Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: October 26, 2016

Claim That Invoices Were Disputed Orally Defeats Summary Judgment on Account Stated Claim

On October 13, 2016, Justice Oing of the New York County Commercial Division issued a decision in Builders Group 1 LLC v. WY Management LLC, 2016 NY Slip Op. 31932(U), holding that oral disputes of invoices precludes summary judgment on account stated claim, explaining:

As for the account stated claims, Figliolia argues that Yanko’s claim that he objected to plaintiff’s invoices is belied by the documentary evidence and that WY has not provided a single specific email, letter or other communication rejecting or disputing the invoice. While self-serving, bald allegations of oral protests are insufficient to raise a triable issue of fact in an account stated claim, Figliolia does not deny Yanko’s claim that he reached out to Figlidlia, specifically, to dispute the invoices. Thus, factual issues exist as to whether WY disputed the invoices in a timely manner.

(Internal quotations and citations omitted).

Posted: October 25, 2016

Decision to Disqualify Counsel in Arbitration is for Court, Not Arbitrator

On October 14, 2016, Justice Sherwood of the New York County Commercial Division issued a decision in Rahmani v. Venture Capital Properties LLC, 2016 NY Slip Op. 31927(U), holding that the decision whether to disqualify counsel is for the court, not the arbitrator, explaining:

[M]atters of attorney discipline are beyond the jurisdiction of arbitrators; issues of attorney disqualification similarly involve interpretation and application of Code of Professional Responsibility and Disciplinary Rules, as well as potential deprivation of counsel of client’s choosing, and cannot be left to determination of arbitrators selected by parties themselves for their expertise in particular industries engaged in. Rule 1.7 of the New York Rules of Professional Conduct prohibits an attorney from representing two clients concurrently where the representation will involve the lawyer in representing differing interests Rules of Professional Conduct. Disqualification of an attorney under this rule is virtually automatic when an attorney represents a client in a proceeding against another current client. Where an attorney simultaneously represents clients with adverse interests to each other, the so-called prima facie rule shifts the burden of proving actual or apparent conflict in loyalties or diminution in the vigor of his representation from the party seeking disqualifications to the attorney with the alleged conflict.

In this case, Mr. Castro seeks to represent plaintiffs in the JAMS arbitration against VCP while simultaneously representing VCP in three active litigations in this court. When an attorney represents a limited liability company, he is deemed as a matter of law to represent each of its members. Accordingly, by virtue of Castro’s representation of VCP, Castro also represents the individual defendants Ebi Khalili and Josh Rahmani because they are members of VCP. Thus, by representing plaintiffs in the arbitration against defendants, he is effectively suing his client, in violation of Rule 1.7.

(Internal citations and quotations omitted).

Posted: October 24, 2016

Allegations of Deceit or Wrongdoing Necessary for Veil Piercing Claim

On October 20, 2016, the First Department issued a decision in Pensmore Investments, LLC. v Gruppo, Levey & Co., 2016 NY Slip Op. 06899, holding that allegations of deceit or wrongdoing are necessary to allege a veil piercing claim, explaining:

Plaintiff established a likelihood of success on its veil piercing claim by showing that defendants used a variety of corporate entities and accounts to collect and disburse money to themselves and the various corporate entities without consideration or corporate formalities, and that they used this web of payments to keep the judgment debtor corporation in business but grossly undercapitalized by paying its debts without putting any funds into it.

Contrary to defendants’ contention, this case is not like Timur on 5th Ave. v Jim, Jack & Joe Realty Corp. In that case, there was no allegation of deceit or wrongdoing. Indeed, there, the defendants did nothing more than take out a lease through a holding company, which the plaintiff knew was an operating company with no assets. Here, in contrast, defendants are alleged to have thwarted the bargain plaintiff made with the corporate judgment debtor by consistently starving the debtor of cash and capitalization.

(Internal quotations and citations omitted).

Posted: October 23, 2016

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on two proposed changes to the Commercial Division rules:

First, the OCA has proposed a new rule regarding sealing court records. The proposed new rule provides:

(a) Except where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. Good cause may include the protection of proprietary or commercially sensitive information, including without limitation, (i) trade secrets, (ii) current or future business strategies, or (iii) other information that, if disclosed, is likely to cause economic injury or would otherwise be detrimental to the business of a party or third-party. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Where it appears necessary or desirable, the court may prescribe appropriate notice and opportunity to be heard.
(b) For purposes of this rule, ” court records” shall include all documents and records of any nature filed with the clerk in connection with the action. Documents obtained through disclosure and not filed with the clerk shall remain subject to protective orders as set forth in CPLR 3103(a).

