Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 1, 2014

Litigation Counsel Disqualified Under Attorney-Witness Rule

On October 20, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Anderson & Anderson LLP-Guangzhou v. North American Foreign Trading Corp., 2014 NY Slip Op. 51530(U), disqualifying plaintiffs’ counsel under the attorney-witness rule and his firm under the former-client rule.

The plaintiffs, Chinese law firms and David Buxbaum of Anderson & Anderson LLP, were retained by the defendant, NAFT, to bring proceedings in China to enforce an arbitration award defendant had obtained in New York. The current action involves a dispute between plaintiffs and NAFT about whether the plaintiffs are entitled to a contingency fee based upon their legal work in China. Mr. Buxbaum was serving as the plaintiffs’ lead counsel, and when the plaintiffs moved for summary judgment, NAFT moved to disqualify him and Anderson & Anderson LLP under the attorney-witness rule and the former-client rule.

Justice Bransten disqualified Mr. Buxbaum as a “necessary witness” because he was the principal drafter of the retainer agreements at the heart of the dispute:

The complexity of this case arises from the interpretation of the Agreements that Buxbaum negotiated, drafted, and signed. Plaintiffs assert that they performed legal services under the Agreements; NAFT does not dispute the actions that Plaintiffs took. Rather, the dispute in this action is whether the work Plaintiffs performed entitles them to payment under the terms of the agreement. Buxbaum is the only individual identified by either party who has personal knowledge of the Agreements, and therefore his testimony is critical . . . . Buxbaum is more critical as a witness than as an advocate.

Justice Bransten rejected the plaintiffs’ argument that exceptions to the advocate-witness rule applied in this case, holding that the exception for testimony that relates “solely to the nature and value of legal services rendered” on the grounds that that exception applies only to services rendered in that particular action, and holding that plaintiffs had not established the “substantial hardship” exception, which applies “only in the most exceptional situations.”

Justice Bransten also disqualified Anderson & Anderson, on the grounds that, under the former-client rule, NAFT was Mr. Buxbaum’s former client any disqualification was automatically imputed to the attorney’s entire firm.

Finally, Justice Bransten rejected the plaintiffs’ argument that NAFT had waited too long to bring its motion, because “the need for disqualification became evident only after Buxbaum, and only Buxbaum, submitted an affidavit in support of summary judgment, showing his testimony to be ‘necessary.”

NOTE: The author of this post (and Schlam Stone & Dolan LLP) represent NAFT in this action.

Posted: October 31, 2014

Court of Appeals Holds That, Absent Express Language, “Affiliate” only Includes Existing Affiliates

On October 23, 2014, the Court of Appeals issued a decision in Ellington v. EMI Music, Inc., 2014 NY Slip Op. 07197, affirming a decision of the First Department affirming a Supreme Court dismissal of an action for breach of contract brought by a grandson of music legend Duke Ellington.

Ellington, presented a type of dispute apparently common in the entertainment industry—a creative artist suing a copyright holder/distributor for engaging in some form of self-dealing in order to reduce the amount of royalties to be paid.

Here, the plaintiff was a grandson of Duke Ellington, who, along with his heirs, was the First Party to a 1961 copyright renewal agreement. The agreement provided that the Second Parties—various music publishers, including EMI’s predecessor in interest as well as “any other affiliate of [the predecessor],” would pay the First Party royalties from the publication of Ellington’s works, including 50% “of the net revenue actually received by the Second Party from . . . foreign publication.” Plaintiff sued EMI for breach of contract, alleging that EMI had at some point begun distributing Ellington’s works through affiliated foreign subpublishers rather than independent foreign subpublishers (as was industry practice when the agreement was signed), thereby effectively increasing EMI’s share of the net revenues at plaintiff’s expense.

However, the foreign subpublishers were retaining the same 50% share of the overall royalties from foreign sales as the previous, unaffiliated subpublishers had. So, it appears that (although not stated explicitly in the opinion) at the time of the contract, the foreign subpublishers would retain 50% of the foreign royalties, with 25% going to EMI and 25% to Ellington. Under the new arrangement, Ellington is getting the same 25%, but EMI and its affiliates collectively get the entire remaining 75%.

In an opinion written by Judge Abdus-Salaam, the majority affirmed the lower courts’ dismissal.

