creating of a false impression by reg- Organization (WIPO). istering a domain name using the entirety of another per- 4. 15 U.S.C. § 1125(e). 5. In contrast, the ACPA is an either/or model. Assuming trademarks were son’s name without permission and . . . [continuing that distinctive when domain names were registered, domain names can be for- use after renewal of registration].” The factor that triggers feited on proof registrants either registered, trafficked in, or used them in bad a finding of abusive registration after renewal rests on the faith. 6. http://www.wipo.int/amc/en/domains/search/overview/index. continuation of bad-faith use with knowledge that the html#31. use that began before renewal continues to be infringing, 7. 15 U.S.C. § 1125(d)(1)(ii)(I and II). which is sure evidence of breach of registrant’s registra- 8. FA0904001259918 (Nat. Arb. Forum June 29, 2009). tion agreement and violation of paragraph 2 of the Policy. 9. Domain Name Arbitration, section 4.01-A (Sources of UDRP law). 10. Rule 15(a) of the Policy. IV. Conclusion 11. D99-0001 (WIPO Jan. 14, 2000) (Scott Donahey, sole panelist). Decisions favorable to trademark owners in branch 12. D2009-0643 (WIPO July 3, 2009) and D2009-0786 (WIPO Aug. 19, 2009). #1 have become extremely rare because the majority of 13. D2013-1324 (WIPO Sept. 27, 2013) in which Mr. Donahey sitting as a panelists are not in favor of amending the UDRP by con- wing in a three-member panel dissented: “It would be much easier for this panelist to maintain that his original decision [approving the binary concept] struction. In contrast, Panels are more willing to find that was correct, and not recant. But in view of the evidence [of the correctness of bad-faith use commencing before and continuing after the unitary view], I am unable to do so.” renewal of registration is actionable is a commonsense 14. D2009-1688 (WIPO March 1, 2010). development of the jurisprudence, not a departure from 15. Paragraph 3.7, supra. it. In fact, as these renewal cases come down, it is becom- 16. D2015-1593 (WIPO November 30, 2015) (Mr. Donahey is a panel mem- ing increasingly clear that where warranted by the facts, ber). the Panel in Eastman Sporto was right, and the Panel in 17. Camilla Australia, supra. PAA was wrong. This conclusion would not be surpris- 18. D2004-0338 (WIPO July 13, 2004). ing under the ACPA because the statute is an either/or 19. Eastman Sporto, supra. model: a trademark owner satisfies its burden by proving 20. FA1511001647496 (Forum January 11, 2016).

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NYSBA Journal | October 2016 | 39 Spies, Lies and a Hollow Nickel A former prosecutor recalls his role in convicting Soviet spy Rudolf Abel

SPY's PROSECUTOR, Assistant Attorney General Tompkins, who directed the operation which resulted in Abel's arraignment, stands in the arcade of Brooklyn federal courthouse with his special assistants, Anthony R. Palermo (left) and James J. Featherstone. (This photo and caption appeared in the August 19, 19578 issue of Life.)

ith its release last year, the Steven Spielberg movie excellent movie that focuses attention on issues that Bridge of Spies sparked renewed interest in Cold existed back in the 1950s and how it’s relevant today – the WWar espionage, specifically the arrest and conviction ability to communicate, to negotiate, to understand your of a high KGB operative known as Col. Rudolf Abel, who was friends and to understand your enemies . . . But the movie later swapped for U2 pilot Francis Gary Powers. In 1964, James does not really spend much time about the trial itself and B. Donovan, Abel’s defense counsel, recounted his experiences very importantly doesn’t spend an awful lot of time on in a best-selling book titled Strangers on a Bridge, portions how the man known as Abel was apprehended. So my of which were extracted for an article in the June 2016 issue of remarks today, speaking to a lawyers group, may focus the Journal. But what about the prosecution? That side of the more on legal issues. I’m looking at my original memo- story might have remained an afterthought were it not for Tony randum that I personally prepared and submitted in Palermo, the sole surviving member of the government team opposition to the (defense) motion to suppress evidence that prevailed all the way up to the Supreme Court. Recently, and declare the search illegal, [which] the government Mr. Palermo, a former NYSBA President, has been in the spot- prevailed on in the trial court, the government prevailed light, including an article by Rosemary Byrne in the Spring on in the Court of Appeals and the government prevailed 2016 Senior Lawyer newsletter, published by NYSBA, and on after arguing two times in the United States Supreme talks before various audiences. He was a panelist in a November Court, albeit by a narrow margin of 5 to 4 (see excerpts of 4, 2015 discussion at the Brooklyn Historical Society, televised the memorandum on page 44). by C-SPAN, and a panelist on an ABC Radio talk show from Los Angeles the day before Mark Rylance won an Oscar for his Facts vs. Dramatic Effect portrayal of Abel. Below is a condensed version of a talk Mr. I was happy to see that (in the movie) the profession Palermo gave on November 24, 2015 before the Monroe County was held to be an honorable profession, as I have always Bar Association, titled “Recollections of a Prosecutor: Trial of believed that we are. They [movie producers/scriptwrit- KGB Master Spy Rudolf Abel.” Comments in brackets have ers] had a couple of things that were wrong ethically. been added by Mr. Palermo for clarity and continuity. Back-dooring the prosecution by talking to the judge at his home about sentencing is not a very ethical thing to Introduction do, and Donovan did not do that. The fact of the matter We have to thank Steven Spielberg, Tom Hanks (who is, Donovan and the prosecution did meet with the court portrayed James Donovan), and Mark Rylance for an and did explain how we felt about the issue of sentencing

40 | October 2016 | NYSBA Journal and, to his credit, Jim Donovan did raise the issue both not believe the integrity, the experience, the linguistic in private sessions with the court as well as in public on ability, the mathematical ability, everything this man pos- the record, in which he said, “You know, it might be in sessed) . . . ultimately was himself responsible for getting the best interest of the United States if we don’t sentence Jim Donovan appointed. this man to death, because he may very well be useful in exchanging someone, maybe we’ve got somebody that The Indictment Is Shared we would like back.” And lo and behold, five years later, Incidentally, in the transcript that I alluded to where Abel that is indeed what happened. asked about (getting a lawyer) he also says, “May I have, may I see the indictment?” The judge said, “Well, these Who Initiated the Prisoner Swap? are legal things and normally we give the indictment to I’m not sure we’ll ever know whether it was the United lawyers. But you seem like an intelligent man. Can we get States that initiated it. . . . [T]he day of the exchange I was a copy of the indictment for this defendant?” And I said, called, I think around six o’clock in the morning, maybe “I have a copy, your honor.” So I’m the guy who handed it was five o’clock, by the Democrat and Chronicle. They the indictment to Abel. And it’s a fascinating document. In knew that I had been involved in the case and asked me terms of the conspiracy that’s alleged, the overt acts that

I was happy to see that (in the movie) the profession was held to be an honorable profession, as I have always believed that we are. what I thought and I said, “Gee, we’re giving up a real are alleged, they made some very interesting reading and spy and what are we getting, we’re getting an airplane I believe for the most part we proved every one of them. pilot.” Well, at the time, we didn’t know that this flying over Russia had been going on for six years, that we The Hollow Nickel had massive coverage of everything that was going on I think this is a fascinating story. The newsboy, James in the Soviet Union and that the plane shouldn’t have Bozart, was collecting for the Brooklyn Eagle in his neigh- been found and the pilot shouldn’t have been found. So borhood and in the course of receiving a collection . . . he my guess is that we might very well have said the time found it sounded a little bit different. He found 45 cents has come . . . but I’m still not sure who initiated that [the and he knew that this person always gave him 50 cents. exchange]. So he continued to feel around on the landing where he had dropped these coins and he found half of one nickel Assignment of Counsel and half of another one. He found a piece of photographic The indictment was handed down on August 7 and paper stuck in a hollow chamber on one of the halves of Assistant Attorney General [William F.] Tompkins, Jim the nickel [which contained an encrypted numeric mes- Featherstone and I are the guys who presented the case to sage on microfiche, an important piece of evidence for the the grand jury and got the indictment. Abel was known prosecution]. to the government only by a lot of other names, and so the indictment reads “USA vs. Rudolph Ivanovich Abel, Cracking the Code aka “Mark,” aka Martin Collins, aka Emil R. Goldfus, The nickel [microfiche] had a lot of numbers on it, col- Defendant.” Well, the transcript gets into the Bar Asso- umns of numbers. And the finest intelligence agencies of ciation [involvement] because there’s this dialogue of the the United States, all of them, including the secret ones judge [Judge Matthew Abruzzo] asking do you have a that we didn’t know about, could not decode this mes- lawyer, do you want me to appoint a lawyer? The court sage until one day in May, 1957, a guy (Reino Hayhanen) explains that this is a capital case and he is allowed to walks into the embassy in Paris and says, “I’m a spy and appoint one or two lawyers. . . . And so finally, Abel said, I’ve been operating in the United States of America and “Well, I think that’s a good idea but would you consider I’m going back to Moscow and I don’t think I’m going checking with the Bar Association?” [The request demon- back for a vacation. So could I have asylum?” And he tells strates Abel’s intelligence and his comprehension of the a lot of stories about how they operated, the methods of American legal system, as well as his astuteness in avoid- a secret network of communication with all sorts of drop ing potential government involvement in his defense, as areas and signal areas and mechanisms with hollowed the movie Bridge of Spies implies.] It’s fascinating that in out pencils and hollowed out coins and trick devices and a case of this magnitude, the idea that this intelligent spy so forth. And bingo, that coin that we hadn’t been able to (and his background is absolutely incredible; you would (decode), it was broken.

NYSBA Journal | October 2016 | 41 Well, the code, basically, it says, “Welcome to the Unit- [which was later determined to belong to Abel, who had ed States. This is how you communicate. You’re going to loaned his typewriter to an artist friend before his arrest. be given money, your family is fine.” There were all sorts On the witness stand, the friend, the artist Burt Silver- of mechanisms as to how he had backup in case a signal man, was upset at having his honeymoon in Italy cut was missed. short in order to testify and said he could not definitively identify the typewriter as Abel’s. However, it was linked Drop Areas to him through a serial number and receipt that Silver- There was a drop area in a hole in a step in Prospect Park man had signed when he turned the typewriter over to at a certain entrance. And the FBI goes to Prospect Park the FBI.] and they discover that there is not a hole there, the whole step had been repaired. They break it open and would The Training of a Spy you believe they found inside of it a metal bolt. And the This guy Hayhanen was trained for over 20 years in Fin- metal bolt, when examined by the FBI laboratory, opens land with a new identity and a new background. This is up and inside is microfiche and a typewritten message the extent to which the espionage system was working

Excerpts from the Majority Decision and Dissents On March 28, 1960, the Supreme Court, in a 5-4 deci- Mr. Justice Douglas, with whom Mr. Justice Black sion, upheld the conviction of Soviet spy Rudolph Abel. concurs, dissenting: Below are excerpts from the majority decision written by No effort was made by the FBI to obtain a search Justice Frankfurter and the dissents of Justice Douglas and warrant from any judicial officer, though, as I said, Justice Brennan. there was plenty of time for such an application. Mr. Justice Frankfurter delivered the opinion of the The administrative warrant of arrest was chosen Court: with care and calculation as the vehicle through which the arrest and search were to be made. The The question in this case is whether seven items were FBI had an agreement with the officials of INS that properly admitted into evidence at the petitioner’s this warrant of arrest would not be served at least trial for conspiracy to commit espionage. All seven until petitioner refused to “cooperate.” items were seized by officers of the Government without a search warrant. The seizures did not occur * * * in connection with the exertion of the criminal process The issue is not whether these FBI agents acted in against petitioner. They arose out of his administrative bad faith. Of course, they did not. The question is arrest by the United States Immigration and Natural- how far zeal may be permitted to carry officials ization Service as a preliminary to his deportation. bent on law enforcement. . . . The facts seem to me clearly to establish that the FBI agents wore the * * * mask of INS to do what otherwise they could not Petitioner’s basic contention comes down to this: have done. even without a showing of bad faith, the FBI and * * * INS must be held to have cooperated to an imper- missible extent in this case, the case being one where Mr. Justice Brennan, with whom the Chief Justice, Mr. the alien arrested by the INS for deportation was Justice Black and Mr. Justice Douglas join, dissenting: also suspected by the FBI of crime. At worst, it may be said that the circumstances of this case reveal an These arrest procedures, as exemplified here, differ opportunity for abuse of the administrative arrest. as night from day from the processes of an arrest But to hold illegitimate, in the absence of bad faith, for crime. When the power to make broad, war- the cooperation between INS and FBI would be to rantless search is added to them, we create a com- ignore the scope of rightful cooperation between two plete concentration of power in executive officers branches of a single Department of Justice concerned over the person and effects of the individual. We with enforcement of different areas of law under the completely remove any independent control over common authority of the Attorney General. the powers of executive officers to make searches. They may take any man they think to be a deport- * * * able alien into their own custody, hold him without Surely no consideration of civil liberties commends arraignment or bond, and, having been careful to discouragement of such cooperation between these apprehend him at home, make a search generally two branches when undertaken in good faith. When through his premises. I cannot see how this can be undertaken in bad faith to avoid constitutional said to be consistent with the Fourth Amendment’s restraints upon criminal law enforcement the evi- command; it was, rather, against such a concentra- dence must be suppressed. That is not, as we have tion of executive power over the privacy of the seen, this case. individual that the Fourth Amendment was raised.

