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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: October 21, 2017

Court Allows Malpractice Claim Against Firm for Failure to Supervise Partner Go Forward

On September 29, 2017, Justice Masley of the New York County Commercial Division issued a decision in Alrose Steinway, LLC v. Jaspan Schlesinger, LLP, 2017 NY Slip Op. 32082(U), allowing a malpractice claim to go forward based on the firm’s alleged failure to supervise one of its partners, explaining:

In addition to malpractice, plaintiff asserts an interesting claim of failure to supervise in its third cause of action against defendants Jaspan Schlesinger LLP and Steven Schlesinger, the managing partner of the firm. There is no vicarious liability for a general partner in an LLP. New York Partnership Law§ 26 (b). Although plaintiff argues that Mr. Schlesinger is liable under New York Partnership Law § 26(c)(i), which provides that each partner shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or her or by any person under his or her direct supervision and control while rendering professional services on behalf of such registered limited liability partnership, it is undisputed that Mr.
Schlesinger never communicated with plaintiff nor supervised Mr. Epstein, another partner. Thus, this causes of action against Mr. Schlesinger are dismissed.

Plaintiff also advances the argument that the absence of any supervisory structure of partners at the firm is malpractice under Partnership Law§ 26 (c) (i). It argues that the law firm, as a whole, has an obligation to make reasonable efforts to ensure that its partners are appropriately supervised. Under this theory, Mr. Epstein’s status as a partner and 39 years of experience is irrelevant. At this early stage, plaintiff may explore this unique theory against the firm alone.

Internal quotations and citations omitted) (emphasis added).

Posted: October 20, 2017

Question of Fact Regarding Whether Time Was of the Essence Precludes Summary Judgment

On October 2, 2017, Justice Ash of the Kings County Commercial Division issued a decision in Scott Randolph LLC v. Gholis of Brooklyn Corp., 2017 NY Slip Op. 32086(U), holding that there was a question of fact regarding whether time was of the essence in a real estate contract, explaining:

Where time is not made of the essence in the original contract for the sale of real property, a party may subsequently give notice to that effect. The notice setting a new date for the closing must (l) give clear, distinct, and unequivocal notice that time is of the essence, (2) give the other party a reasonable time in which to act, and (3) inform the other party that if he does not perform by the designated date, he will be considered in default. Here, Plaintiff failed to demonstrate its prima facie entitlement to judgment as a matter of law on the issue of liability for breach of contract insofar as Plaintiff did not establish that the November and December notices sent by Gholis were insufficient to set a time is of the essence closing date of December 11, 2014. Plaintiffs arguments for summary judgment conveniently ignore Gholis’s November 6’h notice. Thus, Plaintiffs reliance on only the December notices is insufficient to merit Plaintiff summary judgment on its breach of contract claim.

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

Posted: October 19, 2017

Plaintiff Lacked Standing to Assert Claims for Damage to Affiliate

On October 2, 2017, Justice Ramos of the New York County Commercial Division issued a decision in Marco Polo Network Inc. v. 75 Broad, LLC, 2017 NY Slip Op. 32088(U), holding that the plaintiff tenant did not have standing to assert claims against its landlord for damages suffered by the plaintiff’s affiliate, explaining:

[Plaintiff] argues that its claims are not derivative in nature because they are based upon 75 Broad’s breach of the Lease, which was between MPNI and 75 Broad. Moreover, MPNI maintains that the collapse of MPCM caused direct injury to MPNI because of the reduction of its 80% equity interest in MPCM, which was allegedly reduced to zero as a result of 75 Broad’s conduct.

This Court finds that MPNI lacks standing to maintain this action, as MPNI’s claims relate to the diminution in value of its equity interest in MPCM, and are therefore derivative in nature. The fact that MPNI was a party to the Lease has no bearing on whether MPNI is the proper party with standing to sue, as the sole damages alleged involve a diminution in value of MPNI’s equity stake in MPCM.

