New York Law Review

Tag: 1987

  • Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329 (1987): Enforceability of Policy Manuals in At-Will Employment

    69 N.Y.2d 329 (1987)

    Under New York law, an employee handbook or corporate policy does not create an enforceable contract limiting an employer’s right to terminate an at-will employee unless there is an express agreement to that effect, demonstrating explicit limitations on the employer’s right of discharge.

    Summary

    Sabetay, an at-will employee, alleged he was wrongfully discharged for refusing to participate in illegal activities and reporting them. He argued that Sterling’s employee manual and corporate policies created an implied contract guaranteeing job security. The court held that absent an express agreement limiting the employer’s right to terminate at-will employment, corporate policy manuals do not create enforceable contractual obligations. The decision reinforces the importance of clear, explicit language when attempting to create contractual limitations on at-will employment in New York.

    Facts

    Alexander Sabetay was a director of financial projects at Sterling International Group, a division of Sterling Drug, Inc., from June 1972 to December 1984. He managed the dissolution of Sterling’s Greek manufacturing facility. After the liquidation was completed, Sabetay was recalled to New York in February 1984 and terminated in July 1984 because no suitable position could be found within Sterling or its subsidiaries. Sabetay claimed his discharge stemmed from his refusal to engage in tax avoidance schemes and the maintenance of slush funds related to the Greek facility liquidation, and because he reported these activities internally.

    Procedural History

    Sabetay filed a complaint asserting four contract and three tort causes of action based on wrongful discharge. Sterling moved to dismiss the complaint. The Supreme Court dismissed the tort actions but upheld the contract causes of action. The Appellate Division affirmed the dismissal of the tort claims and also dismissed the contract claims. Sabetay appealed to the Court of Appeals, challenging only the dismissal of the contract causes of action.

    Issue(s)

    1. Whether a statement in a corporate personnel policy manual, which enumerates grounds for termination, creates an implied promise that those are the only grounds for termination, and whether a termination without cause amounts to a breach of that implied agreement.
    2. Whether various corporate accounting policies, requiring employees to refrain from and report illegal or unethical activities, constitute an employment agreement precluding termination for refusing to participate in allegedly improper activities.

    Holding

    1. No, because New York law presumes at-will employment, terminable at any time by either party, absent an express agreement establishing a fixed duration or limiting the employer’s right to discharge.
    2. No, because these policies, coupled with a statement on the employment application requiring compliance with company rules, do not create an express agreement not to dismiss an employee for acting in accordance with those policies; rather, they suggest standards for employee performance which, without more, are not actionable.

    Court’s Reasoning

    The Court of Appeals reaffirmed New York’s adherence to the at-will employment doctrine, allowing employers to terminate employees for any reason or no reason, unless expressly limited by agreement. The court distinguished the case from Weiner v. McGraw-Hill, Inc., where an express agreement was found in the employer’s handbook and employment application, coupled with assurances made to the employee during hiring. The court emphasized that Sabetay failed to demonstrate an express limitation on Sterling’s right to terminate his employment. The court cited Murphy v. American Home Products Corp. to reject the notion of an implied covenant of good faith in employment contracts, stressing that such an implied obligation would be inconsistent with the employer’s unrestricted right to terminate at will. The court stated that the language in Sterling’s personnel handbook and Accounting Code did not amount to an express agreement limiting Sterling’s right to discharge at will. The court underscored that significant alterations to employment relationships are best left to the legislature, as stability and predictability in contractual affairs is a highly desirable jurisprudential value.

  • People v. Jones, 70 N.Y.2d 854 (1987): Preservation of Rosario Claims and Prosecutor’s Duty to Disclose

    People v. Jones, 70 N.Y.2d 854 (1987)

    To preserve a Rosario claim for appellate review, the prosecutor must specify any objections to furnishing requested materials at trial; otherwise, the issue is not preserved, and the court will not reach the merits of the Rosario claim.

