Charlie Scibetta Joins DRI 2024 Insurance Coverage and Practice Symposium

Caveat emptor: Foreign purchasers of corporate assets may inherit their seller’s jurisdictional exposure

Court of Appeals: Where one foreign corporation acquires all the assets and liabilities of another, courts may exercise long-arm jurisdiction over the purchaser based on the seller’s New York acts.

Lelchook v. Société Générale de Banque au Liban SAL, 2024 WL 1661460 (N.Y. Apr. 18, 2024).

New York’s long-arm statute, CPLR 302, authorizes New York courts to exercise specific personal jurisdiction over non-domiciliaries where the defendant has engaged in certain enumerated acts, such as transacting business, or committing a tortious act, in New York and the plaintiff’s cause of action arises from those acts. Where a corporate defendant is the product of a statutory or de facto merger, a plaintiff may establish personal jurisdiction under CPLR 302 by imputing the predecessor corporation’s acts to the defendant.

The Court of Appeals held that this same rule applies where a corporate defendant “acquires all of another entity’s liabilities and assets, but does not merge with that entity.” If so, the court explained, “the seller corporation’s New York acts may be imputed to the defendant-purchaser.” Stated differently, the purchaser “inherits the acquired entity’s status for purposes of specific personal jurisdiction.” But this rule applies only where the purchaser acquires the entirety of the seller’s assets and liabilities. For example, “the purchase and continuation of a product line” will not expose the acquirer to jurisdiction in New York based on the seller’s prior acts.

In 2008, a group of plaintiffs injured by Hizbollah rocket attacks in Israel sued the Lebanese Canadian Bank (“LCB”) in federal district court. Plaintiffs alleged that LCB provided financial assistance to Hizbollah, including wire transfers through a New-York based correspondent bank, thus subjecting it to specific personal jurisdiction in New York. Later, in June 2011, Société Générale de Banque au Liban SAL (“SGBL”) acquired “all of [LCB]’s Assets and Liabilities.” Later still, in 2019, plaintiffs brought similar claims against SGBL as LCB’s successor. The district court dismissed the claims against SGBL for lack of personal jurisdiction, but the Second Circuit certified the inherited jurisdiction question to the Court of Appeals.

The Court gave decisive weight to the expectations of the transacting parties and the rights of those injured by the predecessor corporation’s acts. “Sophisticated corporate entities,” the Court reasoned, “will undoubtedly engage in robust due diligence before agreeing to acquire all assets and liabilities of another entity” and “should understand where jurisdiction over such liabilities may lie and the potential cost if ultimately found liable.” And, at the same time, imputing the seller corporation’s acts to the acquirer would protect the interests of those injured by the seller’s acts: “Allowing a successor to acquire all assets and liabilities, but escape jurisdiction in a forum where its predecessor would have been answerable for those liabilities, would allow those assets to be shielded from direct claims for those liabilities in that forum.”

Read the court’s full decision here.

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London (Margin) Calling: British Retailer’s Effort to Obtain Section 1782 Discovery from Morgan Stanley CEO Fails

Second Circuit: District court did not exceed its discretionary authority in denying plaintiff’s § 1782(a) discovery request on grounds of inefficiency and inconvenience.

Frasers Group PLC v. Stanley, 95 F.4th 54 (2d Cir. 2024).

28 U.S.C. § 1782 grants federal district courts discretion to order domestic discovery in aid of a foreign proceeding. Courts exercise this discretion by considering four overarching factors the United States Supreme Court identified in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004): whether the discovery is sought from a participant in the foreign proceeding; the nature of the foreign tribunal and its receptivity to U.S. judicial assistance; whether the request is an attempt to circumvent a foreign jurisdiction’s proof-gathering restrictions; and whether the request is “unduly intrusive or burdensome.”

Frasers, a British retailer group, commenced English proceedings against Morgan Stanley & Co. International PLC (“MSIP”) to recover damages relating to a margin call. Two years into the proceedings, Frasers sought section 1782 discovery from James Patrick Gorman, the then-CEO of Morgan Stanley, who was located in the United States. While the statutory requirements were met, the district court denied the application on the grounds that the first and fourth Intel requirements weighed heavily against authorizing discovery. Frasers appealed, arguing the district court had abused its discretion by improperly requiring that all discovery mechanisms in the foreign venue be exhausted and denying the application merely because there were alternative means of procuring the materials sought.