42 | October 2016 | NYSBA Journal and the curiosity as to how successful it was is part of the talking about today and it’s relevant to society as we find reason why for the last 58 years I’ve been continuing to it today – what do you do with immigrants, do you hold ask who was Abel, what did he accomplish and so forth. them? There’s a lot of literature now that demonstrates that he We continued to talk with Hayhanen and the investi- was extremely successful and basically was probably in gation continued and kept piling up, and we really knew charge of the network of North and South America. that this was the big cheese. I mean, you’ve got connec- And he was a very humble, reasonable, rational per- tions with the Rosenbergs and the message that was son. He really was. Well, the guy who turns on him tells found in Prospect Park led to a Sergeant Rhodes, who us all these things about him and we obviously scour the had been recruited to work with the Soviets when he was neighborhood. One of the places where he had been is a mechanic [in charge of the motor pool] at the American right across from the Federal Courthouse. There was a Embassy in Moscow. So we [government investigators] studio building, which is no longer there now, and they kept uncovering stuff and it [the investigation] was on a find that, yes, there is such a person that bears resem- fast track. That’s probably one of the reasons that I was blance to that [Hayhanen’s description of Abel] and his on the case. I was asked to go up to New York City for name is Emil Goldfus and yes, he’s an artist and has a two days and I took my toothpaste and two white shirts studio on the fifth floor. and a suit. And six months later I got back to Washington. At this point, and it’s at a much higher level than We were on a very, very fast track. I interviewed all of yours truly, somebody is making a decision, what do we those FBI agents and the Immigration and Naturalization do? And at that point, Hayhanen, the defector, is wor- agents. I got their affidavits, I prepared them both for ried about his family back in Russia. He’s worried about grand jury and for trial, the hearing before Judge [Mor- the spot [target] that’s on his back and he is not about timer] Byers and so forth. to testify. And he is saying, “I refuse to testify.” So the There was no time. I read in Jim Donovan’s book Department of Justice, which happens to be made up [how] he [was] trying to figure out what he’s doing and of a lot of different entities, at the time the Immigration he focuses on the constitutional issue and he’s saying and Naturalization Service, the FBI, the Internal Security the government has been following this guy for two Division, etc., at the highest level has got to decide what years, they know all about him and they’ve got reams we’re going to do here. Essentially, they decided that of lawyers and research being done, and I’m reading the they would try to see if they could get this guy to coop- book and saying, “Huh? That’s me.” First year out of erate with them. And the FBI went into the hotel room law school. I graduated from Georgetown Law School in (not quite as shown in the movie), but they did talk with September, joined the Justice Department in November him for a half hour, addressed him as Colonel, and said, and this is now July of the next year, I’m not even out one “Would you cooperate with us?” And he said, “What are year. Basically, I’m the guy that’s doing this research. And you talking about?” They said, “Well, you’re going to be there was no case law on the issue. And I’m thinking, arrested if you don’t cooperate.” He said, “Well, I don’t how come every time they get a legal problem, there’s no know what you’re talking about.” So they call in the INS authority? agents who are out in the hall and basically the arrest Audience question: To what extent at that time and was made. today do we know the exact information that he acquired and transmitted? The Legal Issue Answer: That’s part of the inquiry we make in terms The INS agents had a civil administrative warrant, not of evaluating the success of the conspiracy. All you have a criminal warrant, and the legal issue is, can you seize to do is establish the agreement to obtain information [evidence]? In the process of packing they noticed that and in this instance it happened to be atomic and security Abel was trying to conceal things, tucking things up his information. And that’s what we provided. What really sleeve and even throwing things into the toilet. And then did he acquire and how successful was he? One of the he discarded stuff. He chose what stuff he would put into things that we put in, one of the facts, was payment of his suitcase and he discarded stuff into the waste basket. money to the Rosenberg group. That’s just one illustra- After he left, the FBI went to the owner of the hotel and tion that there were successes. The Rhodes situation said we’d like permission to search the basket, and the – that was critical in our case because that’s essentially basket contained incredible stuff with hollowed out pen- how we got the interest in atomic energy and atomic cils, reams of information, radio receiving schedules and bombs. And Rhodes had a brother who was employed all sorts of good things, letters from home. in an atomic facility and so that’s the type of proof that So that’s where the legal issue comes in and you’ve got we had. . . . I’ve got a long list of primarily high level to give Donovan and his team credit. He had two former KGB people who have defected and have written books, Assistant U.S. Attorneys from the Southern District of including one that is ironic. [It’s about] the heat-sensitive New York who worked with him on the case and they thermal thing that’s used to find metal and used in mis- recognized the legal issue and that’s the one we’re still siles to find the target. And that is something that came

NYSBA Journal | October 2016 | 43 through the Rosenberg network and is believed to have You don’t decide victory by whether you win or lose, it’s been monitored and used by Abel. That particular device whether or not justice is done. And that’s the approach is probably what brought down Gary Powers’ plane. For that we argued both to the jury and throughout. six years as the planes were flying over Russia, the Rus- I was surprised that the Powers’ sentence was 10 sians did not have the capacity to bring down that plane. years. Considering what he was doing and what informa- But it’s theft of that information which probably brought tion the United States was getting with those flights over down Powers and brought down our planes in Vietnam, Russia, I think they were fairer on the sentencing than the as a matter of fact. United States was. I do think he [Abel] had a fair trial and let me say And I probably shouldn’t say this, but my guess is this: If you read the summation of [Assistant Attorney that all was not in unison in terms of how you conduct General] Tompkins, it’s something that you can be proud [defend] this case. How do you defend a guy when you of, it’s something I’ve always stood for and I’ve been on have the evidence that we were able to bring to this case both sides, as a prosecutor for five years with the Justice . . . where do you go? I’m thinking, even in retrospect, Department [and as a court-assigned and independent 58 years later, how would I have tried to examine that criminal defense counsel]. I was a special prosecutor for witness [Rhodes] and I’m not sure I would have spent a the District Attorney’s Office. The role of the prosecutor hell of a lot of time on it. But Donovan did. And essen- is to see that justice is done, it’s not to get a conviction. tially, his approach was, even to the jury, that Abel was a

Excerpts from Palermo’s Memorandum

The following are excerpts from Tony Palermo’s Under Petitioner’s contention that the Government memorandum in opposition to Abel’s petition in the was in “bad faith” in proceeding against him under Southern District of New York for return of property the Immigration Laws (i.e., statutes under which the and suppression of evidence: Government could proceed) and not commencing a prosecution under the Espionage Laws (i.e., statutes Point I under which the Government could not legally Petitioner contends that the search and seizure involved proceed), the only way the Government could function in good faith would be to do nothing against in this case was illegal because the warrant on which he Petitioner at all. was arrested was a “civil” one and did not charge the commission of a crime. In the circumstances of this case, Immigration Assuming, for the sake of Petitioner’s argument, that authorities not only had the right but the duty to it is the nature of the charge in an arrest warrant which apprehend the Petitioner and proceed against him for controls the legality of any search which follows as deportation . . . an incident to arrest, the Government does not agree * * * with Petitioner’s classification that he was arrested Their search here . . . was not a general explora- on a “civil warrant.” The cases which Petitioner cites tion but was specifically directed to the means and do not support his contention, but rather, they stand instrumentalities by which the Petitioner effected for the proposition that deportation proceedings, not and concealed his illegal entry into the United States, the issuance of an alien arrest warrant, are civil and the charge in the Arrest Warrant. not criminal proceedings. Point III * * * In his application, Petitioner requests the Court for an Thus, we feel it is incorrect to label an arrest under order directing the return and the suppression for use such an Alien Warrant as “civil arrest.” It would be as evidence of “any and all property seized on the 21st equally incorrect to refer to it as a “criminal arrest.” day of June, 1957 in Room 839, Hotel Latham, 4 East It is more appropriately termed a sui generis arrest, 28th Street, New York, New York . . .” authorized by Congress in exercise of its power to deport aliens . . . * * * He does not lay any specific claim to any article nor Point II does he allege that articles were taken from him. It is well settled law that a search without warrant may Therefore, assuming for the sake of argument that be reasonable as an incident to a lawful arrest. the search and seizure after Petitioner’s departure * * * were unlawful, Petitioner is without standing to move to suppress or to assert any rights under the It seems to be Petitioner’s contention that because the Fourth Amendment because he has failed to claim government suspected him of espionage, they could any possessory or proprietary interest in the articles proceed against him only on espionage charges. which he now seeks to suppress for use as evidence.

44 | October 2016 | NYSBA Journal patriot, he was not a traitor, [but] this guy [Rhodes] was So yeah, it was a fast track. You don’t get faster justice a traitor. So I’m thinking to myself, then and now, how than that. does that help you defend this particular accused? But I Audience question: Tony, did you say before I came in honestly don’t know how you could have done it. what happened to Abel? Audience question: The movie obviously suggested Answer: Essentially they gave him roles of teaching that the judge had made up his mind and this is a slam and going around and showcasing him and he was not a dunk, let’s get this thing over with. Is that the impression happy camper. He died 10 years after the exchange and that you got? they buried him . . . next to his father, and I think I may Answer: It was extremely critical that the case go have mentioned this – his father happened to have been a forward. And basically, the judge [Byers] did indicate friend of Lenin. And the family was not very happy that that it is going to go forward. The whole question [was his tombstone read Rudolf Abel. According to some of the where] the [defense] motion for a suppression and return books that I’ve read, it was a code that if he was arrested of property would take place – in the Eastern District and was not cooperating and everything was fine, he [Brooklyn, where the criminal charges were pending] or would use the name of Rudolf Abel, who was a colleague the Southern District of New York [Manhattan, where the of his and a dear friend. His family petitioned to have that hotel evidence was seized]. So Donovan and his team did [tombstone markings] changed and they re-carved the try to postpone and we argued the motion that they made stone to also have Willy Fisher [Abel’s real name]. Wil- [in the Southern District], and they made it right away, liam Fisher was born in Newcastle in England in 1903, on and we had to work up affidavits and so forth over in the July 11, which happens to be the date the Second Circuit Southern District [and] argued before Judge [Sylvester] came down with the opinion affirming his conviction. Ryan, and he reserved decision on it. And the case is now scheduled to start and Ryan ends up deciding, “I’m going Editor’s Note: When the Abel case was finally decided at the to exercise discretion and I’m going to deny the motion Supreme Court, Chief Justice Warren wrote a note of thanks and reserve your rights to make it before the trial court.” and praise for the work of the defense team. It would take a They [defense team] took it up to the Second Circuit. And while longer for Tony Palermo to receive his just recognition for the Second Circuit declined to do anything with it. So it his role as part of the prosecution, but it came in January, 1958, now comes back before [Eastern District] Judge Byers after he had resigned from the Justice Department to become and he says, “Okay, can we agree on things that you can Assistant U.S. Attorney in the Southern District of New York. return?” We’ll give him back his money – but we’re not In accepting the resignation, Attorney General William F. giving him back the stuff that we’re using as evidence.” Tompkins wished Tony well and noted, “I should like at this And that’s what the issues focused on in the hearing. The time to express my appreciation for the outstanding services hearing went on for two days and the judge ended up you have rendered to the Department in everything you have with a decision promptly. I think it was October 6 and undertaken and, particularly, in the prosecution and conviction the jury commenced, opening statements were made on of Rudolf Abel.” n October 14 and we [the trial] went through October 25.

