Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: July 30, 2016

Continuous Representation Doctrine Saves Claims Against Auditor from Dismissal

On July 25, 2016, Justice Ritholtz of the Queens County Commercial Division issued a decision in Jefferson Apartments, Inc. v. Mauceri, 2016 NY Slip Op. 26230, applying the continuous representation doctrine to preserve some claims against an auditor.

As Justice Ritholtz explained in the opening of his opinion,

The “continuous treatment” doctrine originated in medical malpractice cases to toll the running of the statute of limitations. This judicial exception was first encountered in 1902 in Gillette v. Tucker, 65 N.E. 865 (Ohio 1902). The Gillette court held that using the surgery date as the starting point for calculating the statute of limitations would improperly burden the victim by forcing her to sue the surgeon while her treatment continued or forego her cause of action. Id. at 871. Over 100 years later, the “continuous treatment” doctrine, adopted by the New York courts, has evolved to cover not only medical malpractice, but, under the name of the “continuous representation” doctrine, has been extended to other professions and occupations, such as accountants.

Proper analysis and application of the “continuous representation” doctrine tend to produce just results, as opposed to mindless invocation of a limitations defense. The instant motion deals, inter alia, with the application of the “continuous representation” doctrine as it relates to the tolling of the statute of limitations in an action alleging accountant or auditor malpractice.

In Jefferson Apartments, the plaintiff asserted claims relating to “the alleged mismanagement of and unauthorized withdrawal of plaintiff’s funds by defendants.” Among the grounds on which defendants moved to dismiss was that the plaintiff’s claims were time-barred. The court granted the motion only in part, explaining:

The continuous representation doctrine tolls the running of the statute of limitations on a claim arising from the rendition of professional services only so long as the defendant continues to advise the client in connection with the particular transaction which is the subject of the action and not merely during the continuation of a general professional relationship. Thus, unless services relating to the particular transaction sued upon were rendered within the limitation period, even the defendant’s general and unfettered control of the plaintiff’s financial, tax and investment affairs is insufficient to sustain the timeliness of the action. Stated otherwise, where a professional advises a client in a series of discrete and severable transactions, the performance of services in each successive transaction does not serve to toll the running of the statute of limitations on any claim arising from the prior transaction.

. . .

The branch of the motion seeking dismissal of the professional malpractice claims based upon the audit performed on the 2011 financials by Mauceri is, [] denied. Plaintiff raised a question of fact as to whether the statute of limitations with regards to these transactions was tolled by the doctrine of continuous representation. At a minimum there is an issue of fact as to whether Mauceri’s representation of plaintiff and the certification/recertification of the financial statement for the 2011 audit reflected a course of continuous representation intended to rectify or mitigate the initial act of alleged malpractice which occurred in connection with the preparation of the financials.

(Internal quotations and citations omitted)

Posted: July 29, 2016

Agreement Contemplating Later Execution of a More-Detailed Agreement Is Still Binding Contract

On July 28, 2016, the First Department issued a decision in Moshan v. PMB, LLC, 2016 NY Slip Op. 05664, holding that a document styled “Letter of Intent” that contemplated a more-detailed final agreement was a binding contract, explaining:

Plaintiff has sufficiently alleged that the commission agreement is a valid and binding contract, and not an unenforceable “agreement to agree”. Although the agreement is styled as a “Letter of Intent” and contemplates that a more detailed agreement will be entered into in future, this is not conclusive. Plaintiff has alleged sufficient facts to permit a reasonable inference that the parties manifested an intent to be bound by the commission agreement, including by performing in accordance therewith. The Letter of Intent also sets forth the material terms of the agreement, i.e., the terms of payment of commissions.

(Internal quotations and citations omitted).

Posted: July 28, 2016

Court Distinguishes Clauses Relating to a Party’s Subjective or Objective Satisfaction

On June 29, 2016, Justice Bransten of the New York County Commercial Division issued a decision in International Finance Corp. v. Carrera Holdings Inc., 2016 NY Slip Op. 31341(U), discussing the rules for interpreting a clause providing for performance to a party’s satisfaction:

Where an agreement includes conditions precedent that must be met to one party’s “satisfaction,” New York courts place those clauses into two categories: (I) clauses relating to “operative fitness, utility or marketability” are examined under an objective, reasonable person standard; and (2) clauses relating to a party’s “fancy, taste, sensibility, or judgment” are examined under a subjective standard. The objective satisfaction standard requires that a party’s decision to reject the performance be reasonable. The subjective standard, by contrast, has been described as “untrammeled” and a party’s decision to reject performance thereunder is only required to be honest and in good faith. Thus, the power to withhold approval is “untrammeled” only where the object of the contract is to gratify taste, serve personal convenience, or satisfy individual preference.

