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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: April 3, 2014

Motion to Disqualify Granted Despite Absence of “Significant Harm”

On March 28, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Mayers v. Stone Castle Partners, LLC, 2014 NY Slip Op. 50461(U), granting the plaintiff’s motion to disqualify a law firm from representing the defendants.

In Mayers, the plaintiff’s motion was premised upon a conversation the plaintiff had with a litigator at the law firm before the present action began. The plaintiff made an unsolicited call a lawyer at the firm seeking to have the firm represent him in a related matter. The lawyer declined due to conflicts.

Although that conversation, “on its own, does not warrant disqualifying,” the firm, the lawyer subsequently discussed the call with his colleague, the defendants’ lead counsel, and information regarding the plaintiff’s call to the firm was included in the complaint. Indeed, the complaint specifically mentioned that the plaintiff “contacted an attorney about the possibility of representing him [and] falsely told the attorney that he was no longer with” the defendant. The court found that these disclosures violated the law firm’s fiduciary obligation to preserve the confidential secrets of prospective clients pursuant to Rule 1.18 of the New York Rules of Professional Conduct:

[The law firm’s] use of [its lawyer’s] discussion with [the plaintiff] in paragraph 33 of the Company’s complaint mandates disqualification. This is so even though: [the defendants’ trial lawyer] did not affirmatively seek this information in his discussion with [his colleague]; the information is not particularly damning in the context of the more troubling allegations about [the plaintiff’s] actions; and most of these facts were public knowledge at the time and would have (and indeed did) come to light on their own.

. . .

After carefully scrutinizing the allegations and weighing the strategic motives of the motion, the court concludes that [plaintiff] has not met his heavy burden of establishing a significant harm caused by [the law firm’s] representation of the Company. Nonetheless, [the law firm’s] disqualification is still necessary because, as the appellate courts have long held, the inquiry must go beyond the strict determination of whether a technical violation has occurred. This inquiry arises from the undeniable maxim of the legal profession that an attorney must avoid even the appearance of impropriety . . . . In other words, the movant need not suffer any harm from the violation.

(Internal citations and quotations omitted.) The court acknowledged that “though courts have long paid homage to the notion that gamesmanship may be ground to deny a motion for disqualification, in practice, the movant’s motive is not what tips the scales.”

This opinion recognizes that, in almost every motion to disqualify, the movant will be acting for strategic reasons, but that that is not a sound basis to deny the motion.  Creating a significant appearance of impropriety will, this decision shows, provide a basis for granting the motion.

Posted: April 2, 2014

Lost Re-sale Profits Recoverable as General Damages When Those Profits Were Contemplated By the Contract

On March 27, 2014, the Court of Appeals issued a decision in Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 NY Slip Op. 02101, holding that the plaintiff’s lost re-sale profits were recoverable as “general damages” on a claim for breach of a distribution contract and did not fall within a contract provision that eliminated liability for “consequential damages.”

In Biotronik, the plaintiff (a distributor of medical devices) sued the developer and manufacturer of a “drug-eluting coronary stent” for breaching the parties’ distribution agreement by failing to provide the stent. The lawsuit sought to recover the distributor’s lost profits from sales of the stents. The First Department affirmed the trial court’s dismissal of the claim based on a damages limitation provision in the distribution agreement that restricted the parties to general (as opposed to consequential) damages. In a decision by Judge Rivera (joined by Judges Lippman, Graffeo and Smith), the Court of Appeals reversed, concluding that under the distribution agreement at issue, the distributor’s “lost profits were the direct and probable result of the breach of the parties’ agreement and thus constitute general damages.” The Court explained the sometimes “elusive” distinction between general and consequential damages:

General damages are the natural and probable consequence of the breach of a contract. They include money that the breaching party agreed to pay under the contract. By contrast, consequential, or special, damages do not directly flow from the breach.

The distinction between general and special contract damages is well defined, but its application to specific contracts and controversies is usually more elusive. Lost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and they are the direct and immediate fruits of the contract. Otherwise, where the damages reflect a loss of profits on collateral business arrangements, they are only recoverable when (1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.

Applying these principles, the Court rejected a bright line rule classifying lost resale profits as consequential damages “simply because they involve a third-party transaction.” Instead, employing a “case specific approach,” the Court concluded that the distributor’s lost profits were general damages because the resale of the stents was not a “collateral business arrangement” but an integral part of the distribution agreement:

The agreement was not a simple resale contract, where one party buys a product at a set price to sell at whatever the market may bear. Rather, the price plaintiff paid defendant reflected the actual sales, and sales price, of [the] stents. The agreement required plaintiff to pay defendant a transfer price calculated as a percentage of plaintiff’s net sales . . . . Each quarter, the parties would calculate a minimum price based on net sales during the preceding quarter. Plaintiff remained obligated to pay defendant the full transfer price for its sales, even when the actual sales price exceeded the minimum price. Thus, the contract would only operate if plaintiff sold stents, and the payment defendant received bore a direct relationship to the market price plaintiff could obtain. . . .

