Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: April 18, 2015

Court of Appeals Arguments of Interest for the Week of April 27, 2015

Arguments the week of April 27, 2015, in the Court of Appeals that may be of interest to commercial litigators.

  • No. 83: Aurora Loan Services v Taylor (To be argued Thursday, April 30, 2015) (“Mortgages–foreclosure–standing to commence action–whether plaintiff demonstrated physical possession of the mortgage note at the time of commencement of the action–assignment of the mortgage by Mortgage Electronic Registration Systems, Inc. (MERS)–summary judgment.”) The Second Department’s decision is available here.
  • No. 85 ACE Securities v DB Structured Products (To be argued Thursday, April 30, 2015) (“Limitations of actions–when cause of action accrues–contract cause of action arising from breach of representations and warranties contained in agreements related to the securitization of residential mortgages–timeliness of contract cause of action under six-year statute of limitation.”). The First Department’s decision is available here.
Posted: April 17, 2015

Transcripts and Videos of Arguments in the Court of Appeals for the Week of March 23, 2015, Now Available

On March 19, 2015, we noted two cases of interest from the oral arguments for the week of March 23, 2015:

  • No. 62: Malay v City of Syracuse (To be argued Wednesday, March 25, 2015) (considering whether a prior federal action was terminated within the meaning of CPLR 205(a) when the “federal district court dismissed plaintiff’s federal and state claims, where plaintiff took an appeal to the federal court of appeals and filed the second action in state court while the appeal was pending, although the federal appeal was later dismissed for failure to prosecute.” See the transcript and the video.
  • No. 49 Financial Guaranty Corp. v Goldman, Sachs & Co. (To be argued Thursday, March 26, 2015) (considering whether whether a plaintiff failed to “establish justifiable reliance as a matter of law because plaintiff did not plead that it exercised due diligence by inquiring about the nonpublic information regarding the hedge fund with which it was in contract prior to issuing the financial guaranty, or that it inserted the appropriate prophylactic provision to ensure against the possibility of misrepresentation”). See the transcript and the video.
Posted: April 17, 2015

Settlement Signed By Counsel Binding On Client

In Gordon v. The City of New York, 09 CV 04577 (E.D.N.Y. Mar. 31, 2015), Judge Edward R. Korman granted defendants’ motion to enforce a settlement agreement signed by plaintiff’s counsel but which plaintiff refused to sign. Judge Korman found that plaintiff was bound by the settlement agreement notwithstanding her change of heart after the settlement was reached but before it was reduced to writing. In so doing, Judge Korman rejected the report and recommendation of Magistrate Judge Marilyn D. Go, finding that no enforceable settlement agreement had been reached.
Plaintiff brought an action against the Administration for Children’s Services (“ACS”) and various ACS employees pursuant to 42 U.S.C. § 1983 for claims arising out of an ACS report, later found unsubstantiated, accusing plaintiff of mistreating her son.

In August 2011, defense counsel notified the court that the parties had reached an agreement in principle to resolve all of plaintiff’s claims, by which the City agreed to pay plaintiff $20,000 in compensatory damages and approximately $27,000 in attorney’s fees, the latter having been negotiated separately between the parties’ counsel. Plaintiff’s counsel prepared the settlement papers and sent them to plaintiff, who signed them with the notation “Under Duress” above her signature. Plaintiff’s counsel did not send the executed papers to defense counsel, instead indicting that his client was not happy with the settlement.

Plaintiff’s counsel and plaintiff agreed to demand $27,000 in damages from the City after plaintiff said that she would settle for $25,000, but the City responded that it would only increase its settlement offer to $21,500. Plaintiff’s counsel offered to reduce his fees by $5,500 and apply that amount to the damages paid to plaintiff to bring the total compensatory damages up to $27,000. The City accepted this offer and prepared a stipulation of settlement which plaintiff’s counsel executed.

