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Derivative Claims in Landlord/Tenant Court

Posted: June 24th, 2013

By Patrick McCormick

In a case of apparent first impression in New York, in Gorbrook Associates Inc., and Norman Fishman, derivatively on behalf of Gorbrook Associates, Inc., v. Ilene Silverstein, John Doe and Jane Doe1, Judge Scott Fairgrieve held that the summary holdover proceeding was properly instituted derivatively by a shareholder on behalf of the corporation.

The petition alleged that petitioner Norman Fishman was an officer and owned 25 shares of Gorbrook and that Fishman and Allen Silverstein were the only directors of Gorbrook. As set forth in the decision, the petition further alleged that Ilene Silverstein was the daughter of Allen Silverstein and sister of Eric Silverstein and that Allen Silverstein and/or Eric Silverstein “arranged for Ilene Silverstein and her husband to move into the premises without a lease or contractual or statutory grant, authority or other basis.” Further still, the petition alleged that Fishman had demanded that Allen Silverstein cooperate or not interfere with Gorbrook’s efforts to secure use and occupancy payments from Ilene or to remove Ilene and her husband from possession of the premises; that Allen Silverstein was aware that Fishman wanted to collect such payments or to obtain possession of the premises; that Allen Silverstein refused to cooperate with Gorbrook’s efforts and that Allen Silverstein opposed the relief sought in the petition so that “it would have been futile for N. Fishman to attempt to secure the approval of A. Silverstein to seek such relief assuming arguendo that such approval was necessary.” A thirty day notice to quit was served and upon the refusal to vacate the premises the holdover proceeding was commenced. Respondents moved to dismiss under CPLR 3211(A)(7) alleging that Norman Fishman did not have authority to bring the proceeding and that a shareholder could not maintain a summary proceeding derivatively.

Not surprisingly, there is more to the story. The moving and opposing papers revealed that Ilene Silverstein had entered into a contract to purchase the subject premises and that the contract was signed by Fishman. When the closing did not occur after the declaration of a “time of the essence” closing date, Gorbrook, by Fishman, terminated the contract and an action was commenced in Nassau Supreme Court wherein Ilene Silverstein sought a declaratory judgment that the contract was valid. Ilene Silverstein also alleged in an affidavit that Fishman owned 25% of Gorbrook’s shares, that Allen Silverstein owned 25% of the shares; 25% were owned by her sister-in-law Robin Silverstein and 25% were owned by Rita Fishman as beneficiary of the estate of Ted Fishman, Norman’s brother. Ilene also alleged that there were 3 directors of Gorbrook: Norman Fishman, Allen Silverstein and Robin Silverstein. Ilene also alleged that she moved into the premises with Fishman’s consent. Robin Silverstein submitted an affidavit wherein she claimed she was a 25% shareholder and was a director and secretary of Gorbrook and that Fishman commenced the proceeding “on his own volition and does not have authority to evict Ilene Silverstein.” Allen Silverstein submitted an affidavit claiming he owned 25% of the shares and was a director with Robin Silverstein and that he was the vice-president of Gorbrook. The Silversteins alleged that Fishman did not have authority to commence the summary proceeding and that the proceeding was vindictive and designed to force Allen Silverstein to make financial concessions in a dissolution proceeding for Gorbrook.

Norman Fishman submitted an affidavit stating that: “Respondents are trying to use Allen Silverstein and Robin Silverstein’s membership on the board of directors to prevent Gorbrook and Norman Fishman from acting derivatively on behalf of Gorbrook”; that he “has a 31.25% ownership interest and that Allen Silverstein has a 18.75% interest”; that the “only two members of the board are Norman Fishman and Allen Silverstein”; and that neither the sale contract or any modification permitted occupancy of the premises and that he protested the occupancy.

