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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 30, 2015

Disclaimer of Coverage Not in Bad Faith When No Intent to Delay and Arguable Basis for Denial Existed

On January 22, 2015, the First Department issued a decision in S Bros. Inc. v. Leading Insurance Services, Inc., 2015 NY Slip Op. 00603, discussing the standard for bad faith refusal to defend under an insurance policy.

In S Bros. Inc., the “[p]laintiff commenced [a] declaratory action approximately one month after asking defendant to reconsider its disclaimer of coverage in connection with the underlying action. Just over a month later, defendant rescinded its disclaimer of coverage and agreed to provide plaintiff with a defense in that action and to reimburse it for the reasonable legal fees it had already incurred therein.” The First Department agreed with the trial court that the “defendant’s initial refusal to defend” was not “an act of bad faith,” explaining:

The record does not evince a conscious campaign calculated to delay and avoid payment on plaintiff’s claims. Moreover, defendant had an arguable basis for disclaiming coverage. Although the plaintiff in the underlying action asserted a claim styled “breach of fiduciary duty and negligence,” her factual allegations of the knowing release of private medical information to an unauthorized third party, could fall within the policy’s exclusion for injury caused by the insured with the knowledge that the act would cause the injury.

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

Posted: January 29, 2015

First Department Affirms Injunction Pending Arbitration Based, In Part, On Agreement Limiting Damages

On January 22, 2015, the First Department issued a decision in Matter of Rockwood Pigments NA, Inc. v. Elementis Chromium LP, 2015 NY Slip Op. 00612, affirming the grant of a preliminary injunction prohibiting the termination of a distributorship agreement pending arbitration of the parties’ dispute.

This post focuses on one aspect of the Rockwood Pigments decision: the First Department’s discussion of irreparable harm. One would think that damages from the termination of a commercial agreement could be compensated for with money damages. However, the First Department explained:

Petitioner also showed that it would suffer irreparable injury in the absence of preliminary injunctive relief. The distribution agreement prohibits the recovery of damages for lost profits on anticipated sales and for lost business damages due to diminished goodwill. Thus, absent preliminary relief, petitioner’s ability to be made whole after a wrongful termination would be seriously jeopardized. Further, respondent’s email “blast” to respondent’s customer base threatened petitioner’s business operations and its creditworthiness.

(Emphasis added). This decision could be used to argue that contractual terms limiting damages increase the likelihood of a court granting an injunction pending litigation. Further, because consequential damages generally are not available unless they were within the parties’ contemplation when they signed the agreement, this decision could be applied even outside the context of an agreement limiting damages.

Posted: January 28, 2015

First Department Analyzes “Manifest Intent” Requirement in Fidelity Bond

On January 22, 2015, the First Department issued a decision in Keybank N.A. v. National Union Fire Insurance Co. of Pittsburgh, PA, 2015 NY Slip Op. 00614, analyzing the “manifest intent” requirement in a fidelity bond.

In Keybank, the plaintiff sought to recover on a fidelity bond. The First Department affirmed the trial court’s denial of summary judgment on the ground that there were questions of fact regarding whether the losses were the result of an employee’s “‘manifest intent’ to cause plaintiff to sustain a loss or to obtain a financial benefit for himself or the developer,” explaining:

Plaintiff now seeks to recover its losses under the fidelity bond issued by defendant, which provided coverage for:

“(A) Loss resulting directly from dishonest or fraudulent acts committed by an Employee acting alone or in collusion with others.

Such dishonest or fraudulent acts must be committed by

the Employee with the manifest intent:

(a) to cause the Insured to sustain such loss; or

(b) to obtain financial benefit for the Employee or

another person or entity.

“Notwithstanding the foregoing, however, it is agreed that with regards to Loans and/or Trading this bond covers only loss resulting directly from dishonest or fraudulent acts committed by an Employee with the intent to cause the Insured to sustain such loss and which results in a financial benefit for the Employee”.

. . .

[S]ummary judgment must be denied because material issues of fact exist as to whether the employee had the “manifest intent” to cause plaintiff to sustain a loss or to obtain a financial benefit for himself or the developer.

Manifest intent involves a continuum of conduct, ranging from embezzlement, where the employee necessarily intends to cause the employer the loss, to the other end of the continuum, which does not trigger fidelity coverage, where the employee’s dishonesty at the expense of a third party is intended to benefit the employer, since the employee’s gain results from the employer’s gain.