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NYSBA Journal | October 2016 | 45 CONTRACTS BY PETER SIVIGLIA

Peter Siviglia has practiced law in New York for more than 50 years, representing clients both domestic and foreign, public and private. He has served as special counsel to other firms on contract matters and negotiating. Peter is the author of Commercial Agreements – A Lawyer’s Guide to Drafting and Negotiating, Thomson Reuters, supplemented annually; Writing Contracts, a Distinct Discipline, Carolina Academic Press; and numerous articles on writing contracts and other legal topics, many of which have appeared in this Journal.

Two Laws and a Case

his article is broken into two “every limited liability company,” and companies in a jurisdiction that insu- parts. Part I discusses § 630 of it does not contain the New York State lates shareholders and LLC members Tthe N.Y. Business Corporation limitation on unpaid services. The lan- from all company debt in the hope Law (BCL) and § 609 of the N.Y. guage of LLCL § 609 – “every limited that any attempt to enforce a New Limited Liability Company Law liability company” – probably com- York judgement in that other jurisdic- (LLCL), which impose on the 10 larg- prehends both domestic and foreign tion would be denied as against public est shareholders and members of pri- LLCs; but, in assessing this conclusion, policy, which is an exception to the vately held corporations and LLCs please examine LLCL § 102(k) and (m) full faith and credit clause of the U.S. liability for the company’s compensa- defining foreign and domestic LLCs Constitution. tion obligations. Part II discusses a and LLCs generally without the “for- recent Appellate Division case that eign” or “domestic” designation. C. Additional Considerations deals with the application of the stat- Also, the N.Y. Partnership Law, in 1. In any event, lawyers must advise ute of limitations to warranties. Both respect of limited partnerships, does clients beginning business in and parts will offer suggestions to address not yet contain provisions similar to expanding business into New York the issues revealed. BCL § 630 and LLCL § 609. of these rules. Lawyers should also advise clients with existing businesses Part I: Liability of Shareholders B. Possible Antidotes (Somewhat in New York of these rules. and LLC Members for the Convoluted; Not Vetted by the 2. Consider whether to try to obtain Company’s Compensation Courts; But Surely Fun to Consider) liability insurance against the risk. It Obligations 1. Use a limited partnership as the may well be proper for the company operating company with a corpora- to pay the premiums for that insur- A. The Two Laws tion or LLC as the sole general partner ance to induce the investment in the As a general rule, shareholders and in which the limited partners (either company. members of an LLC are not liable for corporations or LLCs) are shareholders the debts of their companies. However, or members of the general partner and D. Musings under BCL § 630 and LLCL § 609, elect the directors or managers that I wonder why lawmakers devise laws the 10 largest shareholders and mem- determine how the general partner that might well deter entrepreneurs bers (as determined by value) of pri- will run the partnership. and businesses from investing in New vately held corporations and LLCs, 2. Have the investors use one or York unless the rationale is to stimulate both domestic and foreign, are liable more intervening corporations or LLCs legal business in our state. for compensation obligations of their as the shareholders or members of the companies. operating company. To address the risk Part II: Warranties vs. the Statute Interestingly, BCL § 630 was recently of piercing the corporate veil, the inter- of Limitations amended (A) to state that it applies to vening entities should be reasonably In Deutsche Bank Nat’l Trust Co. both “domestic” and “foreign” LLCs, capitalized, say by at least the amount v. Flagstar Capital Mkts. Corp., 1 the and (B) to limit its application to com- of the initial investments in the operat- Appellate Division, First Department, pensation for “unpaid services . . . pering company. was asked to decide whether the stat- formed in [New York].” However, in 3. For shareholders and members ute of limitations barred a claim based contrast, as of August 25, 2016, LLCL who are not subject to the jurisdic- on a breach of warranties in the sale of § 609 had not been similarly changed. tion of New York courts, organize the mortgage-backed securities. The court, Section 609 of the LLCL applies to operating company or its intervening in a draft of its opinion on August 11,

46 | October 2016 | NYSBA Journal 2016, summarized the issue and its The clause in question, which was is not cured within 30 days after findings as follows: designed to delay the accrual of a buyer notifies seller of that default – and regardless of whether the In this appeal, we must decide cause of action based on a breach of default is cured at a later date, whether the statute of limitations warranty, specified, as stated by the exceeds __X__, the buyer may bars a breach of contract [*2]action court, put all of the outstanding loans to that was brought more than six that any cause of action . . . relating seller at a price equal to the sum years after the seller made alleg- to a breach of representations and of (A) the price buyer paid for edly false representations and war- warranties “shall accrue as to any those loans multiplied by a frac- ranties as to loans underlying resi- Mortgage Loan upon (i) discovery tion, the numerator of which is the dential mortgage-backed securities of such breach by the Purchaser or outstanding principal balance of (RMBS). We find that dismissal notice thereof by the Seller to the those loans at the time payment is of the action is mandated by the Purchaser, (ii) failure by the Seller made to buyer, and the denomina- Court of Appeals’ decision in ACE to [cure, repurchase or substitute] tor of which is the outstanding Sec. Corp., Home Equity Loan Trust, and (iii) demand upon the Seller by principal balance of those loans Series 2006-SL2 v DB Structured the Purchaser for compliance with purchased by the buyer at the time Prods., Inc. (25 NY3d 581 [2015]), this Agreement.” of their purchase by buyer, plus which sets forth a clear rule that (B) ___% of the amount under a breach of contract claim in an The underlying premise of this item (A) [that is, a percentage to RMBS put-back action accrues on clause [item (i)] is the breach of a reimburse buyer for costs and lost the date the allegedly false rep- representation or warranty pertain- profit]. A default in payment will resentations and warranties were ing to matters existing at the time of be deemed to occur on the date of made. Notwithstanding the par- the sale. The clause did not target a a default in payment as specified ties’ sophistication and their assent future performance of the loans, such in the applicable loan agreement. to a contract provision specifying a as a default. Hence, the court, in a If the applicable loan agreement set of conditions that would have unanimous decision, found that the does not specify the date on which delayed the cause of action’s accru- provision was no more than an “unen- a default in payment occurs, the al, we find that the accrual provi- forceable” attempt under the Court of date of default of any payment not sion is unenforceable as against Appeals’ decision in ACE Sec. Corp., 2 made when due will be the due public policy, because it is tan- Home Equity Loan Trust, to expand date of the payment. tamount to extending the statute the date on which a cause of action of limitations based on an impre- accrues under the statute of limitations cise “discovery” rule, which the relating to representations and warran- 3. To address concerns raised by 3 Court of Appeals has consistently ties. Compare, for example, Uniform attorney Robert Kantowitz that sellers rejected in the commercial sphere Commercial Code § 2-725(2). might have with the credit default– (see id. at 593-594). Moreover, the type swap above, I believe a provision accrual provision does not compel A Few Comments along the following lines will satisfy defendant to undertake a prom- 1. The lawyers for the buyer may the “future performance” test because ised future performance, separate have been guilty of malpractice for not it is conditioned on a default in pay- from its obligations to cure or knowing the law or for not knowing ment under a loan at some future date, repurchase defective loans, so as how to safely navigate within the law, not on discovery of a breach of a war- to trigger the statute of limitations but, ironically, a claim for malpractice ranty made at the time of sale relating anew; nor does it contemplate a may be barred by the statute of limita- to matters existing at that time. substantive condition precedent tions. In addition to any rights and reme- to defendant’s performance that 2. A relatively simple provision dies that the buyer has for a breach would delay accrual of the breach along the following lines, obviating of a representation or warranty, if of contract claim (see id. at 595, the need for lengthy, complex warran- at any time [or, in the alternative, 597; Deutsche Bank Natl. Trust Co. ties, would have done the job (much specify a period] a default in pay- v Quicken Loans Inc., 810 F3d 861 like a credit default swap) – especially ment occurs on any loan that is not [2d Cir 2015]). Therefore, we affirm in light of the court’s emphasis on cured within 30 days after buyer the motion court’s dismissal of the “a substantive condition precedent to notifies seller of that default, and action as barred by the six-year defendant’s performance:” Alternative A: if that default is statute of limitations applicable to If at any time [or, in the alternative, attributable in whole or in part breach of contract actions (CPLR specify a period] the total number of to a breach of a representation or 213[2]). loans on which a default in pay- warranty, ment of any amount occurs that

NYSBA Journal | October 2016 | 47 Alternative B: if there has been a made when due will be the due the statute of limitations on claims material breach of any representa- date of the payment. against the borrower for the defaulted tion or warranty respecting that amount. n loan, Additional Considerations In the case of the credit default swap, 1. http://www.courts.state.ny.us/reporter/ then, at any time before the default 3dseries/2016/2016_05780.htm. the purchase agreement, whether with in payment is cured, the buyer may 2. 25 N.Y.3d 581 (2015). the initial buyer or a subsequent buyer put that loan to seller at a price 3. Robert Kantowitz has been a tax lawyer, equal to the outstanding balance of on resale, should specify the price paid investment banker and consultant for over 35 principal and interest on the loan for each loan in the package and the years. He is responsible for the creation of a outstanding principal balance of each number of widely used capital markets prod- at the time payment of that amount ucts, including “Yankee preferred stock” and is made to buyer. A default in pay- loan at that time. “trust preferred,” as well as numerous custom- ment will be deemed to occur on The seller will be subrogated to the ized financial solutions and techniques for cli- buyer’s rights against the borrower for ents. He is a longtime member of the New York the date of a default in payment State Bar Association Committee on Attorney as specified in the applicable loan any defaults that the seller cures, so Professionalism and, as such, co-authored the agreement. If the applicable loan the buyer may wish to add some pro- Committee’s “Report on Attorney Ratings” dated visions regarding the seller’s enforce- December 7, 2015 and has contributed to the agreement does not specify the monthly Attorney Professionalism Forum feature in date on which a default occurs, the ment of those rights prior to exercise this Journal. date of default of any payment not of the put, taking into consideration

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48 | October 2016 | NYSBA Journal POINT OF VIEW BY ROBERT KANTOWITZ Robert Kantowitz has been a tax lawyer, investment banker and consultant for over thirty-five years. He is responsible for the creation of a number of widely used capital markets products, including “Yankee preferred stock” and “trust preferred,” as well as numerous customized financial solutions and techniques for clients. He is a longtime member of the New York State Bar Association Com- mittee on Attorney Professionalism and, as such, co-authored the Committee’s “Report on Attorney Ratings” dated December 7, 2015 and has contributed to the monthly Attorney Professionalism Forum feature in this Journal.

