New York Business Lawyer Blog

Technology is not the only thing you need to investigate insurance fraud. Technology might tell you who to question, but someone still has to do the questioning. Analysis of big data might give you a lot to talk about, but someone, preferably with a little training and experience, is going to have to have that conversation. Technology might be able to sort through a tremendous amount of otherwise indecipherable data in order to identify, or obtain, clues about possible fraud. No matter how good the technology, no matter how vast the meta-data, no matter how many computers parse the data, a skilled investigator still has to connect the dots, and, eventually, a lawyer still has to convince a jury that those dots create a clear, unmistakable picture of fraud.

The interview, where one real person talks to another, is necessary in all fact-finding, whether it be a fraud investigation, a deposition in litigation, or a criminal prosecution. How to obtain information from people, however, is an art, not a science. There might be rules to follow and methods to learn but, by themselves, they are not enough.

An article in the June 1-2, 2013 Weekend Edition of the Wall Street Journal points out the art, and skill, involved in obtaining information from people who may be reluctant to provide it. The author, Jason Matthews, is an ex-CIA agent with more than 30 years of experience, who worked in what now is known as the National Clandestine Service. He talks about what it takes to convince people to spy against their own country. The key, he argues, is to find out what motivates a person. He describes four basic motivational factors, common to all people, that he used. Known by the acronym MICE, they are: money, ideology, conscience, and ego. According to the author:

Money is the most straightforward motivational factor. It's a business deal: the spy gives you useful information, you give him money. Greed may not be good, but it evidently can get you what you want.

Ideology, or the sudden loss of it, is the most potent factor of all, according to Matthews. The example he uses to prove his point, however, really proves another: sometimes, the most motivated person is the one driven by revenge against someone they trusted who hurt them or their family. Matthews describes one of the best assets in CIA history, Dmitri Polyakov. He was a Soviet military officer stationed in the United States, whose son became fatally ill. Moscow refused to allow his son to be treated by an American doctor. He became one of the best spies in CIA history. Simple.

The most potentially dangerous, is the spy motivated by conscience, especially if he is out to save, or to atone for the sins of, the world. In many ways this could describe the NSA leaker, Edward Snowden. If you read his coming out story in the Guardian newspaper, he justifies his leaks by claiming the American public must be told of the NSA's programs because they simply have gotten too big, with too much room for abuse. He describes how he is a champion of internet freedom and does not want to live in a world in which there is no privacy, where the government knows your every move. He doesn't seem to have been motivated by money since he reportedly earned $200,000 per year as a defense analyst and, as he pointed out, did not sell his secrets. He seemingly wasn't motivated by ego, either, since, according to the Guardian's reports, he was a former staffer for the CIA and had a fairly important job with a contractor within the NSA. In other words, he leaked classified information to atone, in his mind, for what he alleges are the sins of his government.

Ego is a tricky tool to use. If a normally meek person has his ego properly stroked, he'll overcome his fears to provide what he is made to believe is crucial information. Once convinced that he's important, that people depend on him, however, he'll always need to be re-assured.

Importantly, blackmailing potential agents, threatening to expose their sexual or other misconduct, doesn't work too well. The agent you get will be unreliable, and the information he gives won't be much better.

What makes the article interesting is that most everyone likes a good spy novel, and sometimes real life is stranger, and better than, fiction. Learning about how the spy world operates always is intriguing, and enlightening.

What makes the article useful is that it demonstrates some of what goes into the art of persuasion. The same thing does not work with everyone; scripts are no good. You have to pay attention to the person. In many ways it's more difficult to read a person than to read a book, and it requires a lot more thought and experience. In many ways, though, it's the same; the true meaning isn't just in what the words say.

An average person, who, right or wrong, feels stuck in the rut of his everyday life, may jump at the chance to tell what he knows about the accident he witnessed, especially when he finds out that five people claimed they were hurt while in the car in which he saw only two people. The single mother, trying to make ends meet in her low-paying job at the local clinic, may be able to put up with the lies and the cheating; she won't risk her children's welfare just to stop fraudulent billing. She will, however, reluctantly tell what she knows in order to make sure that no one else gets hurt by being put under for a medical procedure they didn't even need. Even the arsonist will tell you, if you'll only understand, that he really thought he could put out the fire, he wanted to be the hero, except that the fire just spread too fast.

