Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: September 10, 2014

Fraud Claim Dismissed As Duplicative of Breach of Contract Claim

On September 4, 2014, the First Department issued a decision in Beta Holdings, Inc. v. Goldsmith, 2014 NY Slip Op. 06035, dismissing a fraud counterclaim as duplicative of the counterclaim-plaintiffs’ breach of contract claim.

In Beta Holdings, the plaintiffs, entities associated with a private equity fund, filed suit against the principals of a company the fund acquired, asserting claims for fraud and breach of contract arising from alleged misrepresentations regarding the financial condition of the company.  The defendants filed counterclaims, including a claim for fraud, arising from the plaintiffs’ failure to pay amounts due on a note that was issue in connection with the transaction.  New York Commercial Division Justice Jeffrey K. Oing denied the plaintiffs’ motion to dismiss the fraud counterclaim, and the First Department reversed, holding that the fraud claim was duplicative of the breach contract claim because the defendants did not “allege a duty separate from the terms of the agreement that was breached”:

The fraud counterclaims, insofar as based on the alleged misrepresentations by counterclaim defendants that they would honor the terms of the promissory notes, are duplicative of the breach of contract counterclaims; the allegations are essentially that they did not intend to honor the terms of the notes at the time they executed them. The allegations are insufficient to satisfactorily plead that counterclaim defendants, at the time the agreement was entered into, never intended to carry out the terms of the agreement. Neither do they allege a duty separate from the terms of the agreement that was breached by counterclaim defendants so as to support a claim of fraud, or that the damages sought to be recovered are based on lost opportunities arising from counterclaim plaintiffs having been induced to sell their company. Here, plaintiffs claim that counterclaim defendants orally promised to “grow the company” using methods such as geographic expansion, acquisition opportunities and better marketing, and that these promises are specific and not subject to the agreement’s merger provision. However, this overlooks the September 8, 2008 letter of intent, which includes a promise that the buyers “want to continue to grow the Company,” and briefly summaries how this would be done. The terms of the letter of intent are subject to the merger provision. In any event, the alleged promises are of a general nature and insufficiently specific to establish fraudulent inducement, even were they not barred by the agreement’s merger provision.

(Citations omitted.)  This decision illustrates that, under New York law, a claim arising from a failure to perform under an agreement usually sounds in contract not in tort, and the mere allegation that a party “never intended to perform” under the contract is not sufficient to transform a breach a contract claim into a fraud claim.

Posted: September 9, 2014

Claim for Breach of Covenant of Good Faith and Fair Dealing Duplicative When it Arises from Same Operative Facts as Contract Claim

On September 4, 2014, the First Department issued a decision in Mill Financial, LLC v. Gillett, 2014 NY Slip Op. 06039, holding that a claim for breach of the covenant of good faith and fair dealing is duplicative of a breach of contract claim when both claims arise from the same operative facts.

In Mill Financial, a dispute over commercial loans, the trial court denied a defendant’s motion to dismiss. On appeal, the First Department reversed the portion of the trial court’s decision that refused to dismiss the plaintiffs’ “claim for breach of the covenant of good faith and fair dealing” as “duplicative of the breach of contract claim,” explaining:

Where a good faith claim arises from the same facts and seeks the same damages as a breach of contract claim, it should be dismissed. [The plaintiff] argues that the failure to give notice was the breach of contract, and the taking control and sale of the Club is the conduct giving rise to the good faith claim. However, as noted, the only damages flowing from the alleged failure to give notice are from the sale of the Club. The whole theory of the breach of contract action was that [the plaintiff] was prevented from taking steps to protect its collateral, i.e., stopping the sale of the Club. The conduct alleged in the two causes of action need not be identical in every respect. It is enough that they arise from the same operative facts.

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

Posted: September 8, 2014

Court of Appeals Arguments of Interest for the Weeks of September 8, 2014 and September 15, 2014

Arguments the weeks of September 8, 2014 and September 15, 2014, in the Court of Appeals that may be of interest to commercial litigators.

