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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: July 9, 2014

Notarization by Consular Official Meets CPLR 2309 Authentication Requirement

On July 3, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Sokolowski v. Wodkiewicz, 2014 NY Slip Op. 31709(U), holding that notarization by a consular official met the authentication requirements of CPLR 2309.

In Sokolowski, the parties were litigating over the assets of a partnership. One procedural issue that arose in deciding the plaintiff’s motion for summary judgment was whether “defendant’s affidavit, which was acknowledged by a consul at the United States embassy in Warsaw, Poland, must be disregarded as defendant did not include a certificate of conformity pursuant to CPLR 2309(c).”  The court held that the affidavit was admissible, explaining that “a consular official is explicitly authorized to acknowledge documents (see CPLR 2309[a]; Real Property Law §301), and CPLR 2309(c), operating in conjunction with Real Property Law § 311(4) and (5), does not require a certificate of authentication for the admissibility of an affidavit acknowledged in this manner.” (Internal citations omitted).

Courts have refused to accept affidavits notarized outside the state that did not meet the authentication requirements of CPLR 2309(c), so it is important to know the ins and outs of the application of that rule.

Posted: July 7, 2014

Condominium Board Lacked Capacity to Bring Lawsuit Because Suit was not Formally Approved by Board

On July 2, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Board of Managers of the Clermont Greene Condominium v. Vanderbilt Mansions, LLC, 2014 NY Slip Op. 51023(U), holding that a condominium board lacked capacity to bring the action against the condominium’s sponsor because the board failed formally to vote to authorize the action.

In Board of Managers of the Clermont Greene Condominium, the defendant moved to dismiss on the ground that the plaintiff board lacked capacity to bring an action against it. The court agreed, ruling that even though, as a general matter, “Real Property Law § 339-dd . . . expressly confers standing and legal capacity upon a condominium board to prosecute this action,” the board lacked capacity in this situation, explaining:

Business Corporation Law § 708(a), . . . provides that “except as otherwise provided in this chapter, any reference in this chapter to corporate action to be taken by the board shall mean such action at a meeting of the board.” In the absence of contrary statutory authority directly relevant to condominiums per se, notwithstanding that condominium ownership is a hybrid form of real property, created by statute, and the fact that a condominium, unlike a cooperative, is not organized pursuant to the Business Corporation Law, Business Corporation Law § 708 provides the clearest relevant authority on the subject of board action. It is noted that the bylaws for Clermont Greene Condominium track the language of Business Corporation Law §§ 708(b) and (c) in authorizing action without a formal meeting “if all members of the board. . . consent in writing to the adoption of a resolution authorizing the action” and the resolution and written consents are filed with the minutes of the proceedings (see Bylaws, Section 11), and in providing for waiver of notice upon appearance at a meeting and for participation by telephone, evidencing an intent to conform to the procedures set forth in the Business Corporation Law, as applicable. There is no evidence or representation, however, that any meeting or vote of any kind effected a decision by the Board to commence this action.

Exclusive authority to manage the common elements and joint finances of the condominium is vested in the board of managers. . . . It is clear that plaintiff has standing to maintain this action against defendant, but in the absence of any indication that it acted as a board by voting to authorize commencement of suit, defendant’s motion pursuant to CPLR 3211 (a) (3), must be granted as plaintiff lacked capacity to sue at the time the action was filed.

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

This decision illustrates the pitfalls of not observing the legal formalities of operating a business entity.

Posted: July 6, 2014

Commissions for Out-of-State Discovery Not Issued When No Showing that Proposed Deponent Would Not Give Discovery Voluntarily

On June 30, 2014, Justice Destefano of the Nassau County Commercial Division issued a decision in Vasomedical, Inc. v. Barron, 2014 NY Slip Op. 51015(U), denying a motion for commissions to take discovery outside New York.

In Vasomedical, the defendants sought commissions to take depositions outside New York state. Except for the application that was unopposed, the court denied the motion, explaining:

Pursuant to CPLR 3108, a party may take an oral deposition outside the state under an open commission where it is demonstrated to be necessary or convenient. . . . In order to justify the issuance of a commission to take the deposition of an out-of-state non-party witness, the party seeking the commission must demonstrate the information sought is material and necessary to the prosecution or defense of the claims. The moving party must establish that the witness possesses relevant evidence, or that an examination of the witness would be reasonably calculated to lead to the discovery of information bearing on the claims or defense at issue.

