Bernstein Shur Business and Commercial Litigation Newsletter #28

May 2013 | Issue 28

By Paul McDonald and Daniel Murphy

We are pleased to present the 28th edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we highlight cases that address cloud-computing contacts as the basis for jurisdiction, clarification on bankruptcy discharge standards for fiduciaries, and New York’s securities fraud statute. We hope you enjoy the newsletter.

In the News: 

A U.S. District Court Judge finds jurisdiction over foreign individuals under the Foreign Corrupt Practices Act based on the use and storage of emails on network servers located in the United States. The FCPA, 15 U.S.C. §§78dd-1, is an anti-bribery provision that makes it illegal to make payments to foreign government officials to obtain or retain business. Under the FCPA, willful use of mail or any instrumentality of interstate commerce in furtherance of such illegal purposes can be subject to civil enforcement and criminal prosecution. In a recent case, Securities and Exchange Commission v. Straub, (S.D.N.Y. Feb. 8, 2013), the SEC commenced an enforcement action against foreign individuals who were affiliated with a Hungarian telecommunications company, Magyar Telekom PLC, and were alleged to have bribed public officials in Macedonia. In response to jurisdictional challenges, the SEC claimed that jurisdiction over the individuals existed based on electronic mail communications between Hungary and Macedonia that were routed through and stored on network servers located in the United States. Judge Richard Sullivan of the U.S. District Court for the Southern District of New York agreed, concluding that use of servers in the United States was sufficient to confer jurisdiction over the foreign defendants. If the court’s rationale gains favor, it would provide a significant departure from traditional limitations on jurisdiction, including the requirements of sufficient minimum contacts and purposefully directed activities toward the forum. The decision stands as a reminder of the potential for evolving jurisdictional standards amid rapid changes in technology and communication. Click here to read more about the decision.

The U.S. Supreme Court provides clarity on the scope of the exception to bankruptcy discharge for debts involving defalcation by a fiduciary. By filing a bankruptcy petition, individual debtors often are able to discharge all unsecured pre-petition obligations, unless an exception to discharge applies. Among those exceptions from the general rule of dischargeability are certain forms of misconduct, including “defalcation while acting in a fiduciary capacity.” 11 U.S.C. §523(a)(4). The term “defalcation,” however, is not defined in the Bankruptcy Code. This month, the United States Supreme Court resolved a split among the federal appellate courts as to the intended meaning of defalcation. Some circuit courts required that the fiduciary debtor’s conduct be intentional; others applied a lower standard of mere recklessness. Writing for a unanimous court, Justice Breyer adopted an intermediate approach, declaring that defalcation includes a culpa­ble state of mind requirement involving knowledge of, or gross reck­lessness in respect to, the improper nature of the fiduciary behavior. This decision will have an impact on bankruptcy court decisions as to whether trustees, partners, corporate officers and directors and other fiduciaries are entitled to bankruptcy discharges of debts that involve claims of breach of their fiduciary duties. Click here to read the court’s opinion.

New York’s highest court hears arguments on whether the state attorney general has authority under the Martin Act, the state’s “Blue Sky” law, to enjoin Hank Greenberg, the former chief of AIG, from working in the securities industry. At the trial court level, New York’s attorney general originally sought monetary damages on behalf of former AIG shareholders. In response, Greenberg mounted an aggressive challenge to the Martin Act itself, arguing that the attorney general lacked authority to seek monetary damages on behalf of a private class based on preemption of federal statutes and the existence of a settlement between Greenberg and federal regulators. The attack on the Martin Act was mooted when the state Attorney General withdrew his claim for damages, instead seeking only to enjoin Greenberg from working in the securities industry. Greenberg has attacked the attorney general’s present position on procedural grounds, arguing that the state’s request for injunctive relief is barred because it was not pursued at the trial court level. Click here to read more about the case.