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Criteria for the “Fiduciary Exception” to the Attorney-Client Privilege in the Context of a Derivative Action Explained

The First Department, in a full-fledged opinion by Justice Acosta, in a matter of first impression, developed analytical criteria for determining whether documents sought by the plaintiff major investor (NAMA) in defendant limited liability company (Alliance) (formed for a major real estate development project) were protected by the attorney-client privilege. The documents at issue are communications between the managers of defendant Alliance and their attorneys, defendant Greenberg.  Supreme Court held that the 3000 communications were not protected by attorney-client privilege pursuant to the “fiduciary exception” to the privilege (re: derivative actions) because the interests of the plaintiff were not adverse to Alliance. However, that finding was not based upon a review of the communications. The First Department determined each individual communication must be reviewed to find whether it evinces an adversarial relationship. If so, such “adversity” would be only one factor to weigh in concluding whether “good cause” exists to invoke the “fiduciary exception” to the privilege. The First Department adopted the reasoning of a Fifth Circuit case, Garner v Wolfinbarger, 430 Fed 1093, which sets out a list of factors to be applied in finding good cause to apply the fiduciary exception to the privilege. “Adversity” is but one of those factors:

In the corporate context, where a shareholder (or, as here, an investor in a company) brings suit against corporate management for breach of fiduciary duty or similar wrongdoing, courts have carved out a “fiduciary exception” to the privilege that otherwise attaches to communications between management and corporate counsel. * * *

In 1970, the U.S. Court of Appeals for the Fifth Circuit extended the fiduciary exception to the corporate environment in Garner v Wolfinbarger (430 F2d 1093 [5th Cir 1970], cert denied 401 US 974 [1971]), for the first time allowing shareholders to use the exception to pierce the corporate attorney-client privilege. The Garner court was persuaded by two English cases that “treat[ed] the relationship between shareholder and company as analogous to that between beneficiaries and trustees” (id. at 1102). Relying on those cases and the traditional crime-fraud and joint-representation exceptions for the proposition that the corporate attorney-client privilege is not absolute, the court summarized its reasoning in the following way:

“[W]here the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance” (id. at 1103-1104). * * *

While some factors in the Garner test are relevant to a determination of adversity, Garner did not create a categorical adversity limitation. Thus, adversity is not a threshold inquiry but a component of the broader good-cause inquiry. Moreover, of the Garner factors that pertain to adversity, some will indicate whether the parties are generally adverse, while others will require a review of the communications in dispute; the relevant factors may weigh against finding good cause to apply the fiduciary exception with respect to those communications that reveal adversity. Accordingly, a court may find that the party seeking disclosure has shown good cause to be given access to some communications but not others. NAMA Holdings, LLC v Greenberg Traurig LLP, 2015 NY Slip Op 07346, 1st Dept 10-8-15

 

Exclusion of Defendant’s Brother from the Courtroom Based Upon the Fear of a Testifying Witness Was Proper, Despite Lack of Express Findings by Trial Judge

The First Department determined the exclusion of a single spectator (defendant’s brother) during the testimony of a witness was proper, despite the absence of express findings by the trial judge. The witness expressed her fear of defendant’s brother. The court explained the analytical criteria:

The People established an overriding interest that warranted a courtroom closure that was limited to the exclusion of a single spectator during the testimony of a single witness … . Contrary to defendant’s arguments, the witness articulated a specific fear of testifying in the presence of defendant’s brother, and we find that this fear justified the limited closure … . The trial court was in the best position to determine whether the witness’ expression of fear rose to a level justifying the closure. We note that the court was aware of the brother’s approach to a different witness. Although “a timely objection . . . would have permitted the court to rectify the situation instantly by making express findings” …, defendant made no such objection, and thus did not preserve his complaint that the court failed to set forth express findings of fact to justify the exclusion of defendant’s brother. Accordingly, we decline to review this claim in the interest of justice. As an alternative holding, we find that the court’s ruling “implicitly adopted the People’s particularized showing” and was “specific enough that a reviewing court can determine whether the closure order was properly entered” .. . People v Williams, 2015 NY Slip Op 07335, 1st Dept 10-8-15

