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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: February 10, 2016

E-mail Sent by Party, Under Which Sender’s Name is Typed, Can Satisfy Statute of Frauds

On February 3, 2016, the Second Department issued a decision in Agosta v. Fast Systems Corp., 2016 NY Slip Op. 00699, holding that e-mail exchanges met the requirements of the statute of frauds, explaining:

To satisfy the statute of frauds, an agreement need not be contained in one single document, but rather may be furnished by piecing together other, related writings. Further, all of the terms of the contract must be set out in the various writings presented to the court, and at least one writing, the one establishing a contractual relationship between the parties, must bear the signature of the party to be charged. An e-mail sent by a party, under which the sending party’s name is typed, can constitute a signed writing for the purposes of the statute of frauds. Here, the terms of the alleged agreement were set forth in various writings, including an email and an assignment signed by [one of] the plaintiff[s]. Accordingly, the plaintiffs failed to establish their prima facie entitlement to judgment as a matter of law on the third cause of action.

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

Posted: February 9, 2016

Arguments of Interest in the Court of Appeals for the Weeks of February 8 and 15, 2016

Upcoming arguments in the Court of Appeals of interest to commercial litigators:

  • Case No. 28: Matter of Aoki v. Aoki (to be argued February 10, 2016) (“Powers–Power of appointment–Validity of irrevocable partial release–Constructive fraud–Whether the Appellate Division erred in determining that (1) the burden-shifting framework for constructive fraud by a fiduciary applies only where the fiduciary was a party to or had an interest in the subject transaction and (2) the constructive fraud doctrine did not apply because decedent’s attorneys were not parties to nor had an interest in the releases at issue, where the attorneys allegedly benefitted indirectly from the signing of the releases.”). See the First Department’s decision here.
  • Case No. 34: Spoleta Construction, LLC v. Aspen Insurance UK Limited (to be argued February 16, 2016) (“Insurance–Coverage–Whether plaintiff general contractor on a construction project provided timely notice of an “occurrence” such that it was entitled to coverage as an additional insured under the commercial general liability insurance policy issued by defendant Aspen to a subcontractor; Declaratory judgment action seeking defense and indemnification in underlying personal injury action by injured worker.”) See the Fourth Department’s decision here.
  • Case No. 42: PAF-PAR LLC v Silberberg (to be argued February 18, 2016) (“Suretyship and Guarantee–Guarantee of promissory note–Borrower’s full payment of modified loan amount–Guarantor not liable for more–Whether the guarantor is liable for the full original loan amount where the borrower satisfied its obligations under a modification agreement and the guaranty states that the guarantor’s obligations shall not be affected by “modification, alteration or rearrangement.”). See our blog post about the First Department’s decision here, and our post about the Court of Appeals’ granting leave to appeal here.
Posted: February 9, 2016

Loss Damage Waiver Bars Subrogation Action

On January 21, 2016, Justice Scarpulla of the New York County Commercial Division issued a decision in AXA Art Insurance Corp. v. Christie’s Fine Art Storage Services, Inc., 2016 NY Slip Op. 30148(U), holding that a loss damage waiver signed by an insured barred a subrogation action by the insurer, explaining:

Subrogation, an equitable doctrine, allows an insurer to stand in the shoes of its insured and seek indemnification from third parties whose wrongdoing has caused a loss for which the insurer is bound to reimburse. While parties to an agreement may waive their insurer’s right of subrogation, a waiver of subrogation clause cannot be enforced beyond the scope of the specific context in which it appears. Waiver of subrogation provisions reflect the parties’ allocation of the risk of liability whereby liability is shifted to the insurance carriers of the parties to the agreement. A waiver of subrogation is viewed as a device by which the parties merely allocate the risk of liability between themselves to third parties through insurance.

. . .

In the LDL waiver, the Trust expressly agreed to obtain insurance coverage against All Risks of physical loss or damage to the artworks, and the [insured] accordingly released [the defendant] from all liability for physical loss or damage to my Goods. The [insured] further agreed to notify its insurer regarding the LDL waiver, and arrange for its insurer to waive any rights of subrqgation against [the defendant] regarding any loss or damage to the property while it remained in [the defendant’s] care, custody, and control. . . . I find that it constitutes a waiver of subrogation that bars Plaintiffs’ complaint for gross negligence, negligent misrepresentation, breach of bailment, and breach of contract.

