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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: May 2, 2016

General Merger Clause in Contract for Sale of Business Does Not Preclude Fraudulent Inducement Claim

On April 12, 2016, Justice Demarest of the Kings County Commercial Division issued a decision in Ferris v. Yoon, Index No. 512220/2015, holding that a general merger clause in a contract for the sale of business did not preclude the buyers from relying on parol evidence to support a fraudulent inducement claim.

In Ferris, the plaintiffs purchased a car wash business from the defendants. After the closing, plaintiffs allegedly discovered that the defendants had secretly altered the company’s books to overstate its income. Plaintiffs filed suit seeking to rescind the contract of sale on a fraudulent inducement theory. The defendants moved to dismiss in reliance on a general merger clause in the contract of sale that purported to disclaim reliance on any “representation, warranty, promise, inducement or statement of intention . . . which is not embodied in this agreement.” Justice Demarest denied the motion to dismiss, explaining:

[A] general merger clause is ineffective to exclude parol evidence to show fraud in inducing the contract. To put it another way, where the complaint states a cause of action for fraud, the parol evidence rule is not a bar to showing fraud in the inducement or in the execution despite an omnibus statement that the written instrument embodies the whole agreement, or that no representation have been made. A general merger clause in a contract cannot be used as a shield to protect a party from its fraud. Thus, fraud will vitiate a contract regardless of the fact that it contains a general provision to the effect that no representations have been made as an inducement to enter into the contract.

It is well established that in order to be effective to bar an action for fraud based on extraneous representations, the contractual disclaimer must have the requisite degree of specificity. Moreover, a specific disclaimer will not operate to bar a fraud claim based on statements not addressed by the disclaimer.

. . .

Since none of the [contractual] provisions specifically address representations relating to Car Wash’s income, they are general merger clause provisions, and, thus, do not preclude plaintiffs’ claim of fraud in the inducement or the use of parol evidence to establish reliance upon the representations allegedly made by defendants.

(Citations omitted.)

Justice Demarest went on to explain that apart from the generality of the merger clause, the fraudulent inducement claim survived for the independent reason that the misrepresentations concerned “facts peculiarly within the seller’s knowledge.”

[I]t has been expressly held that under the ‘special facts’ doctrine, a duty to disclose arises where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair. Even a specific disclaimer of reliance on representations cannot bar a fraudulent inducement claim where the facts represented are matters peculiarly within the representing party’s knowledge, and the other party lacks the means to ascertain the truth of the representations.

Here, plaintiffs allege that the income information was controlled exclusively by defendants and the amount of Car Wash’s cash receipts were peculiarly within their knowledge. . . . [D]efendants represented that the income figures were derived from Car Wash’s computer and the computer remained within their exclusive control until the sale of the business closed. [Plaintiff] Ferris’ efforts at due diligence were thus defeated by defendants’ actions since they allegedly gave him manipulated monthly reports, which caused his evaluation of the business to be based upon false information. Plaintiffs, therefore, have sufficiently alleged that defendants possessed peculiar knowledge of the facts underlying their alleged fraud claim.

Posted: May 1, 2016

Efforts to Remedy Alleged Errors Can Trigger Continuous Representation Doctrine

On April 20, 2016, the Second Department issued a decision in Bronstein v. Omega Construction Group, Inc., 2016 NY Slip Op. 02951, holding that a defendant’s efforts to remedy alleged errors triggered the continuous representation doctrine, explaining:

Contrary to [the defendant’s] contentions, in response to his prima facie showing that the action was commenced against him more than three years after his withdrawal, the plaintiffs succeeded in raising a question of fact as to whether the continuous representation doctrine is applicable so as to toll the running of the three-year statute of limitations. Under the circumstances, the evidence of continuing communications between the parties, and of efforts by [the defendant] to remedy the alleged errors or deficiencies in the filed plans, supported the denial of [his] motion to dismiss the amended complaint insofar as asserted against him.

(Internal citations omitted).

Posted: April 30, 2016

Unjust Enrichment Claim Against Company Owner Based on Payments Made to Company Upheld

On April 20, 2016, the Second Department issued a decision in Shah v. Exxis, Inc., 2016 NY Slip Op. 02981, upholding an unjust enrichment claim against a company’s owner based on payments made to the company.

