The legal profession mourns the death of Anthony V. Cardona, the Presiding Justice of the Appellate Division, Third Department. Justice Cardona was a jurist of compassion and wisdom, a hands-on administrator who deeply cared for his Department, and a kind, decent warm and generous person without any pretenses. He will be missed.

Below, we discuss key rulings from the Appellate Division’s four Departments that advanced the law in New York during the final quarter of 2011.

First Department

Opinion Letters. Law firms that issue opinion letters will breathe easier after the First Department’s decision in Fortress Credit Corp. v. Dechert LLP.1 The appellate court gave effect to disclaimers that are commonly used in such letters, namely, that the law firm assumed the genuineness of all signatures and the authenticity of the documents on which it was opining.

In 2008, Dechert was engaged as special counsel in a $50 million loan transaction. The firm was asked to opine on whether the loan documents were duly executed and delivered so that the loan would be a valid and binding obligation of the borrower. Dechert issued an opinion letter, but the transaction was later discovered to be fraudulent. The loan documents had been fabricated, and the borrower’s signature forged, by felon Marc Dreier. The putative borrower had no knowledge of the transaction. Dreier later pleaded guilty to selling more than $400 million in phony notes to hedge funds.

The lender in the 2008 transaction sued Dechert for legal malpractice and negligent misrepresentation. On appeal, the First Department held in an unsigned decision and order that the plaintiffs could rely only on Dechert’s legal conclusions, not on the firm’s factual assumptions. Dechert’s opinion was “clearly and unequivocally circumscribed” by its qualifications that the law firm assumed the documents were authentic, the signatures genuine, and the factual representations and certificates accurate. Thus, the court concluded, the statements in the opinion letter “were not misrepresentations.”

Summary Judgment. When facing a credible motion for summary judgment, what should the plaintiff’s counsel do? One thing not to try, according to the First Department in Ostrov v. Rozbruch,2 is submitting supplemental affidavits by new experts in a different field to support new legal theories and then, at oral argument, handing up a medical article the experts did not mention. “The problems created by open-ended supplemental submissions are manifest,” wrote Justice John M. Sweeney Jr. for a unanimous panel. In Ostrov, a medical malpractice case, supplemental submissions contributed to more than 17 months of delay before the summary judgment motion was resolved.

Justice Sweeney acknowledged that prior decisions “may have created the erroneous impression that supplemental submissions could be routinely utilized in summary judgment motions without regard to the scope of such submissions or the time limitations imposed by the CPLR.” Going forward, however, the court made clear that supplemental submissions “should be sparingly used and then only for a limited purpose.”

Disgorgement. Disgorgement payments made to settle charges by the Securities and Exchange Commission cannot constitute insurable “losses” under a financial institution’s professional liability policy, a unanimous panel of the First Department ruled.

According to the decision authored by Justice Richard T. Andrias in J.P. Morgan Securities Inc. v. Vigilant Insurance Co.,3 the payments at issue were part of a $250 million settlement that resolved charges of late trading and market timing brought against the failed investment bank Bear Stearns.

After settling with the SEC, Bear Stearns’ acquirer sought to recover its outlay from the bank’s insurers, asserting that the settlement was a “Loss” resulting from a “Wrongful Act” and therefore was covered by the bank’s professional liability insurance. The First Department disagreed. Under New York law, Justice Andrias wrote, “disgorgement of ill-gotten gains or restitutionary damages” cannot be insured. “The public policy rationale for this rule,” the court explained, “is that the deterrent effect of a disgorgement action would be greatly undermined if wrongdoers were permitted to shift the cost of disgorgement to an insurer, thereby allowing the wrongdoer to retain the proceeds of his or her illegal acts.”