Plaintiff contends that the waiver of subrogation is void because it permits [the defendant] to excuse itself from all liability in violation of U.C.C. § 7-204. However, it is well settled that a waiver of subrogation is not a contractual provision which seeks to exempt a party from liability but instead simply requires one of the parties to the contract to provide insurance for all the parties. As parties to a commercial transaction, [the defendant] and the [insured] were free to allocate the risk of liability to third parties through insurance and deployment of a waiver of subrogation clause.

(Internal quotations and citations omitted).

Posted: February 8, 2016

Judicial Proceeding Immunity Is Not Absolute

On January 27, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Thomas v. G2 FMV, LLC, 2016 NY Slip Op. 30143(U), denying a motion to dismiss based on judicial proceeding immunity.

The action arose from another pending litigation in which defendant G2 sued the plaintiff Thomas for a declaratory judgment that he had breached his employment agreement by resigning without “Good Cause.” The complaint also recited a long list of improper conduct by Thomas, including incompetence, leaking confidential information, and diverting payroll taxes to pay other company expenses, which exposed the employer to action by the IRS. Thomas counterclaimed for breach of contract and indemnification of attorney fees. Before any discovery took place, the sole cause of action against Thomas was withdrawn, allegedly “to avoid the expense of complying with electronic discovery and depositions,” and G2 conceded that Thomas had resigned for Good Cause.

In the present action, Thomas countersued G2 and several of its officers, alleging that emails in his possession showed that G2 knew that statements in the prior declaratory judgment complaint were false, and were made maliciously at the direction of the individual defendants in order to make Thomas, in essence, a “fall guy” for others’ misconduct. He also alleged that the defendants caused the allegations in the complaint to be publicized in industry publications. The defendants moved to dismiss his claims.

On the cause of action for defamation, Justice Kornreich rejected the defendants’ assertion of the judicial proceeding immunity, stating that:

The absolute privilege accorded statements made in the course of a judicial proceeding may be lost if the privilege is abused . . . . The test is whether the statements are material and pertinent to the proceeding, or whether they are so needlessly inflammatory that malice can be inferred . . . . The test for pertinence is whether the statements are so outrageously out of context that one would conclude that they were motivated only by a desire to defame. Whether the statements are pertinent is a question of law for the court.

. . .

Whether the statements in the UA Complaint were false is a question of fact that must be resolved in the plaintiff’s favor at this juncture. Falsity of some of the UA Complaint’s central and most defamatory allegations can be inferred from the email correspondence . . . .

The judicial privilege defense does not require dismissal because the trier of fact could conclude that the UA Complaint was a sham maliciously filed solely to defame Thomas. G2’s sole motivation to defame could be inferred from the fact that within four months, G2 discontinued the action and conceded liability [on some of Thomas’s counterclaims] before any discovery took place. Malicious intent also could be inferred from [one of the individual defendants’] statement about burying Thomas . . . .

Furthermore, with regard to the pertinence standard, the sole cause of action in the UA complaint was a declaratory judgment that Thomas did not resign with Good Reason . . . . Nevertheless, the UA Complaint alleged that G2 had Cause to terminate Thomas’s employment and outlined grounds for Cause that impugned Thomas’ integrity and professionalism. The UA Complaint did not seek a declaration that G2 . . . had Cause to terminate Thomas’ employment . . . .

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

Justice Kornreich also held that the defamation action could proceed against some of the individual defendants on the grounds that it could be inferred that as officers of the corporate employer G2 they “made the decision to file the UA Complaint to intimidate Thomas . . . .”

Finally, Justice Kornreich refused to dismiss the defamation claim under the fair reporting privilege: “If the UA Complaint was a sham, publication of it would not be ‘fair.’ Instead, a sham complaint would be a false statement given to a news organization for the purpose of publication.”

This decision shows that the litigation privilege against defamation is not absolute, and can be lost if the plaintiff knowingly lies in its complaint or other pleadings. However, the reliance on G2’s quick termination of the action creates—however unavoidably—an incentive for similarly-situated plaintiffs to press their (malicious) claims in order to avoid a suit for defamation or malicious prosecution.

Posted: February 7, 2016

Claims Against Auditors of Failed Fund Dismissed Under In Pari Delicto Doctrine

On January 19, 2016, Justice Bransten of the New York County Commercial Division issued a decision in FIA Leveraged Fund Ltd. v. Grant Thornton LLP, 2016 NY Slip Op. 50093(U), dismissing a claim under the in pari delicto doctrine.