The author, Jason Matthews, says that a bond of trust needs to be established. In a way he's right. There has to be a reason the witness wants to give you the information; often you can see it, staring right there at you. It doesn't have to be anything big; nothing grand. You can hear it, if you listen; it may be faint, but it's there. Every person has a different story to tell and a different reason for telling it. You'll never know what it is unless you listen. Listening and trust often go together; maybe they are even the same thing. One thing seems pretty certain, though: you can't have one without the other; and that is a good lesson for every interviewer to learn.

Negotiations are an important part of everyday existence for all businesses, whether big, medium, or small, whether they are located in New York, around the country, or anywhere in the world. Every time businesses buy and sell goods and services, they negotiate. Business owners want to buy low and sell high. They want to break into a market either by undercutting their competition or by charging a premium for their product to convince buyers of its superior quality. Business negotiations impact the lives of everyday people, too. Everyone knows what a Kindle is, what an iPad is, and what e-books are. Many either have, or know someone who has, at least one of them. In the last few years it's become common for people to walk around with their nose in their tablet, either reading an e-book or surfing the web. Business negotiations played a big part in making this happen.

A good negotiator is a hard person to find. She's someone no one else wants to go up against, but everyone wants, and needs, on their side. Whether you can become one is open to debate, but there are a few things every business owner, corporate officer, or attorney, i.e., anyone involved in negotiations on a regular basis, can do to increase their chances of success. Perhaps the most important thing is knowing what you want. Recent news stories point this out.

The United States Department of Justice has sued Apple over its alleged role in price-fixing the retail cost of e-books; the trial started this past Monday, June 3, 2013, in the United States District Court for the Southern District of New York. According to news reports, Apple is charged with conspiring with publishers to raise the price of e-books in 2009 when it sought to enter the e-book market with its iPad. At that time Amazon.com was selling 90% of all e-books, some at a loss, in order to support its e-reader, the Kindle, which it introduced two years earlier. Apple was looking for a way into the market, and the publishers reportedly were looking for a way to increase prices, and presumably profits. Allegedly Apple, at the suggestion of two of the publishers, agreed to a different pricing model than Amazon.com. The agency-model, as it was called, let the publishers set the price for the e-books and set Apple's compensation as a fixed percentage of the sales price. According to published reports, the Department of Justice alleges that Apple's entry into the market gave the publishers what they had been looking for: a way to increase the price of e-books. Apple is the sole remaining defendant in the case; the publishers have settled.

What makes the Apple trial interesting is the way it demonstrates the stakes, and strategies, involved in business negotiations. Even Apple, the maker of personal electronics that can be found everywhere, had to negotiate its way into a market that was dominated by its competitor. Its apparent decision to accept a compensation agreement favorable to its suppliers, whether that was because the suppliers had the upper hand or because it presented a win-win situation, had ramifications not only for itself and its suppliers, but for the whole consumer marketplace. The Justice Department has challenged even the one type of the provision cited in news reports that explicitly benefitted Apple, the so-called most-favored-nation clauses. These permitted Apple to lower the sales price of an e-book if one of its competitors sold it for less. The thinking probably was that Apple did not want to be undersold, and therefore lose potential customers. How could they effectively compete if their competitors consistently sold the same product for less? If this bit of self-preservation is determined to be unenforceable, what impact will it have on the music and television industries where most-favored-nation clauses reportedly are common?

There is a negotiation strategy, referred to as the added-value, or win-win, strategy, which might explain the pricing plan Apple agreed to with the publishers. It says that a good way to get what you want is to offer as close to a win-win situation as you can. If you make the pie bigger, show the other side how you both can benefit from an on-going, mutually rewarding relationship, you often can achieve more of what you want than if you view negotiations as purely an adversarial, zero-sum game in which one side wins and one side loses. The agency plan clearly benefitted the publishers, who now could set, and therefore raise, the price of e-books. Apple might have believed that it was more beneficial to increase the number of e-books it could, and did, sell, than increase the percentage profit it made on each e-book.

We do not know how Apple's compensation under the agency plan was arrived at. News reports said that Apple was to receive 30% of the sales price of each e-book it sold. There is a way Apple might have been able to increase its compensation, if it had wanted to. New research has found that a negotiator can gain the upper hand when she sets a specific, precise dollar figure, instead of a rounded-off, approximate figure, during negotiations. The research, conducted at the Columbia Business School, by Professors Malia Mason and Daniel Ames and doctoral students Alice Lee and Elizabeth Wiley, found that those offering the precise dollar figure were perceived to be better informed about the true value of the offer they were negotiating. As a result, they received more of what they wanted in the negotiation because the person they were negotiating with believed there was less room to maneuver.

No matter what strategy you use, it is always a good idea to have a game plan before you enter into negotiations. Knowing what you want, and having a plan on how to get there, are more than half the battle.