Manifest intent to injure an employer exists as a matter of law where an employee acts with substantial certainty that his employer will ultimately bear the loss occasioned by his dishonesty and misconduct. . . . An issue of fact remains as to whether the employee’s diversion of checks to the developer that should have been deposited with his employer manifests an intent to harm his employer within the meaning of the fidelity bond.

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

Posted: January 27, 2015

Debt Not Acknowledged in Writing Does Not Revive Statute of Limitations

On January 21, 2015, the Second Department issued a decision in Mosab Construction Corp. v. Prospect Park Yeshiva, Inc., 2015 NY Slip Op. 00505, holding that the defendants had not acknowledged the debt in a writing, restarting the statute of limitations period.

In Mosab Construction Corp, the trial court granted the defendants’ motion to dismiss the breach of contract claim against them as time-barred. The Second Department affirmed, explaining:

[T]he plaintiff argued that the defendants had acknowledged the debt in a writing, and so had restarted the statute of limitations period. General Obligations Law § 17-101 effectively revives a time-barred claim when the debtor has signed a writing which validly acknowledges the debt. To constitute an acknowledgment of a debt, a writing must recognize an existing debt and contain nothing inconsistent with an intention on the part of the debtor to pay it.

Here, the plaintiff’s opposition papers did not include any writing that purported to be a written acknowledgment of the debt by the defendants. Moreover, while the Supreme Court allowed the plaintiff to submit, at the oral argument on the motion, a writing purporting to be such an acknowledgment, the writing submitted by the plaintiff neither acknowledged a debt owed to the plaintiff, nor indicated that the defendants intended to pay the plaintiff. Rather, it set forth various claims asserted by the defendants against the plaintiff. Thus, as the Supreme Court properly determined, the writing did not constitute an acknowledgment under General Obligations Law § 17-101 so as to restart the statute of limitations period.

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

Posted: January 26, 2015

Court Denies Motion to Amend Petition for Judicial Dissolution of Corporation to Add Allegations to Post-Commencement Wrongdoing

On January 16, 2015, Justice Platkin of the Albany County Commercial Division issued a decision in Matter of Digeser v. Flach, 2015 NY Slip Op 50041(U), ruling that a petitioner seeking judicial dissolution of a corporation could not amend the petition to add allegations of post-commencement wrongdoing, while preserving the original valuation date for purposes of the respondent’s buyout right.

Where a shareholder seeks dissolution under that BCL § 1104-a, the respondents “ha[ve] the right under BCL § 1118 to elect to purchase petitioner’s shares for their fair value as of the day prior to the commencement.” In Matter of Digeser, the respondent declined to exercise the buyout right. Later, the petitioner sought leave to amend his petition to add additional grounds for dissolution based on alleged post-commencement conduct. However, he asked that the valuation for purposes of the buyout right be determined based on the original filing date – presumably because the corporation’s value had decreased since the filing of the initial petition. Justice Platkin denied the motion, finding that retaining the original valuation date would unfairly prejudice the respondents:

In the Court’s view, respondents would be substantially prejudiced if petitioner were permitted to pursue dissolution of the subject corporations based upon allegations of post-commencement wrongdoing while retaining a pre-commencement valuation date for BCL § 1118 purposes. If petitioner’s proof of pre-commencement oppression, waste and looting falls short of establishing a basis for relief under BCL § 1104-a, the petition would be subject to dismissal, and any subsequent petition premised upon allegations of post-commencement wrongdoing would be subject to a new BCL § 1118 right of election with an updated valuation date. Petitioner offers no persuasive basis for denying respondents the opportunity to purchase his shares valued as of a date subsequent to the accrual of the grounds for dissolution, as contemplated by BCL § 1118. For this reason, the post-commencement grounds for dissolution should, as a discretionary matter, be denied nunc pro tunc treatment and instead treated as the equivalent of the filing of a new petition. (see BCL § 1107). Accordingly, insofar as petitioner seeks an order that allows him “to serve the amended petition and provides that the . . . date of valuation of the corporate assets remains April 30, 2013″, the motion is denied.