Here, the Court determines that the clause at issue must be examined under an objective standard. When contract duties are contingent upon a particular condition being satisfactory’ to one party that party’s rejection of the condition is to be judged by an objective standard of reasonableness. Although IFC argues that this case warrants application of the subjective standard – effectively granting it the unilateral right to reject Carrera’s invocation of the Expropriatory Event clause – the conditions at issue here do not relate to IFC’s “fancy, taste, sensibility, or judgment.” IFC also argues that the clauses at issue here require its “individual business judgment.” Unlike the cases cited by IFC, the conditions at issue here included (i) that Carrera did not cause the Expropriatory Event, (ii) that Carrera complied with all applicable laws, and (iii) that Carrera exercised due care and took all “reasonable” measures to avoid the Expropriatory Event. Whether these conditions were met can be determined under an objective, reasonable person standard. Indeed, the inclusion of the word “reasonable” in subpart (iii) of the “satisfaction” clause further supports applying the objective standard.

(Internal quotations and citations omitted).

Posted: July 27, 2016

Complaint Dismissed, Fees Awarded, for Disclosing Confidential Settlement Negotiations

On July 12, 2016, Justice Ramos of the New York County Commercial issued a decision in Board of Managers of 823 Park Avenue Condominium v. 823 Park Avenue LLC, 2016 NY Slip Op. 31328(U), sanctioning a plaintiff for disclosing confidential settlement negotiations.

In Board of Managers of 823 Park Avenue Condominium, the parties to a dispute entered into a confidentiality agreement regarding their settlement negotiations. Nonetheless, when the plaintiff sued the defendants, it disclosed some of those settlement communications. The court sanctioned the plaintiff, explaining:

This Court finds that the improper inclusion of the obvious settlement communications constitutes bad faith, and is sufficient to warrant the imposition of attorney’s fees incurred by 823 Park in moving to strike those paragraphs (22 NYCRR 130-1.2).

The inclusion of settlement communications is clearly barred by the pre-negotiation agreement executed by the parties, which states that all statements, communications, correspondence, etc. exchanged between the parties during these discussions constitute settlement communications and may not be used in any manner for any purpose.

(Internal quotations and citations omitted).

Posted: July 26, 2016

Res Judicata Bars Assertion of Claim That Was Compulsory Counterclaim in Prior Federal Action

On July 21, 2016, the First Department issued a decision in Paramount Pictures Corp. v. Allianz Risk Transfer AG, 2016 NY Slip Op 05618, holding that res judicata barred a claim that should have been, but was not, brought as a compulsory counterclaim in a prior federal court action, explaining:

Under the doctrine of res judicata, a final judgment on the merits of an action by a court of competent jurisdiction is binding upon the parties and their privies in all other actions or suits on points and matters litigated and adjudicated in the first suit or which might have been litigated therein. . . . Additionally, under New York’s transactional analysis approach to res judicata, 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.

Notwithstanding the foregoing, we must consider the fact that New York is a permissive counterclaim jurisdiction (CPLR 3011).

Our permissive counterclaim rule may save from the bar of res judicata those claims for separate or different relief that could have been, but were not interposed in the parties’ prior action. It does not, however, permit a party to remain silent in the first action and then bring a second one on the basis of a preexisting claim for relief that would impair the rights or interests established in the first action.

In Classic Autos. v Oxford Resources Corp., the doctrine of res judicata did not bar plaintiff’s right to sue for return of its payment where it had failed to include a counterclaim for money damages in a prior lawsuit involving the same transaction and allowing plaintiff’s claim to proceed to disposition on the merits will not upset any right or interest of either party. While we agree with plaintiff that the relief it seeks in this action (i.e., attorneys’ fees incurred in the federal action) would not impair the rights or interests established in the federal action, meaning that New York’s permissive counterclaim rule would save it from the traditional bar of res judicata, the inquiry does not end there where the prior action was adjudicated in a compulsory counterclaim jurisdiction.

Despite the parties’ arguments to the contrary, we find that plaintiff’s claim for breach of the covenant not to sue is a compulsory counterclaim under the Federal Rules of Civil Procedure (FRCP) Rule 13(a). It existed at the time plaintiff served its answer to the complaint in the federal action and arises out of the transaction or occurrence that is the subject matter of defendants’ federal claim(s). To litigate it in the federal action would not have required adding another party over whom the district court could not acquire jurisdiction (FRCP rule 13[a][1][B]). Moreover, none of the exceptions to the rule apply (id. rule 13[a][2]).

While there is no binding precedent which holds that state courts must apply FRCP 13(a), the district court held that when the forum in which the prior litigation occurred was a compulsory counterclaim jurisdiction notions of judicial economy and fairness require that a party be precluded from bringing all claims that it earlier had the opportunity – exercised or not – to assert as counterclaims.