Judge Fairgrieve held that “a derivative action may be maintained by Norman Fishman on behalf of the corporation Gorbrook.” The court reasoned that “[t]he economic benefit of the summary proceeding belongs to the corporation and not to Norman Fishman, individually . . . Any recovery from a shareholder’s derivative suits inures to Gorbrook and not to the shareholder who instituted the suit . . . Thus any recovery belongs to the corporation. Since the corporation is the owner of the premises and will receive the benefit of the summary proceeding an action may be brought pursuant to RPAPL §721 because Gorbrook is the owner of the property.” The Court also found that Fishman’s pleading adequately pled grounds establishing that a demand on the board of directors to initiate the summary proceeding would be futile and that sufficient specific facts were alleged showing that the other directors would not be impartial and therefore, because “Gorbrook has the right to protest and enjoy the economic benefits to be derived from ownership of said premises . . . this summary proceeding may be brought by Norman Fishman derivatively on behalf of Gorbrook Associates.”

The Court’s Decision/Order is worthy of review not only for the discussion of the viability of the derivative claim but also for the Court’s analysis and determination that Norman Fishman did not have the authority as a director and treasurer to institute the proceeding directly in the name of Gorbrook. This proceeding and the Court’s Decision confirm that sometimes summary eviction proceedings can involve complex issues usually reserved for Supreme Court litigation.

1 District Court of Nassau County, First District, L&T Part, Index Number LT-004906-10, Decided May 14, 2013

College Kids Are Adults

Posted: June 23rd, 2013

By: Martin Glass, Esq. email

Tags: estate planning

The summer before my oldest went off to college, we all went for an orientation weekend. While there, he went off and did his thing and my wife and I went off and did ours. In one of our parent orientation seminars we were reminded that, now that he is 18, he is officially an “adult” in the eyes of the law. We, as parents, would no longer have the automatic legal right to make his healthcare decisions, have access to his healthcare records in an emergency, or be included in any of his financial decisions. Who was paying their enormous bill was irrelevant. His life became private and confidential.

Amid the hustle and bustle of getting your kids off to college, it is easy to forget that you need to make sure they have signed a healthcare proxy and a HIPAA authorization form. (HIPAA is the federal law which prohibits physicians and hospitals from disclosing confidential medical records to anyone other than the patient, unless the patient has expressly authorized another person to have access to his records.) The consequences of forgetting these simple forms can be tragic. If something should happen to your child while at college (such as an injury or illness), you do not want to be told by some doctor or hospital employee in a far-off state that they cannot even talk with you about your child’s medical status.

This is especially true when the potential harm is so easily prevented. With a healthcare proxy, your child signs a document appointing you as their healthcare agent, who will be authorized to make healthcare decisions for them if they ever become unable to make their own decisions. In addition, your child can leave a living will, in which they can specify what kind of end-of-life medical treatments they want (or do not want).

With a HIPAA authorization, your child simply names the person or persons to whom medical personnel may release his or her medical information. This includes the person named as their healthcare agent, but may include others, such as siblings.

Lastly, your child should sign a Durable Power of Attorney. Just because you’re the one actually paying the school’s tuition does not automatically allow you to see his financial records. A Power of Attorney naming you as the Agent will allow you access to his bank accounts, along with his school loans and other financial documents. A Power of Attorney is a bit different from a Healthcare Proxy in the fact that you are given the power immediately after it is signed and you keep the power even if your child becomes incapacitated.

A few years later, my daughter’s college has actually made this a bit easier. They have a form that they give to all incoming students where the student can name who is allowed to talk to the Bursar and Financial Aid Office. Unfortunately, that still can leave you with a problem should you need to speak with a bank regarding your child’s loans.

These documents may seem trivial and typically are not looked at on the same level as a Last Will and Testament, but they should be. Actually, for a young adult with not a lot of “stuff” or assets, these documents can be more important, as they can have an immediate impact on a potentially critical situation.

Supreme Court Focuses on Arbitrations and Class Actions

Posted: June 23rd, 2013

According to Justice Elena Kagan, the Supreme Court’s recent decision confirming a corporation’s ability to require arbitration in the event of a dispute is “Too darn bad.” The June 20, 2013 decision in American Express Co. v. Italian Colors Restaurant (No. 12-133) considered the situation of an Oakland, California restaurant which, along with other merchants, had commenced a class action lawsuit against American Express for violations of the Sherman and Clayton federal antitrust acts. According to Italian Colors and its fellow merchants, American Express used its monopoly power in the credit card market to force merchants to accept credit cards at rates 30% higher than the fees for competing cards.