In FIA Leveraged Fund, the plaintiffs brought a claim against the defendants “to recover approximately $47 million in damages for the allegedly deficient auditing services Defendants provided the Funds.” Among the grounds on which the defendants moved to dismiss was in pari delicto, arguing that the plaintiffs were in essence faulting the defendants for failing to uncover the plaintiffs’ own fraud. The court agreed, explaining:

As explained by the Court of Appeals, the [in pari delicto] doctrine mandates that courts will not intercede to resolve a dispute between two wrongdoers because a wrongdoer should not profit from his own misconduct. Pursuant to the doctrine, the misconduct of an authorized agent is imputed to the corporation even if the particular acts were unauthorized. Moreover, as an affirmative defense, in pari delicto is properly resolved on the pleadings.

Here, the record indicates that [the fund employees with whom the defendants dealt] managed the Funds, as well as their investment activities, in accordance with separate management agreements. Plaintiffs concede that [those employees] carried out fraudulent schemes to prop up the funds they managed. Notwithstanding the illegality of these actions, they are actions that nonetheless fall squarely within a manager’s scope of authority. Thus, the Court concludes that [those employees] were authorized agents of the [plaintiffs], and as such, the aforementioned misconduct—the very same misconduct Defendants are charged with failing to detect—may be imputed to [the plaintiffs].

(Internal quotations and citations omitted). The court rejected the argument that”the issue of imputation is governed by New York’s internal affairs doctrine, which provides that a corporation’s internal affairs are governed by the law of the place of incorporation,” not New York.

Posted: February 6, 2016

Court Enjoins Party From Pursuing Foreign Lawsuit Violating Forum Selection Clause

On January 15, 2016, Justice Scarpulla of the New York County Commercial Division issued a decision in Madden International, Ltd. v. Lew Footwear Holdings Pty Ltd., 2016 NY Slip Op. 50061(U), enjoining a defendant from pursuing a lawsuit in an Australian court when the parties’ contract had a forum selection clause setting New York as the exclusive forum for litigating disputes arising from the agreement.

In Madden International, the parties’ contract provided “that any and all actions or proceedings arising out of or relating to this Agreement or the transactions contemplated herein shall be exclusively heard only in” state or federal court in New York. When a dispute arose between them, the defendant brought an action against the plaintiff in Australia. The plaintiff sought to dismiss that action based on the forum selection clause, but the Australian court denied the motion, holding that the action should proceed in Australia because of the danger that a New York court would not enforce the defendant’s Australian “Trade Practices Act or the Australian Consumer Law” claims against the plaintiff.

The plaintiff moved in the New York action to enjoin the defendant from litigating in Australia. The Commercial Division granted the injunction, explaining:

This action presents the thorny issue of whether I permit [the defendant], who has contractually agreed to conduct its business with a New York based corporation under principles of New York law, to flaunt that agreement and assert claims in a foreign forum that are unavailable to it in New York. The issue is particularly thorny because the Australian court has declared that its own public policy of enforcing its home statutes trumps any agreement between the [the plaintiff] and [the defendant] (an Australian corporation) to apply New York law.

. . .

[T]he irreparable injury to [the plaintiff] if it is forced to litigate in Australia, for claims asserted under Australian statutes, is obvious. [The plaintiff] is based in New York, but conducts its business internationally. [It] presumably negotiated a New York choice of law clause and New York forum selection clause in the Agreement so that it could fully understand and plan for its potential liability in a business dispute with [the defendant]. To force [the plaintiff] to litigate under Australian law, and subject it to potential damages unavailable under New York law, would eviscerate this essential contractual right. If I permit [the defendant] to disregard the New York forum and choice of law provisions under which [it] agreed to be bound, I am opening up [the plaintiff] to potentially unforeseen liability under a foreign statute to which it did not agree to be bound.

In contrast, [the defendant] does not claim that it will be unable to obtain relief on all of its potential claims except for the unique claims under the TPA and/or the ACL. Moreover, in regard to the TPA and/or the ACL, it appears that the only potential injury to [the defendant] is an inability to claim certain consequential damages in New York that it may be able to claim in Australia under those statutes.

For these same reasons, a balancing of the equities tips in favor of [the plaintiff]. [The defendant], a sophisticated business entity, freely agreed to be bound by New York law in its dealings with [the plaintiff], and to resolve any differences in the New York courts. Rather than stand by this contractual commitment, [the defendant] has purposefully flouted it, and sued in a foreign jurisdiction for damages not recoverable in New York.