    Summary

    The defendant was convicted of rape, sodomy, and sexual abuse of his 11-year-old daughter. At trial, the defense sought to confront the complainant with statements she made to a social worker from the Bureau of Child Welfare (BCW), arguing these were prior statements relevant to her testimony. The prosecutor objected, citing privilege and the Family Court Act, and stated he possessed nothing relevant from BCW. The trial court sustained the objection. The Court of Appeals reversed, holding that the prosecutor failed to adequately preserve objections to the defense’s Rosario claim because he didn’t specify his objections at trial, preventing the trial court from considering the matter and the defense from creating a proper record.

    Facts

    Defendant was accused by his 11-year-old daughter of rape and sexual abuse over several years.

    Defendant argued the accusations were fabricated by the child’s mother (from whom he was separated) to gain custody of their children.

    Defense counsel sought to cross-examine the daughter with prior statements made to a BCW social worker.

    The prosecutor claimed the statements were privileged and protected by the Family Court Act and asserted he had no relevant BCW material.

    The trial court denied the defense’s request for the statements.

    Procedural History

    The trial court convicted the defendant of rape, sodomy, and sexual abuse.

    The Appellate Division affirmed the conviction.

    The New York Court of Appeals reversed the Appellate Division’s order and ordered a new trial.

    Issue(s)

    Whether the prosecutor adequately preserved objections to the defense’s request for the complainant’s prior statements to a social worker under the Rosario rule.

    Holding

    No, because the prosecutor failed to specify his objections to furnishing the requested materials at trial, he did not preserve these arguments for appellate review.

    Court’s Reasoning

    The Court of Appeals emphasized the prosecutor’s obligation to turn over a witness’s prior statements relating to the subject matter of their testimony, as established in People v. Rosario.

    The Court found that the prosecutor’s general reference to privilege and the Family Court Act was insufficient to invoke CPLR 4508, which governs social worker-client privilege. The court cited Matter of Grattan v. People to support this point.

    The prosecutor’s claim of possessing nothing relevant from BCW was deemed insufficient to argue on appeal that Rosario material doesn’t include statements in BCW custody.

    The Court stressed that the prosecutor’s failure to raise specific objections at trial deprived the trial judge of the opportunity to consider the issues and prevented the defense from creating a proper record. This record could have clarified the relationship between the People and BCW, the prosecutor’s access to BCW records, and who could assert or waive privilege under CPLR 4508, citing People v. Nieves and People v. Tutt.

    Because the Court did not reach the merits of the Rosario claim, it explicitly stated that it was not ruling on the availability of any of the requested materials. This leaves open questions about when the Rosario rule applies to materials held by outside agencies.

    The Court emphasized the importance of proper objections to allow the trial court to make informed decisions and to create a clear record for appeal. This case acts as a reminder to prosecutors that all objections to Rosario requests must be clearly laid out at trial.

  • People v. Mejia, 69 N.Y.2d 853 (1987): Admissibility of Evidence Based on Reasonable Suspicion and Consent

    People v. Mejia, 69 N.Y.2d 853 (1987)

    Evidence obtained during a street detention is admissible if the police had reasonable suspicion to justify the detention, and evidence obtained from a search of a residence is admissible if consent to enter was freely given.

    Summary

    The New York Court of Appeals upheld the defendant’s conviction for robbery, finding that his initial street detention was justified by reasonable suspicion and that he consented to the police entry into his apartment. The court found no error in admitting testimony about a skirt the defendant discarded while fleeing, as it was relevant to identification.

    Facts

    In the early morning hours, police officers investigating another crime in an area of apartment buildings observed the defendant running. They noticed two other men nearby and suspected the defendant might be the victim of a crime. The police called to the defendant, who stopped, looked at them, and then ran away, discarding a black skirt as he fled. The police pursued and questioned him, and he gave his name and address, which they verified. Later, the police entered the defendant’s apartment, where they arrested him and seized a blue jacket.