The Second Circuit disagreed and affirmed the district court’s ruling. Under the first Intel factor, the need for Section 1782 discovery is not “apparent” where the discovery target is a participant in the foreign proceeding. Although Frasers sought documents from Gorman in the United States, the Second Circuit found Frasers was “for all intents and purposes” seeking documents from MSIP. The court relied on the concession that Frasers would be able to seek the same documents from Gorman, as CEO of MSIP’s parent, in the English proceedings.

The fourth Intel factor, which protects against “unduly intrusive or burdensome” requests, also led the Second Circuit to affirm the district court’s denial of discovery. Gorman’s documents could be obtained in the foreign proceeding, and his testimony “bore little relevance to Frasers’s claims” and was unduly burdensome when weighed against “his competing obligations as the Chief Executive Officer of Morgan Stanley.”

Read the court’s full decision here.

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Homeward Bound: Scots Law Governs Suit Arising from Internal Affairs of Scottish Company

Court of Appeals: In a dispute arising from a company’s internal affairs, the law of the state of incorporation applies unless the state’s interest is “minimal” and New York’s interest is “dominant.”

Eccles v. Shamrock Capital Advisors, 2024 WL 2331737 (N.Y. May 23, 2024).

Under the “internal affairs doctrine,” in disputes arising from a company’s internal affairs, the law of the state of incorporation generally applies. But sometimes, a foreign company’s contacts with New York are so significant that New York law applies.  On that basis, New York law applies only where “(1) the interest of the place of incorporation is minimal—i.e., [where] the company has virtually no contact with the place of incorporation other than the fact of its incorporation, and (2) New York has a dominant interest in applying its own substantive law.”

Plaintiffs, a group of common shareholders in FanDuel Ltd, an online fantasy sports company, claimed that a merger between FanDuel and Paddy Power Betfair plc, a sports betting firm, wrongfully divested them of their interest in FanDuel without compensation.  Under the merger agreement, FanDuel would dissolve in the merger, and its shareholders would receive compensation in the form of equity in the new entity.  The amount of equity received would be based on an agreed valuation of FanDuel.  But, Plaintiffs alleged, FanDuel’s directors and certain preferred shareholders wrongfully deflated the company’s agreed valuation.  As a result, when the merger closed, there was only enough equity to compensate FanDuel’s preferred shareholders.  Plaintiffs, the common shareholders, lost their stake and received nothing.

Plaintiffs brought tort claims for breach of fiduciary duty under New York law against the directors and preferred shareholders.  Defendants moved to dismiss, arguing that Scots law, not New York law, applied to plaintiffs’ claims and that plaintiffs had failed to state a claim under Scots law.

Determining whether Scots or New York law applied, the Court of Appeals began by “clarify[ing]” that “the substantive law of a company’s place of incorporation presumptively applies to causes of action arising from its internal affairs” (and not merely those involving corporate governance).  Applying the two-pronged test described above, the Court of Appeals determined that the interest of Scotland was not “minimal.”  FanDuel was founded in Scotland, registered under Scots law, its Articles of Association referenced Scots law, it maintained offices in Scotland, and many of the plaintiffs lived there.  Nor was New York’s interest “dominant”—even though FanDuel had its principal office in New York, held board meetings in New York, and negotiated the merger in New York.  Taking judicial notice of Scots law, the Court of Appeals held that plaintiffs met their burden to plead a legally cognizable claim under New York’s liberal pleading standard and allowed the case to proceed.

Read the court’s full decision here.

Bike Rental Business Cycles Through Losing Effort to Avoid Settlement Agreement with Competitor

First Department: Parties’ agreement to settle their dispute “subject to” execution of a formal contract was enforceable.

Go New York Tours, Inc. v. Tour Central Park Inc., 216 A.D.3d 455 (N.Y. App. Div. May 9, 2023).

Agreements to agree are unenforceable.  But it is not always clear whether an agreement is an agreement to agree or a binding final agreement.  This is particularly true when an agreement states that it is “subject to” a definitive final contract.

“Go New York Tours” and “Tour Central Park,” two competing businesses offering bicycle rentals near Central Park in New York City, were able to resolve their trademark dispute in mediation.  At the conclusion of the mediation, the parties agreed on settlement terms, memorialized in an exchange of emails, which they agreed were “subject to a formalized Settlement Agreement.”  When Go New York Tours sued Tour Central Park to enforce the settlement, Tour Central Park argued the parties had never reached agreement.

The Appellate Division, First Department disagreed.  The “subject to” language alone did not amount to “an explicit reservation that there would be no contract until the full formal document is completed and executed.”  Accordingly, the parties had entered a valid settlement agreement.  The court also relied on the parties’ subsequent actions—including their correspondence with each other and the court—as evidencing their shared understanding that a deal had been struck.

