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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 24, 2016

Party That Failed to Give Contractually-Required Notice Prior to Bringing Suit Lacked Standing

On May 17, 2016, the First Department issued a decision in Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital, Inc., 2016 NY Slip Op 03837, holding that a party that failed to give contractually-required notice prior to bringing suit lacked standing to bring suit, explaining:

The summons with notice filed by the certificate holders on May 25, 2012, while timely, was ineffective, because the certificate holders lacked standing to assert claims against defendant. Plaintiff’s argument that it alleged compliance with the no-action clause, permitting the certificate holders to assert claims on behalf of the trust, is not persuasive, since the Pooling and Servicing Agreement specifically refutes this basis for the certificate holders’ allegations of standing. Thus, the untimely claim brought by plaintiff on November 30, 2012 could not relate back to the defective summons, because no valid action was commenced by the filing of that summons.

(Internal quotations and citations omitted). As the court explained, the failure to give notice was cured after the statute of limitations ran on the plaintiff’s claims, but since there could be no relation-back to the initial, ineffective, summons with notice, the claim was time-barred.

Posted: May 23, 2016

Inclusion of No Oral Modification Clause In Employment Agreement Does Not Change At-Will Status

On May 19, 2016, the First Department issued a decision in Gootee v. Global Credit Services, LLC, 2016 NY Slip Op. 03984, explaining that the inclusion of a no-oral-modification clause in an employment agreement did not mean that an employee was not an at will employee, explaining:

The employment agreement did not state a fixed duration for plaintiff’s employment or that he could only be terminated for cause. Nor did it expressly state that plaintiff was an “at-will employee.” However, it contained a provision that prohibited modification of “any provision” thereof without “a writing signed by the party against whom enforcement is sought” (the no oral modification clause).

. . .

The inclusion of the no oral modification clause in the employment agreement does not, in and of itself, suffice to rebut the at-will presumption. While the clause precluded the modification of “any provision” of the agreement without a writing signed by the party against whom enforcement was sought, there is no express provision in the agreement that precluded defendant from terminating plaintiff without cause.

(Internal quotations and citations omitted). The court went on to make clear that the no-oral-modification clause was enforceable and barred the employer from changing the terms of employment. However, the clause did not bar the employer from terminating the employment.

Posted: May 22, 2016

No Oral Modification Clause Bars Breach of Contract and Promissory Estoppel Claims

On May 9, 2016, Justice Singh of the New York County Commercial Division issued a decision in Rivera v. Cumulus Media, Inc., 2016 NY Slip Op. 30870(U), dismissing breach of contract and promissory estoppel claims based on a contract’s no oral modification and integration clauses.

In Rivera, the plaintiff’s production company entered into a letter agreement under which the plaintiff “would host a radio program for” one of the defendants. The contract expired on December 31, 2015, but the plaintiff alleged that defendants orally agreed to extend the agreement “on terms that varied from the original.” The defendants refused to perform under the alleged new, oral terms, but did continue to pay the plaintiff after the termination of the written agreement on that agreements’ terms. The plaintiff and his production company sued the defendants for breach of contract and promissory estoppel. The court granted the defendants’ motion to dismiss, explaining:

It is clear that the . . . contract both contemplated that the parties might continue plaintiffs’ employment relationship after the contract expired, and also provided that any agreement to formalize that continued employment relationship would have to be reduced to writing and signed in order to be enforceable. Plaintiffs’ argument that the parties’ continuation of their employment relationship on allegedly modified terms somehow constitutes a waiver of the . . . contract is unpersuasive. That contract also plainly provides that such behavior would give a party the right to deem the agreement terminated, and provides for a procedure for an aggrieved party to follow in that event. Plaintiffs have made no such claim. Instead, they merely claim that, after the . . . contract expired on December 31, 2015, they continued their “pay or play” relationship with defendants as they had before. As a result, they are now “at will” employees, as the Rivera contract provides, until or unless they execute a new written agreement with defendants. The alleged 2016 oral contract did not change this, and cannot serve as the basis for plaintiffs’ anticipatory repudiation claim, as a matter of law, because it does not constitute an “allegation of a definite and final communication by defendant of its intention to forgo its obligations under the” . . . contract, under which any such purported change would be invalid unless it was in writing and executed.

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

The court dismissed the promissory estoppel claim for the same reason, explaining:

The First Department has long acknowledged that the existence of a valid contract containing a “no-oral modification clause” precludes an aggrieved party from proving the “reasonable reliance” element of a promissory estoppel claim. Here, the . . . contract plainly contains such a clause. As a result, plaintiffs cannot prove “reasonable reliance” on the alleged 2016 oral agreement, as a matter of law.