An individual shareholder has no right to bring an action in his own name and on his own behalf for a wrong against a corporation. However, there is an exception when the wrongdoer has breached a duty owed to the shareholder independent of any duty owing to the corporation wronged. Here, the duty owed by Defendants to MPNI was not independent of any duty owed to MPCM. The Lease was between MPNI and 75 Broad, but MPCM was a permitee of the Lease and suffered damages as a corporation. Any alleged wrong by Defendants was thus committed against MPCM as a corporation, ultimately resulting in a, loss in value to MPNI ‘s equity interest in MPCM. If an individual harm is embedded in the harm to the corporation, it cannot separately stand. Moreover, the lost value of an investment in a corporation is quintessentially a derivative claim by a shareholder. Thus, because MPCM is the corporation that suffered the harm, and because MPNI is seeking to recover damages for the diminution in value of its 80% equity interest embedded in MPCM’s loss, the asserted claims are improper. Defendants have established that MPCM, and not MPNI, would benefit from any recovery awarded here. The Court cannot permit MPNI to obtain a recovery that belongs to MPCM.

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

Posted: October 18, 2017

Court of Appeals Grants Leave to Appeal in Case Involving Enforceability of Deed Covenant to Provide Free Electricity

On October 17, 2017, the Court of Appeals granted leave to appeal in Niagara Mohawk Power Corp. v. Allied Healthcare Products, Inc. The case concerns the enforceability of a deed covenant requiring the provision of free electrical power to mills located on a related parcel owned by the defendant. We previously blogged about the Third Department’s decision, which declared the covenant unenforceable, reversing a decision of Justice Platkin of the Albany County Commercial Division.

Posted: October 17, 2017

Foreign Defendants Found Not to Be Subject to Personal Jurisdiction in New York

On October 10, 2017, the First Department issued a decision in IMAX Corp. v. Essel Group, 2017 NY Slip Op. 07091, affirming a holding that foreign defendants were not subject to personal jurisdiction in New York, explaining:

Initially, petitioner failed to establish that New York courts have personal jurisdiction over the Essel Group and the individual respondents on the basis of a tortious act committed without the state causing injury to person or property within the state. As the original event that caused the economic injury was the demerger of E-City in India, the situs of the injury is India. Petitioner’s executive offices in New York do not alone constitute a sufficient predicate for jurisdiction. Nor does it avail petitioner that respondent Subhash Chandra, chairman of the Essel Group, traveled to New York to negotiate the agreement with petitioner, since the injury petitioner alleges arose not from the breach of the agreement but from the demerger. These facts do not constitute a sufficient start in showing that jurisdiction could exist to justify pretrial jurisdictional disclosure.

Additionally, petitioner failed to establish that New York courts have general jurisdiction over respondent Chandra individually pursuant to CPLR 301. New York courts may not exercise general jurisdiction against a defendant under the United States Constitution or under CPLR 301 unless the defendant is domiciled in the state or in an exceptional case where an individual’s contacts with a forum are so extensive as to support general jurisdiction notwithstanding domicile elsewhere. In the present case, movant has failed to show either that Chandra was domiciled in New York or that Chandra’s contacts with New York were so extensive as to support general jurisdiction. Initially, the purchase of the apartment, even if attributable to him personally, is insufficient to establish that Chandra was domiciled in New York. Further, the evidence submitted by petitioner demonstrates that Chandra’s business activities in New York were undertaken on behalf of a corporate entity. No pretrial jurisdictional disclosure is warranted.

To the extent respondents concede that New York courts may exercise general jurisdiction over respondent Asia TV USA, Ltd. (“Asia TV”), petitioner argues that it can recover against Asia TV as well as the other respondents on the ground that respondents should be treated as a single personality for purposes of enforcing the judgment against E-City. However, the evidence does not show that the individual Essel Group promoters used their domination and control over E-City to transfer assets of E-City to Asia TV so as to make E-City incapable of honoring its obligation to petitioner. Rather, the argument that Asia TV should be treated as a single personality with the other companies is without basis as it is undisputed that Asia TV was not in existence at the time E-City was demerged and thus, there is no evidence that any assets were ever transferred from E-City to Asia TV so as to make E-City incapable of honoring its obligations to petitioner. For the same reason, there is no basis for issuing a turnover order against Asia TV as there is no evidence that any assets of E-City were ever transferred to Asia TV. No pretrial jurisdictional disclosure is warranted.