There is no shortage of trial attorneys in New York, or around the country. What makes a good trial attorney, however, is open to debate. How to become one is even more difficult to define. Is it something you can master through hard work and perseverance; is it something you have to have a natural aptitude for; or is it some combination of both? As we previously discussed, there is a lot of practice involved in trial practice. It is important to practice and to do it in the right way; but is it enough?

People believe they know a good trial attorney when they see one and often even when they don't. Most people base their opinion, in large part, on results. Many believe that a good trial attorney is the lawyer who wins huge verdicts, defeats frivolous lawsuits, repeatedly gets his indicted clients off with not guilty verdicts or hung juries (Bruce Cutler comes to mind), or a prosecutor who finally does send the bad guy away for an extended prison stay (Andrew J. Maloney and John Gleeson sound familiar). Judging trial attorneys based on results alone is at least somewhat misleading. It ignores the fact that lawyers can only play the hand they're dealt; it's what they do with that hand that's important. Would anyone argue that Johnnie Cochrane was a better trial attorney than Clarence Darrow, even though Darrow lost one of the most famous trials in modern history?

Even if the characteristics of a great trial attorney are hard to define, there most certainly are a large number of lawyers who would like to be one, and no shortage of qualified consultants to help them achieve success in any given case. The question is, can this be done and who, if anyone, can do it?

We all grew up with the idea that you can be anything you want if you put your nose to the grindstone; through hard work and perseverance you can achieve your dream. Decide what you want to do, practice long and hard enough, and you can become great; except that maybe you can't. New research, led by Zach Hambrick, associate professor of psychology at Michigan State University, concludes that practice alone, no matter how much, is not enough to make one great; it is necessary, but you need something more.

Hambrick and his colleagues tried to determine what influence practice had on an individual's performance in areas requiring a high level of skill. They reviewed 14 studies of chess players and musicians, to determine how practice related to differences in performance. The amount of practice, they found, accounted for only one third of the difference in an individual's skill level. Even then, some individuals achieved elite status without a large amount of practice and others did not master their skill even with copious amounts of practice.

The remaining differences in performance, the researchers theorize, can be accounted for by a person's innate ability or her working memory capacity, which is closely related to general intelligence. Working memory capacity basically is the ability to store and process information, either visually or verbally, to keep it in mind, while using it to complete a task. Hambrick's prior research found that individuals with higher working memory capacity performed complex tasks, such as piano sight reading, better than ones with lower working memory capacity, even when those with the lower working memory capacity had extensive experience and knowledge in the task at hand.

This research bears out the truth behind the adage that it is not just what you know but how you use it that makes all the difference. Having specialized knowledge is not enough. In order to be great, you have to be able to draw on that knowledge, to use it while performing your task, in order to master your skill. And that is what great trial attorneys do. They draw on their experience and knowledge, while presenting the case to the jury. They think on their feet; anticipate problems and how to overcome them; pick up on things others might miss, not because of any magical skill, but because they learn from their practice, their experience, their prior trials, what is important to a jury. They plan ahead, prioritize, remember what the jurors in the last trial said after the verdict and figure out a way to use it to their advantage this time. They bring everything they learned from their past successes, and their mistakes, to the here and now, the present, in order to make their presentation better, more compelling, and more convincing.

To a large degree, a great trial attorney is no different than a great jazz musician who first learns the scales and the chords, until they are almost second nature, before he uses them to improvise magical riffs; or a great quarterback who uses his vast knowledge of his playbook and the opposing defenses, in order to call an audible that results in a huge gain. The same way the jazz musician uses his knowledge to react to what the other players are doing on stage, or the quarterback reacts to the defensive package no matter how well it is camouflaged, a great trial attorney draws on his knowledge, skill, and experience to react to what the opposing party actually says and does during the course of a trial. When he asks a question he actually listens, and reacts, to the answer, and improvises additional questions along the way. He can take a witness down a winding, segmented path, and never lose a step when he calls the witness back to a particular telling statement or contradictory remark. The musician, the quarterback, and the trial attorney each has to know the basics, gain the specialized knowledge, practice until it becomes second nature, and then be able to draw upon it to achieve his goal. No one is a great trial attorney the first time out; even the best lose some along the way; but you do know them when you see them, and they are fun to watch.