 

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Critieria for Amendement of a Notice of Claim Explained

The First Department determined Supreme Court should have granted plaintiff’s motion to amend the notice of claim to include mention of a defective handrail, despite plaintiff’s failure to invoke the proper statutory authority (General Municipla Law 50-e(5)). The court explained the criteria for an amendment:

Under GML § 50-e(5), a notice of claim may be amended within one year and ninety days of an accident to include new theories of liability … . Plaintiff’s cross motion was made eleven months after the accident, well within the one-year-and-ninety- day limitation period.

In determining whether an application for leave to serve a late notice of claim should be granted, a court shall consider “whether the public corporation . . . acquired actual knowledge of the essential facts constituting the claim within the time specified in subdivision one . . . or within a reasonable time thereafter” (GML § 50-e[5]). The court shall also consider “all other relevant facts and circumstances,” including whether the delay “substantially prejudiced the public corporation in maintaining its defense on the merits” (id.).

“In determining whether the city was prejudiced by any mistake, omission, irregularity or defect in the notice [of claim], the court may look to evidence adduced at a section 50-h hearing, and to such other evidence as is properly before the court'” … . * * *

We have previously held that prejudice will not be presumed … . Moreover, “[i]t may not be shown without evidence of an attempt to investigate the accident” … . Given defendant’s actual knowledge of the facts constituting the claim within a reasonable time after the accident, and the lack of evidence of an attempt to conduct an investigation either before or after it obtained knowledge of the issue concerning the handrail in this accident …, “conclusory assertions of prejudice, based solely on the delay in serving the notice of claim, are insufficient” … . Thomas v New York City Hous. Auth., 2015 NY Slip Op 07328, 1st Dept 10-8-15

 

Late Disclaimer on a Valid Ground Not Excused

The First Department determined the failure to timely disclaim coverage on a valid ground was ineffective. The fact that other grounds for disclaimer might have been investigated does not excuse the late disclaimer: …”Insurance Law § 3420(d) ‘precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid . . . while investigating other possible grounds for disclaiming'”… . Endurance Am. Specialty Ins. Co. v Utica First Ins. Co., 2015 NY Slip Op 07329, 1st Dept 10-8-15

 

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Elements of Causes of Action for (1) Misappropriation of (a) Trade Secrets, (b) Business Ideas, and (c) Labor, Skills and Expenditures, (2) Breach of Fiduciary Duty (Delaware Law), (3) Aiding and Abetting Breach of Fiduciary Duty (Delaware Law), (4) Unjust Enrichment, and (5) Promissory Estoppel Described in Some Detail

The First Department, in a full-fledged opinion by Justice Richter, determined the complaint stated causes of action against the Cohen defendants for essentially stealing plaintiffs’ ideas for a website. Defendant Cohen, an investor, eventually served as chairman and CEO of a company formed by plaintiffs to develop the website. The complaint alleged that Cohen caused a strain among the partners which stalled the project. Cohen circulated a liquidation agreement which was never addressed by the other partners. Then, the complaint alleged, Cohen took the plaintiffs’ ideas and website-development work to the founders of Pinterest, which, the complaint alleged, was formed based upon the ideas Cohen misappropriated from plaintiffs. The plaintiffs sued the Cohen defendants and Pinterest. All the causes of action against Pinterest were dismissed by Supreme Court. The First Department held the complaint stated causes of action against the Cohen defendants for (1) breach of fiduciary duty (under Delaware Law), (2) misappropriation of trade secrets, (3) misappropriation of ideas, (4) and misappropriation of labor, skill and expenditures. (Apparently the unjust enrichment cause of action, which Supreme Court dismissed only re: Pinterest, was not a subject of the appeal.) The First Department found that all the causes of action against Pinterest were properly dismissed.   The opinion includes detailed descriptions of the elements of breach of fiduciary duty (Delaware law), aiding and abetting breach of fiduciary duty, unjust enrichment, misappropriation of trade secrets, misappropriation of ideas, misappropriation of labor, skills and expenditures, and promissory estoppel. The discussions are too extensive to be fairly summarized here.  Schroeder v Pinterest Inc., 2015 NY Slip Op 07232. 1st Dept 10-6-15