Plaintiff told her attorney that she did not want to accept his money, but repeatedly promised that she would sign the release forms although she never did. At a court conference, plaintiff informed the court that she did not want to settle. Defendants then filed the motion before the Court. Based on depositions and other testimony, Judge Korman found that plaintiff’s attorney had actual authority to enter into a settlement in which plaintiff would receive $27,000.

Magistrate Judge Go had concluded that any allocation of attorney’s fees must be approved by the settling client, thus the plaintiff had the right to repudiate the stipulation her attorney signed. However, Judge Korman found that plaintiff had authorized her attorney to settle her claims for a specified amount of damages and had also authorized him to negotiate the amount of fees that he would receive. Judge Korman also found to be particularly significant the fact that plaintiff’s attorney fees were reduced in order to increase plaintiff’s recovery. Thus the settlement would be consistent with the underlying purpose of § 1988 and the Supreme Court’s decision in Evans v. Jeff D., which upheld a settlement agreement that conditioned relief on the waiver of all attorney’s fees. Judge Korman found that plaintiff’s objection to the settlement was based on a change of heart rather than any concern about attorney’s fees. Accordingly, Judge Korman found that plaintiff was bound by the settlement agreement signed by her attorney.

In the alternative, assuming that plaintiff was not bound by the stipulation of settlement because it had not been signed by defendants, Judge Korman found that the oral settlement agreement was binding, utilizing the four-prong test articulated by the Second Circuit in Winston v. Mediafare Entm’t Corp.: whether (1) an express reservation of the right not to be bound in the absence of a signed writing existed; (2) there had been partial performance of the contract; (3) all of the terms of the alleged contract had been agreed upon; and (4) the agreement at issue was the type of contract that is usually committed to writing.

Applying the Winston test to the facts, Judge Korman found that: (1) the merger clause indicated that the parties intended be by bound by a written agreement; (2) while Defendants’ sole obligation was to make payment, they could not be expected to do so while the issue of whether there was a valid settlement agreement was undecided; (3) there was no dispute that agreement was reached on all material terms; and (4) this agreement was memorialized in writing and signed by one party. In sum. Judge Korman found that the first factor weighed against enforcement; the third weighed in favor of enforcement, and that the second and fourth factors tipped in favor of enforcement. Thus, even if plaintiff were found not to be bound by the written agreement signed by her attorney, Judge Korman’s analysis of the Winston factors would lead him to uphold the oral agreement reached in the case.

Posted: April 17, 2015

Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing Upheld

On April 9, 2015, the First Department issued a decision in Demetre v. HMS Holdings Corp., 2015 NY Slip Op. 03058, reinstating a claim for breach of the implied covenant of good faith and fair dealing.

In Demetre, the plaintiffs brought claims against the defendant relating to a stock purchase agreement. The trial court dismissed the plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing as duplicative of their claim for breach of contract. The First Department reversed, explaining:

The dismissal of the claim for breach of the implied covenant of good faith and fair dealing, at this juncture, is premature. The court’s dismissal of the claim as duplicative of the breach of contract claim is inconsistent with its determination that the “best efforts” clause, allegedly being breached, is ambiguous as to whether it applied to [the defendant’s] post-acquisition operation of AMG. Because the issues are still undeveloped at this stage of the proceeding, both claims should be permitted to stand.

Further, to the extent the “best efforts” clause could be found inapplicable, plaintiffs have sufficiently pleaded a claim for breach of the implied covenant, as the allegations show that [the defendant], in bad faith, engaged in acts that had the effect of destroying or injuring plaintiffs’ right to receive the fruits of the contract, i.e., the contingent payments. [The defendant’s] contention that the claim would impose on it obligations that are inconsistent with other terms of the contract is unavailing, as plaintiffs were alleging that it failed to fulfill promises that a reasonable person in the position of the promisee would be justified in understanding were included.

(Internal quotations and citations omitted) (emphasis added). This decision illustrates the distinction between a claim for breach of contract and breach of the implied covenant of good faith and fair dealing.