    Procedural History

    The defendant was convicted of robbery in the first degree and sentenced as a persistent violent felony offender. He appealed, challenging the admission of statements made during the street detention, the observation of a fresh cut on his hand during the stop, and the seizure of a blue jacket from his apartment. The hearing court found the street detention justified and the apartment entry consensual. The Appellate Division upheld these findings.

    Issue(s)

    1. Whether the defendant’s statements, the police observations, and the discarded skirt should have been suppressed as products of an unlawful street detention.
    2. Whether the blue jacket should have been suppressed as the fruit of an unlawful warrantless arrest in his apartment.
    3. Whether testimony about the black skirt was improperly admitted.

    Holding

    1. No, because the police had an articulable reason for the initial attempt to talk with the defendant and reasonable suspicion to justify their detention while they questioned him.
    2. No, because the entry into the defendant’s apartment was made with his consent, rendering the subsequent warrantless arrest lawful, and the jacket was properly seized incident to that arrest.
    3. No, because the testimony concerning the skirt was relevant to the issue of identification.

    Court’s Reasoning

    The court reasoned that the police had an articulable reason to attempt to speak with the defendant and reasonable suspicion to detain him based on his running away after being called to, and discarding the skirt. Citing People v. Leung, 68 NY2d 734 and People v. Howard, 50 NY2d 583, the court emphasized the permissibility of brief detentions based on reasonable suspicion. The court also deferred to the lower courts’ finding of consent to enter the apartment, stating, “These determinations involved mixed questions of law and fact, and because there is evidence in the record to support the hearing court’s findings, undisturbed by the Appellate Division, our review process is at an end (see, People v Harrison, 57 NY2d 470, 477).” The court found the testimony about the skirt relevant for identification, as it linked the defendant to the crime through his possession of a similar item at a closely related time, noting the victim’s testimony that her attacker was carrying something black. The skirt itself was not admitted. The court emphasized that the evidence “helped to link him to the crime.”

  • Andrulonis v. United States, 69 N.Y.2d 310 (1987): Court Declines to Answer Certified Questions When State Court Resolution is Pending

    69 N.Y.2d 310 (1987)

    The New York Court of Appeals may decline to answer certified questions from a federal court when the same questions are currently under consideration in the New York State court system.

    Summary

    In this case, the United States Court of Appeals for the Second Circuit certified two questions of New York law to the New York Court of Appeals. However, the New York Court of Appeals declined to answer the certified questions because those very questions were already before the New York State court system in an ongoing case, McDougald v. Garber. The Court of Appeals reasoned that allowing the normal state court process to proceed, including deliberation and writing by the intermediate appellate court, was preferable for resolving significant state law issues.

    Facts

    The United States Court of Appeals for the Second Circuit sought clarification on two specific questions of New York law within a Federal Tort Claims Act case.

    The questions related to whether “loss of enjoyment of life” is a separately compensable item of damages and whether cognitive awareness is required to recover for such a loss.

    At the time the Second Circuit certified the questions, these same issues were actively being litigated in the New York State court system in the case of McDougald v. Garber.

    Procedural History

    The United States Court of Appeals for the Second Circuit certified questions to the New York Court of Appeals.

    The New York Court of Appeals declined to accept the certified questions.

    Issue(s)

    Whether the New York Court of Appeals should answer certified questions from a federal court when the identical questions are already being litigated in the New York State court system, with a decision pending before the intermediate appellate court.

    Holding

    No, because allowing the state court system to resolve the issue through its normal process, including intermediate appellate review, is preferable for resolving significant state law issues.

    Court’s Reasoning

    The Court of Appeals acknowledged the value of the certification process in promoting cooperative judicial federalism and allowing the court to declare state law in non-state actions.

    However, the court emphasized that answering the certified questions would interfere with the ongoing state court proceedings in McDougald v. Garber, where the same issues were being actively litigated.

    The court reasoned that it was preferable to secure the benefit of the normal state court process, including the considered deliberation and writing of the intermediate appellate court, in resolving these significant state law issues.

