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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: December 9, 2016

Covenant of Good Faith and Fair Dealing Did Not Prevent Contract Termination

On November 30, 2016, the Second Department issued a decision in ELBT Realty, LLC v. Mineola Garden City Co., Ltd., 2016 NY Slip Op. 08042, holding that the covenant of good faith and fair dealing did not prevent a party from terminating a contract, explaining:

Here, the Supreme Court properly concluded that the language of section 3.01, which provided that the purchaser could terminate the contract in “its sole discretion” and for “any reason whatsoever,” means what it says: that the purchaser had the sole discretion to terminate the contract if it found the project to be unsatisfactory for any reason whatsoever during the specified time frame. While the implied covenant of good faith and fair dealing between parties to a contract embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, here, the plain language of the contract makes clear that termination of the contract was a possibility and the parties, who were sophisticated, counseled business entities negotiating at arm’s length over a prolonged period of time, should have understood and expected that termination of the agreement could occur during that specified window of time, and that such a decision was the purchaser’s alone and did not need to be accompanied by any specific justification.

To interpret section 3.01 as the seller asks would require adding terms to the contract and thereby make a new contract for the parties under the guise of interpreting the writing, and courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include.

(Internal quotations and citations omitted).

Posted: December 8, 2016

Accounting Malpractice Claim Properly Dismissed for Lack of Privity

On November 30, 2016, the Second Department issued a decision in Weinstein v. CohnReznick, LLP, 2016 NY Slip Op. 08068, affirming the dismissal of an accounting malpractice claim, explaining:

The plaintiffs alleged that Cohn, an accounting firm, assisted nonparties Lawrence Levine and David Levine (hereinafter together the Levines) in wrongfully acquiring the plaintiff Solas Plumbing Corp., a plumbing business. . . .

The Supreme Court properly granted that branch of Cohn’s motion which was to dismiss the cause of action alleging accounting malpractice. Accepting the factual allegations in the complaint as true, and according the plaintiffs the benefit of every favorable inference, the complaint failed to adequately allege the existence of actual privity of contract between the plaintiffs and Cohn, or a relationship so close as to approach that of privity, sufficient to impose a professional duty upon Cohn for the benefit of the plaintiffs. Inasmuch as the complaint failed to adequately allege the existence of a duty owed by Cohn to the plaintiffs, it failed to state a cause of action alleging accounting malpractice.

(Internal quotations and citations omitted).

Posted: December 7, 2016

Default Judgment Reversed; Law Office Failure Sufficient Excuse

On November 29, 2016, the First Department issued a decision in Cheri Restaurant Inc. v. Eoche, 2016 NY Slip Op. 07985, vacating a default judgment, explaining:

To obtain relief from a default judgment, a party is required to demonstrate both a reasonable excuse for the default and a meritorious claim or defense to the action. Here, defendant has adequately demonstrated a reasonable excuse, namely, inadvertent law office failure. Defendant’s new counsel, in an affirmation submitted to the motion court, stated that there was a misunderstanding between her and defendant’s former counsel, and that she was unaware of the scheduled deposition and the compliance conference when she took over representation in early April 2015, approximately a month before the May 5th conference date, which she missed. Shortly after receiving part of defendant’s case file – which only contained plaintiff’s discovery responses and discovery demands – defendant’s new counsel became very ill and lost approximately two weeks from work. Additionally, new counsel affirmed that she was informed by defendant’s former counsel that he had received an extension of time to respond to plaintiff’s discovery demands. In fact, plaintiff’s counsel confirmed that she agreed to the extension. Lastly, defendant’s new counsel affirmed that she was unaware that this was an e-filed case as she had never appeared in the New York County Supreme Court, Commercial Division, before, and her practice involved cases mainly in Queens and Kings County, where e-filing was not mandated.

Additionally, the record does not show a pattern of dilatory behavior by the defendant or his counsel, or indicate that the default was willful. Nor is this a case in which defense counsel was fully aware of her obligations and intentionally and repeatedly failed to attend to them.

(Internal quotations and citations omitted).

Posted: December 6, 2016

Strict Compliance With Notice Provision Not Required In Real Estate Case

On November 28, 2016, Justice Ritholtz of the Queens County Commercial Division issued a decision in 11-01 36 Ave. LLC v. Quamar, 2016 NY Slip Op. 26388, denying a motion for summary judgment seeking to have a time-is-of-the-essence letter declared a nullity.

