Damages Award Thrown Out Because of Failure to Provide Competent, Non-Hearsay Evidence of Damages

On February 8, 2018, the First Department issued a decision in 345 E. 69th St. Owners Corp. v, Platinum First Cleaners, Inc., 2018 NY Slip Op. 00892, vacating a damages award because it was not based on competent, non-hearsay evidence, explaining:

The trial court awarded damages consisting of $196,811.88 representing lost rent over the remainder of the sublease, $48,922.68 in real estate escalation charges, $5,694.18 for the cost of a new sign, $12,300 representing the costs of preparing the demised premises for rerental, and $21,204 representing the proportional real estate broker’s fee for obtaining a new tenant. The court also awarded plaintiff $15,000, representing the reasonable attorneys fees attributable to the prosecution of this action. We modify the damages to reduce the amount for lost rent to $124,811.88 and to vacate the award for real estate escalation charges. The award of damages is in all other respects affirmed. The only witnesses who testified at trial were Larry Kopp and Rahol Sharma, respectively the president and treasurer of plaintiff’s board of directors. Huang correctly argues that neither witness established that the records on which they relied to prove damages were plaintiff’s business records. Nonetheless, the court was entitled to credit the testimony each witness gave concerning matters about which they had personal knowledge. Mr. Kopp testified that he was personally involved in arranging for new signage at the demised premises. He also testified that after the subtenant vacated the premises he was personally involved in hiring a contractor to make the space suitable for re-renting and a real estate broker to find a new tenant. The sublease requires the subtenant to pay these expenses, and the trial court properly found Mr. Kopp’s testimony on the amounts plaintiff actually paid for these items to be credible.

Although Mr. Sharma is plaintiff’s treasurer, he did not establish any personal knowledge regarding the matters about which he testified. The monies Mr. Sharma testified were owed in lost rent were based upon an exhibit that was obviously prepared for litigation. The trial court improperly permitted the schedule to come into evidence and then improperly let Mr. Sharma testify to its contents. The court also incorrectly concluded that just because the amounts claimed owed were set forth in the plaintiff’s verified bill of particulars, Mr. Sharma could competently testify to those amounts. The function of a bill of particulars is to amplify a pleading, limit proof and prevent surprise at trial. A bill of particulars cannot be used to relieve a party of its evidentiary burden to prove the facts asserted therein.

. . . Although plaintiff claims that Dr. Wine did not start paying rent until March 2013 (the last date on which Dr. Wine could start paying rent under the lease), the applicable provision has a condition triggering earlier rent payments. No competent proof was adduced about when the condition precedent to the payment of rent was fulfilled or when Dr. Wine actually started paying rent. No rent ledgers or other probative documents were produced, nor could either witness competently testify about this issue. Mr. Sharma’s testimony concerning when Dr. Wine actually started paying rent was based upon what Dr. Wine had told him. Mr. Sharma’s testimony was inadmissible hearsay and insufficient to prove the underlying fact. Mr. Kopp did not provide any basis for his knowledge. The witnesses’ voluntary board positions with plaintiff corporation, without any information about their duties and/or responsibilities, did not provide the requisite basis for knowledge.

. . .

Plaintiff also failed to prove that it was entitled to additional rent based upon the real estate escalation provision in the sublease. Although the sublease entitles plaintiff to collect “additional rent” for real estate escalations, the calculation is required to be based upon a percentage of real estate taxes imposed on plaintiff, over and above a lease base year. No tax bill from any taxing authority or any other document proving the taxes actually imposed on plaintiff was ever produced at trial. In determining the amount owed for real estate escalations, the court improperly relied on Mr. Sharma’s testimony and the bill of particulars. As indicated, this proof did not provide a sufficient evidentiary basis for the monetary awards made.

(Internal quotations and citations omitted).

A key element in commercial litigation is proving damages. As this decision shows, damages, like liability, must be proved through admissible evidence. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding proving damages.

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Court Refuses to Enforce Forum Selection Clause in Internet Contract

On February 1, 2018, Justice Ash of the Kings County Commercial Division issued decision in Swipe Ice Corp, Inc. v. UPS Mail Innovations, Inc., 2018 NY Slip Op. 30178(U), refusing to enforce a forum selection clause in an Internet contract, explaining:

The creation of online contracts has not fundamentally changed the principles of contract. To create a binding contract, there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. There must be an offer followed by an acceptance. In regard to online contracts, courts look for evidence that a website user had actual or constructive notice of the terms of using the website. Where the supposed assent to terms is mostly passive, as it usually is online, courts seek to know “whether a reasonably prudent offeree would be on notice of the term at issue, and whether the terms of the agreement were reasonably communicated to the user.