    The Court noted that responding to specific questions from the federal court, rather than deciding a case fully before it for review, would affect the ordinary state procedure already in progress.

    The court stated, “In the circumstances, it is unquestionably preferable in the resolution of significant State law issues to secure the benefit afforded by our normal process — the considered deliberation and writing of our intermediate appellate court in a pending litigation.”

  • People v. Buford, 69 N.Y.2d 290 (1987): Standard for Dismissing a Sworn Juror During Trial

    People v. Buford, 69 N.Y.2d 290 (1987)

    A sworn juror in a criminal trial may only be dismissed over the defendant’s objection if the court finds the juror is “grossly unqualified” to serve, meaning the juror possesses a state of mind that would prevent the rendering of an impartial verdict.

    Summary

    This case addresses the standard for dismissing a sworn juror during a criminal trial under New York Criminal Procedure Law (CPL) 270.35. The Court of Appeals held that a juror can only be dismissed if “grossly unqualified,” meaning the juror’s state of mind prevents an impartial verdict. The Court reversed the convictions in two separate cases, finding that the trial courts applied an improper, less stringent standard in excusing jurors. The key factor is whether the juror’s impartiality is clearly compromised, not merely questionable. Speculation about possible bias is insufficient for dismissal.

    Facts

    People v. Buford: During Buford’s murder trial, a forewoman saw two prosecution witnesses leaving the courthouse together and expressed concern about a possible conspiracy. The court questioned her, and she stated she could still be fair. The court excused her over the defendant’s objection.
    People v. Smitherman: During Smitherman’s weapon possession trial, a juror revealed she had personal knowledge of the shooting of the defendant’s friend, which the defendant claimed was the reason he wore a bulletproof vest. Initially, she indicated this knowledge might affect her judgment, but later stated she could still be fair and impartial. The court excused her over the defendant’s objection.

    Procedural History

    Both Buford and Smitherman were convicted in their respective trials. In both cases, the Appellate Divisions affirmed the convictions. The New York Court of Appeals consolidated the appeals and reversed the orders of the Appellate Divisions, ordering new trials for both defendants.

    Issue(s)

    1. Whether the trial court in People v. Buford applied the correct standard in excusing the forewoman from the jury over the defendant’s objection.
    2. Whether the trial court in People v. Smitherman applied the correct standard in excusing the juror with personal knowledge of the defendant’s friend’s shooting over the defendant’s objection.

    Holding

    1. No, because the trial court did not apply the “grossly unqualified” standard established in CPL 270.35, instead relying on speculation about possible partiality.
    2. No, because the trial court did not apply the “grossly unqualified” standard established in CPL 270.35, instead relying on the juror’s particular knowledge, even though the juror stated she could be fair.

    Court’s Reasoning

    The Court of Appeals emphasized that dismissing a sworn juror after the trial has begun requires a showing that the juror is “grossly unqualified” under CPL 270.35. This standard is higher than the standard for challenging a juror for cause during jury selection. The Court reasoned that a defendant has a constitutional right to a trial by a particular jury chosen according to law. The Court stated, “This statutory test places a greater burden upon the moving party than if the juror was challenged for cause”.

    In Buford, the forewoman’s initial concern about a conspiracy was alleviated after being informed that the witnesses’ conduct was proper. Her subsequent statements indicated she could remain fair and impartial. Therefore, it was not “obvious” that she possessed a state of mind that would prevent an impartial verdict.

    In Smitherman, the juror’s knowledge of the shooting of defendant’s friend pertained to a collateral matter, not to material facts in issue. Although the juror initially stated her knowledge would affect her deliberations, she later indicated she could convict if the prosecution proved its case beyond a reasonable doubt. The court emphasized that the trial court must be convinced that the juror’s knowledge will prevent her from rendering an impartial verdict, and the court may not speculate. “In concluding that a juror is grossly unqualified, the court may not speculate as to possible partiality of the juror based on her equivocal responses. Instead, it must be convinced that the juror’s knowledge will prevent her from rendering an impartial verdict.” The Court found that the trial court applied a standard other than “grossly unqualified” by focusing on the juror’s “particular knowledge” rather than her actual ability to be impartial. The Court reiterated that each case must be evaluated on its unique facts and stated that the trial court’s reasons for its ruling should be placed on the record.

