Survey: 2015 Business Associations

Sandra S. O’Loughlin and Christopher J. Bonner review developments in New York Business Association law in 2015. Their review focuses on the major changes made to New York’s LLC law, as well as a holding by a bankruptcy court that ex-partners could be held liable for returning compensation paid while the law partnership was insolvent.

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Sandra S. O’Loughlin: Partner, Barclay Damon, L.L.P., Buffalo, New York; Adjunct Professor and Lecturer, University at Buffalo Law School, State University of New York; J.D., State University of New York at Buffalo Law School; B.A., Daemen College; Rosary Hill College.

Christopher J. Bonner: Special Counsel, Barclay Damon, L.L.P., Syracuse, New York; J.D., Harvard Law School; B.A., Williams College.

New York State Senate Passes Bill to Accommodate Ride Sharing Apps, but the Assembly Will Not Follow

—by S. Alex Berlucchi

Sources: S.B. 4280, 238th S. Sess., 2015-2016 Reg. Sess. (N.Y. 2016); Mike McAndrew, Senate Passes Uber in Upstate NY Bill, but Assembly Expected to Balk, Syracuse.com, 1, 1 (June 17, 2016) http://www.syracuse.com/state/index.ssf/2016/06/senate_passes_uber_in_upstate_ny_bill_but_assemby_expected_to_balk.html

Abstract:  The New York State Senate passed a bill to allow “transportation network companies,” such as Uber and Lyft, to operate in areas of New York State outside of New York City.  Presently, concerns for the safety of the passengers and the insurance requirements for the drivers are causing debate within both the Senate and the Assembly.  While this bill passed in the Senate, it is not likely to pass in the Assembly.  Facing political pressure from Governor Andrew Cuomo, a resolution to the prohibition of ride-booking companies is imminent.

***

The New York State Senate passed a bill allowing “transportation network companies” such as Uber and Lyft, to operate in New York State.  Currently, these companies are only legally allowed to operate in New York City.  Ride-booking companies received an exception to operate in New York City, and the convenient, trend-setting ride services are advocated as an improved means of public transportation.  While this bill did pass in the Senate, the Assembly is reluctant to follow suit.

Senator James Seward (R-Oneonta) sponsored New York Senate Bill 4280, which passed in the Senate Insurance Committee.  The bill would require a minimum of one million dollars in liability coverage whenever a drive has a “paid passenger in their personal vehicle.”  When there are no riders, the Bill similarly mandates minimum coverage, totaling $200,000.  This minimum is higher than the minimum insurance requirements for taxi cab drivers in local municipalities, such as Utica, thus demonstrating an effort to maintain the current taxi cab industry while allowing “transportation network companies” to spread to other cities in New York.  Furthermore, this Bill allows for local control over all other issues, such as accessibility and requirements to act as an independent contractor.

This bill passed, in the Senate, despite strong opposition from the traditional taxi cab and limousine industry.  Similar to protests seen in New York City, allowing ride-booking companies to operate in cities such as Syracuse, Buffalo, and Rochester will have a detrimental effect on the cab industries in these respective localities.  For example, currently only 200 taxi cab licenses are issued, and all 200 are currently taken.  An influx of transportation options may lead to increased litigation with the taxi cab industry; however, there are two issues with the Bill as presently written.

The first issue is a lack access to “transportation network companies” for individuals with disabilities.  Presently, of the 30,000 independent contracts operating in New York City, there are zero vehicles which are wheelchair accessible.  This will be an issue for passing a law in New York, as the Assembly has placed an emphasis on handicap accessibility, as well as safety of the passengers.

In the Assembly, the parallel bill to New York Senate Bill 4280 includes higher mandatory minimum levels of insurance coverage.  There is also an express need to perform background checks on the drivers, in the interest of public safety, and a mandate for handicap accessibility.  These provisions were not included in the Senate version of the Bill.   Therefore, the Assembly is unlikely to resolve these issues.