The credit card agreements between American Express and each of its merchants require that all disputes be resolved by arbitration, and provide that there “shall be no right or authority for any Claims to be arbitrated on a class action basis.” Citing these agreements, American Express moved to dismiss the class action and to compel individual arbitration with each merchant under the Federal Arbitration Act. In opposition to the motion, the merchants submitted an affidavit from an economist who estimated that the expert analysis required to prove the merchants’ antitrust claims could cost “at least several hundred thousand dollars, and might exceed $1 million,” while each plaintiff’s maximum recovery would be $38,549. Even so, the District Court granted the motion, but the Court of Appeals reversed, finding that the merchants “would incur prohibitive costs if compelled to arbitrate under the class action waiver.” If all of the merchants could share the costs in a class action, pursuing these claims would be much more feasible.

Although the merchants argued that requiring each of them to individually arbitrate their claims would violate federal antitrust laws, the Supreme Court disagreed, finding that Congress had established the legality of binding arbitration agreements (such as that at issue in this case). As Justice Antonin Scalia, writing for the majority, noted: “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim.” The Court found that even with a class action off the table, each merchant still had a remedy, albeit an expensive one: “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” The Court’s decision essentially validated the credit card company’s contract mandating arbitration and eliminating the possibility of a class action.

While some observers lauded the decision as an endorsement of alternative dispute resolution and a win for contractual freedom, others, such as Justice Kagan, voiced their concern. Recognizing that cost effectively barred Italian Colors from proving its case outside a class action setting, Justice Kagan wrote that under the majority’s decision, “Amex has insulated itself from antitrust liability — even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.”

DOL Inspection Preparation for Employers

Posted: June 10th, 2013

Most employers know that the U.S. Department of Labor (DOL) oversees compliance with the Fair Labor Standards Act (FLSA) and other statutes that protect workers. What many employers may not be aware of, however, is that the DOL has the authority to conduct inspections of workplaces and bring enforcement actions against employers found to be in violation of the FLSA and related statutes
governing wage payments. Employers may be investigated, inspected, audited, or visited by the DOL Wage and Hour Division (“WHD”) without explanation. Most often, complaints prompt DOL visits, though the existence of a complaint is not always disclosed to the employer. It is critical for employers to prepare for and understand their rights during inspections, investigations and audits. The following highlights some key points to prepare you and your team for a U.S. Department of Labor investigation.

Pre-inspection preparation. Before a government investigation begins, there are preventive measures that employers should take.
a) Check current and past 1099’s going back several years to review job duties to ensure proper classification of independent contractors vs. employees.
b) Review timekeeping systems to ensure that non-exempt employees are being paid for all work performed (including overtime).
c) Ensure that all required payroll records and written policies and procedures are current, accurate and complaint and updated regularly, keeping on top of applicable laws and regulations.
d) Train managers with key concepts of Wage Hour Law (exempt vs. non exempt).
e) Familiarize all employees with the basics of overtime and record keeping under the FLSA.
f) Familiarize key employees with DOL inspection procedure and appoint an employee representative for WHD inspector interviews.
Opening Conference & Preliminary Inspection. The inspection begins with the arrival of the investigator who will likely identify him or herself. The investigator will either present their credentials or an employer may request them. The investigator will request to meet with the employer or representative. An opening conference is conducted, which is when the employer is informed of the purpose of the inspection and the investigation process is explained. Some tips:
a) Clarify the scope of the investigation. Know exactly what they are looking for and don’t provide more than what is asked.
b) Consider your option to demand a subpoena vs. consenting to an investigation.
c) Know that the DOL must give the employer 72 hours to respond to demands and conduct the investigation during reasonable hours not to interrupt normal business operations.
d) Expect the DOL to request and be prepared to provide copies of at least the previous three years of payroll records, and all written policies, practices and procedures (i.e. timekeeping requirements
and procedures).
e) It is not unreasonable to request additional time to prepare the requested documents, although not all investigators will comply with this request.
Document Production. The investigator may request records for examination. Records are
examined to determine of the amount of business transactions, interstate commerce participation, government contracts, the layout of the facility, and payroll and time records.
a) Label all documents produced with “Confidential and Proprietary,” and keep all trade secrets or confidential business information under cover sheets.
b) Make and keep duplicates of every record produced to the DOL.
c) Bates-stamp each produced document to better track and reference what was produced.
On-Site Inspections and Interviews. Investigators may conduct private employee interviews that may occur on the employee’s premises, at the employee’s home, by mail, or by telephone. Both former and present employees may be subject to investigation interviews.
a) During the investigation have a manager escort the WHD representative at all times while on site (except during interviews).
b) Track the activity of the WHD representative; subjects of his questions, written notes, etc.
c) Employers do not have the right to participate in non-exempt employee interviews, but do have the right to attend all management interviews.
d) Once DOL decides who they want to interview, schedule all interviews in advance and prepare employees.
e) Remember that you must never retaliate against employees for agreeing to be interviewed or because of anything they say during an interview.
Closing Conference. A closing conference is conducted at the end of the investigation with the employer. The investigator will inform the employer of standards violated, corrections to be made, abatement dates, and citations may be issued. If the DOL finds any violations: a)Copies of the citation will be provided by mail and employers must post citations where affected employees can view them.
b) Be prepared for follow up inspections to ensure corrections are made and citations are posted.
c) Request time to provide supplemental information to correct any factual errors that form the basis of a proposed violation.
d) In deciding wither to contest the DOL’s findings, consult counsel to review whether the alleged violations are accurate, if the penalties are excessive and if the finding exposes you to costly
compliance measures.

