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Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: July 19, 2014

Agreement Lacking Formula for Computing Compensation not Void for Indefiniteness

On July 9, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Basu v. Alphabet Management LLC, 2014 NY Slip Op. 31807(U), holding that an alleged oral employment agreement was not unenforceably vague because it lacked a formula for calculating the plaintiff’s compensation.

In Basu, the defendant moved to dismiss the plaintiff’s claim for breach of contract on multiple grounds, including that it was void for indefiniteness. The trial court denied the motion, explaining:

The defendants also argue that the oral contract, even if it existed, is void for indefiniteness because no formula was agreed upon on how to calculate the percentage of profits allegedly owed to [the plaintiff]. However, issues of fact remain as to the terms of the alleged oral contract, and those terms may have been sufficiently definite to be enforceable. A price term is not necessarily indefinite because it contains no computational formula. On the contrary, a price term may be considered sufficiently definite if it can be ascertained by reference to an extrinsic event, commercial practice, or trade usage. The calculation of profits, and [the plaintiff’s] share of the profits, may be ascertainable by reference to the hedge fund’s own practice of calculating the profits owed to its traders, or by commercial practice in the industry. At his deposition, Adler testified that the profits and losses for all traders were calculated independently by the firm’s administrator, and that it was common for traders to receive a set percentage of the profits. Because the
calculation of profits may be obtainable by reference to an objective standard, the alleged contract may not be void for indefiniteness. Before rejecting an agreement as indefinite, a court must be satisfied that the agreement cannot be rendered reasonably certain by reference to an extrinsic standard that makes its meaning clear. The conclusion that a party’s promise should be ignored as meaningless is at best a last resort.

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

Posted: July 18, 2014

Absent Precise Language To the Contrary, Limitations Period In Insurance Policy Runs From Date Coverage Was Denied, Not Date of Underlying Loss

On June 30, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Flat Ridge 2 Wind Energy LLC v. Those Underwriter at Lloyd’s, 2014 NY Slip Op. 31804(U), holding that unless an insurance policy contains precise language to the contrary, a limitations period provided for the in the policy runs from the date the insurance company denies coverage, rather than the date of the underlying injury.

In Flat Ridge 2, the plaintiff (a wind power generation company) brought an action against its insurer, seeking coverage for damages to a wind farm caused by a tornado. The insurer moved to dismiss the complaint as time barred under a provision of the policy requiring that any suit against the insurance company be “commenced within twelve (12) months next after the happening becomes known to the Insured.” The insurer argued that this 12-month limitations period ran from the date of the underlying loss and therefore the insured’s claim was time barred. The Court rejected this argument and found the claim timely because it was filed within 12 months of the insurance company’s denial of coverage:

New York law has consistently distinguished between generic policy language, like that used [in Flat Ridge 2’s policy], which is read to set the limitations period to run from the date the insured’s claim accrues, and more specific, precise language, which sets the period to run from the liability triggering event. In Steen v. Niagara Fire Ins. Co., 89 NY 315, 322-23 (1882), the first New York case to address the issue, the court held that the generic language, “next after the loss or damage shall occur” should be construed to mean that the limitations period does not begin to run until “the right to bring an action exists” rather than when the loss “in fact occurs.” The default rule in dealing with these contractual provisions then, is that, the time within which an action must be commenced shall be computed from the time the cause of action accrued, unless the parties agree that the date of loss or damage shall be looked to as the “happening” that starts the clock and they express this intention through clear and precise language. In Fabozzi [v. Lexington Ins. Co., 601 F3d 88 (2d Cir. 2010),] the Second Circuit concluded that only a limitations provision that uses the term of air “after the inception of the loss” or similarly precise language, “can tie a limitations period to the date of the accident or peril insured against.” Fabozzi, 601 F3d at 93. Although the exact language used in the provision in Flat Ridge 2’s policy was not construed by any of these New York courts, a leading insurance treatise quoted in Fabozzi addresses the phrase “after the happening of the loss,” stating that, “language such as ‘after the happening of the loss’ is considered to be ‘lacking in precision’ such that the limitations period
is computed not from the time of the occurrence of the physical loss . . . but from the time that liability accrues.” 601 F3d at 93 (quoting 71 NY Jur. 2d Insurance§ 2528 (2010)). Here, the provision at issue, stating only “after the happening becomes known [ … ]” is similarly lacking in precision, as it does not employ any of the exacting language that would be sufficient to tie the limitations period to the occurrence of the loss or damage itself. For example, it does not make reference to “the physical damage out of which the claim arose,” a particular type of damage causing occurrence itself, or even to “the loss.” Since the language of the limitations provision here is vague and generic, it should be computed from the time that Flat Ridge 2’s claim against Underwriters accrued – the date upon which Underwriter denied coverage – not from the date of the windstorm.