This conversation began in the New York State Legislature more than one year ago.  Gov. Andrew Cuomo spoke to the positive aspects of ridesharing, or ride-booking, as a rapidly expanding business.  As a growing aspect of the technology industry, these “digital networks” provide a valuable service both to citizens of New York, and tourists who may be visiting.

Despite the benefit, the State Legislature is divided on the interests of public safety, and the autonomy provided to local governments will still be a barrier in allowing “transportation network companies” to operate.  The Assembly is not likely to pass the current bill as it is written.  In addition, while the Senate focused on insurance minimums to pass the Bill, the Assembly will need to resolve more issues before proposing a Bill which may be duly considered.  Based on the public response, this discussion is unlikely to resolve itself during the current session.

NY Court of Appeals Grants Summary Judgment in Joint Venture Dispute

—by Shannon Crane

Littleton Constr. Ltd. v. Huber Constr., Inc., No. 96, 2016 N.Y. LEXIS 1688 (June 14, 2016).

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In Littleton Construction Ltd. v. Huber Construction, Inc, plaintiff commenced a proceeding against defendants Huber Construction, Inc. (“Huber”) and Littleton/Huber Joint Venture (the “Joint Venture”) seeking a portion of the management fees collected by Huber as part of the payment for projects completed by the parties in connection with a joint venture. Huber Construction, Inc. (Huber) and Littleton/Huber Joint Venture (the joint venture) seek a portion of the management fee. 2016 N.Y. Slip Op.  04657, at 1–2. Defendants moved for summary judgment, and the motion relied upon the validity and interpretation of the party relationship governing documents. Id. at 2. The trial court partially granted defendants’ motion, leaving one claim seeking recovery of a portion of management fees. The Appellate Division dismissed the complaint in its entirety. Id.

The issue before the Court of Appeals was the parties’ dispute over which agreement governed the joint venture relationship. Pursuant to the motion for summary judgment, defendants met their evidentiary burden of establishing that the Operating Agreement was not executed by Huber, and was thus unenforceable. Id. The joint venture cannot be governed by the terms of an unenforceable document. Id. Because the terms of the Operating Agreement were not enforceable, the Court determined that the Memorandum of Understanding governed the relationship. Littleton Construction Ltd. 2016 N.Y. Slip Op.  04657, at 2 (N.Y. 2016). The Memorandum of Understanding plainly provided for a 9 percent management fee to Huber, which Huber was not required to share with the plaintiff. When a contract is complete, clear and unambiguous, it must be enforced according to its plain meaning; thus, defendants were entitled to summary judgment. Id.

Survey: 2014 Business Associations

Survey of New York Business Associations law for 2013–2014.

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Sandra S. O’Loughlin is a Partner at Hiscock & Barclay, LLP. in Buffalo, New York; Adjunct Professor and Lecturer, University at Buffalo Law School, State University of New York; J.D., State University of New York at Buffalo Law School; B.A., Daemen College; Rosary Hill College.

Christopher J. Bonner is of counsel at Hiscock & Barclay, LLP. in Syracuse, New York; J.D., Harvard Law School; B.A., Williams College.

Kimso v Ghandi

This appeal addresses a party’s ability to amend a pleading following trial and the full presentation of proof by both parties. Counterclaim plaintiff, Mahesh Gandhi and his two associates formed and held equal one-third interests in three corporations. The corporations were given a twenty million dollar loan from the U.S. Dept. of Housing and Urban Development (“HUD”), nine million dollars of that loan was loaned to the three associates as a shareholder loan—each associate made regular interest payments on that loan. Gandhi was removed as the corporations’ manager due to suspected misappropriation of funds. Gandhi filed a state action seeking to compel arbitration and the corporations filed a federal claim alleging multiple counts. Eventually, the parties reached a Settlement Agreement (“Agreement”) agreeing to end all actions and Gandhi sold his one-third interest, but no provision explicitly rid of Gandhi’s shareholder loan obligation.