  • No. 156Ellington v. EMI Music Inc. (To be argued Thursday, September 11, 2014) (regarding the interpretation of the provisions of a royalty agreement between the family of Duke Ellington and music publishers concerning the allocation of revenues from foreign publication of Ellington’s music). See First Department decision here.
  • No. 162: Motorola Credit Corporation v. Standard Chartered Bank (To be argued Tuesday, September 16, 2014) (considering certified questions from the Second Circuit on the application of the “separate entity rule” to post-judgment enforcement proceedings under CPLR Article 52). See Second Circuit decision here. See our previous posts about the Second Circuit decision and the Court of Appeals decision accepting the certified questions here and here.
  • No. 165: Grace v. Law (To be argued Wednesday, September 17, 2014) (regarding whether a party who voluntarily discontinues an underlying action and forgoes an appeal thereby abandons his or her right to pursue a claim for legal malpractice). See Fourth Department decision here.
Posted: September 7, 2014

Defendant Not Allowed to Subpoena Plaintiffs’ Employees Directly

On August 28, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Town New Development Sales & Marketing LLC v. Price, 2014 NY Slip Op. 32307(U), explaining the application of CPLR 3106 when a party seeks to depose an opponent’s employees.

In Town New Development Sales & Marketing, an employment contract dispute, the defendant moved to compel discovery, including “the depositions of two of Plaintiffs’ employees, nonparties Andrew Heiberger and Wendy Maitland.” The court denied that part of the defendant’s motion, explaining:

When a party seeks to depose a corporate employee, it is well established that a corporation has the right in the first instance to determine which of its representatives will appear for an examination before trial.

[The defendant] seeks to compel the depositions of non-parties Andrew Heiberger and Wendy Maitland, who are both employees of Plaintiffs. When the person sought for a deposition is an employee of the party, the company must be served. Historically, a corporation had the right to designate an employee with knowledge of material and necessary facts.

The addition of CPLR 3106(d) in 1984, however, permits a party seeking a corporate deposition to specify a particular employee in its notice. The corporation is obligated to produce that person unless it provides written notice at least 10 days before the deposition that the requested individual is unavailable, and identifies a replacement.

Against this backdrop, [the defendant’s] motion to compel must be denied as procedurally deficient. [The defendant’s] original notice of deposition of Heiberger was not served on Plaintiffs. Price’s subpoenas duces tecum were served directly on Heiberger and Maitland even though both are clearly employees of Plaintiffs. Since [the defendant] seeks to depose witnesses material and necessary to its defense on alleged breaches of the Agreement, [the defendant] may serve a notice of deposition, pursuant to CPLR 3107, or notice of subpoena, pursuant to CPLR 3106(d), on the Plaintiffs. In the instance Plaintiffs do not designate Heiberger or Maitland, Price may seek relief from this Court.

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

This decision shows the importance of paying attention to the details of the CPLR’s disclosure rules.

Posted: September 6, 2014

Insured Must Act Promptly to get Advancement of Defense Costs; Past Defense Costs Need not be Paid until any Coverage Litigation is Resolved

On August 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in QBE Americas, Inc. v. ACE America Insurance Co., 2014 NY Slip Op. 51330(U), granting in part and denying in part a motion a summary judgment motion seeking advancement of defense costs.

This insurance coverage dispute arose from underlying litigations where consumers sued QBE for various improper mortgage practices. In this action, QBE sought indemnification from its insurers, including its primary insurers AIG and Darwin, and also sought defense costs from AIG and Darwin. QBE moved for summary judgment on its claim for defense costs.

The court divided the claims into three groups: “(1) litigation that has already settled or has been discontinued for which AIG and Darwin refuse to advance defense costs; (2) pending litigation for which AIG and Darwin refuse to advance defense costs; and (3) pending litigation for which Darwin has consented to advance defense costs and concluded litigation for which Darwin has agreed to reimburse past defense costs.”