In the underlying dispute, the parties had entered into a contract for the sale of real estate, but could not agree on who was responsible for paying off various “judgments and violations against the property.” Presumably in order to bring the issue to a head, the plaintiff sent the defendants a time-is-of-the-essence letter, and when the defendants did not close, declared a default and brought the lawsuit.

The defendants then moved for summary judgment declaring that the letter was ineffective, arguing that it was not properly served, that it did not place the venue for the closing in the proper location, and that it did not provide defendants a reasonable time to perform.

On the first issue, the contract of sale called for all notices to be sent to the parties’ lawyers, and also to each party, and the defendants argued that, by only serving their lawyer, the plaintiff failed to comply with the contract. The court was confronted by contradictory Second Department precedents, some holding that strict compliance with notice provisions was required, and others holding that it was not required, so long as actual notice was given, and no prejudice resulted. The court decided to follow the most recent Second Department decision and ruled that strict compliance could be excused because the defendants had actual notice and did not claim prejudice.

The court similarly rejected defendants’ second argument that the letter placed the venue of the closing at plaintiff’s lawyer’s office and not at defendant’s lawyer’s office as required by the contract, holding that “the minor deviation from the contract was neither material nor prejudicial.”

Defendant’s third argument, that the letter did not give them “a reasonable time in which to act,” raised “at best for the defendant sellers . . . an issue of fact,” because they had not shown that reasonableness could be decided as a matter of law. The motion for summary judgment nullifying the letter was accordingly denied.

This case is not so much of interest for the specific points of law raised as for the fact that the trial court—unusually—acknowledged a conflict between decisions of a particular appellate division, rather than pretending that one set of cases or the other could be distinguished. The decision also illustrates both that (a) a party relying on technical notice arguments is not in the strongest position if actual notice was provided, but also that (b) parties should take care to strictly comply with notice requirements; after all, if the Second Department’s most recent decision had gone the other way, the plaintiff’s time-is-of-the essence letter might well have been declared a nullity.

Posted: December 5, 2016

First Department Reverses Trial Court Approval of Derivative Action Settlement

On November 29, 2016, the First Department issued a decision in Company v. Clayton Dubilier & Rice, LLC, 2016 NY Slip Op. 08021, reversing the approval of the settlement of a derivative action, explaining:

The settlement does not provide for payment to the company. Plaintiffs are to receive the bulk of the $4 million settlement in reimbursement for their legal fees in this case, and the remainder is to be turned over to their franchisee organization for future legal fees or for distribution, at the organization’s discretion, to plaintiffs. Moreover, because they have not obtained a substantial benefit for the company, but have accomplished only getting their lawyers paid, plaintiffs, who, after four attempts, have yet to plead properly that they have standing to sue derivatively, are not entitled to legal fees. It was an abuse of discretion to approve the settlement of a derivative action purporting to bind the company and all shareholders that was obtained by plaintiffs who had not established — and may never establish — their standing to bring the action. Contrary to plaintiffs’ argument, defendants, as shareholders in the company who received notice of the settlement and had an opportunity to and did object to the settlement, have standing.

(Internal citations omitted).

Posted: December 4, 2016

Court Excuses Untimely Motion for Default Judgment

On November 21, 2016, Justice Hudson of the Suffolk County Commercial division issued a decision in Ehrenkranz v. 58 MHR LLC, 2016 NY Slip Op. 32322(U), excusing an untimely motion for default judgment, explaining:

If the Plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed. The one exception to the otherwise mandatory language of CPLR 3215(c) is that the failure to timely seek default on an unanswered complaint or counterclaim may be excused if sufficient cause is shown why the complaint should not be dismissed. This Court has interpreted this language as requiring both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious. The determination of whether an excuse is reasonable in any given instance is committed to the sound discretion of the motion court. Ongoing settlement negotiations between a Plaintiffs attorney and the Defendants’ insurance carrier during the one year period after the default has been considered a reasonable excuse for a delay.

Here, Plaintiff failed to move for a default judgment for approximately 3 years between Dimitri Boylan’s default in appearing or answering and the Plaintiffs’ July 5, 2016 motion. The Court finds, however, that Plaintiffs excuse for the delay is reasonable, inasmuch as the instant action, which was commenced three years after the Opus action, was delayed by Court Order to bifurcate the two related actions, complex litigation which ensued between the parties, numerous attempts to settle before the trial of the Opus action and after the jury awarded Plaintiffs a judgment, the complex issues that attended the jury trial of the Opus action, and the corporate veil trial. The Court further notes that this action was assigned to three different judges over its pendency. In addition, by denying Defendants’ motion to dismiss Plaintiffs’ remaining causes of action for fraudulent conveyance and aiding and abetting fraudulent conveyance the Court has already found that these remaining causes of action have merit and should proceed to trial. Therefore, the Court, in its discretion, finds that Plaintiffs have demonstrated both a reasonable excuse and meritorious causes of action.