The corporations stopped making payments to Gandhi after making twenty-three monthly payments during which Gandhi did not pay shareholder loan payments. The corporations filed an action seeking declaratory judgment to “offset the remaining amount they owed Gandhi under the Settlement Agreement against the money Gandhi owed the corporations on the shareholder loan notes.” Litigation continued, but both parties’ amended their pleadings. In the corporations’ amendment, they admitted they were “’joint and severally liable for the amounts due’. . .and ‘if Plaintiffs fail to make the full payments to Defendant as specified under Settlement Agreement, Defendant may allege that Plaintiffs are in default of the Settlement Agreement and that Defendant would be entitled to all his remedies.’” One month prior to trial, corporations filed motions to preclude Gandhi from presenting evidence/claiming payments due to him. The trial court deferred, but at trial allowed evidence about the agreement and back payments owed. Gandhi moved to conform the pleadings to align to the proof at trial, seeking to assert a counterclaim. The supreme court granted his motion, the corporations appealed and the appellate division reversed the trial court’s ruling—finding, the late amendment prejudiced the corporations. Gandhi appealed.

Here, the Court found that pursuant to N.Y. C.P.L.R. 3025, a party is permitted to amend a pleading “‘at any time by leave of court . . . before or after judgment to conform [the pleading] to the evidence.’” Furthermore, the Court found that where there is no prejudice to the party opposing the amendment, the court should grant leave to amend. The court has great latitude in exercising discretion over applications to amend pleadings and may only be reversed where there is an abuse of discretion. Here, the court found the appellate division did abuse its discretion because there was no prejudice to the corporations that would support a denial of Gandhi’s request to amend. The Court found that because the corporations had stated in their amended complaint that the sum of money they owed should be reduced by the money Gandhi owed them—explicitly addressing potential back payments—they were not permitted to allege prejudice from Gandhi’s demand for payments due to him. This is because “facts admitted in a party’s pleadings constitute . . .admission, and are conclusive . . .” Furthermore, the Court found that the corporations had elicited evidence that was the basis of Gandhi’s claim.

The Court reversed and remitted the case to the appellate division.

998 N.Y.S.2d 740 (N.Y. 2014)

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In re: Thelen LLP

The Court of Appeals answers two certified questions that arose in two separate law firm bankruptcy cases, where the firms dissolved their partnerships. In Thelen, the partners included an “Unfinished Business Waiver” or “Jewel Waiver” in their partnership agreement. This waiver arose from Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. Ct. App. 1984) which held that absent an agreement to the contrary, profits derived from a law firm’s unfinished business are owed to the former partners in proportion to their partnership interests. Thelen’s bankruptcy estate attempted to recover the value of Thelen’s unfinished business for the benefit of the firm’s creditors. The estate argued that pending hourly matters were among a law firm’s assets.

In Coudert, the firm’s bankruptcy estate argued that the partners’ new firms were liable to Coudert for any profits derived from completing the client matters that they brought from Coudert to their new firms.

The court was asked by the District Court to answer two unresolved questions of New York law regarding the applicability and scope of the “unfinished business doctrine.”  First, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the “unfinished business” of the firm? Second, if the first question is answered affirmatively, how does New York law define a “client matter” for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?

The Court answered the first certified question in the negative and found it unnecessary to answer the second certified question.

The Court of Appeals held that law firms cannot have a property interest in future hourly legal fees because they are ‘too contingent’ in nature and too speculative to create a present or future property interest given the client’s right to hire and fire counsel. The dissolved law firm would only be entitled to the value of the case at the date of dissolution, with interest.

The Court discusses several public policy considerations for the ruling including encouraging client choice and attorney mobility. First, treating a dissolved firm’s pending hourly fee matters as partnership property would allow former partners of dissolved firms to profit from work they do not perform, at the expense of a former partner and his new firm. This creates an “unjust windfall” for the dissolved law firm. Additionally, it would encourage partners to leave their firms before dissolution, so they can keep the fees earned from client matters. Moreover, it would make it difficult for former partners to find new jobs if they must remit the profits from their work for existing clients to their old firms. Clients might also worry that their hourly fee matters are not getting enough attention if the law firm is prohibited from profiting from its work on them.  For those reasons the court held that no law firm has a property interest in future legal fees, and therefore those fees are not property under the unfinished business doctrine.

