Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 22, 2013

Defendant Sanctioned for Filing Inaccurate Note of Issue and Certificate of Readiness

On November 12, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Vladeck, Waldman, Elias & Engelhard, P.C. v. Paramount Leasehold, L.P., 2013 NY Slip Op. 32908(U), sanctioning a litigant for filling a Note of Issue and Certificate of Readiness that falsely indicated that discovery was complete.

In Vladeck, the defendant filed a Note of Issue and Certificate of Readiness “two and half months before the deadline scheduled by the Court,” arguing that discovery was complete because the plaintiff had not, in defendant’s view, “pursu[ed] pretrial discovery with sufficient vigor.” Defendant did not withdraw the Note of Issue even after plaintiff informed defendant that the Certificate of Readiness was inaccurate and that plaintiff had filed a motion to compel within the time provided by the court’s scheduling order.

The Court granted plaintiff’s motion to vacate the Note of Issue and sanction defendant for filing it, writing:

Viewing the matter as a whole, [defendant’s] filing of the Note of Issue two and half months before the deadline scheduled by the Court, while discovery requests remained outstanding, premised on the demonstrably incorrect assertion that Plaintiff failed to timely file its motion to amend and compel, justifies the imposition of sanctions. [Plaintiff] should not have had to resort to motion practice in order to enforce the Note of Issue deadline set by the Court and to point out the inaccuracies in [defendant’s] filing.

It can be a challenge for a litigant to balance the need to file a Note of Issue on the schedule set by the court and at the same time deal with outstanding discovery disputes. But Vladeck was not such a case. Rather, it appears to have been about a litigant filing an inaccurate Note of Issue early for tactical reasons. The result in Vladeck shows the dangers of sharp practice in the Commercial Division.

Posted: November 21, 2013

Laches Defense from Events of WWII Fails for Lack of Prejudice

On November 14, 2013, the Court of Appeals issued a decision in In re: Flamenbaum, Docket No. 178, holding that a laches defense based on events going back to WWII failed because of the failure to show prejudice.

In a probate proceeding, a German museum sought to recover a 3,000 year-old gold tablet from the estate of Riven Flamenbaum.  German archeologists discovered the tablet in Iraq before WWI and gave it to the museum.  During WWII, the tablet disappeared. It resurfaced in 2003, when it was discovered among Flamenbaum’s possessions. The museum filed a notice of appearance and claim with the Surrogate’s Court. After a trial, the Surrogate held that the museum’s claim was barred by laches. The Appellate Division, Second Department reversed, holding that, inter alia, the estate had not shown prejudice. The Court of Appeals affirmed, writing:

We agree with the Appellate Division that the Estate failed to establish the affirmative defense of laches, which requires a showing that the museum failed to exercise diligence to locate the tablet and that such failure prejudiced the Estate. While the Museum could have taken steps to locate the tablet, such as reporting it to the authorities or listing it on a stolen art registry, the Museum explained that it did not do so for many other missing items, as it would have been difficult to report each individual object that was missing after the war. . . . As we previously observed to place a burden of locating stolen art work on the true owner and to foreclose the rights of that owner to recover its property if the burden is not met would . . . encourage illicit trafficking in stolen art.

While the Estate argued that it had suffered prejudice due to the museum’s inaction, there is evidence that least one family member (the decedent’s son) was aware that the tablet belonged to the museum.

Practitioners often invoke laches, but forget the essential element of prejudice. The Flamenbaum decision provides a stark reminder of the effect of the failure (or inability) to show prejudice.

Posted: November 20, 2013

Work Product Protection Not Waived by Referring to Work Product in Complaint

On November 14, 2013, the First Department issued a decision in Assured Guaranty Municipal Corp. v. DB Structured Products, Inc., 2013 NY Slip Op. 07558, affirming the grant of a protective concerning attorney work product.