  • Leyva v. Levy, 69 N.Y.2d 847 (1987): Establishing Legal Sufficiency of Evidence in Medical Malpractice

    Leyva v. Levy, 69 N.Y.2d 847 (1987)

    A jury verdict should only be overturned for insufficient evidence when there is no valid reasoning or permissible inferences that could lead rational jurors to the conclusion reached.

    Summary

    This case concerns a medical malpractice claim where the plaintiff alleged that the decedent’s life could have been saved with a timely blood transfusion. The Court of Appeals reversed the Appellate Division’s dismissal of the complaint against Dr. Foster and the New York City Health and Hospitals Corporation, finding that sufficient evidence existed to support the jury’s verdict. However, the dismissal of the claim against the City of New York was upheld because the plaintiff failed to establish a basis for the City’s liability, as it is a separate entity from the Health and Hospitals Corporation.

    Facts

    The plaintiff’s decedent was allegedly alive at 12:45 p.m. on July 17, 1975. Testimony from Dr. Foster, the plaintiff’s expert Dr. Nearenberg, and Dr. Cehelsky’s examination before trial suggested that a blood transfusion at that time could have saved her life. The jury found in favor of the plaintiff, implying they believed the transfusion would have been effective.

    Procedural History

    The trial court entered judgment in favor of the plaintiff based on the jury verdict. The Appellate Division reversed, dismissing the complaint. The Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    1. Whether the jury’s verdict was based on legally sufficient evidence to support a finding of medical malpractice against Dr. Foster and the New York City Health and Hospitals Corporation.
    2. Whether the City of New York could be held liable for the alleged medical malpractice.

    Holding

    1. Yes, because there was evidence presented at trial from which a rational jury could conclude that the decedent’s life could have been saved with a timely blood transfusion. A new trial is required because the Appellate Division’s order of reversal was on the facts as well.
    2. No, because the City of New York is a separate and distinct entity from the New York City Health and Hospitals Corporation, and the plaintiff failed to demonstrate any factual basis for imposing liability upon the City.

    Court’s Reasoning

    The Court of Appeals held that the Appellate Division erred in dismissing the complaint against Dr. Foster and the New York City Health and Hospitals Corporation. The court emphasized that a jury verdict should only be overturned when “‘there is simply no valid line of reasoning and permissible inferences which could possibly lead rational [jurors] to the [contrary] conclusion reached by the jury on the basis of the evidence presented at trial’ (Cohen v Hallmark Cards, 45 NY2d 493, 499)’”. The court found that the testimony presented at trial provided a sufficient basis for the jury to conclude that a timely blood transfusion could have saved the decedent’s life. Evidence suggesting the patient was alive and a transfusion could have been effective sufficed. However, the Court upheld the dismissal against the City of New York, citing Brennan v City of New York, 59 NY2d 791, for the principle that the City and the New York City Health and Hospitals Corporation are separate entities. Since the plaintiff failed to provide any evidence connecting the City to the alleged malpractice, there was no basis for holding the City liable.

  • Matter of Perez v. Ward, 69 N.Y.2d 840 (1987): Urinalysis for Public Employees Based on Reasonable Suspicion

    Matter of Perez v. Ward, 69 N.Y.2d 840 (1987)

    A public agency may lawfully order an employee to undergo urinalysis based on reasonable suspicion of drug use, supported by substantial evidence.

    Summary

    This case involves challenges by a police officer (Perez) and correction officers (King) to their dismissals for refusing to comply with orders to submit to urinalysis based on reported drug use. The New York Court of Appeals upheld the dismissals, finding that the urinalysis orders were justified by reasonable suspicion based on information from confidential informants. The court emphasized that a public agency may order urinalysis of an employee when there is reasonable suspicion of drug use, and determined that substantial evidence supported the administrative determinations in both cases. The court found the penalty of dismissal was appropriate and rejected the petitioners’ remaining arguments.