20 N.E.3d 264 (N.Y. 2014)

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Survey: 2013 Business Associations

Survey of New York Business Associations law for 2012–2013.

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Sandra S. O’Loughlin: Partner, Hiscock & Barclay, LLP, Buffalo, New York; Adjunct Professor and Lecturer, University at Buffalo Law School, State University of New York; J.D., State University of New York at Buffalo Law School, B.A., Daemen College; Rosary Hill College.

Christopher J. Bonner: Of Counsel, Hiscock & Barclay, LLP, Syracuse, New York; J.D., Harvard Law School; B.A., Williams College.

Survey: 2012 Business Associations

Survey of New York Business Associations law for 2011–2012.

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Sandra S. O’Loughlin: Partner, Hiscock & Barclay, LLP, Buffalo, New York; Adjunct Professor and Lecturer, University at Buffalo Law School, State University of New York; J.D., State University of New York at Buffalo Law School, B.A., Daemen College; Rosary Hill College.

Christopher J. Bonner: Of Counsel, Hiscock & Barclay, LLP, Syracuse, New York; J.D., Harvard Law School; B.A., Williams College.

Note: Young Fella, If You’re Looking for Trouble I’ll Accommodate You: Deputizing Private Companies for the Use of Hackback

A computer operator sits in front of a computer screen, monitoring a tank of toxic chemicals.[1]  A series of computers control the tank’s physical hardware.  All of a sudden, the lights in the control room fail, the computers go offline, and the computer operator yells, “[t]hey’re hitting one of our servers!”[2]  Hundreds of miles away, a team of hackers hired by Barney Advanced Domestic Chemical Co. (“BAD Company”) stare as lines of code scroll by on their laptops.[3]  BAD Company has just infiltrated and taken command of their business rival’s servers.[4]  With the click of a mouse, hackers from BAD Company order the toxic chemical tanks to overflow.[5]  Toxic chemicals seep out of the tanks and contaminate the surrounding countryside.[6]  The computer operators immediately call for a hazmat team.[7]  The exercise ends.[8]

This episode was just a Department of Homeland Security (“DHS”) cybersecurity exercise, but it highlights a massive national security threat: the ability for malicious computer code to infiltrate computer systems, cripple critical infrastructure, and steal massive quantities of intellectual property.[9]  The United States National Counterintelligence Executive (“ONCIX”) noted that “[s]ensitive [U.S.] economic information and technology are targeted by the intelligence services, private sector companies, academic and research institutions, and citizens of dozens of countries.”[10]  The loss of this technology has already cost the United States (“U.S.”) anywhere from $2 billion to $400 billion.[11]  Furthermore, the pace of U.S. data loss is increasing.[12]  Foreign intelligence services, private individuals, and foreign corporations have increased their efforts directed at stealing intellectual property, costing U.S. companies millions of dollars in development costs and tens or hundreds of millions of dollars in potential profits.[13]

There is no doubt that these cyber threats pose a huge problem for both the U.S. government and U.S. companies.  How, then, can we effectively prevent these threats?  Should we pour more money into network defenses?  Should we focus on attack response and recovery from the inevitable network penetration?[14]  Should we pursue an offensive doctrine that establishes a deterrent policy?  Perhaps the best approach is a combination of all three?

Furthermore, who should prevent these intrusions?  Should the U.S. government protect private networks, and does it have the legal ability to do so?  Should U.S. companies shoulder the burden of protecting themselves?  Do we want to empower companies to defend themselves outside their own perimeters?[15]  If so, how far does a company’s ability to defend itself extend?

