Corporate Disclosure Rule Adopted for New York Commercial Division

Continuing in the recent series of amendments to the New York Commercial Division’s Rules, on October 4, 2021, Chief Administrative Judge Lawrence K. Marks ordered the implementation of new Commercial Division Rule 35, addressing non-governmental corporate disclosures. The new rule takes effect on December 1, 2021. A copy of Judge Marks’ Order can be found here.

The new Rule provides:

Rule 35. Disclosure Statement.

(A) Who Must File: Contents. A non-governmental corporate party and a non-governmental corporation that seeks to intervene must file a disclosure statement that:

(1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or

(2) states that there is no such corporation.

(B) Time to File: Supplemental Filing. A party or a proposed intervenor must:

(1) file the disclosure statement with its first appearance, pleading, petition, motion, response, or other request addressed to the court; and

(2) promptly file a supplemental statement if any required information changes.

As with other developments in the Commercial Division’s Rules, the Commercial Division Advisory Council (CDAC) played a pivotal role. The CDAC’s September 30, 2020 Memorandum, entitled “Proposal for New Commercial Division Rule Requiring a Nongovernmental Corporate Party to File A Disclosure Statement Identifying Any Parent Corporation and any publicly held corporation owning 10% or more of stock or state there is no such corporationcan be found here.

We recite a few highlights, but recommend reading the full three-page memorandum to understand all the issues considered, including both practical concepts and meeting judicial ethics rules.

Per the CDAC memo, new Rule 35 is akin to Federal Rule of Civil Procedure 7.1. The Rule’s chief concern is timely alerting judges to potential conflicts of interest. The CDAC observes that judgments against corporations can adversely affect a company’s stock, and its stockholders. If judges know they own stock in a party’s parent corporation, they may want to recuse themselves to avoid that conflict.

Note, there is a 10% threshold to the rule, as with F.R.C.P. 7.1. Thus, the standard for disclosure is not what imaginable information does the party believe “could conceivably be relevant to a judge who is trying to decide whether her or she has a ‘financial interest’ in a case.” Rather, new Rule 35 provides a bright line test with the 10% standard. “The disclosures are calculated to reach the majority of the circumstances that are likely to call for disqualifications based on financial information that a judge may not know or remember.”

Moreover, the issue is not simply a general concern with bias, but includes considering means for judges to avoid violating ethical rules. The CDAC memo observes: “The information required by the Proposed Rule reflects the same ‘financial interest’ standard used in the federal rules of Canon 3C(1)(c) of the Code of Conduct for United States Judges. This standard in the Proposed Rule is consistent with ethical rules and codes of conduct applicable to New York State Judges.”

This “minimal financial information” disclosure  will help judges and parties avoid circumstances that could end up with a judge accused of bias at any time during ongoing litigation. We also note that early recusals can prevent delays, eliminate conflicts that undermine faith in decisions already made, and remove the potentially strategic use of recusal requests.

We again thank Business Court pioneer Robert L. Haig for bringing this new Rule to our attention, and commend the continuing work of the Commercial Division Advisory Council in improving practice in the Commercial Division. It’s been almost 30 years since the original pilot Commercial Parts were first implemented. This seminal court not only provides a business court paradigm, but, working with the CDAC it provides a model for how business courts can adapt and evolve.

Posted by Lee Applebaum