During more in-depth investigations, compliance officers may conduct preliminary investigations including looking into whether or not a complaint is valid, and checking on prior or current investigations for the same employer. Additionally, they may collect copies of prior inspection reports, inspector’s notes, interviews, signed statements, and information on previous complaints. An employer may provide a written position statement and request time to consult legal counsel. Investigators may also subpoena documents and witnesses.

6. Remedies for Violations. Depending on the violation, type of investigation, and who performed the investigation, remedies will vary. Financially, employers may be subject to the payment of back wages, civil money penalties, employee suits for recovery, and Secretary of Labor lawsuits brought on behalf of employees. Legally, employers may be subject to court injunctions brought by the Secretary of Labor, criminal penalties, and court injunctions that prohibit further violations. Certain statutes subject employers to the withholding of funds, administrative hearings, court actions, loss of federal contracts, and the declaration of ineligibility for future contracts. Protection will be provided to the employees who file complaints or provide information for the investigation. Charges of retaliation, and potentially criminal sanctions, may occur if employees are affected after an investigation.

7. Conclusion. Employers should be proactive as opposed to reactive in this area. They should conduct self-audits at least yearly to make sure they are in compliance with applicable laws enforced by the United States Department of Labor. Employers should also train their employees what to do if when an investigator shows up at the facility. Early planning and knowing how to respond to an inspection could
potentially save an employer thousands of dollars and protect the employer from criminal prosecution.

May 2013 Legal Brief – Firm Newsletter

Posted: May 30th, 2013

Second Circuit Holds that Appropriation Art Constitutes Fair Use

Posted: May 29th, 2013

Tags: intellectual property

In a recent decision, Cariou v. Prince¹, the Second Circuit held that 25 works of appropriation art that incorporated original copyrighted photographs constituted fair use under the Copyright Act, 17 U.S.C. § 107. Appropriation art is the “more of less direct taking over into a work of art a real object or even an existing work of art.”²

In this action, defendant Prince took Cariou’s photographs and incorporated them into 30 works. Images of the 30 works and the corresponding Cariou photographs used are available through the Second Circuit’s website:
http://www.ca2.uscourts.gov/11-1197apx.htm.

Cariou sued for copyright infringement and the district court granted Cariou summary judgment, holding that no reasonable jury could find Prince’s work to be fair use. The Second Circuit reversed in part, vacated in part and remanded for further proceedings.

The Second Circuit’s analysis focused on the four non-exclusive fair use factors provided in the Copyright Act: (i) the purpose and character of the use, including whether the use is commercial or for nonprofit educational purposes; (ii) the nature of the copyrighted work; (iii) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (iv) the effect of the use upon the potential market for the value of the copyrighted work.