[Therefore,] the agreement reflects an arrangement significantly different from a situation where the buyer’s resale to a third party is independent of the underlying agreement.

A dissenting opinion authored by Judge Read (and joined by Judges Pigott and Abdus-Salaam) argued that the distributor’s lost profits fell within the contractual exclusion because “[t]hese damages flow from collateral transactions—[plaintiff’s] contracts with its resale customers—rather than from any provision of the Agreement requiring the breaching party to make a payment to the non-breaching party.” The dissenters contended that the majority’s holding would sow uncertainty as to the meaning of the terms general and consequential damages as used in commercial contracts.

One upshot of this decision is that contracting parties who wish to exclude claims for lost resale profits should do so explicitly and should not assume that any damages arising from the non-breaching party’s loss of business with third parties will automatically be regarded as consequential damages.

Posted: April 1, 2014

Court of Appeals Rules That Limitations Period for Judiciary Law § 487 Claims is Six Years

On April 1, 2014, the Court of Appeals issued a decision in Melcher v. Greenberg Traurig, 2014 NY Slip Op. 02213, holding that the limitations period for claims under Judiciary Law § 487 is six years.

“Judiciary Law § 487 exposes an attorney who is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party to criminal (misdemeanor) liability and treble damages, to be recovered by the injured party in a civil action.” In Melcher, both the trial court and the appellate division decided the defendant’s motion to dismiss the plaintiff’s Judiciary Law § 487 claims based on the premise that they were governed “by the three-year limitations period in CPLR 214(2).” The Court of Appeal reversed, holding that because “a cause of action for attorney deceit therefore existed as part of New York’s common law before the first New York statute governing attorney deceit was enacted in 1787,” “liability for attorney deceit existed at New York common law prior to 1787. As a result, claims for attorney deceit are subject to the six-year statute of limitations in CPLR 213(1).”

(Internal quotations and citations omitted).

Posted: April 1, 2014

Financial Advisor’s Claims Dismissed on Statute of Fraud Grounds

On March 25, 2014, the First Department issued a decision in JF Capital Advisors, LLC v. Lightstone Group, LLC, 2014 NY Slip Op. 01984, affirming the dismissal of quantum meruit and unjust enrichment claims under the statute of frauds.

In JF Capital Advisors, the plaintiff (“an investment advisory firm composed of hotel and hospitality industry experts”) alleged that it had an oral agreement with the defendants (a group of “real estate investment companies”) to provide “financial advisory services . . . in connection with defendants’ acquisition of certain hotels and other investment opportunities.” The plaintiff claimed that the defendants failed to compensate it for a “broad range of advisory services” “in connection with eight different projects that defendants were interested in pursuing.” The court concluded that the plaintiff’s claims for quantum meruit and unjust enrichment were barred by GOL § 5-701(a)(10), which provides that a contract to pay compensation for “negotiating the purchase, sale, exchange, renting or leasing of any real estate or . . . of a business opportunity” is void unless it is in writing:

The motion court correctly granted in part defendants’ motion to dismiss plaintiff’s claims for quantum meruit and unjust enrichment with regard to three of the eight investment opportunities that defendants considered, because plaintiff acknowledged either participating in negotiations or preparing documents for bidding, i.e., assisting in negotiations of business transactions. In those cases, plaintiff plainly acted as an intermediary as the statute of frauds contemplates.

That plaintiff provided other services in addition to negotiating deals is not dispositive here. On the contrary, plaintiff undertook those other services to assist defendants’ negotiations, largely by determining the value to defendants of pursuing the deal. The statute of frauds thus squarely covers the financial advisory services plaintiff performed on those projects.

The statute of frauds also barred plaintiff’s unjust enrichment and quantum meruit claims for the financial advisory services it allegedly performed on the remaining five investment opportunities that defendants considered, for which defendants allegedly requested that plaintiff provide certain investment analyses. At the very least, plaintiff’s services in this context amount to “assisting in the negotiation or consummation of the transaction.” The motion court erroneously declined to dismiss those claims on the basis that the information plaintiff provided defendants was not ultimately used to assist in the negotiation or consummation of those investment opportunities. Indeed, investment analyses and financial advice regarding the possible acquisition of investment opportunities “clearly fall within” GOL § 5-701(a)(10).

This decision illustrates that financial advisory contracts are not enforceable unless in writing, and that the statute of frauds cannot be circumvented by recasting a claim for breach of an oral agreement as a claim for quantum meruit or unjust enrichment.

Posted: March 31, 2014

Summary Judgment Granted in Favor of Veil-Piercing Claim

On March 19, 2014, Justice Friedman of the New York County Commercial Division issued a decision in Webmediabrands, Inc. v. Latinvision, Inc., 2014 NY Slip Op. 30700(U), granting plaintiffs’ motion for summary judgment piercing the defendants’ corporate veil.