Generally, however, the party seeking an open commission must demonstrate not only that the information sought is necessary to the investigation of the claim but also that a voluntary appearance or compliance by the witness is unlikely or that discovery cannot be obtained by stipulation or the cooperation of the witness either in New York or the other state. Absent any showing that the the proposed out-of state deponent would not cooperate with a notice of deposition or would not voluntarily come within this State or that the judicial imprimatur accompanying a commission will be necessary or helpful when the designee seeks the assistance of the foreign court in compelling the witness to attend the examination, the moving party fails to demonstrate that a commission is necessary or convenient
.
Here, irrespective of whether the Defendants have demonstrated that the testimony of the non-party witnesses and the information sought is relevant, the present application is devoid of any information concerning counsel’s efforts, if any, to obtain the cooperation and voluntary appearance of the non-party witnesses.

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

Posted: July 5, 2014

Specific Indemnification Provision Trumps General One

On June 24, 2014, the First Department issued a decision in Plymouth Financial Co., Inc. v. Plymouth Park Tax Services LLC, 2014 NY Slip Op. 04686, interpreting conflicting indemnification provisions in an asset purchase agreement.

In Plymouth Financial, the parties disagreed on the distribution of a $1 million “hold-back payment” detailed in their asset purchase agreement based on differing interpretations of the APA’s indemnification provisions. At issue were payments for a litigation specifically identified in the APA: the “MRS Litigation”. The First Department explained:

Defendant contends that it is entitled to reduce the amount of its payment by the amount of an indemnification found in the APA’s section 8.1(a)(v), for costs associated with . . . the MRS Litigation. Plaintiff argues that defendant must pay the full $1 million and cannot deduct the indemnification, because its affiliate company acquired separate counsel in the MRS Litigation and, according to section 8.6 of the APA, this separate counsel was obtained at defendant’s expense.

The motion court correctly determined that section 8.6 was intended to apply only to future third-party claims, while the indemnification in section 8.1(a)(v) was intended to apply specifically to the then-pending MRS Litigation. However, the court incorrectly applied the provisions of section 8.6 to the MRS Litigation indemnification regardless of this distinction. Section 8.1(a)(v) evinces the parties’ clear intent to place the risk of “any and all losses” connected to the MRS Litigation, including legal fees, “whether arising before or after the Closing,” squarely on plaintiff. The provisions of section 8.6 cannot be read to limit the indemnification found in section 8.1(a)(v), as this interpretation would vitiate the language of section 8.1(a)(v), rendering it meaningless.

(Internal quotations and citations omitted).

Posted: July 3, 2014

Summary Judgment In Lieu of Complaint Available Even When There Are Conditions Beyond Failure to Pay

On June 19, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in CF Notes, LLC v. Johnson, 2014 NY Slip Op. 31598(U), granting summary judgment in lieu of complaint on a note.

In CF Notes, the plaintiff moved for summary judgment in lieu of complaint on a note signed by an employee that was made due on demand in the event of one of several conditions occurring and was only payable if the defendant failed to meet certain conditions. The court nonetheless granted summary judgment in lieu of complaint, explaining:

[The plaintiff] makes its prima facie showing that it is entitled to summary judgment on the note. To establish a prima facie case, plaintiff must present an instrument for the payment of money only and evidence of a failure to make the payment called for by its terms. [The plaintiff] submitted a copy of note annexed to its moving papers, which is for the payment of money only. Moreover, by its terms, [the defendant] acknowledges that this Note is an agreement for the payment of money only subject to enforcement pursuant to NY CPLR § 3213.

For evidence of [the defendant’s] failure to make the payment called for by the note, [the plaintiff] submits the Kofsky affidavit, in which Kofsky states that on or about May 17, 2013, [the defendant] resigned . . . . This, by the terms of the note, caused the sum owed under the note to become immediately due and payable. Kofsky further states that [the defendant] did not earn $5 million in gross revenue . . . , such that the Net Loan Amount would have been forgiven. Kofsky also states that [the defendant] has not made any payments against the sums due under the loan. [The plaintiff] therefore makes its prima facie showing that [the defendant]failed to repay the amounts owed under the note.

(Internal quotations and citations omitted).

This decision shows that summary judgment in lieu of complaint is not limited to simple promissory notes, where the only condition is timely payment.

