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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 10, 2017

Claim for Misappropriation of Ideas Dismissed on Summary Judgment

On November 14, 2017 Justice Sherwood of the New York County Commercial Division issued a decision in Schroeder v. Cohen, 2017 NY Slip Op. 32463(U), dismissing a claim for misappropriation of ideas, explaining:

This cause of action for misappropriation of ideas requires proof of two elements: (1) a legal relationship between the parties in the form of a fiduciary relationship, an express contract, implied contract, or quasi contract; and (2) an idea that is novel and concrete. In accordance with the First Department’s determination, plaintiffs’ claim for idea misappropriation cannot extend to material in the public domain. It is plaintiffs’ burden to establish proof of novelty and courts apply a stringent test in determining whether an idea qualifies as novel. Novelty requires a showing of true innovation, not merely that a particular idea has not been used before.

Although plaintiffs claim that their ideas and concepts are novel, it is unclear what ideas were allegedly misappropriated by Cohen. In any event, plaintiffs cannot sustain a claim for idea misappropriation because they have not identified any ideas that are not in the public domain. For example, the use of infinite scroll was not invented by plaintiffs, was a common technique used by web developers, and was a feature that could be publicly seen on the Rendezvoo website. Further, plaintiffs cannot rely on a combination of public ideas to satisfy the novelty requirement, because a combination of pre-existing elements is not considered novel..

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

The law protects intellectual property in a number of ways, but that protection is not unlimited; indeed, as this decision shows, in some ways it can be very limited. We frequently litigate intellectual property claims, including trademark, copyright and trade secret claims. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about whether you have, or face, a claim for theft or infringement of intellectual property.

Posted: December 9, 2017

Conversion Claim Cannot be Based on Money Owed By Contract

On November 22, 2017, Justice Masley of the New York County Commercial Division issued a decision in Caring Professionals, Inc. v. Catholic Health Care System, 2017 NY Slip Op. 32491(U), dismissing a claim for conversion because it sought money owed by contract, explaining:

The claim against the Agencies for conversion is dismissed. A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession. Two key elements of conversion are (1) plaintiff’s possessory right or interest in the property and (2) defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights. Where, as here, the conversion claim pertains to money, the funds must be specifically identifiable and be subject to an obligation to be returned or to be otherwise treated in a particular manner.

Provider alleges that the Agencies sought reimbursement from Medicaid for the services rendered by Provider, but failed to pay Provider, using the money for other purposes. However, this allegation does not establish that Provider had an immediate possessory interest in such funds or that they were segregated in a specifically identical manner for Provider’s benefit. Although the complaint·notes that, under 18 NYCRR § 515(2)(b)(4), the “conversion” of funds is listed as an unacceptable practice, that language does not purport to employ the legal definition of “conversion,” and even if it did, a claim for conversion has not been pled for the reasons stated above.

Furthermore, a cause of action for conversion cannot be predicated on a mere breach of contract and the conversion claim here relies upon no facts other than those underlying the contract claim, i.e., the Agencies failed to pay Provider for its services.

(Internal quotations and citations omitted).

This case illustrates a common misuse of a conversion claim. Yet there are circumstances where a claim for conversion will apply to money as well as tangible objects. We have litigated such issues many times. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about the applicability of legal theories such as conversion and unjust enrichment to claims for money.

Posted: December 8, 2017

50% Shareholder Must Bring Derivative Action, Not Action in Name of Corporation, Against Other 50% Shareholder

On November 9, 2017, Justice Ramos of the New York County Commercial Division issued a decision in U-Trend N.Y. Inv. L.P. v. US Suite LLC, 2017 NY Slip Op. 32502(U), holding that a 50% shareholder could not bring an action in the name of the corporation against the other 50% shareholder and instead must bring a derivative action, explaining:

Where there are only two stockholders each with a 50% share, an action cannot be maintained in the name of the corporation by one stockholder against another with an equal interest and degree of control over corporate affairs. The proper remedy in such a circumstance is a shareholder’s derivative action. Thus, if it is ultimately determined that Aura and U-Trend both had equal control of HSI, U-Trend’s derivative claim, in the name of HSI without naming any HSI directors as defendants, would render its claim non-viable.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions regarding either of these issues.

Posted: December 7, 2017

Court Awards Fees to Prevailing Party But Refuses to Award Fees on Fees

On November 22, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Park Union Condominium v. 910 Union St., LLC, 2017 NY Slip Op. 32487(U), awarding attorneys’ fees, plus interest on the fees, but refusing to award fees on fees.