We are going to pick up where we left off in our last article on subrogation in New York. We were talking about a subrogation case I had that showed how to overcome an exculpatory clause in a contract that absolved one of the parties from liability for its own negligence. In my case, it was an alarm company that monitored a warehouse that had a break-in in which clothes valued at several hundred thousand dollars were stolen. If the alarm company's actions in responding to the alarms at the warehouse amounted to ordinary negligence, the subrogation action would fail because the insured, who signed the contract, could not recover, and therefore neither could the insurer. There could be a recovery, however, if the alarm company's actions amounted to gross negligence because, at least in New York, a party cannot absolve itself from liability for its own gross negligence. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554, 593 N.E.2d 1365, 1370-71 (1992).

According to the court, the basic facts were undisputed. The alarm company received alarms that something had happened at the warehouse, and notified the police and the designated representative of the business, as it was supposed to do. The police never arrived. The warehouse representative was told only that the alarms had been received. He thought they might be false alarms, as had happened in the past, and waited approximately a half hour for the alarm company guard to get to the warehouse, investigate, and call him back to let him know whether there had been an actual break in. When he did not get a call back, he went to bed. The alarm company, however, waited until the next shift, approximately three hours after it received the alarms, to have one of its guards respond to the warehouse to investigate, and it never told anyone from the warehouse that it would not be able to respond for so long; both were violations of its own guidelines. It also only had only a small number of guards on duty to respond to calls in a very large, populated area. In order to enter the warehouse the guards first had to travel back to the central station, get the key for the warehouse, and then drive a long distance back to the warehouse. Only then would they be able to investigate the alarms.

The key was not any one thing that the alarm company did wrong with this particular break in. The fact that it waited three hours to have a guard investigate the alarm, when it stated the guard would respond in 15 minutes, was not, by itself, gross negligence. Instead, I argued the evidence of gross negligence was found in a system that inevitably caused such delays: The evidence of the low number of guards on duty; the large area they had to cover; the long distance from the guard station to the warehouse that made it difficult even on a good night to make it to the warehouse in time; and the violation of its own guidelines. This was evidence of the gross disregard for the rights of others, of actions that smack of intentional wrongdoing, which is required to get to trial on claims of gross negligence.

Continue reading "Subrogation In New York V - Teamwork In Action " »

The last few articles have discussed the basic concepts and rules of subrogation in New York. It is the equitable doctrine that allows an insurer that pays a covered claim to its own insured to stand in the shoes of its insured to recover the money from the person or entity that caused the loss.

Subrogation, once you determine that the insurer can bring the claim, at least in claims involving property loss or damage to businesses, is really an exercise in commercial litigation. Whoever the insured could sue to recover for the loss it suffered, the insurance carrier also could sue; whoever the insured could not sue, the insurer also could not sue.

A good example of this is a subrogation claim I had that involved a theft of a few hundred thousand dollars of merchandise from a clothing warehouse. The thieves, who never were caught, were ingenious. They broke into the warehouse and jerry-rigged a conveyor system so that it brought the clothes right to the loading dock door. Once there, the thieves loaded the clothes into a waiting truck and drove off. The whole operation took approximately 2 hours; not bad for a night's work.

The warehouse, which had its own policy of property insurance, made a claim to recover for the value of the clothes, which its insurer paid because theft was a covered cause of loss under the policy. The insurance company then wanted to try to recover the money it paid the insured, from the parties responsible for the loss.

There was nothing that barred the insurance company from bringing a subrogation claim. The loss clearly was covered under the warehouse's own policy of insurance, which protected against losses caused by theft; the insurance company had to pay, it did not make a voluntary payment. The thieves were never found, so they could not be sued. The warehouse, however, had a central station alarm, and there was nothing in the alarm contract that barred a subrogation claim. There was a big obstacle, however, preventing the warehouse from recovering from the alarm company even if the alarm company's actions had caused the loss; and, if the warehouse could not recover, neither could the warehouse's insurer in subrogation. The alarm contract contained an exculpatory clause absolving the alarm company from liability for its own negligence. Unless the alarm company's actions amounted to more than ordinary negligence, there would be no recovery against it.

One way to overcome an exculpatory clause in a contract which absolves a party from liability for its own negligence, is to prove gross negligence. Gross negligence is the failure to use even slight care, or conduct that is so careless as to show complete disregard for the rights and safety of others; it smacks of intentional wrongdoing. At least in New York, a party cannot absolve itself from liability for its own gross negligence and, most often, whether a party's actions amount to gross negligence is an issue of fact to be tried by a jury rather than determined on a motion for summary judgement. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554, 593 N.E.2d 1365, 1370-71 (1992).

The insured, its representatives, and I worked as a team to obtain evidence that the alarm company was grossly negligent in how it responded to the alarms at the warehouse. The court said this was enough to defeat the alarm company's motion for summary judgement. We'll show how this was done, in our next article.