In Shah, the plaintiff brought an action against the defendants for repayment of money allegedly loaned to the corporate defendant. The Second Department upheld the plaintiff’s unjust enrichment claim against the corporate defendant’s owner, explaining:

[T]he plaintiffs sufficiently pleaded causes of action alleging unjust enrichment insofar as asserted against [the individual defendant], with respect to the loan installment in the sum of $550,000, by alleging that [he] was enriched at their expense, and that it was against equity and good conscience to permit [him] to retain what is sought to be recovered.

(Internal citations omitted).

Posted: April 29, 2016

Guaranty Waiving All Affirmative Defenses Precludes Statute of Limitations Dismissal

On April 11, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Sotheby’s Inc. v. Mao, 2016 NY Slip Op. 30708(U), holding that a guaranty that waived all affirmative defenses waived a statute of limitations defense.

In Sotheby’s, the defendant business owner guarantied a loan from the plaintiff to his business. The guaranty provided that the guarantor’s “obligations hereunder shall be absolute and unconditional, shall not be subject to any counterclaim, setoff, deduction or defense the Company may have against [the plaintiff] or any other person . . . .” (Emphasis added). When the company defaulted on the loan, the plaintiff sought, among other things, to collect on the guaranty. The guarantor moved to dismiss on, among other grounds, the statute of limitations. The court refused to dismiss on that ground, explaining:

The Guaranty, unlike the Agreement, is absolute and unconditional and waives all possible affirmative defenses, including the statute of limitations. As recently reiterated by the Court of Appeals: Guaranties that contain language obligating the guarantor to payment without recourse to any defenses or counterclaims, i.e., guaranties that are absolute and unconditional, have been consistently upheld by New York courts. Absolute and unconditional guaranties have in fact been found to preclude guarantors from asserting a broad range of defenses. Indeed, as the Court noted, the guarantor may not raise as a defense the expiration of the statute of limitations against the primary obligor. Hence, while dismissal of [the plaintiff’s] claims under the Agreement may ultimately be required by the statute of limitations, such dismissal would not absolve [guarantor] of liability. In other words, the subject guaranty effectively provides that, even if the principal is able to escape liability, the guarantee is still enforceable.

(Internal quotations and citations omitted).

Posted: April 28, 2016

Cost of Structural Repairs Not Linked to Covered Damage Do Not Fall Within Property Insurance Policy’s “Blanket Ordinance or Law Coverage Endorsement”

On April 21, 2016, the First Department issued a decision in St. George Tower v. Insurance Co. of Greater N.Y., 2016 NY Slip Op. 03100, holding that the cost of performing legally-mandated structural repairs is not covered by a property insurance policy’s “Blanket Ordinance or Law Coverage Endorsement” unless those repairs are causally connected to covered damage to the property.

In St. George Tower, the plaintiff co-op suffered flooding that damaged the ceilings and floors in certain apartments. In the course of repairing that damage (which the co-op’s insurance carrier acknowledged was covered by the building’s property insurance policy), an architect discovered unrelated structural problems with the building that were required by law to be remediated. The co-op argued that those structural repairs were covered by the policy’s “Blanket Ordinance or Law Coverage Endorsement,” which provides coverage if the building sustains “direct physical damage that is covered under this policy and such damage results in the enforcement of [an] ordinance or law.” New York County Commercial Division Justice Melvin Schweitzer granted summary judgment to the defendant insurer on that claim, holding that the endorsement was not triggered because there was no causal connection between the flooding and the pre-existing structure issues that were incidentally discovered in the course of remediating the flood damage. The First Department affirmed, explaining:

The Ordinance or Law endorsement cannot be triggered simply by the discovery, in the course of an inspection necessitated by a covered event, of structural problems that amount to code violations. That is so whether the discovered condition could have been discerned earlier, or where, as here, it could not have been discovered absent the covered damage.

If the rule were otherwise, even an inspector’s discovery of code violations resulting from shoddy original construction, such as beams or pipes made of sub-par materials, would leave the insurance company liable for the necessary replacement of those materials any time the problem happened to be uncovered in the course of damage remediation. We therefore agree with the motion court; there must be some direct connection between the covered damage and the enforcement of the ordinance, and the necessity of a relationship between the damage and the code enforcement work is not satisfied by the fact that the covered work cannot be completed until the code-compliant repairs are performed. On this record, no evidence was presented that the code-compliant repairs resulted from, or were even related to, the water damage.