Courts have held that there are three general principles regarding the enforceability of internet contracts. First, the website must be designed such that a reasonably prudent user will be placed on inquiry notice of the terms of using the website. Second, the design and content of the website must encourage the user to examine the terms clearly available through hyperlinkage. Third, agreements will not be enforced where the link to the agreement is buried at the bottom of a webpage or tucked away in obscure corners of the website.

In the present case, the court finds that the forum selection clause is unenforceable, as the online service terms and conditions were not reasonably communicated to Plaintiff. The facts indicate that The Agreement referenced a website hyperlink that contained terms not presented to the offeree at the time of acceptance. Furthermore, the hyperlink referenced in The Agreement was not a direct link to the service terms and conditions, instead, The Agreement provided a hyperlink to the general site that the user would have to scroll through to find the actual terms and conditions hyperlink at the bottom of the page. The court reasons that this type of design does not encourage the user to examine the terms, as they are not clearly available through the hyperlink referenced in The Agreement. Therefore, the court finds the forum selection clause to be unenforceable because a reasonably prudent offeree would not be on notice of the terms that were buried at the bottom of the web page in a manner that did not encourage the user to examine such terms and conditions.

(Internal quotations and citations omitted) (emphasis added).

New York contract law recognizes contracts entered into over the internet. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a dispute over a contract entered into over the internet.

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Magistrate Judge Orenstein Denies Government Motion to Bar Subpoena Recipient From Disclosing Existence of Subpoena And Directs That Future Requests To Seal Such Motions Be Of Limited Duration

Posted by Solomon N. Klein, Litigation Partner

Magistrate Judge James Orenstein continues his series of influential rulings on electronic surveillance and evidence gathering. (In re Grand Jury Subpoena, 18-MC-0334 (E.D.N.Y. Feb. 5, 2018) (JO)). In this recent ruling, Magistrate Judge Orenstein denied a government request under the Stored Communications Act, 18 U.S.C. § 2701, et seq. (the “SCA”) to prohibit the recipient from disclosing the existence of the subpoena for one year because the request was “boilerplate” “formulaic” and “conclusory”. The Court also doubled down on an October 2017 decision that “requested” that the government not seek indefinite sealing of the court records on motions for non-disclosure orders, and rather limits the requests to seal to an initial 90 days. The Court noted that the “request” should now be treated as a “directive.”

The general background: The SCA provides a statutory framework for allowing the government to obtain a court order directing “a provider of electronic communications service or remote computing service” not to disclose to the customer or subscriber the existence of the subpoena. (For example, a subpoena issued to Google for email communications relating to a particular account with an order that it not notify the user of the subpoena.) The SCA allows for delayed notice to the customer for 90 days (with additional 90-day extensions) upon a determination by a court that notice would result in harm, such as, causing the target to flee or destroy evidence.

The structure of the statute would seem to contemplate successive requests by the government for extensions every 90 days. However, the apparent government practice has been to request a one-year delay of notice at the outset – one-year being the maximum under a policy by the Department of Justice. However, on October 2017, Magistrate Judge Orenstein “requested” in a footnote that, in the future, the government’s request to seal the court records of the application for a non-disclosure order should be limited to around 90 days subject to further extensions if needed.

In this case, the Court first took issue with the government’s description of the subpoena recipient as “a provider of an electronic communication service, as defined in 18 U.S.C. § 2510(15), and/or a remote comput[ing] service, as defined in 18 U.S.C. § 2711(2).” The Court rejected this description because in the absence of the recipient being Google or Facebook, it did not provide the Court the ability to determine for itself whether the recipient truly was a “covered service provider” of electronic communication/remote computing services under the statute. As an example of the need for a court to make an independent determination, the Court used the government’s recent position (rejected by a Magistrate Judge in D.C.) that a cruise ship company is a covered service provider because it furnishes Wi-Fi service to its guests. “Such a theory would apply with equal force to many stores, restaurants, schools, and individual homeowners – none of which could plausibly be considered a service provider within the law’s meaning. See id. at 2-3 & n.2. It is thus apparent that the government is willing to read the definitional provisions of the Stored Communications Act so expansively that a court should be wary of accepting at face value a conclusory assertion that the statute applies to a given entity about which no additional information is provided.” (In re Grand Jury Subpoena, 18-MC-0334 (E.D.N.Y. Feb. 5, 2018) (JO)).