Posted: July 2, 2014

Parties not Limited to Formal Discovery Process

On June 23, 2014, Justice Bransten of the New York County Commercial Division issued a decision in AMBAC Assurance Corp. v. Countrywide Home Loans, Inc., 2014 NY Slip Op. 31615(U), ruling that parties to a litigation may collect evidence from non-parties outside the formal discovery process.

In AMBAC Assurance Corp., the defendant raised a number of objections to fact gathering and analysis the plaintiff had conducted outside the formal discovery process. The court rejected the defendant’s arguments, and noted regarding the general permissibility of informal discovery:

[T]here are no statutes and no rules expressly authorizing-or forbidding-ex parte discussions with any non-party. Article 31 does not close off these avenues of informal discovery, and relegate litigants to the costlier and more cumbersome formal discovery devices. [T]he Court of Appeals [has] permitted an attorney to contact a doctor, ex parte, to conduct informal discovery. The primary concern was that the non-party must not be gulled into making an improper disclosure so it is important that attorneys would make their identity and interest known to interviewees and comport themselves ethically.

(Internal quotations and citations omitted).

There are often sound tactical reasons to gather evidence outside the formal discovery process. However, parties must still meet their own discovery obligations and keep and eye on the need to obtain evidence in a form and manner that will make it admissible at trial.

Posted: July 1, 2014

Pending Hourly Fee Matters are Not Partnership Property

On July 1, 2014, the Court of Appeals issued a decision in In re: Thelen LLP and In re: Coudert Brothers LLP, 2014 NY Slip Op. 04879, holding “that pending hourly fee matters are not partnership property or unfinished business within the meaning of New York’s Partnership Law.”

In In re: Thelen LLP and In re: Coudert Brothers LLP, the Second Circuit certified “two unresolved questions of New York law regarding the applicability and scope of the unfinished business doctrine:”

Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm?

and

If so, how does New York law define a client matter for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?

The Court of Appeals answered the first question “no”, mooting the second question.

As to whether the Partnership Law made a pending hourly fee matter partnership property, the Court of Appeals held that:

In New York, clients have always enjoyed the unqualified right to terminate the attorney-client relationship at any time without any obligation other than to compensate the attorney for the fair and reasonable value of the completed services. In short, no law firm has a property interest in future hourly legal fees because they are too contingent in nature and speculative to create a present or future property interest, given the client’s unfettered right to hire and fire counsel.

(Internal quotations and citations omitted) (emphasis added). The court went on to explain the public policy ramifications of finding that a law firm has a property interest in unfinished hourly fee work, explaining:

Treating a dissolved firm’s pending hourly fee matters as partnership property, as the trustees urge, would have numerous perverse effects, and conflicts with basic principles that govern the attorney-client relationship under New York law and the Rules of Professional Conduct. By allowing former partners of a dissolved firm to profit from work they do not perform, all at the expense of a former partner and his new firm, the trustees’ approach creates an “unjust windfall” . . . .

Next, because the trustees disclaim any basis for recovery of profits from the pending client matters of a former partner who leaves a troubled law firm before dissolution, their approach would encourage partners to get out the door, with clients in tow, before it is too late, rather than remain and work to bolster the firm’s prospects. Obviously, this run-on-the-bank mentality makes the turnaround of a struggling firm less likely.

And attorneys who wait too long are placed in a very difficult position. They might advise their clients that they can no longer afford to represent them, a major inconvenience for the clients and a practical restriction on a client’s right to choose counsel. Or, more likely, these attorneys would simply find it difficult to secure a position in a new law firm because any profits from their work for existing clients would be due their old law firms, not their new employers.

. . .

Ultimately, what the trustees ask us to endorse conflicts with New York’s strong public policy encouraging client choice and, concomitantly, attorney mobility. . . .”

(Internal quotations and citations omitted)

Posted: July 1, 2014

Contract and Quasi-Contract Claims Based On Oral Modification to Contract Survive Despite “No Oral Modification” Clause

On June 25, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Laquila Group, Inc. v. Hunt Construction Group, Inc., 2014 NY Slip Op. 51007(U), refusing to dismiss claims based on alleged oral modifications to a contract that prohibited oral modifications.

The dispute in Laquila Group, related to construction work on the Barclays Center. Among the issues the court addressed in deciding the defendant’s motion to dismiss was whether the plaintiff’s contract and quasi-contract claims based on oral modifications to the parties’ written contract stated a claim in light of the contract’s no oral modification clause. The court held that they did, explaining:

Generally, a party may not maintain causes of action for quantum meruit or unjust enrichment if a valid, enforceable contract governs the same subject matter.

