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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: February 19, 2017

Dismissal of Fraudulent Misrepresentation Claim Based on Respondeat Superior Theory Affirmed

On February 14, 2017, the First Department issued a decision in VFP Investments I LLC v. Foot Locker, Inc., 2017 NY Slip Op. 01148, affirming the dismissal of a fraudulent misrepresentation claim based on the theory of respondeat superior, explaining:

The fraudulent misrepresentation claim based on the theory of respondeat superior fails to state a cause of action. The allegations reasonably permit the inference that the verification of accounts receivable issued to Foot Locker by nonparty G3K, a provider of marketing materials, fell within the scope of defendant Smith’s employment as Foot Locker’s “Director of In-Store Marketing,” although they do not support a finding that verification was within the scope of defendant Rainier’s employment as “Divisional Vice President of Franchise Development.” However, nothing in the complaint permits the inference that Smith engaged in this fraudulent verification in furtherance of Foot Locker’s business, rather than solely for personal motives.

The fraudulent misrepresentation claim based on implied actual authority fails to state a cause of action. The allegation that Smith procured marketing materials directly from G3K permits the inference that Smith could reasonably have believed that she had implied authority to verify G3K’s accounts receivable. However, she could not reasonably have believed that she had the authority to verify receivables falsely, and Foot Locker is not bound by the conduct in which she engaged that exceeded her authority. The allegations do not support a finding that Rainier could reasonably have believed he had authority to verify G3K’s accounts receivables.

The fraudulent misrepresentation claim based on apparent authority also fails to state a cause of action. As the trial court correctly noted, Smith’s and Rainier’s job titles were insufficient, by themselves, to convey that they had authority over accounting matters. Moreover, the complaint fails to allege any misleading facts or words by Foot Locker. The fraudulent misrepresentation claim based on authority by estoppel fails to state a cause of action. The complaint does not allege that Foot Locker intentionally or carelessly caused plaintiff to believe that Smith or Rainier had the authority to verify receivables on its behalf. It alleges only that Foot Locker knew or should have known of Smith’s fraudulent acts but did not take reasonable steps to notify plaintiff of the acts, to plaintiff’s detriment. However, the allegations that Foot Locker knew or should have known of Smith’s fraudulent acts are conclusory. Nothing in the complaint shows that Foot Locker was aware of the communications between Smith and plaintiff.

(Internal quotations and citations omitted).

Posted: February 18, 2017

Court Rejects Claim Based on Term Sheet for Later-Memorialized Agremeent

On February 6, 2017, Justice Singh of the New York County Commercial Division issued a decision in Pate v. BNY Mellon-Alcentra Mezzanine III, L.P., 2017 NY Slip Op. 30256(U), rejecting a breach of contract claim based on the terms sheet for a later-memorialized agreement, explaining:

The amended complaint alleges that: 1) the Term Sheet is a written agreement, and the participation provision is included in the Term Sheet; 2) plaintiff paid millions of dollars to DRC and transferred his holdings interest to Alcentra and United; 3) plaintiff performed all of his other obligations under both the Term Sheet and the release agreement, but defendants did not cause Holdings to provide him with a 10% economic interest in that partnership, as required by the Term Sheet; and 4) defendants’ failure to transfer that interest to him constitutes a material breach of the participation provision in the Term Sheet.

Defendants contend that plaintiff’s breach of contract claim is expressly barred by the merger clause in the release agreement. In opposition, plaintiff maintains that the parol evidence rule does not bar him from introducing or relying on the Term Sheet. Arguing that the parol evidence rule applies only where a party is seeking to challenge the terms of an agreement based on a prior inconsistent agreement or representation, plaintiff contends that he is not using the Term Sheet to challenge the terms of the subsequent release agreement; rather, he is seeking to enforce the Term Sheet itself, and specifically a provision of the Term Sheet that is not referable to the subject matter of the release agreement and, therefore, cannot be inconsistent with it.