Perhaps one of the most misunderstood tools found in New York law is the injunction. Injunctions affect businesses big and small because they often are used in commercial litigation. Injunctions frequently make the news, especially when one is granted in a high profile case. Many times there will be news coverage of two parties just outside a courtroom, one triumphantly telling all who will listen that the end of the world has been averted; the other, down-faced and glum, saying only that he will live to fight another day. More often than not, the second one is right; for the injunction they most often talk about is a preliminary injunction, which is a provisional remedy that only lasts until the underlying case is decided on the merits.

Most recently, New York State tried to withhold school aid from New York City because the City and the local teacher's union have not agreed on a teacher evaluation plan. Some parents of children who attend New York City public schools sued to stop the aid from being cut. A New York state judge ordered the State not to cut the education aid; he did so by issuing a preliminary injunction. This doesn't mean that the parents won, the State lost, and the aid won't ever be cut. It does mean that the aid will not be cut for now, at least until the court renders a final judgement on the parents' lawsuit.

There actually are three different types of what commonly are known as injunctions. Though they might seem confusing, they really are straightforward:

- A Permanent Injunction.

This is a final judgement of the court after a trial on the merits of the case, which normally restrains or enjoins one of the parties from taking some action. It is an equitable remedy issued after all the relevant facts have been gathered, all the necessary discovery has been had, and a verdict has been rendered. A court does not have the power to issue a permanent injunction in advance of trial. See Oppenheim v. Thanasoulis, 123 App.Div. 494, 108 N.Y.S. 505 (1st Dept.1908).

- A Preliminary Injunction.

This stops a party from doing something, or, less frequently, orders that he take certain actions, even before the court has decided the case on the merits. This interim step, also known an injunction pendente lite, is a provisional remedy, often done to keep things as they are, to maintain the status quo, until the case itself has been decided. See CPLR 6301.

- A Temporary Restraining Order.

This is an instantaneous freeze issued while the court decides whether to order a preliminary injunction. That is, even before the court decides whether to stop someone from doing something, it stops that person from doing it, at least temporarily. See CPLR 6301.

Continue reading "Injunctions in New York - A TKO Before The Final Bell?" »

We have been discussing how much a New York business can recover from someone who damages its property. If the property is damaged, but not destroyed, the business normally can recover either the loss in market value caused by the damage, or the cost of repairs, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the property is totally destroyed, it can recover the reasonable market value of the property just before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the destroyed property is a business' sales inventory, the business normally can recover the wholesale cost of the merchandise, because that is what it would cost to replace the merchandise, and any damages actually sustained by reason of the absence of the articles while they are being replaced. See Dubiner's Bootery, Inc. v. Gen. Outdoor Adver. Co., 10 A.D.2d 923 (1st Dept. 1960). These rules seem intrinsically fair because each will put the business back to where it was before the loss.

A business also can try to recover for damage to its property by making a claim under the property coverage of its business owner's insurance policy. If the policy covers the type of property that was damaged, the damage was caused by something the policy insures against, and the insured otherwise has lived up to its obligations under the policy, the business owner should be able to recover for the damage to its property. The amount the business can recover depends on the language of the policy. It might be able to recover only the actual cash value of the property. One way to determine that is replacement cost minus depreciation. It might be able to recover the replacement cost of the property, without deduction for depreciation. For the destruction of sales inventory, it might be able to recover the sales price of that inventory, if it has purchased the proper coverage. Sometimes, an insurance policy, depending on how it is written, might reimburse the business for its lost income. Even then, however, the business should be aware that it cannot recover both the retail selling price of the damaged inventory and the income it would have earned by selling that same merchandise.

This is illustrated by J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept. 2006). The case involved J&R Electronics, an electronics retailer in Manhattan that was badly damaged as a result of the terrorist attacks in New York City on September 11, 2001. As a result, it made a claim to recover, under its policy of property insurance with One Beacon Insurance Company, for, among other things, the damage to its merchandise, and for its loss of business income. Pursuant to the terms of the policy, One Beacon paid J&R the selling price minus unincurred expenses for the damaged merchandise. That basically means that J&R was paid the selling price minus the money it normally would have spent in order to sell the merchandise. When One Beacon paid J&R's claim for loss of business income, it subtracted the amount it paid J&R for the sales price of the damaged merchandise. J&R objected to this, claimed the sales price should not be subtracted from its lost income, and sued. The appellate court held that J&R could not recover both the selling price of the merchandise and the lost income based on its failure to sell that same merchandise; to do so would have been to give J&R a double recovery.