. . .

Quasi-contractual recovery may . . . be appropriate, however, in the face of a cardinal change, effecting an alteration to the essence of a contract sufficient to constitute an intentional abandonment of the original contract. Whether there has been a cardinal change sufficient to invalidate a contract is generally a question of fact, to be decided by the factfinder.

Here, plaintiff has pleaded that the scope and extent of changes made to the Project, resulting in additional costs of nearly half the Subcontract price, constituted a cardinal change to the contract that could justify treating it as abandoned and granting recovery in quasi contract. Although defendant has submitted evidence that many of the costs incurred by plaintiff were compensated in agreed change orders, plaintiff’s allegations are not conclusively refuted by documentary evidence sufficient to conclude that plaintiff has no claim as a matter of law. Accordingly, defendant’s motion must be denied as to the cardinal-change claim.

As the plaintiff’s surviving cardinal-change claim preserves the possibility of quasi-contractual recovery, dismissal must also be denied as to plaintiff’s quantum meruit and unjust-enrichment claims. Defendant’s reliance on a clause in the Subcontract specifically barring quantum meruit claims is misplaced, since the finding of an absence of a valid, enforceable contract, a prerequisite to quantum meruit recovery, would inherently render that clause unenforceable, along with the remainder of the Subcontract.

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

The court also upheld the plaintiff’s breach of contract claim based on the alleged oral modifications to the contract, explaining:

General Obligations Law § 15-301 (1) states, in relevant part, that “[a] written agreement . . . which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought.” Section 15-301 (1), however, nullifies only executory oral modification, and partial performance of an oral modification, inconsistent with other causes, may prove the modification’s validity. Furthermore, if a plaintiff has detrimentally relied on an oral modification, the doctrine of equitable estoppel will preclude a defendant from raising a clause barring oral modification and § 15-301 (1) in defense.

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

One of the reasons people choose New York law to govern their contracts is that in New York, contracts are generally enforced as written. As this decision shows, however, a contract provision prohibiting oral modifications to the contract might not be enforced when it appears that the parties chose to ignore it during the performance of the contract.

Posted: June 30, 2014

Insurance Policy Flood Damage Cap Applies to All Flood Damage, Even Categories of Damage With a Separate, Higher Cap

On June 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in El-Ad 250 W. LLC v. Zurich American Insurance Co., 2014 NY Slip Op. 24173, ruling that an insurance policy’s coverage limit for losses “arising during” a flood applied not only to property damage claims but also to “downstream” financial losses resulting from a flood.

In El-Ad, the plaintiff real estate developer made a claim under a Builders Risk Insurance Policy for delay-in-completion losses after a construction project was delayed by damage caused by Hurricane Sandy. The policy had a special limit for flood claims, which provided: “The maximum amount [Zurich] will pay for loss or damage in any one OCCURRENCE, and/or in the aggregate annually for loss or damage from all OCCURRENCES, shall not exceed [$5 million] by the period of FLOOD.” “As respects the peril of FLOOD,” the policy defined as a covered “OCCURRENCE” “all loss or damages arising during” a flood.

The plaintiff argued that the flood limit applied only to claims for property damage, not other more remote harms, such as delay-in-completion losses. Justice Kornreich rejected this narrow interpretation of the flood limit, explaining:

[A] loss that would not have occurred but for a flood is subject to a $5 million annual aggregate limit, without regard to the type of loss suffered since the expression “all losses or damages arising during [a flood]” clearly does not exclude non-physical losses. Moreover, the delay in completion endorsement clearly and unambiguously states that it does not alter the sublimits in the Policy. Nor does any portion of the endorsement state that the delay in completion’s $7 million sublimit is not subject to the flood loss $5 million aggregate limit, just as all of the Policy’s other sublimits are so limited.

Finally, it should be noted that it is of no moment that El-Ad paid an extra premium for delay in completion coverage. Had El-Ad not paid this extra amount, it would not have been entitled to such coverage under any circumstances. To be sure, there are myriad possible causes of delay in completion losses. If the cause is something other than a flood (i.e. a terrorist attack, which has a $108 million sublimit), the full $7 million would have been available. However, where, as here, the cause of the loss has its own, lower aggregate limit, that lower limit applies.

Special flood exclusions, caps and deductibles have figured prominently in insurance coverage litigation arising from Hurricane Sandy. This decision illustrates that such provisions are enforced even if they reduce (or eliminate) the insured’s recovery under the policy.