In Assured Guaranty, “plaintiff insurer issued a policy guaranteeing payment of certain classes of the securities issued and when the loans began to default at what it considered to be a high rate, it retained a law firm that hired consultants to conduct a forensic reunderwriting review of the loans. Based on the consultant’s findings, plaintiff” brought an action alleging, inter alia, fraudulent inducement and breach of representations and warranties,” referring to the consultant’s analysis in the complaint.  Defendants sought all documents concerning the analysis, including correspondence between plaintiff’s counsel and the consultant, arguing that plaintiff waived work product protection by discussing the consultant’s work in the complaint.  The First Department disagreed, holding:

The motion for a protective order was properly granted. Plaintiff did not waive any privilege by referencing the pre-litigation repurchase review conducted by its consultants in the complaint. Those references were not made as elements of the claims, but as a good-faith basis for the allegations that are based on defects discovered during the repurchase review of the loans. Further, plaintiff does not need the documents relating to the pre-litigation investigation to sustain its causes of action or prove them at trial, and upholding the privilege with respect to the pre-litigation review materials will not deprive defendants of information vital to their defense since plaintiff disavows any intention to use such materials to help establish its claim.

(Citations omitted).

Posted: November 19, 2013

Second Circuit Certifies Question on Unfinished Business Doctrine to Court of Appeals

On November 15, 2013, the Second Circuit issued a decision in In re: Thelen LLP, Docket No. 12‐4138‐bk, certifying the following questions to the New York Court of Appeals:

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?

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 Second Circuit started with the proposition that under the unfinished business doctrine, “in the absence of an agreement to the contrary, pending contingent fee cases of a dissolved partnership are firm assets subject to distribution” in bankruptcy. (Emphasis added). Thus, “where a lawyer departs from a dissolved partnership and takes with him a contingent fee case which he then litigates to settlement, the dissolved firm is entitled only to the value of the case at the date of dissolution, with interest.” (Emphasis added).

The question posed in Thelen was whether the same rule applied to “hourly fee matters.” The Second Circuit noted that “there is scant New York authority” on the question and addressed the pros and cons of finding that hourly fee matters are unfinished business of the dissolved firm, an interesting discussion that we will not repeat here but that is well worth reading in the linked opinion.

Posted: November 18, 2013

Gross Negligence Claim Dismissed Based on Business Judgment Rule and Lack of Damages

On November 12, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Phillips v. Hoffman, 2013 NY Slip Op. 51836(U), granting summary judgment and dismissing a gross negligence claim filed by a pro se plaintiff against a hedge fund manager who she claimed had mismanaged her money.

Justice Bransten dismissed the claim on two independent grounds.  First, Justice Bransten found that the investment decisions made by the defendant were protected by Delaware’s business judgment rule, which plaintiff could not overcome because she did not allege any negligent process but instead simply took issue with the specific investment choices made by the defendant.  Second, Justice Bransten found that, as a matter of law, the plaintiff had suffered no damages because her initial investment was $450,003 and she received back $936,584 after redeeming her investments, and thus she actually made a profit as the result of the defendant’s alleged gross negligence.

This case illustrates the principle that disappointed investors who don’t make as much money as they would like with their investments do not always have a remedy for their “lost” profits.

Posted: November 18, 2013

First Department Affirms Enforcement of Contractual Obligations to Advance Litigation Expenses

On November 14, 2013, the First Department issued a decision in TMR Bayhead Securities, LLC v. Aegis Texas Venture Fund II, LP, 2013 NY Slip Op. 07578, affirming New York County Commercial Division Justice Bransten’s order compelling defendant venture capital funds to reimburse and advance legal fees and costs incurred by plaintiffs (who had run the funds) in defending an earlier lawsuit brought by defendants against plaintiffs.