Plaintiff maintains that the parties entered into two separate, enforceable, written contracts. Acknowledging that the subject matter of the two contracts overlapped in parts, plaintiff asserts that the second agreement (the release agreement) was – by design – narrower in scope than the first (the Term Sheet). To prove his point, plaintiff relies upon the statement made by Echausse during the telephone call on November 1, 2013, when Echausse said:

Any document I send to you is going to be a very simple 5-page document. It says you get a full release, we indemnify you for the bonds, you put 2 1/2 in, we pay X for the 90% of your LLP interest, and then over the next 30 days we will negotiate a 10% participating interest in DRC going forward.

Accordingly, plaintiff asserts that the participation provision is not “inconsistent” with any provision in the release agreement.

The Court finds that the Term Sheet is unenforceable for several reasons. First, the merger clause states expressly and unambiguously that the release agreement supercedes any prior term sheet. If the Court were to find that the provisions in the Term Sheet were enforceable notwithstanding such language, the Court would render the clause meaningless. An interpretation of a contract that would leave one of its clauses without meaning or effect should be avoided. It is well settled that where the parties have clearly expressed or manifested their intention that a subsequent agreement supercede or substitute for an old agreement, the subsequent agreement extinguishes the old one and the remedy for any breach is to sue on the superseding agreement. It is equally well settled that the construction of a plain and unambiguous contract is a matter for the court to pass upon without recourse to circumstances extrinsic to the agreement.

Second, the Term Sheet was not intended to be the final agreement; rather, it is an agreement to agree. The Term Sheet states plainly, The parties hereby agree to enter into a forbearance agreement (the “Definitive Agreement”) A term sheet that constitutes nothing more than an agreement to agree is not an enforceable agreement between the parties.

Third, plaintiff cannot rely on any telephone conversations or e-mails with the defendants, for the merger clause states unambiguously that the release agreement set forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements (written or oral). The Court of Appeals summarized the purpose of merger clauses in contracts in Matter of Primax Int. Corp. v. Wal-Mart Stores. The Court wrote:

Courts and commentators addressing the substantive and procedural aspects of New York commercial litigation agree that the purpose of a general merger provision, typically containing the language found in the clause of the parties’ agreement that it represents the entire understanding between the parties, is to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing. The merger clause accomplishes the objective by establishing the parties’ intent that the agreement is to be considered a completely integrated writing. A completely integrated contract precludes extrinsic proof to add to or vary its terms.

When parties set down their agreement in a clear complete document, their writing should be enforced according to its terms and evidence outside the four comers of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. Likewise, evidence of what may have been orally agreed by the parties prior to the execution of an integrated written document cannot be used to vary the temis of the writing.

Where there is a conflict between an express provision in a written contract and an alleged oral agreement, the oral agreement is unenforceable. Similarly, where an
agreement contains a merger clause that evinces the parties’ intent that the agreement is to be considered a completely integrated writing, extrinsic evidence that adds to or varies the agreement’s terms should be precluded.

(Internal quotations and citations omitted).

Posted: February 17, 2017

Guarantee of Borrower’s Obligations Under Agreement Not Document Amenable to CPLR 3213 Action

On February 14, 2017, the First Department issued a decision in PDL Biopharma, Inc. v. Wohlstadter, 2017 NY Slip Op. 01151, holding that a guarantee of a borrower’s contractual obligations was not an instrument amenable to summary judgment in lieu of complaint under CPLR 3213, explaining:

The prototypical example of an instrument within the ambit of CPLR 3213 is of course a negotiable instrument for the payment of money—an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time. CPLR 3213 is generally used to enforce some variety of commercial paper in which the party to be charged has formally and explicitly acknowledged an indebtedness, so that a prima facie case would be made out by the instrument and a failure to make the payments called for by its terms. A document does not qualify for CPLR 3213 treatment if the court must consult other materials besides the bare document and proof of nonpayment, or if it must make a more than de minimis deviation from the face of the document.

