Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 6, 2015

Second Department Rules That Court Should Have Allowed Post-RJI Discovery

On February 25, 2015, the Second Department issued a decision in Portilla v. Law Offices of Arcia & Flanagan, 2015 NY Slip Op. 01626, granting post-RJI discovery.

In Portilla, the defendants in a legal malpractice action appealed, among other things, the trial court’s denial of post-RJI discovery. The Second Department reversed, explaining:

A court may, in its discretion, grant permission to conduct additional discovery after the filing of a note of issue and certificate of readiness where the moving party demonstrates that unusual or unanticipated circumstances developed subsequent to the filing, requiring additional pretrial proceedings to prevent substantial prejudice. Here, the appellants demonstrated the existence of unusual or unanticipated circumstances which warranted granting their request for post-note-of-issue discovery. Accordingly, the Supreme Court should have granted that branch of the appellants’ motion.

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

Posted: March 5, 2015

Court Declines to Disqualify Counsel That Negotiated Agreement Under Attorney-Witness Rule

On February 9, 2015, Justice Bransten of the New York County Commercial Division issued a decision in MRC RE Holdings LLC v. Schreiber, 2015 NY Slip Op. 30235(U), refusing to disqualify counsel who negotiated an agreement from acting as trial counsel in action to enforce that agreement, explaining:

Rule 3.7(a) of the Rules of Professional Conduct provides that, unless certain exceptions apply, a lawyer shall not act as advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact. However, the challenging party carries a heavy burden of identifying the projected testimony of the advocate-witness and demonstrating how it would be so adverse to the factual assertions or account of events offered on behalf of the client as to warrant his or her disqualification. Moreover, disqualification under the advocate-witness rule may be required only when it is likely that the testimony to be given by the witness is necessary.

Defendants’ argue that since plaintiff’s counsel in the instant action was also counsel to plaintiff with respect to the disputed agreement, he will be a necessary witness. Specifically, they argue that his testimony will be necessary because he engaged in correspondence with defendants’ counsel during negotiation of the LC and in the aftermath of the failure of the loan to close.

While defendants’ argument is not unreasonable, prior to discovery, it is premature to disqualify counsel. Merely because an attorney has relevant knowledge or was involved in the transaction at issue does not make the attorney’s testimony necessary. Accordingly, Defendants’ motion to disqualify plaintiff’s counsel is denied, with leave to renew following the completion of discovery.

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

Posted: March 4, 2015

Fee Provision in Note Unenforceable Penalty

On February 19, 2015, Justice Sherwood of the New York County Commercial Division issued a decision in Maina v. Rapid Funding NYC, LLC, 2015 NY Slip Op. 30244(U), denying a motion for fees because it sought to impose a penalty.

In Maina, the defendant was granted summary judgment on a note. However, the court denied the defendant’s motion for attorney’s fees of 20% of the face value of the note (as provided by the note), finding that there was “no evidence to support the reasonableness of the” fees, rendering the 20% fee amount in the note an unenforceable penalty. The defendant moved again for summary judgment for its fees, which the court again denied, explaining:

In deciding the prior summary judgment motion, the Court held that the provision at issue providing for the plaintiffs payment of defendants’ attorneys’ fees constituted an unenforceable penalty. Indeed, a provision for the payment of an arbitrary amount as an attorney’s fee is in the nature of a penalty and therefore unenforceable. The provision for payment of fees itself did not provide for recovery of reasonable attorneys fees; rather, the provision provided for payment of an arbitrary percentage of the amount of the Joan then outstanding. Accordingly, the Court declined to enforce the provision and denied the summary judgment motion to the extent it sought attorneys’ fees. The Court’s order was not an invitation to the defendants to file a new summary judgment motion and to submit evidence of the reasonableness of their fees. Once the offending fee provision is struck as an unenforceable penalty, the instant application must fail.