 

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Unlike a “State Human Rights Law” Cause of Action, a “New York City Human Rights Law” Cause of Action Is Supported If Racial Bias Played “Any Role” (As Opposed to a “Motivating and Substantial Role”) In the Discriminatory Action

The plaintiff alleged he was terminated from employment due to racial bias and sued under the Executive Law (New York State Human Rights Law) and under New York City Human Rights Law. Plaintiff acknowledged that he was sleeping on the job, a legitimate reason for termination. Plaintiff’s New York State Human Rights Law cause of action was dismissed because plaintiff could not show that racial bias played a “motivating or substantial role” in the termination. But, because the criteria for a cause of action under the New York City Human Rights Law are broader, the New York City Human Rights Law cause of action survived summary judgment. Under the New York City Human Rights Law, if termination was motivated “in part” by racial bias, even though there was a legitimate reason for termination, the termination is actionable:

The Court of Appeals has recognized that the New York City Human Rights Law must be construed “broadly in favor of discrimination plaintiffs, to the extent that such a construction is reasonably possible” … . Thus, the New York City Human Rights Law is to be more broadly interpreted than similarly worded federal or State antidiscrimination provisions … . The Appellate Division, First Department, has interpreted the New York City Human Rights Law as requiring that unlawful discrimination play ” no role'” in an employment decision … . Our Court has expressed general agreement with the First Department’s interpretation of the New York City Human Rights Law … . Thus, under the broadly worded and broadly interpreted New York City Human Rights Law, if the supervisor’s decision to report the plaintiff was motivated by racial or ethnic animus, even in part, the defendant may be held liable.

The evidence undisputedly established that the plaintiff’s employment was terminated by the defendant because the plaintiff was found to be asleep while on duty, in violation of its rules. Additionally, there was evidence that the defendant had a zero-tolerance policy with respect to violations of that rule. Further, it is also not disputed that the defendant’s no-tolerance policy regarding the termination of the employment of employees found sleeping while on duty is a legitimate policy. Nevertheless, the plaintiff presented evidence that his supervisor reported him to the defendant’s management in part out of racial animus, and did not report other, non-Indian employees who were found sleeping while on duty. Thus, the plaintiff raised a triable issue of fact as to whether his supervisor’s unlawful discrimination, which is to be imputed to the defendant, played a role in the termination of the plaintiff’s employment. Accordingly, the Supreme Court erred in granting that branch of the defendant’s motion which was for summary judgment dismissing the cause of action alleging a violation of the New York City Human Rights Law … . Singh v Covenant Aviation Sec., LLC, 2015 NY Slip Op 06911, 2nd Dept 9-23-15

 

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Question of Fact Whether City Liable for Shooting by an Off-Duty Police Officer Under Negligent Hiring, Retention and Supervision Theory—Akin to Negligently Entrusting a Dangerous Instrumentality (Weapon) to Another

The First Department, in a full-fledged opinion by Justice Renwick, determined plaintiff had raised a question of fact whether the city was liable for the death of the police officer’s girlfriend (plaintiff’s decedent) under a negligent hiring/retention/supervision theory. The shooting occurred when the officer, Maselli, was off duty in his home. Plaintiff alleged the city had notice of Maselli’s violent propensities:

In this case, the alleged duty owed to plaintiff stems from New York’s long recognized tort of negligent hiring and retention … . This tort applies equally to municipalities and private employers … . This theory of employer liability should be distinguished from the established legal doctrine of “respondeat superior,” where an employer is held liable for the wrongs or negligence of an employee acting within the scope of the employee’s duties or in furtherance of the employer’s interests … . In contrast, under the theory of negligent hiring and retention, an employer may be liable for the acts of an employee acting outside the scope of his or her employment … .