We are aware of decisions of other jurisdictions holding to the contrary, and decline to adopt their reasoning. In our view, it is not sufficient that the chain of events beginning with the covered event led to the inspection that uncovered otherwise unrelated code violations.

(Citations omitted.)

Also of note is the First Department’s comment about the high bar under New York law for an insured to recover attorneys’ fees in a coverage action. As we have noted in other posts (see here and here), New York does not recognize a cause of action against a carrier for bad faith claims handling. There is some authority suggesting that a policyholder may recover attorneys’ fees in an extreme case where the insurance company engages in “such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it.” Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967). But that standard is hard to meet. The First Department underscored that point in St. George Tower, observing that “while our affirmance of the award of summary judgment to defendant conclusively establishes the propriety of the dismissal of plaintiff’s attorney’s fees claims, we note that in any event, plaintiff’s allegations that defendant’s denial of coverage was not in good faith were insufficient to entitle plaintiff to reimbursement.”

Posted: April 27, 2016

Account Stated Claim Properly Dismissed; Invoice Relied Upon Sent After Parties Were in Dispute

On April 20, 2016, the Second Department issued a decision in Episcopal Health Services, Inc. v. POM Recoveries, Inc., 2016 NY Slip Op. 02959, affirming the dismissal of an account stated claim because the invoiced amount was in dispute, explaining:

An account stated is an agreement, express or implied, between the parties to an account based upon prior transactions between them with respect to the correctness of account items and a specific balance due on them which is independent of the original obligation. A cause of action for an account stated has been described as an alternative theory of liability to recover the same damages allegedly sustained as a result of the breach of contract.

An essential element of an account stated is that the parties came to an agreement with respect to the amount due. While the mere silence and failure to object to an account stated cannot be construed as an agreement to the correctness of the account, the factual situation attending the particular transactions may be such that, in the absence of an objection made within a reasonable time, an implied account stated may be found.

POM did not assert an agreement as to the amount due. Rather, it asserted that the plaintiff, without justification, ignored POM’s commission statements and refused to open same, indicating that the plaintiff never agreed that the commission statements were accurate. Further, although POM asserted that over $1,000,000 was owed pursuant to an account stated, the only invoice in the record, dated February 28, 2013, after this action was commenced, is for $307,211.98. In view of the foregoing, POM failed to state a cause of action for an account stated, and its fourth counterclaim, which alleged an account stated, was properly dismissed.

(Internal quotations and citations omitted).

Posted: April 26, 2016

First Department Upholds Sanctions For “Profanity-Laden Attack on Lawyer Conducting Deposition”

On April 19, 2016, the First Department issued a decision in Freidman v. Yakov, 2016 NY Slip Op. 02944, upholding an award of sanctions against an attorney for deposition conduct, explaining:

The court providently exercised its discretion by finding that Evgeny engaged in frivolous conduct and sanctioning him. In addition to the episode on which the motion court relied, where Evgeny — a lawyer who was present at Naum’s deposition as an observer and a party — launched a profanity-laden attack on the lawyer conducting the deposition, we have, as requested by counterclaim defendants, reviewed the entire deposition transcript and find it replete with instances of conduct undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another. Although Evgeny is a practicing lawyer, the record shows that he claimed not to know basic legal terms and repeatedly played word games with defense counsel.

(Internal quotations and citations omitted).

Posted: April 25, 2016

Inaction in Face of Alleged Knowledge of Another’s Wrongdoing Not Aiding and Abetting

On April 19, 2016, the First Department issued a decision in Balanced Return Fund Ltd. v. Royal Bank of Canada, 2016 NY Slip Op. 02928, affirming the dismissal of an aiding and abetting fraud claim, explaining:

Plaintiff failed to raise an issue of fact by submitting evidence showing that defendant knew it was structuring the transaction to plaintiff’s detriment in order to benefit the non-party primary wrongdoer. To the extent that the alleged assistance provided to the primary wrongdoer consisted of inaction, it was insufficient to support the aiding and abetting claims.

(Internal citations omitted).