Under the first standard, the Second Circuit found that 25 of the 30 works were transformative because they “manifest an entirely different aesthetic from Cariou’s photographs.”³ The court focused on the differences between the two artists’ “composition, presentation, scale, color palette, and media.”

Under the second factor, the Second Circuit acknowledged that Cariou’s work was both creative and published, which weighted against a finding of fair use, but noted that this factor is of less importance where, as here, the work is used for a transformative purpose.⁴

Under the third factor, even though Prince used all or substantially all of Cariou’s photographs in some of his works, the Second Circuit held that this does not necessarily weigh against fair use because the copying of the entirely of a work is sometimes necessary to make a fair use of the image. In this case, Prince’s 25 works transformed Cariou’s photographs into “something new and different.”⁵

Lastly, under the fourth factor, the Second Circuit focused on whether the secondary work usurps the market of the original work. An alleged infringer usurps the market of the original work and its derivatives when the target audience and the nature of the infringing content are the same as the original. In this case, the Second Circuit found that Prince’s work appeals to “an entirely different sort of collector than Cariou’s” work and that this factor weighs in favor of Prince.⁶

With respect to five of the 30 works at issue, the Second Circuit remanded the case back to the district court for further proceedings.

¹ Cariou v. Prince, Case No. 11-CV-1197, 2013 WL 1760521 (2d Cir. April 25, 213).
² Cariou, 2013 WL 1760521, at *2.
³ Id. at *6.
⁴ Id. at *9.
⁵ Id. at *10.
⁶ Id. at *9.

July 21 – New York Civil Practice & Discovery Update CLE

Posted: May 28th, 2013

gavel freeimages.com Please join us on Thursday, July 21 for a complimentary CLE focusing on critical updates to the CPLR and court rules as well as recent case law that significantly impacts New York civil practice and discovery. Taught by two experienced litigators, CMM partners Scott Middleton and Patrick McCormick, the course will cover a wide variety of topics of interest to all who practice in New York State courts including deposition rules, subpoena standards, privilege issues, electronic evidence, and discovery hurdles facing every practitioner.

The application for New York accreditation of this course is currently pending.

A light dinner will be served.

Thursday, July 21, 2016

5:00 p.m. – 7:00 p.m.

Campolo, Middleton & McCormick, LLP
4175 Veterans Memorial Highway, Suite 400
Ronkonkoma, NY 11779

This seminar is free but registration is required. Please RSVP to Lauren Kanter-Lawrence, Esq., Director of Communications, at Lkanter@cmmllp.com or (631) 738-9100, extension 322.

I Left a Child Out of My Will. Now What?

Posted: May 28th, 2013

By: Martin Glass, Esq. email

Tags: estate planning

Is this a tragic scenario? Probably not, but it certainly represents what is an entirely avoidable estate planning consequence. Here’s the dilemma. Assume after having your first child, you do the smart, responsible thing — you draft a Last Will and Testament which sets forth your final wishes with regard to the distribution of your estate. Fast forward a couple years and say that your first child now has a sibling and that you unintentionally failed to accommodate for in your Will. OK, one last fast forward in time. Twenty-five years later, despite your best intentions and the daily grind always seemingly getting in the way, you find that you never quite got around to updating your Will to reflect your wishes regarding that later born child before you pass away. So much for the best laid plans.

Even though you love your children equally and probably want them to similarly share in your estate, will that actually happen? Will that later born child you omitted from your Will be disinherited because of your planning error, or will the law accommodate her somehow? These are scary questions. It’s my hope to not only calm your fears, but prompt you to action in order to avoid any unwanted estate planning consequences down the road.

If it’s not already abundantly clear, today I’m writing about the inheritance rights of children in New York, and specifically those that are left out of a parent’s estate plan (sometimes referred to pretermitted heirs). For better or worse, it’s more common than you might think that children are left out of a parent’s Will. The good news is that New York State recognizes that drafters sometimes make unintentional planning errors. The legislature has set in place certain rules to ensure that pretermitted children are not precluded from inheriting.