For the first group, the court refused to award summary judgment. The applicable policies defined defense costs as part of the covered loss, so entitlement to defense costs was derivative of entitlement to coverage. Because fact issues existed as to entitlement to coverage, summary judgment was not available. The court also noted that, because the litigations were over, there was no urgent need to rule on defense costs. “Hence, there is no compelling reason why an insured should not wait to recover until a coverage determination is made because a claim for defense costs rises and falls with the underlying coverage claim . . . . Indeed, the pendency of litigation is the gravamen of a claim for the advancement of defense costs.”

For the second group, the court analyzed AIG and Darwin’s duties separately.

AIG’s policies required advancement of defense costs but did not impose a duty to defend on AIG. Accordingly, AIG was only required to advance defense costs attributable to covered claims. Furthermore, QBE had a $1.5m retention applicable to all loss, including defense costs, meaning that AIG was not required to advance anything until QBE had spent $1.5m of its own funds. “An application for the advancement of defense costs, where no duty to defend exists, must be denied where the insured does not establish, at a minimum, which claims in each pending lawsuit are subject to coverage and that the applicable retention for such claims has been exhausted.” (Emphasis in the original.) Because QBE did not prove that it had exhausted the $1.5m retention, its motion against AIG was denied, with leave to renew upon proper proof.

Darwin’s policies, on the other hand, contained an explicit duty to defend, which required Darwin to “advance all of QBE’s litigation costs so long as each lawsuit presents the possibility that any of the QBE entities or any of the claims asserted might be covered.” (Emphasis in the original.) Darwin was therefore obliged to advance future defense costs in any such action. However, relying on its previous reasoning, the court held that even in those cases, Darwin was not required to pay QBE’s past defense costs, only its future costs.

For the third group, where liability for defense costs was not in dispute, the matter was referred to a Special Referee to hear and report on the reasonable attorney fees owing.

For an attorney seeking to obtain advancement of attorney fees for a client in litigation, several lessons can be learned. First—and regardless of whether the insurer has a duty to defend or a duty to indemnify—the party must seek advancement as soon as possible. The court was quite explicit that QBE’s failure to get preliminary injunctions requiring advancement while the litigations were under way hampered QBE, because past defense costs need not be reimbursed before a final decision on coverage is made. In a practical sense, QBE’s failure to move for a preliminary injunction also elevated the burden of proof for payment of defense costs from “likelihood of success on the merits” to “actual success on the merits.” And second, when moving for advancement under a “duty to indemnify” policy, care must be taken to ensure that the claim is ripe, i.e. that all applicable retentions have been exhausted.

Posted: September 5, 2014

Attorney Affidavit Admitted in Support of Motion for Summary Judgment

On August 27, 2014, Justice Bransten of the New York County Commercial Division issued a decision in ZV NY, Inc. v. Moskowitz, 2014 NY Slip Op. 51338(U), explaining the circumstances in which an attorney affidavit may be used to support a motion for summary judgment.

In ZV NY, a commercial landlord-tenant dispute, the defendant opposed the plaintiff’s motion for partial summary judgment on several grounds, including that the motion was “procedurally deficient because Plaintiff failed to submit an affidavit by a person having knowledge of the facts as required by CPLR 3212(b). Instead, Plaintiff submitted an affirmation of its attorney, along with accompanying exhibits.” (Internal quotations and elision omitted). Notwithstanding many cases providing–as a general matter–that attorney affidavits are not sufficient support for a motion for summary judgment, the court rejected the defendant’s argument, explaining:

The affidavit or affirmation of an attorney, even if he has no personal knowledge of the facts, may, of course, serve as the vehicle for the submission of acceptable attachments which do provide evidentiary proof in admissible form, e.g., documents, transcripts. Such an affidavit or affirmation could also be accepted with respect to admissions of a party made in the attorney’s presence. Plaintiff’s use of an attorney affirmation as the means of introducing exhibits in support of its motion is not dispositive.