The Court then rejected the factual underpinnings of the government’s request as “conclusory” and “boilerplate” that, if sufficient, would effectively justify a delayed-notice order for every subpoena to a covered service provider:

[T]he government engages in pure speculation about the potential adverse consequences of disclosure. It writes that notice would give the target “an opportunity” to flee and obstruct, and that is undoubtedly true. But it tells me nothing about whether it is reasonable to believe that the target “will” engage in such conduct, which is the question I must answer. Some context would help: if, for example, the target is being investigated on the basis of an anonymous tip for the misdemeanor of fraudulently displaying the emblem of the 4-H clubs, see 18 U.S.C. § 707, I might hesitate to conclude that the target of such an investigation, upon discovering his status, would either embrace the life of a fugitive or risk the far more severe sanctions for obstruction of justice. On the other hand, I would think it entirely likely that the target of a well-predicated murder investigation might make such choices if given the chance. As the record currently stands, I can engage in no such analysis.

Similarly, the government tacitly assumes that in any investigation involving either electronically stored records or electronic communications – which is to say, in essentially every criminal investigation in which a non-disclosure order would potentially be available under Section 2705(b) – a person’s awareness that she is under investigation supports a finding that she will delete or encrypt evidence so as to make it unavailable to law enforcement. Neither experience nor logic supports such a syllogism. It is of course true that the technology that allows a person to store and transmit information electronically also allows such information to be hidden or destroyed (even if it is harder to do so effectively than many targets would suspect or than the government would have me assume). But that truism, without more, does not reasonably support the conclusion that every investigative target will do so if possible.

The risk that persons who learn they are under investigation will engage in obstruction is a real one, but it arises to different degrees in different circumstances. Congress could have chosen to address that risk in blunderbuss fashion by universally prohibiting the recipient of any warrant, order, or subpoena from disclosing its existence, but it plainly chose not to do so. Nor did Congress choose to alleviate that risk either by requiring a non-disclosure order either where obstruction is merely a possibility, or by committing the discretion to secure relief to the executive branch (as it effectively did, by contrast, with respect to pen registers). Instead, it prescribed a more nuanced approach, circumscribing both the persons who could be subjected to silencing, and the circumstances in which a court may (and must) order it.

(In re Grand Jury Subpoena, 18-MC-0334 (E.D.N.Y. Feb. 5, 2018) (JO)).

Finally, the Court reminded the government that it had ignored the Court’s previous “request” that the application to seal the record of motions for non-disclosure orders be limited initially to 90 days, and that it should now treat the “request” as a “directive”:

I note that the government again, as it did in Google EDNY, seeks to silence a subpoena recipient for an entire year – the maximum permitted under a recent change in Justice Department policy – and seeks to have its Application and proposed order sealed indefinitely, all without explaining the need for those proposed durations. See Google EDNY, I questioned the need in Google EDNY for such a lengthy restriction of the subpoena recipient’s speech and secrecy, ordered the application sealed for 90 days (with a 90-day extension available upon a showing of continued need), and “respectfully request[ed] that in all future sealing requests, the government submit proposed orders with a similar temporal limitation absent a showing of need to do otherwise.” Id. *5 & n.3. I respectfully remind the government of the request it has thus far ignored and invite it to treat the request as a directive in the future; should that prove ineffective, I will consider more effective measures to avoid needless secrecy.

(In re Grand Jury Subpoena, 18-MC-0334 (E.D.N.Y. Feb. 5, 2018) (JO)).

Posted by Solomon N. Klein, Litigation Partner

Court Refuses to Disqualify Counsel Based on Lawyer-Witness Rule

On February 1, 2018, Justice Ash of the Kings County Commercial Division issued a decision in Atlantic Yards Plaza LLC v. Talde, 2018 NY Slip Op. 30179(U), refusing to disqualify a lawyer under the lawyer-witness rule, explaining:

[D]isqualification of MSF is also unwarranted pursuant to the witness-advocate rule. The witness-advocate rule contained in the Rules of Professional Conduct provide guidance, but are not binding on the court determining a disqualification motion. Rule 3.7 of the Rules of Professional Conduct provides that unless certain exceptions apply, a lawyer shall not act as advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact. In the application of that rule, courts have held that the party seeking its application must demonstrate that the testimony of the opposing party’s counsel is necessary to his or her case, not merely relevant or even highly useful. A finding of necessity takes into account such factors as the significance of the matters, weight of the testimony, and availability of other evidence.

