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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 20, 2018

Derivative Action Dismissed for Failure to Plead Demand or Demand Futility

On May 9, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Glaubach v. PricewaterhouseCoopers, LLP, 2018 NY Slip Op. 30875(U), dismissing a derivative action for failure to plead demand or demand futility, explaining:

Under Delaware law, and Delaware Chancery Court Rule 23.1, to have standing to pursue a derivative claim on behalf of a company, a plaintiff must make a pre-suit demand that the board pursue the contemplated action. Such a presuit demand may be excused, however, if such a demand would have been futile. Either presuit demand or demand futility must be pleaded with particularity in order for a derivative claim to survive a dismissal motion.

ln the instant case, the amended complaint fails to allege that Glaubach ever demanded that the Personal Touch board pursue an audit malpractice claim against PwC or that such a demand would have been futile. First, while Glaubach alleges demands that he made on the board of directors. His demands were for the Board to investigate alleged wrongdoing of certain company executives, not to investigate and commence an action against PwC for auditing malpractice. Specifically, he demanded that the Board take action against all parties who received monies fraudulently characterized as educational expenses. This fails to satisfy Delaware’s presuit demand requirement for the derivative accounting malpractice claim.

Moreover, the complaint fails to sufficiently allege demand futility. Where the subject of the derivative suit is not a business decision of the board but, instead, is a wrong committed against the company by a third party, or the board’s inaction, demand is only excused when the plaintiff alleges particularized facts raising a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. A claim that the board failed to act, sometimes referred to as a lack of oversight claim, is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment. In order to rebut the presumption of disinterestedness under the Ra/es test, the plaintiff must plead particularized facts that, if proved, would establish that a majority of the directors face a substantial likelihood of personal liability for the wrongdoing alleged in the complaint. Demand futility is examined with respect to the board’s membership at the time the amended complaint is filed, unless the alleged claims were validly being litigated at the time of the original pleading.

Here, the amended complaint fails to meet the requirements of demand futility. Glaubach’s claim is that the board violated their oversight duties. There are, however, no particular facts establishing that a majority of the board at the time plaintiffs commenced this action was interested or lacked independence. Plaintiffs fail to allege that any, much less a majority, of the directors faced a substantial likelihood of liability for PwC’s alleged malpractice. The complaint fails to allege that there were direct tics between PwC and Personal Touch’s board members, or any allegations that the board was dominated by a director or officer who condoned PwC’s alleged improper conduct. The amended complaint does not even detail the size of the board or its current composition, or that a majority of them were involved in, or even stood to gain by any alleged fraudulent conduct, or other improper conduct by PwC. It fails to meet the heightened pleading standard set forth in Delaware Chancery Court Rule 23.1, as it fails to plead in a director-by-director fashion, instead, asserting conclusory and speculative statements about the board. The Personal Touch executives Glaubach asserts were looting the company for their personal benefit, Slifkin, Balk and Marx, were not a majority. In fact, Slifkin resigned from the Board in July 2013 , and these executives were not alleged to have control over the board. Glaubach ‘s conclusory allegations that the board is populated by persons with ties to one of the alleged wrongdoers, falls far short of the requirement of particularized allegations that a majority of the board would face a substantial likelihood of personal liability. Accordingly, this first claim is dismissed for Glaubach’s lack of standing.

(Internal quotations and citations omitted).

This decision illustrates the special pleading requirements for derivative actions (where a shareholder brings an action on behalf of a corporation). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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Posted: May 19, 2018

Upcoming Arguments in the Court of Appeals in June 2018

Upcoming argument in the Court of Appeals in June 2018 that may be of interest to commercial litigators:

  1. Ambac Assurance Corporation v. Countrywide Home Loans (No. 79) (to be argued Wednesday, June 6, 2018) (“Fraud–Fraud in Inducement–Alleged fraudulent inducement to issue financial guaranty insurance policies for residential mortgage-backed securitizations–elements to establish cause of action for fraudulent inducement–justifiable reliance–applicability of Insurance Law § 3105; recovery of claims payments made by insurer–contractual repurchase protocol; recovery of attorneys’ fees; summary judgment.”)