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

Posted: May 21, 2016

Partial Payment After Statute of Limitations Expires May Toll or Restart It

On May 10, 2016, Justice Scheinkman of the Westchester County Commercial Division issued a decision in Calltrol Corp. v. Dialconnection, LLC, 2016 NY Slip Op. 50765(U), holding that partial payment after the statute of limitations expires can serve to toll or restart the limitations period, explaining:

The premise of Defendant’s motion is that the very allegations of the Complaint show that the action is untimely in that the action was not brought within four years of May 2, 2010, as required by UCC § 2-725(1). However, even if it may be said that Defendant has shown prima facie that the action is untimely, Plaintiff has raised questions of fact as to whether the statute of limitations has been tolled.

The Court notes that Friedman avers in his affidavit, as does the Complaint, that Defendant made payments to Defendant after May 3, 2010, with the payments totaling $42,794.41. Partial payment of a debt before or after the statute of limitations has expired may toll the statute or start it running a new, provided that the payment was of a portion of an admitted debt under circumstances amounting to a clear demonstrated intention to pay the balance. The statute will be tolled if the creditor demonstrates that it was payment of a portion of an admitted debt, made and accepted as such, accompanied by circumstances amounting to an absolute and unqualified acknowledgment by the debtor of more being due, from which a promise may be inferred to pay the remainder.

. . .

As to a written acknowledgment, pursuant to General Obligations Law § 17—101, the statute of limitations will be tolled by a signed written acknowledgment of an existing debt which contains nothing inconsistent with an intention on the part of the debtor to pay it. The critical question is whether the acknowledgment imports an intention to pay (Knoll v Datek Securities Corp., 2 AD3d 594 [2d Dept 2003]; see Jeffrey L. Rosenberg & Assoc., LLC v Lajaunie, 54 AD3d 813 [2d Dept 2008]).

In this case, Defendant acknowledged in writing in the May 2010 Contract that it currently was indebted to Plaintiff in the amount of $419,000, and referred to this amount as the “Balance Due”. Furthermore, the written acknowledgment also referred to the accompanying spreadsheet (the “breakdown of the Balance Due”), which in turn showed that there was a larger sub total of claims by Plaintiff ($558,616.50) and that the sum of $419,000 constituted the “Balance Due This Statement” after deduction of $139,616.50 for a negotiated discount. Thus, the writing reflects an admission of a debt to Plaintiff and certainly does not contain anything inconsistent with an intention to pay the debt.

(Internal quotations and citations omitted).

Posted: May 20, 2016

“Pay-When-Paid” Provision in Subcontract Unenforceable as Contrary to Public Policy

On May 17, 2016, the First Department issued a decision in Nevco Contracting Inc. v. R.P. Brennan General Contractors & Builders, Inc., 2016 NY Slip Op. 03832, holding that a “pay-when-paid” provision in [a] subcontract is not an effective condition precedent to defendant’s duty to perform, since such provisions are void and unenforceable as contrary to public policy.”

Posted: May 19, 2016

Breach of Contract Claim Barred for Failure to Provide Contractually-Required Notice

On May 18, 2016, the Second Department issued a decision in Schindler Elevator Corp. v. Tully Construction Co., Inc., 2016 NY Slip Op. 03868, holding that a breach of contract claim was barred due to the plaintiff’s failure to give the contractually required notice of its claim, explaining:

Where a construction contract contains a condition precedent-type notice provision setting forth the consequences of a failure to strictly comply, strict compliance will be required. Express conditions precedent must be literally performed; substantial performance will not suffice, and failure to strictly comply with such provisions generally constitutes a waiver of a claim.

Here, article 11 of the primary contract between the defendant and the City, which is incorporated into the subcontract, contains such a condition-precedent type notice provision. Article 11.1.2 requires a contractor claiming to be sustaining delay damages to submit, “within forty-five (45) Days from the time such damages are first incurred, and every thirty (30) Days thereafter for as long as such damages are incurred, verified statements of the details and amounts of such damages, together with documentary evidence of such damages.” Moreover, pursuant to article 11.2, a failure “to strictly comply with the requirements of Article . . . 11.1.2 shall be deemed a conclusive waiver by the Contractor of any and all claims for damages for delay arising from such condition.”