In support of the argument that Rapid Funding’s counsel is entitled to seek attorneys’ fees from Maina despite the court’s prior denial of their application, defendants rely nearly exclusively on Korea First Bank v K. Y. Lee. In that case, the United States District Court for the Southern District of New York vacated an award of attorneys’ fees on the grounds that the contractual provision providing for them in a fixed percentage was unenforceable as a matter of law. However, the court permitted the plaintiff [to] attempt to establish the reasonable amount of their fees in a subsequent motion. The case is distinguishable from the instant case in several ways.

[T]he Korea Bank court determined that an award of attorneys’ fees was proper insofar as the actual fee arrangement was disclosed and the fees were determined to be reasonable. In that case, it was not clear whether the contractual fee provision at issue served as a penalty rather than a good faith attempt to pre-estimate damages or as to be unconscionable. In the instant case, the court has already held that the contractual fee provision represents an unenforceable penalty. Accordingly, no purpose would be served by permitting successive summary judgment motions on this issue. Moreover, Korea Bank relied on Equitable Lumber Corp. v IPA Land Dev. Corp.. The fee provision in that case provided that the seller would be entitled to reasonable attorneys’ fees and that 30 percent would be a reasonable fee in the event it turned the matter over for collection. Accordingly, the Equitable Lumber court remanded for a determination of factual issues as to whether the 30 percent figure operated as a penalty, an issue already determined in this case. Additionally, the fee provision at issue here does not provide for reasonable
fees as an alternative to the set percentage.

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

Posted: March 3, 2015

Summary Judgment Granted Based on a “Mutual Account” Between the Parties

On February 3, 2015, Justice Solomon of the Kings County Commercial Division issued a decision in Caring Professionals, Inc. v. Landa, 2015 NY Slip Op 30232(U), granting summary judgment based on a “mutual account” between the parties—a concept similar to the more familiar “account stated.”

In Caring Professionals, the plaintiff, “a provider of nurses, home health aides and personal care aides,” brought suit against a customer for failure to pay for close to $7 million in services for which it submitted invoices that it was undisputed the defendant received and never contested. The plaintiff moved for summary judgment arguing that the defendant’s failure to contest the invoices established an “account stated.” Justice Solomon found that the parties’ arrangement did not fit within the traditional definition of an account stated, but “is more in the nature of a running or mutual account, which shares attributes with an account stated.” The court explained:

A plaintiff establishes its prima facie entitlement to judgment as a matter of law on its cause of action to recover on an account stated by tendering sufficient evidence that it generated account statements for the defendant in the regular course of business, that it mailed those statements to the defendant on a monthly basis, and that the defendant accepted and retained these statements for a reasonable period of time without objection, and made partial payments thereon.

The submissions show that the arrangement between the parties was not an account stated, within the classic definition of the term . The nearly 7900 page spreadsheet showing invoices and 171 payments clearly cannot match invoices to payments one to one, this is to say that each invoice did not generate a payment. This is more in the nature of a running or mutual account, which shares attributes with an account stated.

A “mutual” account is one in which two parties have agreed to a course of dealings in which each periodically furnishes something to the other, each keeping a running account of credits and debits in the expectation that the party in whose favor a balance exists will send the other a bill from time to time. Both an account stated and a mutual account arise out of an agreement, express or implied, that one party will provide goods and/or services and issue invoices and the other party will make payments. In either case, acceptance and retention of the invoices for a reasonable period without objection precludes the receiving party from objecting to the correctness of the items or the balance due.

(Citations omitted). Justice Solomon granted summary judgment to the plaintiff for the unpaid amount stated in the invoices. However, he held that entry of the judgment would have to await the court’s adjudication of defendant’s defense based on an alleged offset based on conduct that predated the invoices at issue.

Posted: March 2, 2015

Former Transactional Counsel Disqualified From Serving as Litigation Counsel

On February 17, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in Nineteen Twenty Four, Inc. v. Parachini, 2015 NY Slip Op. 30236(U), disqualifying counsel.