Second Department

Defibrillation. In a decision that may give health club owners an anxiety attack, the Second Department held that New York law not only requires a health club to provide a defibrillator and a person trained in its use, but also imposes an affirmative duty to use the device on patrons in distress. Therefore, health clubs that don’t defibrillate their clients when required may be sued for negligence, Justice Sandra L. Sgroi wrote in Miglino v. Bally Total Fitness.4

In Miglino, the plaintiff’s decedent suffered a fatal heart attack while playing racquetball. In compliance with a New York statute,5 the health club had a defibrillator on hand, and a trained operator brought the device to the decedent’s side. But, for reasons not made clear, the defibrillator was not used. Disagreeing with First Department precedent,6 the unanimous Second Department panel held that the statute creates a duty to use the defibrillator when needed. “[W]hy statutorily mandate a health club facility to provide the device if there is no concomitant requirement to use it?” the court asked. Justice Sgroi answered that it would be “anomalous” and “illogical” to conclude otherwise, particularly since defibrillation is most effective when administered during the first few minutes after a heart attack begins.

Joint Tenancy. RPAPL §1201 allows a joint tenant to sue for “his just proportion against his co-tenant who has received more than his own just proportion.” Until 2011, no New York appellate court had considered whether that statute allowed a decedent’s estate to sue the surviving joint tenant for half of the decedent’s payments for the purchase and maintenance of a house. In Trotta v. Ollivier,7 decided in November, Justice Mark C. Dillon held for a unanimous Second Department panel that such lawsuits are not authorized.

The property at issue was owned by Susan Leone and defendant Charles Ollivier, an unmarried couple, as joint tenants with the right of survivorship. Leone had paid for the property and funded its upkeep. Neither Leone nor Ollivier ever sought to partition the property. After Leone’s death, her executor nevertheless sued to recover half the property’s purchase price and carrying charges.

The Second Department, however, viewed RPAPL 1201 differently. Justice Dillon explained that the statute allows a joint tenant to recover monies received by the co-tenant in excess of the co-tenant’s share—not funds paid by the joint tenant. Ollivier’s “right of survivorship” meant that he owned the house after Leone died. The statute does not “allow a decedent’s estate to reach back in time and undo the financial acts of a decedent with regard to the acquisition and management of real property.”

Family Court Act. A New York statute requiring a forensic medical examination in all cases of alleged child sexual abuse was unconstitutional as applied, the Second Department held in Matter of Shernise C.,8 a unanimous decision authored by Justice Jeffrey A. Cohen.

Shernise C. gave birth when she was 13 years old and a paternity test established a 99.97 percent certainty that her stepfather fathered the child. After the Administration for Children’s Services (ACS) removed Shernise from the home, Family Court ordered ACS to arrange for a forensic medial exam with color photographs, as required by Family Court Act §1027(g).

Under the circumstances, the appellate court held, the statute’s blanket requirement of a medical examination violated the federal Constitution. “[G]iven the conclusive evidence of abuse provided by the DNA test results,” Justice Cohen wrote, “the State’s need to subject Shernise to a highly intrusive physical examination is so diminished as to render the search unreasonable under the Fourth Amendment.”

Third Department

Medicaid. Health care providers cannot recover consequential damages from the state when it improperly withholds Medicaid reimbursements, a Third Department panel decided in Signature Health Center v. State of New York.9

The claimant, a diagnostic and treatment center that provides services to Medicaid recipients, was to receive payments pursuant to Department of Health (DOH) regulations. Although the Health Department approved a rate adjustment for the center, the agency would not publish the revised rates and refused to apply them. The claimant successfully sued the department for retroactive rate adjustments totaling approximately $3 million. It then sought consequential damages, including lost profits, as a result of the Health Department’s delays.

In a unanimous decision authored by Justice Karen A. Peters, the Third Department found that consequential damages would be inappropriate. Public Health Law §2807, which governs the rates at which a facility may bill Medicaid, does not create a “special duty” or “special relationship” that would support an award of consequential damages. Moreover, §2807′s legislative purpose was to encourage providers to “control their spiraling costs.” “To permit Medicaid providers to bring a private right of action for recovery of consequential damages—including lost profits—against [the state] for its negligent failure to provide reimbursement would…contravene the key cost containment purposes of the statute,” Justice Peters observed.

Environmental Liens. When the State Environmental Protection and Spill Compensation Fund slaps a lien on contaminated property, it does not need to hold a hearing or obtain judicial approval first. That’s the view of the Third Department in State v. Getty Petroleum Corp.,10 a unanimous decision authored by Justice John A. Lahtinen.