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

Posted: September 4, 2014

Court of Appeals Accepts Certified Questions Regarding Interpretation of Oil and Gas Leases

On August 28, 2014, the Court of Appeals accepted two certified questions from the Second Circuit in Beardslee v. Inflection Energy, LLC, 12-4897-CV, a case involving the interpretation of oil and gas leases. At issue in Beardslee is the interplay between two provisions in the leases: (1) the so-called “habendum” clause, which sets the duration of the lease, and (2) a force majeure clause, which concerns delays or interruptions in drilling. The habendum clauses at issue provided for a five year initial term, and an option for a secondary term, which would extend “as long thereafter” as the land “is operated by the Lessee in the production of oil or gas.” The force majeure clauses stated: “If and when drilling . . . [is] delayed or interrupted . . . as a result of some order, rule regulation . . . or necessity of the government, or as the result of any other cause whatsoever beyond the control of the Lessee, the time of such delay or interruption shall not be counted against the Lessee, anything in this lease to the contrary notwithstanding.”

After the expiration of the five-year term, the lessee had still not commenced drilling because the only “commercially viable” method of drilling in the property—high-volume hydraulic fracturing, or “fracking”—was subject to a regulatory moratorium in New York (although permits for other unprofitable methods were in theory available). The lessees took the position that the regulations amounted to a force majeure event under the leases, and that the force majeure clause extended the term in the habendum clause. The landowners brought a declaratory judgment action in the Northern District of New York, alleging that the leases expired by their terms after five years because the lessees had not begun drilling. The district judge granted summary judgment to the landowners, declaring the leases expired.

Finding that the case raised novel and important questions of New York law that had not been addressed by the Court of Appeals, or any lower courts, the Second Circuit certified two questions to the Court of Appeals:

1. Under New York Law, and in the context of an oil and gas lease, did the State’s Moratorium amount to a force majeure even?

2. If so, does the force majeure clause modify the habendum clause and extend the primary terms of the leases?

As the Second Circuit noted, the outcome of this case could have “potentially great commercial and environmental significance to State residents and businesses.” We will continue to follow this case as it makes its way through the Court of Appeals.

Posted: September 3, 2014

First Department Decisions Address Use of Emails As “Documentary Evidence” For Motion to Dismiss

On August 28, 2014, the First Department issued decisions in Amsterdam Hospitality Group, LLC v. Marshall-Alan Assoc., Inc., 2014 NY Slip Op. 06007, and Art & Fashion Group Corp. v. Cyclops Production, Inc., 2014 NY Slip Op. 06008, addressing the use of email correspondence as “documentary evidence” for purposes of a motion to dismiss.

One unique feature of New York State motion practice is that, in addition to the motion to dismiss for failure to state a cause of action, the CPLR permits a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” CPLR 3211(a)(1). Amsterdam Hospitality Group and Art Fashion Group are commercial cases (the former a fraud action brought against an executive search firm and the latter an action for breach of an oral joint venture agreement) in which the defendants filed 3211(a)(1) motions based on email correspondence between the parties that allegedly refuted the claims. As the majority observed in Amsterdam Hospitality Group, the New York courts “have grappled with the issue of what writings do and do not constitute documentary evidence, since the term is not defined by statute”:

Judicial records, such as judgments and orders, would qualify as documentary, as should the entire range of documents reflecting out-of-court transactions, such as contracts, deeds, wills, mortgages, and even correspondence. (David D. Siegel, Practice Commentaries, McKinney’s Cons Laws of NY, Book 7B, CPLR C3211:10 at 22). To qualify as “documentary,” the paper’s content must be “essentially undeniable and . . ., assuming the verity of [the paper] and the validity of its execution, will itself support the ground on which the motion is based. (Neither the affidavit nor the deposition can ordinarily qualify under such a test)” (id.).