Defendants Samuel Wohlstadter and Nadine Wohlstadter own non party Wellstat Diagnostics, LLC (Diagnostics), the diagnostic systems company that received the loan underlying the guaranties at issue in this motion. On November 2, 2012, Diagnostics borrowed $40 million from plaintiff PDL Biopharma to finance certain FDA development trials. The terms of the loan were memorialized in a Credit Agreement, a term note, a security agreement, and a patent security agreement, all dated November 2, 2012. Thereafter, following a default, PDL, Diagnostics and the Wohlstadters entered into a Forbearance Agreement dated February 28, 2013. The two guaranties that accompanied this Forbearance Agreement, one executed by the Wohlstadters, the other by the remaining defendants (entities owned by the Wohlstadters), are the subject of the present motion.

It is true that generally, an unconditional guaranty qualifies as an instrument amenable to CPLR 3213 treatment. However, here, it is unclear whether that is the case. For one thing, the documents guarantee not only “payment” but also “performance” of the borrower’s “obligations.” The term “obligations” is not defined in either of the guaranties, although it is defined in the Credit Agreement as

all liabilities, indebtedness and obligations (including interest accrued at the rate provided in the applicable Loan Document after the commencement of a bankruptcy proceeding whether or not a claim for such interest is allowed) of any Loan Party under this Agreement, or the [Wohlstadters] or any Loan Party under any other Loan Document, any Collateral Document or any other document or instrument executed in connection herewith or therewith, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, including the Applicable IRR Amount.

Notably, in addition, in the note documents, Diagnostics, as the borrower, warranted to provide certain information to PDL, including annual and quarterly reports until all obligations are paid in full.

The guaranties at issue also include a provision that unless new loan documents become effective under Section 21 of the Forbearance Agreement, the guarantee contained in this Section 2 shall remain in full force and effect until all the obligations shall have been fully satisfied. This provision may be interpreted to mean that if new loan documents are entered into, the referred-to guaranties would no longer remain in full force and effect. Since PDL and Diagnostics entered into an Amended and Restated Credit Agreement on August 15, 2013, there is a question as to whether the guaranties remain in effect at this time.

Moreover, we note that determination of preliminary legal issues, and reference to additional documents, was necessary before the motion court could address the question of whether the relied-on guaranties continued to be enforceable and whether they had come due. For instance, it was necessary for the motion court to construe the documents to decide whether the cash contribution required under the Amended and Restated Credit Agreement could be satisfied by the loan defendants obtained from White Oak, or whether the use of the loan funds constituted a default under that Agreement, and if so whether PDL accepted tender of that payment as performance of defendants’ contractual obligation. The motion court also had to construe the Forbearance Agreement and refer to the Restated Credit Agreement to determine that the guaranties remained effective despite the execution of new loan documents. Similarly, the motion court had to refer to the Joinder Agreement to establish some defendants’ purported awareness that the guaranties continued to be in effect. This extent of reference to extrinsic evidence exceeds any permissible limited reference to outside sources allowable under CPLR 3213.

(Internal quotations and citations omitted).

Posted: February 16, 2017

Broad Coverage Exclusion Does Not Render Insurance Policy “Illusory” Where Some Coverage Is Afforded

On February 14, 2017, the Court of Appeals issued a decision in Lend Lease (US) Construction LMB Inc. v. Zurich American Insurance Co., 2017 NY Slip Op. 01141, holding that a broad coverage exclusion in a builder’s risk insurance policy did not render the policy “illusory” because it did not “defeat all of the coverage afforded under the policy.”

In Lend Lease, a developer sought insurance coverage for weather-related damage to a construction crane in New York City during Hurricane Sandy. A divided panel of the First Department found that the crane was not covered under the policy, and in any event, the claim was subject to a “contractor’s tools exclusion” that carved out “loss or damage to . . . Contractor’s tools, machinery, plant and equipment . . . and property of a similar nature not destined to become a permanent part of the INSURED PROJECT.” See our previous post on the oral argument in the Court of Appeals, which includes a link to the First Department decision, here. The Court of Appeals found that there were issues of fact precluding summary judgment on the question of whether “the policy contains coverage for the subject loss in the first instance,” but affirmed the First Department’s holding that the exclusion applied. The Court rejected the insured’s argument that the exclusion should not be enforced because it rendered the coverage “illusory,” explaining:

[T]here is no force to plaintiffs’ effort to avoid application of that exclusion on the ground that it is so broad as to render coverage afforded under the temporary works provision of the policy illusory. To be sure, an insurance agreement is subject to principles of contract interpretation, and an illusory contract — that is, an agreement in which one party gives as consideration a promise that is so insubstantial as to impose no obligation — is unenforceable. We agree with the Appellate Division, however, that an insurance policy is not illusory if it provides coverage for some acts subject to a potentially wide exclusion.