First, presuming Rich is an indispensable fact witness for Plaintiff, he is no longer an attorney with MSF and has not been since April or May of 2016. With regards to any other MSF attorney, Plaintiff fails to demonstrate that the testimony of any such attorney is necessary. Even if an MSF attorney’s testimony is necessary, Plaintiff does not provide a reason to disqualify the entire firm considering that MSF is a mid-sized law firm with many attorneys, only the attorney-witness who will testify on behalf of the client is disqualified.

(Internal citations omitted).

We both bring and defend motions relating to attorney conflicts and do appeals of the decisions on those motions. The attorney-witness rule discussed above is one basis for disqualifying counsel. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you face a situation where counsel may be–or is accused of being–conflicted.

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Court Recognizes “Narrow Exception” to Duty to Defend Where Extrinsic Evidence, Unrelated to the Merits of the Underlying Claim, Negates any Duty to Indemnify

On January 31, 2018, Judge Spatt of the EDNY issued a decision in Striker Sheet Metal II Corp. v. Harleysville Ins. Co. of N.Y., Case No. 16-cv-5916 (ADS)(AYS), holding that an insurance company was relieved of its duty to defend where “extrinsic evidence” (including an email from the insured in response to questions from the insurer) demonstrated conclusively that the accident at issue was excluded from coverage.

In Striker Sheet Metal an employee of the insured company was injured while in the process of unloading HVAC ductwork from the insured’s truck and delivering it to a construction site. The policy at issue excluded coverage for any “bodily injury” “arising out of” the “use” of “any ‘auto’,” owned by the insured, and defined “use” to include the “handling of property . . . [w]hile it is being moved from an . . . ‘auto’ to the place where it is finally delivered.” The complaint in the employee’s personal injury suit was “largely devoid of any of the specific factual circumstances surrounding the incident” and made “no mention that he was in the process of delivering HVAC ductwork when he was injured.” However, in written responses to questions from the insurance company, the insured employer stated that the injury occurred while the employee was “unloading the truck,” which was owned by the insured.

Although the undisputed facts triggered an exclusion to coverage, the insured argued that the duty to defend was governed solely by the allegations in the complaint, which did not plead these facts. Judge Spatt disagreed, explaining:

New York State law recognizes a narrow exception to the duty to defend, which permits a disclaimer of defense prior to litigation or a withdrawal during the course of litigation, if extrinsic evidence to the complaint or insurance policy is unrelated to the merits of the plaintiff’s action and plainly takes the case outside the policy coverage. . . .

The insurer is only relieved of the duty to defend where the extrinsic evidence offered allows a court to eliminate the possibility that the insured’s conduct falls within the coverage of the policy. . . .

(Emphasis added; citations omitted).

Judge Spatt acknowledged “that the precise delineations of the use of extrinsic evidence to prevent an insurer from exercising its duty to defend are unclear under New York law.” One important limitation, however, is that the extrinsic evidence must be “unrelated to the merits” of the case for which the insured seeks defense coverage. City of N.Y. v. Liberty Mut. Ins. Co., 2017 WL 4386363, at *13 (S.D.N.Y. Sept. 28, 2017); see also National Union First Ins. Co. v. Xerox Corp., 6 Misc. 3d 763, 776 (Sup. Ct. N.Y. Co. 2004) (dismissing insurer’s declaratory judgment action where facts relevant to coverage defenses “will likely be fully determined in the context of the various securities actions”); Nationwide Mutual Ins. Co. v. Dennis, 14 A.D.2d 188, 189 (3d Dep’t 1961) (“the policy in this State has been to deny the [insurer’s] declaratory judgment where the matter in dispute can be determined in the [underlying] action”). Judge Spatt concluded it was appropriate in this case to consider “extrinsic evidence, from the insured,” which (1) was “wholly irrelevant to the principal merits of the Underlying Action,” and (2) “conclusively establishes that [there is] no possible factual or legal basis on which Harleysville might eventually be obligated to indemnify its insured under any policy provision.” (Emphasis in original; citations omitted).