The letters and emails relied upon by the Supreme Court and the plaintiff did not strictly comply with the contractual notice requirement, since they did not contain verified statements of the amount of delay damages allegedly sustained by the plaintiff and were unsupported by documentary evidence. Contrary to the plaintiff’s contention, the defendant’s actual knowledge of the delay and the claims did not relieve the plaintiff of its obligation to serve a proper notice of claim, and the defendant’s alleged breach of the subcontract did not excuse the plaintiff from complying with the notice requirements under the circumstances of this case.

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

Posted: May 18, 2016

Motion for Contempt Denied for Failure to Provide Statutory Warning

On May 18, 2016, the Second Department issued a decision in Community Preservation Corp. v Northern Boulevard Property, LLC, 2016 NY Slip Op. 03844, reversing a judgment of contempt because the party seeking contempt failed exactly to comply with the statutory notice requirements, explaining:

The Supreme Court erred in granting the receiver’s motion to hold the appellant in civil contempt. Pursuant to Judiciary Law § 756, a contempt application must be in writing, must be made upon at least 10 days’ notice, and must contain on its face the statutory warning that “FAILURE TO APPEAR IN COURT MAY RESULT IN . . . IMMEDIATE ARREST AND IMPRISONMENT FOR CONTEMPT OF COURT.” A lthough the receiver’s motion was in writing and complied with the 10-day notice requirement, it did not comply with the warning requirement. As such, the court was without jurisdiction to punish the appellant for contempt for failing to comply with its prior order.

(Internal citations omitted) (emphasis added).

Posted: May 17, 2016

Question of Arbitrability is Issue for Court, Not Arbitrator

On April 26, 2016, the First Department issued a decision in Garthon Bus. Inc. v. Stein, 2016 NY Slip Op. 03102, holding that the question of a dispute’s arbitrability should have been decided by the court in the first instance, explaining:

We disagree with the dissent’s position that the London Court of International Arbitration (LCIA) should decide the issue of arbitrability. As the dissent acknowledges, the general rule is that the question of arbitrability is an issue for the courts. The case on which the dissent relies recognizes that it is appropriate for arbitrators to decide the issue of arbitrability where the agreement to arbitrate incorporated the arbitral body’s rules reserving arbitrability to itself. However, the . . . court declined to hold that the arbitrators should decide the issue in that case, since the arbitration agreement there was a narrow one. Because it was narrow, this Court held, the reference to the arbitration rules did not constitute clear and unmistakable evidence that the parties intended to have an arbitrator decide arbitrability.

Here, as discussed above, the Quennington Agreement designated the courts as the sole forum for dispute resolution, and the subsequent agreements, notwithstanding their arbitration clauses, did not nullify that designation. Since that is the case, we cannot state with any degree of certainty that the parties clearly and unmistakably intended for the chosen arbitral body to decide the particular issue presented to us. To hold otherwise would be to completely ignore the existence of the forum selection clause in the Quennington Agreement, which the parties never abrogated. The Court of Appeals recently reaffirmed that the issue of arbitrability is for the arbitrators only where the parties clearly and unmistakably agreed that the arbitrators should decide that issue. . . . .

Moreover, the arbitration clauses, in relation to the forum selection clause contained in the Quennington Agreement, are far narrower, since, as mentioned earlier, they apply to the agreements themselves, whereas the forum selection clause applies to disputes arising not only out of the Quennington Agreement, but also the legal relationship established by the agreement. Of course, if plaintiffs had presented claims that unquestionably and wholly originated after the termination of the Quennington Agreement, the issue of arbitrability would have been for the arbitrators, who most likely would have found that the claims were subject to arbitration. That, however, is not the case.

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

Posted: May 16, 2016

Going-Private Mergers Subject to Business Judgment Rule So Long As Shareholders Protected

On May 5, 2016, the Court of Appeals issued a decision in Matter of Kenneth Cole Products, Inc., 2016 NY Slip Op. 03545, holding that the decision to engage in a going-private merger was subject to the business judgment rule so long as certain shareholder protections are included in the deal, explaining:

The primary issue before us is what standard should be applied by courts reviewing a going-private merger that is subject from the outset to approval by both a special committee of independent directors and a majority of the minority shareholders. Plaintiff urges that we apply the entire fairness standard, which places the burden on the corporation’s directors to demonstrate that they engaged in a fair process and obtained a fair price. Defendants seek application of the business judgment rule, with or without certain conditions. We are persuaded to adopt a middle ground. Specifically, the business judgment rule should be applied as long as the corporation’s directors establish that certain shareholder-protective conditions are met; however, if those conditions are not met, the entire fairness standard should be applied.