Indeed, the contractor’s tools exclusion does not defeat all of the coverage afforded under the policy’s temporary works provision. That exclusion would not defeat coverage initially granted for such things as the cost of erecting scaffolding, for “temporary buildings,” and for such other things as “formwork, falsework, shoring, [and] fences,” which are not “tools” within the meaning of the exclusion. The enforcement of the exclusion does not create a result that “‘would have the exclusion swallow the policy. For the same reason the exclusion does not render the coverage granted under the temporary works provision illusory.

(Citations omitted). This decision illustrates the importance of paying careful attention to an insurance policy’s exclusions. Even broad exclusions that dramatically narrow the scope of coverage are generally enforceable.

Posted: February 15, 2017

Fraud Plaintiff Was Reasonable in Relying on Opinion Letter Without Doing Independent Appraisal

On February 10, 2017, the First Department issued a decision in Remediation Capital Funding LLC v. Noto, 2017 NY Slip Op. 01119, holding that a fraud plaintiff was reasonable in relying on an opinion letter without doing an independent appraisal, explaining:

As relevant to this appeal, plaintiff seeks to assert misrepresentation claims against Noto. In the order appealed from, Supreme Court granted Noto’s motion to dismiss the original complaint, which asserts a cause of action for fraud against Noto, and denied plaintiff’s cross motion to amend its complaint to add a cause of action for negligent misrepresentation, primarily on the ground that plaintiff could not establish justifiable reliance on any alleged misrepresentations, as a matter of law, because it admittedly had not conducted an independent appraisal or any due diligence with respect to the loan transaction. Upon plaintiff’s appeal, we reverse.

A sophisticated party is generally required to exercise due diligence to verify the facts represented to it before entering into a business transaction. The Court of Appeals has recognized, however, that, where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry. In this case, plaintiff alleges that it made the loan to Sheldrake in reliance on Noto’s opinion letter, which was specifically addressed to plaintiff, in which Noto opined that the loan transaction would not put either Sheldrake or Attia into breach of any preexisting contract or agreement to which either was a party. Plaintiff alleges that this representation was false, inasmuch as the undisclosed 2005 letter agreement required Attia to maintain a $2 million cushion of “unencumbered equity” in the property in any refinancing, and — given that the true value of the property was only $1.9 million, based on the terms of the undisclosed 2005 transaction — plaintiff’s $6.6 million loan to Sheldrake wiped out any such equity in the property.

Like the plaintiffs in DDJ Mgt., plaintiff in this case made a significant effort to protect itself against the possibility of falsehood by obtaining a written opinion letter from Noto, the borrower’s attorney, making at least one material representation that, based on the allegations of the complaint, was inconsistent with the actual value of the property. As in DDJ Mgt., on a motion addressed to the sufficiency of the pleadings, it cannot be held as a matter of law that plaintiff was required to do more, and whether plaintiff was justified in relying on Noto’s opinion letter is a question for the trier of fact.

(Internal quotations and citations omitted).

Posted: February 14, 2017

First Department Affirms Dismissal of Investor Claims Against Rating Agencies as Time-Barred

On February 10, 2017, the First Department issued a decision in Varga v. McGraw Hill Financial, Inc., 2017 NY Slip Op. 01131, affirming the dismissal of RMBS investor claims against rating agencies as time-barred, explaining:

Plaintiff’s claims were brought more than six years after the last purchase of securities (CPLR 213[8]) and thus are time-barred.

Plaintiffs’ contention that they did not sustain an injury until after the purchase of the securities, and that therefore the fraud claim could not have accrued before then, is belied by their pleadings, which reflect an understanding that the securities were worth less than their price at the time of purchase. Plaintiffs’ reliance on New York City Tr. Auth. v Morris J. Eisen, P.C., is misplaced, since the payments in this case were made at the time of purchase.