This decision illustrates that an insured’s communications with the insurer in the claims handling process can have a significant impact on the availability of coverage. Insureds are, therefore, well advised to seek the advice of coverage counsel early in the process.

Professional Malpractice Claims Time-Barred

On February 1, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Schembre v. Saggese, 2018 NY Slip Op. 30191(U), dismissing professional malpractice claims as time-barred, explaining:

Non-medical professional malpractice claims are governed by a three-year statute of limitations. A claim for professional malpractice accrues when the malpractice is committed, not when the client discovers it. The continuous representation doctrine tolls the statute of limitations only where there is a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim.

Here, the last act of malpractice and/or misrepresentation concerning the loan that is alleged in the complaint is the February 14, 2013 email between Saggese and Kerry, and plaintiffs were aware, by March 2013 at the latest, that the loan. had not been repaid in accordance with its terms. Accordingly, the statute of limitations for professional malpractice expired in March 2016, almost nine months before plaintiffs filed their complaint. Because malpractice claims accrue at .the time that advice was given, rather than upon discovery, it is irrelevant that plaintiffs allegedly learned that the transaction was a scam in June 2015.

Plaintiffs’ attempt to establish continuous representation by .Saggese and, by extension, GAF, is unavailing. Plaintiffs submit an affidavit from Frank, as well as various documents, purporting to establish that Saggese continued to service the loan through 2015. However, plaintiffs’ malpractice claim is predicated on Saggese’s alleged professional failure to conduct appropriate due diligence before recommending that plaintiffs’ make the loan in 2012, not upon any alleged continuing professional failures concerning subsequent loan servicing. Also, upon a review of the documents submitted, none of the documents dated after the March 2013 loan due date refer to the loan at all. For these reasons, the continuous representation toll does not apply and plaintiffs have failed to raise an issue of fact on the issue. Accordingly, that branch of GAF’s motion to dismiss the fifth cause of action for professional malpractice is granted.

(Internal citations omitted).

We both bring and defend professional malpractice claims and other claims relating to the duties of professionals such as lawyers, accountants and architects to their clients. Contact us if you have questions regarding such claims or appeals of such claims.

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Court Rejects Disclosure Only Class Action Settlement

On February 8, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in City Trading Fund v. Nye, 2018 NY Slip Op. 28030, rejecting a disclosure-only settlement to a class action.

In City Trading Fund, the parties to a class action relating to a merger sought court approval of a settlement in which the only relief awarded was additional disclosures regarding the merger (and a sizeable award of attorneys’ fees to plaintiffs’ counsel).

First, the court reviewed the standard for approving a disclosure-only settlement:

In Gordon, the First Department noted the increasingly negative view of disclosure-only settlements and that decisions of courts in both Delaware and New York called for drastic curtailment of such class action suits, finding them to amount to meritless lawsuits filed in order to raise a threat of enjoining or delaying closure of the transaction.

. . .

In Gordon, the First Department . . . held that to determine whether to grant final approval of a disclosure-only settlement of a class action, courts should apply the classic Colt factors — the likelihood of success, the extent of support from the parties, the judgment of counsel, the presence of bargaining in good faith, and the nature of the issues of law and fact — plus two new factors: whether the proposed settlement is in the best interests of the putative settlement class as a whole and whether the proposed settlement is in the best interest of the corporation. According to the First Department, the new, sixth factor (regarding the best interests of the class) is satisfied where the supplemental disclosures provide some benefit to the shareholders. Hence, approval under Gordon requires a lesser showing than under [the Delaware Chancery Court decision in] Trulia.

That said, while Gordon, unlike Trulia, does not requires the plaintiff to remove any doubt that the supplemental disclosures are material, this court does not read Gordon . . . to permit approval if plaintiff merely makes a showing that the supplemental disclosures are “arguably beneficial” — the expression used in City Trading II. This court does not believe that the First Department in City Trading II purported to opine on whether the subject supplemental disclosures provide “some benefit” to the class. The First Department found it appropriate to defer such a determination to the final approval hearing, describing the disclosures as “arguably” beneficial, thereby invoking the lesser standard applicable on a motion for preliminary approval. This court, now, must evaluate the supplemental disclosures under the standard set forth in Gordon.