Posted: January 25, 2015

Insured Not Entitled to Coverage When it Fails to Set Fire Alarm as Required by Policy

On January 21, 2015, the Second Department issued a decision in Triple Diamond Café, Inc. v. Those Certain Underwriters at Lloyd’s London, 2015 NY Slip Op. 00527, affirming summary judgment in favor of an insurer because of the insured’s failure to observe a policy warranty.

In Triple Diamond Café, the trial court granted the defendant insurer summary judgment on the plaintiff bar and lounge’s claim that the insurer improperly “denied coverage on the basis that the plaintiff failed to comply with a” policy provision providing “Warranted Automatic extinguishing system and hood and duct cleaning, central station fire and burglar alarms will be fully operational throughout the period of the policy,” because the alarm had not been set. The Second Department affirmed, explaining:

Insurance Law § 3106(a) provides: “In this section warranty means any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract”. As a general matter, warranties represent a promise by the insured to do or not to do some thing that the insurer considers significant to its risk of liability under an insurance contract. Here, the provision in the special conditions section of the declaration page which states “warranted burglar alarm will be fully operational throughout the period of the policy” meets the definition of a warranty pursuant to the Insurance Law, since requiring the plaintiff to have a fully operational burglar alarm would be significant to the defendant’s risk of liability under the insurance policy. Contrary to the plaintiff’s contention, there is no requirement that the warranty be set forth in any particular manner, as long as its effect is to create a condition precedent to the insurer’s liability. Indeed, the use of the term “warranted” at the beginning of the subject provision establishes that the provision was a warranty as defined by the Insurance Law. Accordingly, the Supreme Court correctly concluded that the provision contained on the declaration page constituted a warranty as a matter of law.

. . .

In the context of an insurance policy, the statement that an insured have a fully operational security system logically requires that the system be actually utilized by the insured to prevent or mitigate the risk the insurer takes by writing the policy. Interpreting the term as the plaintiff suggests would reduce the provision to a nullity, giving it no comprehensible meaning. Hence, in context, the only reasonable meaning to be assigned to the term “fully operational” requires that the alarm system be activated and in use. Accordingly, the Supreme Court properly concluded that the plaintiff breached the warranty by failing to set the alarm on the date of the loss, and, thus, properly granted the defendant’s motion for summary judgment dismissing the complaint.

(Internal quotations and citations omitted). New York courts can be tough on insurers. Still, they will not read policy terms such as the warranty above out of a policy (particularly a commercial one) to save the insured.

Posted: January 24, 2015

Court Enforces Choice of Law Provision Notwithstanding Dispute’s Lack of Connection to New York

On January 9, 2015, Justice Bransten of the New York County Commercial Division issued a decision in Marsh USA Inc. v. Doerfler, 2015 NY Slip Op 50020(U), holding that, as written in the parties’ agreement, a New York choice of law provision precluded an argument that New York law should not be applied because the parties and the agreement had no reasonable relationship to the state.

The contract at issue in Marsh USA Inc. stated that it “shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to its conflict of laws provisions.” (Emphasis added). Justice Bransten found that the exclusion of New York’s “conflict of laws provisions” from the choice of law clause foreclosed any argument that New York law should not apply because of insufficient connections to the forum – which is essentially a conflict of laws argument. The Court explained:

It is well-settled that a basic precept of contract interpretation is that agreements should be construed to effectuate the parties’ intent. As a result, New York courts are willing to enforce parties’ choice of law provisions. Such provisions are considered prima facie valid. To invalidate such a provision, a party “must show that its enforcement would be unreasonable, unjust, or would contravene public policy, or that the clause is invalid because of fraud or overreaching.

Defendants’ principal arguments against enforcing the choice of law provision in the NSA are that the parties and their agreement bear no reasonable relationship to New York and that the application of New York law would be contrary to the policy of Oregon. However, the second phrase of the NSA’s choice of law provision—”without regard to its conflict of laws provisions”—forecloses such an inquiry. The Second Circuit interpreted nearly identical language, and concluded that “New York’s conflict of law rule regarding trusts [which would have instead called for the application of Cayman Islands law] is not relevant to this case because paragraph 38 clearly states that in interpreting the Settlement Agreement, New York internal’ law applies without regard to conflicts of law.'” Archer Invs. S.a.r.l v. Local 282 Welfare Trust Fund, 462 F. App’x 122, 123-24 (2d Cir. 2012).