In Nineteen Twenty Four, Inc., the defendant moved to disqualify the plaintiffs’ counsel, who represented the corporation of which the plaintiffs were shareholders, against the defendant, also a shareholder. The court granted the motion, explaining:

Defendant relies on Morris v Morris, 306 AD2d 449 (2d Dept 2003), Dembitzer v Chera, 285 AD2d 525 (2d Dept 2001), and Fleet v Pulsar Constr. Corp., 143 AD2d 187 (2d Dept 1988), cases which disqualified counsel for corporations and a partnership who represented shareholders against other shareholders of the corporations or an individual partner against another partner. Morris and Dembitzer, decided under the old rules of conduct, simply cited to previous DR 5-108, which prohibited an attorney from representing a party in a lawsuit against a former client in the same or a substantially related matter. Fleet explained that disqualification in such circumstances was grounded on the obligation of the attorney to preserve the confidences and secrets of the former client and on the appearance of impropriety. Plaintiffs oppose the disqualification motion arguing that no conflict and no prejudice exist since defendant has never revealed any confidential information to corporate counsel, and if he did, it was information already known by plaintiffs. The court need not reach the question of whether [the defendant] confided in the Helbraun Firm and would be prejudiced thereby since Rule 1.13 dictates the firm’s disqualification.

The Helbraun Firm represented the Corporation before the individual parties sought to sever their ties and continues to represent the Corporation. It presently also represents the individual plaintiffs, who are a director, officers and shareholders of the Corporation. Under Rules 1.13(d) and 1.7(a), the Helbraun Firm may not continue such representation both because it represents differing interests of key directors, officers and shareholders of the Corporation, but, more importantly, because the interests of the Corporation and the individual plaintiffs differ. The defendant’s counterclaims plausibly allege that Hoy and Mirarchi breached their duties to the Corporation in negotiating a buyout of defendant’s shares for the individual plaintiffs, not the Corporation, improperly put the Corporation in debt to do so, and violated the shareholder agreement in doing so. Under these circumstances where serious charges of self-dealing and usurpation of corporate opportunity by a director and officers of the Corporation are alleged, a conflict exists between the Corporation and the individual plaintiffs. Indeed, it is questionable that such a conflict could possibly be waived given the fact that counsel’s representation involves the assertion of a claim-by one client [the Corporation] against another client the individual plaintiffs represented by the lawyer in the same litigation. The representation of the corporation will be directly adverse to Hoy and Mirarchi, and the Helbraun Firm could not possibly exert its best efforts in representing both.

(Internal quotations and citations omitted).

Posted: March 1, 2015

Lawyer Victim of Fake Foreign Client Scam

On February 11, 2015, Justice Emerson of the Suffolk County Commercial Division issued a decision in Margot J. Garant, Inc. v. Suffolk County National Bank, 2015 NY Slip Op. 50119(U), discussing a common scam targeted at lawyers.

In Margot J. Garant, Inc., the plaintiff law firm sued the defendant bank for refusing to credit a wire transfer to it. We repeat the full facts below because they relate to a type of e-mail scam of which most of us have been the target at one time or another.