In Park Union Condominium, the plaintiff sought an award of fees, interest and fees on fees. The court granted the first two claims but denied the last, explaining:

In general, a party must pay his or her own attorney’s fees unless an award is authorized by an agreement between the parties, or by statute or court rule. . . . .

According to the Condominium and Board, they are entitled to an ·award of their costs, expenses and attorneys’ fees pursuant to Section 16 of the Agreement. Section 16, entitled “Costs and Attorneys’ Fees in Event of Breach,” provides that

Should it be necessary for any Party to commence legal action to enforce the terms of this Agreement, the prevailing party in such action shall be entitled to recover all costs and expenses, including the costs of· investigation, expert fees, court costs, and reasonable attorneys’ fees and disbursements, incurred in connection with the prosecution or defense of such action, as fixed by a court of competent jurisdiction.

To determine if a party has prevailed for the purpose of awarding attorneys’ fees, the court must consider the true scope of the dispute litigated and what was achieved within that scope. A party may be deemed a prevailing party when it was successful on the central claims advanced..

Here, in the First Department Decision, the Board’s and Condominium’s motion for summary judgment in lieu of complaint was granted. In its decision, the First Department determined that: (1) the parties’ Agreement was “an instrument for the payment of money only,” and (2) the Sponsor defaulted by failing to make payment under the terms of the Agreement.

Hence, the Condominium and Board are the prevailing parties with respect to this action because they succeeded on their appeal on June 30, 2016 and were granted summary judgment on the central claim advanced – that the Sponsor breached the Agreement. And, pursuant to Section 16 of the Agreement, the Condominium and Board are therefore entitled to reasonable attorneys’ fees and expenses incurred with respect to this action.

. . .

The Condominium and Board contend that they are entitled to recover statutory interest on the principal contract amount as well as interest on their attorneys’ fee award. In opposition, the Sponsor argues that because interest is not mentioned as recoverable in the Agreement, it is not recoverable.

Despite the Sponsor’s contention, the Agreement’s lack of reference to interest does not prohibit the Condominium and Board from recovering interest as CPLR § 5001 confers the right to interest in cases involving breach of contract. Under CPLR § 5004, such interest shall be at the rate of nine per centum per annum. A settlement agreement is a contract, so I grant the Condominium’s and Board’s request for statutory interest, at the rate of nine per centum per annum, on the principal contract amount.

Further, New York courts have held that CPLR § 5001 enables parties to recover interest on attorneys’ fees and that such interest accrues from the date that the moving party is deemed the prevailing party. Thus, I find that the Condominium and Board may recover interest on their attorneys’ fees award at the statutory rate of 9% from the date they prevailed, June 30, 2016.

Lastly, the Condominium and Board request an award of fees on fees as reimbursement for expenses incurred from efforts to collect their contractual costs and expenses and their statutory interest. Under New York law, an award of fees on fees must be based on a statute or on an agreement. Here, the Agreement does not explicitly provide for an award of fees on fees. I therefore deny the Condominium’s and Board’s request for an award of fees on fees.

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

Litigating for fees can be hard–both because of the high burden you sometimes must meet to be entitled to fees and because it is important to avoid the pitfall of getting an award of fees that is less than what it cost to move for fees. As this decision shows, the general rule is that even if you are entitled to an award of attorneys’ fees, you cannot get fees on fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are litigating an attorney fee award.

Posted: December 6, 2017

Court Denies Motion to Disqualify Counsel Because Prior Representation Was Not Substantially Related to Present One

On November 21, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in Capital One Equip. Fin. Corp. v. Harari, 2017 NY Slip Op. 32460(U), denying a motion to disqualify counsel because their previous representation was not substantially related to the present one, explaining:

Defendants ask that the issue of disqualification be deferred until after the cases have been consolidated. In the event the motion to consolidate is not granted, however, defendants contend Herrick should be disqualified from representing plaintiff in the New York Actions because Herrick represented eight of the defendants in 13 interrelated bankruptcy cases, the most recent of which occurred in 2003.

Neither party disputes that, under New York law, a party seeking to disqualify a law firm based on prior representation 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. Such a showing raises an irrebuttable presumption of disqualification.

The New York State Bar Association’s commentary to Rule 1.9 of the Rules of Professional Conduct states that:

Matters are substantially related for purposes of this Rule if under the circumstances, a reasonable lawyer would conclude that there is otherwise a substantial risk that confidential factual information that would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.

. . .