The majority first held that “net revenue actually received” was clear and unambiguous, and that that term did not preclude the use of affiliated foreign subpublishers. The majority also found that the affiliated foreign subpublishers were not included in the term “any other affiliate” because they were not in existence at the time the contract was signed:

Absent explicit language demonstrating the parties’ intent to bind future affiliates of the contracting parties, the term “affiliate” includes only those affiliates in existence at the time the contract was executed. Furthermore, the parties did not include any forward-looking language. If the parties intended to bind future affiliates they would have included language expressing that intent. Absent such language, the named entities and other affiliated companies of EMI’s predecessor which existed at the time are bound by the provision, not entities that affiliated with EMI after execution of the agreement.

(Internal citations omitted.)

The majority dismissed the dissent’s criticism, stating that “the parties merely did not account for the possibility that the publisher would eventually affiliate with foreign subpublishers.”

Concurring, Judge Smith rejected the majority’s reasoning: “As a general proposition, it seems wrong to me that, when a contract is written to bind ‘any affiliate’ of a party, its effects should be limited to affiliates in existence at the time of contracting. That invites parties to create new affiliates, and to have them do what the old affiliates are prohibited by the contract from doing.” He also stated that, if the facts had been different and the foreign affiliates had been keeping a greater overall share of the total revenues, the majority would probably have interpreted the term “affiliate” differently.

Judge Smith concurred in the judgment based upon the plaintiff and his predecessors’ apparent acquiescence with the current scheme since 1994.

In dissent, Judge Rivera, joined by Chief Judge Lippman, thought that the term “affiliate” was not clear and unambiguous, and that EMI’s argument that foreign affiliates were not included “merely begs the question of what is an affiliate.” For the dissent, the majority holding excluding subsequently-created affiliates from the term was inconsistent with the purpose of the agreement and with then-prevailing industry practice, and that the plaintiff’s proposed interpretation of the term was “reasonable, or at least as reasonable as the one proposed by EMI.”

The dissent also shared Judge Smith’s policy concerns, stating that the majority interpretation was “troubling” and “sets the stage for the type of abuse alleged here, namely corporate reconfigurations that avoid the understanding of the parties.”

The most interesting question about this decision is whether Judge Smith is right—if under the new arrangement, if the heirs had been getting less than their previous 25%, would the final outcome have been different? On its face, it also appears to be a victory for the kind of prosy contract drafting that long since went out of favor in law schools and legal writing manuals: if the key provision had only included some phrase like “that now exist or ever have existed since the beginning of the world or ever will exist until the end of the world,” plaintiff would have prevailed.

Posted: October 30, 2014

Court Applies Pro Rata “Time on the Risk” Method to Allocate Loss From Environmental Damage Among Liability Insurance Policies

On October 14, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Keyspan Gas East Corp. v. Munich Reinsurance America, Inc., 2014 NY Slip Op. 24306, applying a pro rata “time on the risk” allocation to determine damages in an insurance coverage matter arising from an environmental clean-up at two former manufactured gas plant sites located in Hempstead and Rockaway Park New York.

Where environmental damages occur over a period of years, triggering coverage under multiple insurance policies, allocating the losses has proved “a nettlesome problem.” As Justice Scarpulla explained, courts faced with this dilemma have allocated the loss among the carriers and the insured on a pro rata basis based on their respective “time on the risk”:

A pro rata “time on the risk” allocation requires costs to be allocated according to the number of years that the insurer was on the risk by multiplying the total loss by a fraction that has as its denominator the entire number of years of the claimant’s injury, and as its numerator the number of years within that period when the policy was in effect. Proration of liability among the insurers acknowledges the fact that there is uncertainty as to what actually transpired during any particular policy period.

For years where an insured has no insurance coverage, the insured generally bears its own pro rata share of the loss. Proration to the insured is appropriate for the years where the insured elected not to purchase insurance or purchased insufficient insurance. For those years, the insured is treated as self-insured and bears responsibility for its pro rata share of damages.  Proration to the insured is inappropriate, however, for those years where insurance was unavailable in the marketplace.

(Citations omitted).

