This column reports on several significant representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Jack B. Weinstein, in his Statement of Reasons for sentencing a lawyer to incarceration, called for a shift in the legal profession's culture to encourage attorneys with mental illness to seek help. Judge Weinstein also enforced an Internet arbitration clause against a customer who claimed that her purchase had caused bed bugs. And Judge I. Leo Glasser declined to dismiss IRS claims for money damages against a co-defendant who had benefitted from fraudulent conveyances by her father-in-law to escape estate taxes.

Sentencing: Mental Health Problems of Lawyers

In United States v. Luthmann, 17 CR 664 (Oct. 15, 2019), Judge Weinstein, after sentencing an attorney for crimes that were "absurd, bizarre, and ruthless," discussed the need for the legal profession to do more to help lawyers suffering from mental illness.

Briefly, defendant "abused his status as a lawyer" and conspired with his clients to commit fraud and extortion. He devised a scheme to defraud export companies seeking to buy scrap metal. His methods were sophisticated but often reflective of his Bipolar II Disorder and other mental problems. He recruited a blind person under the care of a guardian ad litem, and on Social Security, to be nominal president of a company abetting the fraud, in the belief that such a disability would preclude a lawsuit. Defendant organized a plan to extort a co-conspirator and used an "enforcer" to point a loaded gun at him. After his arrest and while on release, he sent his wife a threatening letter because he thought she was cooperating with the government. The record has other examples of his irrational acts, sometimes not clearly grounded in reality. Slip op. 1-5. Eventually his bail was revoked.

Defendant pled guilty to conspiracies to commit wire fraud, 18 U.S.C. §§1348, 1349, and extortionate extension of credit, 18 U.S.C. §894(a).

Before sentencing he had a forensic mental health evaluation. The videotaped sentencing hearing was conducted over two days. The advisory range under the Sentencing Guidelines was 57 to 71 months' imprisonment. Weinstein imposed a sentence of 48 months, followed by three years' supervised release.

As Weinstein noted in the Statement of Reasons Pursuant to 18 U.S.C. §3553(c)(2), defendant "excelled academically." After receiving his Juris Doctor and a Masters in Estate Planning, he worked as a law firm associate, then started his own firm. "He gained notoriety as a lawyer for, among other things, his request for trial by combat to resolve a civil suit brought against him for allegedly assisting a client to fraudulently transfer assets." Slip op. 7 (citations omitted). He became involved in politics, resulting in pending state criminal charges for allegedly trying to pay an exotic dancer to falsely report a sexual assault by the Staten Island District Attorney. His New Jersey law license was suspended. Defendant has also been "an abuser of alcohol and cocaine," compounding his mental health problems. In 2012, he was diagnosed with anxiety and depression, and took prescribed medication that interacted poorly with the alcohol and cocaine.

A court-ordered mental health evaluation during defendant's detention in this case led to the diagnosis of Bipolar II Disorder. At the sentencing hearing, he thanked Weinstein for ordering the evaluation, which for the first time accurately diagnosed his condition so he could be treated with the right medication.

Defendant's mental health and substance abuse issues were relevant to sentencing. "These are not uncommon problems for lawyers[,]" especially young attorneys. Slip op. 9-10. According to the American Bar Association, lawyers frequently do not want others to find out they need help. Judges can and should foster an open dialogue about mental problems and substance abuse to reduce the stigma; and more programs, supported by additional resources, should be available to provide care. All of this requires a "shift … in the legal profession's culture." Slip op. 10-11.

Weinstein concluded: "Stigma and underresourced programs no doubt contributed to [defendant's] wariness of obtaining necessary assistance dealing with his problems. These important concerns, however, do not warrant a sentence shorter than 48 months." Slip op. 12.

Arbitration Clause on Website Binding

In Nicholas v. Wayfair Inc., 19 CV 1974 (EDNY, Oct. 16, 2019), Judge Weinstein found an arbitration clause on co-defendant Wayfair LLC's website to be binding on a customer.

Weinstein held a hearing, balancing concerns that courts "must pay special attention to contracts of adhesion used in Internet consumer commerce" with the Federal Arbitration Act's "liberal federal policy favoring arbitration agreements" quoting Epic Sys. v. Lewis, 138 S. Ct. 1612, 1621 (2018). Slip op. 1, 4.