“The Bad, the Good and the Beautiful” A Suggested Approach to the Statute of Limitations Problem Raised by Deutsche Bank v. Flagstar Capital Markets

Editor’s note: Mr. Kantowitz had advance start to run until the time of discovery for example, the relevant facts are gen- notice of the content of Mr. Siviglia’s Octo- of a defect – in this case, a defect in erally apparent at the outset or when ber Contracts column. Here, he presents underwriting standards of the mort- they come into existence later, and a an alternative view of the issues raised gage-backed securities – rather than six-year window from when some- in the Deutsche Bank v. Flagstar Capital at the closing, when the representa- thing that was not supposed to happen Markets case. tions and warranties were made falsely does happen, or vice versa, adequately and the contract had thereby been serves the interests of the parties and have been a “tax guy” pretty much breached. Instead, the court insisted the state. Unfortunately, as financial all my professional life. In the that the parties had no power to agree arrangements and entanglements have course of “doing tax,” one neces- to a longer statute of limitations than become more complicated, this con- I 3 sarily learns the importance of both that provided in the law and there- struct can pose a problem because in substance and form and of knowing fore held that the filing was untimely certain commercial settings – appar- the implications of the words that one because it was made after the six-year ently this was one – the parties feel uses, all of which enter into the analy- statutory period. that they must address the possibility sis of the statute of limitations issue In the words of the court in the pres- or likelihood that actionable defects that was the subject of a recent Appel- ent case: might not be apparent in the first six late Division decision in Deutsche Bank Notwithstanding the parties’ years. This case involved mortgage- v. Flagstar Capital Markets Corp. (1st sophistication and their assent to backed securities, but one could easily Dep’t Aug. 11, 2016). Before I was a a contract provision specifying a analogize to numerous other situations tax guy, I was a “math and physics set of conditions that would have where: guy,” which informs an observation delayed the cause of action’s accru- • The parties agree that the party that I will make toward the end of this al, we find that the accrual provi- that has superior knowledge or article (no peeking). sion is unenforceable as against risk-bearing capacity is to be public policy, because it is tan- responsible for a long time for The Bad tamount to extending the statute certain matters that are uniquely The Deutsche Bank case1 involved mort- of limitations based on an impre- within its knowledge or control at gage-backed securities that had gone cise “discovery” rule, which the the outset, while sour and claims that the represen- Court of Appeals has consistently • The second party takes the risk tations and warranties made at the rejected in the commercial sphere that things were, in fact, as they outset by the seller had been false. (citation omitted).4 were supposed to be at the outset, The court held that it was compelled The court made a point of noting but nonetheless do not evolve in by Court of Appeals precedent, ACE that New York has a strong interest in the way that it reasonably had Securities Corp., Home Equity Loan Trust, giving repose to human affairs.5 expected. Series 2006-SL2 v. DB Structured Prods.,2 Leaving aside certain notorious to negate what was an apparent good areas of child abuse, of course, this is The Good faith agreement by the parties that the perfectly appropriate and not normally Peter Siviglia, in another article in this time to commence an action would not a problem. In a classic contract setting, Journal, has proposed to address this

NYSBA Journal | October 2016 | 49 POINT OF VIEW problem with either of two suggested control tests in aggregating the loans intent to give the buyer a more com- clauses, which reflect different alloca- that go into the security but as long as mercially reasonable time to discov- tions of risks. that has been done as it was supposed er a problem, while the proposed fix His first suggestion reads as fol- to be done, the risk of actual defaults swings the pendulum back further lows: rests with the buyer of the security. In than intended by the parties. If at any time [or, in the alternative, the words of the Deutsche Bank court: I do note that Mr. Siviglia’s clause specify a period] the total number [D]efendant, as originator and does employ a statistical measure of loans on which a default in seller of the loans, made various as its trigger, so the departure from payment of any amount occurs representations and warranties to what the parties might have wanted that is not cured within 30 days . . . purchaser, concerning the char- may not be severe, except if the mar- after buyer notifies seller of that acteristics, quality, and risk profile of ket changes radically, which is what default – and regardless of whether the loans.6 happened as flocks of “black swans” the default is cured at a later date, descended from the sky in the post- exceeds __X__, the buyer may And in the words of the Court of 2007 years. And I also note that it is put all of the outstanding loans Appeals in the ACE Securities case: not normally a good idea for a buyer to seller at a price equal to the [I]t makes sense that [the] sponsor . to skip due diligence and instead rely sum of (A) the price buyer paid . . would not guarantee future per- blindly on a seller’s representations, for those loans multiplied by a formance of the mortgage loans, but in certain situations in the capital fraction, the numerator of which which might default 10 or 20 years markets, especially in connection with is the outstanding principal bal- after issuance for reasons entirely complex securities, such due diligence ance of those loans at the time unrelated to the sponsor’s rep- is impossible or impractical and a good payment is made to buyer, and the resentations and warranties. The faith allocation of risks based on credit denominator of which is the out- sponsor merely warrants certain ratings and/or representations of the standing principal balance of those characteristics of the loans, and party in a position of knowledge is loans purchased by the buyer at promises that if those warranties appropriate and is market practice. the time of their purchase by buyer, and representations are materi- To reflect the desired risk alloca- plus (B) ___% of the amount under ally false, it will cure or repur- tion, Mr. Siviglia has also suggested a item (A) [that is, a percentage to chase the non-conforming loans second clause: reimburse buyer for costs and lost within the same statutory period In addition to any rights and reme- profit]. A default in payment will in which remedies for breach of dies that the buyer has for a breach be deemed to occur on the date of contract (i.e., rescission and expec- of a representation or warranty, if a default in payment as specified tation damages) could have been at any time [or, in the alternative, in the applicable loan agreement. sought.7 specify a period] a default in pay- If the applicable loan agreement ment occurs on any loan that is not does not specify the date on which The seller thus did not promise that cured within 30 days after buyer a default in payment occurs, the there would not actually be defaults. notifies seller of that default, and date of default of any payment not The seller said things about the loans Alternative A: if that default is made when due will be the due on the basis of which the buyer felt attributable in whole or in part date of the payment. it could conclude that, as a statistical matter, the incidence and severity of to a breach of a representation or I agree that this approach is effective defaults would likely be tolerably low. warranty, in preventing the statute of limitations Because it was not possible to be sure Alternative B: if there has been a from commencing to run at the time of that the seller’s failure to do what it material breach of any representa- closing. However, this language also had promised would become manifest tion or warranty respecting that reflects an allocation of risks different within six years after the closing, the loan, from that in the typical transaction. parties attempted to give the buyer then, at any time before the default Under this language, a cause of action longer to act, but the court said no. Mr. in payment is cured, the buyer accrues if and when a sufficient num- Siviglia’s clause above indeed gives the may put that loan to seller at a ber of defaults have actually occurred buyer longer, but in doing so penal- price equal to the outstanding bal- and the defaults have not been cured. izes the seller for defaults even if the ance of principal and interest on As a result, the seller bears the risk seller had impeccably and faithfully the loan at the time payment of that that many defaults happen to followed the processes that it said it that amount is made to buyer. A occur regardless of the cause. Yet, in would follow and even if everything default in payment will be deemed many transactions what is intended that the seller claimed to be true at to occur on the date of a default in from a commercial perspective is that the outset was indeed true. Thus, the payment as specified in the applicable loan agreement. If the appli- the seller must perform certain quality court’s holding frustrates the parties’

50 | October 2016 | NYSBA Journal POINT OF VIEW cable loan agreement does not of such breach by the Purchaser or at the time of closing was actually specify the date on which a default notice thereof by the Seller to the different [in a material way] from in payment occurs, the date of Purchaser, (ii) failure by the Seller what is described in the attached default of any payment not made to [cure, repurchase or substitute] “Schedule of Assumptions,” then when due will be the due date of and (iii) demand upon the Seller by the seller shall be obligated to pay the payment. the Purchaser for compliance with the buyer amounts [or buy back this Agreement.”8 I agree that this clause is effective the securities at prices] computed as provided in Appendix X [and in accomplishing the goal of allocat- But in tying everything to repre- any action to enforce this clause ing the risks essentially as the parties sentations and warranties, the parties must be brought by the buyer intended. However, I believe that Mr. are necessarily agreeing that the seller within two years [of the date of Siviglia and I disagree as to why this will have performed its obligation if discovery]. For the avoidance of clause works. He relies on the presence and only if the statements are true at doubt, this clause creates a cause of the default trigger as the all-impor- that closing time, regardless of what of action that will come into exis- tant discrete future event that must happens at any later date. Hence, the tence, if at all, only upon discovery take place as a predicate to an action, six-year contract statute of limitations as provided herein, and is separate which was absent in the Deutsche Bank must begin to run on the date the rep- and independent from any “repre- case. By contrast, I believe that as long resentations and warranties are made, sentations and warranties” made as the parties say clearly what they i.e., at the closing of the sale. The by the seller as of closing. intend to be the future predicate, they law in New York is that contracting should be free to do so. parties cannot extend the statute of The parties should also specify In my view, the recent cases display limitations in the contract. Case closed whether, if a cause of action arises less than clear reasoning, but one can (unless the Court of Appeals can be both under this language and under read them, or at least I read them, as convinced in an appeal that the parties the representations and warranties, the reflecting the baggage associated with really meant what I am about to sug- causes of action are independent – so certain legal terms. In particular, the gest; I do not have a strong sense that as to give the buyer the benefit of shorthand way of saying that a seller an appeal would be successful, but I whichever one has a longer time to sue is taking the risk that something is not would not be embarrassed to make the – or this one controls exclusively. Note true is to say that the seller “represents argument). as well that the language is neutral in and warrants” as to that something I would like to read the cases to that it refers to a list of assumptions at the closing. Thus, in the contract at have left a door just a bit ajar, so as to rather than to the seller’s having made issue in this case: allow parties to avoid the inflexibil- representations; indeed, it is conceiv- Section 9.03 also included a pro- ity regarding statutes of limitations by able that a contract might give both vision that purported to delay avoiding certain language. Thus, sup- parties rights to the extent that there is the accrual of a breach of con- pose that the parties had steered clear a deviation in one direction or another tract claim until three conditions of the traditional legalese and its atten- from such assumptions. were met. The accrual provision dant but invisible balls and chains, and Implicit in the formulation that I specified that any cause of action instead used plain English such as the have laid out above, perhaps, is that against defendant relating to following: there will have been a default, or else a breach of representations and If at any time in the future, it is the measure of damages would be warranties “shall accrue as to any zero (more on that below). If a default Mortgage Loan upon (i) discovery discovered that the state of affairs

NYSBA Journal | October 2016 | 51 POINT OF VIEW is implicitly or explicitly required, I something that occurs in the are favorable on this issue but other would posit that this formulation works future only if and when it occurs. aspects of whose law may not be opti- largely as does Mr. Siviglia’s second mal. Might the parties provide that suggestion with its default trigger. The Court of Appeals in ACE Securi- the contract is governed by the laws To illustrate the difference in our ties emphasized that New York has a of New York with the exception of the approaches, however, suppose that the strong policy of repose and a skepti- designated provision, which is gov- parties want to allow the buyer to sue, cism regarding discovery-based accru- erned by the laws of that other state? even in the absence of an actual present al times that are hard to pin down The questions of whether that could default, for compensation for a dimi- with certainty, and yet the court also be done and how to interpret such a nution of value due to the perception implied that parties can include sub- contract I leave for another day, but of a likelihood of eventual default that stantive obligations as they wish.9 suffice it to say that that methodol- is higher than would have been the Hence, it ought to be possible to create ogy could be useful for any number case had the assumptions been true. an obligation in plain language that of purposes. This could be especially important in springs into existence, if at all, only at circumstances where the sponsor or a a later time, as long as that later time The Beautiful guarantor can prop up the deal and its is reasonably well defined. In dealing All of the approaches suggested above cash flows in order to avert a default with such a contractual provision, a are traditional contract approaches in and thereby keep the buyer locked into court should not twist itself into a that they say what the parties mean what feels like a slow-moving train pretzel or wrap itself in the state flag to and they say it clearly. Yet, there is wreck. That this could happen and insist that what the parties really meant language in the cases that gives one thereby run out the clock on the six- must have been to make a representa- concern that courts still might balk at year of statute of limitations is acutely tion as of closing on which a cause of allowing formulations that appear to unfair, and the parties may wish to action for breach, with a six-year time be an “end run” around holdings that contract around it. The formulation I limit, accrues no later than closing. It vigorously defend the sanctity of the have laid out above, perhaps with a strikes me that, other than where the fixed six-year statute of limitations qualifier as to how much diminution rule against perpetuities applies, par- as a matter of public policy. To avoid in value there must have been and how ties should be free to choose either of that risk in another way, here is an it must be demonstrated, would reflect two approaches: (i) to say that a repre- approach that I intend to be the equiv- this agreement, yet without using any sentation is being made now, in which alent of the Lombardi Power Sweep. discrete default as a trigger. case the clock starts ticking now if the Rather than simply saying under Reasonable people may differ on representation in fact is not true now, what circumstances and conditions the this, but to my mind all of these varia- or (ii) to create a contingent spring- buyer has certain rights against the tions share certain elements in coming obligation that comes into exis- seller, the parties could create two mon: tence if another Columbus runs his separate options: • In the future there is something (a ships aground and discovers another • The put. First, there would be a default or a diminution in value continent (even though the continent provision giving the buyer an or whatever else is specified was always there, though theretofore absolute and unconditional put in the contract) that represents unknown). of the securities to the seller at an impairment of the buyer’s Let’s also remember that contrary par (or at the remaining unpaid position relative to the buyer’s to what was implied by that famous value, or at some formula price, reasonable expectations at the New Yorker cover, there really is a “rest as the case may be) in the event of outset. of the country” out there. Choice of sufficient defaults or diminution • Something that happens in the law and choice of jurisdiction clauses of value or whatever the parties future (in Mr. Siviglia’s formula- are not necessarily dull boilerplate. It want the trigger to be. Upon the tion the discrete event of default behooves parties and their attorneys buyer’s giving notice, the put and in mine discovery of the vari- to consider whether they can achieve might close in, say, 30 days. ance from the assumed state of what they want by specifying a state • The call. In addition, there would affairs) is clearly and unequivo- whose law and/or courts are more be a provision giving the seller cally agreed to be the trigger for a favorably disposed to the “discov- a conditional call right: if and cause of action. ery” trigger. I have not performed the only if the seller’s representa- • In none of these formulations is tasks of surveying the rules in other tions were in fact [materially] the seller guilty of any post-clos- jurisdictions or of fully analyzing and true when made, the seller has ing action or non-action, and in all answering the conflicts of laws ques- an independent right to call of these formulations the parties tions, which I leave to others. To push the securities from the buyer have agreed that a cause of action this envelope further, suppose that for their actual current trading springs into existence based on there is another state whose positions value. The call could be exercised