Posted: April 16, 2015

Claim Relating to Oral Agreement to Sell Business Interests Dismissed on Statute of Frauds Grounds

On April 9, 2015, the First Department issued a decision in Basu v. Alphabet Management LLC, 2015 NY Slip Op. 03034, dismissing breach of contract claims on statute of frauds grounds.

In Basu , the First Department reversed the trial court’s denial of the defendants’motion for summary judgment to the extent it related to breach of contact and unjust enrichment causes of action relating to certain alleged oral agreements. First, it explained that the trial “court correctly found that the claimed oral agreements are not as a matter of law unenforceable for indefiniteness, since there may exist an objective method for supplying the missing terms needed to calculate the alleged compensation owed plaintiff” and that “General Obligations Law § 5-701(a)(1),” which renders unenforceable oral agreements which cannot be performed within one year from the making thereof or the performance of which is not to be completed before the end of a lifetime, “does not bar the breach of contract claim.” However, the First Department went on to explain, that “defendants may raise General Obligations Law § 5-701(a)(10),” which renders unenforceable an oral agreement “to pay compensation for services rendered in negotiating a loan, or in negotiating the purchase, sale, exchange, renting or leasing of any real estate or interest therein, or of a business opportunity, business, its good will, inventory, fixtures or an interest therein, including a majority of the voting stock interest in a corporation and including the creating of a partnership interest”

for the first time on appeal, since it is a legal argument which appeared upon the face of the record and which could not have been avoided if raised initially. That provision requires dismissal of the breach of contract claim insofar as it alleges a breach of the oral PIPE agreement, which involves a claim for compensation for negotiating the purchase of interests in businesses, since plaintiff acknowledged participating in the negotiations by procuring the deals and by performing research and analysis that determined for defendants the value of pursuing the deals. The unjust enrichment claim relating to the PIPE transactions must therefore also be dismissed.

(Internal quotations and citations omitted).

Posted: April 15, 2015

Opportunity to Comment on Proposed Change to Commercial Division Rules

The Office of Court Administration has asked for public comment on a proposed change to the rules of the Commercial Division that would amend the eligibility criteria for assignment to the Commercial Division by (1) limiting “arbitration proceedings that may be heard in the Commercial Division to those that meet the monetary threshold for the applicable County or Judicial District, except for “arbitration proceedings heard outside the United States,” which “would remain exempt from the monetary threshold requirement,” and (2) “would add home improvement contracts involving certain residential properties to the list of matters that are not eligible to be heard in the Commercial Division.”

E-mail comments on this proposal to by June 10, 2015.

Posted: April 15, 2015

Contract Provision Purporting To Delay Accrual of Breach of Contract Action Deemed Unenforceable

On March 3, 2015, Justice Friedman of the New York County Commercial Division issued a decision in U.S. Bank N.A. v. Greenpoint Mortgage Funding, Inc., 2015 NY Slip Op. 30307(U), holding that a contract provision intended to delay accrual of a breach of contract claim for statute of limitations purposes was unenforceable.

U.S. Bank N.A. is one of many cases in the Commercial Division arising from breaches of representations and warranties made in connection with investments in mortgage-backed securities.  The transaction documents underlying such investments typically require notice, and subsequent cure period, as a condition precedent to bringing a lawsuit for breaches of representations and warranties concerning the mortgages underlying the investment.  In an important 2013 decision, ACE Sec. Corp. v. DB Structured Prods., Inc., 2013 NY Slip Op. 08517 – about which we have blogged here and here – the First Department held that claims for breach of representations and warranties accrue when the false statements are made, not when the contractually required demand is made and refused.