Further, the Court of Appeals has provided clear guidance on this issue in Gargiulo v Oppenheim, stating in dicta, For purposes of the disposition of this appeal we assume, without deciding, that under the procedural compulsory counterclaim rule in the Federal Courts (FRCP rule 13[a] [in 28 USC, Appendix]) claim and issue preclusion would extend to bar the later assertion in the present State court action of a contention which could have been raised by way of a counterclaim.”

Based on the foregoing, we conclude that the later assertion in a state court action of a contention that constituted a compulsory counterclaim (FRCP rule 13[a]) in a prior federal action between the same parties is barred under the doctrine of res judicata.

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

Posted: July 25, 2016

Agent for a Principal with no Legal Status Is Personally Liable for Contract

On July 12, 2016, Justice Scarpulla of the New York County Commercial Division issued a decision in Tecchia v. Bellati, 2016 NY Slip Op. 31311(U), holding that a person holding himself out to be the agent of an entity without legal status is personally liable for any contract into which he enters.

In Tecchia, the defendant (an individual named Bellati) allegedly held himself out as “the owner of Minimal USA, that he was affiliated with Minimal Cucine, an Italian bespoke kitchen designer, and that he could perform the construction improvements that” the plaintiff “sought.” The plaintiff entered into a contract with Minimal USA. The defendant signed on its behalf. The plaintiff later brought an action for breach of the contract, suing the defendant individually.

The defendant moved to dismiss, arguing, among other things, that Bellati should not have been named as a party. The court denied the motion, explaining:

Under New York law, an agent who fails to disclose at the time the parties enter a contract that he is acting on behalf of a principal becomes personally liable under the contract. Further, one who acts as an agent for a principal with no legal status will be personally liable on the contract. And, a defendant asserting an agency relationship as a defense to avoid individual contractual liability has the burden of establishing the disclosure of the agency relationship and the corporate existence and identity.

Here, the Contract was signed by individual defendant Bellati over a line that bore the name “Minimal USA” and there is no indication that it was disclosed to Tecchia that Bellati was acting on behalf of corporate entity Canova instead of individually or on behalf of non-corporate entity Minimal USA. None of the documents submitted by Defendants “conclusively” establish a defense to the claims asserted against Bellati. Defendants argue that an invoice bearing the name “Canova Inc.” gave [the plaintiff] reason to suspect that Bellati was acting on Canova’s behalf. However, the fact that a plaintiff has reason to suspect that an individual is acting as an agent in and of itself is insufficient to relieve the agent from liability. Knowledge of the real principal is the test, and this means actual knowledge, not suspicion. Indeed, nothing short of full disclosure of the principal’s status will relieve an agent from personal liability.

(Internal quotations and citations omitted).

Posted: July 24, 2016

Insurer’s Disclaimer of Coverage Excused Insured from Obtaining Its Consent to Settlement

On July 7, 2016, Justice Ramos of the New York County Commercial Division issued a decision in J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 2016 NY Slip Op. 31295(U), holding that an insurer’s disclaimer of coverage excused its insured from obtaining its consent to settle.

In J.P. Morgan Securities, the plaintiffs sought a “declaration that its insurers are required to indemnify it for claims stemming from Bear Stearns’ monetary settlement of Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) regulatory proceedings and related private litigation predicated on allegations that Bear Stearns facilitated its customers’ deceptive market timing and late trading activities.” One of the defenses advanced by the insurers was that Bear Stearns breached the insurance contract by settling without the insurers’ consent. The court granted the plaintiffs summary judgment dismissing this defense, explaining:

[T]he repudiation of liability by an insurer on the ground that the loss is not covered by the policy will excuse an insured from complying with the term of the policy obligating it to obtain the insurers’ consent before settlement of any matter, provided that the settlement is reasonable. If the insurer does not establish that the loss falls squarely within a policy exclusion as claimed or otherwise does not constitute a covered loss, the insured is excused from further compliance with its obligations under the policy. An insurer declines coverage at its own risk.

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

Posted: July 23, 2016

Tax Estoppel Prevents Claim That Payment Was Earnings After Reporting it as a Gift

On July 7, 2016, Justice Singh of the New York County Commercial Division issued an opinion in Gliklad v. Kessler, 2016 NY Slip Op. 31301(U), holding that the doctrine of tax estoppel barred an argument that a payment was not a gift, explaining:

The Court of Appeals explained the concept of tax estoppel, which is akin to issue preclusion or collateral estoppel, in Mahoney-Buntzman v. Buntzman, 12 N.Y.3d 415 [2009]. The Court wrote:

A party to litigation may not take a position contrary to a position taken in an income tax return. Here, husband does not dispute that, in accordance with his settlement agreement, he reported the $1,800,000 in settlement proceeds as business income on his federal income tax return, in which he swore that the representations contained within it were true. We cannot, as a matter of policy, permit parties to assert positions in legal proceedings that are contrary to declarations made under penalty of perjury on income tax returns.