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

Posted: October 16, 2017

Appeal Timely Notwithstanding That Notice of Appeal Was Rejected by Clerk

On October 10, 2017, the First Department issued a decision in Perlbinder v. Board of Managers of the East 53rd St. Condominium, 2017 NY Slip Op. 07093, holding that an appeal was timely notwithstanding that the Notice of Appeal was returned by the clerk for correction, explaining:

This appeal was timely filed, despite the fact that the initial notice of appeal was returned by the Clerk due to an error and was not refiled until more than 30 days later. The initial filing was sufficient for jurisdictional purposes, and the correction was not consequential. Moreover, plaintiffs filed their pre-argument statement and the orders that are the subject of the appeal at the same time as the initial notice of appeal, thus providing defendant with notice.

(Internal citations omitted).

Posted: October 15, 2017

Res Judicata Effect of Prior Award is For Arbitrator, Not Court, to Decide

On October 2, 2017, Justice Ramos of the New York County Commercial Division issued a decision in Gibbs v. Holland & Knight, LLP, 2017 NY Slip Op. 32075(U), holding that the res judicata effect of an award in an earlier arbitration was for the arbitrator, not the court, to decide, explaining:

As to H&K’s claim that the Gibbs Arbitration is barred by res judicata, H&K argues, at the outset, that this is a threshold issue and is a matter for the Court to decide and not for an arbitrator. H&K asserts that Gibbs had a full and fair opportunity to litigate his compensation claims in the H&K Arbitration, and that his failure to fully plead and litigate his claims during the proceeding results in a waiver. H&K maintains that the H&K Arbitration and the Gibbs Arbitration involve claims that are inextricably part of the same underlying controversy, which Gibbs should have raised in the H&K Arbitration. Further, H&K alleges that Gibbs’ repeated set-off arguments in the H&K Arbitration precludes him from now bringing the Gibbs Arbitration to address the same claims.

In opposition, Gibbs argues that first and foremost, the res judicata effect, if any, of a prior arbitration award is a matter for the arbitrator to decide. Moreover, Gibbs maintains that res judicata is inapplicable because the H&K Arbitration only addressed H&K’s claim to guardian ad litem fees, while the Gibbs Arbitration addresses Gibb’s claim to more than $1.5 million of unpaid compensation. Gibbs also argues that issue preclusion does not bar the Gibbs Arbitration because the claims at issue were not pled or litigated in the H&K Arbitration.

Recent case law demonstrates that the Court lacks the authority to determine whether the Gibbs Arbitration is barred by the doctrines of res judicata and collateral estoppel. On a motion to stay an arbitration, this Court’s “gatekeeper” role is limited to determining whether there was a valid arbitration agreement, whether the parties complied with the agreement, and whether the claim to be arbitrated is barred by the statute of limitations.

Here, as discussed below, it has already been decided that the timing of the Gibbs Arbitration was not in breach of the Partnership Agreement. The parties have not raised any statute of limitations arguments. Accordingly, the Court’s further involvement is unnecessary and unwarranted.

(Internal citations omitted).

Posted: October 14, 2017

Construction-Related Claims Barred by “No Damages for Delay” Clause

On September 28, 2017, Justice Knipel of the Kings County Commercial Division issued a decision in Pabco Construction Corp. v. Liberty Mutual Insurance Co., 2017 NY Slip Op. 32045(U), dismissing a claim based on a construction contract’s “no damages for delay” clause, explaining:

The validity of the plaintiffs claim, as pleaded against the surety in this action, is determined by the validity of its claim against the GC under the subcontract agreement, dated Oct. 20, 2008 (hereafter, the subcontract). The subcontract includes the “no damages for delay” clause which is a type of an exculpatory clause. . . .

Clauses in construction contracts which preclude contractors from recovering damages for delay in the performance of the contract are generally valid and enforceable. There are exceptions to this general rule, and a clause which purports to preclude damages for all delays resulting from any cause whatsoever will not be read literally. Thus, despite a clause barring damages for delay, damages may be recovered for: (1) delays caused by the contractee’s bad faith or its willful, malicious, or grossly negligent conduct, (2) uncontemplated delays, (3) delays so unreasonable that they constitute an intentional abandonment of the contract by the contractee, and (4) delays resulting from the contractee’s breach of a fundamental obligation of the contract. However, the clause exonerates the defendant for delays caused by inept administration or poor planning, a failure of performance by the defendant in ordinary, garden variety ways, or a failure of performance resulting from ordinary negligence, as distinguished from gross negligence.