Second, the OCA has proposed a new rule limiting the total hours of trial. The proposed addition to the rules provides:

If requested by the Court, the estimate shall also contain a request bv each party for the total number of hours which each party believes will be necessary for its direct examination, cross examination, redirect examination, and argument during the trial. The court may rule on the total number of trial hours which the court will permit for each party. The court in its discretion may extend the total number of trial hours.

E-mail comments on these proposals to by December 15, 2016, for the proposed rule regarding sealing and December 20, 2016, for the proposed rule regarding the length of trial.

Posted: October 21, 2016

Party That Frustrates Performance of Condition Cannot Claim Breach Based on Non-Performance

On October 4, 2016, Justice Oing of the New York County Commercial Division issued a decision in Nesconset ZJ 1 LLC v. Nesconset Acquisition, LLC, 2016 NY Slip Op. 31874(U), holding that a party that frustrates the performance of a contractual provision cannot claim breach based on the non-performance of the condition, explaining:

A party to a contract . . . cannot rely on the failure of another to perform a condition precedent to that contract where the party has frustrated or prevented the occurrence of the condition. A condition precedent is an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises. Express conditions must be literally performed; substantial performance will not suffice. . . .

The party who frustrates the occurrence of a condition will not only be precluded from using the failure of the condition to avoid the agreement, but also subjects itself to a claim for breach of the implied covenant of good faith and fair dealing. Implicit in all contracts is a promise of good faith and fair dealing that is breached when a party acts in a manner that — although not expressly forbidden by any contractual provision — would deprive the other party of receiving the benefits under their agreement. The breach of the covenant of good faith is a breach of the underlying contract, and the duty of good faith encompasses any promises which a reasonable person in the position of the promisee would be justified in understanding were included. For example, where a party agrees to cooperate in obtaining an amended certificate of occupancy, but then refuses to do so, rendering the other party’s compliance with the contract condition impossible without judicial intervention, its conduct violates the implied covenant of good faith.

(Internal quotations and citations omitted).

Posted: October 20, 2016

Stipulated Facts at Trial Not Actually Litigated And So Have No Collateral Estoppel Effect

On October 12, 2016, the Second Department issued a decision in Douglas Elliman, LLC v. Silver, 2016 NY Slip Op. 06675, holding that facts stipulated at trial were not actually litigated and thus had no collateral estoppel effect, explaining:

Collateral estoppel precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party or those in privity The doctrine applies only if the issue in the second action is identical to an issue which was raised, necessarily decided and material in the first action, and the plaintiff had a full and fair opportunity to litigate the issue in the earlier action. Collateral estoppel effect will only be given to matters actually litigated and determined in a prior action.

[T]he question of whether Lowe’s employed the plaintiff was not actually litigated and determined in the main action. Since Lowe’s had settled with the plaintiff before trial and the third-party action was severed from the main action, the jury was not asked to consider whether Lowe’s had employed the plaintiff. Further, an issue is not actually litigated if, for example, there has been a default, a confession of liability, a failure to place a matter in issue by proper pleading or even because of a stipulation. The settlement agreement between Lowe’s and the plaintiff cannot bind the Silver defendants, who were not a party to that agreement. As to the stipulation at trial between the plaintiff and the Silver defendants, the doctrine of collateral estoppel is not applicable, since the issues resolved therein were not actually litigated. In addition, Lowe’s failed to demonstrate that the Silver defendants intended for the stipulation to have a binding effect in the third-party action, which had been severed from the main action for trial.

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

Posted: October 19, 2016

Shareholders Had Common-Law Right to Inspect Books and Records of Corporate Subsidiary

On October 11, 2016, the First Department issued a decision in Matter of Pokoik v. 575 Realties, Inc., 2016 NY Slip Op. 06648, holding that shareholders had a common-law right to inspect the books and records of a subsidiary, explaining:

Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose. Furthermore, because the common-law right of inspection is broader than the statutory right, petitioners are entitled to inspect books and records beyond the specific materials delineated in Business Corporation Law § 624 (b) and (e).

Petitioners’ concerns about board mismanagement and excessive expenditures and wasteful dissipation of corporate assets are, on their face, a proper purpose, even if the inspection ultimately establishes that the board had engaged in no wrongdoing. While respondents maintain that petitioners did not tender any evidence to suggest that corporate formalities were not followed between 575 and SPMC, they do not refute petitioners’ assertions that SPMC is the wholly owned subsidiary of 575, in which petitioner Leon Pokoik Family Partners, LP holds shares, and that 575 and SPMC share office space and management and are dominated by certain family members who control the affairs of multiple family businesses. Significantly, 575’s counsel advised petitioners’ counsel that 575 has no employees; has no payroll; pays no salaries; pays no workers’ compensation insurance; and, issues no W-2 forms and has no books or records reflecting salaries paid by 575 to any individual or entity — which leaves petitioners with no source other than SPMC for the information they seek. Furthermore, petitioners’ requests are narrowly related to salaries and compensation and there has been no showing that requiring SPMC to produce the records would impose any undue burden.