The relevant facts and procedural history in the TMR Bayhead Securities decision are sparse. More detail can be found in Justice Bransten’s November 2010 decision construing the defendants’ operating agreements as requiring them to advance and reimburse plaintiffs’ litigation expenses incurred in defending the related action and in Justice Bransten’s May 2012 decision compelling defendants to pay advances requests that was the subject of the TMR Bayhead Securities decision.

In TMR Bayhead Securities, the First Department rejected the defendants’ argument that the payments ordered by Justice Bransten should have been cut in half to reflect the fact that only one of the two plaintiffs was entitled to advancement of his expenses.  In rejecting this argument, the court relied on the good faith affirmation submitted by plaintiffs’ counsel that she would have billed the same amount of time had she just been defending the plaintiff who was entitled to advances, which the First Department had held in Ficus Investments v. Private Capital Management, LLC, 63 A.D.3d 611 (1st Dep’t 2009), was sufficient to obtain 100% of the advances sought based on Delaware cases that had reached the same result.  The First Department also rejected defendants’ argument that Justice Bransten should not have ordered advancement of litigation expenses with respect to plaintiffs’ counterclaims against the defendants in the related action because the broad language in the operating agreements, as well as Delaware case law interpreting similar language, required advancement of fees related to counterclaims that arose from the same facts as the claims asserted in the related litigation.


Posted: November 17, 2013

Contract-Related Claims Dismissed Despite Allegation that Provisions Were Added Surreptitiously or by Mistake

On November 14, 2013, the First Department issued a decision in VFS Fin. v. Insurance Servs. Corp., 2013 NY Slip Op. 07576, illustrating the bedrock principle of contract interpretation that a party is presumed to have read and understood the contract it signed.

In VFS Fin., the defendant asserted “counterclaims and third-party claims of fraud in the inducement, breach of contract, tortious interference with contract, mutual mistake (reformation), and breach of the duty of good faith and fair dealing” based on an allegation that the plaintiff or the third-party defendant had “either surreptitiously or by mistake, inserted” certain terms into a contract. The First Department affirmed the trial court’s dismissal of those claims, holding that the agreements were unambiguous and contained a merger clause and thus that “[i]n this arm’s-length transaction between sophisticated, counseled business entities and a principal — which had had a prior course of dealing — the parties are deemed to have read and understood the terms of the loan documents, which are unambiguous on their face.” (Citations omitted).

Posted: November 16, 2013

Claim for Breach of NDA Allowed to Proceed While All Tort Claims Relating to the Alleged Breach Are Dismissed on the Pleadings

On November 7, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Affinity LLP v. GfK Mediamark Research & Intelligence, LLC, 2013 NY Slip Op. 32873(U), in which he denied a pre-Answer motion to dismiss a claim alleging the breach of a non-disclosure agreement (“NDA”) but granted the motion insofar as it sought dismissal of all of plaintiff’s tort claims.

The NDA was signed in April 2008 as part of defendant’s due diligence in connection with a potential acquisition of plaintiff’s business. The transaction died three months later when negotiations broke off. Shortly thereafter, defendant announced the launch of a service that competed with plaintiff’s service and launched that service in February 2009. A review of the electronic docket indicates that plaintiff did not sue defendant until April 2013, almost four years later, and did not move for any preliminary injunctive relief. Plaintiff sued defendant for breach of the NDA, misappropriation of trade secrets, unfair competition, fraudulent concealment, and tortious interference with prospective business relations. Defendant moved to dismiss all claims on the pleadings and based on documentary evidence.

Justice Schweitzer declined to dismiss the breach of contract claim, rejecting defendant’s argument that the allegations in the complaint established, as a matter of law, that defendant had developed its competing service without using any of plaintiff’s confidential information, given the inferences that he was required to draw in favor of plaintiff in light of the facts alleged that the defendant had announced the launch of its new service only eight days after the transaction between plaintiff and defendant died and launched that service about seven months later. Justice Schweitzer also rejected defendant’s argument that he could determine, as a matter of law and based on defendant’s documentary evidence, that the defendant’s new service was developed using only publicly available information and not plaintiff’s confidential information or trade secrets, because “the determination of whether a trade secret exists is often a question of fact.” (internal quotation marks omitted).