In Keyspan, the court found issues of fact precluding summary judgment as to (1) the time period over which the damage occurred, and (2) when insurance coverage was available. The Court did find that Keyspan should be required to bear losses incurred during the period 1971 to 1982 when New York law precluded insurance coverage for “liability arising out of pollution.” The policy reason underlying the rule was “to prohibit commercial or industrial enterprises from buying insurance to protect themselves against liabilities arising out of their pollution of the environment.” Justice Scarpulla concluded: “Given the Legislature’s clear intent that companies such as Keyspan bear the full burden of their own actions affecting the environment, I decline to exclude the period between 1971 and 1982 from the allocation period when pollution insurance was prohibited.”

Posted: October 29, 2014

Appellant’s Arguments Rejected Based on Judicial Estoppel

On October 21, 2014, the First Department issued a decision in Bank Hapoalim B.M. v. Westlb AG, 2014 NY Slip Op. 07092, rejecting arguments made on appeal when the appellants had taken contrary positions at trial.

In Bank Hapoalim, the plaintiffs were “investors in a structured investment vehicle” who sued the defendant financial institutions regarding the investment. In reviewing the trial court’s decision the First Department noted as an initial matter that:

[O]n this appeal, plaintiffs are judicially estopped from asserting their position on choice of law, as they consistently argued to the motion court that New York law governed the case and that their arguments relied on New York law. A party may not adopt a position on appeal at odds with its arguments to the trial court, and plaintiffs cite no law to the contrary.

Similarly, plaintiffs are judicially estopped from arguing that the Income Notes should be treated as debt, since they argued repeatedly to the motion court that the Income Notes should be treated as equity. Indeed, plaintiffs concede that they previously argued in favor of the proposition that the notes were equity, but now assert that they may argue that the Income Notes are equity for some purposes and debt for others.

(Internal citations omitted).

Posted: October 28, 2014

No Claim for Breach of Covenant of Good Faith and Fair Dealing When Claim Has Same Basis as Breach of Contract Claim

On October 21, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in J. Kokolakis Contracting Corp. v. Evolution Piping Corp., 2014 NY Slip Op. 24321, dismissing a claim for breach of the covenant of good faith and fair dealing.

In J. Kokolakis Contracting Corp., the plaintiff building contractor sued a subcontractor in connection with work the defendant did on a job site, as well as its insurer. The defendant insurer moved to dismiss the plaintiff’s causes of action against it for breach of the covenant of good faith and fair dealing and for attorney’s fees. In granting the motion, the court explained:

Distinguishable [from tort claims] are claims premised upon a breach of the covenant of good faith and fair dealing which the law of this state imposes upon all contracting parties. This covenant mandates that none of such parties 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. The covenant is breached when a party to a contract acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement.

A claim for breach of the implied covenant of good faith and fair dealing is generally actionable only where wrongs independent of the express terms of the contract are asserted and demands for the recovery of separate damages not intertwined the damages resulting from a breach of a contractual are advanced. Where a contractual party is merely seeking to reap the benefits of its contractual bargain, the implied covenant breach claim will not lie, as it is considered duplicative of the breach of breach of contract claim.

Federal appellate authorities have long held that a breach of the implied duty of good faith is a breach of the underlying contract. There is however, recognition of authority to the contrary.

. . .

Here, the court finds merit in the moving defendant’s contention that the plaintiff’s claims for recovery of consequential damages arising from any breach of the implied covenant of good faith and fair dealing and its claims for recovery of litigation costs, including attorneys fees due to the moving defendant’s alleged bad faith denial of coverage are not actionable and are thus subject to dismissal pursuant to CPLR 3211(a)(7). Review of the allegations set forth in complaint reveal that the facts which underlie these claims are the same as those which underlie the plaintiff’s breach of contract claim. There are no allegations of independent breaches of tort duties such as fiduciary duties owing to the plaintiff from the moving defendant which would support a breach of fiduciary duties claim or other tort claim.

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

Posted: October 27, 2014

Account Stated Claim Survives Notwithstanding Plaintiff’s Inability Fully to Document All Charges

On October 23, 2014, the First Department issued a decision in Robson & Miller, LLP v. Sakow, 2014 NY Slip Op. 07263, affirming a grant of summary judgment on a claim for account stated.