(Some internal citations and quotation marks omitted) (emphasis added). This decision illustrates that special limitations periods in insurance contracts are enforced. However, they must be written in precise language, and if ambiguous, they will be construed in a manner favorable to the insured.

Posted: July 17, 2014

Court Examines Elements of Claim for Misappropriation of Skills and Expenditures in Pinterest Lawsuit

On July 8, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Schroeder v. Pinterest Inc., 2014 NY Slip Op. 31809(U), illustrating the elements of a claim for misappropriation of skills and expenditures.

In Schroeder, the plaintiffs claimed that the defendants used their ideas and work in creating the website Pinterest. The defendants moved to dismiss. This post looks at the court’s denial of the defendants’ motion with respect to the plaintiffs’ claim for misappropriation of skills and expenditures. The court explained:

To make a claim of misappropriation of skills and expenditures, plaintiffs must allege (1) investment of labor, skill or expenditure, (2) that the information was misappropriated in bad faith, (3) and used for defendant’s own benefit. Such claims are traditionally called unfair competition. Unfair competition claims can stand even when a misappropriation of trade secret claim fails. Finally, bad faith requires the existence of a confidential or fiduciary relationship and can consist of theft, deception, bribery, or coercion.

(Internal quotations and citations omitted). The court found all three elements adequately pleaded with respect to the individual defendant, Cohen, but not Pinterest, explaining:

Plaintiffs allege that the investment in skill, labor, and expenditures was misappropriated by Mr. Cohen when he took plaintiffs’ ideas to the Pinterest founders. Plaintiffs allege that Mr. Cohen acted in bad faith by stealing ideas when he promised he would not. Plaintiffs allege that Mr. Cohen, as chairman and CEO of both RDV and Skoopwire, while acting as an agent of NY A, knew that the proprietary information he acquired from plaintiffs should be kept confidential. Plaintiffs further allege that Mr. Cohen knew such information was to be kept confidential because Mr. Cohen signed the operating agreement, refused to sign a liquidation agreement, and wrote an email promising that he would not profit from plaintiffs’ ideas. . . .

Plaintiffs sufficiently allege that Mr. Cohen’s misappropriation of Mr. Schroeder’s labor, skill, and expenditures was for Mr. Cohen and NY A’s own benefit and gave defendants an unfair advantage. NY A is allegedly also responsible because Mr. Cohen was at all times acting in furtherance of NY A business and within the scope of his authority as an NYA officer. NYA exists “to provide capital to entrepreneur’s starting new businesses.” Mr. Cohen was affiliated with NY A and plaintiffs met with Mr. Cohen to look for capital. NY A’s success occurs through the investments made by its members. For example, NY A touted the success of Pinterest with a tombstone on its website. NY A is not just a clearinghouse (independent consortium of angel investors) and it does not matter that it is a not-for-profit entity.

This decision illustrates that even where a claim for theft of trade secrets might not exist, a plaintiff might still have a claim for the misappropriation of the fruits of her labor.

Posted: July 16, 2014

Court Lacks Power to Remove LLC Member

On July 9, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Austin v. Gould, 2014 NY Slip Op. 31814(U), dismissing a cause of action seeking the removal of a member of a New York LLC.

In Austin, the plaintiff asserted a host of direct and derivative claims relating to a series of real estate investments. The defendants moved to dismiss. This post focuses on the plaintiff’s claim seeking to remove the individual defendant as a member of an LLC and to deny him indemnification, which the court dismissed. The court explained:

Unless there is a vote Of a majority in interest of the members (LLC Law § 414 ), this court is unaware of a legal basis for directing, ordering or adjudging that an LLC member be removed from a management position. Similarly, plaintiffs have not provided any authority, nor has the court found any, to support the existence of a cause of action seeking denial of indemnification without a contractual basis for doing so.