Posted: April 24, 2016

Question of Fact Whether Insurance Policy Covered Affiliates of Sole Named Insured

On March 30, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in El-Ad 250 West LLC v. Zurich America Insurance Co., 2016 NY Slip Op. 30595(U), finding that there were questions of fact regarding whether affiliates of an insured were covered by an insurance policy despite not being named as insureds in it, explaining:

It is clear . . . that the Policy states that only the Named Insured – plaintiff El-Ad 250 – may recover delay in completion losses. Nonetheless, plaintiff contends that it may recover delay in completion losses incurred by related “El-Ad” affiliates who worked on the covered project.

. . .

Plaintiffs argument that delay in completion coverage is available to its affiliates is based on a line of cases originating with Lipschitz v Hotel Charles. . . . . Lipschitz and its progeny are understood to stand for the proposition that if an insurance policy inaccurately recites the party for whom it was intended that coverage for the subject risk would be available, then that intended insured could receive coverage, despite not being named in the policy. . . .

[The defendant] correctly observes that the legal principles of mistake and reformation are themes underlying many of these cases. However, not all of the above-cited cases . . . expressly base their holding on the doctrine of mistake, nor do any of these cases expressly hold that mistake is an essential element of a claim that the intended insured was not correctly identified in the Policy. On the contrary, there are a number of cases where the decision to afford coverage to a party not named in the policy turned exclusively on intent without any consideration of whether a mistake was made. In fact, the First Department has held that denying coverage based on an absence of evidence of mutual mistake or unilateral mistake coupled with fraud is not justified. Rather, coverage must be provided to the owners of and the only parties with an insurable interest in the insured property, as named insureds because the name of the insured need not appear on the face of the policy; it is enough that it describes the person for whose benefit the insurance is obtained.

Indeed, Lipschitz and its progeny recognize that coverage determinations must turn on the question of whether the parties’ intended to cover the underlying risk, not which corporate entity was the intended insured. . . .

Moreover, as noted, [the defendant’s] underwriting process appears to have accounted for the affiliates, suggesting it understood coverage might extend to them. While[the defendant] disputes this, the reasons behind [its] underwriting are questions of fact that cannot be resolved on its summary judgment motion, where the evidence must be viewed in the light most favorable to plaintiff, the party opposing summary judgment.

(Internal quotations and citations omitted).

Posted: April 23, 2016

Motion to Dismiss Based on Testimony in Other Actions Denied; Questions of Fact Remain

On March 11, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Veleron Holding v. Morgan Stanley, 2016 NY Slip Op. 30594(U), refusing to dismiss claims based on testimony given by a party in another action.

The dispute in Veleron Holding related to an investment in a Canadian automotive parts manufacturer. One of the defendants moved to dismiss the plaintiff’s fraud claim “on the ground that testimony in a recent federal insider trading trial is incompatible with the fraud claim asserted in the complaint.” The court denied the motion, explaining:

The trial testimony does not definitively resolve the relevant inquiry, namely, whether at the time RM transmitted the Guaranty to BNP, RM intended that the Guaranty would not be legally effective. Obviously, if RM did not think it was guaranteeing anything, it could not establish the element of actual reliance. The record on this motion is devoid of any RM witness making such a judicial admission. To be sure, it would be reasonable to conclude that the testimony of RM’s witnesses raise a reasonable inference that after it issued the Guaranty, RM immediately had regrets and sought a way out of it. A reasonable finder of fact might also conclude that RM’s conduct on October 2, 2008 is sufficient circumstantial evidence of its intent on October 1. After all, Moldazhanova basically admitted that she thought the Guaranty was not legally binding on October 2, but stayed silent in her conversations with the banks to permit them to operate under the false impression (in her view) of its validity. Ultimately, as we know, such a strategy did not prove fruitful for RM since the arbitrator eventually held that the Guaranty is enforceable. Consequently, that RM may have acted deviously on the day after the Guaranty was issued is of no moment at this juncture. Nor is it dispositive that RM’s witnesses may have perjured themselves in the arbitration and the Federal Action by being less than forthright about the actions of RM’ s board. Regardless of the veracity of Moldazhanova’s testimony about her views on October 2; neither she nor any other RM witness expressly testified about RM’s intent as to the validity of the Guaranty when it was transmitted on October 1. To the extent Morgan Stanley asks this court to view Moldazhanova’s testimony with a fair degree of skepticism and simply find her not to be a credible witness, such a determination would be improper on this motion to dismiss.

(Internal quotations and citations omitted).