What the court did in J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept. 2006), was to apply to an insurance policy the basic idea behind compensatory damages: to make the injured party whole. Since J&R, as a retailer, would have made money from selling its merchandise, it could recover that lost income only once. Anything else would have put J&R in a better position after the loss than it was in before the loss. It is that basic idea that every business should keep in mind when planning on how to recover if its property is ever damaged.

A business has to know how to recover for damage to its property. Most times it will need to use the money to repair or replace the damaged property or, in the most severe cases, to re-start the business.

In our last entry, we spoke about how a business can establish the amount it can recover from someone who damages its property. Normally, the business can recoup either the reasonable cost to repair the damaged property, or the loss of market value caused by the damage, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). Where the property is totally destroyed, the owner can recover the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934).

Though everyone likes to think the worst will never happen, it can, and often does, in strange and unexpected ways. Recently, on Long Island, a car crashed into the front of a house and drove all the way through to the backyard. This happened in the middle of the night, while the homeowner was asleep. Similar damage also can happen to a business. A couple of months ago, a car drove through the front of a print shop in Florida, through where the supplies were kept, while the store owner was helping a customer. Only a few weeks earlier, a car drove through the back of the same store.

Property damage affects all types of businesses, from retail stores to factories, from start-ups to well established companies. This winter a fire heavily damaged three stores in Smithtown, Long Island. The fire reportedly started in a bar, which had to be closed for repairs; it had opened only a few weeks earlier. In May, a bell factory in East Hampton, Connecticut, was so badly damaged by fire that it was trying to temporarily re-locate so it could re-start production on a limited basis while rebuilding its facilities; the company had operated for 180 years and was the last bell factory in this country. Sometimes, property damage, even from a mundane cause, can be so extensive that it totally shuts down a business. Last week, a custom car tuning shop outside of Rochester, New York was damaged so severely by fire that it had to close; the fire reportedly started in an electrical circuit box.

It is clear that all types of businesses suffer when their property is damaged. One affected by a special set of rules is a retail store. For example, if a car drove through a grocery store, or a clothing shop, in New York, what could the store owner recover from the driver for the destruction of its stock or sales inventory? That would depend on the market value of the property immediately before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). What, however, is the market value of the destroyed food, or clothes, and how is it determined?

Continue reading "What a New York Business Should Know About Recovering for Damage to its Property (II)" »

Everyone knows that if someone damages their property, they should be able to make that person pay for the damage. The Owner of the damaged property should be able to recover as long as it can prove the other person was liable for the damage. Many people, however, including business owners, are unclear about how much they can recover, and what they need to do in order to recover.

A business needs its property to operate, whether that's its equipment, stock, inventory, or its office or warehouse space. When property is damaged in New York, how much can the owner recover from the party that caused the damage, and how is that amount determined? Knowing the answer, in order to ensure that the damage can be repaired, is essential to good business planning. The answer depends, to a large degree, on the type of property and how badly it is damaged.

Property Damage can occur at any time, and often in unexpected ways. It can consist of damage to real property, such as to a building, or damage to personal property, such as to the contents of a building, the personal belongings in a house or an apartment, the business personal property in a leased store or office, or the equipment and stock a business uses to operate. It can affect anyone who owns property, including a business, a landlord, a tenant, a homeowner, or a car owner.

Recently, there was a story in the news that shows just how easily property can be damaged and how quickly the cost of repairs can add up. A hotel in Austin, Texas, claims it suffered $10,000 of property damage because several beer bottles were dropped from the 29th floor into its pool and hot tub. As a result, the pool and hot tub had to be drained to make sure that all of the glass was removed so that no one would be hurt, and the filters for the pool and hot tub had to be repaired. Evidently, a little mischief can cause a lot of damage. The beer bottles were dropped from a privately owned condominium located above the hotel. According to the article, the owner of the Hotel planned to sue the owner of the condominium to recover the cost to repair the damage. If this happened in New York, what would the Hotel have to do to establish that it suffered $10,000 of damage?

When property is damaged in New York because of the negligence of someone else, like the person who dropped the beer bottles into the Hotel pool (the "Defendant"), the basic goal is to make the Owner of the property "whole". That means that a court will try to put the Owner back into the exact same position she was in immediately before the damage occurred. See Ward v. New York Cent. R. Co., 47 N.Y. 29, 33 (1871). The Owner of the damaged property cannot wind up being better off than she was before the property was damaged. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44, (1934). This generally means that the Owner can recover either the difference between the market value of the property immediately before and immediately after it was damaged, or the reasonable cost to restore the property to the same condition it was in before it was damaged (the "Repairs"), whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 536-37 (2002), and Dilapi v. Empire Drilling & Blasting, Inc., 62 A.D.3d 936, 937, (2nd Dept. 2009).