The plaintiff Margot Garant, an attorney with an office in the Village of Port Jefferson, New York, represents clients in real estate transactions. On July 9, 2014, a client named Yang Jun was referred to her in connection with the purchase of a home in Port Jefferson. The record reflects that Garant never met Yang, who claimed to be from China, and that they communicated with each other via email. On July 17, 2014, Garant received a check for the purchase in the amount of $399,585.60 from John Owen of CI Investments, with whom Yang purportedly had investments. The check was drawn on the account of Euro Vinyl Windows & Doors, Inc., at the Bank of Nova Scotia in Ontario, Canada. On July 24, 2014, Garant brought the check to the Port Jefferson branch of the defendant, Suffolk County National Bank (“SCNB”), and deposited it into her attorney escrow account. The deposit was rejected because the check was drawn on a foreign bank and had to be sent out for collection. On July 25, 2014, Garant was given the option of having the funds wired into her escrow account or sending the check out for collection. She chose the latter. The check was sent to SCNB’s Operations Department, which mailed it to the Federal Reserve Bank of Atlanta on July 31, 2014. After the Federal Reserve processed the check and mailed it to the Bank of Nova Scotia, SCNB received a provisional credit therefor in the amount of $399,585.60. On August 8, 2014, SCNB provisionally credited that amount to Garant’s escrow account. However, unbeknownst to SCNB, the Bank of Nova Scotia had rejected the check as forged/counterfeit on August 7, 2014, and mailed it back to the Federal Reserve Bank of Atlanta. August 12 and 13, 2014, Yang sent Garant three emails with instructions for wiring some of the funds to his wife or ex-wife. Each email contained different instructions. The third and final email directed Garant to wire $265,000 to an account entitled Overseas Consultants at Ameriserve Financial Bank in Pennsylvania, which she did on August 13, 2014. On August 18, 2014, SCNB received an envelope postmarked August 14, 2014, from the Federal Reserve Bank of Atlanta. Enclosed therein was a Cash Letter Summary dated August 13, 2014, returning the check. Also enclosed were the check itself and the Bank of Nova Scotia’s return slip indicating that the check was being returned as forged/counterfeit. SCNB telephoned Garant on August 18, 2014, to advise her that the check had been “recalled.” On August 19, 2014, SCNB revoked the provisional credit and charged back Garant’s escrow account $399,585.60.

The plaintiff sued the bank for the $399,585.60 it took from the plaintiff’s escrow account. The court granted the bank’s motion to dismiss, explaining:

The Court of Appeals recently decided a case that is remarkably similar to the one at bar. In Greenberg, Trager & Herbst, LLP v HSBC Bank USA, the plaintiff, a law firm, received an email from Northlink Industrial Limited (“Northlink”), a Hong Kong company, looking for legal representation to collect debts owed by its North American customers. The plaintiff agreed to represent Northlink and requested a $10,000 retainer. Northlink sent Greenberg, Trager & Herbst (“GTH”) a Citibank check from a Northlink customer in the amount of $197,750 with instructions to take its $10,000 retainer out of the check and wire the balance to Citibank in Hong Kong. GTH deposited the check into its attorney trust account at HSBC on Friday, September 21, 2007. HSBC provisionally credited GTH’s account in the amount of $197,750 on the next business day, Monday, September 24, 2007. HSBC sent the check to the Federal Reserve Bank of Philadelphia for presentment to Citibank. Citibank rejected the check because the routing number was not recognized by its automated sorting system and sent the check back to HSBC the next day, September 25, 2007.[FN1] HSBC repaired the routing number; determined that the check belonged to Citbank, Las Vegas; and sent it to the Federal Reserve Bank of San Francisco. On September 27, 2007, in response to an inquiry by GTH regarding whether the check had “cleared,” HSBC advised GTH that the funds were “available.” Later that day, GTH wired $187,750 from its account to Hong Kong pursuant to Northlink’s instructions. On September 28, 2007, HSBC confirmed to GTH that the wire transfer had been consummated. On October 2, 2007, HSBC received a notice from Citibank that the check had been dishonored as “suspect counterfeit” and so advised GTH. HSBC then revoked its provisional settlement and charged back GTH’s account.