    Facts

    Regarding Perez: A reliable confidential informant, with a history of providing accurate information, reported to the police department that Perez was using heroin. Certain allegations made by the informant were verified. On the day before the urinalysis order, the informant stated that he had just witnessed Perez using heroin.

    Regarding Melvin and Henry King: A confidential informant reported the correction officers’ use of illegal drugs at specific locations. The Inspector General’s office verified certain aspects of the information. Shortly before the urinalysis order, the informant advised the Inspector General that he had observed the officers using narcotics at the specified locations.

    Procedural History

    Perez and King separately challenged their dismissals in Article 78 proceedings. The lower courts upheld the dismissals. The cases were then appealed to the New York Court of Appeals.

    Issue(s)

    Whether the orders for the police and correction officers to submit to urinalysis were lawful, given the standard that a public agency may order an employee to undergo urinalysis on reasonable suspicion of drug use?

    Holding

    Yes, because there was substantial evidence supporting the administrative determinations that reasonable suspicion existed to order the urinalysis in both cases.

    Court’s Reasoning

    The Court of Appeals focused on whether the “reasonable suspicion” standard for ordering urinalysis was met in each case. It highlighted the reliability of the informants and the verification of certain details they provided. Regarding Perez, the court emphasized the informant’s history of reliability and the recent sighting of Perez using heroin. Regarding the Kings, the court pointed to the informant’s report of drug use at specified locations and the Inspector General’s verification of some of that information. The court concluded that these facts constituted substantial evidence supporting the administrative determinations.

    The court referenced Pell v Board of Educ., 34 NY2d 222, indicating that the penalty of dismissal was not erroneous under the circumstances. The court explicitly stated that the parties agreed on the applicable standard – reasonable suspicion – and therefore the court did not need to rule on what the proper standard should be, focusing instead on whether that agreed-upon standard was satisfied. The court stated: “these parties have agreed that a public agency may lawfully order an employee to undergo urinalysis on reasonable suspicion of drug use. The central issue is whether, on the facts presented, that standard was satisfied here.”

    The court dismissed the petitioners’ remaining contentions as lacking merit.

  • Matter of Cruz v. Sheriff of New York County, 69 N.Y.2d 866 (1987): Double Jeopardy and Continuing Offenses for Weapon Possession

    Matter of Cruz v. Sheriff of New York County, 69 N.Y.2d 866 (1987)

    The Double Jeopardy Clause precludes successive prosecutions for criminal possession of a weapon when the possession constitutes a single, continuing offense, even if the possession occurs in different locations over a short period.

    Summary

    Cruz was arrested in New York County for possessing a handgun six days after allegedly firing it in the Bronx. He pleaded guilty in the Bronx to a weapons charge. He then sought to dismiss the New York County indictment on double jeopardy grounds, arguing the possession was a single, continuous offense. The Court of Appeals held that unlawful possession is a continuing offense, and successive prosecutions for the same continuous possession violate double jeopardy. The court emphasized that the state cannot divide a single crime into multiple offenses based on time or location.

    Facts

    On February 5, 1985, Cruz fired a handgun at his sister in a Bronx apartment. Six days later, on February 11, 1985, he was arrested in New York County and found to be in possession of the same handgun. Both Bronx and New York Counties indicted him for criminal possession of a weapon. The Bronx indictment covered the February 5th possession, and the New York County indictment covered the February 11th possession.

    Procedural History

    Cruz pleaded guilty to attempted criminal possession of a weapon in the Bronx. He then moved to dismiss the New York County indictment based on double jeopardy. The motion was denied. Cruz then filed an Article 78 proceeding seeking to prohibit the New York County prosecution. The Appellate Division dismissed the petition. Cruz appealed to the New York Court of Appeals.