Under New York’s Oil Spill Act,11 the fund finances the clean-up of oil spills when the party who discharged the oil is unknown, unwilling or unable to pay the costs. When the fund pays clean-up costs, it may place a lien on the property of the discharger or the place where the spill occurred.

In Getty, oil discharges were found to have occurred on property owned by M&A Realty Inc. Although M&A contested the determination, the attorney general demanded that it reimburse the fund’s clean-up expenses. When M&A didn’t pay, the state sued and placed a lien on its property.

On appeal, the Third Department upheld the lien. Even though the lien clouded the title of M&A’s property, the constitution did not require a pre-filing hearing. Instead, M&A had adequate post-filing procedures available to it: The property owner could “challenge the lien either within the context of the pending action or seek a vacatur under the Lien Law §59.” Those procedures protected M&A’s rights sufficiently, Justice Lahtinen wrote, particularly since New York “has a strong interest in protecting and preserving its lands and waters…[and] in ensuring reimbursement of taxpayer moneys expended in cleaning up polluted sites.”

Fourth Department

Tax Credits. Nothing is certain except death and taxes, Benjamin Franklin wrote. Apparently, tax credits have some staying power as well. The Fourth Department has ruled that amendments to New York’s Empire Zones Act12 cannot be applied retroactively to strip businesses of their tax breaks. Under the Empire Zones Act, originally passed in 1986, businesses may receive tax credits for developing or expanding in impoverished areas. In 2009, the Legislature tightened the eligibility criteria, and the 2009 amendment was made retroactive to tax years beginning Jan. 1, 2008.

Businesses whose eligibility was revoked sued the state. In James Square Associates, LP v. Mullen,13 a unanimous decision authored by Justice Samuel L. Green, the Fourth Department concluded that the “retroactive application intended by the Legislature violate[d] plaintiffs’ due process rights.” The plaintiffs had no prior warning that the criteria for certification would change.

Further, the plaintiffs “maintained their eligibility for Empire zones’ tax credits throughout the tax year beginning Jan. 1, 2008 pursuant to the criteria then in effect.” Thus, they “were induced to conduct their businesses in a particular way in specified disadvantaged areas in reliance upon the availability of Empire zones’ tax credits.” Because the tax credits had induced reliance, the state could not invalidate them by passing a later law.

Finally, Justice Green noted that the state failed to articulate any legitimate public purpose to support applying the amendments retroactively (other than collecting additional taxes). The “absence of a persuasive reason for retroactivity, with its potentially harsh effects, offends constitutional limits,” the court concluded.

E. Leo Milonas is a litigation partner at Pillsbury Winthrop Shaw Pittman. He is a former associate justice of the Appellate Division, First Department, and the former Chief Administrative Judge of the State of New York. Frederick A. Brodie is a litigation partner in Pillsbury’s New York office. Pillsbury litigation associates Jay Dealy, Tameka M. Beckford-Young, and Tamara Zakim assisted in preparing this column.

Endnotes:

1. 2011 N.Y. Slip Op. 08626 (1st Dept. Nov. 29, 2011).

2. 2012 N.Y. Slip Op. 00022 (1st Dept. Jan. 5, 2012).

3. 2011 N.Y. Slip Op. 08995 (1st Dept. Dec. 13, 2011).

4. 2011 N.Y. Slip Op. 09603 (2d Dept. Dec. 27, 2011).

5. General Business Law §627-a.

6. Digiulio v. Gran Inc., 74 A.D.3d 450 (1st Dept. 2010), aff’d on other grounds, 17 N.Y.3d 765 (2011).

7. 2011 N.Y. Slip Op 08349 (2d Dept. Nov. 15, 2011).

8. 2011 N.Y. Slip Op 08355 (2d Dept. Nov. 15, 2011).

9. 2011 N.Y. Slip Op. 09058 (3d Dept. Dec. 15, 2011).

10. 2011 N.Y. Slip Op. 07781 (3d Dept. Nov. 3, 2011).

11. Navig. L. Art. 12.

12. Gen. Municipal L. §§955 et seq..

13. 2011 N.Y. Slip Op. 08423 (4th Dept. Nov. 18, 2011).