GTH commenced an action against HSBC and Citibank sounding in negligence and negligent misrepresentation. GTH claimed that Citibank was negligent in breaching its obligation to implement effective procedures for detecting counterfeit checks and that HSBC was negligent for failing to inform GTH and charge back the check when it was first returned by Citibank on September 25, 2007. GTH also claimed that HSBC negligently misrepresented to it that the check had cleared and that the funds were available for transfer. Both HSBC and Citibank moved for summary judgment dismissing the complaint, which was granted by the Supreme Court. The Appellate Division affirmed, as did the Court of Appeals (Pigott, J., dissenting in part). The Court of Appeals applied the Uniform Commercial Code to the negligence claims to find that they were properly dismissed. As for the negligent-misrepresentation claim, the Court found that GTH’s reliance on HSBC’s statement that the check had cleared was unreasonable as a matter of law. Finally, the Court rejected GTH’s estoppel argument. Finding that neither Citibank nor HSBC had breached any duty owed to GTH, the Court agreed with the Appellate Division that GTH was in the best position to guard against the risk of a counterfeit check by knowing its client.

This court finds Greenberg to be controlling. Like GTH, the plaintiffs seek to hold a defendant bank liable for a counterfeit check. While the plaintiffs do not assert a negligence claim against SCNB, they assert claims under the UCC and argue that SCNB did not comply therewith.

. . .

With the foregoing in mind it is clear how a fraud of this type is accomplished. Its object is to cause a worthless check deposited for collection to take a sufficiently long detour in its progress to the drawee bank, to insure that the notice of non-payment will not arrive at the depositary bank until after the expiration of the hold which it placed on the availability of the proceeds from transit items. Having received no such notice before the expiration of the hold, the depositary bank supposes the items to have been paid and allows its proceeds to be withdrawn. By the time notice arrives the malefactor has, of course, absconded with the spoils. The crucial detour is caused by imprinting the fraudulent check with the wrong MICR routing number—i.e., one that does not correspond to the bank designated on the face of the check as the drawee bank, but to a different bank, preferably one that is distant from the institution designated as the drawee bank on the face of the check.

Here, the delay was not caused by a wrong routing number on the check, but by a foreign routing number. Because the check was drawn on a bank located in a foreign country (Canada), it had to be sent out for collection, and U.S. return item deadlines and policies did not apply to it. Sending the check out for collection meant that it had to be mailed to the Federal Reserve Bank of Atlanta, which then mailed it to the Bank of Nova Scotia. SCNB advised Garant that putting a foreign check through the collection process could take two weeks or more to be completed. The Federal Reserve warns foreign check customers that some foreign institutions take longer than 20 business days to pass credit and that they could experience a return on an item weeks after the original credit is passed. In addition, an item sent on collection is not safe from return when, as here, the item is determined to be forged or fraudulent. The Federal Reserve, like the Appellate Division and the Court of Appeals, advises that it is important to “know your customer”.

(Internal quotations and citations omitted).

Posted: February 28, 2015

First Department Examines Standard for Award of Punitive Damages

On February 26, 2015, the First Department issued a decision in Macy’s Inc. v. Martha Stewart Living Omnimedia, Inc., 2015 NY Slip Op. 01728, addressing, among other things, standard for an award of punitive damages.

In Macy’s Inc., the First Department affirmed in part and reversed in part the trial court’s decision in the much-publicized lawsuit involving Macy’s, J.C. Penny and Martha Stewart. This post looks that part of the First Department’s decision affirming the trial court’s holding that Macy’s was not entitled to punitive damages. The First Department explained:

In order to be entitled to punitive damages, a private litigant must not only demonstrate egregious tortious conduct by which he or she was aggrieved, but also that such conduct was part of a pattern of similar conduct directed at the public generally. Punitive damages are a social exemplary remedy, not a private compensatory remedy.

Macy’s, in support of its application for punitive damages, points to, among other things, various emails from JCP’s executives and board members which evince a certain degree of malicious gloating over the supposed coup of obtaining MSLO products for their company and the angst it would cause for Macy’s executives. Macy’s argues that, in conjunction with the actions taken by those executives toward achieving that goal, these emails establish the wanton and reckless conduct required to meet the high threshold for the imposition of punitive damages. To be sure, the conduct of JCP’s personnel in this case was intentional and clearly below any minimum standard of business practices and ethical behavior. However, those emails, while distasteful and far beneath what one would expect from executives of a major corporation, are simply part and parcel of the unsavory atmosphere surrounding JCP’s conduct.