    Issue(s)

    Whether the New York County indictment for criminal possession of a weapon on February 11, 1985, violates the Double Jeopardy Clause, given Cruz’s prior conviction in the Bronx for possessing the same weapon on February 5, 1985.

    Holding

    Yes, because unlawful possession of a weapon is a continuing offense, and the Double Jeopardy Clause prohibits successive prosecutions for the same continuous possession.

    Court’s Reasoning

    The Court of Appeals relied on Brown v. Ohio, which held that the Double Jeopardy Clause prevents prosecutors from dividing a single crime into multiple offenses based on temporal or spatial units. The court reasoned that Cruz’s possession of the handgun for six days constituted a single, continuous offense. Even if Cruz possessed the weapon at his home (which would be a lesser included offense), it would still constitute the “same crime” for double jeopardy purposes under Brown v. Ohio.

    The court distinguished cases where a defendant abandons and then recovers a weapon, noting that continuous possession is essential to Cruz’s double jeopardy claim. Quoting Blockburger v. United States, the court stated that possession is “an offense continuous in its character”. The court further quoted United States v. Jones, stating that “(p)ossession is a course of conduct, not an act.”

    The court emphasized that the legislature had not defined criminal possession in terms of specific “temporal units.” Instead, it is defined by “dominion” and “control.” Therefore, Cruz could only be prosecuted once for the continuous possession of the handgun, and the New York County indictment was barred by double jeopardy.

  • Dynamics Corp. of America v. Marine Midland Bank, 69 N.Y.2d 191 (1987): Debtor’s Duty to Disclose Claims in Bankruptcy

    69 N.Y.2d 191 (1987)

    A debtor-in-possession in a Chapter XI bankruptcy proceeding has a duty to disclose all known or knowable claims in its schedules of assets, and failure to do so precludes the debtor from pursuing those claims individually after the bankruptcy proceeding concludes, unless the claims were properly “dealt with” or abandoned during the bankruptcy.

    Summary

    Dynamics Corporation of America (DCA) sued Marine Midland Bank (Marine) for damages, alleging misconduct that led to DCA’s bankruptcy. DCA had previously undergone a Chapter XI bankruptcy proceeding where it didn’t disclose these claims against Marine. The court held that because DCA failed to list these claims as assets in its bankruptcy schedules, it could not pursue them individually after the bankruptcy concluded. The court reasoned that a debtor-in-possession has a duty to disclose all potential claims so they can be administered for the benefit of creditors.

    Facts

    DCA and Marine had a long-standing banking relationship. In August 1972, DCA initiated Chapter XI bankruptcy proceedings. Marine was a major creditor. In July 1975, DCA sued Marine for $70 million, alleging Marine conspired to destroy DCA’s business beginning in 1970. DCA claimed Marine made misrepresentations about loan renewals, leading DCA to forgo seeking other financing. DCA further alleged that Marine improperly offset DCA’s checking account and seized uncollected checks, forcing DCA into bankruptcy.

    Procedural History

    The Supreme Court, New York County, granted Marine’s motion for summary judgment, dismissing DCA’s complaint. The court relied on the principle that a discharged Chapter XI debtor cannot pursue claims it failed to include in its bankruptcy schedule. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a debtor, after confirmation of a Chapter XI plan of arrangement, can pursue claims against a creditor that were not disclosed in the debtor’s schedules filed with the bankruptcy court.

    Holding

    No, because the debtor-in-possession has a duty to disclose all known or knowable claims in its schedules of assets, and failure to do so precludes the debtor from pursuing those claims individually after the bankruptcy proceeding concludes, unless the claims were properly “dealt with” or abandoned during the bankruptcy.