In Robson & Miller, the plaintiff law firm sued its former client. In affirming the trial court’s grant of summary judgment to the plaintiff on its claim for account stated, the First Department explained:

The motion court properly concluded that the varying figures given by R & M during this litigation, as to the total outstanding fees due, did not undermine R & M’s prima facie case for an account stated, inasmuch as the discrepancies were plainly attributable to the incompetence of its original attorney in drafting the motion papers on its previous motions for summary judgment, which, inter alia, did not include R & M’s complete billing invoices from the past, and records of off-sets that the parties had agreed to. The monthly invoices and records – the timely receipt of which Sakow never disputed – were never challenged by Sakow as to accuracy or reasonableness until the instant litigation was commenced years later. Such circumstances, including that Sakow continued to make payments towards the total fees accrued and billed, without reservation, belie the belated challenges to the reasonableness of the invoiced fees. For similar reasons, Sakow’s argument that the initial invoice related to the 2002 to 2008 fee collection period in question, dated March 7, 2002, reflected a bare, balance forward figure of $81,484.75 without requisite supporting time sheet information, is unavailing. The record reflects that R & M represented Sakow on many legal matters since 1989, and that R & M would send regular, detailed monthly invoices to account for the fees claimed. The record also demonstrates that Sakow never denied receipt of invoices supporting the balance forward figure referenced in the March 7, 2002 invoice, that no objection was raised as to such invoices, and that Sakow continued to make regular payments towards the invoices.

(Internal quotations and citations omitted).  This decision shows the potential power of a claim for account stated and the principle upon which it is based, which is that if the recipient of the account does not challenge invoices, the court will not later make the plaintiff go back and prove their underlying basis.

Posted: October 26, 2014

Court Uses Doctrine of Falsus in Uno, Falsus in Omnibus to Find Whole of Witness’s Testimony Not Credible

On October 2, 2014, Justice Emerson of the Suffolk County Commercial Division issued a decision in Motherway v. Retail Unlimited Maintenance or Remodel, Inc., 2014 NY Slip Op. 32673(U), applying the principle of falsus in uno, falsus in omnibus to disregard the entirety of a witness’s testimony.

In Motherway, the plaintiff sought damages for the defendants’ alleged use of proprietary information. This post focuses on that part of the court’s decision after a bench trial that addressed its credibility findings. The court wrote:

In reaching its decision, the court has considered the record in its entirety. In addition, the court has assessed the credibility of each of the witnesses. In particular, the court has considered the testimony of both Mr. Motherway and Mr. Cartisano. The courts finds Mr. Motherway to be a credible witness and his version of key events to be believable. The court credits Mr. Motherway’s testimony and significant portions of the testimony of his employee witness. On the other hand, the court finds that Mr. Cartisano’s testimony conflicts in significant ways with the credible evidence produced by Mr. Motherway and that it is both unreliable and improbable. Applying the doctrine of falsus in uno, falsus in omnibus, which permits the fact finder to disregard in its entirety the testimony of a witness who has willfully given false testimony on a material matter (NY PJI 1:22), the court does not credit any of Mr. Cartisano’s testimony.

(Emphasis added). Ouch! If ever you have trouble getting your client simply to testify to the facts as they happened, show them this post.

Posted: October 25, 2014

Court Finds No Oral Modification of Written Contract

On September 25, 2014, Justice Whelan of the Suffolk County Commercial Division issued a decision in Air & Power Transmission, Inc. v. Weingast, 2014 NY Slip Op. 32670(U), rejecting a claim based on an alleged oral modification of a written contract.

In Air & Power Transmission, the plaintiffs’ claims were based upon, among other things, the breach of “purported oral promises to indemnify the plaintiffs.” The court dismissed that claim, explaining:

The . . . alleged oral assurances are flatly contradicted by the terms of existing writings between the parties governing the same subject matter . . . .  To be enforceable, a separate, subsequent, additional agreement must address a scenario that was not anticipated and not covered by the terms of the existing written agreements between the parties. There are no allegations that the alleged oral assurances constituted separate, subsequent, additional agreements that addressed a scenario not anticipated or covered by the terms of the existing written agreements. Moreover, the particulars of the oral promises allegedly made by Mass Mutual agents are not alleged with the sufficient particularity to give rise to claims for breach of the alleged oral agreement was a separate, additional agreement.