To the extent plaintiffs allege holder claims, i.e., fraudulent inducement to continue to hold the securities, these claims violate the out-of-pocket rule governing damages recoverable for fraud, and are not actionable.

(Internal quotations and citations omitted).

Posted: February 13, 2017

Court Finds Service of Information Subpoena/Restraining Notice on Party’s Counsel Adequate

On February 3, 2017, Justice Singh of the New York County Commercial Division issued a decision in Deutsche Bank AG v. Sebastian Holdings Inc., 2017 NY Slip Op. 30241(U), holding that service of an information subpoena and restraining notice on a party’s counsel was sufficient service, explaining:

Defendant argues that it was not properly served with the information subpoena with restraining notice and the deposition subpoena. Plaintiff served the Information Subpoena with Restraining Notice and deposition subpoena upon defendant’s New York counsel. At issue is whether the service was proper, given that SHI is a non- domiciliary.

At the commencement of this action, this court held that it had jurisdiction over defendant, despite the latter’s argument to the contrary. SHI brought an action against Deutsche Bank in New York alleging breach of various agreements. The bank commenced. a similar action in London alleging that SHI breached the agreements. Deutsche Bank prevailed in London and sought to domesticate the judgment in New York. This court found that service on SHI through its attorneys was proper pursuant to CPLR 303 as plaintiff could have interposed the judgment as a counterclaim in the related action.

Deutsche Bank now seeks to enforce its money judgment under Article 52 of the CPLR. The judgment has not yet been satisfied, the action, of course, is still pending for purposes of enforcing the judgment. Accordingly, since this action is still pending, the court may continue to exercise jurisdiction over SHI. In Coutts the First Department held that CPLR 303 is extended to the service of a subpoena since the judgment-debtor has, by his voluntary act in demanding justice from the judgment-creditor in federal court, submitted himself to the jurisdiction of the state court. Similarly, here SHI, a non-domiciliary, appeared in New York on its own volition, seeking redress against Deutsche Bank under our laws and submitted to the jurisdiction of the court. It is not unreasonable or unfair for SHI to anticipate that Deutsche Bank will continue to attempt to enforce its judgment in New York.

CPLR 5224(a)(3) also states that service of an information subpoena may be made by registered or certified mail, return receipt requested. The language of the statute is permissive and not mandatory. Moreover, CPLR 5222 provides that a restraining notice shall be served personally in the same manner as a summons or by registered or certified mail, return receipt requested. CPLR 318 authorizes a person or entity to designate a person to act as agent for service of process. CPLR 308(3) dealing with service of summons, allows service of process to be made on that agent in behalf of the principal. Here, defendant’s attorney has been designated as agent to accept service of behalf of defendant. Moreover, pursuant to CPLR 311(b), this court may direct alternative service on a corporation defendant. Therefore, plaintiff complied with the CPLR by serving the subpoenas on defendant’s attorney.

(Internal quotations and citations omitted).

Posted: February 12, 2017

Contract Claim Dismissed as Vague and Conclusory

On February 1, 2017, Justice Singh of the New York County Commercial Division issued a decision in Publications International, Ltd. v. Phoenix International Publications, Inc., 2017 NY Slip Op. 30225(U), dismissing a breach of contract claim for being too vague, explaining:

The allegations of the “manipulated returns” claim are set forth in paragraphs 41 through 48 of the answer and counterclaims.

Section 4.9 of the APA required the parties to adjust the purchase price based on the value of merchandise returned during the five month period after the closing. If the value of the returns during the period was greater than a certain reserve amount, PIL was required to pay PIP fifty percent of the excess.

PIP alleges that the PIL parties breached the APA by engaging in willful and bad faith conduct in order to manipulate returns. Specifically, PIP contends that the PIL parties instructed customers to stop or limit the return of merchandise and failed and/or refused to timely process returns that were requested by customers, thereby delaying returns. PIP contends that it performed a preliminary econometric analysis to determine the impact of the PIL parties’ misconduct.