The motion for disqualification turns on whether Herrick’s prior representation is substantially related to the present action. Defendants do not assert that the bankruptcy cases are substantially related to this action. Defendants’ assertion that all actions arise in the exact same context is little more than an overbroad assertion that issues in all actions are similar, if not identical, an assertion which the Second Department found was insufficient in Med. Capital Corp. Defendants’ arguments that the actions are substantially related turns on its assertion that factual information that would normally have been obtained in Herrick’s bankruptcy representations would materially advance plaintiffs position in this matter. This argument fails as well. Although defendants contend Herrick has gained extensive knowledge of defendants’ inner workings, defendants have failed to advance any argument as to how this knowledge includes secret information that is material to any of the issues involved here or otherwise might give plaintiff an advantage in this case, particularly in light of the straightforward nature of plaintiffs claims. Furthermore, the fact that Herrick’s representation occurred at least fourteen years ago is relevant because any inside financial knowledge defendants claim Herrick gained is outdated and was disclosed in the bankruptcies.

(Internal quotations and citations omitted).

Sometimes, the question of whether a lawyer can be involved in a case that relates in some way to a previous or current client can be a complicated question. We have significant experience in litigating such questions. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about conflicts in legal representation.

Posted: December 5, 2017

Plaintiff Without Standing to Bring Derivative Action Not Entitled to Fee Award Under BCL Sec. 626

On November 29, 2017, the Second Department issued a decision in Sakow v. Waldman, 2017 NY Slip Op. 08403, holding that a prevailing plaintiff that did not have standing to bring a derivative action was not entitled to a fee award under Business Corporations Law Sec. 626, explaining:

Mawash moved for leave to renew its opposition to Sakow’s motion for an award of an attorney’s fee, arguing that it had recently discovered that Sakow was not a shareholder of Mawash when this action was commenced and, therefore, that he lacked standing to commence a derivative action and was not entitled to an award of an attorney’s fee under Business Corporation Law § 626(e). In opposition, Sakow did not dispute that he had transferred his shares of Mawash to nonparty Mawash Realty Trust (hereinafter the Trust) more than two years before this action was commenced. However, Sakow asserted that he had standing to initiate the derivative action because he was acting as a nominee of the Trust. Upon granting renewal, the Supreme Court adhered to its determination that Sakow was entitled to an award of an attorney’s fee under Business Corporation Law § 626(e), but lowered the award to the sum of $300,000 and vacated the money judgment. Mawash appeals.

Business Corporation Law § 626(e) provides, in pertinent part: “If the action on behalf of the corporation was successful, in whole or in part, the court may award the plaintiff . . . reasonable expenses, including reasonable attorney’s fees.” To be entitled to an award of an attorney’s fee under Business Corporation Law § 626(e), a plaintiff must meet all of the requirements for standing to bring a derivative action on behalf of the corporation. These requirements include that the plaintiff be a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates at the time of the challenged transaction and at the time the action was commenced.

Here, upon renewal, the Supreme Court erred in determining that Sakow was entitled to an award of an attorney’s fee under Business Corporation Law § 626(e). At the time this action was commenced, Sakow was not a holder of shares or of voting trust certificates of Mawash, and he did not have a beneficial interest in such shares or certificates. Accordingly, Sakow did not have standing to commence a derivative action. While Sakow contends that, as nominee of the Trust, he could have commenced a derivative action on Mawash’s behalf, that was not the capacity in which he initiated the instant action. Since Sakow failed to satisfy the standing requirements for a derivative action, he was not entitled to an award of an attorney’s fee.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and seeking indemnification or an award of attorneys’ fees. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions regarding either of these issues.

Posted: December 4, 2017

No Jurisdiction Over Defendants If Proper Service Under the CPLR Is Not Made, Even if Defendants Received the Documents

On November 29, 2017, the Second Department issued a decision in Josephs v. AACT Fast Collections Services, Inc., 2017 NY Slip Op. 08357, holding that if defendants were not properly served, the court had no jurisdiction over them regardless of whether they received the Summons and Complaint, explaining:

The affidavits of service filed by the plaintiffs, indicating that they attempted to effect service of the supplemental summons and amended complaint upon Lubarsky and Tarnovsky pursuant to CPLR 308(2), fail to indicate that the process server mailed the supplemental summons to either of these defendants. Jurisdiction is not acquired pursuant to CPLR 308(2) unless both the delivery and mailing requirements have been strictly complied with. Therefore, the affidavits of service did not establish, prima facie, that service was properly effected pursuant to CPLR 308(2). We note that when the requirements for service of process have not been met, it is irrelevant that defendant may have actually received the documents. Since the plaintiffs failed to submit any evidence that the requirements for service of process were met with respect to Lubarsky and Tarnovsky, the court should have directed the dismissal of the amended complaint insofar as asserted against those defendants pursuant to CPLR 3211(a)(8).