Under these circumstances, petitioners have made a sufficient showing to establish their common-law right to inspect the books and records of SPMC, 575’s wholly owned subsidiary, relating to salary and compensation.

(Internal quotations and citations omitted).

Posted: October 18, 2016

Return of Files One Day Later Than Called for in Settlement Agreement Not Material Breach

On October 11, 2016, the First Department issued a decision in Madison Ave. Diamonds LLC v. KGK Jewelry LLC, 2016 NY Slip Op. 06661, holding that the defendant’s “delivery of the converted computer files on Monday August 13, 2012, one day after the 45-day period provided for in the parties’ settlement agreement, was permissible under General Construction Law § 25. Nothing in the agreement suggests an intent that August 12, 2012 was to be a firm deadline such that failure to deliver the files by that date constitutes a material breach of the agreement. That one of the 166 files was missing critical information did not render KGK in breach, as KGK was in substantial compliance.”

Posted: October 17, 2016

Broad Choice-of-Law Provision Does Not Preclude Application of Borrowing Statute (CPLR 202)

On October 11, 2016, the First Department issued a decision in 2138747 Ontario, Inc. v. Samsung C&T Corp., 2016 NY Slip Op. 06671, holding that “a broadly drawn contractual choice-of-law provision” providing “for the agreement to be ‘governed by, construed and enforced’ in accordance with New York law,” does not “preclude[] the application of New York’s borrowing statute (CPLR 202),” explaining:

Where, as here, the plaintiff is a nonresident, alleging an economic claim that took place outside of New York, the time limitations provisions in the borrowing statute apply, regardless of whether the parties’ contractual choice of law agreement can be broadly construed to include the application of New York’s procedural, as well as its substantive law. Pursuant to New York’s borrowing statute, the time within which plaintiff had to commence this action was the shorter of either Ontario’s or New York’s statute of limitations.

. . .

Statutes of limitations, however, have long been considered part of New York’s procedural law because they are deemed as pertaining to the remedy rather than the right. In Tanges v Heidelberg N. Am., Inc., the Court of Appeals explained New York’s procedural characterization of statutes of limitation as follows: The theory of the statute of limitations generally followed in New York is that the passing of the applicable period does not wipe out a substantive right; it merely suspends the remedy. The borrowing statute is considered a statue of limitations provision and not a choice-of-law provision. In referring to the borrowing statute the Court of Appeals observed: There is a significant difference between a choice-of-law question and this Statute of Limitations issue, which is governed by particular terms of the CPLR. Consistent with these principles, case law generally holds that a contractual choice-of-law provision does not bar the application of New York’s borrowing statute. We do not find support for plaintiff’s argument that where a contractual choice-of-law provision is broad enough to include the application of both substantive and procedural New York law, the borrowing statute does not apply. Preliminarily, we note that the NDA choice-of-law provision in this case does not expressly provide that the parties agree only to apply New York’s six-year statute of limitations to their contract-based disputes. In this regard, there is no need to resolve whether such a provision would be an unenforceable extension of the otherwise applicable statute of limitations. We do agree with plaintiff’s argument, that the language of the choice-of-law provision in this NDA, and in particular the use of the word enforcement, is broad and should be interpreted as reflecting the parties’ intent to apply both the substantive and procedural law of New York State to their disputes.

But even this broad reading of the NDA choice-of-law clause does not require that the borrowing statute be ignored in favor of New York’s domestic six year statute of limitations. The borrowing statute is itself a part of New York’s procedural law and is a statute of limitations in its own right, existing as a separate procedural rule within the rules of our domestic civil practice, addressing limitations of time. Thus, applying the borrowing statute is perfectly consistent with a broad choice-of-law contract clause that requires New York procedural rules to apply to the parties’ disputes.

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

Posted: October 16, 2016

Plaintiff Bound by Arbitration in Partnership Agreement Even Though He Had Not Signed Agreement

On October 11, 2016, the First Department issued a decision in Gibbs v. Holland & Knight, LLP, 2016 NY Slip Op. 06670, holding that a plaintiff was bound by a partnership agreement he had not signed, explaining: “The motion court correctly found that, although plaintiff had not signed the partnership agreement containing the arbitration provision, he had assumed the duty to arbitrate by annually agreeing to be bound by the partnership agreement and by repeatedly invoking the dispute resolution provision in the partnership agreement.”