(Internal quotations and citations omitted).

Posted: December 3, 2016

Disagreement Over LLC Management Insufficient Grounds for Dissolution

On November 18, 2016, Justice Ash of the Kings County Commercial Division issued a decision in Matter of Norvell v. Guchi’s Idea LLC, 2016 NY Slip Op. 32307(U), holding that a dispute over LLC management was not sufficient grounds for dissolution, explaining:

Limited Liability Company Law S 702 provides for judicial dissolution as follows: On application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. The petitioning member satisfies the not reasonably practicable standard under LLCL S 702 when, in the context of the terms of the operating agreement or articles of incorporation, the petitioner can show that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.

Here, it is undisputed that when the partnership commenced, there was no operating agreement signed by the parties. Thus, the issue is whether, currently, the purpose of the LLC is being achieved and whether it remains financially feasible. The evidence before the Court indicates that both the purpose of Guchi, as a Japanese restaurant, and its financial viability are being achieved. That Norvell disagrees with Haraguchi’s control and operation of Guchi is insufficient to warrant dissolution of Guchi.

(Internal quotations and citations omitted).

Posted: December 2, 2016

Amended Operating Agreement Not Documentary Evidence Proving Plaintiff Was Not an LLC Member

On November 22, 2016, Justice Knipel of the Kings County Commercial Division issued a decision in Cupcake & Boomboom, LLC v. Aslani, 2016 NY Slip Op. 32310(U), holding that an amended LLC operating agreement that did not list the plaintiff as a member was not satisfactory documentary evidence that the plaintiff was not a member, explaining:

[T]he documentary evidence relied upon by Aslani does not show that Vigouroux ever relinquished or transferred his membership interest in CCBB, The Registration Certificates were never signed and were, therefore, patently insufficient to show a transfer of Vigouroux’s interest in CCBB. Moreover, subsequent to the January 2, 2013 date of these Registration Certificates, Aslani executed the 2014 Operating Agreement, in which he certified, by his signature, that the 2014 Operating Agreement was adopted and approved by each member. As discussed above, the 2014 Operating Agreement set forth that Vigouroux’s interest in CCBB was 39%. There is no evidence of any subsequent written consent by a majority of the members of CCBB to a transfer of Vigouroux’s interest in CCBB. There is also no showing that any consideration was ever paid to Vigouroux for any transfer of his interest in CCBB since the Promissory Note relied upon by Aslani was not signed by CCBB and, as such, was unenforceable. While Aslani relies upon the 2015 Operating Agreement as documentary evidence, such reliance is misplaced since changes to an operating agreement that adversely affect a member’s right to distributions require the consent of that member in writing. Here, Vigouroux did not sign the 2015 Operating Agreement, and did not provide his consent to this agreement, which purported to eliminate his membership interest in CCBB. Thus, since the 2015 Operating Agreement contravenes statutory requirements, it is ineffective to deprive Vigouroux of his membership interest in CCBB.

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

Posted: December 1, 2016

Court of Appeals Grants Leave to Appeal in Case Regarding Application of Res Judicata to Unasserted Compulsory Counterclaims in Prior Federal Action

On November 22, 2016, the Court of Appeals granted leave to appeal in Paramount Pictures Corp. v. Allianz Risk Transfer AG. The First Department’s decision, which we blogged about here, held that a claim that should have been, but was not, brought as a compulsory counterclaim in a federal court action was barred by the doctrine of res judicata under New York law.

Posted: November 30, 2016

Board Did Not Breach Fiduciary Duty By Entering Into Management Contract With Former Employees

On November 22, 2016, the First Department issued a decision in Doppelt v. Denahan, 2016 NY Slip Op. 07868, holding that directors did not breach their fiduciary duty by entering into a management contract with former employees, explaining:

Contrary to the argument advanced by plaintiff, a shareholder who seeks to bring a derivative action on behalf of nominal defendant Annaly Capital Management, Inc., the employees of the company were not an asset that could be monetized, sold or spun off. Therefore, the fact that the employees were free to leave the company to form their own business is not equivalent to the company’s giving up an asset in entering into a management contract with them. Nor does the plan to allow management of the company to be thus “externalized” constitute a breach of fiduciary duty.

(Internal quotations and citations omitted).