52 | October 2016 | NYSBA Journal POINT OF VIEW during the period that begins rity, which is generally higher than the six years, in the form of a par on any date on which the buyer dividends on the common stock. The put in the event of a certain has given notice of its intent to typical transaction will provide that number of defaults, regardless exercise the put, and once the if the trading price of the underlying of why the defaults happened call is exercised, it would close in common stock rises sufficiently (say, to or whether the seller’s represen- 10 days. Obviously, therefore, the 130% of the security’s par amount), the tations were true when made. seller’s timely exercise of the call issuer may call the securities for par. B. The buyer has conditional pro- would preempt the put. The issuer issues a call notice but never tection, i.e., only if the repre- actually repurchases the securities for sentations turn out not to have Taking these two provisions togeth- cash because the holders quickly con- been true when made, for longer er, the combination achieves what the vert them into the underlying shares than six years, starting when the parties want over an indefinite period with a higher value before the call’s problem is discovered. (This is of time by giving the buyer nothing effective date. what the parties in the Deutsche and costing the seller nothing if and In my proposal: Bank case wanted to accom- only if the representations had been • The seller’s ability to nullify the plish, which the court refused to true when made. Importantly, because put if the representations were allow.) the call depends on the truth of the rep- not false when made would deter C. The buyer has conditional pro- resentation rather than upon a breach, the buyer from pressing the red tection but for only six years it either exists at all times or does not button on its desk. To deter the from closing. (This is the limit exist at all, without implicating the buyer from thinking it has noth- enforced in the Deutsche Bank statute of limitations in the slightest. ing to lose by pressing the button, case.) Could a court chafe at this if it felt the seller’s call could even be at sufficiently strongly about the six-year a non-trivial discount from the In mathematical terms, clearly, A > statute of limitations? Maybe, but a trading price. B > C. Since A and C are both permis- judge might have trouble writing that • On the other hand, if the seller’s sible contractual provisions, there is no opinion with a straight face. representations were false, the defensible reason why the intermedi- I have structured such pairs of seller’s call simply has never ate position B – in which there is only options in a variety of settings. One existed, and the seller has no way conditional protection but for longer example with which some readers may to block the buyer’s par put. than six years – should not be allowed. be familiar is contained in typical con- After all, this is not quantum mechan- vertible securities such as convertible The Real Point of this Article ics, where only certain levels of energy, debentures or convertible preferred With all of the above in mind, it and nothing in between, can exist. stock. The holder of a convertible secu- is but a small step to what I really I welcome readers’ thoughts (except rity (the investor) typically has stated think is appropriate: New York should on quantum mechanics) at robert. yield plus a right, but not an obliga- change its position on whether par- [email protected]. n tion, to exchange the security for a ties may agree to an extended statute fixed number of shares of common of limitations to govern a particular 1. I refer to this case as the Deutsche Bank case, as that party, although I note that in the world of stock of the issuer. Normally (as a contract. As between consenting and finance, the same institution can sometimes be on result of option pricing theory), a ratio- well advised parties in a commercial either or both sides of an issue. Here, Deutsche nal investor will not convert the secu- setting, no purpose within the law of Bank was seeking enforcement, while in last year’s Court of Appeals’ ACE Securities case, on whose rity until maturity, at which time the contracts is served by denying them holding this case turned, an affiliate of Deutsche investor will elect whether to convert the right to allocate the real risk that Bank was the defendant resisting enforcement. or to collect the par amount, which- an arbitrary six years may not be And to put the procedural and contractual issues into a broader context, I note that the federal gov- ever is larger. At any time before such long enough to figure out whether or ernment announced that it is seeking an unprec- maturity if the price of the underlying not the seller should owe the buyer edented $14 billion fine against Deutsche Bank in shares has advanced significantly from something. connection with its sale of mortgage-backed securities. where it was at the time of issuance, In order to demonstrate that this is 2. 25 N.Y.S.3d 589 (2015). the security will be “in the money” not just facially sensible but is com- 3. CPLR 213(2). and will trade for a price more reflec- pelled as a matter of logic, here is 4. Slip Op. at 2. tive of the conversion value than of the where I revert to math and physics. par amount, and investors will realize Consider three sequential proposi- 5. Id. at 3. their profits by selling rather than by tions: 6. Id. at 2 (emphasis added). converting. Yet, an issuer may want A. The buyer has unconditional 7. 25 N.Y.S.3d at 595–96 (citations omitted). to bring matters to a head, to “force protection from default for the 8. Slip Op. at 2. conversion” early so as to stop having entire duration of the transac- 9. 25 N.Y.S.3d at 596–97. to pay the stated yield on the secu- tion, or in any event more than

NYSBA Journal | October 2016 | 53 The Legal Writer Respect basic letter-writing princi- legalese. Be courteous but firm. This Continued from Page 64 ples when drafting a demand letter. writing style will capture your readers’ Title – Last Name. Example: “Dear Address why you’re entitled to what attention and make them feel that your Dr. White:”. you’re asking for. Otherwise, why demand is serious. Don’t be harsh, • Introduction. would your readers comply? Put your- humorous, or snarky. Don’t display Introduce the situation. Note self in their shoes; the reason for your sarcasm or anger.13 Don’t threaten to whom you represent, the general demand must be clear. Example: “The raise criminal or disciplinary charges. purpose of the letter (“This letter contract provides that the buyer must Don’t use your letter to embarrass, is to inform you that . . . .” or pay $5,000 in exchange for the car he blame, shame, or delay.14 Don’t offer “My client, Mr. X, has instructed bought from our client. The under- the recipient legal advice.15 You never me to . . . .”), and your request. signed never received any part of the know where your demand letter might Summarize the problem and state $5,000.” end up. It could be in the hands of

If you drown your letter in unnecessary information, your reader will be at sea.

what action the recipient should Organize your facts chronologic- a judge, the media, or a disciplinary take to solve the situation. Keep ally. If the exact dates of the events committee. the introduction short and concise are unclear, preface the date with the to avoid confusing readers with phrase “on or about.” Example: “We Work Toward Resolution unnecessary detail.9 This’ll put discussed this matter on or about June Encourage solutions to the problem. them on clear notice of what’ll 15, 2016.” Demonstrate that you’re willing to follow. Articulate the time period you’re consider creative options to benefit • Body. giving the recipient to respond to your everyone. Show that you want to find State facts. Explain the law sup- demand. The period must be reason- a mutually beneficial solution and that porting your client’s position. able: It must be realistic and sufficient you’re open to working with the other Address the recipient’s misbehav- for the person to respond to your side toward that outcome. Example: ior and your client’s position. request. Example: “You have 15 busi- “As your project deadline is approach- Base your demand on a legal ness days to repair the window or to ing soon, our client will continue foundation, such as breach of pay me $250 in cash or certified funds.” construction work on the site once a contract. Explain which clause State what you plan to do if the written promise to comply with the of a contract was violated and recipient doesn’t respond to your demands is received from you.” A rea- how. Go into clear, specific detail demand on time. Example: “If you do sonable and open attitude helps if the about the action you expect from not fix the situation within 15 busi- dispute spirals toward trial.16 the letter’s recipient. It could be ness days, the undersigned will hire Seize the opportunity to show to do something or to stop doing a professional to repair the window you’re open to means other than litiga- something. Explain not only what at your expense and commence legal tion, such as mediation or arbitration, needs to be done but how it must action against you for financial com- to settle the dispute. Parties on all sides be done, who must do it, the time pensation.” will often prefer to resolve a dispute frame for completion, and the without going to court. Example: Your steps required for the recipient to Tone: professional but firm client, Mr. Quiet, lives in a co-op build- address your client’s needs. As is always the case when writing to a ing in Queens, New York. For the past • Deadline. potential adversary, your letter should three months, his next-door neighbor Explain the consequences of not be formal. Adapt your tone; every case has been playing the drums loudly and complying with the demand and is unique. Ethical considerations and past the hours the co-op rules allow. applicable deadlines. This’ll urge notions of professional civility should Mr. Quiet talked to his neighbor about the recipient to take action, and guide your tone and the content of his issue a few times, but the disturb- it shows you’re serious that your your letter.11 ances continue. Mr. Quiet consults you demands be met.10 Know what you’re aiming for, and for advice. Knowing that your client is • Closing. try to achieve it in a one- or two-page willing to do whatever it takes to solve Close your letter professionally. demand letter. Pay special attention the situation, write in your demand Example: “Respectfully yours.” to your language. Take your audience letter that you’d like to solve the dis- • Sign your letter. into account.12 Use active verbs and no pute out of court.

54 | October 2016 | NYSBA Journal There are many advantages to that you owe rent to Mr. Bank, your Example: A few weeks ago, you noti- alternative-dispute settlement. Ultim- landlord, for the following period: fied Walter Damage, your landlord in ately, reaching a settlement without $3,000 for May 2016 and $3,000 for Lake George, New York, about leaks litigation will allow both parties to June 2016, for a total of $6,000. (2) If coming from your bathroom ceiling. save time, money, heartache, and you do not pay the total rent due with- Noting Damage’s inaction in fixing the more. Trials come with unintended in the next 15 days from the date of plumbing, you write him a demand costs. Your client will want to avoid the service of this notice, (3) Mr. Bank letter requesting that he fix the leaks them. A trial often means that both will initiate a summary proceeding to without delay or you’ll take legal parties lost control over the outcome evict you.” action against him. You can’t stand of the dispute. living in these conditions. You want Be firm. Use demand letters to show Demand clearly what and when the renovation work to start as soon that even if you’re open to settle, you you want it done as possible. want the issue resolved. Convey that if You can seek a specific outcome, such Being reasonable means that even if the recipient doesn’t take steps to solve as requesting that a recipient obey a you want the work finished in a day, the conflict, you won’t hesitate to sue. contract or refrain from doing some- it isn’t realistic to ask Mr. Damage to thing.18 Your request must be precise find a professional qualified for this Facts so the recipient can respond accur- kind of renovation, for him to hire the Provide information about the alleged ately. The recipient shouldn’t wonder professional, for the professional to wrongdoing. State facts and use them what you’re asking for.19 If you drown be available, and for the work to be to convey that your request isn’t your letter in unnecessary information, done right away. A reasonable demand trivial. Answer persuasively and in your reader will be at sea: The focus offers him sufficient time to respond advance any inevitable question you of your demand will be lost. That’ll to your request. Perhaps a two-week might receive in response.17 Example: make it seem like your claim is weak notice — to hire the worker and for “Why didn’t the plaintiff complain of and that you’re on a fishing expedition the worker to complete the renovation shoulder pain until five months after for useful information to strengthen work — is reasonable in this situation. the accident?” your claim. Be clear and concise. Less The reasonableness of a notice will Be concise. Concision will encour- is more. always depend on the circumstances age the recipient to read your let- Avoid using phrases that suggest of each situation. ter and help contextualise the claim. your demand is based on personal Don’t include irrelevant or unneces- observations. Avoid “I feel” or “It is Sending sary details. our belief.” And don’t be overly cau- When you send a demand letter, fol- Consider the following. Your client, tious in presenting your contentions. low through with what you say you’ll Mr. Bank, owns a commercial build- Avoid “It appears that” or “It is sug- do if the time period you set expires. ing in Syracuse, New York. He tells gested that.” Your cowardly assertion The recipient might not address your you that Mr. Enessef, one of his ten- won’t persuade.20 demand appropriately, and your issue ants, has been giving him checks with- Enduring the problems the other might end up in court. Send your let- out sufficient funds for the past two party causes is never pleasant. Ask ter once you’re certain you’re ready, months. Mr. Enessef has been ignoring recipients to remedy their faults. Ask both legally and mentally, to take the your client’s calls and emails. Mr. Bank for what you’re entitled to — don’t matter to the next phase if the recipient is coming to your office today seek- aim for less — but be reasonable. doesn’t comply with your demand.21 ing your advice after his numerous, Recipients are entitled to a reasonable Don’t bluff. unsuccessful attempts to speak with time to respond to your request; not Demand letters shouldn’t be sent Mr. Enessef. allowing enough time will defeat your lightly. Make sure your client under- Your solution to Mr. Bank’s situa- goals. stands why you’re sending one. Send- tion is to write a demand letter – a rent demand – to Mr. Enessef. The demand letter’s body will include three things: NEW YORK STATE BAR ASSOCIATION An instruction to Mr. Enessef to perform a certain act and why, (2) Join the Lawyer Referral a set period within which the act must occur, and (3) a warning of the consequences if the recipient & Information Service does not comply. Give us a call! Your demand letter might look like 800.342.3661 this: “Dear Mr. Enessef: (1) Take notice