In short, the Court finds that the manipulated returns claim fails to state a cause of action, for PIP fails to identify any customers by name or any specific transactions. The allegation that the PIL parties instructed unidentified customers to stop or delay returns on unspecified dates, without providing even one example, is vague and conclusory.

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

Posted: February 11, 2017

Dismissal for Lack of Standing Does Not Have Res Judicata Effect on Merits

On January 30, 2017, Justice Singh of the New York County Commercial Division issued a decision in Paf-Par LLC v. Silberberg, 2017 NY Slip Op. 30205(U), holding that dismissal for lack of standing did not have res judicata effect on the merits, explaining:

Plaintiff’s action is not barred by res judicata based on the decision of the First Department and the Court of Appeals in Paf-Par I. A dismissal premised on lack of standing is not a dismissal on the merits for res judicata purposes. This holding on res judicata grounds even applies where the court had already dismissed a party’s prior action on substantive grounds.

Additionally, dismissal for lack of standing is not intended to have any determinative effect on the merits of the action. Under res judicata, or claim preclusion, a valid final judgment bars future actions between the same parties on the same cause of action. As a general rule, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy. Defendant’s reliance on Landau v. LaRossa, Mitchell & Ross, is misplaced. The Court of Appeals in Landau held that when the disposition of a case is based upon a lack of standing only, the lower courts have not yet considered the merits of the claim. Similarly, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred.

A dismissal premised on lack of standing is not a dismissal on the merits for res judicata purposes. If applied too rigidly, res judicata has the potential to work considerable injustice. In properly seeking to deny a litigant two days in court, courts must be careful not to deprive him of one.

Here, it is unclear whether the claim was brought to a final conclusion. When a dismissal for lack of standing should have been granted, courts may be precluded from issuing judicial decisions on the merits, as the decisions can have no immediate effect and may never resolve anything. It is clear that Plaintiff lacked standing in Paf-Par I. Thus, without obtaining the proper documentation to establish proper standing, the decision of the First Department would fail to resolve the matter. The First Department held that the language of the guaranty could not operate to make the guarantor liable for more than what the primary obligor was obligated to pay and did pay. However, the Court of Appeals ruled that Paf-Par failed to establish standing but remained silent as to whether its decision operated as an affirmance of the First Department’s ruling on the guaranty. Following the clear policy set forth, supra, this court will not deprive Plaintiff its day in court.

(Internal quotations and citations omitted).

Posted: February 10, 2017

Failure to Inform Client of Retention of Co-Counsel Does Not Render Retainer Unenforceable

On February 9, 2017, the Court of Appeals issued a decision in Marin v. Constitution Realty, LLC, 2017 NY Slip Op. 01019, holding that the failure to inform a client of the retention of co-counsel did not render the retainer unenforceable.

In Marin, the plaintiff’s attorney-of-record engaged co-counsel to assist her in a matter, agreeing to pay them a percentage of the fees earned. She did not inform the client that she had engaged co-counsel, a “violat[ion of] the former Code of Professional Responsibility DR 2-107 (a) (22 NYCRR 1200.12 [a]) and the current Rules of Professional Conduct (22 NYCRR 1200.0) rule 1.5 (g).” A dispute subsequently arose over the payment of fees to co-counsel. The Court of Appeals rejected the attorney-of-record’s argument that the engagements with co-counsel were unenforceable, explaining:

Menkes’s attempt to use the ethical rules as a sword to render unenforceable, as between the two attorneys, the agreements with Manheimer that she herself drafted is unavailing. Her failure to inform her clients of Manheimer’s retention, while a serious ethical violation, does not allow her to avoid otherwise enforceable contracts under the circumstances of this case. As we have previously stated, it ill becomes defendants, who are also bound by the Code of Professional Responsibility, to seek to avoid on ethical’ grounds the obligations of an agreement to which they freely assented and from which they reaped the benefits. This is particularly true here, where Menkes and Manheimer both failed to inform the clients about Manheimer’s retention, Menkes led Manheimer to believe that the clients were so informed, and the clients themselves were not adversely affected by the ethical breach.

(Internal quotations and citations omitted).