* * *

As Professor Siegel recognizes, “even correspondence” may, under appropriate circumstances, qualify as documentary evidence. In our electronic age, emails can qualify as documentary evidence if they meet the “essentially undeniable” test.

(Citations omitted) (emphasis added).

In Amsterdam Hospitality Group, the court denied a 3211(a)(1) motion to dismiss claims for fraudulent and negligent misrepresentation, concluding that the emails submitted by the defendant in support of the motion were not sufficiently conclusive to “utterly refute” the plaintiff’s factual allegations:

The emails in this particular case, aside from being not otherwise admissible, are not able to support the motion to dismiss. The “documentary evidence” here . . . do not, standing on their own, conclusively establish a defense to the claims set forth in the complaint. While they may indicate that Bowd put defendants [N.B. it appears this should read “plaintiff”] on notice of potential employment restrictions, other letters indicate that Bowd had, in fact, accepted the offer of employment days before he sent the emails in question. Because defendant has not “negated beyond substantial question” the allegation of reasonable reliance, and the submissions raise factual issues concerning the circumstances and communications underlying plaintiff’s hiring of Bowd, it cannot be concluded that plaintiff has no causes of action for fraudulent and negligent misrepresentation.

Justice DeGrasse dissented, concluding that “documentary evidence consisting of an email sent by Bowd to plaintiff 19 days before Bowd was hired negates the element of justifiable reliance as a matter of law.”

In Art Fashion Group, the First Department unanimously affirmed the denial of a motion to dismiss a claim for breach of an oral joint venture agreement, ruling that the emails submitted by the defendants in support of the motion did not “definitively refute plaintiffs’ claim”:

There is no merit to defendants’ assertion that the emails show, as a matter of law, that no joint venture agreement was reached and that the parties were merely engaging in preliminary negotiations. Even where the parties acknowledge that they intend to hammer out details of an agreement subsequently, a preliminary agreement may be binding.

Although some parts of the emails suggest that all of the details of the joint venture were not fully agreed upon, the emails, when read in their entirety, do not conclusively refute plaintiffs’ allegations that an oral joint venture agreement had in fact been reached. For example, a November 3, 2009 email states that “359 is already operating in AFG’s [office] space” (emphasis added) and was expected to be “cashflow positive by the end of 2009.” This same email talks about “formalizing the establishment of . . . 359 Productions,” suggesting that it was already in existence. Furthermore, in a May 1, 2010 email, plaintiffs’ representative Federico Pignatelli addresses defendant Michael Jurkovac as “[p]artner,” makes reference to “stabiliz[ing] the [c]ompany,” and expresses concern about two managerial changes within the past year.

In a May 13, 2010 email, written six months after the initial email submitted by defendants, Pignatelli informs Jurkovac of his decision “not to proceed anymore with 359P.” Contrary to defendants’ contention, this statement does not unequivocally establish that no joint venture agreement had been reached in the first place. It can just as easily be read as indicating Pignatelli’s decision to terminate an already-established joint venture. The email also discusses 359P’s overhead and notes issues about the extent of the work that was brought into 359P, both of which are consistent with plaintiffs’ claim that a joint venture had been formed. The emails also make reference to other communications, not produced by defendants, identifying issues with 359P’s staff. Thus, it is clear that the emails submitted present only a partial picture of the interactions between the parties.

Finally, although defendants contend that they did not intend to proceed with the alleged joint venture until they executed a formal written agreement, no such express reservation is contained in any of the emails. Because the emails in question fail to definitely refute plaintiffs’ claim that the parties had reached an oral joint venture agreement, dismissal at this stage is not warranted.

(Citations omitted) (emphasis added).

Motions to dismiss based on “documentary evidence” are a useful tool for seeking early dismissal of infirm claims that because of artful pleading may not be easily susceptible to a motion to dismiss based solely on the face of the complaint. However, as these cases illustrate, CPLR 3211(a)(1) is not a means to file an accelerated summary judgment motion. Although in appropriate circumstances email correspondence can form the basis for a motion to dismiss based on “documentary evidence,” where the correspondence is inconclusive or requires further factual development, the motion should be denied.