Nevertheless, at least with respect to the “store-within-a store” concept, JCP was given an arguable basis on which to proceed with its negotiations for a retail agreement with MSLO. It bears noting that this concept came from MSLO’s counsel, who opined that these stores would be in compliance with the Macy’s agreement. JCP had experience with this concept with its Sephora product lines, albeit under very different circumstances. Its personnel were asked to validate whether the concept could work for MSLO. Despite some misgivings by some people involved on both sides of the negotiations as to whether the concept would hold up under a court challenge, the decision to go ahead, while ill-advised, did not constitute the type of wanton and reckless conduct that warrants the imposition of punitive damages.

Taken as a whole, JCP’s conduct, while clearly intentional, did not evince the high degree of moral turpitude and demonstrate such wanton dishonesty as to imply a criminal indifference to civil obligations. As a result, the court correctly determined that punitive damages are not warranted in this case.

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

Posted: February 27, 2015

Acquiror of Corporate Assets Liable for Corporation’s Torts Under De Facto Merger Doctrine

On December 22, 2014, Justice Walker of the 8th Judicial District Commercial Division issued a decision in Precision Process, Inc. v. Smith, 2014 NY Slip Op. 33460(U), holding that the acquiror of a corporation’s assets was liable for the corporation’s debts under the de facto merger doctrine.

In Precision Process, the court granted the plaintiff summary judgment on its claim for “a declaration that defendants Craft Leasing, LLC (Craft) and CK Precision of WNY, Inc. (CKPW) (collectively, “Defendants”) are successors in interest to CK Precision, Inc. (CKP), and are therefore liable for its debts and obligations,” explaining:

As a general principle of New York law, a corporation that acquires the assets of another corporation is not liable for the latter’s torts. However, four (4) recognized exceptions exist – rendering the acquiring corporation liable – where (1) it expressly or impliedly assumed the predecessor’s tort liability (which did not occur here); (2) there was a consolidation, actual, or de facto merger of the two entities; (3) the purchasing entity was a mere continuation of the selling entity; or, (4) the transaction is entered into fraudulently to escape such selling entity’s obligations.

. . .

Defendants contend that successor liability is wholly inapplicable here, because it is solely a strict products liability doctrine that does not apply to business torts such as those at issue here. This Court disagrees. Defendants rely upon the decision in Greenlee v Sherman, a negligence action against the estate of a deceased sole proprietor who had installed a furnace that allegedly caused a fire. Plaintiffs sought to impose liability upon the company that purchased the deceased plumber’s assets. The court stated (in dicta) that it appears that the successor liability doctrine does not apply outside of the products liability area. However, the court also found that plaintiffs had failed to establish a de facto merger, or that the successor defendant was a mere continuation of the decedent’s business – implying that the doctrine may apply in a non-products liability case.

Additionally, the First Department has consistently noted that the successor liability doctrine concerns products liability and torts law but is not applicable, for example, in an action to collect on a promissory note; and that a plaintiff could state claim of mere continuation or de facto merger where a sale to a new business was in an effort to avoid liability under a lease.

(Internal quotations and citations omitted) (emphasis added). Applying this rule, the court went on to hold based on the facts that the de facto merger exception applied.

Posted: February 26, 2015

Absent Agreement on Treatment, Member’s Payments to LLC are Loans, Not Capital Contributions

On February 18, 2015, the Second Department issued a decision in Chiu v. Chiu, 2015 NY Slip Op. 01427, holding that funds paid by a member to an LLC should be treated as loans, rather than contributions to capital, in the absence of evidence that the parties intended them to be capital contributions.