Read the court’s full decision here.

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Airline’s Anticipatory Breach Claim Doesn’t Fly

Southern District of New York: Aircraft lessor did not anticipatorily repudiate contract in renegotiating obligations during COVID-19 pandemic.

Frontier Airlines, Inc. v. AMCK Aviation Holdings Ireland Limited, 2023 WL 4364450 (S.D.N.Y. July 6, 2023).

Anticipatory repudiation (also called anticipatory breach) occurs when a party unequivocally states it will not perform its contractual duties.  Commonly, anticipatory repudiation involves a party advancing an unwarranted interpretation of the agreement or conditioning performance on extra-contractual demands.  Moreover, if a party has “reasonable” grounds to fear its counterparty will breach, the counterparty’s failure to provide requested adequate assurance of its performance may also constitute anticipatory repudiation.

Frontier Airlines sued aircraft leasing company AMCK claiming that AMCK anticipatorily repudiated the parties’ aircraft sale leaseback agreement.  The alleged anticipatory repudiation occurred when, during the widespread financial disruption caused by the COVID 19 pandemic, Frontier Airlines sought to negotiate deferrals on required rent payments to AMCK.  As part of those negotiations, AMCK sent emails and texts to Frontier proposing amended terms, like requiring Frontier to prepay rent and delaying the delivery of aircraft, in exchange for the rent deferrals.  Ultimately, no agreement was reached, and Frontier purported to terminate the parties’ agreement over outstanding rent payments.  Suing AMCK for anticipatory repudiation, Frontier argued AMCK’s communications conditioned AMCK’s performance on extracontractual demands and gave Frontier reasonable grounds to believe AMCK would not perform.

The court found no anticipatory breach.  Interpreting AMCK’s communications as repudiations “would require the Court to read them in isolation and out of the context of the ongoing negotiation.”  Instead, the communications were merely “a quid pro quo that is standard in all negotiations” and “d[id] not approach the level of an unequivocal repudiation.”  Similarly, because the parties were negotiating a rent deferral, Frontier never had “reasonable grounds” to believe that AMCK would not perform.  Accordingly, the court granted summary judgment in favor of AMCK on the anticipatory repudiation claim.

The court also addressed other claims by Frontier against AMCK and its financing partners.

Read the court’s full decision here.

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U.S. Bank’s Argentinian Branch Finds Itself Out on a Limb in New York

Second Circuit: Because Citibank’s Argentinian branch was not a legal entity, it lacked standing to enforce arbitration clause and seek injunction against foreign judgment.

Branch of Citibank, N.A. v. De Nevares, 74 F.4th 8 (2d Cir. 2023).

Under Article III of the United States Constitution, federal courts lack jurisdiction over disputes that do not involve a “case or controversy,” and there is no case or controversy where a plaintiff is not a distinct legal entity that has suffered cognizable injury in its own right. This core constitutional principle of standing defeated an attempt by the Argentinian branch of Citibank to block enforcement against it of an Argentinian judgment against Citibank.

Alejandro De Nevares, an Argentinian citizen and former employee of Citibank in New York, obtained a judgment against the bank in Argentina.  Seeking to prevent De Nevares from enforcing his judgment in Argentina, the Argentinian branch successfully obtained an order in the Southern District of New York compelling arbitration under De Nevares’ New York employment agreement and enjoining De Nevares from enforcing his judgment against the branch.

But the Second Circuit reversed.  On appeal, De Nevares contested subject matter jurisdiction.  He maintained that, under Argentinian law, the Argentina branch was not a legal entity and did not exist separate from Citibank.  Hence, because Citibank itself was not a party to the action, there was no adversity (and, therefore, no “case or controversy”).  Following a de novo review of Argentina law, the Second Circuit sided with De Nevares.  The court allowed that Citibank could have cured the lack of adversity by substituting itself for the branch as plaintiff.  But both Citibank and the branch had consistently taken the position that Citibank was distinct from the branch, and that De Nevares’s sole recourse was against Citibank, not the branch.  As a result, given Citibank’s unwillingness to take its branch’s place in the proceedings against De Nevares, the Second Circuit dismissed the case for lack of subject matter jurisdiction.

Read the court’s full decision here.

The Art of the Steal: Court Orders Return of Pilfered Painting after 35 Years

Second Circuit: Original owner’s claim for recovery of million-dollar painting from good faith purchaser held timely under New York law.