Posted: September 2, 2014

Second Department Affirms Trial Court Decision Modifying Settlement Agreement

On August 27, 2014, the Second Department issued a decision in Mochkin v. Mochkin, 2014 NY Slip Op. 05963, affirming a trial court decision modifying a settlement agreement that had been entered on the record before it.

In Mochkin, the parties settled a dispute between them “in a stipulation of settlement dated July 25, 2011, which was so-ordered by the Supreme Court.” The stipulation “provided that the Supreme Court would retain jurisdiction ‘in all matters related hereto.'” When the defendant was unable to perform the agreement because the plaintiff had filed a notice of pendency against property involved in the dispute, “the defendant moved for a further extension of time to pay the remaining $700,000,” which the trial court granted. The Second Department affirmed, explaining:

Contrary to the appellant’s contention, the Supreme Court providently exercised its discretion in granting that branch of the defendant’s motion which was to further extend the time for payment of the balance of the settlement funds. A settlement agreement entered into by parties to a lawsuit does not terminate the action unless there has been an express stipulation of discontinuance or actual entry of judgment in accordance with the terms of the settlement. Absent such termination, the court retains its supervisory power over the action and may lend aid to a party who had moved for enforcement of the settlement. Further, CPLR 2004 provides, in pertinent part, that the court may extend the time fixed by any statute, rule or order for doing any act, upon such terms as may be just and upon good cause shown. In addition to the statutory authority, a court has authority under the common law, in its discretion, to grant relief from a judgment or order in the interest of justice, taking into account the equities of the case and the grounds for the requested relief.

Here, the appellant and the defendant executed a stipulation of settlement which was so-ordered by the Supreme Court. It did not contain any provision terminating or discontinuing the action, and no judgment was entered in accordance with its terms. It provided, however, that the Supreme Court would retain jurisdiction in all related matters. Under the circumstances of this case, and pursuant to CPLR 2004 and the court’s common-law supervisory authority, the Supreme Court providently exercised its discretion in granting that branch of the defendant’s motion which was to further extend the time for payment of the balance of the settlement funds provided for in the so-ordered stipulation of settlement dated July 25, 2011.

(Internal quotations and citations omitted).

Posted: September 1, 2014

Court Cites Champerty Law in Denying Motion to Substitute Parties

On August 19, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Melcher v. Greenberg Traurig LLP, 2014 NY Slip Op. 51296(U), citing New York’s champerty law in denying a motion to substitute parties.

In Melcher, the 74 year-old plaintiff in a Judiciary Law §487 action moved to substitute “a limited liability company, LJBD Recovery LLC (LJBD) for himself as plaintiff” on the ground that “the substitution will avoid delay in prosecuting the case in the event of his death.” The court denied the motion, explaining:

The doctrine of champerty developed to prevent or curtail the commercialization of or trading in litigation. The champerty statutes are intended to prevent the strife, discord and harassment that would be likely to ensue from permitting attorneys and corporations to purchase claims for the purpose of bringing actions thereon. However, in New York, the prohibition of champerty has always been limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs. When an assignment was made after litigation had already begun, courts have allowed a transfer of claims, but prohibited the addition of new claims. The proposed substitution, if allowed, would prejudice the defendants by shifting the risks of litigation to a shell entity, making plaintiff less accessible to discovery, and allowing Melcher, a non-party, to continue to direct the litigation through his alter ego and to collect and retain all of the relevant information and documents. The plaintiff’s rationale for the substitution, to allow the litigation to continue seamlessly in the event of his death, ignores that he is the sole owner and manager of the proposed substitute plaintiff. Plaintiff provides no rationale for how litigation would continue more smoothly with the sole owner and manager of LJBD deceased, than it would with an administrator appointed for a deceased plaintiff. Accordingly, the court declines the invitation to allow the substitution.

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