Nonetheless, before doing so, it is necessary for the court to determine what the First Department meant in Gordon when it used the words “some benefit” to describe the requisite threshold of importance the supplemental disclosures must meet. As discussed herein, while not explicitly stated in Gordon, the “some benefit” test appears to have been derived from the standard applicable to a mootness fee application under Delaware law. In Delaware, a mootness fee can be awarded if the disclosure provides some benefit to stockholders, whether or not material to the vote, and even where the settlement does not warrant court approval. . . . “Helpful” is a lower bar than “material.” Information can be helpful even if it does not significantly alter the total mix of available information.

That being said, regardless of whether Gordon’s some benefit test was intended to mirror the Delaware mootness fee standard, the only reasonable way to interpret “some benefit” is that while the plaintiff need not . . . rule out all doubts as to the materiality of the supplemental disclosures, the court must be able to plausibly conclude that the supplemental disclosures would, in fact, aid a reasonable shareholder in deciding whether to vote for the merger. If the supplemental disclosures would not do so, then there is no basis to conclude that such disclosures were of any benefit to the shareholders. After all, the whole point of a lawsuit challenging the sufficiency of pre-merger disclosures is to ensure that shareholders have all the information they need to make an informed vote on the merger’s wisdom. For the relief in such a suit to be beneficial, the procured new disclosures must actually be useful to the shareholders — that is, the disclosures must aid them in the decision-making process. If the disclosures reveal information that has no bearing on the wisdom of the merger — such as a disclosure of the CEO’s favorite baseball team — no one would contend such revelation makes a shred of difference to a voting shareholders. There is no benefit to such disclosure.

On the other hand, if a management projection made in the ordinary course of business (e.g., not solely for the purpose of soliciting bids) was not originally disclosed, and such projection reveals a valuation based upon a discounted cash flow (DCF) analysis that materially deviates from the agreed-upon sale price, such a revelation surely would bear on the shareholders’ desire to approve the merger. Indeed, such a disclosure would not only be of “some benefit”, but would likely qualify as plainly material.

Second, the court assessed the proposed disclosures, and held that they were not helpful. The court denied the motion to approve the settlement, noting in a footnote:

Since companies are only legally required to disclose all material facts in connection with a merger, every single proxy will surely omit at least some immaterial fact that might be of some benefit to the shareholders. It is easy to see why permitting a significant attorneys’ fee award for the procurement of an immaterial disclosure, but which is of some benefit, incentivizes a lawsuit in connection with every single merger. This court does not understand what public policy is served by creating this incentive (which Trulia meant to eliminate). Nor does this court understand why the procurement of immaterial supplemental disclosures are a feat worth rewarding. Surely, with minimal effort, the board can find some immaterial, supposedly “useful” fact to provide to plaintiff’s counsel that will allow the company to dispose of the lawsuit for less than it would cost to file a motion to dismiss. A lawyer who files the case with the intention of settling, not for the procurement of a supplemental material disclosure, but for the mere disclosure of minimally beneficial facts, is not seeking to protect or vindicate the legal rights of the shareholders he purports to represent (i.e., since shareholders only have the right to material information). The very point of the lawsuit was simply to get paid — by the shareholders — to go away. This is a pernicious motive for lawsuit.

(Internal quotations and citations omitted).

This decision relates to a controversial issue: shareholder actions relating to mergers where all the relief sought is additional disclosures. As you can see, the courts take a dim view of such actions, concerned that they provide little value to shareholders. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a shareholder class action.

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Corporation’s Former Counsel Cannot Represent One Shareholder Against Others

On February 7, 2018, the Second Department issued a decision in Deerin v. Ocean Rich Foods, LLC, 2018 NY Slip Op. 00820, holding that counsel should have been disqualified due to a conflict, explaining:

A party seeking disqualification of its adversary’s counsel based on counsel’s purported prior representation of that party must establish (1) the existence of a prior attorney-client relationship between the moving party and opposing counsel, (2) that the matters involved in both representations are substantially related, and (3) that the interests of the present client and former client are materially adverse. A party’s entitlement to be represented in ongoing litigation by counsel of his or her own choosing is a valued right which should not be abridged absent a clear showing that disqualification is warranted. The party seeking to disqualify a law firm or an attorney bears the burden to show sufficient proof to warrant such a determination. However, doubts as to the existence of a conflict of interest are resolved in favor of disqualification in order to avoid even the appearance of impropriety.