NYSBA Journal | October 2016 | 55 ing demand letters when you’re not Responding ready to follow through with your Receiving a demand letter is stressful, and explain why. Doing nothing and threat of further action will affect your but don’t rush your response. Before waiting to be sued is the last option. It credibility. Your next demand won’t be responding, analyze the demand and doesn’t show you’re willing to cooper- taken seriously. Send a demand letter assess your options. When respond- ate, and it buys you a bushel of trouble. only when a situation needs to be ing to demand letters, remember the resolved or when your client wants to relevant information discussed above Conclusion solve a dispute and is seriously consid- and take your time working through You can’t always get what you want ering legal action.22 the three key stages: through litigation. But a letter is some- 1. Analyze times all you need. n Keep records Before answering a demand letter, When you send demand letters, keep consider some relevant questions. Ver- Gerald Lebovits ([email protected]), an acting a record of what you wrote and when ify whether the claim is well-founded. Supreme Court justice in Manhattan, is an you sent it. A contract or statute might Does the adverse party have the right adjunct professor of law at Columbia, Fordham, not require that notice be sent by cer- to demand what’s demanded? Is the and NYU. For their research, he thanks judicial tified mail or by another method in claim reasonable? If the demand seeks interns Ted Mulvany (Fordham) and Rosalie F. which the recipient must sign for the money or performance, is the relief Lacoursière (University of Ottawa). letter. Even so, you should send the sought reasonable? notice by a method that produces a Consider settling the dispute. Meas- signed receipt.23 A delivery receipt is ure the efforts it’ll take to comply with 1. Marie Antionette Moore, The Last Word, Nastygrams That Work, 28 Probate & Property 64 useful to track the time since the recipi- the demand against what it’ll take to (May/June 2014). ent has received notice of the situation. contest the case in court, including 2. Charles R. Calleros, Legal Method and Writing Keep this receipt. If the recipient does attorney fees, time, missing work, and 527 (5th ed. 2006). 3. Bret Rappaport, Legal Writing Beyond Memos nothing in response to the demand, or the uncertainty of the outcome. Is all and Briefs, A Shot Across the Bow: How to Write an if the recipient refuses to comply, hav- this worth it? Consider whether the Effective Demand Letter, 5 J. Ass’n Legal Writing Directors 32, 51 (2008). ing this receipt along with a copy of the chances that a judge will rule in your 4. Maureen B. Collins, Writing Tips, Dear Sir or demand letter will allow you to prove favor outweigh the time and money Madam: The Lost Art of Letter Writing, 19 Perspec- that the recipient received the demand it’ll cost you and your client to go tives: Teaching Legal Research & Writing 62 (Fall 2010). letter and knew your demands. You through the judicial process. 5. Adapted from id. can use the receipt to prove that a fair 2. Prepare 6. Rappaport, supra note 3, at 51. notice of performance was given to the Whether you want to negotiate with 7. Helene S. Shapo, Marilyn R. Walter & Eliza- beth Fajans, Writing and Analysis in the Law 306 recipient and that the recipient failed the claimant or fight it out before a (6th ed. 2013). 24 to comply timely with the demand. judge, be organized and efficient. 8. See generally Deborah B. McGregor & Cynthia Recall the chain of events: chrono- M. Adams, The International Lawyer’s Guide to Legal Analysis and Communication in the United Privilege logically, what led to what. Write it States 266–69 (1st ed. 2008). According to the New York Court all down. If documents support your 9. Rappaport, supra note 3, at 45. of Appeals in Front, Inc. v. Khalil, a demand, gather and organize them. 10. Allison Martin, WordWise, Six Tips for Writing Effective Demand Letters, 57 Res Gestae 28, 28 (Oct. demand letter sent during the prelim- You’re trying to convey that you’re 2013). inary stages of an anticipated action telling the truth. It could be letters, 11. Linda H. Edwards, Legal Writing: Process, will be subject to a qualified privilege bills, emails, pictures — anything Analysis, and Organization 244 (5th ed. 2010). 12. Elizabeth Fajans, Mary R. Falk & Helene S. to protect a writer in a future defam- that’ll support your argument. If other Shapo, Writing for Law Practice 215 (2004). ation action from what’s stated in the people were involved, note their con- 13. Edwards, supra note 11, at 244. letter “[i]f the statements are pertinent tact information as witnesses who’ll 14. Martin, supra note 10, at 28. to a good faith anticipated litigation.”25 support you. 15. James W. Martin, How to Write Letters Non- lawyers Will Read (with Sample Letters), 46 Practical Be careful with what you write, 3. Respond Law, 19, 25 (Jan. 2000). therefore. Never make a false declara- If you recognize that you’re wrong 16. Id. at 28. tion. If you do, a privilege might not and that the claimant is entitled to 17. Adam J. Blank & Patrick J. Kennedy, Media- tion, Dynamic Demand Letters, 45 Trial 28, 28 (Dec. apply to your letter. A qualified priv- what’s claimed, you may agree to the 2009). ilege is subject to “the requirements of demand and act accordingly. 18. Collins, supra note 4, at 62. good faith, an interest to be upheld, a If you disagree with the demand, 19. Calleros supra note 2, at 526–27. proper purpose, and publication in a you may contact the claimants or 20. Veda R. Charrow, Myra K. Erhardt & Robert P. Charrow, Clear and Effective Legal Writing 197 proper manner and to proper parties their lawyer, if they’re represented, (4th ed. 2007). only. The person claiming the privil- to explain your position and negoti- 21. Moore, supra note 1, at 64. ege, moreover, must stand in such rela- ate. You can also tell them that you 22. Id. tion to the circumstances as to justify refuse to comply with their demand 23. Id. 24. Id. 26 the language used.” 25. 24 N.Y.3d 713, 715, 4 N.Y.S.3d 581 (2015). 26. 43A N.Y. Jur. 2d Defamation and Privacy § 120. 56 | October 2016 | NYSBA Journal ATTORNEY PROFESSIONALISM FORUM

To the Forum: may extend to communications with ratifies it.” RPC 5.3(b)(1) (emphasis My client insists that we use a private a private investigator hired to assist added). In Professor Roy Simon’s investigator to “dig up” dirt on his the attorney in representing the client. annotation on RPC 5.3(b), he notes that adversary to use in our litigation. I Kovel, 296 F.2d at 922; see In re Grand the “category of nonlawyers ‘associ- certainly can see the benefits of doing Jury Proceeding, 79 Fed. Appx. 476, 477 ated with’ the law firm should include so, but I’m also concerned about the (2d Cir. 2003). “Like any communica- all nonlawyers who are working side ethical pitfalls and my obligations with tions protected by the attorney-client by side with the law firm on a matter, respect to a third-party over whom I privilege, however, communication even though the law firm itself did not may not have control. What are the with such third-party agents is only retain them.” Roy D. Simon & Nicole ethical issues I should be aware of? protected if it is ‘made in confidence for Hyland, Simon’s New York Rules of Should I have my client retain the pri- the purpose of obtaining legal advice Professional Conduct Annotated vate investigator? Would that protect from the lawyer.’” In re Grand Jury Pro- 1412 (2016 ed.). Professor Simon spe- me if the private investigator goes ceeding, 79 Fed. Appx. at 477, citing cifically identifies a private investiga- AWOL? Am I responsible in any way Kovel, 296 F.2d at 922 (emphasis in tor in an example of RPC 5.3(b), not- for the private investigator’s actions original). Similarly, documents pre- ing that this provision would apply if her or she is taking directions from pared in anticipation of litigation by where “a private investigator may be my client and is not adhering to the a private investigator are also pro- investigating a defendant on behalf of guidelines I provide? How do I protect tected by the work-product privilege. multiple plaintiffs.” Id. myself? Costabile v. Westchester, New York, 254 When considering whether you are Sincerely, F.R.D. 160, 164 (S.D.N.Y. 2008). But ratifying a private investigator’s con- A.M. I. Paranoid there are limits to the application of duct, Professor Simon states that “any both privileges and they can be lost lawyer who learns of misconduct after Dear A.M. I. Paranoid: for several reasons. See, e.g., Meyer the fact and then takes advantage of In many circumstances, hiring a pri- v. Kalanick, 15 CIV. 9796, 2016 WL that misconduct (or simply lets it slide) vate investigator may be beneficial 3981369, at *5 (S.D.N.Y. July 25, 2016) may be found to have ratified the mis- to, inter alia, help you gather useful (“there is a ‘crime-fraud’ exception to conduct.” Id. at 1390, 1413. Recently, a information that may strengthen your the work-product doctrine, as there is federal court in the Southern District case. Moreover, the use of a private to the attorney-client privilege” and of New York dealt with this issue and investigator offers certain protections. declining to apply the work-product For example, although you may be doctrine where a party’s investiga- The Attorney Professionalism Committee tempted to investigate some underly- tion included “fraudulent and argu- invites our readers to send in comments ing facts yourself, a private investiga- ably criminal conduct”); Spanierman or alternate views to the responses tor can help prevent a situation where Gallery v. Merritt, 00 CIV. 5712, 2003 printed below, as well as additional you inadvertently become a witness WL 22909160, at *2–3 (S.D.N.Y. Dec. hypothetical fact patterns or scenarios to on a significant issue in your case and 9, 2003) (holding that work-product be considered for future columns. Send have to resign as counsel as a result. immunity is waived when its produc- your comments or questions to: NYSBA, See New York State Rules of Profes- tion to another is inconsistent with the One Elk Street, Albany, NY 12207, Attn: sional Conduct (RPC) 3.7. There are, protection). Attorney Professionalism Forum, or by however, myriad legal and ethical con- Privilege questions aside, the next email to [email protected]. siderations you must consider when issue involves an attorney’s ethical This column is made possible through working with a private investigator. obligations and responsibilities when the efforts of the NYSBA’s Committee on Many of those issues frankly merit engaging a private investigator. If you Attorney Professionalism. Fact patterns, separate treatment. Nevertheless, we or your clients utilize the services of names, characters and locations presented will try to briefly touch upon the main a private investigator for your case, in this column are fictitious, and any resem- legal and ethical issues raised by your and you use the information in the blance to actual events or to actual persons, question. litigation, you can be held responsible living or dead, is entirely coincidental. These The first issue that should be for the private investigator’s conduct. columns are intended to stimulate thought addressed is privilege. A private inves- Under RPC 5.3(b)(1), “[a] lawyer shall and discussion on the subject of attorney tigator’s work and communications be responsible for conduct of a non- professionalism. The views expressed are may be protected under both attor- lawyer employed or retained by or those of the authors, and not those of the ney-client privilege and work-product associated with the lawyer that would Attorney Professionalism Committee or privilege. In United States v. Kovel, 296 be a violation of these Rules if engaged in the NYSBA. They are not official opinions F.2d 918 (2d Cir. 1961), the seminal by a lawyer, if: (1) the lawyer orders or on ethical or professional matters, nor case on this subject, the Second Circuit directs the specific conduct or, with should they be cited as such. ruled that the attorney-client privilege knowledge of the specific conduct,