Under New York law, a child omitted from a Will is entitled to inherit the equivalent of his or her intestate share of the estate, which translates into that portion of the estate that he or she would have received had the parent died without a Will in the first place. The only caveat to this rule is that the parent must not have expressly disclaimed or disinherited the child. In New York, short of successfully contesting a Will, testamentary provisions that disinherit an adult child will typically stand. So while disinheriting a child can prove to be the death knell to his inheriting, a simple inadvertent omission won’t typically prove fatal to a child inheriting.

Could the confusion of this entire scenario have been avoided from the get go? Of course, and in particular, there are two ways it could have been achieved. The first method I offer is a simple alternative for those who don’t want to regularly revisit their wills. For anyone planning on having more than one child (and even those who aren’t), a qualified estate planning attorney knows the proper language to include in a Will to accommodate for the possibility of after born children. Consult with counsel and be sure he knows your plans/intentions so that the proper verbiage can be included in your Will. Although this does usually work, it is not my preferred method. It could easily cause resentment between the siblings-either because Mom didn’t love me enough to even bother updating her Will, or the classic, “Mom loved you best.”

The second method I offer is a bit harder to accomplish. As far as I’m concerned, Wills and Estate Plans occasionally need to be revisited and adjusted based on the present conditions of your life. Plain and simple, these adjustments are absolutely necessary as the circumstances in one’s life change, whether it be because of a new child, divorce, retirement, etc. In order to do your heirs justice and make sure that your wishes are carried out, update your Estate Plan as necessary. While it’s easy to be lazy and assume that your existing Will accomplishes all of your intended estate planning goals, don’t make assumptions. It might cost you a little bit extra to revisit your plan on occasion, but it could mean the difference between your wishes being carried out or not.

Study Finds the Roberts Supreme Court the Friendliest Court to Business in Decades

Posted: May 28th, 2013

The decisions of the current Supreme Court are the friendliest to business of any court since World War II, according to a recent study published in the Minnesota Law Review.

In “How Business Fares in the Supreme Court,” Lee Epstein, William M. Landes, and Richard A. Posner discuss their analysis of nearly 2,000 decisions from 1946 through 2011. The study considered cases with a business on only one side. A vote in favor of the business was considered a pro-business vote.

The authors concluded that five of the ten Supreme Court Justices who have been most favorable to business currently serve on the Court, and two of them, Chief Justice John G. Roberts, Jr. and Justice Samuel A. Alito, Jr., ranked at the top of the list of the 36 most pro-business Justices in the study. The study found that after Roberts and Alito were appointed to the Court, the other three conservative Justices became more business-friendly in their decisions. The authors surmise that “the three may not have been as interested in business as Roberts and Alito and decided to go along with them to forge a more solid conservative majority across a broad range of issues.”

In an article about the Minnesota study that appeared earlier this month in the New York Times (http://nyti.ms/19krzbQ), Adam Liptak highlighted two areas in which the Supreme Court has recently exercised its pro-business view: (1) by protecting companies from class action lawsuits, and (2) favoring arbitration to resolve business disputes.

In March, the Court dismissed an antitrust class action that Comcast subscribers brought against the company, finding that the plaintiffs were not sufficiently cohesive as a class to allow the suit to continue as a class action. In that decision, Comcast v. Behrend, the Court affirmed its 2011 decision in Wal-Mart v. Dukes, in which the Court threw out a sex discrimination class action brought by a million and a half female employees. As Liptak noted in his article, “[t]he decisions essentially required early scrutiny-by a judge, not a jury-of the ultimate legal question in high-stakes cases [i.e., which party should prevail], sometimes before all the relevant evidence has been gathered.” Business groups, which have sought to limit plaintiffs’ ability to bring class actions, applauded the decision.

The Supreme Court has also given businesses extra protection in the area of dispute resolution. In AT&T Mobility LLC v. Concepcion, the Court found that a form AT&T required its customers to sign requiring the resolution of disputes through arbitration rather than in court was a valid contract. As Liptak notes, this decision empowered businesses by allowing them to shield themselves from class actions by way of arbitration agreements.

According to the Minnesota study, the Roberts Court is far friendlier to businesses than any of its recent predecessors. This blog will trace decisions of import from the Roberts Court and analyze the impact of these decisions on business.