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Posted: May 18, 2018

Unjust Enrichment Claim Dismissed Because Contracts Governed Claims

On May 9, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Pressley v. Ford Models, Inc., 2018 NY Slip Op. 30892(U), dismissing an unjust enrichment claim because contracts governed the claims, explaining:

The determination of whether a quasi-contractual claim such as unjust enrichment should be dismissed as duplicative looks only to whether there is a valid written agreement, the existence of which is undisputed, and the scope of which clearly covers the dispute between the parties, and not whether plaintiff may recover under that contract. Each of the contracts at issue contains provisions showing that the agreements apply, not just to compensation received during the term of the contract, but afterwards as well.

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

Unjust enrichment is a common claim in commercial litigation. It is used when there was not a contract between the litigants, but the defendant received an unfair benefit at the plaintiff’s expense. As this decision shows, it only applies when there was not a contract between the parties. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether you have, or are the subject of, a claim for unjust enrichment.

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Posted: May 16, 2018

Transcripts and Videos of Arguments in the Court of Appeals for April/May 2018 Now Available

On April 29, 2018, we noted a case of interest from the oral arguments before the Court of Appeals in April/May 2018:

  1. Ontario v Samsung (No. 57) (argued Tuesday, April 24, 2018) (“Conflict of Laws — Law Governing Contract Action — in breach of contract action brought by nonresident alleging economic claim that accrued outside New York, whether a contract provision specifying that the agreement is to be “governed by, construed and enforced” in accordance with New York law renders inapplicable New York’s borrowing statute, CPLR 202.”) See the transcript and the video.

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Posted: May 15, 2018

Invoking CPLR 3212 and Commercial Division Rule 9, Justice Scarpulla Conducts Immediate Hearing to Resolve Factual Dispute

On May 2, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Overtime Partners, Inc. v. 320 W. 31st Assoc., LLC, 2018 NY Slip Op. 30807(U), invoking CPLR 3212 and Commercial Division Rule 9 in conducting an immediate hearing on the only factual issue in dispute in an action for, among other things, an injunction.

In Overtime Partners, a “commercial landlord-tenant action,” the plaintiff sought “a preliminary injunction to compel defendant 320 West 31st Associates, LLC to accept a proposed sublessee. After two-and-a-half days of hearings on the preliminary injunction motion,” the court “gave the parties notice that, pursuant to CPLR 3212(c), and because of the unique circumstances in this action and the exigency of the dispute,” the court “was converting the motion for preliminary injunction into one for summary judgment on the claims for a declaratory judgment and permanent injunction.”

The court explained: “Pursuant to CPLR 3212(c), a court may order an immediate trial of an issue of fact raised by a motion when appropriate for the expeditious disposition of the controversy. In this action, because I already held a hearing on the only factual issue in dispute, I now utilize the procedure set forth in CPLR 3212(c) to determine Overtime’s causes of action for declaratory judgment and permanent injunction on summary judgment.” In it footnote, it added: “See also Proposed Commercial Division Rule 9-a Immediate Trial or Pre-Trial Evidentiary Hearing, available at https ://www.nycourts.gov/rules/ comments/PDF /CDRule9-a.pdf (‘Subject to meeting the requirements of … 3212(c), parties are encouraged to demonstrate on a motion to the; court when a pre-trial evidentiary hearing or immediate trial may be effective in resolving a factual issue sufficient to effect the disposition of a material part of the case.’).”

New York procedural law (including the special rules applying to litigation in the Commercial Division of the New York courts) is not particularly complex. Still, there are situtations like the one described here where the court and/or the parties can take an action on a different procedural course. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding New York practice, and particularly regarding the rules governing practice in the Commercial Division.

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Posted: May 14, 2018

Justice Kornreich to Retire; Justice Schecter to Take Over Her Part

The Commercial Division has announced that:

After many years of judicial service, the Honorable Shirley W. Kornreich, Commercial Division Part 54, will retire from the bench in May 2018. Justice Kornreich will be succeeded as the Justice assigned to Commercial Division Part 54 by the Honorable Jennifer G. Schecter. Justice Schecter is currently assigned to IAS General Assignment Part 57. Justice Schecter will continue to preside over Part 57 for the time being and until further notice.

Posted: May 13, 2018

Court Dismisses Claim Based on Theory That Defendant Was a Third-Party Beneficiary of Contract

On May 7, 2018, Justice Bransten of the New York County Commercial Division issued a decision in Labor Law 240 Risk Management, LLC v. CRC Insurance Services, Inc., 2018 NY Slip Op. 30859(U), dismissing a claim based on a third-party beneficiary theory, explaining:

Acknowledging it is not a party to the MPA, plaintiff LL240RM contends it may nevertheless pursue a breach of contract claim against AmTrust as a third-party beneficiary of the MPA, because CRC delegated to LL240RM the performance of certain of CRC’s obligations under the MPA.