NYSBA Journal | October 2016 | 57 stated that the RPC “require lawyers matter, unless the lawyer has the prior viewed them and the court denied to adequately supervise non-lawyers consent of the other lawyer or is autho- the motion to suppress the statements retained to do work for lawyers in rized to do so by law.” RPC 4.2. Each and disqualify the claimant’s counsel. order to ensure that the non-lawyers communication between a private Id.. do not engage in actions that would investigator and a potential witness, Like most rules, courts may some- be a violation of the Rules if a lawyer adversary, or agent of an adversary, times make exceptions where pub- performed them.” Meyer v. Kalanick, creates a potential breach of these rules lic policy interests supersede the rote 15 CIV. 9796, 2016 WL 3981369, at *7 and consequently requires consider- application of the rules. Where there (S.D.N.Y. July 25, 2016). This opinion is ation and discussion with the private is a strong public policy in deterring also consistent with RPC 8.4(a), which investigator before he or she interacts activity that may escape discovery prohibits an attorney from knowingly with any potential witness. without the use of undercover inves- assisting or inducing another person Online social media websites have tigatory techniques, one court refused to attempt to violate the RPC through become a valuable source of evidence to preclude evidence even where a another person’s actions. RPC 8.4(a). in litigation, and “friending” a poten- private investigator made misrepre- However, ensuring that private inves- tial witness or adversary could give a sentations to an employee of a party tigators do not engage in actions that private investigator access to signifi- represented by counsel in obtaining would violate the New York Rules of cant amounts of information without evidence. In Gidatex, S.r.L. v. Campani- Professional Conduct, if performed by ever having to leave the office. An ello Imports, Ltd., 82 F. Supp. 2d 119 a lawyer, can be a significant under- ethics opinion addressed whether a (S.D.N.Y. 1999), a private investiga- taking particularly where those inves- private investigator could “friend” an tor posed as an interior designer and tigators are being paid directly by a unrepresented potential witness on recorded interactions with furniture client who demands certain results and a social networking website to gain sales clerks in an effort to gather evi- actions. access to information helpful in litiga- dence that the defendants engaged in One aspect of a private investigation. N.Y.C. Ass’n B. Comm. Prof. Jud. “bait and switch” tactics in violation tor’s practice that warrants extra scru- Eth., Obtaining Evidence From Social of the Lanham Act and the common tiny and consideration is where a pri- Networking Websites, N.Y.C. Eth. Op. law in New York. Id. at 120–21. Even vate investigator makes misrepresenta- 2010-2, 2010 WL 8265845 (2010). In though the defendant corporation was tions to an adversary or unrepresented its opinion, the Committee on Profes- known to be represented by counsel, witness in an attempt to gain informa- sional and Judicial Ethics concluded and the clerks were deemed parties, tion. This is known as “pretexting.” that as long as a private investigator the court found that because the sales While one might think that pretexting used his or her real name and profile clerks were not tricked into making is not an unexpected business practice, to send the friend request, even with- statements that they would not have our profession is held to a very strict out disclosing the reason for making otherwise made in the course of their standard. RPC 8.4(c) specifically pre- the request, it would not cross any regular business routine, there were cludes attorneys from “engag[ing] in ethical boundaries. (Id.). The opinion no ethical violations. Id. at 125–26. The conduct involving dishonesty, fraud, noted, however, that a private investi- court noted: deceit or misrepresentation” and RPC gator may not use deception to obtain To prevent this use of investiga- 4.1 states that, “a lawyer shall not information from a social networking tors might permit targets to freely knowingly make a false statement of site under RPC Rules 5.3(b)(1) and engage in unfair business prac- fact or law to a third person.” RPC 8.4(a). Id.. This opinion is consistent tices which are harmful to both 4.1; 8.4(c). This includes, for example, with a Court of Claims’ decision in trademark owners and consumers situations where a witness inquires as which a private investigator inter- in general. Furthermore, exclud- to whom the investigator represents. viewed Department of Transportation ing evidence obtained by such In such a situation, the investigator employees who were likely witnesses investigators would not promote should disclose the relationship. RPC after a notice of intention was served the purpose of the rule, namely 8.4(c); see NYSBA Comm. on Prof’l against the state, but before the action preservation of the attorney/client Ethics, Op. 402 (1975) [if “inquiry is was commenced, and the attorney privilege. made by the witness as to whom the general had not provided the low- investigator represents, he should, of level employees with any privileged Id. at 122. course, disclose the lawyer-principal”]. information about the subject mat- The public policy interest in allow- In addition, RPC 4.2 prohibits an ter of the case. Schmidt v. State, 181 ing undercover investigations was also attorney from “communicat[ing] or Misc. 2d 499 (Ct. Cl. 1999), aff’d, 279 cited in an action where the court caus[ing] another to communicate A.D.2d 62 (4th Dep’t 2000). The court permitted the admissibility of covert about the subject of the representation in Schmidt ruled that the employees audio recordings made by a private with a party the lawyer knows to be were not represented by an attorney investigator, without misrepresenta- represented by another lawyer in the when the private investigator inter- tions, demonstrating that a supervisor

58 | October 2016 | NYSBA Journal used racial slurs in a racial bias suit. et seq.; Gidatex, S.r.L., 82 F. Supp. 2d at It is important to supervise and stay Mena v. Key Food Stores Co-op., Inc., 195 121. As noted by the court in Mena, informed of the private investigator’s Misc. 2d 402, 407 (Sup. Ct., Kings Co. “[c]ontemporary ethical opinions hold methods for obtaining information as 2003). In Mena, the court reasoned that that a lawyer may secretly record tele- the private investigator is prohibited “weighed against th[e] ethical impera- phone conversations with third parties from revealing your client’s confiden- tive” of “insuring that all [members without violating ethical strictures so tial information and from improperly of the public] are treated with that long as the law of the jurisdiction per- inducing witnesses to change their modicum of respect and dignity that mits such conduct.” Mena, 195 Misc. 2d testimony. Under General Business is the entitlement of every employee at 404–05, citing ABA Comm. on Eth- Law § 82 (GBL), a licensed private regardless of race, creed or national ics & Professional Responsibility For- investigator “shall not divulge to any origin,” the attorney’s involvement in mal Op 422 (2001); New York County one other than his employer, or as his the undercover recording did not war- Lawyers’ Ass’n Comm. on Professional employer shall direct, except as he may rant the suppression of evidence or the Ethics Op. 696 (1993). Accordingly, an be required by law, any information disqualification of counsel. (Id. at 407). investigator’s in-person recording of acquired by him during such employ- This narrow public policy exception, a conversation within New York State ment in respect of any of the work to however, is unlikely to expand to all will be permissible even without the which he shall have been assigned by situations where, as your client might other person’s consent. Many states, such employer.” Similarly, you have hope, a private investigator seeks to however, require both parties’ consent an obligation under the RPC to use merely “dig up dirt” on an adversary. to record conversations. Meyer, 2016 reasonable care to prevent the private In the Southern District of New York’s WL 3981369, at *8. Phone conversa- investigator from disclosing the con- recent decision in Meyer, the court held tions with an individual in a two- fidential information of your client. that evidence obtained by an unli- party consent state can be much more RPC 1.6(c). It is highly likely that the censed private investigator, through complicated. Whereas many commu- private investigator will communicate the use of materially false statements, nications are on cellphones, and it with other people in the course of the made with the intent to gain personal may be unclear as to where part of a investigation. You should be very clear information about the plaintiff and his conversation is taking place, a number with your investigator what informa- counsel, was enjoined. Meyer, 2016 WL of conflict of law scenarios can arise. tion her or she is able to reveal in his 3981369, at *10. The issue of sanctions Suffice it to say, if the investigator or her discussions. was obviated by the parties reaching a is recording communications where Additionally, an overzealous pri- publicly undisclosed agreement to pay there is a likelihood of interstate com- vate investigator may be inclined to a reasonable reimbursement of attor- munications, some research of the cross a line in investigating a matter ney fees and expenses by the investi- legality of the recordings is advisable. and inadvertently attempt to persuade gating party. Id.. The Meyer court dis- Under CPLR 4506, evidence obtained a witness to change his or her testi- tinguished the Gidatex holding because, in violation of Penal Law 250 for wire- mony. This would likely violate RPC in Meyer, the undercover investigation tapping and eavesdropping would be 3.4(b) and possibly the Penal Law’s was not focused on the misconduct at inadmissible. Evidence obtained by prohibition on tampering and intimi- issue in the lawsuit and instead focused unethical or unlawful means, absent dation of a witness. See NYSBA Comm. on the personal investigation of the specific legal authority, however, may on Prof’l Ethics, Op. 402 (1975) (The party and his counsel. Id.. Despite the still be admissible. See Gidatex, 82 F. opinion notes that “[c]are must be numerous clear distinctions in the man- Supp. 2d at 126, citing Stagg v. N.Y. C. taken . . . that the investigator not offer ner and purpose of the investigations Health & Hosp. Corp., 162 A.D.2d 595 any improper inducement to persuade in Gidatex and Meyer, the court went on (2d Dep’t 1990) (admitting testimony the witness to change the testimony to reject the holding in Gidatex and the allegedly in violation of ethics rule previously given”); RPC 3.4(b) (“A proposition that “investigators working and finding, “even if the matters to lawyer shall not . . . offer an induce- on behalf of a party to litigation may which the investigator testified were ment to a witness that is prohibited by properly make misrepresentations in unethically obtained, they neverthe- law or pay, offer to pay or acquiesce order to advance their own interest vis- less would be admissible at trial. New in the payment of compensation to a à-vis their legal adversaries.” Id.. York follows the common law rule witness contingent upon the content of Another common investigative that the admissibility of evidence is the witness’s testimony”); Penal Law technique that can be fraught with eth- not affected by the means through § 215, et seq. (this section of the Penal ical and legal implications is an inves- which it is obtained. Hence, absent Law addresses the prohibition of tam- tigator’s recording of communications. some constitutional authority man- pering and intimidation of witnesses). In New York State, it is not a crime dating the suppression of otherwise The manner in which private inves- to record a conversation without the valid evidence [ ], such evidence will tigators are compensated must also knowledge or consent of the other per- be admissible even if procured by be given close attention. Under GBL son. See New York Penal Law § 250.00, unethical or unlawful means”). § 84, it is unlawful for a licensed

NYSBA Journal | October 2016 | 59 private investigator to perform ser- private investigator’s actions as they feedback from me as well as other vices on a contingent basis or based can have severe repercussions for you, senior staff attorneys. After one of upon the result achieved. As a result your firm, and your client. A Kovel let- the junior attorneys had concluded of this provision, and a number of ter establishing the terms of the private his summation, one of my colleagues Rules of Professional Conduct, neither investigator’s engagement to you at critiqued him as follows: “You did you nor your client may compensate the outset of the litigation is advisable. a great job, but next time try to turn a private investigator on a contingent This can help you to preserve attor- down the gay. A jury is not likely fee basis or based upon the result the ney-client and work-product privilege, to react positively to it.” The junior private investigator obtains. (See RPC establish how you want the investiga- attorney is openly gay. I watched his 1.2(d) (“A lawyer shall not counsel tor to communicate with you, make reaction and he was visibly upset a client to engage, or assist a client, it clear that the investigator does not and taken aback by the comment. As in conduct that the lawyer knows is disclose confidential information to his supervisor, I’m deeply concerned illegal or fraudulent”); 8.4(a); 3.4(b); anyone else, and raise any potential about how to address this situation. N.Y.C. Assn. B. Comm. Prof. Jud. Eth., legal or ethics issues that you believe One the one hand, my senior col- NYC Eth. Op. 1993-2 , 1993 WL 765495 might be relevant in the investigation. league was trying to provide con- (1993)). Similarly, a lawyer cannot If you believe that your investigator is structive feedback because jury bias engage in fee-sharing with a nonlaw- acting unethically or in violation of the toward counsel may clearly have an yer. RPC 5.4(a); see In re Friedman, 196 law, it is certainly advisable that, at a effect on the outcome of a case. On A.D.2d 280 (1st Dep’t 1994). minimum, you end your engagement the other hand, my colleague’s com- Attorneys may, however, advance with the private investigator. ments could be construed as being the fees of a private investigator, make Sincerely, highly offensive and insensitive, if the repayment by the client contingent The Forum by not discriminatory. How should I, as on the outcome of the case, and charge Vincent J. Syracuse, Esq. a supervisor, be addressing this issue actual interest incurred for the expens- ([email protected]) and internally with my colleagues and es. Specifically, RPC 1.8(e)(1) provides Maryann C. Stallone, Esq. with the junior attorney? Do I have an that “a lawyer may advance court costs ([email protected]) and obligation to do something? And if so, and expenses of litigation, the repay- Carl F. Regelmann, Esq. how do I approach the issue without ment of which may be contingent on ([email protected]) exposing my team to liability? the outcome of the matter.” Professor Tannenbaum Helpern Syracuse & Sincerely, Simon notes that “expenses of litiga- Hirschtritt LLP A. M. AWKWARD tion” include the “fees of a private investigator.” (Simon, Simon’s New York Rules of Professional Conduct Annotated, QUESTION FOR THE INDEX TO p. 543; see NYSBA Comm. on Prof’l NEXT ATTORNEY ADVERTISERS Ethics, Op. 1044 (2014)). To the extent PROFESSIONALISM FORUM that a lawyer incurs interest charges for the advanced fees in a contingent I work for a governmental agency. We Yunlan (US) Investment fee action, the client may be charged recently held a training workshop for Management Inc. 61 for interest actually incurred by the our junior staff attorneys pertaining AffiniLaw/LawPay cover 3 lawyer if it is explained to the client to trial advocacy. The attorneys were in advance, including the method by required to cross-examine witnesses, Arthur B. Levine 23 which the rate of interest is calculated, and give opening and closing state- and it is agreed upon by the client in ments as part of the training. After Bloomberg BNA 19 writing. RPC 1.5(c); N.Y.C. Ass’n B. their closing statements, they received Center for International 61 Comm. Prof. Jud. Eth., NYC Eth. Op. Legal Studies 1997-1, 1997 WL 1724481 (1997). You must also retain proof of payments to In Memoriam DecisionQuest 35 private investigators for seven years. RPC 1.15(d)(1)(vi). Ronald E. Feiner Ryan P. Kaupelis NAM 7, 27 New York, NY Yonkers, NY In summary, utilizing a licensed Myron Fishbach Bryon C. McKim Savvy Group 51 private investigator can be very help- Stamford, CT Albany, NY ful to both you and your client if the Thomson Reuters cover 4 William L. Fox Thomas J. O’Connell investigation focuses on the issues that East Greenbush, NY Mt Kisco, NY are the subject of your litigation. It is USI 4 Francis S.M. Hodsoll Bruce David Zeidman inadvisable, however, to bury your Falls Church, VA Haddonfield, NJ head in the sand when it comes to the