(Internal quotations and citations omitted).

This decision reinforces tha point that limited liability companies are governed by statute and member agreement. Whether it is the removal of a member or cutting off a member’s right to indemnification, courts are reluctant to supplant the law and the parties’ agreements.

Posted: July 15, 2014

Opportunity to Comment on Proposed New Uniform Civil Rules for Supreme Court and County Court

The Office of Court Administration has asked for public comment on a proposed new rule on the recognition of tribal court judgments.

The proposed new rule (22 NYCRR § 202.71), would establish “a procedure for recognition of judgments rendered by tribunals or courts of tribes recognized by the State of New York or the United States.”

E-mail comments to rulecomments@nycourts.gov by September 12, 2014.

Posted: July 15, 2014

Consequential Damages Not Available When Not Contemplated at the Time of Contracting

On July 2, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Rampart Brokerage Corp. v. Ribs NY LLC, 2014 NY Slip Op. 31772(U), dismissing the plaintiff’s damages claim to the extent it sought consequential damages.

In Rampart Brokerage Corp., the defendants allegedly mislead the plaintiff and its clients “as to which insurance policies it had been issued, the nature of the policies, the premiums charged, and other terms.” The defendants moved to dismiss. The court denied their motion with respect to the plaintiff’s claims for gross negligence and consequential damages. Certain defendants moved for reargument, which the court granted with respect to consequential damages and, on reargument, dismissed the plaintiff’s damages claims to the extent they sought consequential damages, explaining:

In order to be entitled to consequential damages, plaintiff was required to plead that those damages were the natural and probable consequences of the breach, and that they were contemplated at the time the contract was executed. [The plaintiff’s] complaint merely sought all damages, which may be construed to include consequential damages. However, [the plaintiff] failed to plead either of the requisite elements of a consequential damages claim . . . .

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

Posted: July 14, 2014

Insurer Could Not Use Tort Theory to Transfer Back to Insured Risks the Insurer Had Assumed

On July 3, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Assured Guaranty Municipal Corp. v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 51044(U), dismissing fraud claims that sought to hold an insured liable, on a tort theory, for risks the insurer had assumed.

In Assured Guaranty, the plaintiff monoline insurer sued various defendants in connection with RMBS transactions. The court granted defendant Credit Suisse’s motion to dismiss the plaintiff’s fraud claims, explaining:

[The plaintiff] alleges it was fraudulently induced to issue the subject financial guarantee policies based on Credit Suisse’s countless misrepresentations about the loans in the transaction. Some of the alleged malfeasance expressly falls under the ambit of the PSA’s representations and warranties, such as lies about borrowers’ income. Other malfeasance, such as wholesale abandonment of underwriting standards, does not.

As discussed in DBSP, before a monoline agrees to guarantee revenue to RMBS investors, the monoline and the bank negotiate their risk of loss. Monolines take no risk on non-conforming loans and expressly negotiate the universe of loan defects that constitute non-conformance, negotiations which result in the representations and warranties. Banks want to limit their exposure by negotiating for as narrow a universe of representations as possible (even if banks can put-back non-conforming loans to originators under MLPAs, because originators pose more counterparty credit risk than global banks). The universe of representations ultimately agreed-to is the only universe of non-conformance coverage that monolines are entitled to. The monoline’s risk is every possible problem with the loans not covered by the representations and warranties. So, for instance, when [the plaintiff] does not negotiate for the inclusion of a “no fraud rep” (or any other representation not included in the PSA), perhaps, thereby, charging a higher premium, it makes a conscious decision to take the risk that if such non-included representations cause losses resulting in claims payments, [the plaintiff] will not be reimbursed by Credit Suisse via a put-back. (more…)

Posted: July 13, 2014

Small Claims Decision Has Res Judicata Effect in Supreme Court

On July 10, 2014, the Third Department issued a decision in Tovar v. Tesoros Property Management, L.L.C., 2014 NY Slip Op. 05233, holding that UCCA 1808 does not deprive small claims judgments of res judicata effect.

In Tovar, the plaintiff sued the defendant “in Schenectady City Court for unpaid wages for work from June 2008 through August 2008.” The City Court dismissed the plaintiff’s claims. Three years later, the plaintiff sued the defendant in Supreme Court for “unpaid wages for work that he allegedly performed between August 2007 and March 2008.”