Plaintiff had purchased bedding products on-line through the website of co-defendant Wayfair LLC. Co-defendant Wayfair Inc. is a wholly owned subsidiary of Wayfair LLC. Plaintiff alleged that the purchase caused a bed bug infestation. At the time of her order, a link to the terms and conditions of the website had appeared immediately below the "Submit Order" button, and she reviewed them before clicking it. Defendants' records showed the link was open for 107 seconds. The terms and conditions had clear and conspicuous language requiring that any claim "arising from or relating to these Terms of Use and their interpretation or the breach, termination or validity thereof, [or] the relationships which result from these Terms of Use," including any dispute regarding the arbitrability of a claim, be resolved "by binding arbitration in Suffolk County, Commonwealth of Massachusetts administered by the American Arbitration Association." Slip op 2-3.

Weinstein ordered plaintiff's claims to arbitration. Plaintiff was a "well-informed Internet customer" and college graduate who "has worked in management consulting and at a prominent bank." Slip op. 1. Although she did not recall reviewing the Internet terms and conditions, defendants' computer records showed that she had accepted them, and her claims were plainly within the scope of the arbitration agreement. Slip op. 5-8.

Plaintiff attempted to avoid arbitration by referring to the doctrine of unconscionability. A party alleging unconscionability must show that the contract was both procedurally and substantively unconscionable, and plaintiff could show neither. The terms and conditions were adequately disclosed. Plaintiff had waived her objection to the Massachusetts forum, and her arguments that arbitration would deny her punitive or exemplary damages, and "gut" state law regarding public injunctions, were contrary to case law collected by the court. Slip op. 8-10.

Co-defendant Wayfair Inc. was equally entitled to invoke the arbitration provision, which included not only Wayfair LLC but also its "agents, employees, officers, directors, principals, successors, assigns, subsidiaries or affiliates." Slip op. 10.

Fraudulent Conveyance Liability

In United States v. Lax, 18 CV 4061 (EDNY, Oct. 11, 2019), Judge Glasser denied the motion of co-defendant Shaindy Lax (Shaindy) to dismiss claims brought by the Internal Revenue Service to collect unpaid tax liabilities resulting largely from the conduct of her deceased father-in-law.

Chaim Lax (Chaim) was a diamond merchant. Before he died, he was aware that he was being audited by the IRS and owed substantial taxes and that his Estate would have considerable tax liability to the IRS. In fact, his Estate owed over $60 million to the IRS. The executors of his Estate were his son Moshe Lax (Moshe) and his daughter Zlaty Schwartz (Zlaty). They were also the trustees of the Lax Family Trust, an irrevocable trust Chaim established in 2003, the beneficiaries of which were Chaim's children and grandchildren. Shaindy was Moshe's wife.

The IRS alleged that to shield his assets from IRS collection efforts following his diagnosis of stomach cancer, Chaim undertook a series of sham transactions that Moshe and Zlaty continued after his death. The sham transactions involved moving Estate and trust assets to business entities held in Shaindy's name. Shaindy was the sole member of a number of LLCs into which Moshe transferred Estate assets. The assets included real estate and the wholesale and retail diamond businesses owned and operated by Chaim. After the operating diamond businesses were transferred, they were operated under Moshe's direction because Shaindy had no experience in the diamond business.

The government sought to set aside the transfers as fraudulent conveyances, and to cover any deficiency sought money damages against Moshe, Zlaty and Shaindy. New York Debtor and Creditor Law (DCL) has no express provision for the recovery of money damages, but an implied right of action for damages exists where rescission is no longer practicable. Under applicable case law, defendants "may be held liable for damages, if they are either a 'transferee' or a 'beneficiary' of the [fraudulent] conveyance." Slip op. 10 (emphasis in original). Glasser concluded that Shaindy was a "beneficiary" of the schemes as the sole owner of the companies that received the transferred assets.

It was not necessary to pierce the corporate veil because "the liability of a beneficiary of a fraudulent conveyance is direct, not derivative. Thus, once it has been established that a defendant benefited from a fraudulent conveyance, it is unnecessary to consider whether the traditional prerequisites for veil-piercing are satisfied." Slip op. 12. Additionally, as sole member of the transferee companies, Shaindy exercised dominion and control over them, meeting the first element required for veil-piercing. To meet the second element of veil-piercing, the government had pleaded many badges of fraud, including that (1) the companies were created and used to hide assets from creditors; (2) all the companies were held by Shaindy under her prior name, despite her lack of experience in managing either real estate or diamond businesses; (3) the businesses operated out of Moshe's business addresses; (4) all the companies were funded by the trust; (5) most failed to file tax returns; and (6) all were formed close to the time of the schemes. Finally, the court found that Shaindy's claimed lack of knowledge of the schemes was not a defense against the government's assertions that there was no fair consideration for the transfers. Slip op. 13-17.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.