Continue reading "What a New York Business Should Know About Recovering for Damage to its Property" »

We have been discussing what records a New York Business should keep on file when it is faced with litigation: Records that are relevant to whether it should win or lose the dispute, and any records that could lead to such evidence. We also have spoken briefly about the different penalties that can be imposed for failing to preserve those records. For the most part, they consist of making it harder to win the dispute once a lawsuit has been commenced. Now we are going to analyze the legal requirements for imposing sanctions on the party that fails to save relevant evidence when it has a duty to preserve the evidence.

This may seem like an esoteric discussion, without implication to the typical New York business. There are, however, myriad examples of businesses being penalized for transgressions involving the loss of evidence. They range from the bad faith destruction of evidence (e.g., the accounting firm Arthur Andersen, which reportedly destroyed, over the course of weeks, multiple boxes of documents relevant to an investigation of Enron, and, as a result, lost such a large portion of its business that it had to lay off approximately 85,000 people); to evidence being discarded due to a business' gross disregard of its obligation to preserve it; to documents being carelessly discarded due to a business not carefully following its attorney's instructions to save them (see Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y. 2004). Knowing the rules, the possible penalties, and the tests for imposing them, therefore, is an important lesson every New York business should learn in order to avoid such costly mistakes.

Spoliation is usually penalized during the litigation itself, with penalties that are intended to level the playing field; i.e., to try to ensure that the party that should have preserved the evidence does not gain an unfair advantage by depriving its opponent of the opportunity to use the evidence. The party that is deprived of the evidence (the "Injured Party") is the one that asks the court to sanction the party that "lost" the evidence (the "Spoliator"). In order to penalize a party for Spoliation, however, the offending party must have had control over the evidence and a duty to preserve it at the time it was lost or destroyed. That is, if a party had a record or document, but did not have to keep it, then the party cannot be penalized for discarding it. The party must have lost or destroyed the document with a culpable state of mind: It could have deliberately destroyed the document to keep it from being used in the dispute; it could have failed even to try to save the document after it knew the document should be kept; or it could have negligently discarded the document. Finally, the missing evidence must be relevant to the party's claim or defense, which means at the time of trial it reasonably could have been used to help decide who should win the dispute. See VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (1st Dept.2012); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003); and Gaffield v. Wal-Mart Stores E., LP, 616 F. Supp. 2d 329, 337 (N.D.N.Y. 2009).

Perhaps the hardest part of the test to satisfy is to demonstrate that the missing evidence is relevant to the Injured Party's claim or defense, since the Injured Party cannot know exactly what is in it, because the Injured Party does not have access to it, since the evidence was lost or destroyed.

Continue reading "Records a New York Business Should Always Keep On file (III)" »

In our last post we asked the question: What records does a business have to keep when it is, or it reasonably believes it will become, involved in litigation? The answer is, generally, that a business must preserve records and documents which support its claims, or support defenses against its claims, or which might lead to discoverable evidence. See Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). That is, it must keep records that could help it or hurt it, or which might lead to other evidence that could help it or hurt it, in the dispute/litigation. If the business does not save those records, it can be penalized for "Spoliation."

Spoliation is the significant alteration or destruction of evidence, or the failure to save or preserve evidence or something that could be used as evidence in litigation, whether it is reasonably foreseeable that the litigation will occur or it already has commenced. See West v. Goodyear Tire & Rubber Co., 167 F.3d 776 (2d Cir.1999); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003). See also VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (First Dept. 2012). Penalizing Spoliation is in essence a way to prevent one side from losing, or even destroying, evidence that could help its opponent. Both state and federal courts in New York favor deciding cases on the merits. See Robles v. Grace Episcopal Church, 192 A.D.2d 515 (2nd Dept. 1993); and Traguth v. Zuck, 710 F.2d 90 (2d Cir. 1983). Preserving documentary evidence relevant to the issues in a dispute is one way to ensure that the merits are reached.

A business runs a major risk if it fails to save documents that are relevant to a dispute that could devolve into litigation. The risk involves the litigation itself: The penalty is enforced by making it more difficult, if not impossible, for the offending party to prevail in the litigation. The more egregious the offense, the harsher the penalty and the more difficult it will be for the offending party to win.