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

The rules regarding how you start a lawsuit and bring the defendants into it can sometimes be esoteric. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding the proper way to serve a defendant, bringing them into a lawsuit.

Posted: December 3, 2017

Party Cannot Be Held in Contempt for Failing to Pay a Fee Award

On November 29, 2017, the Second Department issued a decision in Liang v. Yi Jing Tan, 2017 NY Slip Op. 08364, holding that a party cannot be held in contempt for failing to pay a fee award, explaining:

The Supreme Court erred in granting, after a hearing, the plaintiff’s motion to hold the defendants’ attorney in civil contempt based upon her failure to pay counsel fees awarded to the plaintiff in an order dated August 12, 2014. Judiciary Law § 753(A)(3) permits a court to punish a party for civil contempt for the non-payment of a sum of money, ordered or adjudged by the court to be paid, in a case where by law execution can not be awarded for the collection of such sum. This is not a case where, by law, execution cannot be awarded. Therefore, the remedy of contempt is unavailable.

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

We are experienced in bringing and defending contempt motions in civil litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions regarding what acts can constitute contempt or what remedies are available through a motion for contempt.

Posted: December 2, 2017

Implied Covenant of Good Faith Cannot be Used to Create New Contract Rights

On November 16, 2017, Justice Sherwood of the New York County Commercial Division issued a decision in 3839 Holdings LLC v. Theodore Farnsworth, Highland Holdings Group, Inc., 2017 NY Slip Op. 32433(U), dismissing a claim for breach of the covenant of good faith and fair dealing because that covenant cannot be used to create new contract rights, explaining:

A claim that defendants breached the implied covenant of good faith and fair dealing may be properly dismissed as duplicative of the breach of contract claim when both claims arise from the same facts. As the Farnsworth Defendants correctly note the first and second causes of action are virtually identical. For this reason, plaintiffs second cause of action must be dismissed.

Even if this claim were not duplicative of plaintiff’s first cause of action, it would still fail. The implied covenant of good faith and fair dealing embraces a pledge that neither party shall do anything that wil1 have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. The implied covenant is breached when a party acts in a manner that, although not expressly forbidden by the contractual provision, would deprive the other party of the benefits of the agreement. However, the obligations imposed by an implied covenant are limited to obligations in aid and furtherance of the explicit terms of the parties’ agreement. The implied covenant cannot be construed so broadly as to nullify the express terms of a contract, or to create independent contractual rights. To establish a breach of the implied covenant, the plaintiff must allege facts that tend to show that the defendants sought to prevent performance of the contract or to withhold its benefits from the plaintiff. Plaintiffs second cause of action fails to identify any existing contractual obligations that were obstructed, but rather seeks to advance independent contractual rights not already provided for in the agreement. This claim shall be dismissed.

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

The implied covenant of good faith and fair dealing is an important, if often misunderstood, part of New York law. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client faces a situation where a party is being deprived of the benefits of its contract, even if you cannot point to a specific contract term that is being breached.

Posted: December 1, 2017

Litigation Privilege Bars Defamation Claim

On November 28, 2017, the First Department issued a decision in Peters v. Coutsodontis, 2017 NY Slip Op. 08308, holding that the litigation privilege barred a defamation claim, explaining:

Supreme Court properly concluded that the alleged defamatory statements were pertinent to the 2005 action and therefore absolutely protected by the judicial proceedings privilege. The statement in the complaint alleging that Peters fraudulently awarded himself an employment contract, was obviously related to the fraud allegations. The statement regarding the authenticity of the power of attorney related to Peters’ ability to award himself the contract, and was thus pertinent to the allegation that Peters engaged in self-dealing. Public policy favors having litigants speak freely in judicial proceedings.

There are no facts alleged supporting a conclusion that the instant litigation is a sham action brought solely to defame, which would otherwise destroy the privilege. Coutsodontis prosecuted his claims in the 2005 action, opposed plaintiff’s motion to dismiss the 2005 action, and appealed the order of dismissal. His failure to prevail on the 2005 action does not vitiate the privilege, since if the privilege existed only in cases that were ultimately sustained, none of the persons whose candor is protected by the rule — parties, counsel or witnesses — would feel free to express themselves.

(Internal quotations and citations omitted).

Civil litigation can involve claims that cause real reputational harm. As this decision shows, such claims usually are not actionable. We are experienced in advising clients and other counsel on what can be done in such a situation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has questions about defamatory accusations made in the context of a civil lawsuit.