60 | October 2016 | NYSBA Journal CLASSIFIED NOTICES

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NYSBA Journal | October 2016 | 61 HEADQUARTERS STAFF EMAIL ADDRESSES THE NEW YORK BAR FOUNDATION

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62 | October 2016 | NYSBA Journal 2016-2017 OFFICERS MEMBERS OF THE HOUSE OF DELEGATES

First District Sigmond, Carol Ann Hage, J. K., III Keiser, Laurence Claire P. Gutekunst †* Alcott, Mark H. Silkenat, James R. LaRose, Stuart J. Marcus, Robert B. B. President Alden, Steven M. Silverman, Paul H. McCann, John T. * Miller, Henry G. Yonkers Alsina, Neysa I. Singer, David C. Murphy, Hon. James P. Morrissey, Dr. Mary Beth Alvarez, Janet Sonberg, Hon. Michael R. * Richardson, M. Catherine Quaranta Sharon Stern Gerstman Arenson, Gregory K. Spirer, Laren E. Stanislaus, Karen * Ostertag, Robert L. President-Elect Berman, Mark Arthur Spiro, Edward M. Wasmund, Mark Ranni, Joseph J. Buffalo Brown Spitzmueller, Janiece * Standard, Kenneth G. Westlake, Jean Marie Starkman, Mark T. Brown, Earamichia Stong, Hon. Elizabeth S. Williams, James M. Thaler-Parker, Jessica D. Scott M. Karson Chakansky, Michael I. Udell, Jeffrey A. Townley, Rosemary A. Sixth District Treasurer Chambers, Hon. Cheryl E. 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Napoletano, Domenick Clarke, Christopher Justin First, Marie-Eleana Seventh District First District Richman, Steven H. Cooper, Ilene S. Flynn, Erin Kathleen Adams, Holly A. Romero, Manuel A. England, Donna Taa R. Grays, New York * Forger, Alexander D. Baker, Bruce J. Seddio, Hon. Frank R. Ferris, William Taber, III Michael Miller, New York Gallagher, Pamela Lee Brown, T. Andrew † Shautsova, Alena Fishberg, Gerard Galligan, Michael W. * Buzard, A. Vincent Second District Simmons, Karen P. Franchina, Emily F. Gische, Hon. Judith J. Castellano, June M. Domenick Napoletano, Brooklyn Steinhardt, Hon. Marsha L. Genoa, Marilyn Glass, David L. Christensen, Amy L. Sunshine, Hon. Jeffrey S. Glover, Dorian Ronald Third District Goldberg, Evan M. Cicero, Jill M. Ventura, Lourdes M. Hillman, Jennifer F. Goldfarb, David Gaddis, Sheila A. Henry M. Greenberg, Albany Weston, Hon. Michelle Karson, Scott M. Gonzalez, Hon. Lizbeth Hetherington, Bryan D. Kase, Hon. John L. Fourth District Grays, Taa R. Third District Jackson, LaMarr J. Lapp, Charles E., III † Gutekunst, Claire P. Bauman, Hon. Harold J. * Moore, James C. Matthew R. Coseo, Ballston Spa * Levin, A. Thomas Haig, Robert L. Behe, Jana Springer Moretti, Mark J. ifth istrict Levy, Peter H. F D Hills, Bethany Burke, Jane Bello * Palermo, Anthony Robert Makofsky, Ellen G. Stuart J. LaRose, Syracuse Himes, Jay L. Calareso, Mrs. JulieAnn Rowe, Neil J. Mancuso, Peter J. Hoffman, Stephen D. Coffey, Daniel W. * Schraver, David M. Sixth District McCarthy, Robert F. Hollyer, Arthur Rene Gailliard, Glinnesa D. Shaw, Mrs. Linda R. Meisenheimer, Patricia M. Alyssa M. Barreiro, Ithaca †* James, Seymour W., Jr. Gerbini, Jean F. Tennant, David H. * Pruzansky, Joshua M. Kenney, John J. Greenberg, Henry M. * Vigdor, Justin L. Seventh District * Rice, Thomas O. Kiernan, John S. Grogan, Elizabeth Janas * Witmer, G. Robert, Jr. David H. Tennant, Rochester Strenger, Sanford Kiernan, Peter J. Hacker, James E. Eighth District Tarver, Terrence Lee Eighth District Kiesel, Michael T. Heath, Hon. Helena Bloom, Laurie Styka Tully, Rosemarie * King, Henry L. Hersh, MartinN Cheryl Smith Fisher, Buffalo Brown, Joseph Scott Wicks, James M. Kobak, James B., Jr. Hines, Erica M. * Doyle, Vincent E., III Winograd, Elliott C. Ninth District Koch, Adrienne Beth Hurteau, Daniel Joseph Effman, Norman P. Sherry Levin Wallach, Mount Kisco Krausz, Diane F. Kean, Elena DeFio Eleventh District Fisher, Cheryl Smith †* Lau-Kee, Glenn Mandell, Adam Trent Alomar, Karina E. Tenth District * Freedman, Maryann †* Leber, Bernice K. Meyers, David W. Bruno, Frank, Jr. Saccomando Peter H. Levy, Jericho Lindenauer, Susan B. † * Miranda, David P. Carola, Joseph, III † Gerstman, Sharon Stern Madden, Hon. Joan Anne Onderdonk, Marne L. Cohen, David Louis Eleventh District Halpern, Ralph L. Mandell, Andrew Rivera, Sandra DeFelice, Joseph F. * Hassett, Paul Michael Karina E. Alomar, Ridgewood Maroney, Thomas J. Rosiny, Frank R. 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R. David Louis Cohen Reitzfeld, Alan D. Birnbaum, James M. Cohen, Orin J. Schwenker, Eric C. Michael L. Fox Richter, Aimee L. Bowler, Richard J. Marangos, Denise Sciocchetti, Nancy Robertson, Edwin David Braunstein, Lawrence Jay Marangos, John Z. Michael W. Galligan Walsh, Joseph M. Rosner, Seth Burke, Michael K. Martin, Edwina Frances Evan M. Goldberg Wildgrube, Michelle H. Russell, William T., Jr. Burns, Stephanie L. McGinn, Sheila T. Wood, Jeremiah Ira S. Goldenberg Safer, Jay G. Fay, Jody Miller, Claire C. Bryan D. Hetherington Schnabel, David H. Fifth District Fox, Michael L. Scheinberg, Elliott Schwabe, Clara G. Fennell, Timothy J. Goldenberg, Ira S. Elena DeFio Kean Out-of-State * Seymour, Whitney Gaal, John Goldschmidt, Sylvia Jochmans, Hilary F. Bruce J. Prager North, Jr. Gensini, Gioia A. Gordon Oliver, Hon. Arlene Sheehan, John B. Sandra Rivera Shamoon, Rona G. † * Getnick, Michael E. Hyer, James L. Sheldon Keith Smith Sicular, David R.

† Delegate to American Bar Association House of Delegates * Past President

NYSBA Journal | October 2016 | 63 THE LEGAL WRITER BY GERALD LEBOVITS

By Popular Demand: Demand Letters

ou don’t always need to litigate solved by then, use your demand let- Alarmed, Ms. Imitate calls you to ask to get what your client wants. ter to persuade a court that you gave the owner to stop using her restau- YSometimes all you need is a let- fair notice to the recipients for them to rant’s name. She doesn’t want those ter. In this column, we’ll discuss how perform their obligations and warned bad reviews to affect her business. You to write a demand letter and what to about the potential consequences of a write a demand letter to the party at do when you get one. failure to perform.2 your client’s request. In response, the other restaurant owner asserts that Meaning and Purpose Before you write he’s been using the trademark longer A demand letter is a pre-litigation tool Research than Ms. Imitate has, and sues her.5 designed to fix a problem before you’re Before you write a demand letter, In this example, pre-writing research forced to go to court. Demand letters evaluate your client’s chances of suc- could have helped Ms. Imitate make a serve a number of favorable purposes: ceeding in future litigation. Interview decision in light of the facts and avoid- to prompt recipients to resolve conflict; your client, review documents, and ed unintended consequences. to help recipients understand the con- conduct legal research.3 Your letter Once you’ve prepared, the research sequences of their acts; and to warn might not get your intended result if stage concludes with your identifying recipients what’ll happen if they don’t you neglect pre-writing research. your letter’s purpose and audience,6 remedy the situation. A successful Identify and understand the issue including your reader’s legal experi- demand letter will persuade the recipi- before drafting your letter. Objectively ence, educational level, language ent to take your demands seriously. analyze your client’s claim and inves- skills, age, and physical, emotional, tigate the facts. Make sure you have and mental condition.7 Respect basic the most up-to-date information from your client. Use the information you Writing demand letters letter-writing get, but examine the accuracy of the Once you’re ready, start drafting. Be principles when information. Verify that your client has clear, concise, accurate, and straight- clean hands and hasn’t been neglecting forward. A professional and effective drafting a demand any part of the contract. If your client demand letter can be structured using letter. is partly responsible for the situation, these guidelines.8 adapt your demand accordingly.4 Some statutes or rules require attor- Get copies of pertinent documents. Form neys to send a demand letter as a For example, if your client has agreed Demand letters follow similar rules as prerequisite, or condition precedent, to to lend money to a friend and they have other formal letters: suing. Even if the law doesn’t require a a written agreement regulating the • Heading. demand letter as a condition precedent parties’ obligations and rights, obtain Include your contact information, to litigation, an agreement might. An the agreement. Follow the agreement’s the client’s contact information, agreement is the law between the par- prerequisites. If the agreement dictates and the current date. Unlike other ties. If an agreement dictates the steps that a 10-day notice be sent before a letters, you don’t need a “regard- to take before suing, both your actions lawsuit may be initiated, comply with ing,” or “re,” line to indicate the and your demands must comply with the agreement. purpose of your letter. On the left, the agreement. Example: Your client, Ms. Imitate, write the recipient’s contact infor- You can use demand letters to tell is reading a newspaper and sees bad mation. recipients that they can solve a conflict reviews about a neighborhood restau- • Salutation. by performing an act or obligation in a rant. The restaurant has the same name Usually takes the form of Dear – given time frame.1 If the conflict isn’t as the one she opened six months ago. Continued on Page 54

64 | October 2016 | NYSBA Journal

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