The trial court dismissed the complaint, holding that it was barred by res judicata. The Third Department affirmed, explaining:

Under the doctrine of res judicata, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy, so long as the party to be barred had a full and fair opportunity to litigate any cause of action arising out of the same transaction and the prior disposition was a final judgment on the merits. Thus, where those requirements have been met, if a plaintiff in a later action brings a claim for damages that could have been presented in a prior action against the same party, based upon the same harm and arising out of the same or related facts, the claim is barred by res judicata. Stated another way, when a plaintiff brings an action for only part of his or her cause of action, the judgment obtained in that action precludes him or her from bringing a second action for the residue of the claim.

. . .

Plaintiff’s further contention that UCCA 1808 deprives City Court’s judgment of any res judicata effect is also unavailing. We subscribe to the view that the language of this statute, as amended in 2005, only prevents small claims judgments from having issue preclusion effect (collateral estoppel), but not from having claim preclusion effect (res judicata), in subsequent actions. As the elements of res judicata were otherwise satisfied here, Supreme Court correctly dismissed the complaint on that basis.

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

Posted: July 12, 2014

Claims Dismissed for Failure to Present Evidence of Proximate Causation

On June 30, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Mizrahi v. Adler, 2014 NY Slip Op. 31701(U), granting defendants summary judgment dismissing the complaint because the plaintiff could not show that the defendants’ misconduct caused his damages.

In Mizrahi, the plaintiff asserted legal malpractice, fraud and other claims against the defendants in connection with a real estate investment into which the defendants allegedly induced the plaintiff to enter.  In granting the defendants’ motion for summary judgment, the court held, among other things, that the claims against them failed because the plaintiff failed to show that his damages were proximately caused by the defendants, explaining:

Plaintiff’s action fails on the question of proximate cause. While the issue of proximate cause can often be a jury question, the court may always determine whether there are questions of fact. In Laub v Faessel, dealing with claims for fraud, negligent misrepresentation and breach of fiduciary duty, the court, discussing proximate cause, distinguished between a misrepresentation which induces a plaintiff to engage in a transaction (“transaction causation”), and misrepresentations which directly cause the loss to plaintiff (“loss causation”). Loss causation is the fundamental core of the common-law concept of proximate cause: An essential element of the plaintiffs cause of action for negligence, or for any tort, is that there be some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered. Transaction causation is often synonymous with but for causation.

In the present context of a legal malpractice claim, plaintiff alleges transaction causation, because he says that he would not have entered into the agreements had he known that they bore any risk. That is, but for Adler’s representations, there would have been no transaction. However, even assuming that the representations are a basis for finding transaction causation, plaintiff cannot establish loss causation, because many factors led to the failure to close on Unit 6401, or any other unit in the Trump Towers. Plaintiff’s losses were caused by the precipitious drop in real estate prices, and the value of the Trump Towers units in 2008; the Joss of his job; and plaintiff’s failure to obtain financing. . . . As a result, plaintiff has failed to plead proximate cause.

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

This decision shows how the artificial, if necessary, line drawing needed to do causation analysis can leave a plaintiff that has been damaged without a claim because of its inability to tie the defendants tightly enough to the injury.

Posted: July 11, 2014

Commercial Division Rules Amended to Add Rules Regarding Case Assignment and Privilege Logs

The Chief Administrative Judge has signed orders (1) amending the rules regarding the assignment of cases to the Commercial Division and (2) adding a new rule regarding the preparation of privilege logs.

The amended NYCRR § 202.70(d) – (e), which goes into effect on September 2, 2014, provides regarding assignment of cases to the Commercial Division:

Assignment to the Commercial Division

Within 90 davs following service ofthe complaint, any party may seek assignment of a case to the Commercial Division bv filing a Request for Judicial Intervention (RJI) that attaches a completed Commercial Division RJI Addendum certifying that the case meets the jurisdictional requirements for Commercial Division assignment set forth in subdivisions (a), (b) and (c) of this section. Except as provided in subdivision (e) below, failure to file an RJI pursuant to this subdivision precludes a party from seeking assignment of the case to the Commercial Division.