The transaction documents in U.S. Bank had a provision that purported to delay the accrual of claims for breach of representations and warranties until the discovery of the breach and the failure to cure.  Justice Friedman found that an agreement to delay the accrual of a cause of action is unenforceable, and granted a motion to dismiss the claims as untimely.  The Court explained:

The accrual provision cannot serve to delay the accrual of the breach of contract cause of action for purposes of the statute of limitations. As held by the Court of Appeals in Kassner & Co. v City of New York, if an “agreement to waive or extend the Statute of Limitations is made at the inception of liability it is unenforceable because a party cannot in advance, make a valid promise that a statute founded in public policy shall be inoperative.” (46 NY2d at 551 [internal citations and quotation marks omitted].) Statutes of limitations “express[] a societal interest or public policy of giving repose to human affairs.” (Id. at 550 [internal quotation marks and citations omitted].) Thus, although parties may contract to shorten an applicable statute of limitations, an agreement made prior to the accrual of a cause of action “to extend the period as provided by statute or to postpone the time from which the period of limitation is to be computed” conflicts with public policy and will not be enforced. (Id. at 551 [emphasis in original, internal quotation marks and citations omitted].)

The accrual provision . . . by its terms specifies conditions that must be met before any cause of action “accrue[s ]” for breach of representations and warranties regarding the mortgage loans. It is an unambiguous expression of the parties’ intent to delay accrual of a cause of action “arising out of the breach of any representations and warranties” until plaintiff discovers or is notified of the breach, defendant fails to cure, and plaintiff makes demand upon defendant for compliance. This accrual provision, which itself references an underlying breach, cannot redefine the elements of a claim for that breach. To enforce the provision would be to ignore the ACE holding that the cause of action for breach of the representations and warranties accrues when the underlying breach occurs – i.e., when the representations and warranties are made – and not when the repurchase demand is made and refused.

Posted: April 14, 2015

Arbitral Award Vacated for Failure to Enforce Settlement Agreement

On April 9, 2015, the First Department issued a decision in Matter of Citigroup Global Markets, Inc. v. Fiorilla, 2015 NY Slip Op. 03056, affirming a decision vacating an arbitral award.

In Matter of Citigroup Global Markets, the First Department affirmed a trial court order vacating an arbitral award, explaining:

The motion court properly vacated the arbitration award based on a prior settlement agreement. The arbitrators manifestly disregarded the law by failing to enforce the settlement that respondent and petitioner Citigroup Global Markets, Inc. entered into on April 29, 2012. Notably, petitioners provided the relevant law regarding the enforcement of settlement agreements in their motions to enforce the agreement, but the arbitrators ignored the law and denied the motions without explanation. Although arbitrators have no obligation to explain their awards, when a reviewing court is inclined to hold that an arbitration panel manifestly disregarded the law, the failure of the arbitrators to explain the award can be taken into account.

(Internal quotations and citations omitted) (emphasis added). This decision shows that despite the extremely high formal standard for vacating an award, courts will find a way to vacate in cases they find sympathetic.

Posted: April 13, 2015

Justice Anil C. Singh Appointed to Commercial Division

As reported in the New York Law Journal, New York County Supreme Court Justice Anil C. Singh has been appointed to the Court’s Commercial Division. He will replace Justice Melvin Schweitzer, who has reached the mandatory retirement age. A graduate of Lawrence University and Antioch School of Law, Justice Singh served as a law secretary to Justice Alice Schlesinger before his election to the New York County Civil Court in 2002. He was appointed an Acting Justice in 2011 and was elected to the Supreme Court in 2014.

Congratulations to Justice Singh.

Posted: April 13, 2015

Court Affirms Prohibition on Successive Motions

On April 7, 2015, the First Department issued a decision in Fleming & Assoc., CPA, PC v. Murray & Josephson, CPAs, LLC, 2015 NY Slip Op. 02899, analyzing the successive motion rule.

In Fleming & Assoc., the defendants moved multiple times for summary judgment. On appeal of the successive motions, the First Department affirmed the denial of those motions, explaining:

As we have held, [s]uccessive motions for summary judgment should not be entertained without a showing of newly discovered evidence or other sufficient justification. These appeals are from orders denying defendants’ second and third motions for summary judgment. Their first motion for the same relief was denied by Supreme Court’s order entered on July 23, 2013. These motions are not based upon newly discovered evidence and our decision on a prior appeal does not otherwise warrant their consideration.

(Internal quotations and citations omitted).