(Internal quotations and citations omitted). The court held that even though neither party had showed a likelihood of success on the merits, the plaintiff was entitled to an injunction. The court rejected the defendant’s argument “that, under principles of international comity, [the court] must permit the parties to litigate in Australia, because the Australian court has determined that it may void the contractually-agreed upon forum selection and choice of law provisions in the Agreement.” The court explained:

International comity is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protection of its laws. While the doctrine can be stated clearly in the abstract, in practice the Second Circuit has described its boundaries as amorphous and fuzzy. Whatever its precise contours, international comity is clearly concerned with maintaining amicable working relationships between nations, a shorthand for good neighbourliness, common courtesy and mutual respect between those who labour in adjoining judicial vineyards.

Whether to apply the doctrine of comity lies in the sound discretion of the court, and the doctrine is not an imperative obligation of courts but rather is a discretionary rule of practice, convenience, and expediency. New York courts have a particularly strong public policy commitment to protecting New York based corporations’ New York contractual forum selection and New York choice of law provisions. That is particularly true where, a here, the parties are two sophisticated business entities who freely executed forum selection and choice of law provisions in an arm’s length transaction. Given New York’s strong public policy and [the defendant’s] purposeful disregard of its contractual obligations in favor of an unsanctioned suit in its home country of Australia, I decline to extend comity here.

(Internal quotations and citations omitted).

Posted: February 5, 2016

Promise to Compensate Investor for Failed Investment Unenforceable Gratuitous Promise

On January 21, 2016, Justice Sherwood of the New York County Commercial Division issued a decision in Scola v. Boivin, 2016 NY Slip Op. 30116(U), dismissing a breach of contract claim because it was based on a “gratuitous promise.”

In Scola, the “plaintiff Katarina Scola loaned $400,000 to defendant Nordica Capital (Nordica) in return for a private placement note (the Note).” Defendant Bibeau allegedly induced the plaintiff to invest in Nordica. Nordica subsequently defaulted on the note. Among the claims the plaintiff brought against Bibeau was breach of contract based on her “claims that she had an oral contract with Bibeau in which he promised to repay the loan if Nordica defaulted.” The court granted Bibeau summary judgment on this claim, explaining: “Bibeau concedes that he told Scola he would make sure she was repaid, even to the extent of selling his personal assets. He denies having guaranteed the Note. He adds that his assurance was made after Nordica defaulted, thereby making it an unenforceable gratuitous promise.” (Internal quotations and citations omitted) (emphasis added).

Posted: February 4, 2016

CPLR 7511 Only Authorizes Correction of Computational Errors, Not Reversal of Substantive Rulings

On January 28, 2016, the First Department issued a decision in Madison Realty Capital, L.P. v. Scarborough-St. James Corp., 2016 NY Slip Op. 00596, affirming the confirmation of an arbitral award, explaining:

A court cannot examine the merits of an arbitration award and substitute its judgment for that of the arbitrator simply because it believes its interpretation would be the better one. Indeed, even in circumstances where an arbitrator makes errors of law or fact, courts will not assume the role of overseers to conform the award to their sense of justice. Applying this standard, there is no basis to upset the final award.

. . .

CPLR 7511(c)(1) only authorizes modification of computational errors and mistakes in description, not reversal of substantive rulings. Defendants challenge the arbitrator’s calculation of rent on multiple bases; however, not only are their arguments substantive, they are unavailing.

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

Posted: February 3, 2016

Arbitrary Decisions Not Covered by the Business Judgment Rule

On January 21, 2016, the First Department issued a decision in Tsui v. Chou, 2016 NY Slip Op. 00428, holding that the trial court “incorrectly determined that plaintiffs’ breach of fiduciary duty and breach of contract claims [we]re barred by the business judgment rule,” explaining:

Plaintiffs, suing derivatively on behalf of all unit owners of a condominium, allege in the amended complaint that the Chou defendants breached their fiduciary duties by, among other things, failing to disclose various lawsuits and defendant Robert Chou’s criminal record, failing to account for missing monies and receipts, commingling funds, denying access to information and documentation, and improperly renewing defendant Chou Management’s management agreement. Plaintiffs also allege that defendant board members improperly extended their terms on the board beyond the allowable period under the bylaws. There is nothing in the record to indicate that the board discussed or informed themselves as to these allegations. The board’s determination not to pursue these claims was arbitrary and therefore not protected under the business judgment rule.

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