Abbott Laboratories v. Feinberg, 2023 WL 19076 (2d Cir. Jan. 3, 2023).

Replevin is a cause of action for the return of property wrongfully taken or held.  In New York, as long as a stolen object remains in the thief’s possession, the three-year statute of limitations for replevin runs from the time of the theft. But, where the property is in the hands of a good-faith purchaser, the claim does not accrue until the true owner demands the object’s return and the purchaser refuses to give it back.  As a result, in New York, unlike many other jurisdictions, the true owner may have a timely claim for replevin against the good-faith purchaser years or even decades after the theft.

Applying this rule, the Second Circuit affirmed the trial court’s judgment granting Abbott Laboratories’ claim for return of the painting Maine Flowers by the American Modernist painter, Marsden Hartley.  In 1987, Abbott delivered Maine Flowers to Robert Duncan for restoration.  Rather than restoring the painting and returning it, however, Duncan created a forged copy, which he gave to Abbott while selling off the original.  After a series of transactions, the genuine original ended up in the possession of Carol Feinberg, who acquired it in 1993.  Abbott did not discover the theft until 2016, and by 2018, it successfully traced the artwork to Feinberg.

After Feinberg refused Abbott’s demand to return the painting, the parties filed competing lawsuits in the Northern District of Illinois (Feinberg) and the Southern District of New York (Abbott).  Ultimately, both cases were consolidated in the Southern District of New York.  And, after a bench trial, the district court there entered judgment granting Abbott’s claim for recovery of the painting.

On appeal, Feinberg’s principal argument for reversal was that the lower court should have applied Illinois’ statute of limitations, under which Abbott’s claim were time-barred.  But the Second Circuit disagreed.  In a summary order, it held that New York law applied because Feinberg’s refusal to hand over the painting took place in New York, where the painting was located.  On that basis, Abbott’s claim was timely because it did not accrue until 2018.

The Second Circuit also rejected Feinberg’s other arguments.  First, Feinberg maintained, she acquired good title to the painting under a statutory exception to the usual New York rule that a thief cannot convey title to stolen property.  Under New York’s Uniform Commercial Code, Feinberg argued, Duncan was able to convey Abbott’s title to subsequent purchasers because he was a merchant who regularly dealt in goods of this kind, and Abbott had “entrusted” the painting to him.  But the court disagreed, finding no evidence that Duncan was in the business of selling (as opposed to restoring) paintings.

Finally, the court rejected Feinberg’s laches defense.  Specifically, Feinberg argued that Abbott’s delay in bringing the case prevented her from establishing her “entrustment” defense because Duncan and other relevant witnesses were now deceased, so that she could no longer obtain their testimony as to the nature of Duncan’s business.  But the Second Circuit, applying a deferential “abuse of discretion” standard, accepted the district court’s conclusion that Abbott’s delay in discovering the theft was reasonable because Duncan had returned the forgery to Abbott in its original frame and with the original labels, and because Abbott, at the time, was preoccupied with authenticating other, more valuable works in its collection.

Read the court’s full decision here.

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Decrypting Foreign Data Privacy Law, Court Requires Production of Information Stored on Chinese Servers

Southern District of New York:  Chinese data privacy law did not absolve cryptocurrency firm from compliance with its U.S. discovery obligations.

Owen Elastos Foundation, 2023 WL 194607 (S.D.N.Y. Jan. 11, 2023).

As a rule, foreign data privacy laws and other blocking statutes do not “deprive an American court of the power to order a party subject to its jurisdiction to produce evidence even though the act of production may violate” foreign law.  Instead, federal courts conduct a two-step analysis when faced with a party’s claim that compliance with its U.S. discovery obligations will require it to violate foreign law.  First, the party resisting discovery must persuade the court that “the discovery sought is indeed prohibited by foreign law.”  If the court finds that it is, the court will then undertake a “comity analysis” to “determine the weight to be given to the foreign jurisdiction’s law.”

Courts in the Second Circuit consider seven factors when deciding whether comity calls for deference to the foreign blocking statute in a particular case:

(1) the importance to litigation of the documents or other information requested;

(2) the degree of specificity of the request;

(3) whether the information originated in the United States;

(4) the availability of alternative means of securing the information; and

(5) the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine the important interests of the state where the information is located; and

(6) the hardship of compliance on the party or witness from whom discovery is sought; and

(7) the good faith of the party resisting discovery.