In Chiu, two members of an LLC litigated their respective ownership shares and the value of those shares. Reversing a trial court decision after trial that one of the members had only a 10 percent ownership interest, the Second Department explained:

After a joint nonjury trial, the Supreme Court issued a decision finding that although Winston Chiu initially had a 25% membership interest in the LLC, subsequent capital contributions by Man Choi Chiu had the effect of reducing Winston Chiu’s membership interest to 10% and increasing Man Choi Chiu’s membership interest to 90%. . . . Here, the Supreme Court properly determined that the LLC’s records, which included the LLC’s tax returns for the years 1999 and 2000, established that Winston Chiu’s initial membership interest was 25%. Although Man Choi Chiu contends that the LLC’s records were incorrect, he cannot subsequently take a position contrary to that taken in the income tax returns which he admitted that he signed. However, the Supreme Court incorrectly determined that the subsequent contributions by Man Choi Chiu should be treated as capital contributions, and not as loans, as the record was bereft of any evidence of an agreement between the members to such treatment. Accordingly, on the date of his withdrawal, Winston Chiu’s membership interest remained at 25%.

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

NOTE: Schlam Stone & Dolan LLP was counsel for Winston Chiu at trial and on appeal.

Posted: February 25, 2015

Court of Appeals Holds that Qualified Litigation Privilege Applies to Pre-Litigation Statements

On February 24, 2015, the Court of Appeals issued a decision in Front, Inc. v. Khalil, 2015 NY Slip Op. 01554, holding that statements made by attorneys prior to the commencement of litigation are protected by a qualified privilege if the statements are pertinent to a good-faith anticipated litigation.

In Front, Inc., counsel for plaintiff sent the defendant and, later, the defendant’s prospective employer, a letter accusing the defendant (its former employee) of attempting to steal the plaintiff’s “confidential and proprietary information,” conducting an “illegal competing side business,” misappropriating trade secrets, and other misconduct and threatening to sue. The defendant commended a third-party action for defamation against the plaintiff’s counsel.

The trial court determined that the letter was absolutely privileged, because the letter “clearly related to the litigation initiated by” the plaintiff and “the demands made in the letters . . . substantially reflect the causes of action and relief requested” in the main action. The First Department affirmed on substantially the same grounds. The Court of Appeals granted leave to appeal. It affirmed, resolving a split between the Appellate Divisions, explaining:

The rationale supporting the application of privileged status to communication made by attorneys during the course of litigation is also relevant to pre-litigation communication. When litigation is anticipated, attorneys and parties should be free to communicate in order to reduce or avoid the need to actually commence litigation. Attorneys often send cease and desist letters to avoid litigation. Applying privilege to such preliminary communication encourages potential defendants to negotiate with potential plaintiffs in order to prevent costly and time-consuming judicial intervention. Communication during this pre-litigation phase should be encouraged and not chilled by the possibility of being the basis for a defamation suit.

Nonetheless, as a matter of policy, the courts confine absolute privilege to a very few situations. We recognize that extending privileged status to communication made prior to anticipated litigation has the potential to be abused. Thus, applying an absolute privilege to statements made during a phase prior to litigation would be problematic and unnecessary to advance the goals of encouraging communication prior to the commencement of litigation. To ensure that such communications are afforded sufficient protection the privilege should be qualified. Rather than applying the general malice standard to this pre-litigation stage, the privilege should only be applied to statements pertinent to a good-faith anticipated litigation. This requirement ensures that privilege does not protect attorneys who are seeking to bully, harass, or intimidate their client’s adversaries by threatening baseless litigation or by asserting wholly unmeritorious claims, unsupported in law and fact, in violation of counsel’s ethical obligations. Therefore, we hold that statements made prior to the commencement of an anticipated litigation are privileged, and that the privilege is lost where a defendant proves that the statements were not pertinent to a good-faith anticipated litigation.

(Internal quotations and citations omitted) (emphasis added). The Court of Appeals went on to hold that the statements at issue met the standard for the qualified privilege.