Here, as in Archer, Defendants’ arguments in favor of applying Oregon law would correctly be characterized as “conflict of laws” arguments and therefore may not be considered according to the plain language of the NSA, which requires the application of New York law to the governance and construing of the NSA, without regard to New York’s conflict of laws provisions. Accordingly, the choice of law provision must be enforced, such that New York (not Oregon) law governs the parties’ dispute.

(Some citations omitted).

Posted: January 23, 2015

SEC Administrative Order Insufficient to Establish Dishonesty Triggering Insurance Policy Dishonest Acts Exclusion

On January 15, 2015, the First Department issued a decision in J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 2015 NY Slip Op. 00462, holding that an SEC administrative order, arising from an investigation of improper “market timing” by Bear Stearns, did not constitute an “adjudication” of wrongdoing sufficient to trigger a Dishonest Acts Exclusion in Bear Stearns’ professional liability policy, but could be the basis for an affirmative defense based on the public policy against permitting insurance coverage for disgorgement.

In affirming the decision of New York County Commercial Division Justice Charles Ramos on the application of the exclusion (which we previously blogged about here, the First Department explained:

To negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case. Further, the court is required to interpret the policy in light of common speech and the reasonable expectations of a businessperson. Here, the issue is the applicability of the Dishonest Acts Exclusion, so defendants bear the specific burden of demonstrating that a settlement constitutes an “adjudication” for purposes of the exclusion.

In arguing that the term “adjudication” means any resolution of a dispute that has specific consequences for a party, defendants virtually ignore the part of the Dishonest Acts Exclusion that requires that any adjudication “establish that such Insured(s) were guilty of any deliberate, dishonest, fraudulent or criminal act or omission” (emphasis added). Defendants quote the dictionary definition of “adjudication,” but fail to note that “establish” is defined, in this context, as “to put beyond doubt”. It can hardly be said that the SEC Order and the NYSE Stipulation put Bear Stearns’s guilt “beyond doubt,” when those very same documents expressly provided that Bear Stearns did not admit guilt, and reserved the right to profess its innocence in unrelated proceedings. Again, in interpreting the policy we are guided by reason, and defendants’ position that the settlement documents “establish” guilt is not reasonable.

The First Department reversed Justice Ramos’ dismissal of the insurance carriers’ affirmative defense based on the public policy against permitting insurance coverage for disgorgement of ill-gotten gains. The court explained that although the wording of the policy prevented the insurance companies from relying on the SEC’s “findings” in the administrator orders to avoid coverage based on the exclusion, the “language of a policy may be overwritten is where an insured engages in conduct ‘with the intent to cause injury,'” as it would violate public policy to permit insurance coverage in that context regardless of what the policy says.

Posted: January 21, 2015

“But for” Standard for Legal Malpractice Applies Equally to Accountant Malpractice Claim

On January 8, 2015, Justice Friedman of the New York County Commercial Division issued a decision in Hamadeh v. Spaulding, 2015 NY Slip Op. 30027(U), examining the causation standard for an accounting malpractice claim.

In Hamadeh, the defendants moved to dismiss the accounting malpractice claims against them. In deciding that motion, the court reviewed the causation standard for such a claim:

Defendants do not cite any case law in the accountant malpractice context which holds that the malpractice must have been the sole proximate cause of the plaintiffs injury. As discussed above, cases in the accountant malpractice area have used the term “a proximate cause” in articulating the standard that the plaintiff must prove. In the legal malpractice context, an often-cited formulation of the standard of proof requires that three elements be established: “(I) the negligence of the attorney; (2) that the negligence was the proximate cause of the loss sustained; and (3) proof of actual damages. It requires the plaintiff to establish that counsel failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession and that ‘but for’ the attorney’s negligence, the plaintiff would have prevailed in the matter or would have avoided damages.” In other legal malpractice cases, however, the courts have held that the attorney’s malpractice must have been “a” proximate cause of the plaintiffs injury. The Second Department has expressly held that these varying formulations of the proximate cause standard (“a” as opposed to “the” proximate cause) have “no substantive import,” and that the “but for” standard for attorney malpractice cases does not require proof that the defendant attorney’s negligence was the “sole proximate cause” of the plaintiffs losses.

The court assumes that the “but for” standard from the legal malpractice context applies equally to accountant malpractice claims.

(Internal quotations and citations omitted).