We begin with the general principal that courts should strive to avoid interfering with the internal management of business corporations. To that end, we have long adhered to the business judgment rule, which provides that, where corporate officers or directors exercise unbiased judgment in determining that certain actions will promote the corporation’s interests, courts will defer to those determinations if they were made in good faith. The doctrine is based, at least in part, on a recognition that: courts are ill equipped to evaluate what are essentially business judgments; there is no objective standard by which to measure the correctness of many corporate decisions (which involve the weighing of various considerations); and corporate directors are charged with the authority to make those decisions. Hence, absent fraud or bad faith, courts should respect those business determinations and refrain from any further judicial inquiry (see id. at 631). We have, therefore, held that the substantive determination of a committee of disinterested directors is beyond judicial inquiry under the business judgment rule, but that the court may inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee.

A freeze-out merger is typical of situations in which a director’s loyalty may be divided or compromised, thereby calling into question the applicability of the business judgment rule. In such a merger, the majority stock owner or group in control attempts to freeze out the interests of minority shareholders. There are three main types of freeze-out mergers: (1) two-step mergers, in which an outside investor purchases control of the majority shares of a target company, then uses that control to merge the target with a second company, thereby freezing out the minority shareholders of the target and forcing a cash-out of their shares; (2) parent-subsidiary mergers; and (3) going-private mergers, in which the majority shareholder seeks to remove public investors and gain ownership of the entire company.

[In t]his Court’s seminal decision regarding freeze-out mergers . . . , we recognized that, where there are common directors or majority ownership between the parties involved in a transaction, the inherent conflict of interest and the potential for self-dealing requires careful scrutiny of the transaction. In reviewing a two-step merger . . . we held that while, generally, the plaintiff has the burden of proving that the merger violated the duty of fairness, when there is an inherent conflict of interest, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the merger . . . .

We now adopt [the] standard of review in [the Delaware Supreme Court decision in Kahn v M & F Worldwide Corp.] for courts reviewing challenges to going-private mergers. The standard set forth in MFW reinforces that the business judgment rule is our general standard of review of corporate management decisions, and is consistent with this Court’s [prior holding] that the substantive determination of a committee of disinterested directors is beyond judicial inquiry under the business judgment rule, but that courts may inquire as to the disinterested independence of the members of a special committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee. While the business judgment rule is deferential to corporate boards, minority shareholders are sufficiently protected by MFW‘s conditions precedent to the application of that standard in going-private mergers. . . . .

According to the Delaware Supreme Court, for purposes of this rule, a complaint is sufficient to state a cause of action for breach of fiduciary duty — and the plaintiff may proceed to discovery — if it alleges a reasonably conceivable set of facts showing that any of the six enumerated shareholder-protective conditions did not exist. Conclusory allegations or bare legal assertions with no factual specificity are not sufficient, and will not survive a motion to dismiss. Mere speculation cannot support a cause of action for breach of fiduciary. If the pleading requirements are met, in order to defeat summary judgment, a plaintiff must then demonstrate that there is a question of fact as to the establishment or efficacy of any of the enumerated conditions designed to protect the minority shareholders. Finally, if the evidence demonstrates that any of the protections were not in place, then the business judgment rule is inapplicable and the entire fairness standard applies.

Reviewing the complaint here under the MFW standard, we conclude that the courts below properly determined that the allegations do not withstand defendants’ motions to dismiss. Plaintiff did not sufficiently and specifically allege that any of MFW‘s six enumerated conditions were absent from the merger here. Beginning with the first condition, plaintiff concedes that Cole conditioned the merger, from the outset, upon approval by both a special committee of independent directors and a majority of the minority shareholders.

(Internal quotations and citations omitted).

Posted: May 15, 2016

Notice of Impending Dismissal of Putative Class Action Required Even if Class Not Yet Certified

On May 12, 2016, the First Department issued a decision in Vasquez v. National Securities Corp., 2016 NY Slip Op. 03817, holding that the proposed class of a putative class action must be given notice of the dismissal of the action even if the class is not yet certified, explaining:

The motion court correctly required notice of the impending dismissal of the putative class action even though the class had not been certified. The court correctly relied on our decision in Avena v Ford Motor Co. (85 AD2d 149 [1st Dept 1982]), the subsequent amendment of Federal Rule of Civil Procedure 23(e) to restrict the notice requirement to dismissals, discontinuances and compromises of “certified class” actions notwithstanding. The legislature, presumably aware of the law as stated in Avena, has not amended CPLR 908 to conform to the federal statute. Although defendant-appellant raises policy arguments in support of its position, its remedy lies with the legislature and not with this Court.

(Internal quotations and citations omitted).