Justice Schweitzer then dismissed plaintiff’s tort claims based on the black letter rule that, absent some special relationship, parties to an arm’s-length contract do not owe each other extra-contractual duties and can make claims only for breach of contract.

Given the ubiquity of NDAs in modern-day commercial transaction, Justice Schweitzer’s decision provides a valuable road map to practitioners who wind up in litigation when one of their clients allegedly breaches an NDA.

Posted: November 16, 2013

Decision Illustrates the Danger of Overreaching in Pleading

On November 7, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in U.S. Bank Natl. Assoc. v. Lightstone Holdings LLC, 2013 NY Slip Op. 32874(U), illustrating the dangers of overreaching in pleading.

In U.S. Bank, the plaintiff amended its complaint in what had been a breach of contract action to “add[] two ‘alternative’ causes of action” for “fraudulent concealment” and “negligent omission and misrepresentation.” We quote below several paragraphs of Justice Schweitzer’s opinion, to show the court’s reaction to the added claims:

Each of these alternative claims is premised on the same allegations. Plaintiff first asserts that there is no language in the Intercreditor Agreement that could support the Mezzanine Lenders’ position that they have priority over the Senior Lender with respect to the Capped Guaranty. This assertion is completely at odds with the Appellate Division’s holding that the parties’ differing positions regarding the Intercreditor Agreement are “equally plausible.” Plaintiff then alleges that since there is no supporting language in the Intercreditor Agreement, Bank of America and the other Mezzanine Lenders must be relying on some undisclosed waiver of plaintiffs priority right to the Capped Guaranty that is not contained in the Intercreditor Agreement. According to plaintiff, Bank of America and Wachovia must have concealed this side waiver, not contained in the Intercreditor Agreement, when they assigned the Senior Loan Agreement and related loan documents, including the lntercreditor Agreement, to Wells Fargo as Trustee, which later assigned those agreements to plaintiff.

Plaintiffs allegation that Bank of America and the other defendants are relying on an undisclosed side waiver not contained in the Intercreditor Agreement is demonstrably false. Bank of America does not and has never alleged the existence of an agreement extraneous to the Intercreditor Agreement. Neither has any other Mezzanine Lender in this case. To the contrary, Bank of America maintains, and has always maintained, that the Mezzanine Lenders’ priority rights are based on the Intercreditor Agreement.

The Appellate Division remanded this case for a determination on the facts of which parties’ interpretation of the Intercreditor Agreement is correct. This is a pure contract case and plaintiffs’ attempt to turn it into a fraud case is utterly baseless. Plaintiffs’ fraudulent concealment and negligent omission and misrepresentation claims are frivolous and are dismissed, with prejudice.

It is generally considered good practice to think creatively about causes of action and to assert all that there are, lest they be waived. Justice Schweitzer’s opinion shows that too much of a good thing can be a bad thing. Do not be the counsel that stretches the facts so far in pleading alternative causes of action that the court dismisses them as “utterly baseless” and “frivolous.”

Posted: November 15, 2013

Shareholder Expulsion Provision Applied

On October 29, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in Christou v. Koureli Rest. Group, Inc., 2013 NY Slip Op. 32743(U), denying a motion for a preliminary injunction by plaintiffs to enjoin the other shareholders of a private company from reducing their shares to zero pursuant to the shareholder agreement which enumerated certain occurrences which would justify such a expulsion.

Justice Kornreich denied the motion because she found that an occurrence for expulsion had been satisfied. Specifically, the plaintiffs had failed to properly supervise the build out of the restaurant owned by the corporation. The case is noteworthy because it illustrates how a properly drafted shareholders agreement will be enforced even when it results in two shareholders being stripped of their shares.