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

Posted: October 24, 2014

Breach of a Contractual Representation or Warranty Occurs at the Time of Signing, Not the Effective Date of the Agreement

On October 21, 2014, the First Department issued a decision in U.S. Bank N.A. v DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 07093, addressing the question of when a claim for breach of a representation or warranty occurs.

In U.S. Bank, the First Department affirmed a trial court’s denial of a motion to dismiss a claim for breach of a contractual warranty on statute of limitations grounds, explaining:

If a contractual representation or warranty is false when made, a claim for its breach accrues at the time of the execution of the contract. This is true even where the contract states that its effective date is earlier. The claim cannot accrue earlier, because until there is a binding contract, there can be no claim for breach of warranty. Additionally, in the residential mortgage-backed securities (RMBS) context, it should be noted that the claim cannot generally accrue before the contract, because the trust that is the recipient of the representations and warranties typically does not come into existence prior to the closing of the transaction. Furthermore, the representations and warranties were made as of the closing date, and the contract, which did not explicitly address the statute of limitations, does not indicate a clear intent to alter the accrual date relating to claims for a breach thereof. As such, the IAS court correctly held that the representation and warranty claims accrued on February 7, 2007, the date the pooling and service agreement, the agreement sued upon, was executed.

(Internal quotations and citations omitted) (emphasis added). It is not unusual for agreements to be executed on a date other than the effective date of the agreement. This decision provides a rule for determining the accrual date of a breach of representation and warranty claim in that situation.

Posted: October 23, 2014

Implied Covenant of Good Faith and Fair Dealing Requires Landlord to Consent to Renewal of Sidewalk Cafe Permit

On October 21, 2014, the First Department issued a decision in DMF Gramercy Enterprises, Inc. v. Lillian Troy 1999 Trust, 2014 NY Slip Op. 07110, illustrating the application of the implied covenant of good faith and fair dealing.

In DMF Gramercy Enterprises, the plaintiff sued the defendants over the defendant’s refusal to consent to the plaintiff’s continued operation of a sidewalk café in the space the plaintiff leased from defendants. The First Department affirmed the trial court’s finding that this refusal breached the terms of the lease and, at any rate, “that the implied covenant of good faith and fair dealing would otherwise restrict defendants’ ability to deny consent, and that they have failed to make a satisfactory showing of good faith in this case.” As to the implied covenant of good faith and fair dealing, the First Department explained:

We note initially defendants’ correct assertion that the sidewalk café is not part of the leased premises. . . . Nevertheless, the lease gives plaintiff the right to make use of the sidewalk space. . . .

Having determined that the lease allows plaintiff to use and occupy the sidewalk for the operation of a sidewalk café, it necessarily follows that defendants cannot withhold or revoke their consent to that use absent a good-faith basis. As the Court of Appeals has explained:

In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance. This covenant 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. While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.

Because the stipulated facts demonstrate that the sidewalk café existed at the time of the lease’s execution, plaintiff (through its assignor) was justified in understanding that the landlord promised to refrain from unreasonably withholding its consent to operate the sidewalk café. It is of no moment that paragraph 1(d) of the lease refers to the revocable nature of the right, if any, to maintain beyond the building lines, because that language does not go so far as to give defendants the right to revoke their consent for any reason whatsoever. Furthermore, paragraph 1(d) can be viewed alternatively as affirming that the landlord cannot guarantee the right because it is revocable by the City, the entity that owns the sidewalk and has the authority to grant sidewalk café licenses.

To permit defendants to withhold or revoke their consent at will would destroy plaintiff’s right to receive the fruits of the contract inasmuch as those fruits are gained by operating the sidewalk café. As discussed above, the lease permits plaintiff to use the sidewalk for the operation of a sidewalk café, provided, of course, that such use is lawful. Plaintiff’s sidewalk café can only be lawful if it obtains the consent of the landlord (a prerequisite to the grant of a license by the City). Accordingly, the landlord cannot obstruct plaintiff’s operation of the sidewalk café by refusing in bad faith to consent. As the trial court observed, defendants did not reserve the right to terminate consent in their sole discretion. Therefore, their right to deny consent must be bridled by the implied covenant of good faith and fair dealing.

(Internal quotations and citations omitted).