Thus, in this case, plaintiffs’ negligence claims do not depend on whether Maselli acted within the scope of his employment or whether the City participated in, authorized, or ratified Maselli’s tortious conduct. Rather, the alleged breach of duty stems from the claim that during Maselli’s employment with the City, the City became aware or should have become aware of problems with Maselli that indicated he was unfit (i.e. possessed violent propensities), that the City failed to take further action such as an investigation, discharge, or reassignment, and that plaintiff’s damages were caused by the City’s negligent retention, or supervision of Maselli.

The negligent retention or supervision of a police officer, which results in the employee having possession of a dangerous instrumentality, is similar to if not indistinguishable from the tort of entrusting a dangerous instrumentality to another. The duty analysis should be the same. “One who supplies directly or through a third person a chattel for the use of another whom the supplier knows or has reason to know to be likely because of his youth, inexperience, or otherwise, to use it in a manner involving unreasonable risk of physical harm to himself and others whom the supplier should expect to share in or be endangered by its use, is subject to liability for physical harm resulting to them” … . The duty not to entrust a gun to a dangerous or incompetent police officer thus extends to any person injured as a result of the negligent entrustment. Gonzalez v City of the New York, 2015 NY Slip Op 06869, 1st Dept 9-22-15

 

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Question of Fact Whether Former Tenants Entitled to Pass Apartment to Their Son Under the Rent Stabilization Law

The First Department determined there was a question of fact whether former tenants had stopped using their apartment as a primary residence, or whether they had permanently vacated the apartment. Under the terms of an agreement (Settlement Agreement), if the former tenants had permanently vacated the apartment, they were entitled to pass the apartment to their son, who had been living there most of his life. If, on the other hand, the former tenants merely stopped using the apartment as their primary residence, they could not pass the apartment to their son. The former tenants had moved to Uganda, where they had a home. They returned to New York every year to visit and used the apartment during the visits:

Although the parents no longer have rights to the apartment, there are still disputed issues of fact regarding whether at the time the parents moved to Uganda, they permanently vacated the apartment or continued to use the apartment as nonprimary residents. This issue and disputed facts directly affect the son’s right (if any) to a successor tenancy. If the parents permanently vacated, then the son would have rights as a successor. If, however, the parents continued to use the apartment as non-primary residents, the son’s claim would fail This issue precludes the grant of summary judgment to either side on the issue of whether the son has successor rights.  Waterside Plaza Ground Lessee, LLC v Rwambuya, 2015 NY Slip Op 06867, 1st Dept 9-22-15

 

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Under the Facts, the Prosecutor Was Not Obligated to Present Exculpatory Evidence to the Grand Jury—Defendant Did Not Exercise His Right to Testify Before the Grand Jury

The First Department determined defendant’s motion to set aside the verdict on the ground the prosecutor did not charge the grand jury on the justification defense was properly denied. The indictment alleged the defendant attacked the victim, Valdez, with a machete. At trial, the defendant testified that Valdez attacked him with a baton and he used a knife in self-defense. It was revealed at trial that Valdez did in fact have a baton at the time of incident, that Valdez had not told the police about the baton, and that, months later, he told the prosecutor about the baton before the matter was presented to the grand jury. The defendant chose not to testify before the grand jury. No mention of the baton, or that the defendant made a statement claiming he acted in self-defense, was made in the grand jury proceedings and the grand jury was not instructed on the justification defense. The First Department held that the prosecutor’s failure, in the grand jury proceedings, to present evidence the victim had a baton, or that defendant stated he acted in self-defense, did not amount to misconduct justifying the dismissal of the indictment. The court emphasized the defendant’s failure to exercise his right to testify before the grand jury to present exculpatory evidence, and explained the nature of the prosecutor’s duty to present exculpatory evidence to the grand jury:

It is axiomatic that a prosecutor, in presenting evidence and potential charges to a grand jury, is ” charged with the duty not only to secure indictments but also to see that justice is done'” … . The role of the grand jury is not only to investigate criminal activity to see whether criminal charges are warranted but also to protect individuals from needless and unfounded charges … . For that reason, justification, as an exculpatory defense that if accepted eliminates any grounds for prosecution, should be presented to the grand jury when warranted by the evidence … . However, a prosecutor, in presenting a case to a grand jury, is “not obligated to search for evidence favorable to the defense or to present all evidence in [the People’s] possession that is favorable to the accused . . . In the ordinary case, it is the defendant who, through the exercise of his own right to testify . . . , brings exculpatory evidence to the attention of the Grand Jury” … . Thus, a prosecutor is not obligated to present to the grand jury a defendant’s exculpatory statement made to the police upon arrest … . Where, however, a prosecutor introduces a defendant’s inculpatory statement to the grand jury, he is obligated to introduce an exculpatory statement given during the course of the same interrogation which amplifies the inculpatory statement if it supports a justification defense … . * * *

Assuming arguendo that, as claimed by defendant and denied by the People, the ADA did know about the … baton at the time of the grand jury proceedings, dismissal of the indictment based on the failure to charge the grand jury on justification still would not be warranted. “[A] Grand Jury proceeding is not a mini trial . . . The prosecutor . . . need not disclose certain forms of exculpatory evidence . . . [Nor is] the prosecutor . . . obligated to present the evidence or make statements to the grand jurors in the manner most favorable to the defense” … . As previously noted, a prosecutor is “not obligated to search for evidence favorable to the defense or to present all evidence in [the People’s] possession that is favorable to the accused . . . In the ordinary case, it is the defendant who, through the exercise of his own right to testify . . . , brings exculpatory evidence to the attention of the Grand Jury”… . People v Morel, 2015 NY Slip Op 06865, 1st Dept 9-22-15

 

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Principal’s Failure to Follow the Performance-Rating Procedures Required by the School District and Collective Bargaining Agreement Deprived a School Social Worker of a Fair Review Process—Unsatisfatory Rating (U-Rating) Annulled

The First Department determined the principal’s failure to comply with the relevant performance-rating procedures deprived petitioner, a school social worker, of a fair review process.  Petitioner’s unsatisfactory rating (U-rating) was annulled:

Petitioner establishes that in evaluating her performance, respondents did not adhere to their procedures or those provided in the parties’ collective bargaining agreement. Special Circular No. 45, a memorandum issued by respondents in response to the mandate set forth in the Commissioner of Education Regulations (8 NYCRR) § 100.2(o), outlines the procedures for rating professional personnel, as does the related manual produced by the New York City Public Schools, entitled Rating Pedagogical Staff Members. Specifically, as a pedagogical employee, petitioner was to be given at least one full period of review during the school year by her principal, followed by a meeting with the principal to discuss her strengths and any areas in need of improvement. Additionally, as a social worker employed at a school, she should have been evaluated by the school principal in consultation with the in-discipline supervisor, in accordance with the collective bargaining agreement. * * *

…[T]he complete absence of constructive criticism and warnings during the entire school year, compounded by the lack of a formal observation and accompanying feedback during the school year, “undermined the integrity and fairness of the process” … . Accordingly, the judgment should be reversed, and the petition granted to the extent of annulling the U-rating. Matter of Murray v Board of Educ. of the City School Dist. of the City of N.Y., 2015 NY Slip Op 06866, 1st Dept 9-22-15

 

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