(e) Transfer into the Commercial Division

If an RJI is filed within the 90-day period following service of the complaint and the case is assigned to a noncommercial part because the filing party did not designate the case as “commercial” on the RJI, any other party may apply by letter application (with a copy to all parties) to the Administrative Judge, within ten days after receipt of a copy of the RJI, for a transfer of the case into the Commercial Division. Further, notwithstanding the time periods set forth in subdivisions (d) and (e) of this section, for good cause shown for the delay a party may seek the transfer of a case to the Commercial Division by letter application (with a copy to all parties) to the Administrative Judge. In addition, a non-Commercial Division Justice to whom a case is assigned may sua sponte request the Administrative Judge to transfer a case that meets the jurisdictional requirements for Commercial Division assignment set forth in subdivisions (a), (b) and (c) of this section to the Commercial Division. The determinations of the Administrative Judge with respect to any letter applications or requests under this subdivision shall be final and subject to no further administrative review or appeal.

You can learn more about the background of the rule by reading the request for comment that the Office of Court Administration posted earlier this year on the proposed rule.

* * *

The new Commercial Division Rule 11-b, which went into effect on July 8.2014, provides regarding regarding privilege logs:

Privilege Logs.

(a) Meet and Confer: General. Parties shall meet and confer at the outset of the case, and from time to time thereafter, to discuss the scope of the privilege review, the amount of information to be set out in the privilege log, the use of categories to reduce document-by-document logging, whether any categories of information may be excluded from the logging requirement, and any other issues pertinent to privilege review, including the entry of an appropriate non-waiver order. To the extent that the collection process and parameters are disclosed to the other parties and those parties do not object, that fact may be relevant to the Court when addressing later discovery disputes.

(b) Categorical Approach or Document-By-Document Review.

(1) The preference in the Commercial Division is for the parties to use categorical designations, where appropriate, to reduce the time and costs associated with preparing privilege logs. The parties are expected to address such considerations in good faith as part of the meet and confer process (see paragraph (a) above) and to agree, where possible, to employ a categorical approach to privilege designations. The parties are encouraged to utilize any reasoned method of organizing the documents that will facilitate an orderly assessment as to the appropriateness of withholding documents in the specified category. For each category of documents that may be established, the producing party shall provide a certification, pursuant to 22 NYCRR § 130-1.1a, setting forth with specificity those facts supporting the privileged or protected status of the information included within the category. The certification shall also describe the steps taken to identify the documents so categorized, including but not limited to whether each document was reviewed or some form of sampling was employed, and if the latter, how the sampling was conducted. The certification shall be signed by the Responsible Attorney, as defined below, or by the party, through an authorized and knowledgeable representative.

(2) In the event the requesting party refuses to permit a categorical approach, and instead insists on a document-by-document listing on the privilege log, then unless the Court deems it appropriate to issue a protective order pursuant to CPLR 3103 based upon the facts and circumstances before it, the requirements set forth in CPLR 3122 shall be followed. In that circumstance, however, the producing party, upon a showing of good cause, may apply to the court for the allocation of costs, including attorneys’ fees, incurred with respect to preparing the document-by-document log. Upon good cause shown, the court may allocate the costs to the requesting party.

(3) To the extent that a party insists upon a document-by-document privilege log as contemplated by CPLR 3122, and absent an order to the contrary, each uninterrupted e-mail chain shall constitute a single entry, and the description accompanying the entry shall include the following: (i) an indication that the e-mails represent an uninterrupted dialogue; (ii) the beginning and ending dates and times (as noted on the e-mails) of the dialogue; (iii) the number of e-mails within the dialogue; and (iv) the names of all authors and recipients – together with sufficient identifying information about each person (e.g., name of employer, job title, role in the case) to allow for a considered assessment of privilege issues.

(c) Special Master. In complex matters likely to raise significant issues regarding privileged and protected material, parties are encouraged to hire a Special Master to help the parties efficiently generate privilege logs, with costs to be shared.

(d) Responsible Attorney. The attorney having supervisory responsibility over the privilege review shall be actively involved in establishing and monitoring the procedures used to collect and review documents to determine that reasonable, good faith efforts are undertaken to ensure that responsive, non-privileged documents are timely produced.

(e) Court Order. Agreements and protocols agreed upon by parties should be memorialized in a court order.

You can learn more about the background of the rule by reading the request for comment that the Office of Court Administration posted earlier this year on the proposed rule.