In New York, the focus is on helping the party that is deprived of the lost evidence, (the "Injured Party") and this necessarily penalizes the party that "lost" the evidence, also known as the "Spoliator." To level the playing field, the court can prevent the Spoliator from presenting favorable evidence at trial. Imagine what it would be like if a business had a key piece of evidence that it was certain would help it win, but could not use it because it did not save evidence that the opponent might have been able to use. Sometimes replacement evidence can be found, but this often requires a lot of time and effort. The court can order the Spoliator to pay the Injured Party the cost of developing the replacement evidence. At trial, the court can give the jury an adverse inference instruction. That means, basically, that the jury can find the lost evidence would have helped the Injured Party and hurt the Spoliator. Finally, the court also can decide that the Injured Party should win, and the Spoliator should lose, the case. If the Spoliator is the Plaintiff, the court can dismiss the complaint. Without the complaint, there is no litigation and the case is dismissed. If the Spoliator is the Defendant, the Court can dismiss its answer. Without an answer, the Plaintiff gets a default judgement against the Defendant. See Ortega v. City of New York, 9 N.Y.3d 69 (N.Y. 2007).

There are many examples of what happens to a business if it fails to preserve relevant evidence. The harshest penalties normally are reserved for the ones that deliberately destroy evidence or which at least have a pattern of "losing" relevant documents and records. How and why the particular penalties are applied is something that we will discuss in subsequent posts.

What records does a business have to keep and for how long? That may seem simple enough to answer, but it isn't. It depends on the situation. There are rules governing tax records; rules for certain kinds of licensed professionals; and rules for when a business becomes involved in litigation. We're going to talk about a business involved in litigation. What makes that so important is that the same rules often apply even before anyone has been sued.

A business normally generates a lot of paperwork. This frequently includes correspondence, bids, proposals, contracts, sales records, invoices, and receipts. It would cost a tremendous amount of money to maintain all of those records for an indefinite period of time, and that money probably could be better spent elsewhere, including on improving the business. As a result, a business often keeps certain types of documents, such as letters or emails, for only a relatively short time before it discards them.

Most New York businesses are faced with litigation at one time or another. It might be a contract dispute, where your customer doesn't want to pay you for the goods it purchased, or you don't want to pay your supplier full price because some of the items you bought were defective or arrived late. It could be an action for wrongful termination of an employee. Maybe the dispute is about the terms of a lease, including whether the landlord or the tenant is responsible for making repairs; or the duties under a financing agreement or insurance policy. Most times, the business becomes aware of the problem before someone starts a lawsuit. Often, the parties will try to settle the dispute first, on their own, without going to court. It's only after negotiations fail that one of them will sue the other to get what it wants. When, exactly, should a business begin to make sure it keeps all the records necessary to protect itself, and what records, out of all the ones that it generates, should it keep?

The documents that are produced in litigation often are key evidence in determining which side will win. For example, a Wall Street brokerage, MF Global, went bankrupt last Fall. It allegedly used clients' money to cover its own losses. The government is investigating whether that happened. The bankruptcy trustee reportedly was considering whether to sue Jon Corzine, the ex-governor and Senator from New Jersey who ran the company, and others, to get back some of the money. A key piece of evidence apparently is an email that allegedly refers to Jon Corzine having approved of using customers' money that way.

In New York, when a business reasonably believes that it will be involved in litigation (i.e., either it will be sued or it will sue someone else), it must preserve records that are relevant to the dispute, including electronic records and emails. Records are relevant, among other reasons, when they concern a party's claims or defenses. A good way to think of this is, if a record has to do with a reason why you should get what you want in a dispute, or with a reason why the other side should not have to give you what you're after, then the record should be kept. A business must save those records even if it normally would discard them after a short period of time. It must segregate and collect those records so that they can be searched readily by someone other than the person who saved them. It's not enough to say you saved them; someone else actually has to be able to find them. A business does not have to keep multiple copies of the same, identical documents. It cannot, however, destroy documents that have at least some unique, meaningful value. If a business has two documents, either the second one says the same thing as the first or it does not. If the second document says the same thing as the first, and the first document already has been saved, then the second does not have to be kept. If the second document also has additional, important information relevant to the dispute, then it's not identical to the first document, and it does have to be saved. Importantly, the business must follow these rules, and retain the records, even before litigation, when it tries to negotiate a settlement in good faith, or even when the business has not yet received notice of a specific claim being made against it; it only must reasonably believe it could wind up in a lawsuit. See VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33 (1st Dept. 2012); and Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003).

These rules are enforced by what can be severe penalties. What those penalties are and how they are applied, as well as other aspects of this complex issue, will be discussed in subsequent posts.