The third-party beneficiary concept arises from the notion that it is just and practical to permit the person for whose benefit the contract is made to enforce it against one whose duty it is to pay or perform. To assert a claim as a third-party beneficiary, the plaintiff must establish: (1) a valid and binding contract between other parties; (2) that the contract was intended for the plaintiff’s benefit; and (3) the benefit was immediate, not incidental, indicating that the parties to the contract assumed a duty to compensate plaintiff if the benefit is lost.

Under the standards in the Restatement (Second) of Contracts for determining claims of third-party rights, the plaintiff must be an intended, not incidental, beneficiary, such that performance of the promise satisfies the obligation of the promisee to pay money to the third party beneficiary, or the circumstances show that the promisee intends to give the beneficiary the benefit of the promised performance. It must show that no one other than the third party can recover if the promisor breaches the contract, or that the contractual language clearly evidences an intent to permit enforcement by the third party. The parties intent to benefit the third party must be apparent from the face of the contract, and their manifestation of intent must be sufficient to make the beneficiary’s reliance probable and reasonable. Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such an intent.

Here, LL240RM is not a promisee of AmTrust, and the MPA does not require any performance to be rendered to LL240RM Under the MPA, AmTrust’s payments run to CRC, not LL240RM, which was paid pursuant to a separate agreement with CRC, the UMSA (Underwriting Management Services Agreement). AmTrust did not retain CRC, as its managing producer for the Program, for LL240RM’s benefit LL240RM fails to point to any language indicating that AmTrust and CRC, as the parties to the contract, intended that the MPA was for the benefit of LL240RM, and that they assumed a duty to compensate LL240RM if the benefit was lost, CRC dearly had the right to recover from AmTrust if AmTrust breached the MPA, however, there is no language in that agreement indicating the parties intended to give LL240RM an individually enforceable right thereunder.

(Individual quotations and citations omitted).

Usually, the only parties who have rights under a contract are the parties that signed the contract. Here, a party tried–but failed–to base a claim on being a third-party beneficiary of a contract. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted: May 12, 2018

IAS Court Did Not Err in Striking Defendants’ Pleadings as a Discovery Sanction

On May 10, 2018, the First Department issued a decision in Rosengarten v. Born, 2018 NY Slip Op. 03465, affirming the striking of defendants’ pleadings as a discovery sanction, explaining:

The motion court’s decision to strike, based on a finding that defendants’ conduct with respect to its discovery obligations was willful and contumacious and without reasonable excuse, was a proper exercise of its discretion. The record amply demonstrates that from the start of the discovery process defendants engaged in a pattern of willful and contumacious conduct by, inter alia, disregarding court orders despite being repeatedly warned of the ramifications of doing so, providing discovery responses that were unduly burdensome and without reviewing them, and otherwise failing to meaningfully comply with the discovery requests.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called “discovery”). This decision discusses the problem of litigants not performing their discovery obligations. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).

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Posted: May 11, 2018

Amendment to Name Defendant Did Not Relate Back to Date of Original Complaint

On May 3, 2018, the First Department issued a decision in Markov v. Stack’s LLC (Delaware), 2018 NY Slip Op. 03238, holding that a proposed amendment to a complaint to name a new defendant did not relate back to the date of the original complaint, explaining:

The motion court properly dismissed the complaint on the ground that it was served after the statutory limitations period had expired. Plaintiff’s claims arose on January 14, 2008. The original complaint in this action, which was filed on January 6, 2014 (just days before the six-year statute of limitations expired), did not name Stack’s LLC as a defendant, nor did it name defendant Stack’s LLC (Delaware). The amended complaint, which for the first time named Stack’s LLC (Delaware) as a defendant, was not filed until January 24, 2014 — more than a week after the statute had run. Plaintiff cannot properly rely on CPLR 1024 as a shield from the statute of limitations. Even assuming that the appellation “John Doe” referred to a corporation rather than a natural person, the complaint’s description of the John Doe defendant was not described in such a way as to fairly apprise Stack’s LLC (Delaware) that it was an intended defendant. Thus, the inadequate description rendered the action jurisdictionally defective.

(Internal citations omitted).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by the statute of limitations.

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