The plaintiffs claim, as pleaded in this action, alleges none of the enumerated exceptions to the enforceability of the “no damages for delay” clause. Accordingly, the plaintiff’s complaint is dismissed with leave to amend.

(Internal quotations and citations omitted).

Posted: October 13, 2017

Clear and Convincing Standard of Proof Not Applied at Summary Judgment

On September 28, 2017, Justice Friedman of the New York County Commercial Division issued a decision in Ostad v. Nehmadi, 2017 NY Slip Op. 32050(U), holding that even though a plaintiff would be required to prove its claim for a constructive trust at trial by clear and convincing evidence, on summary judgment, the court’s role was still to identify whether there were questions of fact, explaining:

Finally, Nehmadi argues that even if there is some facial merit to Ostad’s allegations, the action must be dismissed because, with.out documentary evidence or credible witnesses, Ostad cannot establish his claim for a constructive trust by the clear and convincing evidence standard applicable at trial. Relying on United States Supreme Court precedent in libel cases brought by a public figure, Nehmadi argues that a ruling on a motion for summary judgment or for a directed verdict necessarily implicates the substantive evidentiary standard of proof that would apply at the trial on the merits.

New York courts have applied the clear and convincing evidence standard to the assessment of a libel defendant’s motion for summary judgment. Defendants have not, however, cited any case in which the clear and convincing evidence standard of proof has been applied to summary judgment motions in other contexts, notwithstanding that a party would have the burden of proof at trial. Moreover, defendants have cited no authority for the proposition that witness testimony is insufficient to meet the clear and convincing standard or that a witness’s alleged past history of untrustworthiness can be the basis for dispensing with a trial. The court accordingly rejects defendants’ contention that. a trial in this action is rendered futile by questions as to the credibility of the witnesses Ostad relies on to corroborate the agreement.

(Internal quotations and citations omitted).

Posted: October 12, 2017

RMBS Trustee Sanctioned for Using Data Sought From Quashed Subpoenas

On September 28, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Home Equity Mortgage Trust Series 2006-5 by U.S. Bank N.A. v. DLJ Mortgage Capital, Inc., 2017 NY Slip Op. 32053(U), sanctioning an RMBS trustee for using borrower data that had been sought through subpoenas that the court had quashed, explaining:

On March 25, 2015, I struck the hundreds of subpoenas that the Trustee served on non-party borrowers’ employers. Contrary to the Trustee’s contention now, I did not merely do so simply to bar the Trustee from using the subpoena discovery mechanism. I struck the subpoenas because they were so overbroad and burdensome, they were incredibly intrusive into the non-party borrowers’ privacy rights as to their employment and finances, and were not shown to be necessary, i.e. the Trustee did not demonstrate that it did not already have the relevant information or could not get the information it sought through other, less intrusive means. I gave the Trustee the option of coming back with a more targeted list of discovery, to seek information that had no possibility of already being in the mortgage loan file.

At no time during that oral argument did the Trustee reveal that it had already been seeking the borrowers’ employment information through other means, i.e., the Work Number database and the VOE. While it was vaguely mentioned in a paragraph in its order to show cause, the Trustee never specifically informed the court that it was seeking essentially the identical information, that I had just found to be burdensome and overly intrusive, through other means. Directly contacting the borrowers’ employers through the VOEs contravenes my March 25, 2015 holding that it was inappropriate to invade the borrowers’ privacy rights and employment by directly contacting their employers for the purposes of litigation discovery.

Further, the Trustee has not shown that it would be unable to prove its allegations – that the representations and warranties were breached – by means other than disrupting non-party borrower privacy and employment rights. The Trustee’s claim, that it sent the faxes and subpoenas to employers simply as a permissible loan reverification tool, is meritless. This litigation was commenced in 2012. The Trustee’s hundreds of subpoenas and fax requests, sent many years after litigation was commenced, were plainly used to support the Trustee’s litigation position, as amply demonstrated by the Payne Report. As such, the Trustee is precluded from relying on employment and income information obtained from the VOEs. As the work Number database is a public database tool, reports generated by the Trustee through information received from that database will not be precluded.

(Internal quotations and citations omitted).