These questions highlight a disturbing reality: many of the networks that control our electricity, water, financial systems, and other critical industries operate in a largely unregulated and unprotected cyberspace.[16]  In fact, cyberspace has drawn comparisons to the American Wild West; in both areas, black hat criminals have taken advantage of the lawlessness of their respective domains.[17]  To bring order to this chaos and tame the Wild West, private companies must have the ability to protect themselves in cyberspace.  As such, this note advocates for a form of cyber self-defense called active defense.  Active defense, colloquially known as “hackback,” is when a targeted entity uses a counter-cyberattack against an attacker’s system, thereby stopping the cyberattack in progress and discouraging future attacks.[18]

Part I of this note will analyze the cyber threat that both the U.S. government and U.S. companies currently face.  Part II will consider who is best suited to respond to these cyber threats—whether it is the private or the public sector—and what options each entity can pursue.  Part III assesses how the law of self-defense applies in cyberspace, paying particular attention to both the benefits and drawbacks of hackback.  Part IV transitions to a discussion of the Computer Fraud and Abuse Act (“CFAA”), the basic federal anti-hacking statute, and explains how the Department of Justice (“DOJ”) might view hackback.[19]  In doing so, I will propose a legal framework that allows companies to hackback under a deputy arrangement with the U.S. government, providing the benefits of hackback with the oversight of government regulation.

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Zach West: Juris Doctor Candidate 2013, Syracuse University College of Law.



[1].  Ellen Nakashima, Homeland Security Tries To Shore Up Nation’s Cyber Defenses, Wash. Post, Oct. 1, 2011, http://www.washingtonpost.com/world/national-security/homeland-security-tries-to-shore-up-nations-cyber-defenses/2011/09/27/gIQAtQ6bDL_story.html.

[2].  Id.

[3].  Id.

[4].  Id.

[5].  Id.

[6].  Nakashima, supra note 2.

[7].  Id.

[8].  Id.

[9].  Id.

[10].  Office Of The Nat’l Counterintelligence Exec., Foreign Spies Stealing US Econ. Secrets In Cyberspace, Report to Cong. on Foreign Econ. Collection and Industr. Espionage, 2009-2011, i (2011), available at http://www.ncix.gov/publications/reports/fecie_all/Foreign_Economic_Collection_2011.pdf [hereinafter “Foreign Spies”].

[11].  Id. at 4.

[12].  Id. at 1.

[13].  Id.

[14].  Gen. Michael V. Hayden, The Future of Things “Cyber”, 5 Strategic Stud. Q. 3, 5 (2011), www.au.af.mil/au/ssq/2011/spring/spring11.pdf.

[15].  Id.

[16]. See Greg Y. Sato, Should Congress Regulate Cyberspace?, 20 Hastings Comm. & Ent L.J. 699, 709 (1998) (“the Internet is highly unregulated; cyberspace is not subject to any central control and operates without any supervision . . . Since there is no supervising or police-like authority which overlooks activity on the Internet, ‘anything goes’ in cyberspace”); see also In Praise of Chaos: Governments’ Attempts to Control the Internet Should be Resisted, Economist, Oct 1, 2011, available at http://www.economist.com/node/21531011 (“For something so central to the modern world, the internet is shambolically governed . . . It is in short a bit chaotic.”).

[17].  Neal Katyal, Community Self-Help, 1 J.L. Econ. & Pol’y 33, 60 (2005).

[18].  Alexander Melnitzky, Defending America Against Chinese Cyber Espionage Through the Use of Active Defenses, 20 Cardozo J. Int’l & Comp. L. 537, 538-40 (2012).

[19].  See generally Computer Fraud and Abuse Act, 18 U.S.C. § 1030 (2006).

Survey: 2011 Business Associations

The period covered by this Survey was marked by significant decisions, of which Kirschner v. KPMG LLP, discussed under the topic of Agency below, seems to the authors to be especially worth discussing at length and in detail.

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Sandra O’Loughlin: Partner, Hiscock & Barclay, LLP, Buffalo, New York; Adjunct Professor and Lecturer, University at Buffalo Law School, State University of New York; J.D., State University of New York at Buffalo Law School, B.A., Daemen College; Rosary Hill College.

Christopher Bonner: Of Counsel, Hiscock & Barclay, LLP, Syracuse, New York; J.D., Harvard Law School; B.A., Williams College.