One who has served as attorney for a corporation may not represent an individual shareholder in a case in which his interests are adverse to other shareholders. Here, the plaintiff alleged in an affidavit that the defendants’ counsel was involved in the formation of Ocean Rich, and the defendants’ counsel admitted that he had represented Ocean Rich in various past matters. Counsel’s prior representation of Ocean Rich was in fact representation of its three shareholders, whose competing interests are at issue in this action. Likewise, counsel’s involvement in the formation of Ocean Rich and his representation of it against third parties was substantially related to the present action. Since the defendants’ counsel was in a position to receive relevant confidences from the decedent, whose estate’s interests are now adverse to the defendants’ interests, the Supreme Court should have granted that branch of the plaintiff’s cross motion which was to disqualify the defendants’ counsel.

(Internal quotations and citations omitted).

We both bring and defend motions relating to attorney conflicts and do appeals of the decisions on those motions. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you face a situation where counsel may be–or is accused of being–conflicted.

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No Claim for Civil Conspiracy Without An Underlying Tort

On February 7, 2018, the Second Department issued a decision in McSpedon v. Levine, 2018 NY Slip Op. 00826, affirming the dismissal of a civil conspiracy to defraud claim because there was no underlying fraud, explaining:

New York does not recognize civil conspiracy to commit a tort as an independent cause of action. However, a plaintiff may plead the existence of a conspiracy in order to connect the actions of the individual defendants with an actionable, underlying tort, and establish that those actions were part of a common scheme. Under New York law, in order to properly plead a cause of action to recover damages for civil conspiracy, the plaintiff must allege a cognizable tort, coupled with an agreement between the conspirators regarding the tort, and an overt action in furtherance of the agreement. Here, since the underlying tort of fraud was properly dismissed, the cause of action alleging civil conspiracy to commit fraud was also properly dismissed, since it stands or falls with the underlying tort.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. And sometimes, the fraud involves more than one person working together to perpetrate the fraud. However, as this decision shows, in New York, there can be no claim for a conspiracy to defraud without a claim that an actual fraud occurred. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.

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Plaintiff Cannot Withstand Summary Judgment By Showing Question of Fact on One Element of Fraud Claim if it Fails on Another Element

On January 22, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in xLon Beauty, LLC v. Day, 2018 NY Slip Op. 30142(U), holding that a plaintiff could not withstand summary judgment dismissing its fraud claim by showing that there was a question of fact regarding one element of the claim when the defendant had shown that there was no question of fact regarding another element, explaining:

Defendant maintains that there was never any representation made, but as described above, this remains a contested issue of fact as both Weinberg and Garfinkel now offer affidavits that contradict Defendant’s claims . According to Weinberg, the statement was made to induce Plaintiff to enter into the 3% Agreement. That agreement was replaced by the 7% Agreement as to which there is no claim of either fraud or fraudulent inducement. Moreover, Defendant has made a prima facie showing that the purported representation (i.e. that Defendant would use her business connections to promote the product) was not false. . . .

Rather than address the element of falsity, Plaintiff focuses instead on the element of scienter and argues that whether this representation was “knowingly false or intended to deceive” is exclusively in Day’s knowledge. However, by failing to rebut Defendant’s showing as to to the underlying falsity of the representation, an essential element to of Plaintiffs fraudulent inducement claim, Plaintiff fails to rebut Defendant’s prima facie showing of entitlement to summary judgment.

Plaintiff also argues that summary judgment should be denied on the basis that certain facts relevant to the complaint are solely within Defendant’s control, Defendant has not yet been deposed, and Defendant has not fully complied with Plaintiffs discovery requests – namely, requests for admissions, and document requests relating to her efforts to “sabotage or otherwise harm the business of Xlon.” However, as none of Plaintiffs bases for further discovery bear on the issues that are dispositive to this motion, Plaintiff’s claimed need for further discovery cannot alter the result on this motion. Accordingly, Defendant’s motion to dismiss the fraudulent inducement claims is GRANTED and the amended complaint is DISMISSED in its entirety.

(Internal citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, and they all must be met. Thus, as this decision shows, failure to establish one element of a fraud claim defeats the claim, even if there is evidence supporting other elements of the claim. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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