In Webmediabrands, the plaintiffs were judgment creditors of defendant Latinvision (“LVI”) who sued LVI’s principal shareholder, officer and director, Vassallo, and another company wholly owned by Vassallo, LVM, seeking to hold them liable for LVI’s obligation. “Vassallo was the principal shareholder and officer of both LVI and LVM.” In support of their motion, the plaintiffs presented undisputed evidence that the three defendants routinely commingled funds, including numerous undocumented “loans” to Vassallo by the entities, as well as the lack of “any documentary evidence showing the existence of corporate governance mechanisms.” Based upon that evidence, the court awarded summary judgment to plaintiffs, explaining:

As a general rule, claims involving alter ego liability are fact-laden and not well suited for summary judgment resolution. Here, however, the undisputed facts establish that LVI and LVM had overlapping owners and directors; LVI, LVM, and Vassallo commingled assets; Vassallo used corporate funds for personal purposes; LVM used LVI’s domain name; and LVM and Vassallo held no corporate meetings and kept no corporate records. Under these circumstances, the court holds as a matter of law that both Vassallo and LVM are liable as alter egos of LVI for the judgment against LVI.

(Internal citations and quotations omitted.)

This decision illustrates the type of situation in which veil piercing is appropriate.

Posted: March 30, 2014

Appellant Sanctioned for Submitting Deficient Record on Appeal

On March 27, 2014, the First Department issued a decision in Getty Properties Corp. v. Getty Petroleum Marketing Inc., 2014 NY Slip Op. 02139, sanctioning a defendant that submitted a deficient record on appeal.

In Getty Properties, the First Department both denied the defendants’ appeal and sanctioned them for submitting a “deficient” record on appeal, writing:

The record filed by defendants’ attorney was so deficient as to amount to frivolous conduct (see 22 NYCRR 130-1.1[c][3]; Rogovin v. Rogovin, 27 AD3d 233 [1st Dept 2006]). By order entered December 12, 2013, we granted plaintiffs leave to file a supplemental appendix without prejudice to seeking costs and/or sanctions directly on the appeal. We remit the matter to Supreme Court to determine plaintiffs’ actual expenses of printing the supplemental appendix (see CPLR 5528[e]; Fidelity N.Y. v. Madden, 212 AD2d 572, 573-574 [2nd Dept 1995]; Mandell v Grosfeld, 65 AD2d 743 [1st Dept 1978]), as well as reasonable attorneys’ fees incurred in connection with plaintiffs’ motion to dismiss the appeal for the deficient appendix (see 22 NYCRR 130-1.1[c][3]; Rogovin, 27 AD3d at 235).

(Emphasis added).

To be sure, the cost of preparing the record in a complex case can be significant. This decision shows how not to handle the problem.

Posted: March 29, 2014

Judiciary Law Section 487 Claims Must Be Brought in Forum in Which Misconduct Occurred

On March 20, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Alliance Network, LLC v. Sidley Austin LLP, 2014 NY Slip Op. 50430(U), dismissing Judiciary Law Section 487 claims because they were not brought in the action in which the alleged misconduct occurred.

In Alliance Network, the plaintiffs brought a number of claims relating to a failed real estate development, including claims against several lawyers and law firms alleging that they had violated Judiciary Law § 487 in an earlier, related litigation. The court dismissed those claims, explaining:

Section 487 of the Judiciary Law provides that an attorney who is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party shall forfeit to the party injured treble damages, to be recovered in a civil action. The Attorney Defendants seek dismissal of Plaintiffs’ Section 487 claim on several grounds, including failure to state a claim. However, before delving into the parties’ arguments as to each of the misrepresentations alleged, there is a threshold issue that troubles the Court and requires dismissal of Plaintiffs’ claims.

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Posted: March 28, 2014

Transcripts and Videos of Arguments in the Court of Appeals for the Week of February 17, 2014, Now Available

Transcripts and videos of arguments in the Court of Appeals for the week of February 17, 2014, are now available on the Court of Appeals website.

On February 10, 2014, we noted two cases of interest from the oral arguments for the week of February 17, 2014:

  • Docket No. 63: Matter of Kapon v. Koch (considering whether a court ruling on a motion, under CPLR 3119(e), to quash an out-of-state subpoena to a non-party witness should apply the generally applicable standards under CPLR Article 31, or should instead review the subpoena with “solicitude” to ensure that a New York resident with no stake in the litigation is not unduly burdened).  See the transcript and the video.
  • Docket No. 54: Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Brothers Company (considering whether a motion to dismiss a third-party action on forum non conveniens grounds, under CPLR 327(a), empowers the court to dismiss the main action on the same ground, even though no party to that action moved for that relief).  See the transcript and the video.
Posted: March 28, 2014

Defendant Whose CPLR 3220 Offer Was Rejected is Entitled to Her Attorneys’ Fees Related to Proving Damages From Time of Offer

On March 27, 2014, the First Department issued a decision in Abreu v. Barkin & Associates Realty, Inc., 2014 NY Slip Op. 02146, clarifying that an offer of judgment under CPLR 3220 entitles the offering party not just to costs but also to its attorneys’ fees related to proving damages.

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