(Mahoney-Buntzman, 12 N.Y.3d at 422 (internal citations omitted)).

The doctrine of tax estoppel has been applied consistently in the commercial litigation arena. . . .

The holdings set forth in these cases are dispositive, and compel estoppel against defendant in the present action. Kessler is estopped from claiming to this Court that the conveyance from Cherney to defendant was compensation when defendant, under penalty of perjury, asserted to the IRS that the conveyance was something entirely different. Although defendant contends that the gift was really compensation, he proffers no W2 forms, 1099 forms, bank statements, or evidence that he has amended his 2014 tax returns to reflect such fact.

Accordingly, Kessler is estopped from recasting the gift from Cherney as compensation to defendant, and defendant has failed to show the existence of a genuine issue of material fact rebutting plaintiff’s prima facie case.

(Internal quotations and citations omitted).

Posted: July 21, 2016

Actions Dismissed on Standing Grounds May be Refiled Pursuant to CPLR 205

On July 7, 2016, the First Department issued a decision in U.S. Bank N.A v. DLJ Mortgage Capital, Inc., 2016 NY Slip Op. 05440, analyzing whether an action dismissed on standing grounds can be refiled pursuant to CPLR 205. The court explained:

This action was originally commenced within the statute of limitations period by Federal Housing Finance Agency, in its role as conservator for Freddie Mac, a certificateholder in each of the HEAT Trusts. However, pursuant to the “no action” provision in the PSAs, which limits the circumstances under which a certificateholder may commence suit under those agreements, FHFA lacked standing to sue. FHFA later substituted the Trustee as plaintiff.

Because FHFA commenced this action within the limitations period, the original claims were timely. Moreover, the fact that FHFA sued before meeting the condition precedent to suit by serving repurchase notices on DLJ, does not, in and of itself, render the claims time-barred. Rather, they would be subject to refiling by a proper plaintiff pursuant to CPLR 205(a), if they were not time-barred on standing grounds.

Generally, actions dismissed on standing grounds may be refiled pursuant to CPLR 205(a). However, here, the Trustee is not entitled to refile the claims under CPLR 205(a), because it is not a “plaintiff” under that statute. Moreover, the Trustee may not rely on relation-back (CPLR 203[f]) to save its refiled claims, because there was no “valid preexisting action” to relate back to. Because the Trustee cannot benefit from either CPLR 203(f) or 205(a), the refiled claims are time-barred on standing grounds.

(Internal citations omitted).

Posted: July 20, 2016

Modification of Agreement Cannot Increase Obligation of Guarantor, But Does Not End It

On June 27, 2016, Justice Bransten of the New York County Commercial Division issued a decision in Toyota Tsusho America, Inc. v. Kaye Refining Corp., 2016 NY Slip Op. 31236(U), holding that the modification of an agreement between a debtor and a creditor did not affect a guarantor’s obligations:

It is well-established that a guaranty is to be interpreted in the strictest manner and cannot be altered without the guarantor’s consent.” Moreover, a guarantor should not be bound beyond the express terms of his guarantee.

While Toyota concedes that it never informed Javash of its agreement to exceed the $300,000 limit set forth in the November 3, 1995 Letter Agreement, Toyota maintains that it was not required to do so. Paragraph 11 of the Letter Agreement provides that the agreement may not be modified except in writing signed by Toyota and KRC. Thus, according to Toyota, since the Letter Agreement speaks to the possibility of modification, Javash was on notice that the Agreement could be modified and therefore should be deemed to have given its consent to an indefinite expansion of the amounts covered by the Guaranty – even expansion of the guaranteed amount by up to twenty times.

The Court disagrees. Interpreting the Guaranty in the strictest manner, it clearly pertains only to the November 3, 1995 Letter Agreement, which was cited in paragraph one of the agreement and, for further clarity, was attached as an exhibit. Nothing in the Guaranty states – or could be construed to state – agreement by Javash to guarantee any additional amount above and beyond the $300,000 cap contained in paragraph 6 of the Letter Agreement.

. . .

While Javash cannot be held surety to the modified agreements, Javash likewise cannot use the modified agreements as an excuse to disclaim his original guaranty. The liability of a surety cannot be extended beyond the plain and explicit language of the contract, a surety is not entitled to any particular tenderness in the interpretation of the language of his contract. Here, the Guaranty unambiguously provides for Javash’s guaranty of KRC’s liability under the November 3, 1995 Letter Agreement. The subsequent modifications entered into by KRC and Toyota do not bind Javash; however, they likewise do not terminate the obligation that Javash knowingly and explicitly assumed under the Guaranty. Although guarantor should not be bound beyond the express terms of his guarantee, a surety nonetheless may be held to the terms of its agreement.

(Internal quotations and citations omitted).