    Court’s Reasoning

    The Court emphasized the importance of disclosure in Chapter XI proceedings, where debtors-in-possession have a fiduciary duty to their creditors. The court stated that the requirement of disclosure includes “[u]nliquidated claims of every nature, with their estimated value.” The court reasoned that the only property that may revest in the debtor is property that was “dealt with” in the bankruptcy or abandoned. Property is “dealt with” when it has been listed in the debtor’s schedule of assets, administered by the bankruptcy court for the benefit of creditors, and not otherwise affected by the ultimate plan of arrangement involving the debtor’s other assets. Property can be considered abandoned only if the trustee or debtor-in-possession knows of it and manifests an intent to abandon it. Since DCA’s claims against Marine were not disclosed in its schedules, they were not “dealt with” in the bankruptcy and did not revest in DCA after the proceeding. The court found DCA’s argument that it didn’t learn of its fraud or improper offset causes of action until after the Chapter XI proceeding ended to be unpersuasive, holding that DCA presented no evidentiary material sufficient to raise a triable issue of fact. The court quoted Stein v United Artists Corp. in noting that without a rule precluding such a debtor from later pursuing claims about which it knew or should have known at the time of filing its petition, a debtor-in-possession might employ less than diligent efforts to ascertain and disclose all potential claims, thus undermining its obligation to the estate and prejudicing the interests of the unsecured creditors.

  • Matter of Savemart, Inc. v. State Tax Comm’n, 69 N.Y.2d 787 (1987): Taxing the Furnishing of Information

    Matter of Savemart, Inc. v. State Tax Comm’n, 69 N.Y.2d 787 (1987)

    The sale of customer lists in the bulk sale of a fuel oil distribution business is not subject to sales tax under Tax Law § 1105(c)(1) unless the seller is in the business of furnishing information.

    Summary

    This case addresses whether the sale of customer lists during the bulk sale of fuel oil distribution businesses is subject to sales tax under New York Tax Law § 1105(c)(1). The New York Court of Appeals held that the transfer of customer lists in these circumstances is not taxable because the sellers were not in the business of furnishing information. The court distinguished the situation from cases where businesses specifically compile and sell mailing lists or other information as their primary function.

    Facts

    Several fuel oil distribution businesses were sold in bulk sales of assets. As part of these sales, customer lists were transferred to the purchasers. The State Tax Commission assessed sales tax on the transfer of these customer lists under Tax Law § 1105(c)(1).

    Procedural History

    The taxpayers challenged the sales tax assessments. The Appellate Division’s judgment was reversed. The petition was granted, the determination of the State Tax Commission was annulled, and the matter was remitted to the Supreme Court, Albany County, with directions to remand to the State Tax Commission for further proceedings.

    Issue(s)

    Whether the transfer of customer lists in the bulk sale of a fuel oil distribution business constitutes the taxable furnishing of information under Tax Law § 1105(c)(1).

    Holding

    No, because the sellers were not engaged in the business of furnishing information, and the customer lists were not prepared at the purchaser’s request.

    Court’s Reasoning

    The court focused on the language of Tax Law § 1105(c)(1), which imposes a tax on:

    “(c) The receipts from every sale, except for resale, of the following services:
    (1) The furnishing of information by printed, mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner, including the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons”.

    The court emphasized that the statute and related regulations indicate that it is the sale of the service of furnishing information by a business whose primary function is to collect and disseminate information which is taxable, and not the mere sale of information incidentally.

    The court distinguished the case from situations where businesses specifically compile and sell mailing lists or other information as their primary function, citing Matter of Mertz v State Tax Commn., 89 AD2d 396, Names in the News v New York State Tax Commn., 75 AD2d 145, and Matter of Drey Co. v State Tax Commn., 67 AD2d 1055. In those cases, the sale of mailing lists was deemed taxable because the businesses were in the business of providing such lists.

    The court distinguished this case from Matter of Long Is. Reliable Corp. v Tax Commn., 72 AD2d 826, lv denied 49 NY2d 707. In the present case, the seller was not engaged in the business of furnishing information, and the record indicated that the seller did not prepare the customer list at the purchaser’s request.

    The court concluded that because the fuel oil businesses were not in the business of furnishing information, the transfer of customer lists was not taxable under section 1105(c)(1). The critical factor was the nature of the seller’s business and whether the furnishing of information was its primary function.