New York Business Lawyer Blog

June 15, 2012

Records a New York Business Should Always Keep On file (III)

by The Law Firm of Grasing & Associates

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

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

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

Perhaps the hardest part of the test to satisfy is to demonstrate that the missing evidence is relevant to the Injured Party’s claim or defense, since the Injured Party cannot know exactly what is in it, because the Injured Party does not have access to it, since the evidence was lost or destroyed.
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June 11, 2012

Records a New York Business Should Always Keep On File (II)

by The Law Firm of Grasing & Associates

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

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

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

June 6, 2012

Records A New York Business Should Always Keep On File

by The Law Firm of Grasing & Associates

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

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

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

May 30, 2012

New York Businesses Collecting the Money Customers Owe (III)

by The Law Firm of Grasing & Associates

We’ve previously discussed the problem of partial payments being disguised as payments in full, and how this can prevent a New York Business from collecting the full amount a customer owes it. Depositing a check, marked payment in full, normally creates an Accord and Satisfaction, which discharges the remainder of the claim, unless the depositor endorses the check by clearly indicating that he reserves his rights or deposits the check under protest. See UCC 1-207. A check marked “Payment in Full,” however, can be defeated; even if deposited without the restrictive endorsement noted above, there still must be a genuine Accord and Satisfaction in order to discharge the remainder of the debt.

It’s important that every New York Business understand what an Accord and Satisfaction is: A subsequent contract that both parties enter into in order to satisfy, in whole or in part, their obligations under a prior contract. It can be established only by showing that both parties were fully aware of, and freely entered into, the new contract. See Merrill Lynch Realty/Carll Burr, Inc. v. Skinner, 63 N.Y.2d 590 (NY 1984); Narendra v. Thieriot, 41 A.D.3d 442 (2nd Dept. 2007); Church Mut. Ins. Co. v. Kleingardner, 2 Misc. 3d 676 (Sup. Ct. Oswego County, 2003).

It is also important to know that depositing, without a restrictive endorsement, a check marked “Payment in Full,” does not automatically establish an Accord & Satisfaction: The business that accepts, and deposits, a check marked “Payment in Full,” has to know that, if it accepts that check (i.e. it accepts the lower proffered payment) it will settle or discharge a legitimately disputed claim. See Merrill Lynch Realty/Carll Burr, Inc. v. Skinner, 63 N.Y.2d 590 (NY 1984). This is especially important where there is more than one outstanding, or possible outstanding, claim between the parties.

May 25, 2012

New York Businesses Collecting the Money Customers Owe (Part II)

by The Law Firm of Grasing & Associates

In our last entry, we spoke about a fairly common problem most New York Businesses have encountered: Where a customer/client makes a partial payment but tries to pass it off as payment in full for the money it owes. We also presented a way a business can protect itself: By placing a restrictive endorsement on the check, a business should be able to collect the partial payment and live to fight to recover the remainder of the debt another day.

The problem, in New York, is based on a legal concept known as “Accord and Satisfaction,” which sounds more complex than it actually is. To establish an Accord and Satisfaction, there must be a genuine dispute regarding an unliquidated claim. That could mean that the two parties to a sales contract have a dispute over how much the Buyer owes the Seller for the goods it purchased. For example, the Buyer claims it owes the Seller $700.00, but the Seller insists the Buyer owes it $1,000.00, because that is what they originally agreed to. Next, the parties must mutually resolve that dispute by entering into a new contract which discharges all or part of their obligations under the original contract. This could be an agreement by which the Seller agrees to accept the $700.00 for the goods the Buyer purchased, even though the original contract was for $1,000.00. If the Buyer pays the $700.00, and the Seller accepts the $700.00 without objection, then there is an Accord and Satisfaction, and, as a result, the Seller cannot recover the remaining $300.00 due it under the original sales agreement.

In New York, when one party accepts a check in full satisfaction of a disputed unliquidated claim, the claim is discharged, as an accord and satisfaction. (See, Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 66 N.Y.2d 321; Merrill Lynch Realty/Carll Burr v. Skinner, 63 N.Y.2d 590). As a result, if there is a dispute about the money a New York Business is owed, and it receives a check marked “payment in full”, it should make sure that it does not simply sign and deposit the check. Depositing a “Full Payment Check,” that way, is evidence that the business agrees to accept the lesser amount as payment in full. Instead, the business should clearly indicate that it does not accept the check as payment in full. One way to do this is to sign the check with the restrictive endorsement mentioned earlier.

May 18, 2012

New York Businesses Collecting the Money Customers Owe

by The Law Firm of Grasing & Associates

Most New York businesses have been involved in fee disputes; where you’re trying to collect for goods or services you’ve sold to another. You know you lived up to your end of the bargain; you gave your customer/client what they asked for. All you want them to do is to live up to their responsibilities; i.e. pay you the price they agreed to, but they don’t, haven’t, and won’t. They always come up with an excuse. They haven’t had the time to get to it; they’re waiting on someone else to pay one of their bills; the check is in the mail. The bottom line, though, is they still haven’t paid the fee they agreed to.

Sometimes, the customer/client does pay something, though it is less than the full amount. Even though it is a partial payment, they indicate right on the check that it is in full satisfaction of all fees they owe you. Many times they’ll even cite a statute which they claim backs them up. Many businesses do not know what to do when they face that situation. Often they panic. Though they need the money and are entitled to it, after all they did earn it, they are afraid that if they cash that check they’ll forfeit their right to collect the remaining balance of the fees from the customer/client. As a result, they often don’t deposit the check; some return the check, and others deposit the check but fail to pursue the customer/client for the remainder of the fees.

At least in New York, there is a way around this problem. Under UCC 1-207, the recipient of just such a check can deposit the check and still maintain its right to proceed against the customer/client to recover the remainder of the money owed to it. Under that statute, a depositor can put a restrictive endorsement on the check before he puts it in the bank to collect the proceeds. The endorsement will include words that make it clear that the depositor does not forfeit his rights under the purchase or sales agreement. These could include such phrases as: Deposited Under Protest/With Reservation of Full Rights/Pursuant to UCC 1-207. At the very least, this will allow a business to live to fight another day; it won’t guarantee that you’ll recover the money you’re owed, but it won’t foreclose your ability to try to collect it. At the same time, it will let you deposit the check you’ve been given, collect at least some of the money you’re owed, and thereby make the dispute smaller and, perhaps, more manageable. When the economy is poor, this is something that businesses should be able to utilize to boost their bottom line. It may not be much, but then again, in times like these, every dollar does count.