Defendant Elastos Foundation, registered in Singapore and with offices in Shanghai and Beijing, was in the business of creating and selling cryptocurrency tokens.  Plaintiffs were a putative class claiming that the tokens were securities that Elastos was required, but failed, to register with the U.S. SEC.  At the start of discovery, Elastos explained that its employees used their personal devices for both Elastos and non-Elastos communications, and that the data at issue were stored both on Elastos servers in China and on Google servers in the United States.

When plaintiffs sought documents from nineteen individuals, including both U.S.- and China-based custodians, Elastos resisted, arguing that the Personal Information Protection Law of the People’s Republic of China (the “PIPL”) required consent of the China-based custodians before producing, or even collecting, their documents, and that several custodians did not consent.

But the court rejected that argument.  Joining another court in the Northern District of California, it concluded that the PIPL does not prohibit processing personal information for the purpose of U.S. litigation.  Rather, under two enumerated statutory exceptions, personal information processing is permissible if “the processing is necessary for the performance of statutory duties or obligations,” or under “other circumstances provided by laws or administrative regulations.”  Compliance with U.S. discovery obligations, the court held, fell within those exceptions.  The court also found that Chinese law did not reach the data stored on Google servers in the U.S.

Moreover, even assuming that the PIPL prohibited the disclosure, the court found that the first, fourth, fifth, and sixth factors of the comity analysis weighed in favor of production.  Critically, it explained, the “most important” fifth factor, which weighs the relevant interests of the United States and China, “weigh[ed] decidedly in favor of production.”  The U.S. had both an “obvious interest” in applying its discovery rules in U.S. litigation and a “significant interest” in protecting investors under its securities laws.  On the other hand, China’s interests were relatively weak, given that Elastos was merely a Singaporean entity that happened to store data on Chinese servers.

Read the court’s full decision here.

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Ambiguity is in the Eye of the Beholder:  Divided Appellate Division Panel Allows Lawsuit for Recovery of Referral Fee to Proceed

First Department: Judges split on whether garbled contract language was open to “multiple reasonable interpretations” or the product of “obviously inadvertent errors”.

MAK Tech. Holdings Inc. v. Anyvision Interactive Techs. Ltd., 181 N.Y.S.3d 219 (N.Y. App. Div. 2022).

Under New York law, “a written agreement that is clear, complete and subject to only one reasonable interpretation must be enforced according to the plain meaning of the language chosen by the contracting parties.”  On the other hand, a contract is ambiguous if it is “susceptible of multiple reasonable interpretations.”  Ambiguous contracts require consideration of extrinsic evidence (including documents and witness testimony) to establish the parties’ intent.

Plaintiff MAK Technology entered into a Referral Agreement with defendant Anyvision, a developer of AI-driven facial recognition software.  The Agreement provided that MAK would refer businesses to Anyvision, in exchange for a fee, for a “Term” of three years from the Agreement’s November 23, 2017 “Execution Date.”  Later, in 2018, the parties entered into two amendments to the Agreement.  Finally, in July 2021, after the Agreement’s three-year Term had expired, Anyvision announced it had raised $25 million from a company referred by MAK.  When Anyvision refused to pay the resulting referral fee, MAK sued for breach.  Anyvision, in turn, moved to dismiss.

The survival of MAK’s claim hinged on whether one of the amendments to the Agreement at least potentially could be read as having postponed the operative Execution Date by nine months from November 23, 2017, when the Agreement was signed, until August 24, 2018, when the amendment was executed.  If that was the parties’ intent, the Agreement’s Term likewise would have been extended by nine months. However, the critical language in the amendment was garbled. It read:

Each of the undersigned hereby agrees that the with affect as of the date hereof and notwithstanding anything to the contrary in the Agreement, the Agreement shall be amended as follows . . .

Stretching to interpret the quoted language, a three-judge majority ruled that it was susceptible to “multiple reasonable interpretations” and therefore ambiguous.  According to the majority, the bolded words could mean either “with effect as of the date hereof” or “with the Effective Date as the date hereof.”  Because the provision was “literally unclear and ambiguous,” the majority concluded, it “must be interpreted in light of extrinsic evidence.”  On that basis, the court affirmed the trial judge’s denial of Anyvision’s motion to dismiss, in effect allowing the case to proceed.

The two dissenting judges, understandably, were “unable to see the ambiguity the majority claim[ed] to detect.”  According to the dissent, the absence of any language in the amendment “purporting to change the definition of the term ‘Effective Date’ in the original Agreement” confirmed that the “obviously inadvertent errors” in the operative clause could not “reasonably be construed to change the . . . Agreement’s definition of ‘Effective Date.’”

Read the court’s full decision here.